Every economic cycle ends with excess which is sovereign debt, says Joe Zidle, chief investment strategist at Blackstone. This time such excess sovereign debt might be the “mother of all bubbles”, he suggests.
The strategist said that failures in the repo market, negative-yielding debt, a deeply negative term premium, trade conflicts around the world, and a collapse in manufacturing all seem unrelated right now.
“At the end of any economic cycle, we often get warnings that appear to be unrelated,” he says. “It’s in hindsight that we realize that they were not at all random.”
Investors saw this during the run-up and aftermath of the housing bubble, “and we’re seeing it now.”
The “mother of all bubbles” in the sovereign debt market is the catalyst that will likely trigger the next recession, according to Zidle. He expects that to happen between mid-2020 and the end of 2021.
“I’ve turned more bearish on the current economic outlook. I don’t expect a recession in six months, but I don’t think it will be as far out as two years from now, either… I believe excess sovereign debt might be the mother of all bubbles.”
Zidle points out that stocks tend to rise until about six months before a recession, meaning there could be some market gains left.
“Cyclicals and low-quality stocks should outperform in an improving earnings environment,” he said. “New highs in equity markets will likely be set.”
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