Sheff

David Rosenberg: Where to Go For Positive Returns


Monday, July 23rd, 2012

 

 
David Rosenberg discusses how the 3 D’s (Deleveraging, Deflation, and Demographics) are hurting markets, and where investors can go for positive returns, with Wealthtrack’s Consuelo Mack.

Here is the full transcript:

CONSUELO MACK: This week on WealthTrack, the influential economist whose projections have been right on target. Financial Thought Leader David Rosenberg shows how the 3 D’s of deleveraging, deflation and demographics are hurting economies and markets and where investors can go for positive returns, next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. This week, we are sitting down for an in-depth interview with one of the handful of prognosticators who has gotten it right going into and through the rolling global financial crisis we are experiencing to this day. He is Financial Thought Leader David Rosenberg, chief economist and strategist at Toronto-based wealth management firm Gluskin Sheff. Dave returned to his native Canada in 2009 after spending many years as Chief North American Economist at Merrill Lynch, where Institutional Investor magazine placed him on their coveted “All American All Star Team” from 2005-2008.

Rosenberg took on the bullish Wall Street herd as early as 2004, when he started warning about the developing housing and credit bubble which, as he predicted throughout, would wreak havoc on the financial system and many world economies. Well he hit the nail on the head again last year, forecasting the global economy would slow and that treasury bond yields would fall- another homerun. In his influential and widely read daily “Breakfast With Dave” reports, he ranges across the globe covering everything from Europe and how “it is rather incredible that this rolling crisis is now going on 2-1/2 years and policy makers have yet to find a viable solution”; to emerging markets and “why the once mighty BRIC currencies are depreciating of late at their fastest pace since the 1998 Asian crisis”; to the financial markets and “how the “pattern of the past three years is unmistakable as each spring, the equity market corrected as stimulus measures wore off, to only then prompt more incursions by the fall.”

What other patterns are unmistakable to Dave Rosenberg and why did he write in a recent report that “the future is brighter than you think”? I asked him all of the above and more, starting with what he thinks the most important patterns for the economy and markets.

DAVID ROSENBERG: I think the primary trend is still one of deleveraging. It hasn’t really changed much from the last time that the two of us spoke; it’s become much more global in nature. So it started off in the U.S. four or five years ago, in the American mortgage market, the housing market, consumer loans in general, but now we’re seeing how it’s morphed into the survival of the welfare state and all the debt finance to prop up these peripheral countries in Europe, and even now there’s questions about whether China is going to have a hard or soft landing because of a perceived property bubble there.

So we’re still in this deleveraging cycle, still dealing with the impact of too much debt relative to the size of the global economy, and this is what’s creating all this market angst and instability that we’re still living with; notwithstanding the fact that the economy, the U.S. economy is three years in a recovery, we’re still stuck in a very slow growth mode, but recurring financial market instability at the same time.

CONSUELO MACK: So is there any way of knowing whether the second half is going to be worse, better, or the same as the first half? Because, I mean, I’m thinking of my audience out there, and myself included, and saying, “I don’t want to live through another three or four years like this.” So what’s it going to look like, do you think the second half?

DAVID ROSENBERG: Well, I’m going to sound like a classic economist here and say it’s going to be somewhere in between, and this is what I mean. Are we going to get another gut wrenching, you know, 7% decline in GDP, and lose another 8 million jobs? I don’t think we’re going to go through anything close to what we endured in ’08 and ’09.

CONSUELO MACK: And to back-to-back kind of 50% decline in the stock market?

DAVID ROSENBERG: It’s not going to be that bad. But then again, you have to take a look at the contours of the recovery. I actually think the recovery tells you a lot more than the actual gut-wrenching recession did, because normally when you do this with the economy, you do that.

CONSUELO MACK: You get to a V, right?

DAVID ROSENBERG: Well, even in that 1933-’36 period, you got a huge recovery, much bigger than we had this time around, and this time around we had basically a checkmark of left-hand person, that’s what we had. It was not a V-shaped recovery; it was a very meager recovery, especially when you consider everything that the government threw at this thing. Consider the Fed took rates to 0 in December of ’08, they’ve tripled the size of their balance sheet $3 trillion. We’ve had, what, $4 trillion, four years of trillion-dollar deficits, and…

CONSUELO MACK: The fiscal stimulus…

DAVID ROSENBERG: …and more foreclosure moratoria. We’ve tried everything. So we’ve had modest economic growth, but very unacceptable. And now what’s happening is the Fed is left now with all these uncreative tools. Like Ben Bernanke certainly believes that he can do more but, you know, in Economics 101 you learn about the law of diminishing returns, and it’s basically that you end up getting less and less and less incremental impact from the same policies over time. And so that was the same with QE1, QE2, with the LTRO that we had out of Europe. We were getting just a smaller incremental impact on the economy with each individual policy proposal.

CONSUELO MACK: So therefore three years into a quote, unquote “recovery”, so are we on the cusp of another recession?

DAVID ROSENBERG: Cusp or precipice, I don’t know if I’m quite there yet. The economy is extremely fragile. The underlying trend in the economy is barely 2%, it’s barely 2%. So when you have a trade shock that can wipe out 2 percentage points of growth, you’re left with 0. Now, maybe that’s not a recession in the classical sense because we’re not actually going in reverse, but the unemployment rate is going up in a no-growth environment. And then you talk about this so-called fiscal drag, this fiscal cliff that we’re going to see next year- it’s because, you know, we’re probably not in as bad as shape as the Europeans, but here in America, we’ve kicked the can down the road a lot in terms of the Bush tax cuts getting extended, in terms of payroll tax relief, extended unemployment insurance benefits, all these provisions expire December 31st. So just by the government taking back the parking permit from everybody, we have a drag on the economy next year from fiscal restraint, 4 percentage points of GDP, percentage points.

CONSUELO MACK: Which we don’t have. So listening to you, Dave, quite honestly, I do want to kind of bury my head in the sand and I’m thinking to myself, you know, that I want to be in incredibly safe assets, that this is no time to put risk on. And yet, you know, one of the things that you follow, as well, is investor sentiment and the fact that there is a growing despair out there that people are very frightened and worried. And as we know traditionally, that’s in fact, the time when it’s actually best to buy risk.

