To The Moon

The chances of a recession are increasing worldwide. The US economy has been in a technical recession since the beginning of this year, defined as two consecutive quarters of contraction. This contraction is explained by corona-lockdowns and stock effects. To qualify as a real recession, a significant drop in economic activity is required and, judging by various indicators including the labour market, retail sales and industrial production, this is certainly not yet the case. There are an increasing number of indicators that point to an impending recession, but normally in the United States, it takes an average of ten months before a recession ensues. The Chinese economy also contracted in the second quarter, the result of strict corona controls that left cities such as Shenzen, Shanghai and Beijing partially or totally closed. There, the question is not if, but when there will be a recovery. The corona policy is gradually being relaxed and more relaxation will follow after the People's Congress at the end of the year. In addition, measures are being taken to stimulate the housing market. Nowhere is the likelihood of a recession greater than in Europe. In fact, a recession is the base scenario there. With the Russians cutting off the supply of natural gas, energy prices have risen further. This will depress growth for the rest of the year. In the second quarter, there was still economic growth in the eurozone, but that was mainly due to the opening up after the corona crisis. The annoying thing is that any normalisation of natural gas prices will have little impact on the economic scenario. Indeed, by now winter prices are largely fixed and the drought is exacerbating energy shortages. Furthermore, the ECB needs to raise interest rates further and it does not look like the headwinds of rising energy costs and interest rates will subside any time soon. All in all, the global economy is likely to grow by 2.5 per cent this year, up from over 6 per cent last year.

The growth of the US economy in the second quarter was depressed by 2 percentage points due to inventory reductions. That is good for the current quarter. Furthermore, the latest labour market figures were strong. It has not happened since the 1970s that so many jobs were created during a recession. It is up to the US central bank to slow down the economy to such an extent that fewer jobs will ultimately mean less inflation. Once that has been achieved, the Federal Reserve has the option of easing policy. However, financial markets have been betting on such a soft landing in recent weeks. As a result, interest rates have fallen and equity markets have recovered. Several Fed members are rushing to say that the US central bank will continue to raise interest rates for some time, but markets seem to be paying more attention to the direction of the figures and less to the absolute level. For example, according to the latest figure, inflation fell from 8.7 per cent to 8.5 per cent. That does not mean that prices are falling, but that they are now rising by 8.5 per cent instead of 8.7 per cent. Still, such a high percentage that a few years ago would have been hard to imagine. Economic growth indicators are also weakening, but growth itself still looks robust. At the same time, the high level indicates that the likelihood of the Federal Reserve turning monetary policy around any time soon is extremely low. The market is therefore too far ahead of the music and, given the absolute level of inflation and growth, interest rates will have to rise further, which could lead to a severe recession. Post-corona, the world has been simultaneously hit by supply shocks, higher commodity prices and a rising US dollar. Central banks are raising interest rates to curb inflation. It is possible that there has been a spike in inflation or that the spike will soon follow, but the full effects of higher interest rates have not yet been felt in the economy. Even if we manage to avoid a recession, it is hard to imagine that the economy will return to pre-corona levels.

The fact that equity markets have anticipated too much of a turn in monetary policy that is not forthcoming makes them vulnerable. It is too early to speculate that the US central bank will stop raising interest rates or that it will abandon its policy of quantitative tightening. Although the ECB has little influence on rising energy prices in Europe, this central bank also has little choice but to raise interest rates further. Inflation is simply still too high. For bondholders, the current level of inflation is destroying capital, regardless of maturity. Unfortunately, the war between Russia and Ukraine is creating more inflation, as wars always do. Inflation is, after all, the result of subsidising expenditure that yields no return with money that does not exist. Inflation is rising because of deglobalisation, because of the energy crisis and its accompanying energy transition, because of a shrinking labour force and because of the need post-corona to make longer supply chains more robust. Central banks seem convinced that the current high inflation is mainly related to supply-side distortions and the developments around Taiwan and Ukraine could prolong it. Meanwhile, wages are rising, in the United States, but now also in Europe. Because of this discrepancy between the fundamentals and the financial markets, we are cautious with both equities and bonds. As a result, we are emphasising alternative investments in the portfolio. Furthermore, the sometimes sharp losses on the stock exchange also create opportunities for investors, because certain investments have been unjustly overvalued. For example, there are now shares for sale that are valued much lower than the market but that have better fundamentals. Even in the bond segment, the rise in interest rates combined with higher credit spreads creates more opportunities. Also, the volatility in the coming months may provide new opportunities.