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.