Economists Anticipate ‘Not So Soft Landing’


Simpler Trading Team

Jul 24th 2023  .  5 min read

Esteemed economist David Rosenberg has shattered the rosy economic outlook peddled by the likes of the Federal Reserve, Treasury Secretary Janet Yellen, and J.P. Morgan Chase CEO Jamie Dimon. As the ex-North American Chief Economist at Merrill Lynch and current President of Rosenberg Research, he foresees an impending recession looming over the U.S. economy.

Rosenberg identifies the Federal Reserve’s rate hikes as the harbinger of economic calamity, equating the current tightening to the stringent fiscal era under Paul Volcker. He anticipates a slump in spending by businesses and consumers, a rise in unemployment, and an overall trend towards conservatism, directly contradicting popular optimism.

In stark contrast to many, Rosenberg dismisses any possibility of a potential ‘soft landing’ for the economy. Rather than giving credit to the Federal Reserve’s monetary policy for ameliorating the impending downturn, he advises investors to protect their assets by investing in defensive, rate-sensitive sectors such as utilities, consumer staples, and REITs. Furthermore, he advocates a ‘barbell’ strategy in the bond market, balancing investments between short- and long-term securities.

Watch my interview on @FoxBusiness‘s Barron’s Roundtable with @JackOtter.— David Rosenberg (@EconguyRosie) July 24, 2023

According to Rosenberg, the cheerful narratives spun by Yellen and Dimon are more a reflection of political influences than economic reality. He identifies rising household borrowing delinquency rates and a decline in bank lending as factors contradicting their optimistic views. Banks seem to be bracing for a storm, amassing cash assets and limiting non-liquid ones, suggesting a looming financial crisis.

He also bursts the bubble surrounding the stock market’s continuous ascent, arguing that it mirrors speculative frenzy rather than economic reality. Instead, he views the bond market as a more reliable economic barometer, which he believes presents a sobering perspective compared to the stock market’s misleading optimism.

Drawing from historical precedents, Rosenberg postulates that a peak in the stock market often precedes an economic downturn. He refutes the idea of a ‘soft landing’ being a resting spot, envisioning it as a prelude to recession.

Rosenberg also dismisses the narrative around a robust U.S. labor market, attributing the seemingly low unemployment rate to a delayed response to the economy’s health. The current scenario of companies hoarding labor to avoid future shortages paints a distorted picture of economic wellness, he says.

In a nutshell, Rosenberg delivers a stern reality check to market participants, urging caution, promoting a shift towards defensive sectors, and predicting an economic downturn, despite popular narratives claiming otherwise.

Given Rosenberg’s perspectives, what are some strategies that may potentially help option traders navigate a ‘hard landing’?

Buying Put Options on Vulnerable Sectors: If Rosenberg’s predictions are accurate, it implies that certain sectors – particularly those sensitive to economic downturns, such as technology, financials, discretionary consumer goods, and industrials – are likely to suffer. Therefore, buying put options (which increase in value as the underlying asset decreases in value) on stocks in these sectors could be a good way to hedge a portfolio or make a profit from the downturn.

Selling Credit Spreads on Defensive Stocks: Defensive stocks such as utilities, consumer staples, and REITs typically perform well during economic downturns. However, if these stocks have run up significantly due to fear and the expectation of a downturn, their prices might be inflated. Traders can sell credit spreads on these stocks, earning premium income.

Using Options to Execute a ‘Barbell’ Strategy in the Bond Market: Given Rosenberg’s recommendation of a ‘barbell’ strategy, option traders could also consider using options on bond ETFs or futures. This might involve buying calls on long-term bond ETFs (anticipating that bond prices will rise as investors seek safety and as the Fed potentially reverses its tightening stance in response to a recession) and buying puts on short-term bond ETFs (anticipating that these might fall in the short-term as the Fed continues its tightening).

It’s important for every trader to figure out what strategies work best for them in a potential economic downturn. The strategies we’ve mentioned might not be a good fit for everyone. So, think of these strategies as starting points or ideas, not as a one-size-fits-all plan. Each trader needs to do their own homework and consider their own situation before deciding what to do. If you’re looking for guidance and mentorship to navigate the trading world effectively, we have exciting news for you!

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