Quite often, investors describe economic forecasts as a hard landing (recession), a soft landing (weak growth but no recession), or no landing (moderate to strong economic growth). As evidenced by the massive rotation toward economically sensitive sectors like industrials and materials and the significant underperformance of interest-rate-sensitive growth stocks, the no landing, or as it’s called today, the economic reflation narrative is preferred.
While the reflation narrative neatly explains the recent market rotations, we still must question whether a no landing economic scenario is likely. Obviously, there is no answer, as no one knows what the future holds. That said, the current market sentiment reminds us of rule number nine from Bob Farrell’s ten famous trading rules:
When all the experts and forecasts agree, something else is going to happen.
Bob’s rule holds that we should be concerned when the public and professional analysts are largely in agreement about the economic outlook. He argues the opposite is more likely. Taking Bob’s stance is certainly contrarian. Such a contrarian investment strategy usually rewards investors who appreciate the day’s narrative but also recognize that it may not be the likely path.
To this end, we share the graphic below courtesy of BofA. Among the global professional investment managers they surveyed, only 6% expect an economic hard landing, i.e., a recession. The majority now expect a “no landing” or continued strong economic growth. Moreover, the number of no landing votes has risen significantly from near zero nine months ago. Bear in mind, 50% of those surveyed last April thought the economy would experience a hard landing within a year.
Ray Dalio Hype Versus His Thoughts
Ray Dalio just spoke to the World Economic Forum, and the majority of his reviewers spout doom and gloom, as we share in the screenshot below. While his long-term outlook is concerning, the hype and fear being spread by the social and mainstream media is over the top. To wit:
What viral posts often add or exaggerate about Dalio’s outlook:
- “Hyperinflation is coming fast.”
- “America is going broke right now.”
- “Dollar collapse is imminent.”
What Dalio has said:
- The U.S. faces a serious debt supply-demand problem.
- The deficit likely needs to shrink toward ~3% of GDP to stabilize things.
- If policymakers do nothing, markets could eventually force painful adjustments.
To summarize his views, Dalio stresses that the pace of debt issuance can not grow faster than our ability to pay for it forever. In time, he thinks the bond markets will push back and demand higher yields. At that time, policymakers must choose among austerity, artificially low interest rates, inflation, and or currency weakening. Importantly, however, the warning is not of a collapse in the coming weeks, but instead, the system becomes harder to manage over time as the debt grows.
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