François Trahan admits, the majority of his clients and many economists believe that the global economy is on the right track and that a recession could be avoided. But the renowned financial strategist is categorical, the opposite will happen: a rout on the stock markets, a major recession, a rise in the unemployment rate.
“I have been publishing macroeconomic research for 28 years and I have never seen such a dangerous context, even the one that preceded the American economic crisis,” reported the founder of Trahan Macro Research, on the sidelines of a conference Thursday in Montreal in front of members of CFA Montreal, the association of chartered financial analysts.
A few months ago, the Quebecer who lives in Virginia described the economic horizon as “apocalyptic”. However, even if this catastrophe is not yet proven, it persists and signs.
“When the story is finished, I’m not sure that this adjective will be inappropriate,” judged the man who spent the summer in the Eastern Townships.
His knowledge of economic cycles shows him a clear trend. “For almost a hundred years, it has been the movement of interest rates that has dictated the economy,” explains Mr. Trahan. Aggressive rate hikes have always preceded recessions, because they affect household consumption, at the heart of developed economies. He is also concerned about the simultaneous effect of tightening bank credit standards. Canada and Quebec would not be spared.
According to him, the effects of these increases are still being felt on the economy with a delay of approximately two years. It is therefore from 2024 that his prophecy is likely to come true, given that key rates have increased from the start of 2022.
“In six months, I’m going to look a little more bright “, laughed the one who was admitted to the Institutional Investors Hall of Fame, adding that “it’s the story of his career” to be called crazy.
A risky environment for investment
What will be the effect on the average citizen? “A decline in the market is a decline in personal wealth for most people. The message is to understand that a risky environment is coming and that we must think about our assets in this context,” he advised.
Does the past always guarantee the future? Why couldn’t the situation be different this time? Mr. Trahan doesn’t believe it. “For each of the 13 cycles that have taken place since the Second World War, there have always been special things and it is a reflex of investors to say that it will be different this time. In 2000, the Internet was set to change our lives. In 2008, the world believed that things would be different for the real estate market and that China would have eternal growth. Now it is artificial intelligence that creates expectations. »
During his speech, Mr. Trahan provided numerous examples of economists and leaders who made optimistic forecasts shortly before the outbreak of the latest economic crises. He also cited a 2018 study by the International Monetary Fund that found that the majority of economists have historically failed to predict recessions.
“There are temporary rallies that look a lot like the start of a sustained market rally. So people who don’t have a good understanding of the economic cycle tend to think that it’s the start of something longer term,” the economist said, in an apologetic tone.
He also believes that the institution, like the Bank of Canada, has gone too far in its escalation. “The two variables that weigh the most on their decision, the core inflation rate and the unemployment rate, are two indices that lag behind the economic cycle. So they tend to raise more than they should and cut more than they should. The consequence is that we have a cycle which has more volatility than it would have if there were competent people at its head,” he commented.
No lifeline
The global nature of the current economic difficulties worries Mr. Trahan all the more. In the past, difficulties experienced in the United States have been offset by economic growth in other regions. The strategist named post-reunification Germany in the 1990s and China 20 years ago.
“Right now, we’re all in the same boat. All economies face rising interest rates or inflation, and all large economies have debt and public finance problems,” explained Mr. Trahan.
President of CFA Montreal, Odrée Ducharme clarified that this is only “one point of view among several elements that our members must take into account”. These times of economic uncertainty make the work of a financial analyst complex and delicate.
“There is the rise in inflation, coupled with a rise in interest rates that we have not seen in decades, markets which demonstrate a lot of volatility. Our role is to provide our members with varied perspectives,” said the woman who is senior director at CDPQ Gestion de Fonds. “Caution is required and there is no consensus. »