This topic will be aimed at discussing arguments and counterarguments against a Soft Landing
My opinion until now has been to give a very low probability of a soft landing scenario, based on leading economic indicators, historic correlations, and the economy’s need for constant credit to grow, but I am always open to arguments that make me think I could be wrong and this time will be different. So I will be posting arguments I encounter in both directions.
Until now, the massive stimulus during the pandemic is what is creating a lot of uncertainty in my thinking and outlook, since the amounts are unprecedented, and no one really knows or really understands its continuing workings on the economy and markets.
Here are some counter-arguments of Nassim Taleb who is a former trader/funds manager and now highly regarded scholar/author/theorist. He is listed as a scientific advisor to Universa Investments - Wikipedia. His active involvement in day-to-day market observations is unclear/unlikely.
As he specialized in hedging against “tail risks” or in other words rare “black swan” type events his views might have a natural negative bias. I have multiple books of him on my reading list but did not read any yet.
His arguments:
There are 100 trillion in real estate valuations which are unsustainably high in the current rate environment.
Startups got unsustainably large amounts of funding in the past.
Overall problems with debt and a generation of investors who is used to a 0% rate environment.
My take:
His generalized points are correct but we need to find concrete pain points.
Realestate and VC markets corrected already heavily.
Focus on debt levels, debt/valuations ratios needed to understand risks coming from real estate. We started some work on commercial real estate here.
For me to say this is a definite recovery, would need to see several months of good data starting a new clear uptrend. For now, this could just be an outlier, as these rebounds seem pretty normal in past cycles before continuing lower, the data being volatile, and nothing moves in a straight line.
Btw , if a recovery in housing happens, this will mean higher housing prices (which has already happened in feb and march S&P/Case-Shiller U.S. National Home Price Index (CSUSHPISA) | FRED | St. Louis Fed), higher CPI, and higher rates down the road. It would just push the cycle forward in my opinion after a new wave of inflation.
About Nassim, I have read his black swan book. Now he seems to be betting on a more serious crisis, more than just a regular recession, which I don’t think at the moment is very likely either.
But to really know if a financial crisis is not happening, we would need to understand better all the financial system.
I am not in particuarly deep in the real estate topic and it’s recent developments and data points but just based on the overall environment a recovery at this point feels deeply illogical.
It’s widely recommended to read fooled by randomness before reading black swan, i believe.
Overall it’s important that we are developing a clear framework of accurately assessing different people we are listening to. As an example being a great scholar and developing new intellectual frameworks requires another kind of focus and studying of more abstract topics compared to someone who needs to be closer on the current state of the economy because he is working for an actively managed funds.
Btw, is not like I am bearish in the market per se at the moment while the current macro state is stable, the momentum is clearly bullish too. IMO only a shock could reverse it at this point (higher inflation, credit event, liquidity issues, etc), but I think that could even be more dangerous at the same time, because of the extremely bullish sentiment currently.
El-Erian says people on the sideline are getting pulled in by soft landing narrative. Says he would not position against the recent rally in the short term.
Yes, I agree with him. You can see it in the earnings estimates that sof landing is becoming more and more the consensus.
And I think the bull momentum will only change now with a shock, or a unexpected scenario.
@Magaly what is your current stance about a Hard vs. Softlanding and which arguments support both sides?
I thought it could make sense to map out arguments on both sides in a mindmap here in order to make it easier for me to see the whole picture.
(I suggest arguments being sorted by their strength with the strongest arguments of both sides being on top of their respective side)
In addition to the short overview in the mindmap, which contains mainly keywords/very short arguments that link to supporting research we might want to create discussion topics for important key topics esp. if they are to be debated or the assessment is uncertain.
This is an interesting chart. It says nothing about the possibility of a soft landing or not in this cycle, but is always interesting to see how predictable can be some market behaviors. And how you need to be even more skeptical if everyone is agreeing on 1 outcome, even for the economy.
Jamie Dimon says to be prepared for higher rates and slower growth since stagflation is probably the worst possible outcome.
He says that the best everyone can do is to manage risks acknowledging that very adverse scenarios can happen, and be prepared to be able to handle all of them.
Interesting how this year is the opposite of last year end, where everyone was basically talking about a recession in 2023, now everyone is talking about a soft-landing.
