Downturn Like 2008 Crisis, or Worse, Is Coming: Steph Pomboy

Default Cycle Coming

The corporate credit market is facing a more of a maturity wall in the immediate future, she noted. “If you were a chunk borrower and you were borrowing at 4% a year ago, now you’re borrowing at 8.5%, so that’s a problem and I don’t think anyone’s focused on that.”

In the consumer arena, “we’re already seeing delinquency rates rise there both in credit cards an auto loans,” Pomboy added.

Many borrowers can’t pay 8.5% interest, she said, explaining that the economy is entering a default cycle. “You’re already seeing it in the consumer space, you’ll see it in the corporate space, we’re seeing it in commercial real estate. And that will tighten credit conditions irrespective of what the Fed does,” she said.

As for Fed Chairman Jerome Powell’s forecast for a mild recession later this year, she said, “I think the speed with which the data fall apart is going to catch a lot of people by surprise.”

First-quarter economic data was inflated by seasonal factors and an unusually warm winter, and “the second quarter fallout is going to be dramatic,” she said.

“The Fed, not surprisingly, their forecast sucks and will be completely wrong as it is every single time, and yet they’re harnessing their policy obviously to this forecast that’s always wrong, so their policy as ever will be wrong again,” said Pomboy.

Pivot Wouldn’t Be Bullish

The economist said she’s puzzled by the idea that a Fed pivot on rate cuts would signal investors to buy when the catalyst for a pivot, especially when the central bank has discussed rates being higher for longer, “is going to be something so ugly that you’re not going to want to be long. You’re going to really trying to hit the sell button on everything at that point.”

Pomboy considers corporate earnings estimates to be “pie in the sky.” During the inflation surge, input prices rose much higher than consumer prices, so “behind the curtain corporate margins were getting absolutely pressed to the bone,” she noted.

“Nothing I see suggests that we’re going to see earnings growth,” said Pomboy. She cited an unprecedent inventory buildup, saying, “we, two years in, still haven’t really made much progress in drawing that down. That’s going to be accomplished by massive discounting.”

S&P 500 earnings estimates are inflated by share buybacks, with earnings per share numbers looking much better than the reality, she said. “Half of it is just air,” she said.

Gold and gold miners are core positions in Pomboy’s portfolio, which also includes long-dated Treasurys and some cash.

“I have no exposure to the equities markets whatsoever except the miners,” she said. “When everyone else is nervous I feel great.”