Andy Krieger's Thoughts on the Market - 7 February 2023

Today I am going to provide a brief update. In my last write-up, I pointed out the nearly overwhelming challenges facing the equity markets right now. The January jobs report reinforced my negative outlookon equities, as the Fed will have a brutal challenge to navigate a truly soft landing in the economy. Earnings are coming down, interest rates are still climbing, the job market is the tightest it has been inover fifty years, and financial conditions have eased dramatically over the past three months with the stock market and bond market rallies. This is an awful environment for the Fed, and it is likely that they will be forced to hike rates even higher than first expected. Please remember that nearly every recession in the U.S. has been preceded by a period of very low unemployment levels. The likelihood of a Fed cut this year, barring a massive exogenous event such as an attack of Taiwan – or perhaps a blockade -- by China, is increasingly unlikely.

The recent provocative move by China to float a spy balloon over Canada and the U.S. was a very clumsy, but blatant attempt to evoke a nasty response from the U.S.A strong response by the U.S.would in turn give China the excuse it wants in order to start taking more aggressive steps to reclaim control of Taiwan. The increasing hostility between the U.S. and China is a very dangerous development that has been simmering for years. We no longer have the luxury of viewing this geopolitical tussle as a side event when we are analyzing market risk. It is a very real, and potentially toxic, item which we need to consider as being relevant.

My overall view on stocks is now even more pessimistic than before, and I am expecting a possible move below 3,000 in the S&P’s. At the same time, however, the currency markets are setting up for a remarkable year of hyper-volatility. We just finished 15% and 20% rallies in the euro and pound, respectively, against the U.S. dollar (“USD”). The Australian dollar (“Aussie”) has had a huge rally aswell, strengthening by about 18% against the USD. I feel that at a minimum, these moves are done, and a period of significant dollar strength is now starting. I am not sure if this is going to be a large correction of the recent dollar weakness, or a much bigger move. I need to see how this plays out overthe next couple of weeks before deciding.

At the same time, I expect the yen to strengthen on the crosses. Yen strength should be notable against the pound, the euro, and the Australian dollar, but it should strengthen against nearly all major currencies. Will it strengthen against the USD? I am not convinced, but it wouldn’t surprise me to see a divergence, with the yen strengthening as the other currencies weaken against the USD. I am not sure whether this will be a major move (e.g. 10%), or perhaps just a sharp move of 5% to 7%, but my feeling now is that this could turn out to be a very large trend move. I will write again soon, but I wanted to offer a very quick commentary on the currencies.

I will write a much longer update in several weeks.