DAVID ROSENBERG: I mean, there are always opportunities. In a fat-tail world, you’ve got to be very cognizant of the risks. So it’s as much not just focusing on the gross returns, but we have to – and this is what we’re doing every day at my shop at Gluskin Sheff- is we are assessing the risk, identifying it, managing it, and pricing it. And frankly it’s not about, you know, being risk averse. You know, people think that somehow, you know, when you talk about risk all the time you’re risk averse. It’s always important to make sure as an investor that you’re getting paid to take on the risk, that you’re not paying…

CONSUELO MACK: Right, so it’s price is really…

DAVID ROSENBERG: Right. Like, for example, I would say, you know, the high-yield bond market right now is actually, I would argue, priced for a bad economic outcome. You want to buy the assets that you think have already discounted. What’s embedded, what’s the story in this particular asset class, what’s it telling you? So I’m taking a look at the high-yield market right now. I think it’s actually very attractive. We have a core portfolio of high-yield bonds, and the reason I say that is because ultimately when you’re buying corporate bonds, you’re staking a claim in the corporate balance sheet. And the one thing that’s not changed, despite the fact that we’ve got all this angst overseas, the fact that the U.S. economy has hit stall speed, corporate default rates are barely more than 2%, you’ve got corporate balance sheets in great shape whether you look at debt equity ratios, or interest coverage ratios- the fact that treasurers companies both Canada in the U.S. have locked in their maturity schedules, 80% of corporate debt is locked in. In some sense, the corporate sector is in better financial shape than the government sector is. So I like corporate bonds.

CONSUELO MACK: One of the things that you’ve told clients is that reliance and deriving a stable income stream while preserving capital is paramount right now. So in these uncertain times, stability of income stream is one of your major investment focuses.

DAVID ROSENBERG: Right. And it comes down to what my overall theme is called: the macro and market outlook in 3D. So I’m talking about the 3Ds. What are the 3Ds? Well, they’re deflation, there’s demographics, and there is deleveraging and we talked about the deleveraging. There’s also this demographic overlay because the first of the Boomers are 55 going on 56, that’s the median age. The first of the Boomers are in their mid-60s, and so they control the wealth. They’re in a different part of their investment life cycle right now, and so accumulating cash flows as opposed to relying on strictly capital appreciation for the Boomer class, the life cycles as far as investments are concerned, that’s altered. And we’re seeing it in our own business in terms of what our clients are telling us, how they would like their money managed.

So you’ve got the demographics talking about the deleveraging, but the deflation. And so people will say to me, “Well, I thought in a deflation, cash is king in a deflation.” And the answer is well, you know, historically that’s true. That’s the ultimate capital preservation- cash is king in deflationary environment except when interest rates are 0. And so then it’s not cash is king, cash flow is king. So it’s imperative. It’s not just about preservation of capital, which of course in the fat-tail world, which is the deleveraging world, capital preservation is key; but you have to overlay that with preservation of cash flows. That’s why MLPs have been so popular.

CONSUELO MACK: Right, Master Limited Partnerships.

DAVID ROSENBERG: That’s why muni funds. That’s right, and that’s why REITs, and that’s why dividend growth, dividend yield have been so popular now. People come back and say to me, “But these things look so expensive.” Well, they look expensive because that’s what’s in demand, you know? And it doesn’t mean because it’s expensive you don’t want to buy it. You know, the perfume I bought is expensive, yeah, but is it good? Yes. Well, okay, that’s why it’s expensive because it’s a good thing to buy. These are good strategies right now, and that’s why their prices have been up as much as they have.

CONSUELO MACK: So as far as this pattern that we’ve seen for the past three years in the stock market, and where it rallies until the spring and then it basically sells off. That has been very disheartening for investors. Are we locked into that for the foreseeable future?

DAVID ROSENBERG: I think what we have is this battle going on, got this battle. We have the secular forces of deflation coming from all this deleveraging and the deleveraging, of course, takes demand out of the global economy, you’ve got the deflation, and then you’ve got these governments fighting it hard. So the secular forces of deflation in the market place, and then the tug-of-war as governments come in and reflate- whether it’s China, or whether it’s the U.S. government, or whether it’s the ECB. And so what this does is creates tremendous volatility, tremendous volatility.

But once again, the question is for an investor, what do I do with this volatility? How can I sleep at night? And that’s why in conjunction with say income equity over here, and corporate bonds over there, there should be a slice in the portfolio in hedge funds that really hedge long-short strategies that can actually be…

CONSUELO MACK: And they exist? There really are hedge funds that really hedge?

DAVID ROSENBERG: Well, you know, hedge funds have been around for 50 years. They got a bad name in the last cycle because they weren’t hedge funds, they were leverage long-only funds. But there are firms out there that are either hedge funds. You know, Gluskin Sheff is not a hedge fund, but 20% of our business is managing these long-short strategies, and it’s actually a very effective way to be nimble in the market place when you get these dislocations.

It’s really just taking sectors and companies that you think are bad businesses, are going to cut their dividends, and you put a short position on them, and you couple that with long position of the companies that you think are going to grow the dividends over time.

CONSUELO MACK: So let’s talk about earnings, because I know that you’ve said that the E in the price earnings ratio, the earnings, they are problematical. So what is your outlook for corporate earnings? And again, what does that mean for the stock market?

DAVID ROSENBERG: Well, corporate earnings right now have hit an inflection point, and it’s not just that they’re slowing, they’re actually starting to contract. Earnings are actually, after a three-year period of steady increases off those lows in 2009, corporate profits are actually now starting to decline outright.

CONSUELO MACK: And you’re talking about the S&P 500?

DAVID ROSENBERG: S&P 500 and even bigger picture. When we got the GDP numbers a couple of weeks ago- the GDP numbers give you corporate earnings for all of America, not just for the large-cap companies- and corporate earnings are coming down. And my sense is that the earnings estimates by the analysts on Wall Street is still far too high. Earnings estimates are important. I’m noticing that fewer companies are giving guidance. Fewer companies are giving guidance. What’s that telling you? That corporate CEOs, very similarly, they have a very clouded crystal ball right now. Fewer companies are giving guidance, and then the ones that are giving guidance, for every one that’s saying something positive about their business, two to three are saying something negative about what the outlook is. And on top of that, the estimates are starting to come down. I don’t think they’ve come down enough.

