Stephanie Pomboy: A Grim Outlook for the Economy, Stocks

Obviously, the burden of proof is on me, because for 20 years the consumer has reliably borrowed from China to buy their tube socks. Post-crisis, the consumer has clearly pulled back. How many months did we have disappointing retail sales numbers that no one could explain? They'd say it's too hot, too cold, there's Brexit. But what's really causing this slowdown in spending is that the post-crisis consumer is determined to save, and do it the old-fashioned way. Historically, when rates go down, people save less. In this cycle, things have completely reversed. Over the same stretch of time that the two-year note has gone from 4% to 1%, the savings rate has doubled. There are mountains of evidence to support my thesis. But every Wall Street analyst and the Fed is using the pre-crisis analytical framework to look at an economy that is fundamentally challenged.

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Q: Where, when, and how will helicopter money begin?

Japan is the most natural place for it to start, but Japan isn't dramatically different from the U.S., the U.K., or Europe. We're all dealing with an aging population. This is another great flaw in the logic of monetary-policy makers. They've pushed rates to and below zero in an effort to boost growth. But they did so against a population that is aging and needs more than ever to get returns on what they've set aside. By lowering rates, they've actually intensified the saving urge.

The statistics bear this out. Over the last four years, U.S. nominal GDP growth has gone from 4.3% to 4.1% to 3% to 2.4%. The deflator, the inflation we are supposed to be targeting, went from 1.9% to 1.6% to 1.5% to 1.1%. What greater proof do you need that lower rates aren't helping and, to the contrary, are making things worse? Growth and inflation are slowing, and it has to do with this aging demographic. Add the emotional and financial scares from the housing-bubble bust, and policy makers have really got it ass-backwards. They're taxing the economy, not stimulating it.

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Q: Is it possible that you're too negative? Stocks are hitting new highs and recent economic data seem reasonably sturdy.

The July payroll number was a barnburner on the upside. But that report is the exception. Jobless claims, the NFIB small business survey, the employment component of both the ISM manufacturing and nonmanufacturing surveys--they all suggest things are rolling over [getting worse]. Importantly, the No. 1 input into hiring--corporate profits--has posted five consecutive quarterly declines, which suggest employment growth will follow. Employment is going to look a lot softer over the next six months.

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Q: So what are you positive about?

Because economic growth won't be a catalyst to push rates higher, I continue to like government bonds. Look for a re-pricing of credit risk with the spreads between investment-grade and junk bonds widening out. We'll also have a renewal of QE in the U.S. and are seeing it elsewhere. And as Fed tightening goes out the window and the dollar sells off, we'll have another meaningful leg up in gold.