“From Bambi to Godzilla.” Strategist David Rosenberg confuses the Federal Reserve as he sees a 30% drop in house prices and the S&P 500 return to an early 2020 low
By Jonathan Burton
But don’t despair. “Permabear” Rosenberg sees a new bull market for stocks, bonds and other risky assets in 2024 when, he says, it becomes a “permabull”.
The last time David Rosenberg shared his outlook for the US stock market and economy with MarketWatch in late May was depressing enough.
“I feel like I’m reliving the summer of 2008,” Rosenberg wrote at the time. He speculated that the S&P 500 – which was then trading above 3,900 points – would eventually flirt with 3,300.
Rosenberg is the chairman and chief economist and widely followed strategist of Toronto-based Rosenberg Research & Associates Inc. and predicted that the anti-inflation movement would trigger a painful economic recession.
Five rate hikes later, with more expected, Rosenberg is even more pessimistic about the stock market and the economy in 2023 — and to say he’s disappointed in the Federal Reserve and Chairman Jerome Powell would be an understatement.
“The Fed’s job is to take the punch bowl away at the start of the party, but this version of the Fed took the punch bowl away at 4 a.m.,” Rosenberg said, “when everyone was stuffed alcohol.”
Many market pundits and economists are now siding with Rosenberg – criticizing the Fed for waiting too long to fight inflation and warning that the central bank may now be going too fast and too far.
But Rosenberg leans even closer to the railing. Here’s what he says investors, owners and workers can expect in the coming year: S&P 500 drops to 2,700 (lowest since April 2020), U.S. home prices fall by 30% and the unemployment rate rises. The US economy is sinking into a recession, for which the Fed – in particular Powell – is largely responsible.
“He went from Bambi to Godzilla,” Rosenberg says of Powell’s drastic and rapid transformation from inflation skeptic to inflation killer. Rosenberg adds, “Powell was compared to [disgraced 1970s Fed Chair] Arthur Burns. No one in central banking wants to be compared to Arthur Burns. It is reality.”
Admittedly, the reality is not something financial markets have had much of a grip on over the past few years, with essentially free money and a hands-off Fed fueling a buoyant investment climate. “Now this movie is going upside down,” Rosenberg says, and the reality here is that the next few scenes will be tough.
But since markets are cyclical, Fed inflation and punch bowl dumping should lead to a new bull market for stocks, bonds and other risky assets, Rosenberg says. He sees this new beginning starting in 2024, so don’t despair – it’s less than 15 months away.
In this mid-October interview, which has been edited for length and clarity, Rosenberg discussed the tough conditions investors currently face and offered his best ideas for their money over the next 12 months – including including Treasuries, stock sectors that can profit from longer term business trends and technology themes, and good old-fashioned money.
MarketWatch: You’ve been skeptical of the Fed’s interest rate hikes since they began last March. But it seems that your skepticism has turned into a kind of disbelief. What is the Fed doing now that is so unprecedented?
Rosenberg: The Fed is ignoring market signals and chasing lagging indicators like the year-over-year CPI and unemployment rate. I have never seen the Fed at any time before this release totally dismissing what is happening on the supply side of the economy and totally ignoring what is happening from market signals. I have never seen the Fed tighten so aggressively in a raging bull market for the US Dollar. I’ve never seen the Fed tighten that aggressively to a major drop, not only in the stock market, but also in the most economically sensitive stocks. I’ve never seen the Fed tighten that aggressively in an inverted yield curve or a commodity bear market.
MarketWatch: The focus on lagging indicators says little about where the economy is headed. What do you see happening to the economy if US central bankers are really only looking at half the picture?
Rosenberg: The things the Fed actually has control over are either deflating or deflating. Areas most closely tied to the business cycle are beginning to see a deceleration in price momentum. These are areas that are very closely linked to changes in spending.
The index of leading indicators is down for six months in a row. When you’re down six months in a row on the main official economic indicators, historically the odds of a recession aren’t 80% or 90%; they are 100%.
