Latest Log Entry

Sharing this morning's entry to our internal market log:

1/15/2023

Judging by the nearly overwhelming consensus among economists, our 2023 recession thesis has exceptionally high odds of playing out… The timing would be the looming question… The safe assumption would be H2, but we’ll stick with our H1 thesis for now.

The consumer still seems pretty engaged with at least the services sector, although, clearly, producers – per both ISM and JPM PMIs, and the general commentary captured in the NFIB small business survey – are bracing for/anticipating a notable slowdown.

The minority of economists who are not in the recession camp (39% of those participating in WSJ’s latest survey don’t predict a 2023 recession) cite strong consumer and corporate balance sheets, and China aggressively stimulating (and I presume plenty of fiscal from other nations) as factors that’ll keep the economy growing throughout the year.

I sympathize with their position, which expresses the very reasons we believe a recession in 2023 will be mild by historical comparison.

With regard to US consumers, clearly, they are tapping credit cards and spending down savings to keep up the pace… Good Q4, and so far January, stock market performance is, I suspect, boosting their confidence a bit right here… Plus, there’s oodles of commentary coming from the perma-bulls about history favoring stocks coming off of down years, where we sit in the election cycle, yada yada.

Thing is, inflation! The Fed, and in particular, the ECB, of late have sent the message that financial market pain is to be expected, and accepted, if they’re going to win the battle against inflation… Clearly, however, financial market actors are not believing them at this juncture.

The “market” is betting that the “data dependent” commitment central bankers continue to express will guide their hands… Which has been illustrated vividly (rallies) when weakening data releases hit the wire.

Essentially, the “market” sees the Fed backing off sufficiently to avert an earnings-crushing recession somewhere between here and there… That’s certainly a plausible scenario – and one we’re open to – it’s just a risky one to bet big on right here.

European equities, for example, have screamed higher so far this year, despite the crushing commentary (that crushed the market for a moment) from Lagarde last month… She, in no uncertain terms, said that they are going to aggressively tighten until inflation is beaten, regardless of the hit to markets and/or to the economy.

We are definitely bullish on Europe beyond what’s left in the current bear market… In the meantime, however, the recent rally, in our view, has gotten ahead of itself and will likely turn out to be a classic bull trap in the end… Same can be said for global equities in general.

Now, when it’s all said and done, I actually do believe that those who are outright bullish equities this year have not-small odds of turning out to be right by year-end… In fact, that (a positive 2023) essentially jibes with our overall thesis… The difference being that they think the worst is over, while our work (at this juncture) says that probabilities still point to more pain to come, but that it’ll arrive early enough in the year to see the bear market to its end, leaving sufficient time for the next bull market to carve out positive returns by year-end.

As for the next bull market, odds, history, politics, geopolitics, currency dynamics, etc., strongly suggest that it’ll be vastly different than the last… I.e., the go-forward setup screams non-US over US equities, and favors asset classes (select commodities, in particular) that thrive in a generally higher inflationary environment than we’ve experienced these past several decades…