David Rosenberg And A Few Good Economic Observations: "Can You Handle The Truth?" His 2010 "Outlook"

Tyler Durden's picture

Courtesy of David Rosenberg of Gluskin-Sheff

It’s that time of the year when ‘sell-side’ research departments publish their Year-Ahead Reports (as I once did in the not-too-distant past); as do all the financial magazines.

I realized after countless emails and phone conversations (in that order) that there is a very high expectation that I publish one too. I honestly have no intention of publishing a specific set of forecasts in my current role as the Chief Economist and Strategist for Gluskin Sheff for public consumption — the granularity of my recommendations is reserved for our Investment team and our client base. Be that as it may, I am more than happy to comment on what I see as an emerging consensus and my general view on the direction of the economy and the markets in the coming year without getting into too much detail or numerical forecasts, which are the domain of the ‘sell-side’ macro teams globally.

At the outset, let it be known that when I read everyone else’s year-ahead prognostications, all I can think of is, “where do I store this stuff for a year so I can look back and say ‘That was so wrong!’.” It’s not that the reports are always bullish every year; it is that they seem so contrived. And, as I mentioned in the December 10th edition of Breakfast with Dave, this year, probably like most years, there seems to be a remarkable level of agreement. Based on my reading, here is what I conclude the consensus views are as we head into 2010:

  • Muted recovery, but positive growth, for sure! No risk of a ‘double dip’.
  • Equity markets up!
  • A barbell strategy of domestic multinational blue chips and emerging market equities.
    The U.S. dollar is…neutral, but we did locate more bulls than bears (so much for the ‘carry trade’ thesis).
  • Positive on commodities for the most part.
  • Concerned about government balance sheets, and therefore…
  • …Bearish on long term government bonds because they are the ‘competition’ and, after all, who would tie their money up for 10 years at 3.5% when you can lose 22% in stocks? And, therefore…
  • …Bullish on spread product (as long as it’s not long-term). And, therefore…
  • …Really comfortable with high yield (just for the coupon and the view that default rates will come down).
  • Certain that volatility will not be an impediment.
  • The Fed will begin to raise rates in the second half of the year, but that this will have no impact since they will still be low.

So here we are with a glorious opportunity to reintroduce Bob Farrell’s Rule 8: “When all forecasts and experts agree, something else is going to happen.”

That being said, these economists and strategists, many of whom I know, are smart guys (and gals) and they are human. To ‘talk your book’ is human; to have the courage to ‘buck the consensus’ is divine. I too am human; I also like to feel that I have courage of my convictions; and I too have a “book” (of sorts — it’s called reputation). But I have decided to take the opportunity of the “Year-Ahead Moment” to transition from sell-side to buy-side and more importantly, to reflect on the past year and really try to prognosticate from the gut. You would be surprised how a blend of intuition and experience can make a difference in a cycle like the one we are in that has absolutely nothing in common with the other recessions of the post-WWII era.

Forecasting is a humbling profession even in the best of times and I have learned a lot in the past year, especially from my partners here at Gluskin Sheff who realizes all too well that:

1. It is what is embedded in asset prices benchmarked against the forecast that is of utmost importance for investors;
2. The focus of any forecast must take into account the reality that minimizing portfolio risks is at least as critical as maximizing the returns, and;
3. Every forecast has an error term and the range around any projection in a post-bubble credit collapse can be extremely wide.

I do not view the economic events of the last two years as a classic recession/recovery phase. They only exist in the context of a secular credit expansions and contractions. We are in a post-credit bubble credit collapse that is ongoing, à la Bob Farrell’s Rule 4: “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.”

Mainstream economists called this downturn “The Great Recession”. This is truly a gentle way of saying “Depression”. When we can have the courage to come to grips with the fact that we did in fact experience a depression of sorts, which is by definition a credit event, then and only then can we draw a conclusion that a sustainable recovery will not get underway until the ratio of household credit to personal disposable income reverts to the mean (and goes to an excess in the opposite direction). I know it sounds harsh, but we shall endure — believe it. Transition is rarely without pain.

The ratio of household debt to disposable income is up from a 30% ratio back in the 1950s to 125% today (though down from 139% at the peak in 2007). Mean reverting to a ratio closer to 60% means that the deleveraging process will be a multi-year event and by the time it is over, more than $7 trillion in additional household credit will have to be extinguished. For more on this see the unbelievably grotesque article on the front page of last Thursday’s (December 10) Wall Street Journal — The New American Dream.

