Avi Tiomkin: The US is leading the world into recession

Against the background of the collapse on the stock markets and the S&P 500 Index’s bear market slide, Avi Tiomkin, who advises some of the biggest hedge funds in the world, gives a surprising forecast: “Within four to five months, the US central bank reverses its policy and lowers the interest rate, because of a deep recession in the US and the entire world that will make all the inflation hysteria disappear,” Tiomkin says, speaking to “Globes”.

“The global economy is sliding into a very heavy recession, which the US is leading, and we can already see changes in the inflation process today,” Tiomkin says. “Within a few months, the strength of the recession and the clear decline in the inflation process will oblige the central bank in the US, contrary to all the forecasts, to cut its interest rate and, very probably, to go back to quantitative easing.”

Tiomkin reiterates what he has said in the past, that the economic crisis of 2008 was never really resolved, but was temporarily resolved through interest rate cuts around the world, which were zero or even negative, and through fairly aggressive fiscal policy in most countries (that, according to him, was the correct policy). Then, however, came the Covid-19 pandemic, wrecking all the global processes: “Even before the pandemic broke out, the US economy was on a weakening trend, and the European economies were almost in an effective recession,” he says.

“Covid-19 came along, and at one blow nearly $9 trillion were injected into the banking system by the central banks, distorting the world’s financial structure, the banking system, and the outlook of the decision makers. The results were very low interest rates and a huge bubble on the stock markets, manifest first and foremost in the technology stocks and the SPAC flotations.

“From the moment that the central bank reduced the flow, we started to see initial signs of collapse, the first affected being the various SPACs and all the high-tech and biotech stocks that had reached stratospheric heights.”

Meanwhile, Tiomkin points out, the Chinese market has been in crisis for three years, “with a real estate market on the brink of disintegration and a banking system at risk of collapse,” as he puts it. “The injection gave everyone a certain amount of air; it ended towards the end of last year, and the declines began even before the interest rate was raised, just because of the expectations, and that was even before the rise in energy and produce prices resulting from the Russian invasion of Ukraine,” he says. And now, “with the US having stopped injecting budgets, the monetary system and the fiscal system have both started to deteriorate.”

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“We have reached a stage in which the markets start to react to every negative factor. Following the rise in prices of the past year in the US, purchasing power has been eroded,” Tiomkin says. “There have also started to be clear signs of rises in stocks held by companies, putting pressure on the financial system, and clear signs of collapse in the US real estate market. The US Homebuilders Index has fallen almost by half. There is a steep decline in sales of houses and apartments in the US, and tremendous weakness in the commercial market as well.

“The rise in prices itself is puts a damper on economic activity,” he adds, “because it harms the public’s purchasing power. At first, talk of approaching inflation makes people bring forward purchases to beat the price rise, and then it makes them save more in order to be able to deal with the inflationary process.”

Tiomkin says that another factor that is affecting the economy negatively is that the savings accumulated during the Covid-19 lockdowns completely disappeared as soon as the global economy was opened up. “Within a short time, the money was spent, and savings levels today are similar to what they were before the pandemic.”

The consequence, Tiomkin says, is that sources for continued economic activity don’t exist, not with the public, not with the government, and not with the central bank. “The long-term effect of interest rate hikes and the collapse on the stock market wiping out wealth, is an accumulation of irreversible damage, and so even now there are clear signs that that a recession is already happening. The strength of the recession is not yet being felt, but only now is the long-term effect of the interest rate rise starting to emerge, and the collapse in all kinds of assets – stocks, bonds; in bitcoin too, but at the macro level that has no significance.”

“Purchasing power is falling”

“All the economists in the world are terribly happy, because for thirty years they’ve been warning about inflation, and all the time the opposite happened,” Tiomkin says tartly, “and all of a sudden there’s a rise in prices.”

For inflation to continue, he says, the public’s purchasing power has to grow significantly, but in fact the opposite is happening. In the labor market, the indications are of people moving to part-time work, and layoffs in the high-tech industry as share prices collapse and flotations cease.

What about the supply chain difficulties? “All the talk of inflation was built on the supply bottleneck, but that’s gone, it has been completely solved,” he stresses. “If there are problems, they are marginal and normal. Within the past few months, the index of ship leasing prices has fallen by half, and that can be seen in stock prices in the sector, which give an indication of the general direction of maritime cargo.” The result, he says, is that in another four to five months, “all the inflation stories will disappear.”

Real estate stocks: “Looking ahead, not a good picture”

“The stock and real estate markets are now at the crash stage, and react to whatever the central banks do. Looking ahead, the general picture is not good, because even if the US central bank changes policy, it will take time until the effect is felt in the markets. Another thing is that we will now have profit warnings from companies every day, because of changes in their profit forecasts.

“The number one factor that has supported the market in the past two years,” he adds, “is share buybacks by companies. Now, the financing costs of buybacks has jumped because of the interest rate, recession conditions are developing, and it is very likely that most companies will stop the buybacks. That will remove very significant support from the market. Just since the beginning of this year, buybacks amounting to a trillion dollars have been announced.”

Real estate in Israel: “A danger to the banking system”

“If Israel enters a recession, then, just as in the US home prices reached a peak and are now starting to change direction, here too we’ll see a significant change of direction. Incidentally, that is for the wrong reasons – not because there’s more supply, but because of a recession, and because the banking system will not be prepared to give mortgages to buyers. When it comes to mortgage banks, you have to remember that when an individual customer fails to meet payments, the bank is protected, because it has a home that it can sell. If it’s sector-wide, there are 100,000 homes on which repayments are not being made, and it’s impossible to sell them.”

Will we see insolvencies in mortgages?

“If we enter a recession and interest rates reach 3-4%, there’s no way that that won’t happen. The big danger for the banking system is that it awarded mortgages on the basis of the values of the homes. That’s the banks’ big panic.”

On the Israeli economy in general, Tiomkin says that he fails to understand the Bank of Israel’s confidence in the economy’s strength, when the data already show weakness. “The global weakness signals a hit to exports, and there’s no doubt that the rises in interest rates and the collapse in stock prices are affecting the public’s purchasing power,” he says, and estimates that the Bank of Israel too will switch to a policy of cutting interest rates.

“High-tech distorted the national figures”

“High tech in Israel faces an unprecedented crisis,” Tiomkin says, “because the growth of the past two to three years created phenomenal demand for employees, and many companies with no justification for their existence could raise money because of the dramatic valuations that came about. That’s over.

“As soon as there are no flotations, people’s employability and their pay demands completely disappear. That’s very significant, because much of the boom in employment came from high tech. The high-tech numbers skewed Israel’s national statistics out of all proportion.”

Published by Globes, Israel business news – en.globes.co.il – on June 15, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

Published by Globes, Israel business news – en.globes.co.il – on June 15, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.