Will the recession be structural? Analyses
The risk of recession this year is not yet the risk of a structural recession. The analysis by Alessandro Fugnoli, chief strategist of the Kairos funds
In the span of a few months we have gone from perceiving the extraordinary strength of a two-year drugged business cycle in every possible way to the idea of an imminent, if not already present, global recession.
The financial markets, for their part, have passed from the idea of inconceivable inflation (2020) to that of transitory inflation (2021), only to arrive, in the first half of 2022, at the idea of a similar stagflation to that of the seventies which only a drastic cure of monetary restriction and recession will be able to put an end.
The exchanges, which had convinced themselves that they were the only possible investment in a world of permanently negative real rates and which thought they were unstoppable, thanks to an inexhaustible army of buyers ready to take advantage of any weakness, have discovered that they are vulnerable.
This vulnerability was initially perceived exclusively on the multiples front and led to attacks focused on who these multiples had expanded them the most, namely technology. Recently the feeling of vulnerability has spread to profits and involved sectors that had initially seemed safe from problems such as mass consumption and large distribution.
Only fossil energy stocks held up well or even appreciated along with a number of small-cap, low-multiples companies that had been overlooked for being in traditional sectors during the big rally.
Everything else was involved in a descent that at times seemed unstoppable. There was debate on the stopping point of the downside. Some have hypothesized, after the drop of 20 per cent from the maximums, a further 10 per cent (or 3500 of SP 500) to reach the average size of historical bear markets, or 30 per cent. Others have proposed the complete cancellation of these two hectic years of experiments and the nostalgic restoration of the prepandemic order, which ended in early 2020 with inflation at 2 percent, the SP index at 3250 and ten-year rates at 1.55. Finally, others have drawn even darker scenarios, if only because rates have in the meantime doubled compared to that fortunate era. As for profits, it is true that they have risen since then, but from now on it is a widespread feeling that they will encounter increasing obstacles in their way.
In short, we have passed from paradise, no matter how artificial, to an almost complete loss of anchors and points of reference, naturally aggravated by the chaos of war.
In recent days, however, the idea has spread in the markets that the correction that has taken place so far is sufficient, at least for the moment. You can stop and look around. First sell (or buy) and then think, traders say when they see avalanches on the horizon. Now that panic-driven sales, VaR and margin calls are complete, it's time to think.
It turns out that the world is more complicated than how the proponents paint it completely pink (there are still some strategists who see 2022 ending above 5000) or completely black.
The risk of recession this year is not yet the risk of a structural recession. It is only due to the extreme volatility of stocks, first reduced to the bone in the dark months of the pandemic and then reconstituted in forced stages starting from mid-2021, in part to guard against surprises coming from production chains that have become unreliable (you can buy it as long as you can) and partly with the idea of a resurgence of consumption in the postpandemic world.
Now it turns out that inventories have grown too much and that consumers, with their incomes eroded by inflation, do not have all this desire to spend. Where they have it, more than on things (already purchased widely during lockdowns) the propensity to spend is on services (the Tac that had been postponed, the trip to Disneyland promised to homebound children). With less demand for physical things, industrial production can stall by a quarter or two.
The structural recession, the one that involves homes, cars, consumer demand in general and the desire to invest on the part of businesses is not yet a topic for this year and must be postponed to 2023 or 2024. For now, we are still hearing the positive effect of the fiscal and monetary pressure of the past two years. Later this effect will fade and then disappear, while rate hikes and erosion of profit margins begin to be felt.
This refinement in the assessment of the overall picture is already leading to the stabilization of stock exchanges and bonds and also to some timid recovery attempts. It is now possible to say, albeit in a whisper, that the worst for this year has passed and that, exogenously permitting, the year could close above current levels.
At the same time, however, we must recognize that the sword of Damocles of a complete, though not necessarily deep, recession will remain on our heads over the next two years, limiting the potential for recovery in this 2022. The deciding variable, of course, will be l 'inflation. Interestingly, however, the Fed's drumbeat of war has already subsided. Perhaps the desire to raise rates at all costs until inflation has given the impression that it is ready to leave the scene is not so granitic.
Where it is still very dark is how the world will start again once it has been purged of the excesses of these years. There is no new theoretical elaboration on the horizon that has any depth. How to ensure growth and stability in the next historical phase remains to be determined.
Among the few who are unbalanced we point out Summers, who hypothesizes a return to secular stagnation and Blanchard, who speaks of a return to low rates (albeit less low than in the last decade) after the end of inflation.
Operationally, as we have seen, this is a moment of stabilization on the dollar, rates, commodities and stock exchanges. Tactically, limited recoveries are possible on all risk positions. Any recoveries are naturally welcome, but even more welcome is the return of a more balanced vision anchored in the reality of the present and the near future.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/la-recessione-sara-strutturale-analisi/ on Thu, 02 Jun 2022 05:37:59 +0000.