Perhaps inflation is a consensus forecast but deflation is the present day reality and often lingers for years following a busted asset and credit bubble of the magnitude we have endured over the past two years. The fact that China’s voracious appetite for basic materials will continue to exert upward pressure on commodity prices does not detract from this view, especially given the widespread excess capacity in the manufacturing sector and the new frugality that has gripped, and in many cases, been embraced by the retail sector. Higher raw material prices, owing to developments in Asia as opposed to demand pressures here at home, will prove to be a sustained source of profit margin compression for many sectors and companies linked to finished consumer goods and services.

So, much of what I have read in various Year-Ahead Reports predict corporate earnings, GDP growth here and abroad, interest rates and relative values of currencies. As I mentioned earlier, the error term is bound to be very wide in this new paradigm (since WWII) of a secular credit collapse. GDP growth in 1934 was 10%, but the Depression wasn’t over until 1940.

Since 1989, the Japanese stock market has had no fewer than four 50%-plus rallies and there still has been no period of growth that can be called a sustained expansion. Today, we have our own special set of conditions and it is bound to be tricky as is typical during a post-bubble credit collapse, no matter how intense the government reaction. Prematurely committing to the ‘risk’ trade is probably going to be the most lamentable action over the next few years.

Suffice it to say, we believe that the dominant focus will be on capital preservation and income orientation, whether that be in bonds, hybrids, hedge fund strategies, and a consistent focus on reliable dividend growth and dividend yield would seem to be in order. To reiterate, I see the range of outcomes in the financial markets and the economy to be extremely wide at the current time. But one conclusion I think we can agree on is the need to maintain defensive strategies and minimize volatility and downside risks as well as to focus on where the secular fundamentals are positive such, as in fixed-income and in equity sectors that lever off the commodity sector.

This, in turn, underscores my primary focus of favouring Canadian dollar based investments over the U.S. because at no time in my professional life have the downside risks — economic, fiscal, financial and political — been so low on a relative basis and the upside potential so high as is the case today. The near-2,000 basis point gap this year between the TSX and the S&P 500 — the former leading — should be taken in the context of being just past the halfway point of a secular (ie, 16-18 year) period of outperformance. Northern exposure never felt this hot.

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Gimp's picture

And his outlook is???  Everyone has become so good at verbose gobbledygook that you need at least three UN translators to understand anything written in or by corporate America. Keep it simple.

just.a.guy's picture

It's actually clearly written and concise given the complexity of the subject, but I'll MTV-generationalize it for you.

deleveraging will continue

this will mean substandard economic growth

people piling into equities thinking the worst is over are going to get burned.  japan went through the same thing.

buy high quality credit and equities in materials producers. 

buy canada.

eat poutine and hunt moose.

rosie out.


or if THAT's too complicated for you i'll just summarize it as pearls before swine.

AN0NYM0US's picture

and here is one of Rosies Pearls from May 2009


In other words, there is still more substantial downside risk than upside risk
to the U.S. corporate earnings outlook. I doubt the recession is going to end
as quickly as the consensus of economists and strategists believe (next
quarter). And, even if we manage to see $70 on mid-cycle EPS, what is the
appropriate multiple? The fair-value P/E should approximate the ‘real’ Baa
corporate bond yield, which means a 12x multiple is appropriate. Though this
can clearly change — judging by the growing share of government in the
economy, more regulation and less free trade, the implications for
productivity, the potential GDP growth rate and the fair-value multiple will
likely all be lower.


Slap 12x multiple on to a $70 mid-cycle earnings estimate, which I think is the
best we can accomplish and we are at 840 on the S&P 500. But assuming
that S&P 500 operating EPS first has 30% more downside before we see the
trough (which would be $30), and then apply a typical 60% premium to that
under the generous assumption that we see a typical mid-cycle rebound from
the lows, then we would be talking about mid-cycle earnings just below
$50. Slap on a 12x multiple and there you have the downside story: 600 on
the S&P 500.

But at least we know what the range of outcomes can look like: 600 to 840
on the S&P 500. On March 9th, there was much more upside; today at 892,
quite the opposite.



likely a lot of impoverished swine running around if they invested in equities based on Rosies predictions

Anonymous's picture

"likely a lot of impoverished swine running around if they invested in equities based on Rosies predictions"

That is right and despite ZH bashing the dollar, the buck still has not reached a new all time low. The end of QE did not bring a market black swan. If I had listened to Cramer, I would be in great shape right now. C'est la vie.

