Are we on course for a full-blown recession by 2023?
(Kitco News) - The Federal Reserve announced it will be windingdown its bond-buying program later this month. The process will involve a $15billion monthly reduction from the current $120 billion a month the Fed isbuying currently. "The bull market is going to crack eventually because theconsecutive monthly tapering is going to hurt the markets the most," AlasdairMacleod, Head of Research at Goldmoney, emphasized.
Speaking in a panel along with John Lonski, Presidentof Thru the Cycle, hosted by Michelle Makori, Lead Anchor and Editor-in-Chiefof Kitco News, both Macleod and Lonski agreed that inflation is worse than theFed admits, which will push us into a recession.
Lonski, the former Chief Economist at Moody'sCapital Markets, discussed his long-term economic outlook. "I am not all thatoptimistic about what lies ahead for the economy in 2023 - 2024. In the 1970's,we had prolonged stays by steadily increasing price inflation. Those episodesof rising price inflation did not end until the U.S. went into a recession,"Lonski explained. "An economic slump would be in response to higher interestrates and reduced profitability."
But Macleod is much more cautious in his forecastsaying there are many reasons for his caution. "If you look at governmentfinances, we can see what's happening to U.S. treasury debt. Yields are alreadyrising," he said. "There will be momentum that will likely occur behind risingyields because of this inflation problem, which is a lot worse than anyone isprepared to officially admit. Higher inflation is also being fueled by all themoney printing that has occurred in recent years."
Lonski spoke about the impact the tapering ofbond purchases will have on the equity markets. "I think you are going to seesigns of an end to recent yearly increases in U.S. equities that have been inexcess of 50 percent," he said. "My sense is that the market right now hasunderestimated where profits are going to be in 2022. What makes matters worsewill be higher interest rates. A sell off in equities accompanied by muchslower economic growth will most likely be the case."
Macleod says it's possible that the bull marketmay be over by the beginning of 2022. He recalled when Fed Chairman JeromePowell tried to taper in early 2020. "In the six week period, the S&P lostone third of its value. That was a bear market within six weeks," Macleodemphasized.
Lonksi advised the best way for investors toprotect their portfolio is by putting money in short term assets that arelinked to short term interest rates. For example, I suggest loans where youfloat your rate loan -- and with the expected rise in interest rates -- willprovide you with some protection," he said.
For more on Lonski and Macleod's views on the economy andthe markets, please watch the full video above. Follow Michelle Makorion Twitter: @MichelleMakori
By Kitco NewsFor Kitco News
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