The New York Times has recently published several articles dealing with the question “To be or not to be a recession?” Some of the biggest experts on Wall Street, CEOs, investment managers, analysts and investors were interviewed in the articles. These are long articles, with deep insights from many experts. But one thing is common to all, Uncertainty about the answer. Moreover, those who bother to answer the question “Why did the market suddenly go up like this?” It is widely claimed that at the end of 2021 the stock indices reached all-time highs and insane levels and a major correction was promised. However, after declines of about 20% in the Dow, about 25% in the S&P, and about 35% in the Nasdaq, and in view of the known economic facts at the end of the second quarter of the year, the investors (the wisdom of the masses) probably decided that the declines led to the level of the current economic environment in the US , represents buying opportunities and start buying. In mid-June and after about six months of sharp declines, the indices started to rise and the debate at the moment is on the question of whether the price levels of the shares in mid-June justified the return of buyers to the market and whether the increases will continue or not?
Before we try to answer, we should point out that since we have actually been through all the recessions that have existed in the US since the late 1960s, we understand why the experts are careful to establish a clear position. The reason for this is simple, they are careful because they have never encountered a pre-recession period like the current one.
One of many examples of the debate comes from the largest bank in the USA, JP Morgan-Chase which is, without a doubt, a leading factor in investor decisions. Three of the bank’s executives gave their opinion on the issue. The chairman of the board, Damon, warned of a “harder than expected recession”. Chief economist Bruce Cassman raised the bank’s expected probability of a recession in the next 12 months to 35% and their lead analyst, Marko Kolanovic He said, “In response to economic weakness and declining inflation expectations, the interest rate markets are already sensing a reversal of Fed policy by pricing in an earlier (January 2023 versus August 2023 mid-June) and lower (currently 3.3% versus a 4% peak in mid-June) interest rates, so we We remain cautiously optimistic.”
These statements represent the leading opinion regarding the question of the recession and you will see a detail of the things in the attached article. However, after the aforementioned statements, last Sunday, the bank issued an interesting announcement to the stock market that quite contradicts fears of a recession. In a full service where customers can plan and book trips ranging from a simple domestic flight to an extravagant safari. The bank bought a reservation system, a restaurant review company and a prestigious travel agent and is building its own port lounges and a force of thousands of travel agents. A new website will be launched in the coming months.” We were looking for something about the fear of a recession that does not bode well for this type of project and we did not find it, the largest bank in the US entered with full force the field of travel, which by the way has become one of the most important expense categories for banks and credit card issuers recently and JP Morgan wants a large piece of the pie.
“And this does not yet include space tourism,” said an analyst who deals with the issue, “a huge field of tourism that is just beginning.” The bank also hopes to turn traveling customers into lifelong Chase fans, attracting more of their spending and other financial needs. This is an impressive investment, an investment that no bank, certainly not JPwill perform in the face of an approaching recession.
Helen Zantner, the chief economist of the Morgan Stanley investment bank, states that “the acceleration of inflation was a common precursor to a recession, but despite high and rising inflation, the probability of a recession in the next 12 months, according to the bank’s models, is about 30%” and Dr. Nathan Sheetz , Citigroup’s global chief economist, expects the US economy to “slow but not contract.”
Janet Henry, Global Chief Economist of HSBCdoes not predict a recession in the US, “but our forecasts certainly paint a picture of an uneven decline just like the recovery that preceded it.” There is no renowned expert who has not expressed an opinion and no media channels, fromCNN through the BBC and Bloomberg did not talk about the issue when the media, as is customary, spreads scary headlines that do not correctly represent what is written in the articles. Even Professor Robini is back to scaring. But for about a month and a half the market has been going up, why?
Because the investors still believe that the chance of a recession is not higher than the chance of no recession and we will not be surprised at all if the investors, who will continue to see approvals for the infrastructure investment plan, such as the “chip law” or the “climate and clean energy regulation” that passed this week, will continue to buy shares. Of course, Putin is still here and Qi hasn’t left and Mrs. Pelosi found the time to visit Taiwan. But, as we have already written before, such scary things have never been able to defeat investor dreams and the big dream is still here!
Look at the attached graph. The graph shows what happened to the basket unit TAN (a basket that invests in companies engaged in solar energy, including 46 companies) two days after it became known that the Democratic senator from Iowa, Joe Manchindecided to support legislation that includes a $369 billion investment in climate and clean energy policies.
What does this jump of the basket actually mean? She tells us that investors believe in continued economic growth. Investors believe that the values are no longer in space and that the technology revolution will continue to disrupt, expand and optimize the economy. The increases we have seen in the last month and a half express the investors’ belief that all those factors that supported and still support the correction (the war in Russia, Ukraine, China, inflation, commodity prices, the supply chain, trade wars, etc.) are the result of non-economic developments and the possibility that they will disappear as quickly as they arrived is reasonable and that the economy will continue grow.