WaterWings's picture

Dammit all to hell! Will the zombies stop being right, Gddmn it!


deadhead's picture

I have stated this several times and will do so again.

on several occasions during the period of approximately may through july Mr. Rosenberg wrote that he felt the spx could hit 1200 before the bear market rally reverted and he warned people about this.  I  read it in his reports on at least 3 occasions.

i'm not going to go through rosie's reports to quote as you did but it is there.  that is simply a fact and your quote does not tell the whole story.

Ripped Chunk's picture

"deleveraging will continue

this will mean substandard economic growth"    Is the standard with or without the 25% of previous years consumption fueled by home equity and credit card borrowing?  Because that is a big variable.

etrader's picture

Thanks Tyler !

Are you guys on best behavior this week on posting full articles ;-)

Anonymous's picture

True but a list of bullet points make it clear and it
seemed foggy at best. I'll go with the Gimp.

Anonymous's picture

This guy got it wrong but he just can't admit it.
I have but I only report to my wife.

Ripped Chunk's picture

And once your assets return to a better level (if they ever do) you probably won't report to her anymore either.

Anonymous's picture

Those losses represented the 5% equity investments of
my 8 figure portfolio not including my wine country
estate and unlike Tiger and most probably you
I don't fear an honest conversation with my wife,

Green Sharts's picture

Mainstream economists called this downturn “The Great Recession”. This is truly a gentle way of saying “Depression”. When we can have the courage to come to grips with the fact that we did in fact experience a depression of sorts, which is by definition a credit event, then and only then can we draw a conclusion that a sustainable recovery will not get underway until the ratio of household credit to personal disposable income reverts to the mean (and goes to an excess in the opposite direction). I know it sounds harsh, but we shall endure — believe it. Transition is rarely without pain.

The ratio of household debt to disposable income is up from a 30% ratio back in the 1950s to 125% today (though down from 139% at the peak in 2007). Mean reverting to a ratio closer to 60% means that the deleveraging process will be a multi-year event and by the time it is over, more than $7 trillion in additional household credit will have to be extinguished.

Why doesn't Rosey have the courage to say we are experiencing a depression instead of we did experience one, i.e past tense?  Nothing else he writes suggests the worst is behind us.  It's like his projection that stocks will return "only" 6% from current levels over the next decade.  If 10 year treasuries are yielding 3.6% there's no reason for investors to expect more than 6% from a basket of stocks.  Rosey's rhetoric is far darker than his forecasts.  I guess he is at the outer boundary of a tolerable distance from the consensus.

BG_rulez's picture

How about the explosion in government debts then? The overall indebtedness still grows!

Shiznit Diggity's picture

Why doesn't Rosey have the courage to say we are experiencing a depression instead of we did experience one, i.e past tense? 

There's a limit to how far an economist can stick his neck out of the consensus cocoon and still retain mainstream credibility.


el Gallinazo's picture

Well, he starts out saying that he doesn't pull out the best wine for

the non-paying guests.  I am no financial genius and can't

understand half the stuff written on this blog, but Rosie's statement is

perfectly clear to me.  As to your point, he says that we were in 

a depression and it will take years to come out of it.  I guess that

means we are still in it.  Look at U6.


Leo Kolivakis's picture

Leo Kolivakis's outlook for 2010:

  • The shift in fundamentals will continue as the US labor market will urprise to the upside. In this context, the euro and other currencies will depreciate against the greenback in coming quarters.
  • Improving US fundamentals will send gold prices much lower in coming quarters but oil prices will rise (despite appreciation of greenback) as the US economic recovery becomes firmly entrenched.
  • Liquidity rally will continue and improving fundamentals will drive earnings and stocks higher in the first half of 2010. Watch for speculative flows in renewable energy sector (solar stocks in particular).
  • As the recovery becomes firmly entrenched, the market will start pricing in rate hikes for the second half of 2010. On Tuesday, the Fed announced that it's removing a lot of the excess liquidity (allowing liquidity facilities to run their course) and cost of repos is going up (indirect way of removing excess liquidity).
  • Rate hikes will not kill stocks right away, especially not in the speculative sectors. In fact, some banks will experience windfall gains as they charge more on existing lines of credit and housing lines of credit.

Please do not attack my views. Come back in a year to tell me how stupid they were. :)

Green Sharts's picture

You're enough of a buffoon without referring to yourself in the 3rd person.

Leo Kolivakis's picture

Sorry, didn't mean to steal your spotlight.

Anonymous's picture

April Fools?

greased up deaf guy's picture

agreed.  i stopped reading after that first sentence fragment.

