Rosenberg's Call: Recession, Rising Inflation, Cooling Commodities, S&P 500 Top

Rosenberg's odd stagflation scenario is a recession in 12 months, with rising inflation, but cooling commodities.

Bullet to the Forehead

David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., says US Recession in 12 Months, S&P 500 Has Peaked.

“Cycles die, and you know how they die?” Rosenberg told the Inside ETFs Canada conference in Montreal on Thursday. “Because the Fed puts a bullet in its forehead.”

The market is in a classic late cycle, with wages rising at full employment, cooling commodities and potential trade wars, said Rosenberg, who was one of the first economists to warn of the Great Recession when he was at Merrill Lynch before the financial crisis. The result will be higher inflation, he said.

“We are seeing a significant shift in the markets,” he said. “The Fed was responsible for 1,000 rally points this cycle so we have to pay attention to what happens when the movie runs backward.”

The header image is from Lance Robert's April 20, Weekend Reading: The Return of Stagflation.

Strange Stagflationary Mix

Rising inflation and a cooling economy is a strange mix. It seems he is counting on higher wages. But will wages keep rising in a recession? Will prices keep rising if commodities cool?

Rising inflation coupled with a recession is the definition of stagflation. But in Rosenberg's strange mix, stagflation will be accompanied with falling commodity prices.

The stagflation in the 1970s was accompanied with rising commodity costs and "oil shock".

Deflationary Setup

I believe inflation concerns will quickly go the other way once recession hits. The bond market sure acts that way.

Mike "Mish" Shedlock

Comments (14)
No. 1-14
Ambrose_Bierce
Ambrose_Bierce

The bond market is pricing in a Fed reversal. Inflation this time around is in the service sector, and most people are not going to give up the amenities, housecleaning, lawn and garden, pool, and fast food always gets a lift in a recession, so no layoffs at Jacks. The big item is energy, and if the Fed reverses on rates (sooner rather than later) then oil prices can come down, corr: HY to Oil prices. So far there is no fear in HYG, making new highs.

killben
killben

With the market resilient and not too far from its ATH, expecting the Fed to reverse course is just dreaming. It is when the market falls hard - may be 20 to 25% that we will see the Fed's resolve. Going by past record, we can expect the Fed to cower and run.

Bam_Man
Bam_Man

It doesn't matter what "inflation" does in that scenario. If the economy goes into recession and asset prices collapse, the Fed will be cutting rates and QE-ing like you wouldn't believe. If there happens to be "inflation" in that scenario, then I think that would be a God-send for the Fed, for it would allow them to avoid having to go to negative (nominal) interest rates - at least until the recession turns into a full-blown depression.

AWC
AWC

Looks like Rosie is calling commodity cooling in the present, not the future?

Misc
Misc

Inflation has been dramatically under counted over the past 5 or so years. When the BLS calculates inflation for retail items it includes size/quantity changes in their calculations. However with housing (the largest component of CPI) the do not include the increase in the number of people per dwelling. There has been plenty of anecdotal evidence that the number of people per residence has been increasing quite a bit.

Kinuachdrach
Kinuachdrach

To expand on Misc's point -- does anyone really trust Government numbers on unemployment, inflation, wages, or much of anything else? If the dials can't be trusted, then we could be very surprised by what happens. Seems like a good time to focus on revenue-generating real assets, like farmland or machine shops.

Casual_Observer
Casual_Observer

The fed is caught between a rock and a hard place. Interest rates are rangebound and when there are no more bullets left to fire the economy will go into free fall. At some point the junk bond market will go to crap followed by government bonds. This will force assets of all kinds to be sold and create another banking crisis which will be made worse by loosening lending standards and financial regulations.

hmk
hmk

Could the low yields on bonds be a reflection on demand due to negative yields in Europe and Japan? This may be why yields are low. Also, dont understand why no one questions the fake inflation numbers put out by the govt. Something seems amiss.

Blacklisted
Blacklisted

The inflation will be in taxes, fees, civil asset forfeitures, and establishment suicides, as pensions and interest expense grows, alongside anti-establishment victories.

Casual_Observer
Casual_Observer

I agree with Mish's thesis. At some point everything will go on sale but unlike 2009/2010 there will be nothing the Fed can do to reinflate everything again. I'm thinking early 1990s prices on most things. It is going to be really ugly this time down and things won't get better until the mid to late 2020s. Probably a war is in the future to try and save the economic bust.

Six000mileyear
Six000mileyear

If David Rosenberg had done his homework, he would have noticed in over 95% of the time the bond market made a move in either direction, and then the FED changed rates. If he REALLY did his homework, he would have made the same conclusion about other major Western central banks (germany, Great Britain)

glider
glider

Seems like a trade war might cause stagflation. It would be a shortage and producer cost based inflation and would slow the economy.

Carl_R
Carl_R

I think you are right on the reason for the low yields, but wrong on inflation. You have to remember that the inflation numbers aren't just "numbers", but have real impact on real people, because they are used to index payments such as social security. Thus, rather than looking at a number in the abstract, or looking at your personal circumstances to compare to that inflation number, you can look to a large group of people, Senior citizens, and you can look at them over a long period of time. If the inflation numbers or "off" by 1% in a single year, you really won't notice it, but, if they are off by 1% a year for twenty years, they will see a 19% drop in their standard of living (.99^20=.81), and that you would notice. If John Williams is right, and inflation numbers have been low by perhaps 3% a year for the last 20 years, then the results would be obvious, because the standard of living for Senior citizens would have fallen by about half (.97^20=.54) over the last twenty years. I think it is demonstrably true that the standard of living of Senior citizens has not fallen by half over the last twenty years. If it had, Seniors would be picketing, even rioting, and AARP would be up in arms. Since none of that is happening, it is quite clear that his thesis is wrong. What has happened to the standard of living of Senior citizens over the last twenty years? From my observation, not much. It is probably a bit higher today than it was twenty years ago because the quality of care in Senior care facilities has improved, which would imply higher costs. Thus, over the last twenty years I would say that inflation numbers have been pretty close, and if anything, slightly high, rather than low.

Ambrose_Bierce
Ambrose_Bierce

China has been the buyer of first and last resort in commodities, if they have a recession global commodity prices will fall. I expect a global depression which will be death to the capitalist economy. since we are a consumer nation you will be able to buy all the junk you want, for a while, but that has zero effect on capital investment in the socialist producer countries, after there is no profit margin the consumer nations will not be able to retool, (just like the depression before it, only worse) There will be huge government consumer subsidies and consumers will wisely save that money and defeat the purpose, money velocity will go negative and the government will have to depreciate the old money (time stamp it maybe) to make the new money they print viable. whoosh