Essentials

Bank Credit Analyst

In Section I, we respond to the ongoing challenge to our view that the US economy is on a recessionary path. The available evidence overwhelmingly supports the notion that US monetary policy is tight, which argues against the “no landing” economic scenario. It also underscores that the recessionary clock is indeed ticking unless the monetary policy stance eases soon. The “soft landing” narrative remains improbable and may have been unduly boosted by artificially low inflation readings over the summer. Until concrete signs of the meaningful rate cuts emerge, we will continue to recommend that investors maintain defensive portfolio positions. In Section II, we review the “modern-day” Phillips Curve, and explain why it is unlikely that the Fed will see a sustainable return to its 2% target without a rise in the unemployment rate above NAIRU.

Bank Credit Analyst

Bank Credit Analyst

In Section I, we audit the market’s “soft landing” narrative in response to a meaningful challenge to our cautious stance from recent financial market developments. We acknowledge that US economic growth was stronger in the first half of the year than many investors expected, but we are unmoved by the recent uptick in “soft landing” hopes. A “soft landing” outcome very likely necessitates interest rate cuts before recessionary dynamics emerge, and it is far from clear that rate cuts or (especially) an easy monetary policy stance are likely to materialize over the coming year. As such, we continue to believe that conservative portfolio positioning is appropriate. In Section II, we discuss some simple approaches that we use when valuing the major asset classes that we cover. We conclude that global ex-US equities and ex-US developed market currencies are the main assets that can be considered “cheap” today.

Bank Credit Analyst

Bank Credit Analyst

In Section I, we reiterate why a soft economic landing remains improbable in the US. Some reasonable estimates of the level of excess savings point to their depletion in a year’s time, but other estimates indicate a much earlier end point. We interpret this evidence, as well as other indicators, as pointing to an earlier rather than later US recession if the current stance of monetary policy is maintained or tightened further. In Section II, we provide an update on the US housing market. We acknowledge that permanent site residential structures investment may begin to contribute positively to US real GDP growth if the recent pickup in housing starts is sustained. But the recent housing market data is symptomatic of a negative housing supply shock that is far more consistent with the “no landing” economic scenario than the “soft landing” scenario that stocks are betting on. We continue to recommend that investors position their portfolios conservatively.

Bank Credit Analyst

The Russian mutiny reveals the underlying trend of domestic instability. Russian instability is negative for global stability. The endgame of the war in Ukraine is exacerbating the problem, likely pushing up the equity risk premium.

Bank Credit Analyst

We are overweight Private Credit. Improvements in yield, negotiating leverage, and structuring upside are major tailwinds over the coming years. The business cycle provides an attractive backdrop for all Private Credit sub-asset classes. In this Special Report we examine Private Credit as a whole, but with more emphasis on the income-focused sub-categories of Senior and Mezzanine Debt.

Bank Credit Analyst

Policymakers will likely continue to stimulate domestic demand via targeted measures and piecemeal stimulus. Yet, the economy will disappoint unless Beijing provides “irrigation-style” stimulus. The latter is not our base case scenario.

Bank Credit Analyst

A massive crackdown on cryptocurrencies and crypto companies began this year in the US. Liquidity has collapsed as a result. This lack of liquidity coupled with the anticipated large-scale liquidation of crypto assets by the US government and other large players could be bearish for prices over the next few months. However, a buying opportunity could emerge by year-end, as new regulatory structures in the rest of the world will finally allow institutional investors to access cryptocurrencies without operational risks. The era of thousands of cryptocurrencies is also probably over, with the space likely to consolidate into a few tokens.

Bank Credit Analyst