I need more cowbell's picture

Nah, I can't wait a year. You're an idiot.

Leo Kolivakis's picture

Judging from your pic, you don't need more cowbell but more blood flowing to your brain. I am going to remember you and slam you hard next year. Don't forget to renew your membership to Mensa International..LOL!

I need more cowbell's picture

Unless I missed the "Golly gosh, I wonder what Leo thinks?!!" post, your hijacking this thread leaves you wide open to all commentary.

Don't feel bad, every village needs an idiot.


Leo Kolivakis's picture

Words are cheap. I put my balls on the line and my money where my mouth is. You can slam me till those cowbells start ringing, but I stand by my 2010 outlook. This is not hijacking a thread, but adding my views. Go back to your village, you're embarassing yourself again.

I need more cowbell's picture

Well, your words are cheap, thats for true.

 As for you putting your money on the line and your balls where your mouth is, wow, good for you- I'd never leave the house if I could do that.

Leo Kolivakis's picture

Get ready to bend over and grab your ankles shorty...it's going to hurt!

I need more cowbell's picture

Leo, are you having prison flashbacks again?

Ripped Chunk's picture

Now girls, can't we just get together and settle this in a civilized manner?  With 8" blades??

Anonymous's picture

Hey this is Fight Club you guys. You know the rules. Lets get it ON!

Anonymous's picture

I'll second that opinion. Leo is the Steve Liesman of

Leo Kolivakis's picture

Steve who? Leo is Leo and you'll remember my call when it becomes reality.

AN0NYM0US's picture

166647 - you have that wrong  - Leo is more like the Laszlo Birinyi or Mario Gabelli of ZH - bullish and correct

Rainman's picture

I agree with your view that rate hikes will not kill stocks right away.

They'll be planted firmly in the ground by then.

Leo Kolivakis's picture

Really? Why? All I see is shorts that are going to get whacked hard again in 2010. The market is on a tear and the US economy will follow.

basehitz's picture

"All I see is shorts "


You assume rampant pessimism. It's the opposite. Bears haven't been this low since '07. See  "2 year" chart.



SWRichmond's picture

The market is on a tear and the US economy will follow.

What will we make, and who will buy it?

delacroix's picture

where is the growth engine. what will drive these improving conditions, HOPIUM ?

Rainman's picture

There is absolutely, positively no way that massively declining real asset values in CRE and RRE (layered together) can avoid pulling down the economy in 2010. And we sit on an an S&P earnings valuation that must improve 20% + to meet current pricing.....even with the financial industry earnings overstatements.

The interconnection of RE value + MBS + CDS is a worrisome trio of live bombs that will go off in pension funds, insurance companies and other institutional holdings sooner than later. All that's keeping the fuse unlit is the voodoo accounting associated with the marking of assets.....a subject that has received limitless attention here for months.

Furthermore, we must factor in the coming rollback of public sector employment. It functions presently off a stimulus prop that cannot last through next year without a politically brutal Stimulus II battle....and this Congress is losing its guts fast going into the midterms. Employment pullbacks in this sector adds a couple clicks to the unemployment rates and all the other resulting issues with higher unemployment rates.

I do agree with you on very selective opportunities and that will always be the case. But I keep seeing distorted valuations via gubmint stimulus. Once removed, things become clearer. And it is an error to think popular resistance to U.S. debt isn't going to get even stronger legs next year. It will be the wild card on all value projections. 

I could go on . If any of these clouds has a silver lining that you are seein', I'm all eyes !! 


Anonymous's picture

there are no shorts left fool, only irrational exhuberance

AN0NYM0US's picture

Leo - how about some specific numbers both for the US and for the great white north

Goodness knows you have been far more accurate this year than Mr. Rosenberg

Leo Kolivakis's picture

I forecast GDP growth north of 3.5% in the US and close to 3.3% in Canada in 2010. Strong first half will surprise a lot of economists and financial analysts.

AN0NYM0US's picture

will you put a number (range) on the S&P and TSX 60  e.g. high low finish for 2010

Misthos's picture

Peak Oiler here. I disagree about a sustainable rebound.  Even if it's possible (only thru gov't stimulus) oil prices will snuff it out due to increased demand, if we don't have a financial panic first.  I'll check with you next year.

Anonymous's picture

hey Leo, you have links to your prev predictions? Please post them here. If you do not then STFU!!!!

Leo Kolivakis's picture

They are all over my blog moron...go to my archives and read all my predictions. Otherwise, STFUP right back at ya!

jm's picture

Appreciate you laying it out there.