- Steve Hanke tells Insider that the stock is looking “pretty expensive” and that a recession is “just around the corner.”
- A Johns Hopkins professor expects an economic downturn in the first half of next year.
- Hanke expects inflation to ease, 10-year Treasury yields to decline, and home prices to remain stable.
Steve Hanke says stocks are looking expensive and a recession is likely next year.
The risks of holding stocks rather than government bonds are generally offset by their better predicted returns.
However, Treasury yields have risen and stock prices have risen in recent months, resulting in a negative equity risk premium – stocks are expected to deliver lower returns than bonds, despite being riskier assets.
“This is unusual and shows that the stocks are overpriced,” Hanke told Insider.
The professor of applied economics at Johns Hopkins University is best known for serving as chairman of Toronto Trust Argentina when it was the world’s best-performing market mutual fund in 1995.
As far as the housing market is concerned, Hanke said there is a shortage of homes for sale. He attributed this to the limited inventory of existing houses and inadequate construction of new houses in more than 15 years. As a result, he suggested that unmet demand would drive up prices.
Hanke, a former economic advisor to President Ronald Reagan, also told Insider why he expects US growth to decline.
He said the country’s money supply “exploded” during the pandemic as the federal government pumped cash into the economy. This raised property prices and subsequently, increased economic activity.
Annual inflation also hit a 40-year high of more than 9% last summer, as John Greenwood, a professor and a fellow at Johns Hopkins and former chief economist at Invesco, predicted in July 2021.
The Federal Reserve has “turned things around” since last spring, Hanke said. The central bank has raised its benchmark interest rate from near zero to 5%, and worked to shrink its balance sheet.
“The money supply is dropping like a stone, and is currently contracting at a rate of minus 3.7% annually – something we haven’t seen since 1938,” he said.
The renowned economist warned that a decline of that magnitude could stymie economic growth: “We believe a recession is certain and will begin during the first half of 2024.”
Hanke also highlighted that he and Greenwood predicted in February that inflation would drop to around 2% by the end of 2023. The price hike has already come down to around 3% in recent months.
In addition, the veteran currency and commodity trader flagged the difference between the current 10-year Treasury yield of about 4.3% and the expected 1.9% yield based on its trend rate over the past 43 years.
“With inflation coming down and a recession looming, I expect the 10-year yield to go down and the gap to narrow,” Hanke said.
Economists have been ringing the alarm bells on stocks and the economy for some time now. He warned in February that pressure on corporate profits and declining production did not bode well for equities, and earlier this month he cautioned that complacent investors were “sleepwalking” into market turmoil and recession. Are.
Source: markets.businessinsider.com
