Market declines foretell the recession. Bankruptcies and a wave of executions await us, says the head of Partners Borkovec

Financial markets are experiencing a thorny year. And straight on multiple fronts. In the global market, we can observe sales of stocks, cryptocurrencies, but also other risky assets. The declines are gaining momentum due to growing fears that uncontrollable inflation, rising interest rates and slowing growth could lead to a recession.

“I usually have positive expectations. This time, however, I think that a significant slowdown awaits us and there is a considerable probability of a certain recession here, “says Petr Borkovec, an economist, investor and founder of the Partners group, in an interview with Forbes.

Where do they see the current reasons for the decline of individual investment instruments, how the fight against inflation will continue and what awaits us in the future? “Everything will lead to problems for many companies, layoffs and bankruptcies. Unfortunately, we will also see a wave of executions at the consumer level, “warns Borkovec.

What is behind the current financial market downturn?

Liquidity, ie demand, departs quickly from risky assets. And when there is no demand, prices fall. In addition, the outflow is associated with supply, profit-taking and short-circuiting. At the crypt, robots have certainly started with institutional investors. The reason for the outflow is mainly rising interest rates. We see this beautifully in the Czech Republic, where even a very conservative investor can invest in government bonds with a yield of six percent or more.

Why risk stocks with a theoretical potential of eight to ten percent a year and a casino called crypto? Higher interest rates are always associated with capital outflows and declines in some asset classes, and expectations work the same way. And when inflation is expected, rates are expected to rise and so on.

The second reason is the real fear of a recession. The combination of rising inflation, high capital prices, deglobalization, war and many other risks leads to the conclusion that a recession is likely and that it is realistic that many companies without solid foundations, which grew rapidly due to large amounts of printed money, simply will not. Or he will have big problems.

Do you dare to guess where the dips will find their bottom?

I have no idea where the bottom is. But high volatility will certainly continue, and I think the declines will continue. The psychology and sentiment of the market is rather bearish, and unfortunately these situations work in spirals, when impulses to decline, caused by the previous decline, come. However, although we recommend putting new money into more conservative classes, there is already an opportunity for ongoing and long-term regular investment in shares.

Declining stock value, cryptocurrency, gold also has no great performance. So where is the money? Do people move them to other assets, or do they completely withdraw them from the market?

For the most part, money is not really lost, it just moves. However, part of the value created will actually temporarily disappear as the stock values ​​and the crypt fall. Most of the money simply moves to safer ports, which suddenly do not bear a negative but a positive return.

Simply put, the spread between the potential returns of risky asset classes and the significantly more secure returns of those more conservative asset classes is too low to pay off to bear those risks. So capital floats to the money market and into various forms of debt – different national qualities, rated bonds, so-called high-yield bonds and the like.

Typically, central banks have stopped buying huge volumes of bonds from various countries cheaply, and they now have to sell them at higher rates to traditional investors. Other destinations will be countercyclical assets or various alternative investments.

The price of gold is definitely not evolving to cover inflation…

I don’t understand why gold should grow with inflation. People and big investors just stopped believing it, and that’s plenty. Not believing equals low demand and that means a rising price. There is no fundamental reason why gold, which is essentially useless and generates nothing, should grow in value at the same time as inflation. It is a very speculative and stupid asset. It is volatile in the long run, yet with a very low yield.

In your opinion, are the current sell-offs on the financial markets a harbinger of the economic recession that is being talked about more and more among experts?

I usually have positive expectations. But this time I’m significantly less positive. A significant slowdown awaits us and there is a considerable probability of a certain recession here.

How will it be different from the previous one? Will it be longer and deeper?

I don’t think it will be long and deep, and I would almost call it healing, even if it hurts. But it’s great that no one should have much to do with it this time. No printing of money or large subsidies for survival.

What recipe do you see for fighting inflation?

I think the fight will be longer than expected. Especially if the war doesn’t end. And even if it ends, the fight with Russia will continue properly and this will leave energy inflationary pressures. High inflation will keep interest rates higher, and this will eventually be passed on to companies that stop investing – after all, they stop.

High inflation will further lead to consumer fear, a drop in demand, which we are also seeing. All this will push many companies to layoffs and go bankrupt. Unfortunately, we will also see a wave of executions at the consumer level. Eventually, it will lead to lower inflation, but it will be associated with rising unemployment, a further decline in consumption, and thus a slowdown in the economy or recession.