What Is Going On In The World, And What Are We Doing?
I have been involved in the field of financial services for two generations. I remember what happened in 1987, the dot.com period, and the financial meltdown of 2008.
I've seen just about everything that might have an impact on asset management.
What is happening in our world today is so foreign to proven investment principles that most people can’t conceive just how real and severe our current challenges are.
A Long Way To Fall
Stock Market’s Bottom Is Hardly Within Sight
Like a year ago, some of the biggest asset managers in the world, including BlackRock Inc., Fidelity Investments, and Carmignac, are issuing warnings that markets are underestimating both inflation and the final peak of US rates.
After Wall Street virtually universally overestimated the trend of inflation, the stakes are quite high. $18 trillion was lost in global stock markets, while the US Treasury market had its worst year ever. The Federal Reserve's 2% objective for inflation is still expected to be reached within a year, according to inflation swaps, despite the fact that the money markets are wagering the central bank will begin lowering rates.
According to Frederic Leroux, a member of the investment committee and head of the cross asset team at €44 billion ($47 billion) French asset management Carmignac, this has set up the markets for another rough ride because worker shortages are likely to fuel higher-than-expected inflation.
Leroux asserted over the phone that inflation was a permanent condition. "Central bankers believed they could control interest rate levels after the crisis. They have learned over the previous two years that inflation does, not them”.
“The belief that inflation will drop to 2.5% next year”, he continued, “is one of the largest mispricings in the market today”. He then said that the globe is entering a macroeconomic cycle similar to the one that existed between 1966 and 1980. Energy shocks during that time period twice caused the US to experience double-digit inflation.
BlackRock's Investment Institute analysts predict continued high inflation and little chance of a recession forcing the Fed to lower interest rates. Instead, even if inflation remains above the bank's 2% objective, they anticipate the Fed will scale back its hefty hikes into smaller ones as the effects of the economic slowdown become more apparent.
According to Jurrien Timmer, director of global macro at Fidelity Investments, inflation is still a major market risk because the Fed has consistently stated that it wants to see the indicator fall all the way to the 2% target rather than merely a slowdown in price increases. - Yahoo Finance
Morgan Stanley Warns U.S. Stocks Risk 22% Slump
US equities face much sharper declines than many pessimists expect with the specter of recession likely to compound their biggest annual slump since the global financial crisis, according to Morgan Stanley strategists.
Michael Wilson — long one of the most vocal bears on US stocks — said in a research note that while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are still too high and the equity risk premium is at its lowest since the run-up to 2008. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.
“The consensus could be right directionally, but wrong in terms of magnitude”,Wilson said, warning that the benchmark could bottom around 3,000 points — about 22% below current levels.
The strategist — ranked No. 1 in last year’s Institutional Investor survey — isn’t alone in his view that earnings expectations are too optimistic. His counterparts at Goldman Sachs Group Inc. expect pressure on profit margins, changes to US corporate tax policies and the likelihood of recession to overshadow the positive impact from China’s economic reopening. - Yahoo Finance
Peter Schiff: More Pain Ahead for 2023
Last year was a tough one for investors. In fact, it was the worst year for Wall Street since 2008. The Dow was down about 8.8%. The S&P 500 fell by 19.4%, dropping more than 20% from its high. The Nasdaq took the worst hit, tumbling by 33.1%. Meanwhile, the bond market tanked, bitcoin collapsed, and the air started coming out of the real estate bubble.
While price inflation has cooled a bit, it is still running far above the Fed’s 2% target. Nevertheless, there is talk about a Fed pivot to rate cuts in the year ahead. Peter pointed out that “the last couple of times the Fed was able to orchestrate a pivot, it did it when inflation was 2% or less. If the central bank makes that move in the near future, it will “throw gasoline on the fire”.
Peter said that the year ahead could be particularly rocky for unprofitable tech companies that benefited from the Fed’s easy money policies in the past, and he sees a continued rotation into “value” stocks from companies with a proven track record of profitability. - Lew Rockwell
Jerome Powell Flashes His Hawk Feathers
Fed Chair Jerome Powell first engaged in this tough guy talk last summer in Jackson Hole. In that short yet memorable speech, Powell spelled out the costs of tightening quite explicitly. Growth would fall below its long-term average, labor markets would take a hit, and both businesses and households would be squeezed by higher interest rates, Powell explained.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses”, Powell said.
