JPMorgan’s Marko Kolanovic explains why he is “outright damaging” on shares

So you know short-term interest rate moved a lot in the last six months and they'll probably still go a bit higher and stay there uh you know consumer took a lot of debt interest interest rates went up um consumer was resilience resilient and and that was a sort of our thesis last year that corporate and consumers are.

Very resilient but as the time progresses they're less and less resilient so we do think that we will uh have a recession the question is whether it's a mild or less mild both here in the U.S and in Europe so sort of as the time passes we think that fundamentals are deteriorating you know and the market has been moving up you know like.

So that has to clash at some point yeah it feels almost like investors just are hoping that things won't be as bad the recession will be mild we've heard that time and time again from CEOs at this point saying you know what we don't see things as being that bad it's almost like people want to be lazy long at this point I mean how would you characterize.

The market action yourself it's a little bit like that so there's a little bit of sort of uh um a technical move higher you know like the trend followers started covering shorts adding some Longs volatility Vicks declined a lot below 20. so declining vix usually brings some inflows some systematic some.

Discretionary you know then people start believing in narratives that things will be better we have a China which gives a little bit of a sentiment dollar is weaker so I think that created this narrative that kind of verses behind us kind of recession is over or recession will happen some somehow magically last year and now we're about to grow which.

Which we don't agree we see actually if you look at all of these data like I send the regional service like Empire Philly Richmond they're all kind of going lower so for me question is what's going to make this survey turn up you know this data point turn up you know and and I don't see that happening on unless fed cuts and fed doesn't have an.

Intention to cut now you know so I do think things have to get worse before they get better so the vix on puzzled at a 20 vix here so I hear you on that but you often cite investor positioning you guys are great at this and to me this is a lot of cash out there there's also if you look at the economy and this is a different metric but you've got 2.6.

Trillion in New China savings that you know suddenly could get Unleashed no that's what makes it tough right because positioning is not that high you know and that's a bullish argument you know and that's an argument that we kind of use extensively last year and didn't kind of save us position was was low already in June July last year we still.

Went to Lowe's you know like so but I agree on a positive side positioning is not that high and that's I think it makes it difficult that's why it makes it painful and Market kind of drifts higher because there is a little bit of that positioning pain or ability to relate as the volatility comes down you know but overall we do think the.

Direction of economy is South you know and at some point that will have to you know corporate CEO may say like things look fine now but are they going to be fine in three six or nine months and Market should look a little bit ahead of that Marco what's the math around earnings for this and I think Mike Wilson his low ends 180 you're starting.

To see more and more people ratchet down their S P 500 numbers what are yours look we are at 205. it's it's a tricky right so we are 205 which sort of prices in mild recession right so now if there is no recession which again we don't think that that's the case but if there's no recession it's probably 2 25 230. if there is a recession could be.

More along what Mike is saying could be another you know 10 lower so call it 180 190. so we're we're sort of in between you know uh so very mild recession that's what we're pricing in now we can be wrong both ways it can be worse or it can be a bit better if we avoid recession but we do think it's 200 and 205 and then multiple is is a little bit.

High now given that the FED is still moving higher it doesn't sound like your your PE matches with what you foresee for the economy though I mean if you if you say the 205 reflects on the recession and the indicators that you take a look at indicate that anything everything's going to go south even more that doesn't say to me mild yeah it.

You're right you know like so that's why what we are projecting and it is a little bit convoluted so we think things first turn South get much worse than fed quickly Cuts you know or or reacts or or signals cutting and that basically inflicts us higher you know like so so we still are hoping that there's going to be some backstop in in the in the uh.

You know so when you look at all these data kind of rolling off like yeah if if they're left unchecked at five percent plus interest rates it would be much worse more along the lines with some of our competitors are saying but we think at some point they'll they'll backstop it you know like so big question is where is it 3600 thirty four hundred.

Thirty two hundred sort of we don't have a very strong conviction but we do think lower is the direction right Marco when you think of your 205 s p for for this year I mean think about these large multinationals make up a big part of that right and so right now we're waiting for Microsoft's guidance right here and so what are the incentives.

Especially with the dollar that you just mentioned that's so weak and that was one of the reasons why they warned let's say six to nine months ago um do they have any incentives these major companies just just to inch it out like quarter by quarter rather than just kind of take big cuts so that could be a pad that we basically.

We just gradually deflate get rid of some of the excesses the dollar stays a a Tailwind at these lower levels uh so that's this sort of a soft Landing scenario where whereby consumer can kind of you know still still survive next call it's six to 12 months you know it's it's possible it's a risk to our base case scenario you know I happen to think.

That you know there is usually some uh contagion or something that happens unexpected you know one thing leads to another and market a little bit kind of frontruns all of those developments so I I think it's less likely that you have this type of very soft gradual range bond market until we are ready to Rally let's say in 2024 you know so it's.

Possible in that case we're not going to be right the fundamental to your turn around is the idea that the FED will Flinch unfortunately the FED will just back down and give into the markets that's what my view and again you remember you know 475 or 5 or 525 I don't think there's too much of a difference.

Actually but last time we had this type of rates were in 2007. you know and and and then they went to zero after that right so so I just don't think that five percent rate we can have this economy functioning in financial markets and all the changes that happen in in the markets beat leveraging the markets be private asset classes Ventures Venture.

Capital probably they could do all those things I don't think they can coexist at five percent long term so I think something we'll have to give and fed will need to flinch

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