Charles Robertson is Renaissance Capital’s global chief economist and head of the firm’s macro-strategy unit. He is also the lead author of “The Fastest Billion: The Story Behind Africa’s Economic Revolution.” Robertson was ranked the No. 1 economics and macro analyst for emerging Europe, the Middle East and Africa in the Extel survey in 2007, 2008, 2009 and 2010. He recently sat down with ETF.com to discuss why he believes the U.S. stock market could be headed for a big downturn in the near future.
ETF.com: I recently read some interesting commentary you made that the U.S. stock market could fall more than 50 percent. What are the main factors you think that could drive that type of move?
Charles Robertson: I've done a lot of work on major crashes. What I've seen is we have these crashes that happen roughly every 40 years. These are the ones that then get forgotten about, and the lessons don't get passed on to the next generation because they're too intermittent. We saw it in the Great Depression. We saw it again in the 1970s. In fact, we also saw it in the 1830s—which was called America's first great depression—and then again in the 1870s.
What's interesting about these very significant crashes is that there's always a double dip. And that double dip has been triggered for various reasons. What that tells us is that there's an underlying fragility, a lack of confidence in the system after a major crash that makes it particularly sensitive to falling again by another 50 percent.
ETF.com: What do you see as the catalyst for the crash?
Robertson: There are a number of things that could trigger the double dip this time around. The first issue is Greece. While we sidestepped the body blow recently, the underlying fragility of the eurozone system has been made apparent.
There's very high unemployment and a lack of social backing for austerity. Even though the Greeks recently passed reforms in parliament, we don't know how well they're going to enact what they've promised to do.
The second issue is U.S. interest-rate hikes. The U.S. labor market has done so well in the last five or six years that it's turned out to be one of the best recoveries in U.S. unemployment of any crash. So of course the Fed can raise rates, you would think.
And yet there are some interesting side effects you could see. Very low rates have allowed emerging markets to borrow at a rate that they've never borrowed at before; likewise for banks and financial institutions.
Property in Hong Kong is directly linked to the Fed funds rate. Mortgages are set by the U.S., not by what's happening in China or Hong Kong, and that might prove sensitive to a Fed hike. Moreover, the U.K. is likely to follow the U.S. on rate hikes. So you might have more knock-on effects in more areas from Fed funds hike than just in the U.S. market itself.
Another trigger for the crash could be the proverbial “black swan” events. No one expects them; that's why they're called black swans, but they're out there as risks.
And finally, I would highlight the simple fact of how long has it been since the last U.S. recession. We're already over the average duration of a U.S. recovery. This has already been one of the longest recoveries on record. These things don't last forever; they never have and they never will. It's not a matter if but when we see the next recession.
ETF.com: You mentioned these cycles are inevitable, but do you have any sense, based on your analysis, of when we might see the big downturn? Is it something that can happen relatively soon in the future?
Robertson: Based on the previous double dips we've looked at, it could start any time in the next 12 months.
ETF.com: And would that be a buying opportunity?
Robertson: What history tells us is that, in the first nine months, there is a 2 to 3 percent fall in the S&P 500 each month. After that is when the big loss of confidence comes. That's when there's the panic of, "Wow, we're going into a global financial crisis. How are we going to manage it this time?"
At that point, you just have to play it incredibly safe and be in cash or Treasurys. But once the dust settles, yes, you've got the best buying opportunity for the next decade.
Typically, after about 12 to 15 months of decline is when you find the bottom. It would be surprising if it were much shorter than that. There is a psychological process of things going wrong, people reacting, central banks making decisions, etc. It's an emotional process that you can't short-circuit.
ETF.com: What's your take on the recent plunge in China's stock market? Is that a concern for you?
Robertson: There's always a chance of China blowing up the world economy now because it's big enough to warrant that level of concern.
Our base case is that we see a major downturn in China not this decade, but in the 2020s. The trigger will be inflation because the Chinese have now got so much debt that inflation and the consequent big interest rate hikes to deal with inflation are what will crack the Chinese story. When you don't have inflation, central banks can just ease policy and inject liquidity into the system. In the short term, I think they can manage it.
Additionally, the latest stock market bubble was too brief to actually distort the real economy. It just didn't drive the real economy sufficiently long enough for it to be a trigger for a big economic downturn.
ETF.com: You mentioned the Fed rate hikes and how those could be a big trigger for a recession in the U.S. How high will rates go before we see a negative impact on the economy?
Robertson: I'm not saying the rate hikes will necessarily be the trigger. They could be. Or it could be Greece, or it could be China, or any of those factors I talked about.
What the Fed has told us is that they're going to be gradual and slow. It will be a hike, then a pause, then a hike, then a pause, and they will do it for as long as they feel comfortable while watching inflation and watching growth.
I doubt we're getting back to 3 to 4 percent rates again. I'd be surprised if they get that high in the next 18 months. I think something would have gone wrong before then.