If you’re hearing constantly about something landing, it’s not the Chinese balloons. This story is so last week. No, everybody and her sister argues whether how soon, and how much the US economy would cool down, if at all. Soft landing, crash landing, no landing, anyone?
It is quite surprising to be honest. Rates have increased from zero to 5% on the short-end, the US rate curve is now inverted like it normally suggests an imminent recession, inflation is still rocking at 6.4%, business margins are compressing, and delinquency rates are increasing. The scene is set for a pretty sloppy downside.
[insert economic gauge]
Yet, employment is fairly strong, morale is already bouncing back from the 4Q22 lows, and investments in infrastructure and IP promise a well-needed second breath. Reality is that companies and households still have some form of cash and equity cushion that make them feel comfortable.
Portfolio managers are doubling down on a few themes. Emerging markets, notably China, should be reborn from its hashes as it continues unshackling its economy from stringent covid measures. Bond managers are flocking to the short-end with some mildly daring longer duration bets on high quality bonds. Companies compliant with ESG standard could attract investment flows for a less carbonated and benevolent economy. The geopolitical tale end is swollen with fat risks though, with US and China further breaking down the world into two camps, and a hot conflict in Ukraine dangerously looking like a redo of the cold war.
What civilization would prevail? I don’t know and I leave that to the digital history books of 2100, but this really feels like we are left re-inventing the world order as set by the post second world war. In my book, I see technology ever again unlocking slack, and calling winners. First, in healthcare and education sectors, making it more affordable and efficient. Secondly, further increasing productivity as demographics wane in the largest economies. Thirdly, helping the pivot out of a carbonated economy into more earth-conscious means of value creation.
For some, such periods feel ripe for challenging the status quo. Crypto challenges the US dominance over world markets. China challenges Uncle Sam. Young and female shake up the outdated patriarchal model. Environmentalists alert on the dead-end of using fossil fuels to power our ever-increasing demands. This will bring positive changes for sure.
If capitalism, the pursuit of growth, and democracies remain a thing, we are still left with a few puzzling questions. How do we ever walk out of the debt spiral? Can we still achieve global peace and development if the world shatters into two or more opposing blocks? Are ever increasing wealth gaps sustainable? Tough choices, and no wonder that economists feel a little bit like in no man’s land right now.
360 Advisory LLC is a Boston-based RIA managing investments, including crypto