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Economic

Investors should act as if the Fed is no longer in place

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The writer is the chief global investment officer at Credit Suisse

In keeping with the good traditions of the financial industry, this is the time of year to speculate on the health of the global economy and what to do with the collective wisdom of investors.

Digging into the economic and investment forecasts of various banks and asset managers, many have noted an overwhelming consensus that a recession will occur next year in the world’s largest economy.

According to this text, a recession in the United States in 2023 should lead to a rapid slowdown in inflation, allowing for Federal Reserve To stop raising prices and then – at a later stage – to start lowering prices to get us out of trouble. This scenario is familiar from the American recessions of the early 1990s, 2001, and 2008. What always follows is a stock market rally, and investors live again for another cycle.

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However, it is somewhat inconvenient that both market watchers and market participants are currently converging on this rather optimistic assessment, not least because widely agreed-upon market opinions are usually so wrong. We must be missing something. So, what could go wrong with this text? At what point do we go from “it’s the same this time” to “it’s different this time”?

There are strong reasons to expect consensus. Growth has already slowed rapidly. The Eurozone and the UK are already in recession and growth in the US has slowed considerably. US inflation has peaked and the Fed is determined to battle it out, which means it could drop further. This economic outlook is also priced in steadily by the financial markets.

The most obvious sign is certainly the strongly inverted yield curve where short-term bond prices are higher than longer-term maturities. Since the 1960s, this has been a reliable indicator of an impending recession. At the same time, an inverted yield curve is also a reflection of market participants’ expectations that inflation rates are likely to decline and that the central bank will – at some point – cut interest rates to support growth again or calm market turmoil. Thus, the fact that the curve is so inverted at the moment also means that investors expect inflation to return to normal quickly and that the Fed may be able to cut interest rates sooner rather than later.

However, there are also factors at odds with current consensus expectations that are worth examining. First, when it comes to growth, the US recession could come significantly later than many expect. The US economy is not as exposed to interest rate hikes by the Fed as it was in the past. Nowadays, homeowners mostly have fixed-rate mortgages, and companies have used the low interest rates of yesteryear for long-term financing.

Households and businesses will feel the impact of higher prices later than usual. So while growth is already weak, falling into an outright recession could be like waiting for Godot. This is in stark contrast to the rapid recession/rapid recovery pattern that markets seem to expect.

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Second, when it comes to inflation, it may turn out to be more entrenched than expected. Wage growth inflation in particular appears to be steadily due to a shortage of skilled workers. The new multipolar world order will force structural changes on the economy, such as the need to rebuild reliable supply chains closer to home, which often come with higher prices. Likewise, the urgent need to decarbonise can exacerbate “green inflation,” that is, higher prices for environmentally friendly goods and services.

All of this means that inflation rates can come down much more slowly than many of us (including central banks) would like. The Fed may end up in a position where it will have to keep interest rates high because of inflation – even as a recession begins.

This can be negative for stock markets, as the initial market recovery after a recession is often the result of interest rate cuts. The Fed’s “mode” – the Fed’s willingness to prop up markets in times of volatility – will disappear forever, and the way out of recession will be fiscal rather than monetary.

These reasons make the current market consensus very uncomfortable. We risk being in a longer period of weak growth, high inflation and weak equity markets than we have been during previous slowdowns. Thus, investors are advised to keep their portfolios diversified, including a reasonable allocation of fixed income. Alternative investments such as hedge funds or private equity can be a way to manage portfolio risk.

In fact, investors should continue to be cautious next year and act as if the Fed is no longer in place. This means that it is really different this time.

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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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