Advisor questions 'whistling past the graveyard' from industry, predicts recession and downturn this year
While the Canadian economy may appear to be struggling under the weight of high interest rates, the United States has consistently bucked expectations. ‘Surprising resilience’ should, at this point, stop appearing so surprising. US GDP has continued to grow, often faster than expected. At the same time, inflation in both the US and Canada has stayed stubbornly above 3 per cent, leaving central bankers with a choice.
Rate hikes appear to now be fully off the table. At the end of 2023 Federal Reserve Chair Jerome Powell said that there would likely be three interest rate cuts this year. Consensus now is that cuts will come, but debate rages as to when. The Federal Open Market Committee meeting begins today, with the key interest rate decision coming tomorrow. As that meeting gets underway, John De Goey expects that we will not see any cuts now, and we may not see any cuts coming as soon as some investors have predicted.
“The Fed has said it will not repeat the errors of the 1970s, when rates started coming down and central bankers started loosening only to see rates go rocketing up in the 80s and things turn out worse than they should have,” says the portfolio manager at Designed Securities. “I don’t know how anyone can claim to be hawkish and cut even 25 basis points if inflation remains over 3 per cent. As long as inflation is over 3 per cent, I don’t think that central bankers have the data to cover an easing of rates.”
De Goey thinks that we need to see two consecutive months of CPI prints below 3 per cent before either the Fed or the Bank of Canada will take action on interest rates and begin to cut. Since the December print published this month for both Canada and the US was above 3 per cent, De Goey sees it as unlikely that we get two CPI prints below that magic number before the next BoC meeting on March 6th or the next FOMC meeting on March 20th.
Because he expects interest rates to stay higher for longer, De Goey believes it’s unlikely the US negotiates a ‘soft landing’ and it’s certainly too early for investors to start behaving as though it has. De Goey defines a soft landing as one quarter of negative GDP growth followed by a resumption of positive growth — as opposed to a recession or ‘hard landing’ which would be two consecutive quarters of negative growth. ‘No landing,’ he says, would simply be the US economy continuing to grow positively. He sees the odds of a hard landing as somewhere between 80 and 85 per cent.
Given that outlook, De Goey advocates for defensive asset allocations. He is keeping a lot of money in multi-unit residential real estate, mostly apartment REITs that do real estate lending. He also keeps around a 20 per cent exposure to an inverse of the US stock market in his clients’ portfolios. He has access to structured notes that will perform positively when the US stock market drops, and negatively when it gains. He is predicting a downturn this year, and is therefore holding those short products as well as assets he sees as uncorrelated and defined by strong cash flows.
Read more: What did the BoC's January announcement tell us about future cuts? | Wealth Professional
De Goey admits that his view runs contrary to the more bullish consensus that has reigned over markets since at least October of 2023. He argues that the current bullishness is as much a product of the industry’s own bias when outlooks or predictions are presented. It’s an argument he makes in his 2023 book Bullshift, that chief economists and spokespeople for investment firms are incentivized to paint a more positive picture of the market and the economy than reality, because they do better when their clients are “fat and happy and not worried about a major downturn.”
“I’m worried that other people aren’t worried, because if people were giving proper advice they would be encouraging investors to pump the brakes,” De Goey says. “I’m not hearing as much of that as I think I should. As a result I believe there’s a certain degree of false confidence and whistling past the graveyard in the investment community right now. The financial advisory community is telling people not to worry, but I’m getting worried because I think there are a lot of objective concerns that would cause most rational people to at least be cautious.”
