Markets

An unknown 'international shock' will likely cause the next recession, Burton Malkiel says

Key Points
  • If the U.S. economy were to experience a downturn, it would likely be because of an unforeseen event, Burton Malkiel said. 
  • "My guess is, if we have a recession, what's going to cause it is some shock that we don't know of now," the Wall Street pioneer said. 
  • However, Malkiel stressed the difficulty of predicting a recession. 
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Mysterious international shock will likely cause next recession: Burton Malkiel

If the U.S. economy were to fall into a recession in 2020, it would likely be because of an unforeseen event, Wall Street pioneer Burton Malkiel told CNBC on Thursday.

"My guess is, if we have a recession, what's going to cause it is some shock that we don't know of now," Malkiel said on "Squawk on the Street."

"Some international shock. A resumption of the trade war," he suggested. "It's going to be something like that, not something we can see in the immediate future."

Malkiel, whose 1973 book "A Random Walk Down Wall Street" helped initiate the shift toward low-cost passive index investing, stressed that predicting a recession is an exceedingly difficult task.

"Don't try it at home. That's my advice," said Malkiel, who is an emeritus economics professor at Princeton University and chief investment officer at Wealthfront.

But, when looking at U.S. data, Malkiel said he does not see obvious cracks in an economic foundation upon which the longest expansion in American history has been built.

"I don't see particular warning signs now but again, you never know," he said.

Malkiel's comments come against the backdrop of a new report from the Conference Board that found CEOs' biggest fear in 2020 is a recession.

Recession worries were elevated at times in 2019 as the U.S.-China trade war, uncertainty around Brexit and slowing global growth dominated headlines.

Those concerns hit a fever pitch in late summer when the bond market presented a historically reliable signal that a recession was on its way in the next year.

But those fears waned as 2019 progressed, with the yield curve reverting and tensions in the trade war improving, and stocks finished the year at record highs.

Malkiel is not alone in his belief that chances of a recession are low in 2020. On Tuesday, economists at Goldman Sachs issued a bullish report that argued an economic downturn is unlikely over the next several years.

"While new risks could emerge, none of the main sources of recent recessions — oil shocks, inflationary overheating, and financial imbalances — seem too concerning for now," they wrote. "As a result, the prospects for a soft landing look better than widely thought."

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If we have a recession, it will be caused by some shock that we don't know of now: Burton Malkiel