Recession is upon us, says Wall Street luminary Francois Trahan

A few months ago, in November, you said that the next year was going to be apocalyptic. Do you still think so today?

Yes quite. If we take the example of the American economy, where 68% of gross domestic product (GDP) comes from consumption, that makes it very sensitive to changes in interest rates. Initially, the US central bank misanalyzed inflation and raised rates a year late. So she's in catch-up mode. When you're forced to raise 75 basis points, you know you did something wrong.

So this shock to the economy, it's coming. People saw the market go down last year and they have the perception that we have already [avoided] the recession. But the reality is that it is right in front of us. There is usually a long lag between interest rate changes and the impact they have on the economy.

On saw the markets fall, but now there is good economic news : Jobs are being created in the United States and inflation is starting to slow. Sounds like we're getting away with a soft landing, but I understand that's not the case, based on your analysis.

Honestly, I think that's next to impossible. In every cycle I've seen, there's always that period of debating the possibility of a soft landing rather than a recession. It's okay to have this debate.

Another thing that is common in bear markets is having temporary rallies that make people feel like the worst is behind them. Unfortunately, the recession is ahead of us. It's crystal clear.

Quebecer François Trahan has been one of Wall Street's best strategists for several years.

And what will this recession look like, according to your forecasts?

It hasn't started yet. In fact, the unemployment rate is still at its lowest. In the econometric models that we use, it takes two years, when there is a change in interest rates, before we see the impact on the ;economy. It gives a lot of time to think that things are better…

But what's going to happen is what happens every time the Fed raises rates: there's a downturn. And this time it's more intense than in the past.

So that means : recession, decline in the GDP, rise in the unemployment rate, stock markets falling again, but in an apocalyptic way, to quote you. It's a dirty word, though.

Yes, absolutely. The first time I used that term was early last year. I feel even more comfortable using it today because we have even more information. For example, we know about interest rate hikes. Back then, it was still guesswork.

And then, we already see the real estate industry reacting. This market tends to weaken a year before a recession. So, if we want to have an idea of ​​what's to come, we just have to look at what's happening in the real estate market right now. It was going very well and, suddenly, in mid-2022, everything started to change. The data is now atrocious.

Should central banks stop raising interest rates?

It depends on the objective. If you really want to eliminate inflationary problems, you have to raise interest rates enough to find a balance in the job market, which is the main source of inflation right now.

Inflation for goods, so anything related to supply chains, it's been going down for a year. It's pretty much settled. It's the services, the big deal. It's the dominant part of core inflation, and it's really driven by the job market. It is therefore difficult to foresee a sustained decline in services inflation before seeing unemployment rise, and rise a lot.

What is what does this mean for stock markets and the bond market?

It's really focused on what's going on with monetary policy. In the United States, we have a central bank that only reacts to data. She is clearly unable to see anything coming that is even right in front of her.

I think we're going to have a rebound in inflation in three to six months, so the Fed is going to be forced to raise rates more than it thinks itself.

Of course, the Canadian economy is a bit different from the US economy, but all industrialized countries are in the same boat. The dominant part of their economy is consumption. They are therefore all sensitive to interest rate increases.

And the stock market?

But the classic bear market is when earnings start to fall. And this bear market, it hasn't really started yet. He's right in front of us.

The words of this interview have been edited for brevity and clarity.