What does it mean for the stock market? You know, I think that if we were to go into a recession, normally the market corrects 20%. I’m not going to say that we’re going into a recession, but my sense is that the stock market is going to remain at best in the range that it’s been in for the past several months. We have to respect the range, but we’re going to be still in for a lot of volatility, which is why I was saying before that hedge funds, they really hedged, totally appropriate. On top of that, you have to be nimble and as tactical as you possibly can be, but if you’re going to ask me do I think that there’s more downside pressure given the risks out there, and especially to corporate earnings, the answer is yes. I think at this stage, without getting into, you know, what’s your call on where we can get to, I think the balance of risks is at that the market goes down over the near term and then goes up. And if it does, I think it will be a great buying opportunity down the road.

CONSUELO MACK: Let me ask you just about another macro issue, which is what about Europe? And you’ve said, you wrote recently that, you know, you’re two and a half years in, you know, these rolling problems keep coming up in Europe, and there are no viable solutions.

DAVID ROSENBERG: Well, I mean, there are solutions. I don’t know how viable they are. I think it’s a matter of just looking at it realistically. The European Union was working just fine. You know, the whole notion that we were going to try and avoid another World War, another European war at all costs. I don’t think that we needed to have a currency union to achieve that. You can’t have a monetary union and not have the fiscal union, and an integrated banking union. You can’t have it.

CONSUELO MACK: So realistically, I mean, are the 17 countries going to sacrifice their sovereignty?

DAVID ROSENBERG: Hardly likely. I had breakfast recently with a CEO of a major Canadian bank, and he told me that they have a Eurozone breakup committee. And he said this is happening around the world. Any major multinational corporation, any business that is doing business in Europe has one of these Eurozone breakup committees, not unlike the pre-Y2K committees that you had in the late 1990s. So you can bet your bottom Euro that if that’s what they’re doing, the Eurocrats in Brussels are trying to come up with some sort of… you talk about viable, what’s a viable exit strategy? Unless the ECB steps up en masse and rapidly expands its balance sheet, and starts buying the bonds of Italy and Spain en masse at auction, you know, that’s pretty radical. I don’t know what the quick fix is. So I think that the end game will ultimately be that the Eurozone breaks up.

CONSUELO MACK: One of your investment themes that we’ve talked about basically has been capital preservation and income orientation, as well, and one of the themes that you and I have talked about in the past is what you call “SIRP”, which is Safety and Income at a Reasonable Price. Are you looking for SIRP investments? Is that still a major strategy theme?

DAVID ROSENBERG: I would say that SIRP has its thumbprints across all the portfolios we’re running at Gluskin Sheff. In fact, what’s interesting is that we, for years, since 2001 we’re running this one particular strategy that’s called “premium income”, which it’s a hybrid, it’s got dividends, and it could have REITs, it could have preferred, convertible bonds; it’s really a portfolio aimed at distribution, a portfolio aimed at generating monthly cash flows for our clients.

CONSUELO MACK: And that’s Safety and Income at a Reasonable Price.

DAVID ROSENBERG: Right. Well, when we say… for example, when I talked about corporate bonds, and we’re talking about “safety” in quotes; I mean, safety, it’s relative. When talking about corporate bonds, it’s because of the quality of the balance sheets are very strong. Because that’s inherently when you’re buying corporate bonds, it’s mostly about default risk. You want to minimize that strong balance sheets. When I talk about on the equity side, we’re talking about running portfolios that have a low beta, which means low correlations with the overall market direction.

CONSUELO MACK: Right. The overall stock market direction.

DAVID ROSENBERG: The overall stock market direction, so we’re talking about, so it’s not just about, you know, does this company have a consistent history of paying off dividends, and we like the business. It’s also how does it move relative to the overall market? So in a period like this where it’s very tumultuous, and where the market is more prone to go down than up, you want to run your portfolios with very low betas. And so that’s the safety part, that’s the “S” part of the SIRP.

CONSUELO MACK: And the low correlations of the markets, in a highly correlated market, which is what we’ve been in for the last several years, so what are the areas that aren’t correlated that have low betas?

DAVID ROSENBERG: Well, for example, one of the themes that we liked has been the consumer frugality theme. So it means consignment stores, it means private label, it means do-it-yourselfers. I mean, for example, you could actually say, wow, because a Home Depot, does it fall under that category as an example. I’m not going to go sell my home, I’m not going to move, I’m underwater in my mortgage, but you know what? I still want to have a fun life, so instead of buying a new home, I’ll spruce up my existing home. And so home repair, a do-it-yourselfer, and so you can find…

CONSUELO MACK: So can you match a name or two to, you know, the frugality theme? So, for instance, frugality, what’s a–

DAVID ROSENBERG: Well, I’ll tell you one area where we have been long, and it’s worked out well has been the dollar stores. And they’ve been phenomenal investments, and by the way, it’s not just because low income households shop there, you’d find… and what the studies are showing is that a greater share of middle income households are actually going to dollar stores. And that’s an area where we have focused on in terms of our consumer exposure.

CONSUELO MACK: Let me run down a couple of the other investment themes, noncyclical. So give me, you know, what’s the theory behind the noncyclical emphasis? And give me an idea.

DAVID ROSENBERG: Well, it’s all about generating stable cash flows. In an uncertain environment, what do you want in an uncertain environment? You want stability. What about utilities, regulated utilities? Regulated utilities. They have regulated pricing power. What about telecom? And it might not just be the stock, you might want to buy the bonds of these companies. Once again, if you have a single A telecom company that’s giving you a triple B yield, you know, I will be happy to take that all day long in terms of looking at the risk and reward. So telecom, utilities, consumer staples, these are the areas that will tend to outperform in the environment that I’m describing right now.

