Private Markets To Implode As Fed Hikes to 7% | Bilal Hafeez

Episode Summary

Executive Summary: Bilal Hafiz argues 2023 will be a difficult year marked by tighter financial conditions, weaker earnings, and a higher risk of recession than markets expect. He sees major stress in private markets and crypto, continued volatility in rates and currencies, persistent services inflation, and a likely but temporary reopening bounce in China. Despite near-term risks, he also identifies possible upside gray swans such as peace in Ukraine and improved China-U.S. relations.

Main Topics: 2023 macro outlook: tougher than consensus (Priority: 5/5): Bilal’s base case is that 2023 remains painful for risk assets and the economy as the impact of prior rate hikes fully works through the system. He expects more weakness than the soft-landing narrative implies. Earnings recession and equity market pressure (Priority: 5/5): He argues 2022’s equity drawdown was mostly valuation compression, but 2023 will add earnings downgrades, margin pressure, and slower sales as growth weakens and costs stay elevated. Private markets and leverage risk (Priority: 5/5): A major gray swan is a severe break in private equity/private credit due to hidden leverage, refinancing stress, and exposure among pensions and insurers, potentially triggering public-sector backstops. Inflation, labor shortages, and central banks (Priority: 5/5): Bilal expects inflation to fall but remain sticky, driven by wages and services, forcing central banks to stay hawkish longer and potentially push policy rates much higher than markets expect. China reopening versus structural weakness (Priority: 4/5): He distinguishes between China’s negative long-term structural story and a near-term cyclical rebound from zero-COVID reopening, while warning the rebound may fade as health and balance-sheet constraints bite. Bonds, currencies, and energy (Priority: 4/5): He favors higher front-end yields, sees further dollar strength in the first half of 2023, and expects energy prices to have a medium-term upward bias even after recent declines. Crypto and market contagion (Priority: 3/5): Crypto has likely not finished unwinding, but Bitcoin and Ethereum are still viewed as durable assets. Macro conditions remain the dominant driver of crypto price action.

Key Arguments: 2023 is likely to be a tough year for nearly everyone because the full effects of the shift from zero rates/QE to restrictive policy have not yet fully hit the economy and markets. 2022 equity weakness was largely valuation derating from higher rates; 2023 should be worse because earnings expectations are likely to get downgraded. A recession may be more severe than the market’s soft-landing base case because the Fed still needs to rebalance supply and demand, especially given ongoing labor shortages and sticky wage growth. Private markets are vulnerable because leverage accumulated during the low-rate era is mostly outside the banking system and is often masked by lagged or non-mark-to-market pricing. If private equity/private credit break down, the damage may fall less on banks and more on pension funds, insurers, retirees, and potentially public-sector balance sheets. VC is already in a sharp correction: fundraising, valuations, and the growth-at-all-costs mindset have all deteriorated toward profitability and cash-flow discipline. China has a weak structural outlook due to too much debt, too little consumer-led growth, and poor allocation of savings, but reopening should create a near-term cyclical bounce. The Fed may not pivot soon; Bilal’s team even sees the policy rate potentially reaching 7%-8% by end-2023 if inflation and labor tightness persist. Inflation is likely to decline from its peak, but services inflation and wages will keep it above the market’s expectations, possibly around 4% rather than 2.5%-3%. Energy prices may rise again after the winter and restocking cycle, especially with China reopening and Europe needing to rebuild gas inventories. The dollar is expensive but could strengthen again in early 2023 as European and Chinese positives get priced in and U.S. recession/pivot expectations prove premature. Crypto remains vulnerable to macro headwinds and exchange/peg-related surprises, even though Bitcoin and Ethereum are likely long-term survivors.

Data Points: Fed policy rate current level: 4.5%-5% - Market/central bank expected range discussed for the near term Potential Fed peak rate: 7%-8% - Bilal’s team’s base case for end-2023 policy rates 2022 private equity returns (reported lagged): up 10% - Private equity performance cited through end of June/beginning of July 2022, despite public equities being down Public equity performance in 2022: down 15%-20% - Referenced to show the mark-to-market gap versus private equity U.S. inflation peak timing: June 2022 - Bilal says inflation likely peaked in June Expected U.S. inflation by end-2023 (consensus): 2.5%-3% - Market/economist consensus referenced as too low by Bilal Bilal’s expected U.S. inflation by end-2023: around 4% - His forecast for stickier inflation Core services inflation: 5%-6% - Used to support the view that inflation remains sticky Disney+ economics: about $4 per user per month revenue vs. about $20 per user per month content cost - Example used to illustrate Disney’s streaming profitability problem MacroHive Prime discount: $220 annual subscription during the promo window - Forward Guidance promotion for listeners MacroHive Prime regular price: $468 annual subscription - Listed in the ad read before correction was noted Discount period: 14 days / Dec. 22, 2022 to Jan. 6, 2023 - Promo window for the MacroHive offer Euro level mentioned: 95 to above 105 - Approximate euro/dollar move discussed over 2022 and early 2023 expectations ECB expected peak rate: around 3% - Bilal’s view for ECB hiking path Bank of England expected peak rate: around 4% - Bilal’s view for BOE hiking path

Pivotal Quotes: "2023 is going to be a tough, tough year for everybody, for risk investors, for economists, for everybody." — Bilal Hafiz: Opening outlook for the year ahead "I think it could be more severe." — Bilal Hafiz: His response to whether the coming recession will be mild or severe "The other side is the financial market side, which is almost decoupled from the real economy." — Bilal Hafiz: Explaining why markets can weaken even without a classic severe real-economy recession

Implications: Listeners should expect higher volatility, weaker risk assets, and potentially stickier inflation than consensus expects. The biggest watchpoints are private-market stress, labor and wage data, central-bank hawkishness, China reopening, and the dollar/energy cycle.