- David Rosenberg answered seven key questions about markets and the economy in an Insider interview.
- He shrugged off inflation, called a recession, and predicted stocks and house prices will plunge.
- The veteran economist sees the Fed cutting rates later this year, and offered portfolio advice.
David Rosenberg answered seven burning questions about markets and the economy in an interview with Insider this week.
The Rosenberg Research president and former chief North American economist at Merrill Lynch said the inflation threat has faded, and a recession is underway. He also predicted stocks and house prices would tumble, and the Federal Reserve would begin cutting interest rates later this year.
Moreover Rosenberg suggested some solid bets for investors in the months ahead, and dismissed crypto as too volatile and tough to value.
Here are our 7 questions and Rosenberg’s answers to them:
1. Why did inflation spike, and should we still be worried about it?
Inflation surged to a 40-year high of 9.1% last June, and was still over 6% in December — well above the Fed’s 2% target. Rosenberg blamed surging prices on “excessive fiscal and monetary stimulus that took hold against a recurring set of global supply shocks.”
In other words, the Fed’s near-zero interest rates and epic bond-buying spree during the COVID-19 pandemic, combined with the US Treasury dispatching stimulus checks and bailing out companies, stoked historic demand. Meanwhile, the virus’ disruption of international supply chains, coupled with Russia’s invasion of Ukraine roiling food and fuel production, choked supply.
However, Rosenberg argued the upward pressure on prices has now faded. Many government-aid programs have ended, while the Fed has hiked rates from virtually zero to nearly 5% over the past year and started to shrink its balance sheet.
“All the inflation is in the rear-view mirror,” he said, dismissing official government measures as imperfect and lagging reality.
2. Is there a recession coming?
“Let’s face facts, the economy is flat on its back,” Rosenberg said, arguing official GDP readings are flattering and don’t reflect the underlying health of the country.
The veteran economist noted that changes to monetary policy act with a lag of 6-to-18 months, meaning most of the Fed’s rate hikes haven’t taken full effect yet. He also pointed to the US money supply shrinking for the first time in decades last year, and banks tightening their lending requirements, which usually only happens in recessions.
Moreover, he highlighted the US central bank’s stated expectation that unemployment will rise to 4.6% — a scale of increase that has historically only occurred during prolonged downturns.
“The Fed is giving us a recession call on a silver platter,” he said. “There is no get-out-of-jail-free card,” he continued, meaning the Fed can’t tighten economic conditions so aggressively without causing serious fallout.
3. Why did stocks surge during the pandemic, and where are they going from here?
“When the central banks take the risk-free rate to zero, your discounted cash flows end up looking like ‘Jack and the Beanstalk’,” Rosenberg said about the stock market’s boom in 2020. He meant that when interest rates are cut to nothing, the relative appeal of stocks increases as safer options such as savings accounts and bonds offer virtually no returns to investors.
Rosenberg also discussed the idea of the “Fed put,” or investors’ belief that their downside is limited as the central bank will eventually step in to save the day.
“The Fed gave investors the comfort level that it was going to be the lender of last resort, first resort and everything in between,” he said.
Stocks fell sharply in 2022, but have jumped so far this year. Rosenberg described the rebound as a “very whippy and junky, short-covering, bear-market rally,” and warned investors face a “meat grinder” of a year.
“There’s not a snowball’s chance in hell that we’ve hit the bottom of this market,” he said, arguing stocks are still far too expensive relative to other assets.
He suggested the S&P 500 could drop from about 4,100 points today to as low as 3,000 points — a 27% decline — if the Fed insists on hitting 2% inflation.
Rosenberg noted the stock market has historically bottomed 70% of the way through a recession, and 70% of the way through the Fed’s easing cycle. As the recession is only just starting in his view, and the central bank is currently tightening, stocks could have much further to fall.
“If 2022 was about multiple contraction from nosebleed levels, 2023 is when interest rates percolate through the economy and into corporate earnings,” he said.
He was referring to higher rates dampening spending, investing, and hiring, plus making it costlier for businesses to service their debts. Those impacts typically weigh on company profits and drag down stocks, especially in a recession.
4. When will the Fed stop raising rates and start lowering them?
“There’s a good chance they’ll be done in March, although we could see a hike in May,” Rosenberg said. “I think they’ll be cutting rates in the second half of the year.”
He suggested that by the third quarter, the job market may have cooled sufficiently and inflation might be below 2%, freeing the Fed to begin reducing rates.
5. What’s the outlook for house prices?
“The price bubble heading into this bear market was bigger than it was in the mid-2000s,” Rosenberg said. “The higher they are, the harder they fall.”
He noted there’s less leverage in the housing market today than during the last big bubble, drastically lowering the risk of another financial crisis. Yet he still sees house prices plunging 15% to 20% from current levels, or as much as 25% from their peak last year.
6. What should investors have in their portfolios?
“The Fed is paying you to be in cash,” Rosenberg said, noting investors will appreciate liquidity when asset prices drop into bargain territory.
He touted long-dated bonds, which typically rally during recessions. He also pointed to gold, which could benefit from the US dollar weakening once the Fed starts cutting rates.
At the same time, he talked up stocks that should be more resilient to a recession — in areas such as healthcare, utilities, consumer staples — as well as defense and technology stocks with solid long-term growth prospects.
7. Should investors bet on crypto?
“It’s way too volatile for me,” Rosenberg said regarding crypto. “It’s fun to trade, but something that can be up or down 20% or 30% in a matter of weeks — why introduce that to your portfolio unless you’re a gambler?”
Rosenberg also emphasized the difficulty of determining the worth of something that doesn’t generate cash or yield a return to investors.
“I don’t know how to value it,” he said. “Therefore, as they say on “Shark Tank” — ‘I’m out.'”