Marathon Asset Management reposted this
Recession or No Recession: That is the Question The WSJ Survey of 66 leading Economist says, ‘No Recession”. These leading economists reported their probability of recession in 2025 is a mere ~25%, down from ~65% likelihood just last year. 25% is too high, it’s more like a fat tail risk (perhaps 10%) based on the strength of the U.S. economy (see chart below). The Fed’s unwritten rule is to only ease by 50bp when starting an easing cycle when recession is imminent. Fed was wrong to go -50bp on its first cut and they know it. Despite all the strong data (discussed below), the Fed is boxed in to 25bp on November 7th since it would look foolish to pause right now despite the data suggesting that they should. Markets still expect the Fed to ease at its next 8 consecutive meetings over the course of the next year, however, it is my view that the data will require the Fed to take a pause at some point, taking a tad longer (4-6 months) to arrive at 3% than market expect. I call it the Tennessee Two Step. The Atalanta Fed maintains the best GDP predictive models and their 12-factor economic forecasting model now predicts +3.2% real GDP in Q3 of ’24. S&P 500 earnings are growing at a double-digit pace y-o-y with forward earnings forecasted to grow >10% as profits rise across a broader range of industry sectors. Consumers in aggregate remains strong with wealth creation soaring to record levels (US consumer have accumulated more than $165T of asset value more than debt) as asset prices rise. Strong job growth and wage increases allow for greater consumer consumption. Retails sales (ex-autos) blew past consensus estimates, rising .7% last month (~7% – 8% annualized), as consumers remain strong. Strong growth, expanding employment and Fed easing. So, despite predictive indicators such as 1) inverted yield curve, 2) Fed tightening financial conditions by raising Fed Funds by 525bp 3) collapse of CRE sector 4) rise in corporate restructuring/defaults 5) regional banking crisis -> the U.S. economy is alive and well. Unprecedented fiscal stimulus/sheer size of the stim programs that the Federal Government unleased fully negated the impact of the Fed. Now that the Fed is easing, it’s risk on for markets. I remain bullish and credit is a winner. Be selective, but my advice to capital allocators is to continue to lean in to credit.