from houses to banks, what will happen - Corriere.it

from houses to banks, what will happen - Corriere.it


Within the next 18 months I expect the US economy to enter a recession. The markets are not prepared for that scenario. The warning was launched by Sushil Wadhwani, chief investment officer of Pgim Wadhwani, governor emeritus of the London School of Economics and Commander of the Order of the British Empire. A long career, built between finance and institutions, Wadhwani was also a member of the Monetary Policy Committee of the Bank of England and worked for Goldman Sachs as director of equity strategies. A transversal path that finds expression in an acute analytical capacity, full of references to the history of the markets, even the less recent one. We are at the end of a tightening monetary cycle. In these phases, typically, incidents can occur on the financial markets. Do you remember 1994? Then the drastic increase in interest rates triggered the crisis in Mexico – recalls Wadhwani -. This time we find ourselves facing the crisis of American regional banks: the phenomenon does not concern only three or four realities, the entire local banking system appears vulnerable. I would not be surprised if other critical situations emerge.

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Moreover, the current period brings to mind the savings and loan crisis of the period 1984-1994, which led to the bankruptcy of over a thousand institutions - he says -. If the macroeconomic situation were to worsen, it would have negative repercussions on the commercial real estate sector, to which local financial institutions are highly exposed. The good news, says the economist, that the current situation is in no way comparable to the financial crisis of 2008, which also involved the big banks. The problem seems to be much more contained today. And with fewer ramifications on a global scale. However, this is not an invitation to let our guard down: monetary tightening was necessary to re-anchore inflation expectations, but it will have a significant impact on growth, he continues. There are those who disagree with this statement, pointing to the surprising resilience of corporate profits. But according to Wadhwani, the effect of the massive fiscal stimulus introduced by governments to support GDP during the pandemic: this has generated a savings glut, which in turn has made families more resilient, so far – he claims -. It will take longer to see an impact on profit momentum, but it will come eventually. The US will come to terms with a period of decline. And the history of the financial markets says that in the post-World War II period, only after every American recession did the stock market hit bottom. When that happens, profits can fall sharply. And if that were to happen, we could see the S&P 500 rewind to 3,500 or 3,600 points, towards last fall's lows (that would be equivalent to a loss of nearly 20% from current values, ed).

Little optimism

The hope of investors, therefore, that the recession does not materialize. It's hard to be optimistic about this, as the effects of the credit crunch and the US banking crisis will be felt. And inflation has not yet reached the Fed's target – says Wadhwani -. But even if I were wrong, it would mean that the economy is surprising, growing more than expected. And then the US central bank would have a problem: it would be forced to raise rates again. And the market is not ready for this hypothesis. I don't exclude that the stock exchanges could go up again for the next two or three months. But I am worried about the next period, when the recession approaches. And what needs to happen for stock markets to get back on track to a more sustainable uptrend? During the recession, the Fed will begin to ease its monetary policy. This will restore investor confidence, concludes Wadhwani.



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