In this article, we will analyze one interesting economic article from closed foreign sources, Michael Hartnett of Bank of America – a Wall Street strategist. He notes that the main question will be not whether it’s a recession or stagflation, but whether it’s a depression.
A week ago saw the biggest outflow from equities since Dec. 21 of $14.4 billion, also for the 9th consecutive week. capital outflow…
At the same time, loan repayments resumed (the outflow of funds on IG bonds was $6.6 billion, HY – $3.5 billion, EM debt – $0.6 billion).
Along with the largest municipal bond outflow since March 20 ($3.2 billion); another tentative hint of a coming recession: $1.9bn tech inflow (as investors return to deflationary “growth” themes), biggest $0.6bn in 3-month utilities sector inflow, big payouts on financial performance of $1.7 billion.
Which brings us to the second main element of all Hartnett’s notes, namely to − recession. As Hartnett notes, reminding readers that showed the latest survey of fund managers (I previously attached the screen to the telegram channel, subscribe), “Theme recession is now very hot, everyone is afraid of it…the mood of investors is below on the screen…
Corporations (NFIB US small business Confidence), consumers (Michigan), all indicators are very recessive.
So, now that we know a recession is coming, here’s a rundown of how we’re going to get there, according to the notes: Tape Stories: Hartnett.
We are starting with a sharp rise in food prices, with wheat at the highest level in history, guaranteed to make the 2011 Arab Spring a dress rehearsal compared to the upcoming food games…
or rather, the “food and energy games” as energy prices continue to rise (natural gas at 14-year highs) and the “inflationary shock” continues with the annual US CPI rising to 10.1%, the highest level since 1981.
Extend this to the rest of the world and we have an epic crisis. We have: inflation, food shortages, power outages, curfews… The Sri Lankan rupee has collapsed by 60% since the start of the war, as $7bn in debt payments this year vs $2bn in foreign reserves signal a default is coming (Sri Lanka opts for social stability in relation to foreign debtors).
“Shocks in inflation and rates lead to defaults, first the smallest and weakest, and then the largest.”
Hartnett then brings us to what has traditionally been the logical response to recessions (and market crashes): central bank panic. Only this time, such intervention may prove problematic for one simple reason: Once considered competent (if not omnipotent, thanks to their money printers), central banks are now powerless.
Consider Kuroda of the Bank of Japan, who has vowed to support a policy of “strong monetary easing” to…”do what exactly?”, Hartnett asks, and continues to mock the Japanese central bank in rhetorical language. Let’s just note that since the Bank of Japan introduced control over the yield curve, GDP growth in 2016 was 0.0%, CPI 0.2%; current strong YCC policy defense = Japanese yen at 20-year low), but “strong stock market (Nikkei in dollar terms at the same level as Jan. 18)”.
The BOJ’s dismal failure to meet any of its targets is just one example of a larger picture that has taken shape over the past 14 years: in the wake of the 2008 global financial crisis, in order to make the rich richer while creating a historic wealth gap, central banks bought $23 trillion in assets, cut rates and created negative-yielding debt of $18 trillion.
While this revolutionary monetary policy has been fantastic for bonds, loans, PE & tech stocks, Hartnett admits one more thing we’ve been arguing all along, that central bank policy has been a major cause of inequality and lack of economic growth (especially in Japan and Europe, where the transmission mechanism from QE through asset markets to the real economy is less strong).
Here is the sad centrally planned reality since 2008, courtesy of the central bank:
- The Bank of Japan introduced quantitative easing on March 01 (GDP 0.5%, CPI 0.2%, bonds 1.5%, stocks 1.8%,)
- The Bank of Japan introduced YCC on September 16 (GDP 0.0%, CPI 0.4%, bonds -3.2%, equities 6.1%,)
- ECB “whatever it takes” July 12 (GDP 1.2%, CPI 1.5%, bonds 0.0%, equities 5.6%,)
- ECB introduced NIRP on July 14 (GDP 1.4%, CPI 1.6%, bonds -1.6%, equities 2.1%,)
- The Fed introduced quantitative easing on November 08 (GDP 1.7%, CPI 2.1%, bonds 3.3%, stocks 13.0%).
And that’s bad, it’s about to get a lot worse, because while this was all part of QE, we’re now ending QE around the world and about to start the biggest globally coordinated tightening in decades.
As Hartnett puts it, COVID, the end of globalization, the war, the “all-in” monetary/fiscal glut over the past 2 years has led to a generational “inflation shock” which in turn forced a switch from QE to QT in 2022/23 . And as shown in the diagram below, “central banks are on track to raise rates >250 times in 2022, the biggest tightening this century”
And as the Fed’s $9 trillion balance sheet prepares to shrink to $7.2 trillion by the end of 23, the QE winners – bonds/loans/PE/tech – are about to become QT’s biggest losers.
However, there is already “a lot of negativity” in the markets, and even a bear as ardent as Hartnett believes that a new downturn calls for deleveraging and/or a consumer recession “…however, both are guaranteed because, as we’ve said hundreds of times in the past, “every tightening cycle ends in disaster”, a statement that is also the main tenet of Hartnett’s latest note in which he writes that “Fed rate hike cycles always end in default and bankruptcy of governments, corporations, banks, investors” .
As for the tolerable conditions for the next crash, Hartnett writes that an abrupt end to the era of mass money printing will lead to deleveraging, which is why, according to the BofA strategist, “banks are trading so poorly.” And, speaking of deleveraging, “25 b.p. from the Fed is very little… 150bp is a completely different matter.”
So, returning to the topic at hand, namely the upcoming/current recession, Hartnett concludes his last weekly commentary by noting that a recession is now fully expected, but everyone fears it: investors (BofA April FMS), corporations and consumers (Small business and consumer confidence are already on the decline.)
Meanwhile, Chinese imports are already in recession…
with orders for capital goods in the US, Germany, Japan…
A tipping point nonetheless calls for clear signs of a slowdown in consumer spending and the US labor market. And while the evidence for this is only partial so far, the moment there is clear evidence that the labor market is turning into a crater, watch the recession become the new reality.
But that won’t happen soon (certainly not before the midterms, because the Biden administration needs at least something to brag about, and the job market is one of those things.
Sincerely, Stanislav Stanishevsky.
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