CONSUELO MACK: And one other category that you had was hard assets. So what are we talking about when you’re emphasizing hard assets?

DAVID ROSENBERG: Resources are not a bad place to be. They’re already corrected quite a bit, so resources, whether it’s raw food, or whether it’s, I would say energy, which is corrected quite a bit. ]If you’re a long-term investor, these are complements. They’re not going to generate a yield for you, but they are what you want to own, things you can see, touch and feel in a very uncertain world, and these things have cheapened up quite a bit, as a hedge against the income part of the portfolio.

CONSUELO MACK: So one question is One Investment for long-term to diversify portfolio, what is it that you would recommend that we all own some of?

DAVID ROSENBERG: Well, I’m still a big advocate of corporate bonds. As I said, I think balance sheets are in great shape, default rates are low, there is too much default risk priced in, and so I would say I would focus on, let’s try and generate equity-like returns without taking on the equity risk. And there is a part of the capital structure that can accomplish that, and it’s called “corporate credit”. That is still to me a happy medium between 0 percent treasury bills and going out in the riskiest part of the equity structure. So corporate bonds to me are a solid investment.

CONSUELO MACK: And Dave Rosenberg, you know, you have a reputation of being a permabear, which is not fair, because you were also known as a permabull in the ‘80s and the ‘90s, and in a recent report you said” the future is brighter than you think.” Why when others are despairing are you getting enthusiastic about the future?

DAVID ROSENBERG: Well, I’m not going to say I’m getting enthusiastic about the future. What I am willing to do is put out some checkmarks as to what can cause me to turn more optimistic. And so I see a flicker of light, and it’s realization that politics will lead the financial markets, which will lead the economy, and what leads the politics is the grassroots level, and so what happened last month, for example, I think in Wisconsin with the recall in San Jose, San Diego, and there seems to be this growing realization at the grassroots level that we have to get our public sector balance sheets in better shape; that these underfunded liabilities have to come under control. So we’re starting to see more of a groundswell of support.

What I’m thinking about is how things will change politically on November the 6th, understanding, coming from Canada; Canada went through what Europe is going through right now. Canada is going through what the U.S. was going through back in the early 1990s. You could never have predicted that Canada ten years later would be the poster child for fiscal integrity globally. But it took tremendous political courage.

CONSUELO MACK: We’ll see what happens, and that’s what you’re going to be watching, Dave Rosenberg.

DAVID ROSENBERG: I’m more than willing to reclaim my status of a permabull that I had in the ‘80s and ‘90s if I see those clouds part come November.

CONSUELO MACK: All right, Dave Rosenberg, so great to have you here from Canada, Gluskin Sheff. It always a pleasure to have you on WealthTrack.

DAVID ROSENBERG: Thank you.

CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s reiterates one we just talked about- Dave Rosenberg’s long-time income generating strategies which is S.I.R.P.: safety and income at a reasonable price. So this week’s Action Point is: seek safety and income at a reasonable price, or S.I.R.P.!

Everything we know about the financial markets right now points to ongoing volatility and headwinds for stock price appreciation. Among the areas Rosenberg recommends where you can find reliable dividend growth and dividend yields are: Canadian and U.S. preferred stock shares, which are senior to common stocks; energy infrastructure investments, such as natural gas pipelines; and utilities. All S.I.R.P. vehicles.

And that concludes this edition of WealthTrack. I hope you can join us next week. We are going to sit down with an investment professional who combines two disciplines: overall investment strategy and actual fund management. BlackRock consultant Bob Doll will join us to discuss macro trends and micro strategies. Until then, to see this program again, or others and read my Action Points and our guests’ One Investment recommendations, please visit our website, wealthtrack.com Have a great weekend and make the week ahead a productive one.

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“The Use Of Temps Is Outpacing Outright New Hirings By A 10-To-1 Ratio”


Thursday, July 12th, 2012

 

For many months, if not years, we have been beating the drum on what we believe is the most hushed, but significant story in the metamorphosis of the US labor pool under the New Normal, one which has nothing to with quantity considerations, which can easily be fudged using seasonal and birth death adjustments, and other statistical “smoothing” but with quality of jobs: namely America’s transformation to a part-time worker society. Today, one of the very few economists we respect, David Rosenberg, pick up on this theme when he says in his daily letter that “the use of temps is outpacing outright new hirings by a 10-to-1 ratio.” And unlike in the old normal, or even as recently as 2011, temp hires are no longer a full-time gateway position: “Moreover, according to a Manpower survey, 30% of temporary staffing this year has led to permanent jobs, down from 45% in 2011…. In today’s world, the reliance on temp agencies is akin to “just in time” employment strategies.” Everyone’s skillset is now a la carte in the form of self-employed mini S-Corps, for reason that Charles Hugh Smith explained perfectly well in “Dear Person Seeking a Job: Why I Can’t Hire You.” Sadly, that statistic summarizes about everything there is to know about the three years of “recovery” since the recession “ended” some time in 2009.

From Gluskin Sheff

More on that Payroll Report

The more we sift through it, the more we didn’t like it. Even with the bump in June hours worked and average weekly earnings, the reality is that the Q2 results for both slowed markedly. The economy has hit stall speed yet again — the third time in the past three years.

On top of that, some other details in the data were disturbing. The ranks of the unemployed rose 29k on top of a 220k surge in May. Those who were unemployed and just completed temporary work soared 218k after a 137k increase in May to stand at the highest level since November 2010 (right when QE2 began!). The total pool of available labour jumped 258k to 19.3 million which means that there is now but one job opening for every six people out there who are either actively or passively looking for work. No wonder wage pressures are fading fast.

There are some pundits who believe that the +25k pickup in temp agency employment is a good sign since in the past this sector acted as a leading indicator for job creation… if only we can bring back those old days. In today’s world, the reliance on temp agencies is akin to “just in time” employment strategies — the use of temps is outpacing outright new hirings by a 10-to-1 ratio. The reality is that few businesses want to commit and this shows through in the Household Survey as well with part-time employment in an uptrend and full-time in a downtrend. Moreover, according to a Manpower survey, 30% of temporary staffing this year has led to permanent jobs, down from 45% in 2011.