This view is supported by the behavior of the ten-year bond yield, the “safe haven”. The yield of these bonds (which are the biggest alternative to shares) has decreased, despite interest rate increases and promises of continued increases, by 20% since mid-June (from 3.48% in 16.6 to 2.74% in 3.8). What does this mean about investor expectations? President and CEO of the Federal Reserve Bank in San Francisco, Mary Daly She is also a member of the open market operations committee that sets the interest rate, although she said that she is surprised by the behavior of the bonds which should reflect investors’ expectations, “I expect that we will continue to raise the interest rate for now and then keep it there for a while.” But investors think otherwise.
Why did the increases stop in the last two days? Because a new “external disturbance” has arisen and is even more frightening than Putin. A disturbance in the image of Israel’s great friend, the Speaker of the Congress Nancy Pelosi. Polsey decided, against the wishes of the president and many of her Democratic colleagues, to visit Taiwan. The visit shocked the communists in Beijing who are threatening. We don’t think this is what will change the trend.
Our opinion, which we have repeated over and over for years and especially since the exit from the 2008 crisis and the beginning of the actual merger of the technology revolution with the economy of the 20th century, is that the global economy, led by the United States, entered, beginning in the 1980s, a period of prolonged economic tide (prolonged economic cycle) in the economic and business cycle.
It is a process of total social and economic change that the technological revolution, in its progress, actually imposes on humanity and with the support of humanity. In the early 1980s, President Reagan created the basis and business environment for the advancement of the revolution and this, like a perpetual motion machine (perpetum mobilae), began a process of disrupting the 20th century economy and social order. In 2008, as mentioned, the actual merger began and it would not have happened if the “change of generations” had not taken place at that time.
the generation Baby Boomersborn 1946-64, who led the economy, society and politics at the end of the 20th century was replaced by generations ofX, Y and theZ, born 1965-1996. The progress of the revolution and its adoption by the consumer and the industry would not have been carried out without these generational exchanges. This is what we mean when the grandchildren of people our age ask us (starting in November 2023 if Musk fulfills his promise to release an autonomous car in mass production to the market) when they come to pick us up at the nursing homes, “Tell me, grandpa , how come you weren’t afraid to drive cars alone?”.
This revolution is going on simultaneously in two worlds that examine it in a different way, even though these two worlds, Main Street and Wall Street, are made up of the same people. While on Main Street they mainly deal with the real world of adapting and implementing the technologies in practice and on the basis of economic viability, the attention on Wall Street is focused on the potential, on the dream and this is the big difference between Wall Street and Main Street.
If we take the energy industry as an example, then Main Street focuses on creating alternatives to fossil energy while taking into account the economic viability at every stage, while Wall Street (who wants exactly the same disruption) focuses on the question, “What will be the result of the disruption and its effect on the valuation of the company – the value of the company”. The question of how the disruption is carried out is less interesting. This gap, between a world driven by facts and a world driven by expectations is the difference between Main Street and Wall Street. This difference has allowed the information revolution to create a situation on Wall Street where the stock valuation platforms of the 20th century are irrelevant. This is why a company that has no revenue can get crazy values on Wall Street and that is also the reason why the valuation of the same company, one month later, falls by 80%. The “small investor” of 2022 is drowning in a sea of information, a significant part of which is fake news and sensational headlines. We wrote about it Quite a few.
How to behave in today’s situation? The situation today is unique. Between the end of 2021 and the middle of June 2022, a correction was made in the stocks, a correction that was undertaken because of the valuation levels at the time, especially in the technology stocks, but which was “fueled” by a series of external events that we mentioned. All the events that supported and are supporting the correction can be reversed, investors believe that. In the middle of June , when all the experts fear that the declines in the stocks will worsen as a result of the increase in the problems that caused the correction and the concerns that then arose from the results of the second quarter, the stocks started to rise. The change in trend occurred while more and more experts are gradually increasing the chances of a recession and the financial media is celebrating with scary headlines.
The results of the second quarter of the year that have been published so far are indeed better than the expectations, but the results are “past”, and the recession is coming, so what is pushing the stock indices? In our opinion, only the dream provided by the technology revolution and those who know the “small American investor” will agree with us. In any sector you touch, you immediately see the growing potential, especially in light of the fact that the Houses of Representatives succeed in activating the investment plans in the various infrastructures.
In the short and medium term, we will continue to see swans and corrections of all kinds, but the extended economic tide period is just beginning, so the levels of mid-May-June 2022 are definitely collection levels and in our opinion, only baskets and funds! Chips, water treatment, security and agriculture are the leaders for us.
* The above should not be seen as a recommendation to carry out operations and/or investment advice and/or investment marketing and/or advice of any kind. The information presented is for information only and is not a substitute for advice that takes into account the data and needs of each person. The one who makes use of the above information – does so at his own discretion and sole responsibility. The authors may hold some of the papers mentioned above.