According to strategist David Rosenberg, prepare for a recession this summer, real estate busts, and stock market drops.
What to anticipate with the Feds rate hikes
Inflation has become more persistent than anticipated, and the Federal Reserve is wielding its knives. It’s a mallet, at any rate.
A sharp tool at best, raising interest rates — the central bank’s primary method to control runaway costs – is a blunt instrument at worst. Until recently, Fed Chairman Jerome Powell has been hesitant to employ it.
According to Rosenberg, the Fed’s attack on inflation, which began Wednesday with the first of an expected sequence of interest-rate hikes, will likely kill the United States’ inflation dragon — at a high cost.
The expectations of investors accustomed to getting easy money and seeing spectacular gains in equities, real estate, and other rate-sensitive assets are naturally high.
The Fed will push the dollar so hard that the U.S. economy will plunge into recession as soon as this summer, according to Edward Peter, president and chief economist of Toronto-based Rosenberg Research & Associates Inc., which investors widely follow.
In his view, there is already evidence of a slowing economy, which for him only serves to underscore his recession prediction.
This cycle does not always end with just one downturn. In the 1980s, two devastating recessions — in 1981 and 1982 — led to a decade’s worth of inflation being destroyed and the U.S. economy and stock market being resurrected by then-Fed Chairman Paul Volcker — the inflation fighter and Powell’s role model.
When prices rise rapidly, demand decreases; demand is crushed when they are increased too far. The resulting recession hurts home values, consumer-discretionary stocks, nice-to-have products and services and positively affects Treasury bonds and producers of consumer staples, health care and medicine, energy and food.
It’s difficult and selective to invest during these circumstances, but investors must play their hand. In a phone interview last week, Rosenberg explained his recession argument and offered guidance on where to put your money for you to profit from whatever cards Mr Market deals.
At the moment, Rosenberg’s economic and market outlook is not popular. But as he likes to point out, “Forewarned is forearmed.”
Inflation is on the minds of investors
The economy is in a tailspin and is largely ignored. However, you’ve just released a “recession tool kit” for investors. Why now?
“The timing came from Federal Reserve Chairman Jerome Powell,” said Rosenberg. Last week, Powell praised Volcker as “the greatest public servant.” That’s all you need to know. How did the greatest of them all, Volcker, kill inflation? Through back-to-back recessions in the early 1980s. Volcker is credited with ushering in a secular two-decade-long bull market and economic expansion, but only because he destroyed inflation through back-to-back recessions.
The Fed can only curb ongoing cost-push inflation is through a recession. It’ll take demand destruction to bring inflation down.
Should the Federal Reserve raise rates now while the United States is still recovering from the epidemic and geopolitical risk is increasing in Europe and Asia?
In an interview with Business Insider, Rosenberg said the Fed is “very concerned” about its reputation and is under political pressure to raise interest rates. I’ve never seen a White House urging the central bank to raise rates, which is usually the case. However, Biden is being blamed for inflation, which he considers the most significant risk. His difficulty will be at the midterm elections when disinflation must be induced to avoid catastrophe.
If I were at the Federal Reserve, I would do a much better job explaining why now isn’t the best time to raise interest rates, given all of the uncertainty, and offer a more precise definition of what transitory inflation entails. The Fed feels its reputation is being assailed, and Wall Street, academia, the media, and the political class are all calling for it to raise interest rates. I don’t envy Jay Powell one bit.