As this all relates to the upcoming U.S. election, there are some more interesting tidbits to chew on. Looking at the social groupings in the data, we see that since President °barna moved into the White House in January 2009, the unemployment rate for African Americans has climbed to 14.4% from 12.7%, the unemployment rate for Hispanics has risen to 11% from 10%, the unemployment rate for women has risen to 8% from 7%, and the unemployment rate for youth (20 to 24 years old) has jumped from 12.4% to 13.7%. By and large, these were the segments of the popu}ation that helped President Obama win in that historic election in November 2008. The Reaganesque’ question that must be posed is: Are these folks better off than they were four years ago?

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Gold ‘Will Go To $3,000/oz’ – David Rosenberg


Friday, May 11th, 2012

 

Gold ‘Will Go To $3,000/oz’ – David Rosenberg

Highly respected economist and strategist David Rosenberg has told that Financial Times in a video interview (see below) that gold “will go to $3,000 per ounce before this cycle is over.”

Markets are repeating the downturns of 2010 and 2011 and it is time to search for safety, David Rosenberg of Gluskin Sheff tells James Mackintosh, the FT Investment Editor.

Rosenberg sees a “very good opportunity in gold” as it has corrected and seems to be “off the radar screen right now”.

He sees gold as a currency and says the best way to value gold is in terms of money supply and “currency in circulation.”

As the “volume of dollars is going up as we get more quantitative easing” he sees gold at $3,000 per ounce.

Mackintosh says that Rosenberg’s view is a “pretty bearish view”.

To which Rosenberg responds that it is “bullish view on gold and gold mining stocks.” Mackintosh says that it is “bearish on everything else”.

Rosenberg  says that it is not about being “bullish or bearish,” it is about “stating how you view the world” and he warns that the major central banks are all going to print more money and keep real interest rates negative “as far as the eye can see.”

This is “critical” as one of the key determinants of the gold price are real short term interest rates.

The longer they stay negative “the longer the bull market in gold is going to be.”

Rosenberg sums up that “this is not about being bullish or bearish, it is about how do we make money for our clients.”

The interesting interview can be watched here.

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Rosenberg: Déja 2011 All Over Again


Monday, April 16th, 2012

From the first day of 2012 we predicted, and have done so until we were blue in the face, that 2012 would be a carbon copy of 2011… and thus 2010. Unfortunately when setting the screenplay, the central planners of the world really don’t have that much imagination and recycling scripts is the best they can do. And while this forecast will not be glaringly obvious until the debt ceiling fiasco is repeated at almost the same time in 2012 as it was in 2011, we are happy that more and more people are starting to, as quite often happens, see things our way. We present David Rosenberg who summarizes why 2012 is Deja 2011 all over again.

From Gluskin Sheff

DÉJA VU

It is incredible how things are playing out so similarly to this time last year. We closed the books on 2010 at 1,257 on the S&P 500, then hit an interim high of 1,343 on February 18th of 2011 and then corrected to 1,256 on March 16th. We later had a nice bounce off that low to 1,363 on April 29th (a higher high). Who knew then that by October 3rd, the index would roll all the way back to 1,099 and was in dire need yet again for more central bank intervention?

This time around, the S&P 500 kicked off the year at 1,257 to hit an interim high of 1,374 on March 1st. We then corrected down to 1,343 as of March 6th and then rallied our way back to 1,419 on April 2nd (again, a higher high). Only time will tell if the 1,419 close on April 2nd proves to be the peak for the year as the 1,363 high as back on April 29th of last year.

In fact, the exact same pattern occurred in 2010. Out of the gates, the S&P 500 shot up from 1,115 to a brief peak of 1,150 by January 19th. After a brief correction (as we had in early March of this year) to 1,056 by February 8th, the market soared to 1,217 by April 23rd — literally, a straight line up —just as we saw happening two weeks ago. Again, who knew then that we would be at 1,047 by August 26th? Once again, it took aggressive action by the Fed to revive the bull. This is an incredible seasonal pattern. It works for bonds too. Has anyone recognized how the yield on the 10-year T-note surged in the winter-spring of 2008, 2009, 2010 and 2011? In each of the past three years, 4% was either pierced, tested or approached. These were the peaks of the year each time. This time, the seasonal high was 2.4%. Are you kidding me? Our pal Gary Shilling may well be onto something when he says the ultimate low may be somewhere close to 1.5%.

To some extent, the bounce we are seeing reflects how deeply oversold the market was with the Dow losing 550 points over a five-day span. The AAII sentiment poll showed the bull camp shrinking 10 points in the past week to 28.1% and the bear share expanding 13.8 points to 41.6% so quite the shift here. It does not take much at all in these nerve-racking times to get investors to switch their views on a dime. So much of the move has been technical. Sentiment perhaps in some cases washed out — very quickly. It is still too early in the earnings reporting season to make a call here on the fundamentals — Alcoa is not the canary in the coalmine for the overall economy. And the economic data are still broadly mixed. Much of this rally actually is based on quite a bit of fluff like renewed expectations that the Fed is actually going to embark on more stimulus after all, following comments yesterday from two senior Fed officials:

Based on such analysis, I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information. In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.

Vice Chair Janet L. Yellen, The Economic Outlook and Monetary Policy

Remarks at the Money Marketeers of New York University

Also, we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks. In the headwinds department, I would include the run-up in gasoline prices mentioned earlier because that will sap purchasing power, the continued Impediments to a strong recovery from ongoing weakness in the housing sector, and fiscal drag at the federal and state and local levels. In terms of downside risks, these include the risk that growth abroad disappoints and the risk of further disruptions to the supply of oil and higher oil prices.

On the inflation front, the overall rate of increase of consumer prices, as measured by the 12-month change of the price index for personal consumption expenditures slowed to 2.3 percent in February from a recent peak of 2.9 percent last September. Even though the recent rise of gasoline prices mentioned above could interrupt this pattern, we expect this moderation of overall inflation to resume later this year.

