Tuesday, June 6, 2023
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Bloomberg: Weighing Recession Risks

David Bianco, DWS Americas CIO and Sharmin Mossavar-Rahmani, Goldman Sachs Wealth Mgmt CIO dive into growth in the US and how earnings in other countries stack up. They also evaluate which country has benefitted the most from globalization.
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Let me start with you, David. Does the equity market agree with the bond market about where we’re headed? I don’t think so. And then sometimes there are good reasons for the bond market and equity market looking like they’re disagreeing when they’re really agreeing. But this time around, I think the equity

Market is ignoring the recession signals that are flashing. Well, what do you think about that? I mean, are there recession flashing, signals flashing? And is the equity market disregarding? The cover for outlook this year was question heavy fog. And the whole point was that there was a lot of uncertainty.

There’s heavy fog. And to have too much conviction on the probability of a recession is not prudent. We actually think the probability is 45 to 55 percent. We’ve never been this high and we’ve never had a 10 percentage point range. So our view is a recession is not obvious and clients shouldn’t position

Themselves saying there is a recession and let’s go underweight equities or there’s no recession. We should go overweight equities. And we actually don’t think the bond market and the equity market are sending mixed signals. If you look at where the equity market

Is and where interest rates are and you compare them to a period like two thousand and three, four or five, six, that average period, the equity risk premium, meaning the incremental earnings yield relative to treasuries is the same today as it was then when interest rates were the same level.

So we don’t think it’s actually an inconsistent message. What about the so-called credit crunch love? It’s not a crunch at all, but at least a credit tightening. He agrees with that. I mean, what is that going to do? Does that make the likely recession go up?

There’s no doubt that we are seeing tightening of lending. So if you look at the loan officer surveys, more people are pulling back on lending than not. So quite right. You see it across the board, all sectors, real estate and otherwise.

But the fact is, is that already priced in the market and is a growth rate of around one point four or one point six percent, that’s the range we have actually reflecting that. We believe it is growth will probably be

Slower by about point 4, 2.5 percent because of tightening of credit, but not so much to cause a recession. David, where are you on this unlikely to recession and particularly let me tie in the credit tightening with what the Fed

Is likely to do is just let the Fed off the hook a little bit. Well, it’s helping the Fed, but the Fed has more work to do. We expect another hike in May and there might be more hikes perhaps in the autumn if inflation doesn’t come down faster.

I agree with Sherman that the equity market under the surface there has been a defensive rotation. So there is some acknowledgment of the risks ahead. And the equity risk premium is also a healthy equity risk. Under normal conditions, we’re trying to figure out if her earnings are sustainable and if these interest rates

Are sustainable, there’s is risk that interest rates go up after this flight to safety. And I think the bond market is doing right now and earnings are going downward. We’re in a profit recession. We’ll talk more about it later. But there’s more risk to the earnings outlook.

Sure. I mean, let’s switch to China just for a while. We’ve got China data out this week that were somewhat encouraging about growth. You have a big report out actually on China. You’re actually even have a chart in which you compare what happens if you take a hundred dollars at the low point

Of the great financial crisis and invest in the different sectors. Take us through that chart. Yes. If I had to say over the last 20 years of being in private wealth management, it’s one of my favorite charts because we’ve had a U.S. pre-eminence investment view. And this chart bears the fact that this

Is actually what is happening. And we think that’s going to continue and that is very important in terms of flow of funds into the U.S.. What the chart actually shows you is if you had put in, let’s say, a hundred dollars in U.S. equities, the S&P 500 versus one hundred

Dollars in emerging markets or in developed non U.S. markets or China, what would the return have been? You would have earned eight hundred dollars if it was in U.S. equities and only about 250 in Chinese equities. So in spite of all this growth and enthusiasm for a China, it has not been

A good place to invest at all. In fact, you’d only earn about a third. And going forward, we think there’s too much euphoria that this recovery from the lockdown would be that meaningful. We can have a short term recovery, but generally we think China is going to have a substantially slower

Trend growth. And we encapsulated it all in our report called Middle Kingdom Middle Income. They’re not going to escape the middle income trap. David, too much euphoria over China. Do you agree? I think there is a bit of too much of Europe, as you saw here, over the reopening in China.

And it’s good for China, it’s good for China’s service consumption. But I don’t think it’s going to stop the profit recession that we expect at the S&P. And the interesting thing is America is the greatest. And U.S. equities over the past 10, 15 years have been the place to be.

Large caps, growth stocks, tech stocks. And suddenly investors have said, why should I just deviate from what has worked so well over the past 10 years? The trouble is, things are changing and. Uncertainty on the ability of profits to keep growing at a strong pace and interest rates stay low is the concern.

So I don’t want to be cute about this, but this is sort of like past performance is not a predictor of future ISE rise. And your point about Sherman’s chart, I mean that this is all fine and good going back to great financial crisis going forward might be quite different.

We’re facing more challenges. Jeremy So the gap between the US and the rest of the world may not continue to be as big in terms of outperformance, but the growth in the US is driven by earnings per share growth. It’s not driven just by price action and multiple action.

And if you look at the earnings per share growth in the US, the other countries don’t even come close. If you look at China, it has lagged and it’s not looking at a particular window where earnings per share growth may have been much higher. It’s actually looking at long term

Earnings growth in the US and sector by sector. Most of them have underperformed the US. I love what you’re saying. I’m happy to elaborate on it. There’s a difference between growth and good return on capital and the S&P 500 American companies. They know how to get strong returns on their incremental investment spending

And a lot of that has come through globalization, digitalization and we have to see how much more upside there is on those things. Well, let’s just end on that globalization question, because I’m not saying we’re going entirely away from globalization, but it’s not going to be

The way it was in the past. It looks like it’s going to be more divisive than it was in the past. Shery Ahn, how does that affect your analysis? If one has to think of which country in the world has benefited the most from globalization?

