Events in April were dominated by the echoes of the March bank meltdowns, as First Republic stumbled toward a climactic demise at the end of the month while other regional banks continued to tighten liquidity and investors anxiously unloaded bank preferred stock.
Readers who are familiar with the Jimmy Stewart classic It’s a Wonderful Life will recognize the bank run scene where George Bailey explains fractional reserve banking to customers of the Building and Loan and then proceeds to stem the tide by personally providing liquidity and giving a rousing speech that restores confidence in the institution.
All it took was one outsized increase in Non-Farm Payroll data the first Friday in February to completely unwind the prevailing narrative that the economy was on its last legs and that rate cuts were just around the corner.
What a difference twelve months makes. We entered 2023 with nary a discussion of COVID variants or restrictions outside of China, and with an aggressive cycle of interest rate hikes in the rear-view mirror. To be sure there is still plenty of COVID-related debate in policy circles, but it is generally backward looking and more focused analysis of pandemic era decisions.
And thus, not with a whimper but with a bang did 2022 pass into history. The year, which saw the most serious attempt to normalize monetary conditions since the Global Financial Crisis witnessed, an unprecedented scale of monetary tightening which upset both markets and economies.
“A fool and his money are lucky enough to get together in the first place. Gordon Gekko” November was already shaping up to be an interesting month – Zuckerberg’s apology for the $600 billion bonfire of shareholder value at Meta set the tone – when news broke of first a liquidity then a solvency […]
The ignominious end of the buffoonish Roman Emperor Nero’s reign famously led to the “Year of the Four Emperors” in 69 AD, a time marked by duplicitous scheming and great volatility.
Having collectively spent the last 18 months with the heads in the sand about the looming inflationary crisis central bankers went full circle in attempt to channel their inner Paul Volcker to slay the monetary dragon.
The strength of the USD was at the forefront of market developments in August, as Europe’s energy woes and sclerotic growth elsewhere propelled the Greenback to levels not seen in twenty years. This move in turn complicates the job of central banks already stretched to deal with sky-high levels of inflation and historically has created problems for developing economies.
July is peak season for European opera festivals but this year it was politicians across the continent that provided all the dramma giocoso. UK Prime Minister Falstaff got things rolling by finally succumbing to pressure to resign, kicking off a leadership race that is unlikely to augur significant policy change but will likely reduce No 10’s consumption of cheap wine (available by the suitcase load!).
In previous commentaries we stated our belief that the degree of monetary tightening required to tip economies into recession is not significant. In June we saw a concerted effort from central banks to accelerate hiking policies (Fed +.75%, BOE +.25%, SNB +.50% etc) while the ECB primed the market for action at the upcoming meeting in July, which set government bond markets into freefall in the first half of the month.
In May central banks swung into action as the Fed raised interest rates by .50% while the Bank of England moved by .25%. Both moves had been widely expected. While inflation remained elevated concerns started to shift towards slowing growth and the first serious signs of recession risk, which now seems very likely in 2023.
April was the month when the mountebanks who administer public policy finally said the quiet part out loud. “How could we be expected to know that printing too much paper money would lead to runaway inflation??”.
The month of March was dominated by the continuing war in Ukraine and its ongoing geopolitical and economic impact. In response, a wave of sanctions was initiated in a broad and coordinated fashion that aimed to isolate the Russian government and economy but also had implications for the Europe.
February was certainly a whirlwind month as interest rates, earnings and geopolitics all combined to create a highly volatile environment for all asset classes which bounced from “risk-on to risk-off” throughout the month.
The best thing about getting to the end of January is knowing you won’t see it again for another 11 months. This year’s version came complete with market drama, geopolitics, political scandal and economic uncertainty, while December’s twin themes of Omicron and inflation rumbled in the background.
Inflation and the Omicron COVID variant were the main drivers of markets in December as the former’s continuing rise finally compelled central bank action with the Fed formally announcing the beginning of the tapering process for bond purchases, while the Bank of England raised its benchmark rate to .25%.
November’s dominant themes were a continuation of issues that have been top of mind for the past several months, most notably inflation, central bank policy and COVID related developments. Starting with inflation, data across all economic zones registered strong gains in November, further stretching the credibility of the word transitory.
October picked up where September left off as attention remained focused on the length and depth of the inflationary cycle. Central bankers remained united in their characterization of the phenomena as temporary, while acknowledging that continuing high inflation “was more persistent than expected.”
The limits of government intervention were on full display in September as yet another seventies moment came to life with an energy crisis. However, unlike the original OPEC dominated crisis, this one is completely self-inflicted, with misguided policies executed in the name of “consumer protection” and “net zero” demonstrating the folly of government by shibboleth.
As some readers will recall, the ‘70s would have fit Mr Weber’s categorization, albeit with great music and films. The combination of geopolitical and political turmoil and runaway inflation certainly left their marks on economies and financial markets alike.
On July 19 the month came alive with the long-expected lifting of remaining COVID restrictions in the UK, so called Freedom Day. Unsurprisingly the “lifting of all restrictions” actually saw the introduction of a number of new restrictions, thereby dampening the expected bounce of a reopening.
Attention was once again firmly centred on the Federal Reserve in June, with the mid-month meeting upending markets while giving the commentariat a bad case of the vapours. The cause? News that the Fed’s “dot plot” forecast showed rate hikes by late 2022 and that policy makers have acknowledged that they might soon discuss when to begin tapering bond purchases.
The animal spirits were rampant in the crypto markets in May, with traders heeding the call of the bombastic Tesla founder to make digital currencies the tail wagging the proverbial Doge. Volatility surged to 160% on USD/BTC at one point, buffeted by Musk’s conflicting comments and increasing regulatory scrutiny.
Both inflation and taxation came to the fore in April as data continued to confirm that recent efforts at monetary stimulus have manifest themselves in higher inflation prints.
As we pass the one-year anniversary of lockdowns across large parts of the world we remember Pericles, the fifth century BC Athenian hero who had considerable experience with both pandemics and lockdowns.
February saw divergent moves in markets as equities shook off higher interest rates to finish strongly, in what will surely be a recurring theme for the balance of the year.
January got off to an auspicious start as most of Europe was pushed back into lockdown very early in the month, dampening sentiment which had been given a boost by vaccine test successes and rollout.
