Ever since the United States Federal Reserve (the central bank) began hiking interest rates in early 2022 to “combat inflation”, fears of recession have grown. But the next recession is going to be an ugly one, and it will appear as if “the whole country take a pay cut” according to former Merrill Lynch economist David Rosenberg, who is also the president of Rosenberg Research.
“The leading indicators are telling me that the recession is actually starting this quarter,” he said in a recent YouTube interview with Blockworks Macro. “If it’s not this quarter I think it’s next quarter. It’s certainly not a 2024 story.”
With rampant inflation, most Americans are struggling with wages that are not keeping up with the rising cost of living. Should a recession materialize, it could result in greater financial hardships. Not only that but artificial intelligence and automation are going to make it tough for people in the future.
“A recession is a very big call because it is actually a haircut to national income. It’s as if the whole country takes a pay cut,” Rosenberg explained according to Yahoo News. “It’s not that we take the Lamborghini from 80 down to 20. It’s that we go in reverse.”
“I am bearish on equities as an asset class,” Rosenberg said, adding that he doesn’t believe “a recession is fully priced in. I don’t like the valuations. I mean, we’re pressing against a 19 forward multiple,” he said, referring to the forward price-to-earnings ratio. “So what does that get you? Like 5.3% as an earnings yield. I can pick up 5.4[%] in single-A triple-B corporate credit … wind up in a better part of the capital structure.”
The S&P 500 currently sits at 4,169 and the economist’s target implies a downside of 23%. “It will be painful if you’re long, but if you have the dry powder and the liquidity, you’ll be able to pick up assets at better levels as you always do in a recession,” Rosenberg said.
In other words, when the recession comes and stocks tumble, investors can take advantage of better prices by buying the dip…if you have the capital to do so. Most Americans are struggling now. If a recession hits, it’ll hit the lower-income people the hardest.
“The beauty of recessions is that they cleanse, and they move assets from weak hands to strong hands,” he said.