This was done to dispel the notion that the Fed would hesitate in the event of a recession. Before Jackson Hole, a lot of people on Wall Street and elsewhere believed that a recession would compel the Fed to stop raising interest rates early and start cutting them in 2023. The idea that the Fed could control inflation by allowing the economy to "soft-land" had persuaded many that if a hard-landing appeared more possible, the Fed would abandon its fight against inflation.
This worked for a time. Yet as the new year has dawned, financial conditions have continued to ease as the stock market presses ahead and borrowing costs have eased significantly from the October highs. In just the first week of this year, companies have issued $63.7 billion in U.S.-marketed debt, up from a total of $36.6 billion in the last five weeks of 2022, according to a report in the Financial Times citing data from Dealogic. This is not what is supposed to happen when financial conditions are allegedly “restrictive”.
It’s clear that Powell’s vague talk about “some pain” and “below-trend growth”—as startling as it was last August—is not carrying much weight with markets. So Fed officials have taken to being more explicit about the economic, social, and political headwinds they expect to face and overcome in their crusade against inflation.
“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time”, Powell said. “But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy”.
Powell is trying to warn Wall Street that it is not going to win this fight. Wall Street, however, is not yet in the mood to receive the message.- Breitbart
Federal Reserve officials have been attempting to convince markets of their commitment to fighting inflation by explicitly talking about the unwelcome costs they are willing to bear and inflict to succeed.
Tech Will Save The Market, Right?
Apple became the first company to lose a Trillion dollars in valuation.
On January 3, 2022, the company was valued at just over $3 Trillion, and by the end of the year, it was down to $2 Trillion.
Apple ran into challenges with iPhone 14 – particularly the Pro and Pro Max – this fall when a COVID-19 outbreak in China impacted its manufacturing partner Foxconn. Now the company’s stock has hit a 52-week low amounting to one trillion dollars in value lost as further forecasts for iPhone challenges have surfaced. - 9TO5Mac
The trillion-dollar club is losing members as tightening from the Federal Reserve leads the most valuable companies in the country to lose trillions in market capitalization.
Valuations for Apple, Microsoft, Amazon, Tesla and Alphabet (Google's parent company) have lost a combined $3.4 trillion this year, according to findings from market analysis firm Finbold. That's a 34% drop in market capitalization, the total value of a company's shares of stock, from Jan. 1. - USA Today
And Then There Is ESG Investing
Warning: Your retirement fund may have been Shanghaied by BlackRock or other Wall Street asset managers who’ve unilaterally decided that the tens of trillions of dollars of other people’s money they control should be used to advance political causes they favor – to “make the world a better place”.
As most people know, ESG stands for Environmental protection, Social justice, and Governance of corporate and societal affairs. They’re all noble-sounding causes. However, under ESG they’re centered around progressive, woke agendas, with prevention of “manmade climate cataclysms” uppermost. Fund assets are used to drive “net zero” climate agendas and punish or de-fund fossil fuel companies.
That narrow focus creates serious problems. Those trillions of dollars are supposed to be passively invested in index and other funds, under fiduciary obligations to secure maximum returns in support of state, local, corporate and personal retirement and investment accounts. Under ESG, however, strong returns are too often sacrificed to serve politicized agendas, often in collusion with governments, activists and other financial institutions, and thus also in violation of antitrust laws and basic ethical principles.
Woke ESG practitioners also employ narrow ES&G definitions to virtue-signal, pontificate and impose prescriptive agendas with little or no regard for the consequences. When the “existential threat of manmade climate change” is the primary arbiter, enormous problems associated with replacing fossil fuels with “clean renewable energy” are simply ignored, suppressed and censored out of the analysis.
People are dying – who would have survived illnesses and preexisting health conditions if they hadn’t been so impoverished, cold and malnourished. In the USA, 14% of seniors have skipped meals and 10% delayed or canceled medical procedures or rationed prescription medications in 2022 because of sharply rising energy, food and other prices. Honest ESG scores would factor all this in, as well. - Lew Rockwell