Professor of applied economics at Johns Hopkins University, Steve Hanke, made a bold prediction on CNBC’s Street Signs Asia on Friday.
Despite a CNBC survey, which polled economists, fund managers and strategists, projecting a 52% chance that a recession will grip the U.S. over the next 12 months, Hanke sees a recession in 2023 as far more likely.
The Hot Take: “The probability of recession, I think it’s much higher than 50% — I think it’s about 80%. Maybe even higher than 80%,” Hanke said.
Hanke blames the central bank for irresponsibly dumping money into the economy with stimulus, which increased liquidity.
“The reason for that is because the Fed exploded the money supply, starting early 2020 at an unprecedented rate, and they don’t want this length to be visible between the money supply and inflation,” Hanke told CNBC.
After a long period of quantitative easing, the Federal Reserve didn’t focus on tightening up the money supply over time, Hanke said.
The Fed Decision: The Fed raised the key benchmark interest rate by 0.75% on Wednesday, bringing the new range to between 3% and 3.25%. The move comes after the central bank raised rates by 0.75% back-to-back in June and July. A 0.25% rate hike and a raise by half a percentage point were initiated in March and May of this year, respectively.
Although consumer price data for July and August indicate inflation has peaked, the Fed plans to remain aggressive in its approach to tackle inflation, projecting interest rates to peak at between 4.5% and 5% next year.
Hanke says the harsh and quick approach to quantitative tightening will drain the money supply into negative territory, throwing the country into a recession next year.
The professor believes the Fed should keep the money supply growing at 5% to 6% to reduce inflation back to the 2% target rate.
“Now it’s zero. And it will probably go negative,” the professor said. “And that’s that’s why we will see a recession in 2023,” he said.
The Great Recession: The last global recession took place between the third quarter of 2007 and the first quarter of 2009. During that time, The S&P 500 plunged 57.69% from an Oct. 11, 2007 high of $1,576.09 to a March 6, 2009 low of $666.79 before beginning to rebound.
Comparing Then To Now: The S&P 500’s chart, beginning at least from the March 2020 COVID-19 pandemic lows, has taken on an eerily similar appearance to the ETF’s chart between June 2006 and September 2008.
If the S&P 500’s current price action continues to follow the price action of late 2008 and early 2009, like it has been the last 2.5 years, the market could be in for an even larger downturn.
The chart below compares the price action of the S&P 500 over the two different time periods. If the trend continues, the blue arrows show the possible trajectory the ETF could take.
It’s important to take note of the similar trendline that developed (yellow line), where the S&P 500 bounced up to hit the area on three occasions during each time period before taking a massive downturn.
Technical analysis is not a certainty, however, and as the old saying goes, “when everyone’s looking one way it’s sometimes best to look the other way.”
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