For a long time, Wall Street was focused on rates, and when the Federal Reserve would put an end to the zero interest rate policy era.
Now the focus is switching to another R-word: recession.
The Fed finally hiked last week, but even as it did so there were some predicting that central banks would revert to easing and zero.
That is because many are now predicting a recession.
“If the next recession comes in the next couple of years it’s hard to imagine Fed Funds being high enough that the Fed will be able to avoid returning to zero again with risks that QE4 will be needed,” Deutsche Bank’s Jim Reid said last week.
He added that “it would be heroic to think we won’t see [zero interest rate policy] again at some time over the next 2-3 years.”
Some of the biggest names on Wall Street, including Leon Cooperman, Jeff Gundlach and Fed chair Janet Yellen have discussed the potential for a recession in the past couple of weeks.
Here is what they had to say:
Real-estate investor Sam Zell says there’s a “high probability” a recession will take hold
Billionaire real-estate investor Sam Zell said on December 16 that he’s sure the US economy is in trouble.
“I think the economy is closer to falling over than it is to going up,” he said. “I think that there’s a high probability that we’re looking at a recession in the next 12 months.”
He said the strong dollar is having an impact on US production and US businesses, and that they are competitively disadvantaged.
The Wall Street Journal Dollar Index, which tracks the strength of the dollar against a basket of 16 currencies, is up around 9% over the past 12 months.
“It’s hard to see where strength is going to come from; weakness is pervasive.”
Hedge fund billionaire Leon Cooperman isn’t anticipating a recession
“We don’t anticipate a recession. If we are right that there is no recession, I’d expect that 2016 is a year where market breadth catches up to the averages,” Cooperman, founder of Omega Advisors, said earlier this week in a CNBC interview.
Breadth is basically a measure of how many stocks are going up in the market against how many stocks are going down.
“If the economists are right, that there’s no recession to forecast horizon and we have another year of economic growth. I would expect the market to broaden out.
“Conversely, if we are heading to a recession – oil prices reflecting recession, the poor market breadth are reflecting a recession, then I’d expect the same dozen stocks to come down and meet the average common stock.”
Citigroup strategists estimate that there is a 65% chance of a recession next year
Citigroup strategists said that the odds are that the US is headed for some tough times.
“The cumulative probability of US recession reaches 65 percent next year,” Citi’s rates strategists wrote in their 2016 outlook. “Curve inversion will likely come more quickly than the consensus thinks.”
Curve inflation is where investors receive lower yields on longer-term debt than short-term debt.
The previous five recessions were predicted by an inverted yield curve, and currently the 2-year/10-year spread — or the difference between the nominal yield on 2-year Treasuries and 10-year Treasuries — is down to 128 basis points, the tightest it’s been in over six years.
Janet Yellen says there is a limited chance of a US recession, even with the Fed’s rate hike
Speaking with reporters after the Fed’s decision to hike rates, Federal Reserve Board of Governors Chair Janet Yellen said she can’t put a specific probability on a recession happening in 2016, but she did challenge the Citigroup report that put the odds of a recession at 65%.
She also said she’s certain the Fed put an end to the zero-interest-rate policy at just the right time:
“Were the FOMC to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly at some point to keep the economy from overheating and inflation from significantly overshooting our objective.
“Such an abrupt tightening could increase the risk of pushing the economy into recession.”
Bond guru Jeffrey Gundlach is pegging the odds of a recession at one-in-three
“I would give it about a one-third chance for 2016. The things that are not looking good [are] nominal GDP is not improving year-over-year,” Gundlach, founder of Doubleline Capital, said in a CNBC interview the day of the rate hike.
“Commodities prices, they hit again a new low today. And the dollar isn’t even rallying, by the way. The dollar is the same levels; it is lower than it was in March and commodity prices are much lower.
“So you can’t blame the recent commodity weakness on dollar strength, exactly. If commodity prices can’t find footing, I think it’s going to be weaker rather than stronger.”
He cited the CRB index, a commodity-futures price index, which has fallen sharply.
“What is the CRB index doing dropping 14% from September 17 … who knows? It is so big, I can’t even quote it.”
Raoul Pal puts the odds of a global recession at 65% in the next 12 months
Former macro-fund manager Raoul Pal says there’s now a 65% chance of a global recession.
He is focused on the Institute of Supply Management’s (ISM) manufacturing index, which recently fell below the 50-level for the first time since 2008.
If it falls from its current level — 48.6 — to 47, Pal ratchets up his odds of a recession to a whopping 85%.
“If manufacturing is slowing down in America, it’s slowing down in the rest of the world,” Pal said in a recent interview. “Basically, ISM tracks GDP really well. It means GDP is falling, so growth in America is falling and growth is falling around the rest of the world.”
JPMorgan analysts think there is a 76% chance of a recession by 2019
JPMorgan economists Michael Feroli, Daniel Silver, Jesse Edgerton, and Robert Mellman think there is a three-in-four chance that there will be a recession in the next three years.
“Fed rate hikes won’t break the back of growth,” they said in a note to clients, adding later: “Our longer-run indicators, however, continue to suggest an elevated risk that the expansion is nearing its end, and our preferred model now puts the probability of recession within three years at an eye-catching 76%.”
The economists use a combination of nine different indicators from consumer sentiment to the unemployment rate to develop a short- and long-term recession probability.
“When we first wrote, only manufacturing sentiment was signaling an above-average probability of imminent recession,” they said.
“But recent weakening in the Richmond Fed services survey and the ISM nonmanufacturing index have now pushed the nonmanufacturing sentiment probability up somewhat as well.”
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