Bob Michele, managing director, is chief investment officer and head of the Global Fixed Income, Currency & Commodities (GFICC) group at JPMorgan.
CNBC
For a minimum of one market veteran, the recovery of the stock market after a series of bank failures and soaring rates of interest means just one thing: beware.
The present period reminds Bob Micheleinvestment director JPMorgan Chasemassive asset management armin regards to the deceptive standstill through the 2008 financial crisis, he said in an interview with the bank’s headquarters in Latest York.
“It jogs my memory rather a lot of March to June 2008,” Michele said, noticing the similarities.
Then, as now, investors were concerned in regards to the stability of US banks. In each cases, Michele’s employer calmed his frayed nerves by taking over a difficult competitor. JPMorgan bought bankrupt regional player First Republic last month; in March 2008, JPMorgan take over investment bank Bear Stearns.
“The markets saw it as a crisis, there was a political response and the crisis was resolved,” he said. “Back then you definitely had a gradual three-month rally within the stock markets.”
The top of an almost 15-year period of low cost money and low rates of interest all over the world has irritated investors and market watchers alike. Top Wall Street executives, including Michele’s boss Jamie Dimon, have been sounding the alarm in regards to the economy for greater than a yr. Higher rates of interest, the reversal of the Federal Reserve’s bond-buying programs and foreign conflicts have created a potentially dangerous combination, said Dimon and others.
The US economy stays surprisingly resilient, nevertheless, as May jobs data rose greater than expected and prompted rising stocks Some call the start of a latest bull market. Converging currents have divided the world of investors into roughly two camps: those that see a soft landing for the world’s largest economy and people who predict much worse.
Calm before the storm
For Michele, who began his profession forty years ago, the signs are clear: the subsequent few months are only the calm before the storm. Michele oversees over $700 billion in assets for JPMorgan and can be the Global Head of Fixed Income for the bank’s Asset Management division.
He said that in previous cycles of rate of interest hikes dating back to 1980, recessions began a median of 13 months after the Fed’s final rate hike. The last move by the central bank took place in May.
Michele said that on this ambiguous period just after the Fed finished raising rates of interest, “you are not in a recession; it looks like a soft landing” since the economy remains to be expanding.
“Nevertheless it could be a miracle if it ended with no recession,” he added.
The economy is more likely to fall into recession by the tip of the yr, Michele said. While the beginning of the slowdown could also be postponed, due to the lingering effects of Covid-19 stimulus funds, said the goal was clear.
“I’m deeply convinced that we shall be in a recession in a yr’s time,” he said.
Rate the shock
Other market observers don’t share Michele’s view.
Black Rock bond chief Rick Rieder said last month the economy was in “a lot better shape” than consensus and will avoid a deep recession. Goldman Sachs economist Jan Hatzius recently lowered the probability of a recession in a yr to only 25%. Even amongst those that predict a recession, few consider it’s going to be as severe because the 2008 crisis.
To begin the argument that a recession is looming, Michele points out that the Fed’s moves from March 2022 are probably the most aggressive series of rate of interest hikes in 4 a long time. The cycle coincides with steps by the central bank to scale back market liquidity through a process often called quantitative tightening. By letting its bonds mature without reinvesting the proceeds, the Fed hopes to scale back its balance sheet by as much as $95 billion a month.
“We’re seeing things you’ll be able to only see in a recession, or where a recession ends,” he said, starting with a few 500-point “rate of interest shock” last yr.
Other signs of an economic slowdown include a tightening of credit, in line with surveys by loan officers; rising unemployment claims, shortening delivery times to suppliers, an inverted yield curve and falling commodity values, Michele said.
Trade in pain
He said the pain will likely be biggest in three areas of the economy: regional banks, business real estate and junk-rated corporate borrowers. Michele said he believes each of them is more likely to settle.
Regional banks still He noted that they face pressure on account of investment losses related to higher rates of interest and depend upon government programs to assist cover the outflow of deposits.
“I do not think it’s fully resolved yet; I believe it has been stabilized with government support,” he said.
He said downtown office space in lots of cities is “almost a wasteland” of uninhabited buildings. Property owners facing debt refinancing at much higher rates of interest can just walk away from their loans, as some have already done. He said these insolvencies would hit regional bank portfolios and real estate investment funds.
A girl wearing a mask walks past advertisements for office and retail space available in downtown Los Angeles, California, May 4, 2020.
Frederic J. Brown | AFP | Getty’s paintings
“There are rather a lot of things that resonate with 2008,” including overvalued real estate, he said. “But before that happened, it was largely dismissed.”
The last one, he said below investment levellower-rated firms that used to enjoy relatively low borrowing costs now face a totally different funding environment; those that have to refinance loans with variable rates may hit the wall.
“There are various firms that depend on very low funding costs; after they go to refinance, it’s going to double, triple, or they will not give you the chance to do it and may have to undergo some kind of restructuring or insolvency,” he said.
Rieder ribs
Given his worldview, Michele said he’s conservative in his investments, which include investment-grade corporate loans and securitized mortgages.
“We put all the things we have now in our portfolios at -3 for several quarters% to -5% of real GDP,” he said.
This contrasts JPMorgan with other market participants, including its counterpart Rieder BlackRock, the world’s largest asset manager.
“Part of the difference with some of our competitors is that they are more comfortable with credit, so that they’re willing so as to add lower-interest loans, believing they’ll be fantastic with a soft landing,” he said.
Despite gently deceiving his competitor, Michele said he and Rieder were “very friendly” and had known one another for 3 a long time, going back to when Michele was at BlackRock and Rieder at Lehman Brothers. Rieder recently teased Michele about JPMorgan dictate that executives needed to work from their offices five days per week, Michele said.
Now the trail of the economy may write the ultimate chapter of their modest rivalry, leaving one of the bond titans to seem like a more savvy investor.