The notion that the U.S. economy will smoothly navigate away from a severe downturn is not only overly optimistic but unrealistic, argues esteemed economist Stephanie Pomboy.
Having foreseen the structural fragilities in the housing and credit markets that precipitated the 2008 financial crisis, Pomboy, a veteran of ISI now leading MacroMavens, anticipates a forthcoming "double-dip" profit recession for American corporations.
This grim forecast is anchored in the Federal Reserve's swift and substantial rate hikes—increasing by 525 basis points over 17 months—to curb inflation, with the expectation that elevated rates will persist.
Pomboy critically views the prevailing market optimism about imminent substantial rate reductions as misguided. In her discussion with Rosenberg Research, she articulates a skepticism towards the ability of an economy, burdened by record levels of leverage, to absorb such rapid monetary tightening without significant repercussions.
Despite a retreat from recession prognostications by some analysts, Pomboy highlights the distress signals from U.S. consumers, evidenced by stagnant retail sales for two years, which, when adjusted for inflation, suggest a consumer recession is already underway.
This consumer downturn, she warns, precedes what is likely to be a sharp decline in corporate earnings, as the full brunt of the Fed's rate hikes has yet to manifest fully across the economy. Businesses face rising borrowing costs amid an environment where profits are barely holding, having increased a mere 4% compared to the stock market's nearly 30% ascent over the past year.
Pomboy anticipates a consequential "double-dip profits recession," stressing the diminishing ability of firms to manage higher debt costs, which could precipitate significant economic challenges. This bleak outlook extends to the stock market, where a sequence of record highs this year might abruptly end, especially as investors potentially confront delayed rate cuts in 2024.
This scenario, she suggests, underscores the market's vulnerability to rapid devaluation, reflecting broader concerns of unsustainable stock price inflations reminiscent of the periods leading up to the dot-com and 2008 financial crises. Her analysis, aligning with other market experts, hints at a looming bubble set to burst, marking a cautionary tale for investors and the broader economy.
