This year we’ve had significant feedback around our expectations being premature.

16th December 21: we expressed concerns around inflation. In particular that the Fed wasn’t prosecuting its case as to how it intended to deal with it (back then they used the term “transitory”).

5th Jan 2022: we expressed further concerns around inflation, arguing that conservative investors would receive negative real rates of return from bonds and this was pushing them into equities, which wasn’t appropriate for their risk profile.

21st June 2022: we said the market had fallen to fair value. That the US was already in recession and that the equity market wont bounce until the Fed pivots.

These “best guesses” are all forward looking. We are not being contrarian for the sake of it. There is no benefit telling you where we are today, because that information is already baked in to asset prices. I liken these views to the quote by famous ice hockey player, Wayne Gretzky; “I skate to where the puck is going to be, not where it has been.”

We now believe the world economy has had the biggest tightening of financial conditions in living memory. Not just rapidly rising rates, but rising energy costs, rising food costs, increased mortgage payments, the negative wealth effect from falling asset prices and of course the negative narrative across all media impacting consumer confidence.

We think growth is slowing faster than the Fed is willing to acknowledge. Have you noticed the Fed is trying to tell us that two consecutive quarters of negative GDP growth is no longer the definition of recession! If first you don’t succeed – redefine success! They are telling us a group of economists known as NBERs, who we didn’t know existed until lately, apparently have a new “holistic” definition for recession, which coincidentally suits the government / Fed narrative.

US debt is so large that it cant handle the interest rate rises that the Fed is forecasting. Their interest bill would be bigger than their social services spending. Similarly in Aust, the alarming level of household debt would mean about 15% of mortgage holders would be forced sellers. That’s enough to see the market plummet. For both of these reasons and many others, rates wont go as high as what is being telegraphed. They cant. This is why, to date, central banks have used such strong hawkish language. Also known as jawboning, if they can scare the economy into slowing (with the threat of whats coming), then whats coming wont need to be as bad.

With plummeting growth (best indicated by the ISM chart for those who want to monitor this over the next 6 months) and what will be a deepening US recession, the Fed must pivot. Last night when the latest 0.75% rate rise was announced, markets rallied – because of the language used. There was a subtle indication that further rises would moderate. This first sign is very positive for markets.

I think the last US CPI (@9.1%) or the next will be the peak. The 10 year bond rate has fallen nearly 1%, showing the market believes the prospect for cash rate rises has fallen dramatically. We expect the hiking cycle will be over soon (in the US) and should finish here before the end of the year. Long term assets (like tech stocks and crypto) will benefit first and most. Eventually the whole market benefits. Crypto seems most oversold and tech seems to have fully priced in a meaningful recession. However ordinary markets are just beginning to see profit downgrades (which is a lagging indicators) and will only get worse over the next year. This makes me think theres a 50% chance that this isn’t the bottom for the general market, it’s quite possibly a bear market rally and there’s one more leg down. If so, this hopefully this might be over by Sept.

Remember markets bottom long before the economy bottoms. We see economic conditions deteriorating for another 9-12 months (as per lagging indicators such as CPI). Which tells me markets should bottom soon, if they haven’t already.