BFA Weekly Newsletter

I've been crafting financial newsletters for over 15 years, having witnessed various economic cycles, both highs and lows, with their respective moments of excitement and turbulence.

This year has proven to be one of the most challenging in recent memory. Typically, people subscribe to financial newsletters when they are eager to discover avenues for wealth generation, motivated by the prospect of financial gain.

Interestingly, in the grand scheme of things, the financial markets aren't performing terribly. The S&P 500 (SPX) is only down approximately 10% from its peak, indicating a relatively mild correction. Volatility remains relatively subdued, and pockets of speculative activity, such as initial public offerings (IPOs), persist. While it's true that last year's bear market was far more severe, such crises often conceal opportunities within the chaos.

However, this year has been an exception, offering little in the way of opportunities, characterized by a sluggish progression marked by declining interest rates, a strengthening U.S. dollar, and only marginal declines in stock prices. Aside from a brief surge in AI-related investments a few months ago, there hasn't been much to get excited about.

The economic landscape is deteriorating, evident not only in data but also in people's sentiments and actions. Recent data, such as the Conference Board Consumer Confidence figures, reveal a decline in optimism about the future. Despite these indicators of economic weakness, bond yields continue to climb, creating a puzzling paradox.

This paradox can be attributed in part to supply factors, including substantial Treasury issuances and potential sales of U.S. Treasuries by foreign entities like China. Bond markets have witnessed challenging price movements, with minimal upward ticks.

Our Email Beige Book consistently reports on the worsening economic conditions, leaving little doubt that a recession is looming. The question remains: Will it be the first recession accompanied by rising interest rates?

In parallel, some have drawn comparisons to the events leading up to the 2008 financial crisis. Just as in those times, signs of economic deterioration are mounting, but the market has been slow to respond. It's essential to remember that the "Big Short" trade wasn't remarkable for its eventual payoff but for the patience and conviction required to see it through.

Debates about a soft or hard landing persist, but experience suggests that soft landings are elusive; hard landings are the norm. The Federal Reserve's past overtightening will inevitably have consequences.

As I observe the markets each day, I reflect on the courage of those who held their positions in the "Big Short" trade, even when faced with adversity. If the Fed decides to cut rates, it may do so more aggressively than anticipated. The potential for a substantial rate cut, perhaps even 300 basis points, should not be underestimated.

In times like these, one is reminded of Marvin the Martian's famous line, "Where's the kaboom? There was supposed to be an earth-shattering kaboom!" We find ourselves in a similarly uncertain situation, hoping for clarity amidst the chaos.

Enjoy the weekend,

Best, 

JB