The nod to lower rates helped markets rally strongly in the middle of the week. “Market-based odds of a move as early as July have shot up to 50-50 from just 20% a month ago.” But while this “could certainly spark a brief rally,” don’t get too excited, says the oft-bearish Rosenberg. The Fed typically only starts to cut rates when the economy is heading for (or is already in) recession. “Investors with long time horizons… know that you don’t go long on the first rate cut; you go long on the last.”
One big risk in the next recession is that lenders to companies now have far less protection than at any time in the past (because the conditions – “covenants” – attached to loans are so lax), which means that they will lose more money during the downturn, as corporations default on their debt. This is how the next economic recession could turn into a financial one. “Hold on to your hat,” he warns.