Investment guru Dick Bove warns that chances are good that America will plunge into an economic recession by the end of next year.
The veteran bank analyst told CNBC that he sees a 60 percent chance of the economy taking a major downturn in the next 14 months.
If that happens, it will be the fault of the Federal Reserve and its "fivefold" increase in interest rates, he says. To assume that all the people who financed trillions of dollars at the lower rate "can automatically adjust to the higher rate without any negative consequences is, I think, a major mistake," the chief financial strategist at Rafferty said.
Bove isn't alone in his warnings about a looming recession.
Morgan Stanley Investment Management’s top strategist recently outlined a trio of factors which he predicts will trigger the next U.S. recession
Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, in reflecting on the causes of the 2008 crisis in an opinion piece for the New York Times, explains that today “the markets are even larger, having grown to 360 percent of global G.D.P., a record high. And financial authorities — trained to focus more on how markets respond to economic risk than on the risks that markets pose to the economy — have been inadvertently fueling this new threat.”
Sharma, the author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” summarized his trio of triggers:
- Surging private corporate debt. Sharma explains that the typical American company owned by a private equity firm “has debt six times higher than its annual earnings” — or twice the level that a public ratings agency would consider high-risk or “junk.”
- The China bubble. Sharma says the biggest risks outside the United States are in China, “which has printed by far the most money and issued by far the most debt of any country since 2008.” He explains that Beijing’s regulators have had little success reining in borrowers and lenders. “Easy money has fueled bubbles in everything from stocks and bonds to property in China, and it’s hard to see how or when these bubbles might set off a major crisis in an opaque market where most of the borrowers and lenders are backed by the state. But if and when Beijing reaches the point where it can’t print any more money, the bottom could fall out of the economy.”
- Federal Reserve’s rate hikes. “Over the last 50 years, every time the Fed has reined in easy money by raising interest rates, a downturn in the markets or the economy has followed eventually. It may take a while, but trouble almost inevitably does come.”
His warning also comes with a disclaimer:
“But economists are more often wrong than right. Professional forecasters have missed every recession since such records were first kept in 1968, and one of the many reasons for this is ‘recency bias’: using economic forecasting models that tend to give too much weight to recent events,” Sharma wrote.
“They see, for example, that big banks are in much better shape than in 2008, and households are less encumbered by mortgage debt, and so play down the likelihood of another recession. But they are, in effect, preparing to fight the last war.”
Ironically, JPMorgan Chase's retail chief predicts that worry over impending U.S. recession might actually cause one.
"This late-cycle recession has the potential to become a self-fulfilling prophecy," JPMorgan Chase Co-President Gordon Smith said Tuesday during a financial conference held in New York, CNBC.com reported.
"There is a great deal of volatility in the equity markets, a great deal of conversation around how late we are in the cycle and worry about the cycle," Smith said.
"That will ultimately lead to business confidence deteriorating, it will ultimately lead to [corporate] reductions in spending, that will ultimately lead to a shorter work week for hourly-paid people, which will ultimately lead to unemployment beginning to rise, and we would've developed our own recession," Smith said.
Smith, who runs JPMorgan's consumer banking division, says the U.S. economy looks "extremely strong," CNBC.com quoted him as saying.
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