Investors are repeating a big mistake they made before the 2008 crash and financial crisis, top economist says

• David Rosenberg sees the same investor complacency as before the 2008 crash and financial crisis.
• The US economy will suffer a recession within the next few quarters, the veteran economist says.
• Prices of stocks and homes, debt levels, late payments, and bank woes are all red flags in his view.

David Rosenberg just issued a grave caution to investors, warning their complacency reminds him of the lead up to the housing crash and financial crisis of 2008.

Most of Wall Street now anticipates a soft landing, where the Federal Reserve succeeds in crushing inflation without tanking the economy or causing unemployment to spike. There was a similar mood in 2007, when “the consensus and many market participants mistakenly assumed the recession would never come,” Rosenberg wrote in a memo titled “2007 Redux” this week.

The veteran economist and Rosenberg Research president drew several parallels between the two periods, and underscored why he’s convinced there’s trouble ahead. He noted that stocks and homes are pricier today relative to incomes and profits than at the peak of the mid-2000s bubbles. Credit-card and auto-loan delinquencies are on the rise, and there are dangerous amounts of debt in the shadow-banking sector, he continued.

Rosenberg underscored that the collapse of New Century Financial and Bear Stearns in 2007 were shrugged off as isolated and contained incidents — similar to how the flurry of bank failures this spring are widely viewed. Moreover, the current strength of several economic indicators could be misleading, he cautioned, as many of them only capitulated eight months into the 2008 recession.

The former chief North American economist at Merrill Lynch pointed out that consumer demand was shored up by government spending in the mid 2000s, and argued that pandemic stimulus has had the same effect. The Fed has also hiked interest rates more aggressively over the last 18 months than it did in the mid-2000s, and the central bank’s rate cuts in the summer of 2007 weren’t enough to save the economy, he said. 

Rosenberg warned that back then, investors fell “hook, line, and sinker” for the narrative that the boom-bust cycle was history and a “new era” was underway. He asserted that history is repeating itself, and the US economy is headed for a slump that most people don’t see coming.

“I am willing to acknowledge that the recession has been delayed. But it has not been derailed,” he wrote. “This recession will come in the next few quarters, not the next few years,” he continued, predicting a surge in job losses and loan defaults, faster disinflation, and a new bull market in Treasuries.

Rosenberg’s latest warning won’t surprise his close followers. He has previously compared the current environment to the dot-com and housing bubbles, and likened the fierce pushback he’s faced to the harsh dismissals he’s weathered in the past before ultimately being proven right.

“I’m bloodied but unbowed, and not willing to surrender to the legion of new ‘new era’ advocates,” he said.

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