William C. Dudley, President of the New York Federal Reserve Bank

Remarks at the Center for Economic Development, Syracuse, New York

Beyond a brief jolt to investor risk appetite, it is debatable as to what these rounds of Fed balance sheet expansion really accomplished in terms of helping the economy out. Three years of near-0% policy rates and a tripling in the size of the Fed’s balance sheet hasn’t changed the fact that this goes down as the weakest recovery ever — we’ve never gone this long without seeing a quarter of 4% GDP growth or better — or that the economy remains extremely fragile.

One thing seems sure. If the stock market were truly telling us anything meaningful about the economic outlook, then we wouldn’t be having the yield on the 10-year T-note at 2.05% and barely budging as the S&P 500 nudged even higher to close at the highs of the session in yesterday’s impressive positive price action.

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David Rosenberg: The Truth On Sideline Cash


Wednesday, March 21st, 2012

The money-on-the-sidelines argument has reached deafening and self-confirming as anchoring bias among any and every swollen long-only manager seems to have made them ignore the realities of the situation. David Rosenberg, of Gluskin Sheff to the rescue with good old fashioned facts – as much as they might disappoint the audience. Barton Biggs quote in the USA Today article points out how bullish he is and how cash levels are very high and “idled money is ready to be put to work”. However, as Rosie points out equity fund cash ratios are at a de minimus 3.6%, the same level as in the fall of 2007 and near its lowest level ever. The time when cash was heavy and ‘ample’ was at the market lows in 2009 when the ratio was very close to 6%. Bond fund managers, it should be noted this includes the exuberant HY funds, are now sitting on less than 2% cash so if retail inflows continue to subside as they did this week, buying power could weaken over the near-term. What David points out that is more interesting perhaps is the converse of most people’s contrarian dumb money perspective – the household sector appears to have used the rally of the past three years, for the most part, to diversify out of the equity market (getting out at price levels they could only dream of seeing again). As we have pointed out again and again, the retail investor has been a net redeemer in equity funds for nine-months running and has been rebalancing since the March 2009 lows in a clearly demographic shift towards income strategies as the memory of two bursting bubbles within seven years is seared into most private investors’ minds.

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David Rosenberg On Taxation-Shock-Syndrome


Wednesday, February 22nd, 2012

While nothing is more certain than death and taxes (and central bank largesse), David Rosenberg of Gluskin Sheff uncovers The Unlucky Seven major tax-related uncertainties facing households and businesses that will likely lead to multiple compression in markets (rather than the much-heralded multiple expansion ‘story’ which appears to have topped the talking-head charts – just above ‘money on the sidelines’ and ‘wall of worry’, as ‘earnings-driven’ arguments are failing on the back of this quarter). As he notes the radically changed taxation climate in 2013 and beyond will have an impact on all economic participants as they will probably opt to bolster their cash reserves in the second half of the year in preparation for the proverbial rainy day.

First, the top marginal personal tax rate rises to 39.6% from 35% as the Bush tax cuts expire at the end of 2012.

Second, a limit on itemized deductions will add a further 1.2 percentage points to the top rate.

Third, a new 0.9% Medicare tax on incomes over $200,000 gets imposed ($250,000 for joint filers).

Fourth, the top 15% rate on long-term capital gains rises to 20%.

Fifth, dividends will once again be taxed at ordinary rates — 39.6% for the top income earners.

Sixth, a new 3.8% tax on investment income gets introduced for incomes over $200,000 ($250.000 for joint filers).

Seventh, the top estate tax rate goes from 35% to 55% (60% in some cases). The estate tax exemption falls to $1 million from $5 million (the gift-tax exemption also drops to $1 million and the rate adjusts hither to 55%).

Forty-one separate tax provisions expire this year — see page 32 of the Economist. Of course, there is always the chance that after the November 6th election, a Congress that can never seem to allow anything temporary to meet its expiry date will pass an extension — for more on all this, see More Uncertainty for 2013 on page B9 of the Weekend WSJ.

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David Rosenberg in Depth – Are We In a Recession?


Wednesday, November 16th, 2011

This week on Wealthtrack, Consuelo Mack interviews one of the few economists to foresee the global economic slowdown. Gluskin Sheff’s David Rosenberg saw signs of trouble as chief economist at Merrill Lynch. Now back in his native Canada at Gluskin Sheff he continues to warn about a prolonged slump with high unemployment in the developed world. He discusses what it means for investors and where to find growth despite a stagnant U.S. and Europe.

Source: Wealthtrack, November 11, 2011.

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2011 Outlook for Global Economies and Investment Strategies: Part 2 – David Rosenberg


Friday, July 22nd, 2011

Following up to the presentation by Gary Shilling at this year’s Strategic Investment Conference, we next move on to an old Zero Hedge favorite: David Rosenberg.

David Rosenberg

Chief Economist & Strategist
Gluskin Sheff + Associates, Toronto

Synopsis:

“Commodities Aside, Deflation Remains the Primary Trend”

David Rosenberg was unequivocal in his view that deflation is still the underlying trend, drawing the distinction between inflation due to fears of rising oil prices and the real forces that drive inflation. Core inflation is what drives the bond market, and there, he believes the underlying 1-2 year trend is down. “Take out the noise, and inflation is still comatose.” None of the economic factors point to sustainable inflation, yet rising inflation seems already priced into the markets as the majority view.

Rosenberg acknowledged the surge in oil and food prices (now 22% of US consumer spending), driven in part by speculative positions, and agreed this will show up temporarily in slightly higher goods inflation. Nevertheless, two thirds of the US economy is the service sector, which continues to show signs of deflation, even with rents hooking up (did it mean to say “looking”?).

“The labor market is what worries me! It will stop inflation in its own tracks.” Unit labor costs are the principal driver of long-term inflation. 1 in 7 Americans is un- or underemployed (U-6 Unemployment rate at record highs). Real wages are declining. Further deflationary pressure is building at the State and Local Government level as layoffs loom. With stimulus coming to an end, he expects cuts at the federal level as well.

In home prices, like Gary Shilling, Rosenberg predicts another 15-20% to the downside, while commercial real estate appears to be rolling over again to the downside as well.

