Bob Michele, Managing Director, is Chief Investment Officer and head of the Global Fixed Income, Currency & Commodities (GFICC) group at JPMorgan.
CNBC
For at least one market veteran, the stock market’s revival after a string of bank failures and rapid interest rate hikes means only one thing: watch out.
The current period reminds Bob Michellechief investment officer for JPMorgan Chase‘s massive asset management armof a rogue lull during the 2008 financial crisis, he said in an interview at the bank’s New York headquarters.
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“This reminds me so much of that period from March to June in 2008,” Michele said, listing the parallels.
Then, as now, investors were concerned about the stability of US banks. In both cases, Michele’s employer calmed frayed nerves by swooping in to take over a troubled competitor. Last month, JPMorgan bought failed regional player First Republic; in March 2008, JPMorgan taken over the investment bank Bear Stearns.
“The markets saw 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 a nearly 15-year period of cheap money and low interest rates around the world has irked investors and market observers alike. Top Wall Street executives, including Michele’s boss Jamie Dimon, have been sounding the alarm about the economy for more than a year. Higher interest rates, the reversal of the Federal Reserve’s purchase programs and the struggles abroad made for a potentially dangerous combination, according to Dimon and others.
But the US economy has remained surprisingly resilient as wages rose more than expected in May and caused inventories to rise some to call the beginning of a new bull market. The countercurrents have divided the investment world into broadly two camps: those who see a soft landing for the world’s largest economy and those who envision something far worse.
Silence before the storm
For Michele, who began his career four decades ago, the signs are clear: the coming months are just the 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 cycles of rate hikes dating back to 1980, recessions start on average 13 months after the Fed’s last rate hike, he said. The most recent move by the central bank took place in May.
In that ambiguous period just after the Fed finishes raising rates, “you’re 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 likely to slip into recession by the end of the year, Michele said. While the onset of the downturn could be pushed back thanks to the lingering effects of Covid stimulus funds, he said the destination is clear.
“I’m very confident that we’ll be in a recession a year from now,” he said.
Rate shock
Other market observers do not share Michele’s view.
Black rock Federal chief Rick Rieder said last month that the economy is “in much better shape” than the consensus view and could avoid a deep recession. Goldman Sachs economist Jan Hatzius recently reduced the chance of a recession within a year to just 25%. Even among those who see a recession ahead, few think it will be as severe as the 2008 downturn.
To begin his argument that a recession is on the way, 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 central bank moves to contain market liquidity through a process known as quantitative tightening. By letting its bonds mature without reinvesting the proceeds, the Fed hopes to shrink its balance sheet by up to $95 billion a month.
“We see things that you only see in a recession or where you go into a recession,” he said, starting with the “interest rate shock” of about 500 basis points over the past year.
Other signs pointing to an economic slowdown include tightening credit, according to surveys by credit officials; rising jobless claims, shorter delivery times from suppliers, the inverted yield curve and falling commodity prices, Michele said.
Pain trading
The pain is likely to be greatest, he said, in three areas of the economy: regional banks, commercial real estate and junk-rated borrowers. Michele said he believes a reckoning is likely for each.
Regional banks still are under pressure from investment losses related to higher interest rates and depend on government programs to handle deposit outflows, he noted.
“I don’t think it’s fully resolved yet; I think it’s been stabilized by government support,” he said.
Downtown office space is “almost a wasteland” of vacant buildings in many cities, he said. Property owners faced with refinancing debt at much higher interest rates simply can walk away of their loans, as some have already done. Those defaults will hit regional bank portfolios and real estate investment funds, he said.
A woman in her face mask walks past advertisements for available office and retail space in downtown Los Angeles, California, on May 4, 2020.
Frederic J. Brown | AFP | Getty Images
“There are a lot of things that resonate with 2008,” he said, including overvalued real estate. “But until it happened, it was largely rejected.”
Last, he said below investment gradeRated companies that enjoyed relatively low borrowing costs now face a very different financing environment; those needing to refinance floating rate loans may hit a wall.
“There are many companies that are on very cheap financing; when they go to refinance it will double, triple or they won’t be able to and will have to go through some sort of restructuring or default,” he said.
Ridge Rieder
Given his worldview, Michele said he is conservative with his investments, which include investment-grade corporate credit and securitized mortgages.
“Everything we own in our portfolios, we’re highlighting a few quarters of -3% to -5% real GDP,” he said.
That contrasts JPMorgan with other market participants, including its counterpart Rieder of BlackRock, the world’s largest asset manager.
“Part of the difference with some of our competitors is that they’re more comfortable with credit, so they’re willing to add lower-interest credit in the belief that a soft landing will be fine,” he said. he.
Despite gently outplaying his competitor, Michele said he and Rieder were “really friendly” and have known each other for three decades, dating back to when Michele was at BlackRock and Rieder was at Lehman Brothers. Rieder recently teased Michele with a JPMorgan dictate that executives had to work from offices five days a week, Michele said.
Now the path of the economy could write the latest chapter in their quiet rivalry, making one of the bond giants look like the more savvy investor.
