QUOTE OF THE WEEK
“With confidence, you have won before you have started” – Marcus Garvey
TECH CORNER
This week I am going to paraphrase from Stanley Druckenmiller, a famous asset manager, who has never had a losing year whom I happen to agree with.
We both agree that a recession is on the way due to a year of aggressive interest rate hikes from the Federal Reserve trying to fight sticky inflation and that a hard landing is inevitable. There are more shoes to drop.
This is really the Fed’s fault for blowing up an asset bubble in stocks, real estate, and other sectors by keeping interest rates low for so long after the Global Financial Crisis with their easy money policies. The Fed switched their policy in 2022 and started raising rates and we know that led to the dismal stock market returns for that year.
High interest could lead to more issues in key sectors of the economy like what happened with the regional banks in March when Silicon Valley Bank rapidly failed forcing regulators to step in and backstop depositors.
We now have an ailing commercial real estate market especially in the office sector as many employees are now working from home. Many of the commercial real estate assets are financed by regional banks which will put added pressure on them as owners start to miss mortgage payments.
As I have stated before and I will go into detail next week, the banks capital is drying which has resulted in them just not loaning money. They are taking fewer risks amid slowing economic growth which is leading to a “credit crunch.”
There is a lot of stuff under the hood in this type of environment due to the biggest and broadest asset bubble ever. When you add in a 5% interest rate increase in one year, the bankruptcies we have seen in the banks and other big firms such as Bed Bath & Beyond, it is most likely just the tip of the iceberg.
The probability that a recession will come in the second half of this year is in the cards and it could be deeper than the so called mild recession or a “soft landing. The stock market always declines during recessions. The recent run up in the markets so far this year can’t be justified with earnings declining.. Earnings are expected to go negative for the second quarter of 2023.
The warnings are dire and the economy is teetering on the brink of a hard landing and should it crash, it is likely that bankruptcies will surge, unemployment will jump over 5% and corporate profits will drop at least 20%.
