The soft-landing signals exhibited by the weak U.S. economy and stock market are likely to shift towards a harder landing by 2022’s second half, David Rosenberg of Rosenberg Research told attendees at John Mauldin’s virtual Strategic Investment Conference this morning.

However, the “bands of uncertainty are wider” than Rosenberg has ever seen them in his 35 years in the business, which included an extended period as Merrill Lynch’s chief North American economist. “The stock market will lead the housing market” and result in a powerful “wealth effect” by the second half of this year, he warned.

Part of the reason the downturn could be powerful is attributable to the abrupt change in Fed Policy. The reversal in fiscal policy has been just as dramatic.

“Last spring fiscal policy was adding 5% a year [to GDP],” the Toronto-based economist and strategist noted. By year-end that same figure is headed towards minus 2.8%, creating whiplash into a U.S. economy already suffering supply shocks.

Rosenberg, who is known for contrarian views, noted that less than a year ago Fed chairman Jay Powell was “sounding like a social worker.” Today he is eulogizing former Fed chair Paul Volcker as the “greatest economic public servant” of the modern era.

“I think the Fed is going to overdo it on policy tightening just as they did” on policy easing, he told attendees. “The Fed will destroy demand.”

If there is a silver lining, Rosenberg said that heavy-handed Fed policy could render inflation truly transitory. He quoted his old boss, former Merrill Lynch chief market technical strategist Bob Farrell, who once famously observed that when everyone thinks something will happen, something else will happen.

All the talk of nascent union movements and supply chain bottlenecks are overblown and unlikely to last in Rosenberg’s view. About the only thing that President Biden has said “that’s accurate” is that corporations are exploiting the current situation and engaging in price-gouging.

“Consumers are catching on,” he said. The corporate sector in America has managed to ram through “four years of price increases in one year.”

Consumer spending finally appears to be rolling over in the face of rising prices. In recent weeks, manufacturers from Procter & Gamble to mattress makers are starting to see sagging demand.

What many professionals, including economists at the Fed, fail to realize is how late in the cycle the U.S. economy actually is, he said. It’s understandable, given the unprecedented nature of the pandemic economy.

Traditional timing in normal economic cycles has little relevance. Rosenberg estimated the U.S. economy currently was in the eigth inning, not the sixth or seventh inning. Based on a series of 18 indicators he and others developed at Merrill, the current cycle is 82% over.

The fact that the current economic expansion started in May 2020 is distorting many economists’ perception. Remember that the “last recession lasted two months,” he said.

The Fed “usually tightens policy in the third inning. They’ve never started this late in the cycle except in 1999,” he noted. “What happened a year later?”

Looking at the stock market, Rosenberg pointed to the relative weakness of cyclical stocks, which appears almost precisely the same as it did at the onset of the last three recessions.

Meanwhile, boring utilities and consumer staples stocks are hitting new highs, another end-of-cycle signal.

The composition of inflation has completely reversed over the last year, Rosenberg continued. For example, Russia's invasion of the Ukraine and the latest outbreak of covid in China both short-circuited demand for U.S. exports in the world's two biggest consumer markets, Europe and Asia.

“This [current] inflation is about supply; last year it was about demand,” he said. “So many complex supply issues are out of the Fed’s control.”

Recessions typically follow a food-and-fuel price squeeze when price increases exceed 6%. Currently, they are rising at an 8% rate.

Rosenberg differentiated the present bout of inflation from the 1970s because there is a corresponding “wage-price spiral.” Real inflation-adjusted average weekly earnings have been falling for more than six months.

The history of Fed tightening cycles isn’t particularly encouraging either. Rosenberg said 11 of the past 14 tightening cycles ended in recessions. What’s different this time is not the low level of interest rates but rather the rate of change, which is dramatic.

For stock market investors, the good news is that equities already are down 13%. Recessions, on average, take stocks down 30% and Rosenberg added that if the S&P 500 were to hit 3,550, “I’d get interested.”

Nonetheless, he warned attendees at the SIC conference to be “extremely cautious.”

Among the investments that perform well as the economy enters a recession are U.S. Treasurys, gold, the U.S. dollar and dividend-paying, non-cyclical stocks.

It may be counter-intuitive, but Rosenberg said that even in periods of recession and elevated inflation, "there is a rally in Treasurys.”