JPMorgan Asset Management Global Head of Fixed Income Bob Michele said that today’s economic climate calls to mind the lull seen in the 2008 financial crisis. Michele, who manages more than $700 billion worth of assets for JPMorgan, thinks the current climate is deceptive.
In an interview, he said: “This does remind me an awful lot of that March-to-June period in 2008.”
In other words, the coming months could well prove to be the calm before the storm.
In past rate hike cycles, there has been a pattern of recessions starting 13 months, on average, following the final rate increase by the Fed. Their most recent move occurred in May, and the clock is already ticking. Michele said that during the period right after the central bank stops raising rates, “you’re not in a recession; it looks like a soft landing” given that the economy continues to grow. However, he did not try to downplay what is likely in store.
“But it would be a miracle if this ended without recession,” he noted.
Michele believes the economy could enter into a recession before the close of the year. Although it may be delayed slightly as Covid stimulus funds continue to have some effect, there is no question where we’re headed.
“I’m highly confident that we’re going to be in a recession a year from now,” he added.
One reason he feels confident making this prediction is that the Federal Reserve’s actions in the last 15 months have been their most aggressive rate increases in the past four decades. The Fed is also using quantitative tightening, and Michele says we are currently seeing moves that are normally only seen during or just before recessions. He also cited growing unemployment, dropping commodity values, an inverted yield curve and tightening credit as further signs that an economic slowdown is underway.
While a recession will affect everybody, he thinks commercial real estate, junk-rated commercial borrowers and regional banks will be the hardest hit.
When it comes to commercial real estate, he points to the high number of unoccupied buildings in many metro areas as property owners grapple with high interest rates and default on their loans.
Meanwhile, junk-rated companies that have benefited in the past from low borrowing costs will have a hard time coming to terms with the new funding environment, and those looking for refinances for their floating-rate loans could well end up in trouble. He thinks many will see rates double or even triple, prompting restructuring and defaults.
For regional banks, investment losses related to higher interest rates, along with pressure due to reliance on governmental programs for meeting deposit outflows, will create a lot of pressure. Michele thinks the recent problems in this industry have not been solved; instead, they have only been stabilized thanks to help from the government.
Jeremy Siegel, a retired finance professor for the University of Pennsylvania’s Wharton School and financial commentator, also expects a recession, although he believes it will be shallow, particularly in light of pressure in the political season to avoid a deep recession.
Germany recently fell into a recession as inflation took its toll on Europe’s largest economy, with higher prices affecting household spending on everything from furniture and clothes to groceries. The Ukraine conflict’s effect on Russian gas supplies also contributed to the situation. The inflation rate in Germany was 7.2 percent in April.
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