Mike Singleton, senior analyst at Invictus Research, warns that the US leading economic indicators have been declining since 2022, pointing towards a potential recession over the next 12 months. He further states that the recent banking troubles and failures indicate that the popular adage, "The Fed raises rates until something breaks," is currently in motion, with the full impact of tightening expected to affect the broader economy over the next year. As a result, Singleton believes that investors should be prepared for potential downside risks.
Here's what he had to say in a recent interview on FS Insider (see Fed Backstopping Failed Banks But Inflation Is Still Too High, Says Mike Singleton for audio).
Deflation and Further Tightening
According to Singleton, "the outlook is for what we call deflation…slower real growth and slower inflation."
A large part of this is not just due to the rapid tightening by the Federal Reserve starting last year, but also the commensurate tightening by banks, which were already tightening up on lending standards prior to the recent banking turmoil.
"Banks tend to have very good insight into their borrowers, whether those be businesses or individuals; and so, we take that very seriously. Of course, you can just look back at the history of bank lending standards and you can see like clockwork before every recession banks are tightening their lending standards."
Banks aggressively tightening across the entire credit spectrum
Recession Ahead
Singleton's base case scenario is that the economy will experience a continuing slowdown with a recession in the second half or early part of 2024.
“We just saw the two-year yield fall 110 basis points in a week. If you look back at history…that tends to happen within the vicinity of a recession…that is something that we don't want to ignore.”
In the past, the Fed has tended to halt rate hikes before a recession occurs. However, at present, the futures market is anticipating the Fed to pause and maintain the current range of 4.75-5% on the federal funds rate in the coming months before reducing rates in the second half of the year. This contradicts the Fed's plans of surpassing 5% and staying at that level for an extended period, indicating that the futures market is starting to factor in recession.
Two Possible Scenarios
When asked about the two most likely scenarios in the current market, Singleton said, "either we see things stabilize from current levels because of what the Fed and the FDIC have done in order to backstop some of these recent banking troubles. But that just means we should expect the Fed to continue on their tightening path because inflation is still running too hot.”
The second scenario would be if see further blowups occur in the banking and financial system, causing the Fed to pause, which is what the market now expects. Even under that scenario, the odds are quite low that the US economy is going to recover or see a rebound given the level of tightening already in the system.
Though there was quite a bit of talk about a ‘no landing’ or rebound scenario earlier this year, Singleton says the odds for that are very low.
Investment Implications
Given the above, Singleton has been telling his subscribers to remain overweight defensives, cash, and looking to buy long-term bonds once it is clear the Fed is done tightening.
The following was just a brief portion of the material covered in our recent conversation with Mike Singleton at Invictus. To listen to this full audio interview, see Fed Backstopping Failed Banks But Inflation Is Still Too High, Says Mike Singleton or, if you’re not already a subscriber to our FS Insider podcast, click here to subscribe.
Also, don’t forget to follow more of Mike’s work and to sign up for his daily, weekly, and monthly video updates by going to invictus-research.com.
