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After the FOMC decision, I said that thinking was “these morons are going to hike us into a recession” and that sentiment has certainly spread.
At the same time, what happened in the UK is critical. The market reaction to deficit-funded tax cuts and writing a blank cheque for energy subsidies is just as important: It means that the era of free money for governments is over. We’ve reached the limits of what deficit spending that markets will tolerate.
That has critical implications for governments in the eurozone and the rest of the world. The fiscal lifeline is gone and it’s happening as an expensive energy crisis hits.
On the corporate side — as I wrote Friday — the capex cycle is dead. Any plans for spending in 2023 are getting rolled back now and all that’s going to do is cut capacity down the road and lead to shortages and commodity price spikes.
But that’s a trade for another day. The problem right now is that something is going to break. Maybe that something has already happened in the UK bond market but there’s a world of emerging-market strain out there and China isn’t looking good either. Like Buffett said, we’ll find out who is swimming naked.
At the very minium though, markets are certainly pricing in something akin to a global recession right now. At some point the warm, safe embrace of bonds will be the place for shelter but we’re not there yet.