Dick Bove: Recession Will Hit by 2018
Bank analyst Dick Bove of Rafferty Capital Markets sees economic growth, inflation and interest rates heating up and then a recession ensuing by 2018.
The yield on the 10-year Treasury note will rise to 8 percent in 2017, he says in a report obtained by CNBC. The 10-year Treasury yielded 2.78 percent Monday afternoon.
“In order to develop earnings models for banking companies, you must have a ‘worldview’ related to money supply, the economy, inflation and interest rates,” Bove writes.
“The view that I am using . . . implies a relatively fast growing economy, increasing rates of inflation, much higher interest rates, and a move back to recession by 2018.”
Traditionally GDP moves in synch with M2 money supply, which includes coins, currency, demand deposits (checking accounts) and time deposits (savings accounts).
But in the last few years, M2 grew more rapidly than the economy and is now expanding at a 5.4 percent rate.
“My view is that the nominal GDP is about to catch up,” Bove said. “This means a stronger economy and a surge in inflation and interest rates. For banks, this would be nirvana. It means more loans at higher rates and wider spreads.”
Meanwhile, the Congressional Budget Office recently revised downward its estimate of potential GDP in 2017 to $19.2 trillion from $20.7 trillion.
“The assumption has always been that the U.S. economy will gain back what was lost in a recession,” Barry Bosworth, senior fellow at the Brookings Institution, told Bloomberg Businessweek.
“Academics are coming to the realization that this time is different and that those losses appear permanent and cannot be regained.”