We are all familiar with the idea of the tipping scale, right? Well, it is often used as an iconic symbol of law and justice.
However, it represents not only law and order but also a sense of balance.
Balance has been relatively present in today's economy as the cycle continues, although its trajectory is becoming increasingly uncertain.
To me it seems like It's not a question of if things will break at some point - but rather when the broken system will show symptoms of recovery or symptoms of further coarseness.
While the prevailing sentiment, including my own judgments, suggests a deeper recession and bear market are imminent, recent developments have raised intriguing questions about the potential for a different outcome.
One of which is the major impact of monetary stimulus that has been injected into the economy over the past years.
Amidst concerns of a deep bear market, I cannot discount the influence of significant monetary support provided by the Federal Reserve. Despite aggressive rate hikes, inverted yield curves, surging debt levels, and weak economic data, the substantial infusion of funds has introduced an element of uncertainty.
The question arises: Could the unprecedented amount of monetary support and government spending alter the usual outcomes? Could we see a continued bull move merely due to the previously injected stimulus funds?
Analyzing data since 1981, it becomes evident that the Federal Government has embarked on a prodigious spending spree. The correlation between low-interest rates and escalating debt levels during previous rate hike cycles, which invariably led to recession, offers a logical explanation.
Despite the anticipation of a weaker economy, the combination of higher interest rates and other factors may contribute to unexpected resilience in the markets.
The mainstream narrative often disregards the substantial impact of the Inflation Reduction Act, amounting to $1.7 trillion, in addition to over $5 trillion in direct stimulus payments during the pandemic. The surge in economic activity and resultant inflation triggered by the distribution of direct payments is a testament to the enduring effects of this monetary support.
Another factor that could mitigate a severe recessionary drag is the significant federal spending projected for the coming year. The Biden Administration's successful implementation of a $1.7 trillion Federal spending package in the Inflation Reduction Act, with funds being deployed throughout 2023, will likely provide short-term economic support regardless of project outcomes.
While economists and analysts predict an impending slowdown and recession, it is essential to recognize the substantial liquidity currently bolstering economic activity in the near term.
Additionally, the US debt ceiling has been reached as the United States economy has reached a consumer debt all time high of over 17 trillion usd - another indicator of economic turmoil.
Yet, this has been nullified by the high likelihood of the debt ceiling being extended rather than the United States having to default on this debt
The question arises as to whether the recent stock market rally, led by the Nasdaq, indicates that the worst is behind us.
Historical indicators, such as inverted yield curves and recessionary composite indices, should not be overlooked, as they have reliably predicted recessions in the past.
However, the potential improvement in economic data and sentiment-driven surveys could confirm that the market is indeed leading the way.
The ongoing market rally amid the backdrop of aggressive rate hikes and tighter lending standards poses valid concerns. However, the lingering effects of substantial monetary support, alongside robust government spending, may help avert a severe economic downturn.
Investing in such an environment becomes increasingly challenging, as the competing forces of historical patterns and monetary excesses unfold. While future returns are expected to be lower, volatility will likely persist until the effects of monetary support wane, and economic growth adjusts to the burden of increased debt levels.
So which way are we going from here?
I’m positioned on both sides of the tipping scale for myself. I don’t seek to predict the market, and as of now, the scale is overweight on both sides of the scale, waiting for the last push in either direction.
I'm positioning myself to play reactionary once the scales actually tip in either direction.