Ed was on BNN this morning to give his thoughts on current market conditions. He began by saying that the recent market rally was driven by an increase in available liquidity, but that this liquidity is now being taken away by central banks. Consequently, the markets are seeing a downturn. Ed emphasized that the main risks today are sticky inflation and stagflation, and that it is necessary to get inflation under control before the markets can find a new equilibrium. He continued by saying that we have yet to see the lagged effect of the tightening of monetary policy, as such measures were taken while G7 countries were experiencing unprecedented levels of debt. The tricky part about this market is that he doesn’t think that 100-150 bps in inflation has ever been so important for the markets. If inflation gets down to 2.5%, we can afford to be more optimistic. If inflation gets stuck at 4%, it could lead to rate hikes and considerable trouble.
Ed thinks we are most likely to see a market correction on anything that was frothy, and the weakest links in credit chains, such as leveraged loans, high-yield markets, and real estate. He continued by emphasizing two points. First, he expects that we will see a slowdown in the future, which may not yet be reflected in the stock market. Second, with the discount rate, the corporate bond market and the equity market are connected, and both seem overpriced.