The highly anticipated recession and bear market that many experts predicted for 2023 have yet to materialize. In fact, most assets have seen a surge, with the NASDAQ reaching a 52-week high in July. This raises the question of how this could be happening and whether the rally will continue.
One prominent figure who predicted a recession was Michael Burry, known for his role in the famous “Big Short” trade. In January, he declared that the US could be in a recession by late 2023, with lower Consumer Price Index (CPI) and the Federal Reserve cutting rates. The recent CPI print coming in lower than expected has further fueled the recent rally.
Independent macro and crypto analyst Lyn Alden recently published a newsletter exploring the topic. Alden believes that the US economy will likely enter stall speed or experience a mild recession while still facing persistent inflation. This suggests that markets may continue to trend upwards until an official recession hits.
Alden points out that the key difference between the inflationary periods of the 1940s and the 1970s lies in rapid bank lending and large monetized fiscal deficits. The 1970s experienced rapid bank lending as baby boomers began buying houses, while the 1940s saw large fiscal deficits due to funding the war effort. Alden argues that the current situation in the 2020s resembles the 1940s more than the 1970s. However, the Federal Reserve is using a monetary policy playbook from the 1970s, which may not be effective in the current scenario.
Inflation today has primarily been driven by the creation of new federal debt, or what some may call government money printing. Raising interest rates to curb inflation can work, but it worsens fiscal deficits by increasing interest payments on debts. The US currently has a much higher debt-to-GDP ratio than in the 1970s. Despite the Federal Reserve raising rates, the underlying cause of the current inflationary environment remains unaddressed.
Despite expectations of a recession, the first half of 2023 has been bullish for equities, particularly in the tech sector. Tech stocks have been soaring, led by a few mega-cap stocks such as Nvidia, Apple, Amazon, and Google. However, the NASDAQ’s distribution has become lopsided, with these megacaps making up a significant portion of the index. The NASDAQ will be rebalancing to give these stocks less weight.
The rally in tech stocks has also been supported by an easing in bond market liquidity, which began in late 2022. This has caught the attention of blockchain and crypto enthusiasts who see it as a potential safe haven. They note that real interest rates remain negative, suggesting continued risk in bonds. Crypto has demonstrated a near-zero correlation with equities, making it less sensitive to interest rates.
While risk assets currently have a bid, this trend could easily reverse by year-end. However, with the halving of bitcoin and the potential for a spot bitcoin ETF, crypto seems poised for a breakout. It’s important to note that this article does not provide investment advice, and readers should conduct their own research before making any decisions.