A long financial thriller | The Manila Times

IN several ways, one can feel that summertime is approaching. A classic indicator is that leisure sections in the media have been focusing on books and series that can entertain while at the poolside or where summer holidays are spent.

I will refrain from coming up with a top 10 list of huge macroeconomic reports that could be an exciting read. Instead, I will share what theme I will dive into when the opportunity arises during the coming weeks.

The coming American recession will, in every way, either be a financial thriller or incredibly exciting, depending on which perspective it is viewed. The story is also unusual as it is about a recession that may occur in approximately one year. Many economic downturns typically develop unexpectedly quickly — otherwise, most governments would naturally try to avoid the crisis by introducing various economic measures.

In this case, financial markets are already reacting to an economic downturn in 12 months, so yes, I assess that the majority in financial markets are now just waiting for it to happen.

In summer fiction, the author would probably create a magical character who conjures away the coming downturn but, unfortunately, investors also have to accept reality. A very significant character has also stepped into the limelight, namely the world’s largest and most powerful central bank, the US Federal Reserve (Fed).

I do not find it entertaining to work in a financial market with negative returns but that’s the reality right now. Despite this situation, my position is that finally, a central bank has shown some power by putting monetary policy stability higher than economic growth.

The big jump in inflation finally got the Fed to ensure monetary policy stability, hence the aggressive rate hikes. The goal is simply to cool the economy down to a standstill or to a level where it is not growing anymore.

The first bank to smell the recession was Deutsche Bank and its research department has already managed to make its forecast more negative.

On June 22, Fed Chairman Jerome Powell gave an update to the banking commission in the Senate in Washington, D.C. He said a recession was definitely an option. He bluntly told politicians that it was more important to tame inflation than to maintain a strong labor market — in short, it is all about slowing down the economy until demand falls.

The US economy is quite robust so it will take time to cool down from high gear. Therefore, this extended and unusual financial thriller is evolving due to the prospect of recession at some point in 2023.

The easiest magic to use in the attempt to steer clear of the recession is, as mentioned earlier, political initiatives. President Joe Biden could propose some growth measures now, which could affect the second quarter of 2023, but it will be difficult because his political opponents will naturally block all proposals to make him look as bad as possible.

The stock market has also partially priced in weak American growth prospects for next year, so this summer’s questions will include whether that development will continue. Do we all wait out a cold economic period of two years and thereafter everything will be good again?

Intuitively, some might think that it doesn’t make sense, that it is unlikely for a magical character to arrive and fix it, or that some other form of magic can lift the mood again. Powell stated more points toward the other direction in his speech, namely the risk of an escalation in the war in Ukraine and even more lockdowns in China.

Both developments are certainly a possibility but in my summer reading of the financial thriller, I will search for other possible directions. One thought is that economic growth will stop much earlier than a year, which is definitely possible. Alternatively, I will also consider whether the economic headwind hits the economy in a narrow instead of broad way, where it could be that mainly the middle class and only a number of business sectors will have to scale back. I regard the latter as an option and should this be the conclusion, then the allocation to stocks must be increased again.

Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.