And the line from The Big Short movie, “it all came crashing down” comes to mind. We have been warning of precisely this since the start of the year, and even with the huge collapse already seen in US equities, I am not changing my view that investors should continue to play defence.

"Protect your portfolios” from the roof-tops we should all scream. The situation is not a buy the dip or look across the valley scenario. People need to step back and see the bigger historical picture. What I am about to say will not be a surprise to anyone, but investors need to connect the dots.

At the point of highest confidence and enthusiasm in global stock markets and others, there were already worrying signs coming from inflation, not transitory, a moderation in manufacturing globally, and consumer sentiment.

Sales have remained firm, but consumer sentiment has been nose-diving to GFC levels for some time. Suggesting there may be a 'last hurrah' by consumers taking place at the moment. Both in the USA and elsewhere.

We haven’t even gotten to the war in Ukraine yet? Permanently higher food and energy prices and even shortages of both.

The most powerful factor of all is that the Federal Reserve and other western central banks have fallen well behind the worst inflation curve in decades. This has resulted in their now being set on a course to be aggressively raising rates against ever higher inflation. Inflation that is impervious to interest rate hikes in any case.

The end result is inevitably the squeezing of consumers and business alike by sky rocketing prices and higher interest rates. Mortgage stress will grow substantially, potentially triggering a second great housing market crisis in the USA this century.

If that happens, property price decline on top of high inflation particularly in the energy sector, and already economic crisis levels consumer confidence, then a particularly bad recession will take hold. This scenario could unfold as soon as later this year.

Even Larry Summers agreed with me over the weekend that the US is at risk of recession within the next year. I believe it could be imminent this year.

The stock market crash already seen is due for a sharp upward correction of some kind, but it does not look likely anytime soon given the very bearish close in New York trading yesterday. When a rally does eventuate, investors should take advantage and continue to hedge their portfolios against further downside risk.

The big buys of the moment are the US dollar and Oil. Gold too. Though it may have further deleveraging downside to be seen first. In the end though, it will again become a safe-haven refuge.

It would be great to be wrong, but this increasingly looks like an historic unwinding of a giant tulip bulb period where central banks went out of their way to throw fuel on the fire.

Clifford Bennett

ACY Securities Chief Economist.

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

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