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Historic moment not a dip

And the line from the movie The Big Short, “everything fell apart” comes to mind.

This is precisely what we have been warning about since the beginning of the year, and even with the huge collapse already seen in US equities, I do not change my view that investors should continue to play defensive.

“Protect your wallets” from the rooftops we should all be shouting. The situation is not a buy the dip or look through the valley scenario. People need to step back and see the bigger historical picture. What I’m about to say won’t come as a surprise to anyone, but investors need to connect the dots.

At the height of confidence and enthusiasm in global and other equity markets, there were already worrying signs coming from non-transitory inflation, a moderation in global manufacturing and sentiment. consumers.

Sales remained firm, but consumer confidence fell to GFC levels for a while. Suggesting that there could be a “last hurray” by consumers right now. Both in the USA and elsewhere.

We haven’t even got to the war in Ukraine yet? Permanently higher food and energy prices and even shortages of both.

The most powerful factor of all is that the Federal Reserve and other Western central banks have fallen well below the worst inflation curve in decades. As a result, they are now set on a path of aggressively raising rates against ever-higher inflation. Inflation impervious to interest rate hikes in any case.

The end result is inevitably the compression of consumers and businesses by skyrocketing prices and higher interest rates. Mortgage stress will increase dramatically, potentially triggering a second major US housing market crisis this century.

If this happens, with falling house prices on top of high inflation, especially in the energy sector, and already the economic crisis is stabilizing consumer confidence, then a particularly severe recession will set in. . This scenario could unfold as early as the end of this year.

Even Larry Summers agreed with me this weekend that the United States is in danger of a recession within the next year. I think it could be imminent this year.

The stock market crash already seen is due to a sharp upward correction, but that doesn’t seem likely anytime soon given the very bearish close of trading in New York yesterday. When a rally does occur, investors should take advantage of it and continue to hedge their portfolios against further downside risk.

The big buys at the moment are the US dollar and oil. Gold too. Although it may have other downsides of deleveraging to see first. In the end though, it will once again become a safe haven.

It would be great to be wrong, but this is looking more and more like a historical unfolding of a period of giant tulip bulbs where central banks tried to add fuel to the fire.

Clifford Bennett

Chief Economist of ACY Securities.

The views expressed herein are solely those of Clifford Bennett and do not represent the views of ACY Securities.

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