Bob Michele, Managing Director, is the Chief Investment Officer and Head of the Global Fixed Income, Currency & Commodities (GFICC) group at JPMorgan.
CNBC
To a minimum of one market veteran, the stock market’s resurgence after a string of bank failures and rapid rate of interest hikes means just one thing: Be careful.
The present period reminds Bob Michele, chief investment officer for JPMorgan Chase‘s massive asset management arm, of a deceptive lull in the course of the 2008 financial crisis, he said in an interview on the bank’s Recent York headquarters.
“This does remind me an awful lot of that March-to-June period in 2008,” said Michele, rattling off the parallels.
Then, as now, investors were concerned concerning the stability of U.S. banks. In each cases, Michele’s employer calmed frayed nerves by swooping in to accumulate a troubled competitor. Last month, JPMorgan bought failed regional player First Republic; in March 2008, JPMorgan took over the investment bank Bear Stearns.
“The markets viewed it as, there was a crisis, there was a policy response and the crisis is solved,” he said. “Then you definately had a gradual three-month rally in equity markets.”
The top to a virtually 15-year period of low-cost money and low rates of interest all over the world has vexed investors and market observers alike. Top Wall Street executives, including Michele’s boss Jamie Dimon, have raised alarms concerning the economy for greater than a yr. Higher rates, the reversal of the Federal Reserve’s bond-buying programs and overseas strife made for a potentially dangerous combination, Dimon and others have said.
However the American economy has remained surprisingly resilient, as May payroll figures surged greater than expected and rising stocks caused some to call the beginning of a fresh bull market. The crosscurrents have divided the investing world into roughly two camps: Those that see a soft landing for the world’s biggest economy and those that envision something far worse.
Calm before the storm
For Michele, who began his profession 4 a long time ago, the signs are clear: The subsequent few months are merely a relaxed before the storm. Michele oversees greater than $700 billion in assets for JPMorgan and can also be global head of fixed income for the bank’s asset management arm.
In previous rate-hiking cycles going back to 1980, recessions start a median of 13 months after the Fed’s final rate increase, he said. The central bank’s most up-to-date move happened in May.
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In that ambiguous period just after the Fed has finished raising rates, “you are not in a recession; it looks like a soft landing” since the economy continues to be growing, Michele said.
“However it could be a miracle if this ended without recession,” he added.
The economy will probably tip into recession by the tip of the yr, Michele said. While the downturn’s start could get pushed back, due to the lingering effects of Covid stimulus funds, he said the destination is evident.
“I’m highly confident that we’ll be in recession a yr from now,” he said.
Rate shock
Other market watchers don’t share Michele’s view.
BlackRock bond chief Rick Rieder said last month that the economy is in “a lot better shape” than the consensus view and will avoid a deep recession. Goldman Sachs economist Jan Hatzius recently dialed down the probability of a recession inside a yr to only 25%. Even amongst those that see recession ahead, few think it is going to be as severe because the 2008 downturn.
To start out his argument that a recession is coming, Michele points out that the Fed’s moves since March 2022 are its most aggressive series of rate increases in 4 a long time. The cycle coincides with the central bank’s steps to rein in market liquidity through a process referred to as quantitative tightening. By allowing its bonds to mature without reinvesting the proceeds, the Fed hopes to shrink its balance sheet by as much as $95 billion a month.
“We’re seeing things that you simply only see in recession or where you wind up in recession,” he said, starting with the roughly 500-basis point “rate shock” previously yr.
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Other signs pointing to an economic slowdown include tightening credit, in keeping with loan officer surveys; rising unemployment filings, shortening vendor delivery times, the inverted yield curve and falling commodities values, Michele said.
Pain trade
The pain is prone to be biggest, he said, in three areas of the economy: regional banks, business real estate and junk-rated corporate borrowers. Michele said he believes a reckoning is probably going for every.
Regional banks still face pressure due to investment losses tied to higher rates of interest and are reliant on government programs to assist meet deposit outflows, he noted.
“I do not think it has been fully solved yet; I feel it has been stabilized by government support,” he said.
Downtown office space in lots of cities is “almost a wasteland” of unoccupied buildings, he said. Property owners faced with refinancing debt at far higher rates of interest may simply walk away from their loans, as some have already done. Those defaults will hit regional bank portfolios and real estate investment trusts, he said.
A girl wearing her facemask walks past promoting for office and retail space available in downtown Los Angeles, California on May 4, 2020.
Frederic J. Brown | AFP | Getty Images
“There are quite a lot of things that resonate with 2008,” including overvalued real estate, he said. “Yet until it happened, it was largely dismissed.”
Last, he said below investment grade-rated corporations which have enjoyed relatively low-cost borrowing costs now face a far different funding environment; people who must refinance floating-rate loans may hit a wall.
“There are quite a lot of corporations sitting on very low-cost funding; once they go to refinance, it is going to double, triple or they will not give you the chance to and so they’ll need to undergo some type of restructuring or default,” he said.
Ribbing Rieder
Given his worldview, Michele said he’s conservative together with his investments, which include investment grade corporate credit and securitized mortgages.
“All the things we own in our portfolios, we’re stressing for a pair quarters of -3% to -5% real GDP,” he said.
That contrasts JPMorgan with other market participants, including his counterpart Rieder of BlackRock, the world’s biggest asset manager.
“A few of the difference with a few of our competitors is that they feel more comfortable with credit, so that they are willing so as to add lower-rate credits believing that they’re going to be nice in a soft landing,” he said.
Despite gently ribbing his competitor, Michele said he and Rieder were “very friendly” and have known one another for 3 a long time, dating to when Michele was at BlackRock and Rieder was at Lehman Brothers. Rieder recently teased Michele a couple of JPMorgan dictate that executives needed to work from offices five days per week, Michele said.
Now, the economy’s path could write the newest chapter of their low-key rivalry, leaving considered one of the bond titans to seem like the more astute investor.