Where’s the lending? The Fed’s Quantitative Easing is still sitting on bank balance sheets. This must get re-circulated into the economy to cause inflation. Meanwhile, the household sector is still paying down debt, as credit contraction continues. There is still no sign of a meaningful increase in the money multiplier or in the velocity of money as credit and wages stand in the way. For comparison, Rosenberg demonstrated how closely the US situation parallels that of Japan, and emphasized the sacrifices that Canada made to correct what was a more difficult situation.

Bonds: Rosenberg believes we’ll see rates at 2% before we see 4%. At these low levels of interest rates, the potential for capital gains in the bond markets is tremendous. “We’re in a post-bubble credit collapse. I’m bullish on long term rates. Getting the long bond yield down to 2% would be very stimulative for the economy.”

Commodities: He believes we are in a secular bull market, and expects there will be a correction in the short term, in both commodities and precious metals. With the prospect for the fed increasing interest rates “years away,” this bodes well for Gold according to Rosenberg. However, he believes we could see a brief counter-trend rally when QEII ends in June.

QEIII: He believes if the economy slips and unemployment goes back up, the Fed will further ease monetary policy. “Here we are, two years into the recovery, and we still face a 5 ½ % output gap. This has never happened before; usually the gap is zero by now.” Rosenberg is convinced we will see QEIII.

Full pdf of Rosenberg presentation can be found here. This is easily the most comprehensive David Rosenberg presentation put together to date.

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Gold Correction a Buying Opportunity? (Rosenberg)


Friday, July 30th, 2010

This article is a guest contribution from David Rosenberg, Chief Market Economist, Gluskin Sheff.

In terms of what is driving market sentiment right now, it boils down to three things. First, there is a consensus view that the stress tests in Europe were a game changer and that the crisis has been dealt with. Second, there is a lot of hope that the Chinese government has managed to curb the property and credit bubble and did so by engineering a soft-landing and not a hard-landing and that no further policy restraint is going to be needed. Third, almost everyone is dismissing double-dip risks in the U.S.A., and a whole army of Wall Street research departments are expending considerable resources into dissecting the ECRI and concluding that it is not foreshadowing another recession.

The latest was a report that said that the ECRI was only -1.5 (not -10.5) once the effects of mortgage applications were removed. How about that? Remove housing, and it’s “only” -1.5 (as if that is any good in any event).

This takes us back to 2007 and 2008 when all the research houses (except for the one I toiled at) came to the conclusion that once you strip out the effects of housing, the U.S. economy was just in fine shape, didn’t you know? Housing doesn’t matter, right?

Right.

But all is not right!

At least not with jobs and housing.

First, even though the BLS told us that the U.S. jobless rate fell to 9.5% in June from 9.7%, we know that the rate would be 10.2% if not for the plunge in the labour force over the past two months. Second, we just received the detailed regional data and they showed that the unemployment rate climbed last month in 291 of the 374 areas monitored; fell in 55 and was flat in 28.

Now how does that grab you? Of the 12 metro areas with a depression-like 15% unemployment rate, 10 were situated in California – the largest state ostensibly is not yet out of recession (just as Janet Yellen moves back to Washington from San Fran). And when you consider that the state government in California just reinstated a fresh round of furloughs, you know that the extent of underemployment along with unemployment is extremely deep (see “New Furloughs in California” on page A13 of the NYT).

Second, the housing backdrop is still very weak. The high-end homeowner is now buckling as foreclosures among those with jumbo prime mortgage loans (mortgages of over $729,750) have soared 600% in the past 2-½ years. Foreclosures among borrowers with prime conforming loans have risen 425%.

According to RealtyTrac, we still have a situation today, despite all the taxpayer money that has been thrown at the situation, where 154 of 206 cities (with populations of 200,000 or more) have posted increases in foreclosure filings on a YoY basis. Meanwhile, sellers of properties are starting to see the light and are cutting their prices (not yet evident in the Case-Shiller but will be soon).

Thirty percent of homes sold last month were properties in which the owner had to cut his/her asking price (Zillow). As well, it is now taking 8-9 weeks to sell a house upon listing, down from 10-11 weeks a year – in another sign that sellers are becoming more realistic and coming closer to match the existing depressed bids there are out there. Remember – this remains a full-fledged buyers market out there with a near-record 19 million vacant housing units nationwide to choose from.

GOLD CORRECTION A BUYING OPPORTUNITY

There is no question that gold’s allure as a safe-haven has taken a bit of a beating with the more confident tone coming out of European markets, but be assured that in a global post-bubble credit collapse, skeletons come out of the closet when you least expect it. The surprises are not over; not by a long shot. And the gold price will ebb and flow, but it is in a secular bull market and will retain its natural hedge against recurring concerns surrounding the integrity of the global financial system. Watering down financial regulation bills in the U.S.A., kicking the can down the road via less-than-onerous Eurozone stress tests and reduced capital stringency as per Basel III does not alter the deleveraging game that much and the rounds of market instability that will come our way.

The investment demand for gold remains quite solid at a time when production growth is still anaemic – the World Gold Council just released data showing that investors bought 273.8 metric tons of gold via ETF’s in Q2, the second highest tally on record (and brings net investment in these finds to over 2,000 tons value at just under $82 billion).

Complete report here.  (Registration is required.)

(c) Gluskin Sheff

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What are the Bulls Looking At? (Rosenberg)


Friday, July 23rd, 2010

This article is a guest contribution from David Rosenberg, Chief Market Economist, Gluskin Sheff.

WHILE YOU WERE SLEEPING

Asian equity markets are flying high this morning and Europe is mixed-to-up as it rides a four-day winning streak. Emerging markets gained 0.8% today, closing at the best level since May 4th. Asia-Pac surged 1.7% today. The Chinese market has undergone a resurrection, having posted its best week in seven months, and is breaking out, which bodes well near-term for the commodity complex – and if you strain your eye just enough, you will see the Baltic Dry Index is forming a bottom.

Copper is heading towards its best week in five months (+9%), oil is still hovering near 11-week highs and gold has made its way back towards $1,200/oz on dollar slippage and news of higher India imports. As such, the resource-based currencies are firming up again – the Australian dollar is back trading at a two-month high, as an example. Earnings season is going well thus far– not across the board but across some heavyweights with CAT and MSFT (beating on both the bottom and top lines) the latest reports to generate enthusiasm.

