Economist David Rosenberg sounds alarm on recession risks: Are we ignoring the lessons of history?

David Rosenberg, Founder Rosenberg Research

Economist David Rosenberg has raised red flags against repeating the mistakes of past economic bubbles.

In a recent memo, the president of Rosenberg Research criticized the chorus of experts who have dismissed recession concerns, drawing parallels to oversights that preceded the dot-com and housing crises.

Rosenberg accused economists of relying on outdated indicators, saying, "Virtually every economist is doing what they did at the end of 2007, 2000, and 1989 – gazing into the rear-view mirror instead of looking through the front window."

He emphasized the danger of focusing on lagging and coincident economic indicators and urged a shift to forward-looking signals.

A key recession indicator highlighted by Rosenberg is the inverted yield curve, the difference between 2-year and 10-year Treasury yields. Currently inverted for 13 months, the longest period since 1979-80, and by as much as 157 basis points, Rosenberg asked: "Why would anyone bet against a metric that has gone 8 for 8?" referring to its perfect record of predicting recessions.

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The depth and duration of the yield curve's inversion, according to Rosenberg, correlate with the severity and length of subsequent recessions, making it a potent signal with a more compelling track record than the equity market.

Money supply decline

The New York Federal Reserve's recession probability model, based on the yield curve, echoes this sentiment, placing the chances of a recession in the next 12 months at over 90 percent.

Rosenberg pointed to additional recession barometers, including a steep 5.5 percent drop in US money supply in November, the sharpest decline since 1980. The Conference Board's leading economic indicators index has declined for an unprecedented 20 consecutive months, mirroring patterns observed in the mid-1970s and early-1980s, which resulted in severe economic downturns.

The economist argued that the Federal Reserve has quietly signalled a likely recession with its muted growth forecast for 2024, questioning the sudden indication that interest rates have likely peaked and will be cut within months. Rosenberg highlighted the skepticism surrounding the central bank's uncharacteristic swiftness in decision-making.

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While acknowledging the role of pandemic savings withdrawals and aggressive government spending in averting a 2023 recession, Rosenberg warned that these economic tailwinds have faded.

Sardonically dismissing claims of "no recession," he underscored his firm's commitment to the recession call, emphasizing the delayed impact of interest rates soaring from nearly zero to over 5 percent in 18 months.

Rosenberg concluded his memo with a sobering reminder of historical stock market crashes during recessions, projecting a potential 30 percent decline in the S&P 500. A decline of that magnitude would take the S&P 500 from a near-record 4,770 points to about 3,300, its lowest level since late 2020.

Despite his past accurate predictions, Rosenberg's warnings have faced skepticism. Yet, he insists that the true impact of the Federal Reserve's recent actions is yet to be fully realized.

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