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April 19, 2023 at 03:13 PM
What You Need to Know
- The weakest links break first, but that doesn't mean the other links are intact, she said.
- A Fed pivot would come after an ugly catalyst that wouldn't signal a time to buy stocks, she said.
- Pomboy considers current corporate earnings estimates to be fanciful.
The impending U.S. economic downturn will be equal to or worse than the 2008 financial crisis, according to MacroMavens founder and economist Stephanie Pomboy, who predicts “major dislocations.”
Among other points, she dismissed market optimism over an expected Federal Reserve interest rate cut, explaining that if the central bank did start cutting rates this year, the move would be sparked by “ugly” economic conditions that wouldn’t warrant buying stocks.
Pomboy also brushed aside the idea that the downturn would hit only limited areas in the economy.
“You can line up the dominoes and then identify how the first one’s going to fall over and what’s going to fall over next and next and next,” she said Tuesday on the Hedgeye Investing Summit webcast. “It’s not surprising that the (market) consensus is offsides and that the Fed once again is offsides.”
Tightening and Debt
Pomboy cited the Federal Reserve’s aggressive tightening cycle and a debt-laden economy for her outlook.
“Ultimately what it all comes back to is the amount of leverage that’s been built up into the system that is going to have to be unwound on the back of all these rate hikes that the Fed has undertaken,” she said.
“And what’s particularly unique about the current cycle is obviously the speed of magnitude with which the Fed has raised rates on an economy which is now toting twice as much debt as it did going into the global financial crisis,” she added.
More bullish analysts cite the strength of consumer and corporate balance sheets, but Pomboy said that’s not the case when digging beneath the average.
Household balance sheets may not be as bad as they were going into the great financial crisis, but “the corporate sector is really in rough shape, but it’s obscured by, again, the law of averages.”
Major Dislocations
“When you take an economy that’s got twice as much debt as it did going into the global financial crisis and you raise rates on it in unprecedented fashion you’re going to cause major dislocations, and the idea that we are going to have some soft landing or no landing or whatever is just absolutely laughable,” said Pomboy.
The downturn won’t be contained to only Silicon Valley Bank or regional banks or commercial real estate, she said.
“The idea that it’s just the commercial real estate market is a joke,” Pomboy said. “The Fed had this free-money bonanza going on for the better part of the decade that followed the global financial crisis and obviously everybody took advantage, and there are people who took more aggressive advantage and that’s starting to become made clear.
“The weakest links in the chain break first but that doesn’t mean that the rest of the links are intact or going to stay intact,” she said. “Give it a minute if you think it’s just commercial real estate, just wait a second, because this is clearly going to devolve in a variety of ways.”
