Podcast Summary
Financial markets: Tension and growth: Despite trade concerns and negative yielding debt, stocks are at an all-time high. Bond performance and investor caution add complexity. Real estate and personal growth offer opportunities for local insights and empathy.
The financial markets are experiencing a unique blend of tension and growth. While there are concerns over trade deals, the Fed's stance, and negative yielding debt, the stock market remains at an all-time high. This divergence between bonds and stocks is further complicated by the performance of various parts of the market. Government bonds may indicate a potential recession, but corporate bonds and equities continue to thrive. Additionally, there's a general sense of caution among investors, with many engaging in defensive strategies. Amidst these conflicting signals, it seems that many are adopting a wait-and-see approach. In the real estate sector, Principal Asset Management leverages a 360-degree perspective to deliver local insights and global expertise, helping identify compelling investing opportunities. Meanwhile, in our personal lives, empathy, insight, and awareness can help us better understand and address the invisible struggles of those around us, contributing to healthier individuals and companies.
Bullish strategist turns bearish: Market sell-offs and US recession ahead: A former trader and current macro strategist at Bloomberg, Mark Cudmore, is warning of market sell-offs and a possible US recession due to the disappearing growth and earnings pillars, and the potential loss of impact from liquidity due to increasing leverage.
Mark Cudmore, a Bloomberg macro strategist and former trader, who has long been bullish on the market, has recently flipped bearish and is warning about significant market sell-offs and a possible US recession. He believes that two of the three pillars supporting the market - growth and earnings - are disappearing, and the third pillar, liquidity, while not disappearing, may lose some of its impact due to the increasing leverage in the system. Economists have not yet fully factored in the impact of tariffs, and a removal of tariffs and rate cuts would be necessary to restore the expected growth rate. Global manufacturing PMI has been in contraction territory for 13 straight months. Cudmore, who has a history of turning bearish during crises but staying bearish too long, is now advising to sell the rallies instead of buying the dips.
Economic Indicators Signal Potential Recession, But Earnings Strategists Aren't Convinced: Economic indicators suggest a recession, but earnings strategists are still optimistic due to reliance on economists' data. The Fed's easing may provide temporary relief, but its past record is poor. Divergence between stocks and bonds is a concern, and potential earnings recession could lead to market volatility.
The economic indicators, such as PMI readings and earnings forecasts, suggest a significant slowdown in growth starting around August or September, potentially leading to a recession. This trend is not being fully recognized by earnings strategists yet due to their reliance on macroeconomic inputs from economists. The Fed's easing mode may provide some relief, but its past record of preventing recessions is poor, and monetary policy may no longer be an effective tool for changing the economic cycle. The divergence between the stock market and bond market, with record high stocks and negative-yielding debt, is a cause for concern as it indicates investors' differing perceptions of the economic outlook. The potential for a drastic earnings recession, coupled with the economic slowdown, could lead to significant market volatility.
Signs of an economic downturn: Bond market signals economic downturn, but stocks continue to reach new highs. Sectors like transportation, small caps, and home builders show weakness, while job market shifts add to concerns. The trade dispute may have accelerated this process, but the economic cycle was already showing signs of change.
The current economic environment may be experiencing the end of the cycle, as indicated by the bond market and various economic indicators. While stocks continue to reach new highs, signs of weakness in sectors like transportation, small caps, and home builders, along with job market shifts, suggest a potential economic downturn. The bond market's reaction, which provides extra liquidity and lowers the discount rate for stocks, can make equities seem more attractive, but this trend may not last long. The trade dispute may have accelerated this process, but it's essential to recognize that the economic cycle was already showing signs of change. The speaker's shift to a structurally bearish stance reflects this perspective, and the added complications of the trade war make the situation even more challenging.
US-China trade situation worsens, shifting Asia's narrative: The US-China trade war is now seen differently on both sides, with China taking a more defiant stance and demanding equal footing, making a resolution unlikely in the near future and potentially negative for US stocks.
The US-China trade situation has significantly deteriorated in May, leading to a breakdown in the relationship between the two countries. This has shifted the narrative in Asia, where China is now seen as unwilling to make concessions without the US making the initial ones. Meanwhile, in the US, there is a belief that Trump will eventually make a deal before the election. However, both China and the US have boxed themselves into positions where satisfying domestic public opinion makes a resolution difficult. The trade war is now being viewed differently on both sides of the globe, with China taking a more defiant stance and demanding equal footing. This dynamic makes a trade deal seem unlikely in the near future, and could lead to negative consequences for the US stock market.
