Top economist Steve Hanke says stocks look expensive – and a recession is 'right around the corner'

• Stocks look "pretty pricey" and a recession is "right around the corner," Steve Hanke told Insider.
• The Johns Hopkins professor expects an economic slump in the first half of next year.

Stocks look expensive and a recession is likely to strike next year, says Steve Hanke.

The dangers of holding stocks instead of government bonds are typically offset by their superior projected returns.

However, Treasury yields have swelled and stock prices have surged in recent months, resulting in a negative equity risk premium — stocks are slated to return less than bonds despite being riskier assets.

"That's unusual and suggests that stocks are pretty pricey," Hanke told Insider.

The professor of applied economics at Johns Hopkins University is known for serving as the president of Toronto Trust Argentina when it was the world's best-performing market mutual fund in 1995.

As for the housing market, Hanke noted there's a shortage of homes for sale. He attributed that to limited inventory of existing homes, and more than 15 years of insufficient construction of new homes. As a result, he suggested unmet demand would shore up prices.

Hanke, a former economic adviser to President Ronald Reagan, also laid out to Insider why he expects US growth to falter.

He noted the nation's money supply "exploded" during the pandemic as the federal government flooded the economy with cash. That caused asset prices to soar and, later, economic activity to surge.

Annualized inflation also hit a 40-year high of more than 9% last summer, as the professor and John Greenwood, a fellow at Johns Hopkins and Invesco's former chief economist, predicted in July 2021.

The Federal Reserve has "thrown things into reverse" since last spring, Hanke said. The central bank has raised its benchmark interest rate from nearly zero to north of 5%, and worked to shrink its balance sheet.

"The money supply is falling like a stone, and is currently contracting at a minus 3.7% annual rate – something we have not seen since 1938," he said.

The renowned economist warned that a decline of that magnitude would likely choke economic growth: "We believe that a recession is baked in the cake and will commence during the first half of 2024."

Hanke also highlighted that he and Greenwood predicted in February that inflation would fall to about 2% by the end of 2023. Price growth has already cooled to around 3% in recent months.

Moreover, the veteran currency and commodity trader flagged the gap between the current 10-year Treasury yield of around 4.3%, and the expected 1.9% yield based on its trend rate over the last 43 years.

"With lower inflation and a recession right around the corner, I anticipate that the 10-year yields will come down and the gap will close," Hanke said.

The economist has been ringing the alarm on stocks and the economy for some time. He warned in February that pressure on corporate profits and shrinking output didn't bode well for equities, and cautioned earlier this month that complacent investors were "sleepwalking" into market turmoil and a recession.