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.