US multinationals facing growth and earnings declines due to Asian consumer base: Professional investors are trading defensively and hedge fund leverage is high, signaling potential risks in the financial system
The current economic climate, marked by an expensive stock market and a turning economy, is expected to lead to significant growth and earnings declines for US multinationals that heavily rely on the Asian consumer base. Additionally, the credit markets could experience severe financial pain due to a lack of liquidity and the inability for banks to act as middlemen during a sell-off. While some early indicators of trouble have emerged, such as the recent stress in various funds, it's important to note that this doesn't necessarily mean a repeat of the 2008 crisis. However, professional investors have started trading more defensively, and hedge fund leverage is reaching pre-crisis highs, indicating that there is risk in the system that could be squeezed quickly.
Market turmoil doesn't always hit illiquid assets first: During market sell-offs, more liquid assets like stocks and bonds may be sold off first. Patience is key when navigating illiquid assets, and timing is crucial for minimizing losses.
During times of financial market turmoil, it may not be the most illiquid assets like corporate credit and leverage loans that see the most significant selling pressure. Instead, more liquid assets such as stocks and government bonds may be sold off first. This was observed during the 2008 financial crisis when emerging market currencies reached an all-time high despite clear signs of an impending crisis. Therefore, those looking to navigate illiquid assets during market sell-offs should exercise patience and wait for clear signs of a cycle turn before making trades. It's essential to keep in mind that the timing of these moves is crucial, and illiquid assets may experience significant step moves once the market has stabilized. This is a valuable lesson learned from the last crisis, and it's worth considering as we navigate the current financial landscape. Additionally, the speaker noted the contrasting behavior of the dollar during the 2008 crisis and its current strength, highlighting the importance of understanding how different asset classes react to market conditions.
US Dollar Weakening Supports Vulnerable Assets: The weakening US dollar can support emerging markets and commodities during a financial crisis, but its support may not last long if the crisis is bigger than anticipated. The credit market, particularly leverage finance and CLOs, could hide significant leverage in the financial system.
The weakening US dollar, driven by macroeconomic factors and the actions of central banks like the Federal Reserve, can support assets typically vulnerable in a global financial crisis, such as emerging markets and commodities. However, this support may only last until it's clear that the crisis is bigger than anticipated. Unlike the 2008 financial crisis, the dollar may not experience a subsequent massive boost. The credit market, specifically leverage finance and CLOs, is a potential hidden pocket of leverage in the financial system. Being publicly bearish comes with the challenge of maintaining flexibility and admitting when the facts change, which can be difficult but necessary for profitability.
US-China trade deal and the Fed's actions impact on markets: A grand trade deal with tariff removal is needed for market boost, but the Fed's response to potential credit market cracks adds complexity, and the market's calmness amidst dire rhetoric and easing measures doesn't guarantee a soft landing for the economy
While the trade war between the US and China continues to be a concern for the markets, a simple truce may not be enough to prevent a bearish scenario. The removal of existing tariffs in a grand trade deal is what could potentially provide a sustainable boost to markets. However, the Fed's response to potential cracks in the credit market and its shift into easing mode adds a layer of complexity to the situation. Despite the concerns, some observers feel that the market's calmness in the face of dire rhetoric and the Fed's actions suggest that something may be different this time. Yet, the question remains about the timing of the cycle's end and the effectiveness of the Fed's actions given the length of the current expansion. The bond market's demand for multiple rate cuts this year also raises questions about the market's reaction to the Fed's easing measures. Ultimately, the idea of a soft landing for the economy is a myth, and the ability of the Fed to engineer one is questionable.
Predicting market movements is uncertain: Analysts like Mark Cudmore from Bloomberg provide valuable insights into the current economic landscape, but predicting market movements is impossible even for the most informed analysts.
Even the most informed analysts, like Mark Cudmore from Bloomberg, may not be able to accurately predict market movements, especially in the face of unprecedented economic conditions. While it's impossible to know for sure what will happen in the markets by this time next year, Cudmore's insights and perspectives are valuable in understanding the current economic landscape. Tune in to Odd Lots next year to find out if Cudmore's predictions were on the mark or not. In the meantime, don't forget to follow Tracy Alloway and Joe Weisenthal on Twitter, as well as Bloomberg Podcasts and Laura Carlson. Also, check out the new podcast "Money Stuff" with Matt Levine and Katie Greifeld. And if you're a business owner, consider the American Express Business Gold Card for earning rewards on your top spending categories.
