Yesterday morning's live BCA Research discussion featured a back and forth that I thought pretty well captured what are legitimate bullish and bearish, policy-centric, economic narratives.
I'll paraphrase:
Bullish analyst:
Yes, the Fed is raising rates, but financial conditions which is how rates should work their way through the economy are loosening, and they have been loosening for most of this year... So that's going to have a positive impact on growth, with a lag...
Meanwhile, fiscal policy has gone from being extremely restrictive to being neutral, or actually stimulative...
You have real wages that are starting to rise again, you have housing, which has made a negative contribution to growth for two years, now going to make a positive contribution, you've got manufacturing which is showing some signs of stabilizing...
So, yeah, I see the narrative for recession, but I just don't see where it's a narrative that would be a base case, based on the other data.
Bearish analyst:
First and foremost, historically-speaking, economic data is generally resilient before recessions happen, that's why recessions happen -- nobody knows they're coming.
Recessions are very difficult to predict, they are strongly associated with tight monetary policy.
Financial conditions are indeed tight; mortgage rates relative to 10-year yields have exploded, short-term rates are above trend and at levels that have been consistent with recessions in the past... You have credit card interest rates that have increased, you have auto loan interest rates that have increased... We have behavior in the mortgage market that is also indicating that mortgage interest rates are too high because you have people with existing homes who aren't putting them up for sale because they don't want to pay prevailing mortgage rates...
It's obvious that monetary policy is tight... The question is, how long is it going to end up taking? Tight monetary is a very good predictor of recessions, it's not a good predictor of how long it will take from when monetary policy becomes tight to when the recession actually happens...
On top of all of this, all of our reasonable estimates of excess savings show that they're continuing to be depleted.
Now, the problem for the unsuspecting investor is that -- in the land of financial pundits -- there, alas, seems to be an unwritten rule that says they gotta pick a side... And when pundits get themselves gigs on major financial news programs, it's as if they're campaigning on behalf of whatever their bias may be... And, man, can they be convincing!
I.e., you gotta be bullish or you gotta be bearish, can't be both, and can't be neither.
Well, frankly, I fully reject the notion that you can't be neither... In fact, under present circumstances -- given that both narratives possess plausibility -- if we're talking folks like us who are tasked with caring for other people's money, it is grossly irresponsible, if not negligent, to pick a side.
I.e., in our view, the only prudent path, until more clarity is achieved, is to diversify in a manner designed to capture a chunk of the upside should the bullish narrative play out, and to mitigate a chunk of the downside should the bearish case ultimately take hold over whatever's left in the current cycle.
Stay tuned...
Asian stocks mostly sold off overnight, with 12 of the 16 markets we track closing lower.
Same for Europe so far this morning, with 14 of the 19 bourses we follow trading down I type.
US equity averages are down to start the session: Dow by 445 points (1.25%), SP500 down 1.06%, SP500 Equal Weight down 1.33%, Nasdaq 100 down 1.37%, Nasdaq Comp down 1.34%, Russell 2000 down 1.37%.
As for Friday’s session, US equity averages traded higher: Dow up 1.2%, SP500 up 0.9%, SP500 Equal Weight up 0.85%, Nasdaq 100 up 0.9%, Nasdaq Comp up 0.6%, Russell 2000 up 0.1%.
This morning the VIX sits at 17.83, up 13.06%.
Oil futures are down 0.88%, nat gas futures are up 1.14%, gold's down 0.38%, silver's down 1.38%, copper futures are down 2.09% and the ag complex (DBA) is down 0.88%.
The 10-year treasury is up (yield down) and the dollar is up 0.63%.
Among our 34 core positions (excluding options hedges, cash and money market funds), 5 -- TLT (long-term treasuries), VGIT (intermediate-term treasuries), EMB (emerging mkt bonds), XLV (healthcare stocks) and AT&T -- are in the green so far this morning... The losers are being led lower by MP Materials, Range Resources, FEZ (Eurozone stocks), EWW (Mexico equities) and XLF (financial stocks).
"...most people pay special attention to the new generation coming of age—because they sense that this youthful archetype, alive to the future’s potential, may prefigure the emerging mood of the new turning.They’re right. This rising generation does prefigure the emerging mood. Yet like the mood of the turning, the personality of the rising generation always catches most people by surprise."
Have a great day!
Marty
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