By Jonathan Burton
Keith McCullough, founder and CEO of Hedgeye Risk Management , isn’t one to mince words in discussing financial markets, the Federal Reserve or the economy.
Right now he has a few less-than-charitable things to say about how the Fed’s rate hikes have ground up stock and bond investors.
His investment-research firm’s economic models turned bearish on stocks and bonds at the beginning of 2022. Prices have since tumbled, but McCullough is still bearish. He’s now steering investors to defensive positions primarily in cash, the U.S. dollar, gold and income-producing equities.
McCullough is preparing investors for the painful recession he expects for both Wall Street and Main Street in 2023. To anyone expecting the Fed to realize its rate increases have been excessive and rescue the markets, McCullough is blunt: “There’s no dovish pivot,” he says.
Even if the Fed were to relent, McCullough says the damage is done. “They’re far too late,” he says of the Fed. “Just like it was impossible for them to stop inflation, it’s impossible for them to stop the pending U.S. corporate profit recession or the mainline recession.”
In this recent interview, which has been edited for length and clarity, McCullough outlines his base case for the U.S. economy and the financial markets going into 2023, and advises investors to take shelter from a coming storm many of them have never seen.
MarketWatch: In a MarketWatch interview last April, you said “the Fed always screws up” and predicted a bear market for U.S. stocks in the summer. That happened. What do you expect now from the Fed — learn from its mistakes or make more?
McCullough: Recession today is what “transitory” inflation was a year ago. The Fed is as wrong on recession risk as they were on inflation.
I’m about as bearish as I’ve been since 2008. Instead of the economy having a soft landing, I think the landing is going to be hard. The recessionary economic data keeps getting worse, not just in the U.S. but in Europe as well.
Free money forever created behavioral problems and a behavioral bubble for the markets and investors. You believe you’ll have unlimited access to easy money and your behavior, whether you’re building profitless growth companies through storytelling or cryptocurrencies that also are just stories. You’re coming from the mother of all behavioral bubbles that now will be addressed with tighter money. When you’re printing money and the economy is accelerating to the fastest growth rate ever, you’re going to have the mother of all bubbles. Now, GDP is going to slow to zero, and you get the opposite.
Read McCullough’s April 2022 interview: ‘The Fed always screws up’: This forecaster sees U.S. stocks in a bear market by summer
MarketWatch: A hard landing for the economy and an economic environment echoing the 2008 financial crisis is a pretty damning verdict. You’re not in the perma-bear camp with some forecasters, so what are you seeing now to have such a pessimistic outlook?
McCullough: On a lot of levels it’s worse now than in 2008. If 2008 was about Wall Street collapsing on itself, on all its conflicts of interests and lies, this one is more about Main Street. Main Street is broke. Main Street is taking all this inflation into their cost of living. Main Street has the highest credit-card interest going back to the 1990s. It’s way worse than 2008 on that basis. If you’re trying to pay your bills with credit, it’s getting worse and worse. And then they’re going to lose their jobs. Labor collapsing is always the last thing to go down. We’re right on the cusp of the labor cycle going the wrong way.
That’s what’s going on right now. GDP and profit growth are both going negative. The Fed is going to see all of that and have to change. The big screw-up people will have is that the minute they see Fed dovishness, they’re going to buy stocks and crypto. Then they’re going to realize they’re in a recession, which is an entirely different setup from what got those bubbles to begin with, which was unlimited easing and fiscal support plus GDP growth.
We have economic deceleration irrespective of what the Fed does. It’s impossible for the Federal Reserve to stop gravity. They’re far too late. Just like it was impossible for them to stop inflation, it’s impossible for them to stop the pending U.S. corporate profit recession or the mainline recession.
