Bob Michele, Managing Director, is Chief Investment Officer and Head of the Global Fixed Income, Currency & Commodities (GFICC) Group at JPMorgan.
For at least one market veteran, the resurgence of the stock market after a series of bank failures and rapid interest rate hikes means only one thing: watch out.
The current period reminds Bob Micheledirector of investments for JPMorgan Chasemassive asset management armof a deceptive lull during the 2008 financial crisis, he said in an interview at the bank’s New York headquarters.
“It reminds me a lot of that time from March to June in 2008,” Michele said, drawing parallels.
Then, as now, investors worried about the stability of US banks. In both cases, Michele’s employer calmed her nerves by rushing to acquire a struggling competitor. Last month, JPMorgan bought failing regional player First Republic; in March 2008, JPMorgan took over investment bank Bear Stearns.
“The markets viewed it as, there was a crisis, there was a policy response and the crisis is resolved,” he said. “Then you had a steady three-month rally in the stock markets.”
The end of nearly 15 years of cheap money and low interest rates around the world has upset investors and market watchers. Top Wall Street executives, including Michele’s boss, Jamie Dimon, have been sounding the alarm about the economy for more than a year. Higher rates, the cancellation of Federal Reserve bond-buying programs and foreign strife created a potentially dangerous combination, Dimon and others said.
But the U.S. economy remained surprisingly resilient as May payrolls numbers rose more than expected and rising inventories caused some to call the start of a new bull market. The cross-currents have divided the investment world into roughly two camps: those who see a soft landing for the world’s largest economy and those who envision something far worse.
The calm before the storm
For Michele, who started his career four decades ago, the signs are clear: the next few months are just a calm before the storm. Michele oversees more than $700 billion in assets for JPMorgan and is also global head of fixed income for the bank’s asset management arm.
In previous rate hike cycles dating back to 1980, recessions begin on average 13 months after the Fed’s last rate hike, he said. The last central bank decision was in May.
In this ambiguous period right after the Fed has finished raising rates, “you’re not in a recession, it feels like a soft landing” as the economy continues to grow, Michele said.
“But it would be a miracle if it ended without a recession,” he added.
The economy will likely tip into recession by the end of the year, Michele said. While the start of the recession could be postponed, thanks to the lingering effects of Covid stimulus funds, he said, the destination is clear.
“I’m very confident that we’re going to be in a recession a year from now,” he said.
Other market watchers do not share Michele’s view.
black rock Bonds chief Rick Rieder said last month that the economy was in “much better shape” than consensus and could avoid a deep recession. Goldman Sachs Economist Jan Hatzius recently reduced the probability of a recession within a year to just 25%. Even among those predicting a recession, few believe it will be as severe as the 2008 recession.
To begin his argument that a recession is coming, Michele points out that the Fed’s actions since March 2022 are its most aggressive round of rate hikes in four decades. The cycle coincides with central bank action to curb market liquidity through a process known as quantitative tightening. By allowing its bonds to mature without reinvesting the proceeds, the Fed hopes to reduce its balance sheet by up to $95 billion a month.
“We see things that you only see in a recession or when you find yourself in a recession,” he said, starting with the “rate shock” of around 500 basis points last year.
Other signs pointing to an economic slowdown include the credit crunch, according to loan officer surveys; rising jobless claims, shorter delivery times from suppliers, inverted yield curve and falling commodity values, Michele said.
trade in pain
The pain is likely to be greatest, he said, in three sectors of the economy: regional banks, commercial real estate and junk-listed corporate borrowers. Michele said he thought a settling of scores was likely for everyone.
“I don’t think it’s fully resolved yet; I think it’s been stabilized by government support,” he said.
Downtown offices in many cities are “almost a wasteland” of unoccupied buildings, he said. Homeowners faced with refinancing debt at much higher interest rates can simply move away of their loans, as some have already done. Those defaults will hit the portfolios of regional banks and real estate investment trusts, he said.
A woman wearing her face mask walks past an advertisement for available office and retail space in downtown Los Angeles, California, May 4, 2020.
Frederic J. Brown | AFP | Getty Images
“There are a lot of things that resonate with 2008,” including overvalued real estate, he said. “Yet, until that happened, it was largely rejected.”
Finally he said below investment grade– rated companies that have benefited from relatively cheap borrowing costs are now facing a very different funding environment; those who need to refinance variable rate loans may hit a wall.
“There are a lot of companies sitting on very low cost financing; when they go to refinance, it will double, triple or they can’t do it and they’ll have to go through some sort of restructuring or default,” he said.
Given his worldview, Michele said he is cautious with his investments, which include investment-grade business credit and securitized mortgages.
“Everything we have in our portfolios, we’re stressing for a few quarters of -3% to -5% of real GDP,” he said.
This pits JPMorgan against other players in the market, including its counterpart Rieder of BlackRock, the world’s largest asset manager.
“Part of the difference with some of our competitors is that they feel more comfortable with credit, so they’re willing to add lower rate credit, thinking they’ll be fine in a soft landing” , did he declare.
Although he kindly ribbed his competitor, Michele said he and Rieder were “very friendly” and had known each other for three decades, dating back to when Michele was at BlackRock and Rieder at Lehman Brothers. Rieder recently teased Michele about a JPMorgan to dictate that executives had to work from offices five days a week, Michele said.
Now, the trajectory of the economy could write the final chapter in their low-key rivalry, leaving one of the bond titans looking like the shrewdest investor.