Despite nearly two years of recession predictions by Wall Street’s top minds, billionaire investors, and former Federal Reserve officials, the U.S. has yet to suffer an economic downturn. And with a strong labor market and inflation fading in the face of aggressive interest rate hikes, some experts have turned bullish, arguing that Fed Chairman Jerome Powell can engineer a soft landing for the economy. Even the Fed’s staff economists revealed in July that they are no longer forecasting the “mild recession” they had first predicted in March.
But Jeremy Grantham, cofounder of investment firm Grantham, Mayo, Van Otterloo & Co. (GMO), believes investors should ignore his more optimistic peers and the central bank’s staff.
“The Fed’s record on these things is wonderful,” Grantham said sarcastically in a Bloomberg interview Thursday. “It’s almost guaranteed to be wrong. They have never called a recession, particularly not the ones following the great bubbles.”
The veteran investor made his name predicting the dotcom crash of 2001 and the Global Financial Crisis of 2008, but is also known for making some off-base, or at least premature, market bubble forecasts in recent years. This week he argued that the Fed’s interest rate hikes are still working their way through the economy, increasing the cost of borrowing for households and businesses, depressing real estate prices, and weighing on growth-focused stocks.
Ultimately, that means “we will have a recession running perhaps deep into next year and an accompanying decline in stock prices,” he warned.
A longtime Fed critic, Grantham believes that central bank officials “prided themselves in stimulating the bubbles” with near-zero interest rates and aggressive purchases of mortgage-backed securities and government bonds since the Global Financial Crisis, and particularly through COVID. But now, he argues, the economy is paying the price for their unsustainable policies.
“They took credit for the beneficial effect of higher asset prices on the economy,” he said. “But they have never claimed credit for the deflationary effect of asset prices breaking—and they always do.”
For Grantham, years of unsustainable growth in asset prices owing largely to Fed policy and a lack of investment in the production of key raw materials globally will ultimately lead to a new era for the economy.
“I suspect inflation will never be as low as average for the last 10 years,” he warned, referring to the under 2% average annual inflation rate of the past decade. “We have reentered a period of moderately higher inflation and therefore moderately higher interest rates. And in the end, life is simple: Low rates push up asset prices; higher rates push asset prices down.”
Grantham isn’t the only well-respected name on Wall Street with a bearish outlook for the U.S. economy. David Rosenberg, a veteran economist and founder of Rosenberg Research, told Bloomberg Friday that we have “the furthest thing in the world from a robust economy.
“The recession has been delayed; it has not been derailed,” he said, noting that, historically, it has taken an average of around two years for a recession to begin after the Fed’s first interest rate hike, and the central bank started the current hiking cycle roughly 16 months ago.
In recent weeks, Rosenberg has repeatedly warned about numerous headwinds to the U.S. economy. He fears that China’s current economic issues—including a property crisis, sky-high youth unemployment, and potentially persistent deflation—will slow global economic growth. He’s also worried the end of the U.S. student debt relief program will weigh on U.S. consumer spending and that fiscal policy will be constrained by Fitch’s recent downgrade of U.S. government debt.
On Friday, Rosenberg even argued that banks have been raising their loan loss provisions—the funds they set aside for loan defaults—because “they know what’s coming.”
“We’re not going to get out of this without a recession…It reminds me of the summer of ’07…everyone was asking: ‘Where is this recession?’” Rosenberg said, noting that they got their answer just a few months later when the Global Financial Crisis began in December of 2007.
It should be noted, however, that Rosenberg predicted a recession would hit the U.S. economy in 2022, arguing in May of that year that rising interest rates would lead to falling home prices and a “wealth shock” that would slash consumer spending. Rosenberg, like many of his peers, has been forced to push back the timing of that recession call over the past year, but he remains convinced that, eventually, the economy will crack under the weight of rising interest rates.
Similarly, Grantham has been warning of an “epic” stock market bubble since January of 2021 and a pending U.S. recession since early last year. But he, too, has been forced to push back his forecast. Now, the recession is coming this year, he argues.
