Bob Michele, Managing Director, is Chief Investment Officer and Head of JPMorgan’s Global Fixed Income, Currency & Commodities (GFICC) group.
CNBC
For at least one market veteran, the rebound in the stock market after a string of bank failures and rapid rate hikes means only one thing: caution.
The current period recalls Bob Michele, chief investment officer for JPMorgan ChaseHe said in an interview at the bank’s New York headquarters that the bank’s massive wealth management division experienced a deceptive lull during the 2008 financial crisis.
“It reminds me a lot of the period from March to June 2008,” said Michele, listing the parallels.
Then as now, investors worried about the stability of US banks. In both cases, Michelle’s employer calmed her strained nerves by taking over a troubled competitor. Last month, JPMorgan bought failed regional player First Republic; In March 2008, JPMorgan acquired the investment bank Bear Stearns.
“Markets saw it as if there was a crisis, there was a political response and the crisis was resolved,” he said. “Then there was a steady three-month rally in stock markets.”
The end of a nearly 15-year period of easy money and low interest rates around the world has angered investors and market watchers alike. Top Wall Street executives, including Michele CEO Jamie Dimon, have been concerned about the economy for more than a year. Higher interest rates, the suspension of the Federal Reserve’s bond-buying programs and unrest abroad made for a potentially dangerous combination, Dimon and others said.
But the US economy remained surprisingly resilient as payrolls rose more-than-expected in May and rising stocks led some to call the start of a new bull market. The backlash has roughly divided the investing world into two camps: those who expect a soft landing for the world’s largest economy and those who envision something far worse.
The calm before the storm
For Michele, who began his career four decades ago, the signs are clear: the next few months are just the calm before the storm. Michele manages more than $700 billion in assets for JPMorgan and is also global head of fixed income for the bank’s wealth management arm.
In previous rate-hike cycles since 1980, recessions would have started an average of 13 months after the Fed finally hiked rates, he said. The latest move by the central bank came in May.
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In this murky time, just after the Fed has finished raising rates, “You are not in a recession; it looks like a soft landing” because the economy is still growing, Michele said.
“But it would be a miracle if this ended without a recession,” he added.
The economy is expected to slide into recession by the end of the year, Michele said. Although the start of the downturn could be delayed due to the ongoing impact of Covid stimulus funds, he said the target is clear.
“I’m very confident that a year from now we’re going to be in a recession,” he said.
tariff shock
Other market observers do not share Michele’s view.
BlackRock Bond chief Rick Rieder said last month the economy was in “much better shape” than widely believed and could avoid a deep recession. Goldman Sachs Economist Jan Hatzius recently reduced the probability of a recession to just 25% within a year. Even those who expect a recession to come, few believe it will be as severe as the 2008 downturn.
To kick off his argument that a recession is imminent, Michele points out that the Fed’s moves since March 2022 are the most aggressive series of rate hikes in four decades. The cycle coincides with moves by the central bank to rein in market liquidity through a process known as quantitative tightening. By phasing out its bonds without reinvesting the proceeds, the Fed hopes to trim its balance sheet by as much as $95 billion a month.
“We see things that you only see in a recession or where you go into a recession,” he said, beginning the “rate shock” of around 500 basis points last year.
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Other signs of an economic slowdown include tightening lending, according to surveys by loan officers; rising unemployment, shorter supplier lead times, the inverted yield curve and falling commodity values, Michele said.
pain trade
The pain is likely to be greatest in three areas of the economy, he said: regional banks, commercial real estate and junk-rated corporate borrowers. Michele said he believed reckoning was likely for everyone.
Regional banks are still under pressure from investment losses related to higher interest rates and rely on government programs to cover deposit outflows, he noted.
“I don’t think it’s fully resolved yet; I think it’s been stabilized by government support,” he said.
In many cities, downtown office space is “almost a wasteland” of uninhabited buildings, he said. Homeowners who need to refinance their debt at much higher interest rates may simply call in their loans, as some have already done. Those defaults would hit regional bank portfolios and real estate mutual funds, he said.
A woman wearing a face mask walks past advertisements for available office and retail space in downtown Los Angeles, California, May 4, 2020.
Frederic J Brown | AFP | Getty Images
“There are many things associated with 2008,” he said, including overvalued real estate. “But by the time it happened, it was largely dismissed.”
He concluded by saying that sub-investment grade companies, which benefited from relatively cheap borrowing costs, now face a radically different financing environment; Those needing to refinance adjustable rate loans could hit a wall.
“There are many companies that rely on very cheap financing. If they refinance, the amount doubles or triples, or they can’t and they have to undergo restructuring or default,” he said.
corrugated wheels
Because of his worldview, Michele said he’s conservative about his investments, which include investment-grade corporate bonds and securitized mortgages.
“Everything we own in our portfolios we are stressing for a couple of quarters of -3% to -5% of real GDP,” he said.
That distinguishes JPMorgan from other market participants, including its counterpart Rieder from BlackRock, the world’s largest wealth manager.
“Some of the differences with some of our competitors is that they are more comfortable with credit and are therefore willing to add credit with lower interest rates because they assume they don’t mind a soft landing,” he said.
Though Michele gently taunted his competitor, he 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 was at Lehman Brothers. Rieder recently teased Michele about JPMorgan’s rule that executives must work in the office five days a week, Michele said.
Now, the trajectory of the economy could write the latest chapter in their low-key rivalry and make one of the bond titans appear as the smarter investor.
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