But leading economic indicators are not what the Fed is focusing on. If I applied monetary policy, I would choose to drive looking out the front window rather than the rear view mirror. This Fed is focusing on the rear view mirror.
The impact of the Fed has yet to be felt in the economy. This will be next year’s story. This Fed is consumed by high inflation and very worried that it is fueling a wage-price spiral even though it hasn’t happened yet. They tell you in their forecast that they are ready to push the economy into recession in order to kill the inflation dragon.
A recession is therefore a sure thing. What I know of recessions is that they destroy inflation and trigger bear markets in stocks and residential real estate. You get asset deflation before consumer disinflation, which is going to happen next.
It’s not complicated. Jay Powell compares himself to Paul Volcker and no other central banker. Volcker also had to deal with inflation on the supply side and did so by crushing demand and creating the conditions for back-to-back recessions and a three-year equity bear market. What else does anyone need to know? Powell was compared to [former Fed Chair] Arthur Burns. No one in central banking wants to be compared to Arthur Burns. It is reality.
MarketWatch: It’s surprising that the Fed is choosing the narrow course you describe. What do you think caused this?
Rosenberg: Powell told us in March that the Fed is going to operate regardless of what happens on the supply side of the economy. They really only focus on the demand side. The risk is that they overdo it.
I know what the Fed thinks. I just don’t agree with them. Ben Bernanke believed that the subprime problems would remain contained. Alan Greenspan thought at the start of 2001 that we were just in a stock recession.
Look what happened. In August 2021 in Jackson Hole, Powell looked like the country’s social worker. He came to the rigorous defense of not only transient but secular inflation. In March 2022, he switched from Bambi to Godzilla. Enough was enough. The lingering impact of Covid, Omicron, the China shutdown, the war in Ukraine, the frustration of returning labor. I understand all that. But in a very quick way, they changed what seemed to me to be an effective structural vision.
It’s basically a policy of fucking torpedoes, full steam ahead. They are fully prepared to plunge the economy into a recession. Whether it’s sweet or not, who knows. But they focus on demand reduction. They focus on falling asset prices. Because the Holy Grail is to bring inflation down to 2% as quickly as possible. The higher the inflation readings, the more likely they are to affect wages and that we recreate the conditions that occurred in the 1970s. That is not my primary concern. But that is their primary concern.
MarketWatch: Financial markets have already convulsed. Take us through the next 12 months. What additional pain should investors expect?
Rosenberg: First, distinguish between a soft landing and a hard landing bear market. In a soft bear market, you reverse 40% of the previous bull market. If you think we’re going to avoid a recession, then the lows have already been recorded for the S&P 500.
In a bear market in recession, historically, 83.5% of the previous bull market reverses. Because you don’t just get multiple contractions. You get a multiple contraction which is met with an earnings recession. On top of that, we need to be superimposed on a multiple recession low of 12. We’re not at 12. Then on top of that, what’s the impact of the recession on earnings, which are typically in down 20%. Analysts haven’t even started touching their numbers for next year. And that’s how you get to 2,700.
This is the retracement of the madness, which more than doubled in the stock market in less than two years – 80% of which was related to what the Fed was doing and not because anyone was smart or we had a cycle. massive profits. That’s because the Fed cut rates to zero and doubled the size of its balance sheet.
Now this movie is turning upside down. But let’s not focus so much on the level of the S&P 500; talking about when will the market bottom? What are the conditions when the market bottoms out? Historically, the market has bottomed out 70% of the way to recession and 70% in the Fed easing cycle. The Fed is not easing. The Fed is tightening in an inverted yield curve. The yield curve is currently very abnormal. Why would anyone think we’re going to have a normal stock market with an abnormally shaped yield curve?
The question is, when will the risk-reward be there to start tapping into the risk pool? By this time next year, I expect we will be there, which will make me more optimistic for 2024, which I think will be a great year. But not right now.
MarketWatch: The Fed is likely to suspend rate hikes. But a pause is not a pivot. How should investors react to announcements that look like policy changes?
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