The latest economic data points out of Germany have been surprisingly good – especially the just-released IFO survey for July, which soared to a three-year high of 106.2 from 101.8 – the consensus was at 101.5 (though other numbers in the Eurozone such as French consumer spending left a tad to be desired). U.K. GDP for the second quarter also offered up an upside surprise –+1.1% (not annualized!), the best since 2006Q1 and about double the consensus expectation (Sterling has rallied a further 1% today on the news).

We just got some soft CPI data out of Canada that should help Carney sleep better at night. The headline dipped 0.1% in June, as expected, reducing the yearly rate to 1.0% from 1.4%. After a year of huge housing-induced growth, we have a 1% inflation rate in this country. The core CPI was a surprise, dropping 0.1% as well and this took the YoY rate down to 1.7% from 1.8% – a touch below the BoC’s estimate for Q2. No doubt we will see a pop in July due to the HST, but the inflation trends are actually very conducive to friendly rates environment.

Optimism abounds over the European bank stress tests. So earlier concerns of a European economic meltdown have yet to occur, and likewise regarding fears of a bubble-bust or social unrest in China where signs of a cooling off in property prices have triggered expectations of an early exit from the government’s policy tightening program.

The safety of government bonds is losing a bit of an allure here as the 10-year T-note yield seems set to retest the 3% mark on the upside but let’s not lose sight of the visible slowing taking place right now in the U.S. economy. Sentiment is one thing; economic reality something else altogether. Be aware – the overwhelming consensus is for no double-dip, for yields to rise and for a summertime equity market rally (which seems to have already occurred, though both Bob Farrell and Walter Murphy have recently entertained that view that this thing may have more legs).
On the technicals, a break of 1,100 on the S&P 500 would be widely viewed as a significant and positive near-term development by many a chartist. While volume has been lagging (we highlight that below), what many a bull will point to is the fact that the ratio of new highs to new lows has risen now for …. three days running.

So what else are the bulls looking at right now?

  • Congress extending jobless benefits (yet again).
  • Polls showing the GoP can take the House and the Senate in November.
  • Some Democrats now want the tax hikes for 2011 to be delayed.
  • Cap and trade is dead.
  • Cameron’s popularity in the U.K. and market reaction there is setting an example for others regarding budgetary reform.
  • China’s success in curbing its property bubble without bursting it.
  • Growing confidence that the emerging markets, especially in Asia and Latin America, will be able to ‘decouple’ this time around. We heard this from more than just one CEO on our recent trip to NYC and Asian thumbprints were all over the positive news these past few weeks out of the likes of FedEx and UPS.
  • Renewed stability in Eurozone debt and money markets – including successful bond auctions amongst the Club Med members.
  • Clarity with respect to European bank vulnerability.
  • Signs that consumer credit delinquency rates in the U.S. are rolling over.
  • Mortgage delinquencies down five quarters in a row in California to a three-year low.
  • The BP oil spill moving off the front pages.
  • The financial regulation bill behind us and Goldman deciding to settle –more uncertainty out of the way.
  • Widespread refutation of the ECRI as a leading indicator … even among the architects of the index! There is tremendous conviction now that a double-dip will be averted, even though 85% of the data releases in the past month have come in below expectations.
  • Earnings season living up to expectations, especially among some key large-caps in the tech/industrial space – Microsoft, AT&T, CAT, and 3M are being viewed as game changers (especially 3M’s upped guidance). Even the airlines are reporting ripping results.
  • Bernanke indicating that he can and will become more aggressive at stimulating monetary policy if he feels the need and yesterday urging the government to refrain from tightening fiscal policy (including tax hikes).
  • Practically every street economist took a knife to Q2 and Q3 GDP growth, which has left PM’s believing we are into some sort of capitulation period where all the bad news is now “out there”.

From our lens, this is still a meat-grinder of a market. The bulls have the upper hand, but only until the next shoe drops in this modern-day depression and post-bubble credit collapse. The S&P 500 is still down 2% for the year, the Dow by 1%, the FT-SE and Nikkei by 11%, the Hang Seng by 5% and China by over 20%.

Ask the bullish community if by this time of the year we were supposed to see bonds outperforming stocks – folks like our friends Byron Wien at Blackstone and Jim Caron at Morgan Stanley thought we were on our way to a 5.5% yield on the 10-year T-note. So let’s keep the whippy, albeit positive, action in the equity market into perspective. This is the sixth (!) multi-week bounce in the equity market so far in 2010 and the year is barely seven months old.

So the best we can say is that we do have a tradable rally on our hands and that at the 50-day moving average on the S&P 500 we also are at a critical technical juncture – but remember, in a secular bear market, these rallies are to be rented, not owned. To be sure, 140 companies have reported so far and the news overall is good … but earnings are a coincident, not a leading indicator.

As for the bond market, it is quite remarkable that everyone focuses on what Ben Bernanke has to say and what the impact will be on equity market sentiment (we even field calls as to whether the Fed would ever buy equities!). Well, all we know is that historically, there is a 160 basis point spread between the Fed fund rate and the 10-year T-note yield, and a 210 basis point spread between the funds rate and the long bond yield. So at a minimum, all the Fed has to do is continue to pledge to keep the overnight rate close to 0% and then do the math as we embark on Bob Farrell’s Rule #1, which is classic mean reversion and you will see why it is that seeing the 30-year down to 2-1/2% is a far less controversial call than meets the eye.

And that remains the pain trade for many a fixed-income portfolio manager who fear small numbers but do not see the huge potential gains in total return terms because of the power of convexity at today’s interest rate levels. The answer is “no” – there is not one way for bond yields to go in a prolonged deleveraging cycle, and “yes”, this is Japan all over again. The record-low yield on the 2-year note after a year of statistical economic recovery has already told you that (not to mention the need for the Fed at this point to even have to contemplate another round of quantitative easing)!

You can download the whole report here. Registration is free.

Copyright (c) Gluskin Sheff

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