The world is experiencing the sweetest economic moment of recent years, world wealth is growing above what was expected around 3%. For the first time since 2010, this positive growth affects all OECD countries. Also for the first time in many years growth is not linked to the rise in inflation and prices are contained. In addition, we continue in an environment of low interest rates and corporate profits do not stop increasing what is driving the capital markets and especially the stock markets to record highs.
Faced with this situation, talk about the end of the party seems to be doomsayers, but it is also preventable. This is the philosophy that MdF Family Partners is betting on , an advisory firm for high family assets that manages 10,000 million euros in assets in Spain, the United States and the United Kingdom and that has just published its annual analysis of the House View 2018 market. , where they have no qualms about identifying themselves as the first to leave the party.
“The economy has always been and continues to be cyclical. The question is not whether there will be a recession, but when it will take place, “says Daniel de Fernando , one of the partners who together with former minister José María Michavilla founded the company in 2008. In his analysis, they have drawn three scenarios with different degrees of probability.
Recession in 2018: central bank error
The first would be an imminent recession in 2018. For this, it would be necessary for central banks to make the mistake of raising interest rates too quickly . The Fed already made that mistake in 1937, which caused an increase in unemployment, a collapse in industrial production and a fall in corporate profits of 50%. “The Fed’s restrictive policies end in recession. And there is a delay of between 9 and 36 months before a decision has an impact on inflation and employment, “warns the House View 2018 report.
“It is difficult for this to happen again. The Fed and the other central banks are very aware of the effect that more restrictive monetary policies could have and we believe that they will act with great caution, despite the little margin of action they have. We do not give more than a 20% chance to this scenario, “explains De Fernando.
Recession in 2019: black swan in the market
Who said they had learned the lessons of the previous crisis? The history of economics is full of examples of how humans stumble again and again on the same mistakes. This time it was not going to be different. When just 10 years have passed since the outbreak of one of the most powerful crises in history, the alarms are jumping again.
According to the analysis of MdF we are in a scenario in which the unemployment rate is at the lowest level of the last 16 years (not the case of Spain), at the same time the delinquency is rebounding and the debt has returned to maximums in companies and in the States. “We are in the last phases of the expansive economic cycle and we are returning to commit the same excesses,” they warn.
The scare can arrive in any market. There are plenty of reasons. The S & P’s leading global equity index has been setting records for months. The profitability of the bonds also marks them, but in the opposite direction and there are cases in which you pay for having those bonds instead of obtaining benefits for them. There are huge amounts of money in circulation, but that liquidity is “artificial” fruit the billions injected by all central banks. In 2007, the scare came from the mortgage market that no one was watching. Now, it could be anywhere, and as it was last February when volatility skyrocketed contagion is immediate. “Volatility is no longer a tool to measure market risk. It has become a determinant of risk “, warns the founding partner of MdF, after remembering that there are currently two trillion euros betting on the volatility.
Despite the alarm, the analysis of the House View 2018 shows some caution, and the chances of finding a black swan that brings us back to a recession scenario in 2019, puts them at 30%.
Recession in 2020: inflation rushes
Far more feasible are the MdF analysts that the recession arrives in 2020. A 50% probability is given to the scenario in which inflation is the trigger of the next crisis . “We are in a moment of dormant inflation that closely resembles what happened in 1965”, explains Daniel de Fernando.
According to projections in MdF, a very “plausible” scenario is that in the next 18 months, unemployment will fall in the US to 3% and that implies a necessary rise in wages that will lead to an increase in inflation, which could reach rebound in a “remarkable” way at the beginning of 2019.
The current situation has, according to the report, many similarities with what happened in 1965. Sharp fall in unemployment, core inflation at very low levels, moderate growth, official rate of money adjusted upwards (1.5%), the Fed subject to political pressures, the consideration that there was a change of cycle and that innovations had changed the relationship on inflation and therefore was unlikely to rise.
Now, Daniel de Fernando explains, the same thing happens, but with some nuances that make both analysts and central bankers more cautious. “Past experience also helps,” he says.
In any case, if as in 1965 the rise in wages caused an increase in inflation, the Fed would be forced to make aggressive adjustments which would trigger the crisis. Although the report also contemplates the possibility that inflation is being overestimated and that this could be lower due to measurement errors, which would also add to a wrong measurement of global growth, as economists such as Woody Brock have pointed out .
We believe that a recession is inevitable before the end of 2020 as the production gap is almost nil, demand is growing more than supply and policies are expansive “
Daniel de Fernando Founder of MdF Family Partners
In this situation of more or less dark clouds in the not too distant future, MdF is advising clients to bet on prudence. According to the House View 2018 report, the recession is the most common cause of most bear markets, and to the extent that stock markets tend to advance the behavior of the economy six months prior to the vast majority of the markets. Recessions are bearish.
But since it is impossible to know when those declines will begin, MdF’s most prudent advice to its clients is to “let someone else take the last cent.” That prudence invites us to take advantage of market upturns to get out of the most dangerous pockets such as the US and move investments to Asian markets with more travel and enough liquidity to get out in case of problems.
Prudent investments and cash, the recipe for the next two years
In this line, the credits must be the minimum possible. Never borrow to invest. Investments in the next two years must be of short duration, depending on what may happen at any time.
Betting on industrial raw materials is a defensive attitude to the extent that their prices take time to react to market events and do not get carried away by the generalized drops of the beginning of the crisis. Refuge part of the heritage in gold, is another defensive classic for which also bet on MdF.
In fixed income, the only positive point is seen in the debt of emerging countries in local currencies . And they also opt for the dollar, now very low, than for other currencies. But, above all, they insist: ” There is no need to be afraid of being in liquidity, that will serve as a protection when there is a strong correction in the markets”.