The Big Economic Risk Wall Street Doesn’t Talk About: Stephanie Pomboy

Stephanie Pomboy digs to find risks and opportunities where others fail to tread.

Right now, the founder and chairman of economics research firm MacroMavens predicts an earnings slump, marked by “tremendous margin squeeze for the average business.”

This will be a significant price squeeze not seen since the 1970s, as she tells ThinkAdvisor in an interview.

Bold and prescient, in 2002 the economic analyst predicted the impending inflation of the housing bubble long before others saw it. In 2007, she predicted the worst financial crisis since the Great Depression.

Last year, Pomboy warned of a stock market crash.

His earnings recession forecast is based on facts: input costs have “outstripped the capacity [of corporations] to pass them on,” she pleads.

Indeed, “the relationship between input costs and consumer prices is so integral to the outlook for the stock market,” she says.

Pomboy argues that the Federal Reserve’s monetary and fiscal stimulus at the worst of the coronavirus pandemic did little to increase economic activity, but instead did much to create “a massive asset bubble financiers,” which now, following the withdrawal of the stimulus, is starting to deflate, she says.

In the interview, Pomboy, whose clients include investment firms, mutual funds and hedge funds, among others in and out of financial services, argues that the main risk now is that the Federal Reserve is “belatedly trashing inflation”.

Diving beneath the surface of existing trends, she analyzes economic and financial market data to find and interpret subtle signals of change.

That is, it looks for what is not listed on the market, then foresees the implications.

Pomboy launched MacroMavens 20 years ago after a decade of working with Ed Hyman at CJ Lawrence and ISI Group. She graduated with a degree in economics from Dartmouth College in 1990.

It produces two weekly reports covering risks and opportunities, one for institutional investors, the other for retail investors.

Her podcast is “The Super Terrific Happy Hour” (“business, finance and economics, with a side of skepticism”), which she co-hosts with Grant Williams.

ThinkAdvisor interviewed Pomboy on May 17. She was speaking by phone from her base in West Palm Beach, Florida.

She noted that no one else seems to be predicting an earnings recession because Wall Street is “taking[s] whatever companies say as gospel until they say otherwise. No one is looking ahead. »

Here are the highlights of our interview:

THINKADVISOR: What do you retain from your analysis of the economy and the financial markets?

STEPHANIE POMBOY: There is the very real prospect of an earnings recession. Yet nowhere on Wall Street is anyone predicting this. It seems like a no-brainer.

The relation between [corporate] input costs and consumer prices are integral to the stock market outlook.

And right now, input costs far outstrip the ability of [corporations] to pass them on.

What are the implications?

I look at the difference between the two and see an implied margin squeeze for the average business. We have never seen such enormous compression as in the 1970s.

I’m talking about real pressure on corporate profit margins.

Will there be indications of an earnings recession in current earnings reports?

Simply because input costs are rising faster than companies’ ability to spend [them] along, doesn’t mean it immediately hits current earnings reports. It takes a while for it to show up in the actual revenue numbers.

It will therefore take time for corporate comments to filter into the forecasts of Wall Street strategists.

Why isn’t anyone else forecasting an earnings recession, as you say?

No one is looking ahead. They take everything companies say as gospel until they say otherwise.

Wall Street only focuses on what the companies are saying. They wait for them to say [for example]”Here is our forecast for the next quarter.”

What is the main risk you perceive?

The Fed will belatedly smash inflation. This is the main thing that worries the stock market.

You will see the stock market continue to come under pressure if the Fed continues to hike rates.

Most people say, “They’re going to raise rates, and the economy will sort of have a soft landing.” It will slow down and everything will be perfect.

I think that wait is just fantastic, to put it mildly.

Can the Fed trigger a recession by raising interest rates?

It remains to be seen whether we are currently in a recession or not. In the first trimester [real GDP growth fell at a rate of 1.4%].

If we start again in the second quarter, even with the smallest margins, we will have technically reached the definition of a recession.

The Fed made a religion of inflation just when it was about to take care of itself anyway because consumers were already running out of money to support their spending on everything at higher prices.

It’s kind of a classic Fed mistake.

How healthy is the economy?

The idea that the Fed can raise rates without precipitating a recession is rooted in a misconception of the real strength of the economy to begin with.

When you withdraw the amount of money that was handed over to consumers to spend, a different picture [emerges] on the inherent strength of the economy and the ability to withstand the withdrawal of stimulus.

But the consensus has been that the economy is strong. How do you square that with what you’re saying?

One of the things the Fed and Wall Street have underestimated is the extent to which the strength of the economy we’ve seen over the past two years was entirely a function of monetary and fiscal stimulus, which totaled around 10 trillion dollars.

We invested $10 trillion in the economy, but the GDP only grew by $2.3 trillion. With inflation, you get real growth of $600 billion.

It’s sad how little real increase in economic activity we’ve gotten for all this stimulus.

What we got was a massive financial asset bubble, which is now starting to deflate because we’re removing stimulus.

You write that the asset bubble is now deflating and “we can expect spending to slow significantly, compressing margins and depressing hiring.” Please provide details of consumption expenditure.

For so long, real wealth and “phantom wealth” have been the beating tail of the dog of the economy. When there is a positive wealth effect, consumers increase their spending and have a greater tolerance for accepting higher prices.

[Just so]when the reverse happens and their net worth begins to decline, they reduce their spending and their willingness to bear higher prices across the board.

And what is happening now?

We’re getting into this now, partly because politics suggests that energy prices, of course, and food prices, perhaps to a lesser extent, are going to stay high.

So even if people start to see their 401(k)s going in the wrong direction and get the urge to cut spending, they’ll continue to pay more and more for everything they can’t live without.


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