(TL;DR at bottom)Anyone remember when it was ‘obvious’ that Europe was going to be in a deep recession? (I was expecting a recession for sure, though was still bullish on the stocks)America (first)Before Europe, let me take a quick detour to America. I made a comment yesterday on how in the US, JPM/other banks are revising down their recession predictions. Here is the link. A snippet:According to the firm’s trading model, seven of nine asset classes from high-grade bonds to European stocks now show less than a 50% chance of a recession. That’s a big reversal from October when a contraction was effectively seen as a done deal across markets. […]But thanks to a slow-burn rally of late, US high-yield credit has seen some of the sharpest repricing, with recession odds dropping to 18% from 33%. European markets have also suddenly danced to a bullish beat. The EuroStoxx index reflects just a 26% probability — down from 93%. JPMorgan calculates the metrics by comparing the pre-recession peaks of various classes and their troughs during the economic contraction.Figure of recession chanced priced by assets. Here’s Bloomberg’s October article. Note the headline, “Forecast for US Recession Within Year Hits 100% in Blow to Biden.” And today? Unemployment 3.5%, Q3 GDP growth of 3.2%, and Q4 projected to be 3.5% (real, quarterly, annualized growth) by the Atlanta Fed. Month over month CPI reports showing inflation sub 2% or even deflating (the last 6 month over month CPI reports if annualized come out to about 1.8% inflation). Here is a detailed comment I made about inflation last week and how promising the data looks.Have earnings collapsed? Not yet, or else SPY wouldn’t be up some 11% from its lows and big banks / airlines (oh and Ally??) raising guidance. US small cap value ($AVUV) up 21% (this sector bottoms before the wider economy). We shall see this coming week if earnings will need another quarter to meltdown.Is all this because of an over-indebted consumer? Not really. Check out household debt and credit debt as a share of GDP or income, respectively.EuropeAnd now to Europe. I made a thread early December 2022 asking if Europe bottomed. The comments were quite sure the answer is no. Have those views changed? VXUS (all ex-US stocks) is now up 24% from its lows. The Europe specific ETF $VGK is up 32% from its lows, so this isn’t being driven by ex-(US and Europe). Ex-US Developed Small cap Value (AVDV)? Up 26%. You’d think the industrials would get decimated by high energy prices, right? Well how is Siemens AG doing? Up 63% from its lows. How about steel producer ArcelorMittal SA? Up 50% from its lows. Chemical company BASF SE? Up 48%.Natural gas prices in Europe were at some point absurdly high. They’ve fallen, albeit still higher than pre-crisis trends. But lower than invasion prices. Did Europe massively deindustrialize? Nope. What about growth expectations? Seem to have bottomed.Oh and what more, here is Eurozone current account entering surplus. A region that is urgently importing outrageously expensive LNG and shutting down all its export industries would be in deep deficit, as happened in 2022. Now it’s exporting more (in value) than it imports.To the FT article:As recently as last month, analysts surveyed by Consensus Economics were predicting the bloc would plunge into recession this year. But this month’s survey found that they now expect it to log growth of 0.1 per cent over the course of 2023. This is thanks to lower energy prices, bumper government support and the earlier-than-anticipated reopening of the Chinese economy, which is set to boost global demand.Economists had feared that Europe would be among the hardest-hit areas of the global economy this year due to its exposure to the economic consequences of Russia’s war with Ukraine. Just weeks ago IMF managing director Kristalina Georgieva said that “half of the European Union will be in a recession” during 2023.There is now less than a 30 per cent chance of a recession, down from the an estimated 90 per cent last summer, according to Anna Titareva, economist at UBS. […]The recent sharp fall in wholesale gas prices back to levels last seen before Russia’s invasion of Ukraine has also helped boost the economic outlook. JPMorgan this week raised its 2023 eurozone GDP forecast to 0.5 per cent after anticipating natural gas prices would be about €76 per megawatt hour, rather than its previous expectation of €155.Sven Jari Stehn, economist at Goldman Sachs, said firmer demand in China would “boost European trade significantly, especially in Germany”.German chancellor Olaf Scholz said this week he was “convinced” Europe’s largest economy would not fall into a recession. Banque de France governor François Villeroy de Galhau said: “For Europe, we should avoid a recession this year, which I wouldn’t have said with such confidence three months ago.”Some economists do still expect a recession. Silvia Ardagna, economist at Barclays Bank, said that while the downturn would not be as deep as previously thought, the eurozone economy would still contract for two successive quarters — meeting the technical definition of a recession.Kenningham warned aggressive rate increases by the ECB could lead to a weak recovery.Lagarde signalled in Davos the ECB would raise rates by 50 basis points at its February and March meetings. The deposit rate has already increased by 2.5 percentage points to 2 per cent since June last year, a pace of tightening that eurozone economies have not experienced before.Was it luck? Obviously the weather was very lucky to be warm. But if your 90-100% recession chances depends on the weather…. It’s not a very great forecast.Is the all-clear in? No. But if the recession call is even unclear in the EU, how much less likely is it in the US?! With China reopening, the world economy suddenly looks like it is in a better place. And not at risk of a food catastrophe, as the Economist wrote on May 19th. Wheat prices Soybean pricesMy Older PredictionsThese were my predictions made on June of 2022, at the worst of the sentiment. I predicted a rapid fall in inflation (seems to be happening, as the last 6 months of CPI reports average to 1.8% annualized). I also predicted a mild or worse recession (didn’t seem to happen yet). I also wrote that I wasn’t as bullish at this point, and I think I became more bullish a few months afterward about Europe/US stocks (around August/September).Here were my premature mid-May predictions about inflation peaking. How many months was I off by? Graph of core CPI, and also CPI.TL;DRs:Do not trust forecasts that say there is a 100% chance of anything, and do not underestimate the resilience of institutions and their people.Also, here are all 18 images I linked to in this gigantic post for easy browsing and 12 more all about the UK.
