2020 was about COVID and the scientific search for a vaccine. 2021 was about quasi-reopening of the global economy and too much fiscal and monetary stimulus here in the USA (probably in the neighborhood of $3 trillion too much). 2022 was about inflation and the Fed getting too far behind both inflation and the market. And early 2023 is about a slowing economy and the timing of a recession…it’s a comin’.
In some of my recent notes I have talked about the Fed “jamming on the brakes” in their attempt to reverse inflationary trends and slow a much-too-hot economy via rate hikes. The chart below captures this brake jamming perfectly. Over the past 40 years there have been six rate hiking cycles. The 2022 rate hiking cycle has distinguished itself by being both the biggest and the fastest. Brake jamming at its finest.
You cannot have a line like the red line below and not leave a big wake behind. FTX and crypto trading platforms RIP. Market favorites of the Summer of 2021, like FinTech SPACs and meme day-trading darlings (AMC Entertainment and GameStop), also RIP. SVB and First Signature are the recent noted casualties. You cannot jam on the brakes like the Fed has just jammed on the brakes and not have residual fallout. Money supply growth is cratering, inflation is falling, and the economy is weakening. We are going to have a recession, likely this summer. Not a newsflash to our regular viewers. Commercial real estate (especially office RE) and high yield debt are about to experience an unpleasant drawdown and likely some form of permanent impairment. These are both areas that need to be avoided.
Source: Federal Reserve and EISI as of March 31, 2023
Richard Barrett
Chief Investment Officer
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