JPMorgan Ponders ‘Armageddon’ Scenario
"Pause is not enough."
That's one of four possible macro scenarios included in JPMorgan's 2023 economic outlook. The others are "Damage done and broad," "Slip-sliding away" and "Soft landing." Three entail recession.
The odds are somewhat evenly distributed. The figure (below) shows the subjective probabilities and describes the policy and macro conjuncture behind each scenario.
As you can see, the base case (by a very narrow margin) finds the US slipping into a mild downturn late next year
Two of the most significant and non-Fed influenced inflation inputs are the global manufacturing engine which, at least currently, is predominantly located in China and energy prices.
Unless Xi wants to “channel Putin” and double down on becoming an isolated aggressor that simply takes what he wants and risks becoming worse off economically (and it does not appear that Xi wants to emulate Putin), the global supply chain will continue to normalize in 2023 because China needs global trade to increase the wealth of China and to keep the Chinese people from revolting against Xi.
Anecdotally, I ordered a GE dishwasher mid-November for my parents and it is estimated to arrive at the end of January- which seems like an “abnormally” long time compared to pre-covid lead times.
With regard to energy prices, if US leadership doesn’t want to allow some fracking to offset the Putin effect, then there is always the option of taking him out. This might also help with global peace.
If these two inflation inputs get even partially solved in 2023, then it seems that the pressure to raise terminal rate targets will lessen significantly.
Unless you know a certain kind of “guy,” taking out Putin is easier said than done. Is it not, even for the United States?
One of the biggest misconceptions going in the West is the idea that the Russian war in Ukraine will come to an abrupt end once Putin is removed. That’s an incredibly ahistorical outlook. Russia’s involvement in WWI didn’t end when the revolutionaries deposed the Czar. Almost all of the revolutionaries (a motley conglomerate of disparate political outlooks) just assumed as a default they’d keep fighting the good fight. They were still Russians after all! Only one minor revolutionary advocated for capitulation. Since the bulk of the military was stationed in the capital, and since the bulk of the military didn’t want to die, they sided with him, and that’s how Lenin managed to seize total power.
Putin’s removal from power might foreshorten the timeline perhaps, but it definitely won’t end the war
Regarding your conclusion and Kolanovic’s warning, I have to believe that the federal reserve knows the system can’t handle 6%. If they even get to five before a systemically important financial institution cries uncle, I don’t think they can stay there very long. Tax receipts are going to be weak this year and the treasury is revising up their deficit projections, so they will need to issue bonds on top of QT. Have fun with those market prices for bonds. Fed would be belligerent to push this. We literally can’t afford a bad recession this year.