GM. This is Micro Digest. We make Mondays less blue.
Back in June, we talked about how bad things are looking for the second half of 2022 and well it's been three months now into the second half so here's a market update.
Spoilers: Things are not looking good 🥴
Let's dig in 👇
We've been in a bubble for a little while now. The US stock market remains to be very expensive and the increase in inflation this year has hurt multiples, not the mention fundamentals have started to deteriorate enormously: the war in Europe, the food and energy crisis, record fiscal tightening and etc.
Jeremy Grantham at GMO has a theory that it takes multiple stages to burst a bubble:
- First, the bubble forms
- Second, a setback occurs, as it did at the beginning of the year when everything was priced to perfection and valuations took a step back
- Third, a bear market rallies which we have just seen
- Fourth and finally, fundamentals deteriorate and the market declines to a low (which we are entering)
Fundamentals are falling apart
- The food and energy crisis 🌽
- Rusia and Belarus account for roughly 40% of global exports of potash (key fertilizer). The war in Ukraine drove wheat/corn/soybean prices to record highs earlier this year
- This increase in food prices is causing trade imbalances and civil disorder in the most vulnerable countries
- The energy shock we are seeing now is also almost guaranteeing to tip Europe into a recession
- Greatest fiscal tightening in history 🪙
- Just last week, the Fed decided to raise interest rates by another 75 bps (0.75%). The 3rd straight 75 bps hike and there are no signs of slowing down
- Then the Bank of England met and raised rates to 0.5%, declaring the economy is already in recession
- Housing is in trouble 🏡
- Historically, real estate has been the most important asset class for economical stability but now it seems to be falling apart
- The Chinese property market is now under dire stress which is now mirrored around the world
- The US is also seeing record mortgage unaffordability
- The situation looks even worse in those countries where mortgages are typically floating rates.