The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us. The new regime of greater macro and market volatility is playing out.
A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation.
[OCS: It appears we are heading for a recession, and we have chosen our scapegoat for any coming difficulties. It is the central banks who are artificially manipulating interest rates.
Notice what they don’t say – that the U.S. government is executing domestic policies designed to crush our economy, particularly with their manipulation of the energy markets, which underlie all economics and intermodal transportation of goods. Not to mention the wasteful spending driving inflation, as too much money is now chasing too few goods. The key to escaping our inflationary bonds is more production, not less.]
This keeps us tactically underweight developed market (D.M.) equities. We expect to turn more positive on risk assets at some point in 2023 –but we are not there yet. And when we get there, we don’t see the sustained bull markets of the past.
[OCS: A logical conclusion given that our economy and trust in our government institutions have tanked since the advent of the Obama/Biden administration.]
That’s why a new investment playbook is needed.
[OCS: What is needed is a change in the governance of the United States and a thorough housecleaning of government agencies, institutions, and corporations.
We must scale back social justice experiments in socialism and return to the basics: prioritizing government spending, returning respect for law enforcement, promoting the nuclear family over bizarre and damaging living arrangements that are causing damage to our children, and above else, educating rather than indoctrinating.
We must return to honest journalism that speaks truth to power and does not substitute narrative for news. And, we need to redefine privacy in a digital age as we curtail public-private fascist relationships between the government and private tech entities.]
We laid out in our 2022 midyear outlook why we had entered a new regime –and are seeing it play out in persistent inflation and output volatility, central banks pushing policy rates up to levels that damage economic activity, rising bond yields and ongoing pressure on risk assets.
[OCS: The Federal Reserve is not a government agency. It is a private corporation run for the benefit of its undisclosed shareholders. And like all organizations, it puts its survival and needs above all else.]
Central bankers won’t ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. They are deliberately causing recessions by overtightening policy to try to rein in inflation. That makes recession foretold. We see central banks eventually backing off from rate hikes as the economic damage becomes reality. We expect inflation to cool but stay persistently higher.
[OCS: Again, the emphasis is on the central banks – most of which respond to the Federal Reserve – and not an out-of-control government. To be expected because Larry Fink appears to be an elite progressive communist democrat advancing the agenda of the World Economic Forum and their “woke” ESG (Environmental, Social, and Governance) stakeholder business model. <Source>]
What matters most, we think, is how much of the economic damage is already reflected in market pricing. This is why pricing the damage is our first 2023 investment theme. Case in point: Equity valuations don’t yet reflect the damage ahead, in our view. We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes. Yet we won’t see this as a prelude to another decade-long bull market in stocks and bonds.
The new playbook calls for a continuous reassessment of how much of the economic damage being generated by central banks is in the price.
That damage is building. In the U.S., it’s most evident in rate-sensitive sectors. Surging mortgage rates have cratered sales of new homes. We also see other warning signs, such as deteriorating CEO confidence, delayed capital spending plans and consumers depleting savings.
This new regime calls for rethinking bonds, our second theme. Higher yields are a gift to investors who have long been starved for income. And investors don’t have to go far up the risk spectrum to receive it. We like short-term government bonds and mortgage securities for that reason. We favor high-grade credit as we see it compensating for recession risks. On the other hand, we think long-term government bonds won’t play their traditional role as portfolio diversifiers due to persistent inflation. And we see investors demanding higher compensation for holding them as central banks tighten monetary policy at a time of record debt levels.
Our third theme is living with inflation. We see long-term drivers of the new regime such as aging workforces keeping inflation above pre-pandemic levels. We stay overweight inflation-linked bonds on both a tactical and strategic horizon as a result.
[OCS: It’s not the aging workforce – it’s corrupt politics.]
Our bottom line: The new regime requires a new investment playbook. It involves more frequent portfolio changes by balancing views on risk appetite with estimates of how markets are pricing in economic damage. It also calls for taking more granular views by focusing on sectors, regions, and sub-asset classes, rather than on broad exposures. <Read more…>
[OCS: Forget the new playbook – what is needed is a new administration and commitment to the U.S. Constitution. It should also be noted that BlackRock speaks of this new regime in the third person as if they are not a significant member of the “new regime.”]