A U.S. recession will occur within the next 12 months thanks to the Federal Reserve Board’s decision to “overtighten” the funds rate by 75 to 100 basis points over the last 15 months, David Rosenberg, chief market strategist at Gluskin Sheff & Co., told attendees at John Mauldin’s Strategic Investment Conference in Dallas Tuesday. He added that this recent Fed blunder would have severe consequences.
“There will be a price to be paid for this,” Rosenberg said. The former chief North American economist for Merrill Lynch, who predicted the financial crisis in 2007, was highly critical of Fed Chairman Jay Powell.
In Chinese New Year terms, 2018 was the year of the dog. Referring to Powell, Rosenberg said, “He bit, he barked and then he whimpered” adding, 2019 is the year of the pig and “lipstick won’t work.”
Many economists, including Rosenberg, have whimsically talked about a correlation between the level of interest rates and the height of the Fed chair. Former chair Janet Yellen stood 5 feet tall and was the most dovish Fed chief in recent memory. In light of this, Rosenberg wondered why President Trump didn’t pick diminutive supply-side economist Arthur Laffer as Fed chair.
On a more serious note, Rosenberg pointed out that the stock market changed direction last year when the yield on short-term Treasury paper exceeded the yield on the S&P 500. Meanwhile, the Shiller P/E ratio ratio still exceeds 30.
Monetary policy typically has lags of 9 to 18 months and some think that the interest rates hikes by the Fed are only now starting to show up in the economy. Retail sales, for example, have been negative in two of the last three months. Credit card, which is more expensive than it was a year ago, has been rising sharply.
There is “not a snowball’s chance in hell there isn’t a bubble out there,” the Toronto-based economist remarked. “The question is where is it?”
Citing a 2018 San Francisco Fed paper that argued U.S equities would produce virtually no real returns for the next decade, Rosenberg also questions the metrics, like one-year trailing earnings and one-year future earnings. Equities are an asset class “with a 50-year duration,” he said.
The correlation between equity performance and the economy has declined, he added. It used to be 70 percent; now it’s 40 percent.
Rosenberg found one statistic with a perfect correlation: the $4 trillion in QE and the $4 trillion in corporate buybacks. “The boom in earnings has been a buyback boom,” he added. “The share count is at a two-decade low.”