It has been China. China’s growth rate is completely dependent on globalization. They have huge surpluses. They’ve used that surplus to build the property sector, build the infrastructure, infrastructure business that they have and very dependent on exports. If globalization at the margin decreases

A little bit and globalization peaked in 2000 and eight before just at the peak of the global financial crisis, then they are going to be hurt the most and the US hurt the least. So in fact, the slight the globalization even would be very beneficial for the US and hurt China.




  1. Yield curve inversion has never been wrong in predicting a recession because of what it represents. To take the stance that there's not a great chance of a recession is stupid.

  2. Earnings are not sustainable and the FED is going to hold interest rates higher for longer. I think the bottom will be a short time after a downturn combined with the FED reserve shocking the market by not coming to the rescue.

  3. Monetary policy cannot control inflation by itself by raising the interest rate or reducing credit and contracting the money supply. However, fiscal policy must intervene in order to help and support monetary policy in the war against inflation, by reducing government spending, rationalizing government expenditures, increasing taxes on the rich and wealthy, increasing tax revenues, increasing the average per capita share of tax revenues, reducing the budget deficit, reducing sovereign debt, and paying off a large part. Of which . Thus, reducing interest payments. In this case only, prices can be reduced and the strength of the national currency can be increased. The interest rate will automatically decrease, the price level will decrease, and the inflation rate will automatically decrease as well. Thank you, may God's peace, mercy and blessings be upon you,
    economic researcher Hussein Mubarak, Cairo,
    on Friday, Shawwal 8, 1444 AH, April 28, 2023 AD.

  4. My greatest concern is how to recover from all these economic and global troubles and stay afloat especially with the political power tussle going on in US.

  5. I’m confident the current market has an equal possibility of making high-value gains or losses, so I'm cautious with my selections; but, I heard that a trader made over $850k in this market, and I could really need ideas on how to achieve similar profits

  6. Some economists have projected that both the U.S. and parts of Europe could slip into a recession for a portion of 2023. A global recession, defined as a contraction in annual global per capita income, is more rare because China and emerging markets often grow faster than more developed economies. Essentially the world economy is considered to be in recession if economic growth falls behind population growth.

  7. How do they hire a GS person so clueless?? Globalisation allowed China to export more and US to borrow more. How does she think the RMB/USD was kept stable if they weren't buying Treasuries/USD assets at the same pace as exports? Deglobalisation means deleveraging of the US which is massively more harmful to US in terms of economic activity than to China where the domestic consumption per capita and velocity of capital is starting a much lower base

  8. US outperformance is great but you have to consider how massive US equity markets are compared to other parts of the world, including China and India. It's a developed nation that greatly values capitalism, as soon as China and India reach the same levels of awareness in the masses on how to properly deploy capital, the tide will definitely shift and we will see much better performance from Asian equities. That being said, as of this moment, you have to deploy capital in the US. It's the innovation hub of the world by a large margin but lets see how long this fact holds true. I'm long USA but I'm also rationale and think there will be great leveling of the playing field in little as 5-10 years.

  9. If Goldman Sachs cant see a recession coming with the state of the US leading economic indicators, term spread, developments n the employment markets, then they need to hire people that can appreciate these data…..Like me….

  10. Wow GS CIO is either dumb or a liar.. Being it's GS I'm going to go with the latter… 
    Her chart doesn't mention that those big returns have been fueled by free money from the Fed QE, ZIRP, ect.. We are now in the exact opposite scenario than in the 2010s.. QT and an aggressive hiking cycle. She also claims that interest rates in the early 2000s were similar as today, but she fails to mention debt levels today are multiple times higher, so cost of servicing the debts are much higher, even with the same interest rates as 2000s.  
    Then, she makes a ludicrous statement that de-globalization is bad for China and good for US. This is wrong. De-globalization will hurt US. US consumers will have to pay more for the same products they already consume, in turn being able to afford less things and living a lower quality of life, or having to forego many products, instead of buying everything they want as they do now. China on the other hand may not benefit greatly from de-globalization, but they can still sell their products elsewhere or consume them themselves.. If anything, they will have an abundance of products, which would in turn lower prices for their own consumers. The ones that get hurt are the US consumers.. Who will produce all these abundant cheap products for the US? The 2020/21 supply chain shortages were an example of what would happen if China stopped producing and the US consumers have to bid up prices for fewer goods.. goods which will also have much higher production/labor costs.

  11. Those statistics show how US markets got inflated by Fed policies by pumping money to Wall Street . China does not have stupid Fed and unchecked capitalism.

  12. Compared to Historical Average Interest Rates,
    the Markets have been Spoiled – like a Rotted child.

  13. Now I know who has been the go-to person for the Biden Administration. Watch China catch the next wave of re-globalization unlike the US

  14. 6:56 ever consider maybe it would result in both sides being hurt substantially? Hmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm..

  15. The CIO of wealth management saying don't panic and don't take your money out of our accounts? I'm so shocked! Really! Pikachu face! No conflicts of interest anywhere to be seen. Nada. Tea anyone?

  16. I think the Australian stock market is the highest returning over the long term but comparing US & ASX over the 10 years doesn’t work as ASX is usually undervalued while US is overvalued.The US is 50% above its long term average while ASX is trading around its average though markets have wider margins than normal which will contract if deglobalisation happens(ASX will be worse affected) & on a side note has used much less leverage than US.

  17. Nonsense, historical performance doesn't guarantee future returns. To think China or developing economics return will be lower than US for the next decade or two is absurd

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