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Bob Michelle, MD, is Chief Investment Officer and Group Head of Global Fixed Income, Currency and Commodities (GFICC) at JPMorgan.
CNBC
For at least one market veteran, the stock market’s resurgence after a series of bank failures and rapid rises in interest rates means only one thing: Watch out.
Remember the current period Bob MichelleChief Investment Officer c. B. Morgan ChaseBig asset management armIt was deceptively quiet during the 2008 financial crisis, he said in an interview at the bank’s headquarters in New York.
“It reminds me so much of March-June in 2008,” Michelle said.
Then, as now, investors were concerned about the stability of US banks. Either way, Michelle’s employer calmed frayed nerves by swooping in on a troubled competitor. Last month, JPMorgan bought failed regional player First Republic. In March 2008, JPMorgan took over Bear Stearns investment bank.
“The markets saw that there was a crisis, there was a political response, and the crisis was resolved,” he said. “Then you had a steady three-month rally in the stock markets.”
The end of nearly 15 years of cheap money and low interest rates around the world has rattled investors and market watchers alike. Top Wall Street executives, including Michelle’s boss Jamie Dimon, have raised the alarm about the economy for more than a year. Dimon and others said that high interest rates, a reversal of the Federal Reserve’s bond-buying programs, and external conflicts made for a potentially dangerous mix.
But the US economy remained surprisingly resilient, with payroll numbers in May rising more than expected and inventories rising some To call the beginning of a new bull market. Crosscurrents have divided the investment world roughly into two camps: those who see a soft landing for the world’s largest economy and those who envision something much worse.
The silence before the hurricane
For Michel, who began his career four decades ago, the indications are clear: The next few months are just the calm before the storm. Michelle oversees more than $700 billion in assets for JPMorgan and is also the head of global fixed income for the bank’s asset management arm.
He said that in previous cycles of rate hikes going back to 1980, recessions began an average of 13 months after the final Fed rate hike. The most recent central bank move occurred in May.
“I’m not in a recession; it feels like a soft landing” because the economy is still growing, Michelle said in that murky period after the Fed finished raising interest rates.
“But it would be a miracle if this ended without a recession,” he added.
Michelle said the economy is likely to enter recession by the end of the year. While the onset of the downturn could be delayed, thanks to the ongoing effects of Covid Stimulus funds, he said, the destination is clear.
“I’m pretty sure we’ll be in a recession a year from now,” he said.
shock rate
Other market watchers do not share Michelle’s view.
Black stone Bond chief Rick Reader said last month that the economy is in “much better shape” from the consensus view and could avoid a deep recession. Goldman Sachs Economist Jan Hatzius recently reduced the probability of a recession within a year to just 25%. Even among those who predict a future recession, few believe it will be as severe as the downturn in 2008.
To begin his argument that a recession is coming, Michel notes that the Fed’s moves since March 2022 are the most aggressive series of interest rate increases in four decades. The cycle coincides with central bank moves to curb market liquidity through a process known 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 only see in a recession or where you end up in a recession,” he said, starting with an “interest rate shock” of roughly 500 basis points last year.
Another sign of an economic slowdown is a tightening of credit, according to surveys of loan officers. Rising unemployment filings, shortening vendor delivery times, an inverted yield curve, and falling commodity values, Michelle said.
Pain trading
He said the pain is likely to be greatest in three areas of the economy: regional banks, commercial real estate and junk-rated corporate borrowers. Michel said he thought the account was likely for both of them.
Regional banks still He cited pressures due to investment losses associated with higher interest rates and reliance on government programs to help meet deposit outflows.
“I don’t think it’s been fully resolved yet; I think it’s been stabilized with the support of the government,” he said.
He said office space in many cities is “nearly arid” of unoccupied buildings. Landlords may face debt refinancing at much higher interest rates walk away of their loans, as some have already done. He said those defaults would hurt the portfolios of regional banks and real estate investment funds.
A woman wearing her face mask walks past an advertisement for available retail and office space in downtown Los Angeles, California, May 4, 2020.
Frederick J Brown | AFP | Getty Images
“There are a lot of things that resonate with 2008,” he said, including overpriced real estate. “But until that happens, it’s been largely dismissed.”
He finally said below investment gradeRated companies that have enjoyed relatively cheap borrowing costs are now facing a very different financing environment; Those who need to refinance floating rate loans may hit a wall.
“There are a lot of companies that rely on very low cost financing; When they go to refinance, it will double or triple or they won’t be able to and they’ll have to do some kind of restructuring or default.”
Ribbed wheels
Given his worldview, Michel said he is conservative in his investments, which include investment-grade corporate credit and securitized mortgages.
“Everything we have in our portfolios, we’re tightening over a two-quarter period of -3% to -5% of real GDP.
This contrasts JPMorgan with other market participants, including its counterpart Wheels BlackRock, the world’s largest asset manager.
“Some of the difference with some of our competitors is that they feel more comfortable with credit, so they’re willing to add lower-rate credits thinking they’ll be fine on a soft landing,” he said.
Despite bashing his rival, Michell said he and Reeder were “very friendly” and had known each other for three decades, dating back to when Michelle was at BlackRock and Reeder was working at Lehman Brothers. Reeder recently teased Michelle about JPMorgan dictate Michelle said executives had to work from offices five days a week.
Now, the course of the economy could be writing the latest chapter in their low-key rivalry, leaving one of the bond giants to look like the shrewdest investor.
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