Gone is the Marko Kolanovic who, week after week after week would tell clients to buy the dip - and that's just in 2022 - as the S&P finally entered a correction earlier today after the latest plunge in stocks, and in his place we had a brief glimpse of this strange, crticial-thinking and skeptical creature that we haven't seen since some time in 2017 when the Croatian quant last dared to ask unpleasant questions or deliver non-goalseeked narratives that not all is well in an artificial market propped up thanks to trillions in liquidity injections.
Unlike his most recent note, when he told clients that "small caps are already in a recession" so it's time to buy the dip - just as stocks tumbled anew thanks to soaring rate hikes and the Ukraine crisis - in the latest JPMorgan view published this morning, Kolanovic writes that "geopolitical escalation over the last few days materially increased the risk of further aggravating the energy and commodity crisis developing over the past 2 years" a crisis which as recently as November Kolanovic said didn't exist, because as he calculated in November, for oil to be considered expensive, it "would need to be trading at ~$115/bbl (we say this is conservative because we have excluded “expensive assets” such as central bank balance sheets and Nasdaq, which would imply a median oil price in the $300-$500/bbl range)." Apparently, three months later oil is suddenly expensive again.
In any case, in taking a page out of the Kolanovic playbook of old where one could actually learn something instead of merely be bombarded with childish BTFD sermons that always skirted around the major risk factors and accentuated whatever the conventional wisdom bull thesis du jour war, today the JPM quant writes that "potential trade disruptions of oil, gas, grains and metals is now a significant risk for investments and the real economy" and that "portfolio managers should hedge this risk by increasing allocations to commodities, energy and materials. These allocations would serve as a hedge to inflation, geopolitical risks, and COVID reopening in what we see as a continued cycle of economic expansion. Although commodity inventories have contracted sharply, China’s share is abundant." Some more details:
The world is short Commodities. China is not. Global tradeable commodity inventories have contracted sharply over the past six months, declining in aggregate by 25% from 64 days of consumption at the peak in April 2020 to 48 today, a five year low. This drove the BCOM up 85% during the same period, to a multi-year high. While tradeable commodity stocks are critically low, it is important to acknowledge the abundance of available inventories in leading commodity consumer and importer China, to draw upon as required, which can influence import demand. China currently holds an estimated 84% of global copper, 70% of corn, 51% of wheat, 40% of soybeans, 26% of crude oil and 22% of aluminum inventories, according to our sources. Inclusive of China, global commodity inventories are at about 62 days of consumption, down 18% since the April 2020 peak
Yes China's share may be abundant, but the US is not China, where "low levels of tradable inventories have left us with few shock absorbers, which could drive nonlinear commodity price increases, particularly in light of our base case of a further rise in geopolitical tensions." Wait... when did that become the base case?
We don't expect an answer, nor do we expect Kolanovic to remain bearish - especially since JPMorgan is one of the few banks left with a 5000+ S&P price target now that even Goldman has capitulated - because after regaling clients with what may be his bearish take in years, the head of global markets strategy at JPM reverts back to his permabullish self (after all he is no high enough in the JPM org chart to be a member of the policy team having left analysis behind), and writes that "if geopolitical risks fade, we see big upside potential for Russian equities given their dislocation with oil prices", or in other words, precisely the opposite view of his nemesis, Wall Street's biggest bear, Michael Wilson, who earlier today wrote that if geopolitical risks fade, the market may bounce but will still tumble as low as 3,800 by the end of March as the late-2018 playbook repeats.
So how does Kolanovic gloss over the elephant in the room - the Fed's tightening into a slowdown/recession - to give clients a carte blanche to buy just as soon as Biden somehow teaches Putin a lesson? Well, he says that, "while equities are down ytd due to rising rates" - to which we would also add a slowing economy and collapsing earnings guidance - he notes that "historically the initial volatility around rate liftoff didn’t last and equities made new all-time highs 2-4 quarters out." Which may be true, but the Fed has only raised rates with stocks more overvalued just one time: that was in June of 1999. Everyone remembers what happened next...
... everyone, expect apparently Marko, who decides to keep digging and argues that "the start of policy tightening is usually a confirmation that the cycle has legs, rather than the signal of its end", which again is incorrect, because as we showed earlier, never before has the curve been this flat before the Fed hiked rates even once!
So how does Kolanovic address the all too real risk that the curve will invert - something his own colleague Nick Panigirtzoglou spent his last "Flows and Liquidity" discussing? Why, he doesn't and instead like any good politician simply ignores the topic saying instead that "as we don’t see the yield curve inverting or real yields reaching problematic levels this year, it is premature to talk about end-of-cycle worries."
Of course, ending on with yet another BTFD chorus would make even JPM's clients openly mock the strategist, so he had to caveat his bullish outlook somewhat, concluding that "that said, there is cause for caution as the path for optimal monetary policy is narrow in the current backdrop."
In other words, it only took trillions in lost market cap, a correction for the S&P500 and a bear market for the Nasdaq for Marko to admit that there actually are risks.