David Rosenberg Vindicated

Tyler Durden's picture

From today's Breakfast with Rosie


Well, it took some patience but it looks like the economic environment I was depicting this time last year just shortly after I joined GS+A is starting to play out. Deflation risks are prevailing and a growing acknowledgment over the lack of sustainability regarding the nascent economic recovery. Extreme fragility and volatility is what one should expect in a post-bubble credit collapse and asset inflation that we endured back in 2008 and part of 2009.

History is replete with enough examples of this — balance sheet recessions are different animals than traditional inventory recessions, and the transition to the next sustainable economic expansion, and bull market (the operative word being sustainability) in these types of cycles take between 5 to 10 years and are fraught with periodic setbacks. I know this sounds a bit dire, but little has changed from where we were a year ago. To be sure, we had a tremendous short-covering and a government induced equity market rally on our hands and it’s really nothing more than a commentary on human nature that so many people rely on what the stock market is doing at any moment in time to base their conclusions on what the economic landscape is going to look like.

So, we had a huge bounce off the lows, but we had a similar bounce off the lows in 1930. The equity market was up something like 50% in the opening months of 1930, and while I am sure there was euphoria at the time that the worst of the recession and the contraction in credit was over, it’s interesting to see today that nobody talks about the great runup of 1930 even though it must have hurt not to have participated in that wonderful rally. Instead, when we talk about 1930 today, the images that are conjured up are hardly very joyous.

I’m not saying that we are into something that is entirely like the 1930s. But at the same time, we’re not in Kansas any more; if Kansas is the type of economic recoveries and market performances we came to understand in the context of a post-World War II era where we had a secular credit expansion, youthful boomers heading into their formative working and spending years and all the economic activity that went along with it, and periods when recessions were caused by excess inventories and overzealous central banks fighting inflation — a war that can always be won with traditional interest rate weapons.

Now we are in the process of unwinding the excesses of a parabolic credit cycle of the prior decade, the first of the boomers are now retiring with nobody around to buy their monster homes and the Fed is now fighting a deflation battle that is prompting comparisons to Japan for the past two decades. Moreover, here we have the Fed unexpectedly cutting its forecast for growth and inflation in the past month-and-change, and then we had Ben Bernnake tell us that the macro outlook is “unusually uncertain”. The world’s most important monetary authority, with all deference to the People’s Bank of China, is now openly contemplating more experimental quantitative easing measures to propel economic growth at a time when policy interest rates are zero, the size of the Fed’s balance sheet is already triple its normal size, at $2.3 trillion, and at a time when the budget deficit exceeds $1 trillion, or 10% of GDP, and there are cries now even from incumbent Democrat senators for Obama to extend the once vilified Bush tax cuts. You can’t make this stuff up.

In this increasingly uncertain economic and political climate — not just in the U.S., but abroad, don’t think for a second that the debt problems in Europe have been solved, they haven’t, the problems have merely been delayed — what I want to talk about in this highly uncertain backdrop is what I do know with at least some certainty.

First, I know that there is tremendous complacency out there because based on my extensive daily readings, and the massive volume of emails I receive, there are legions of folks who still think we are in a cyclical bull market; completely oblivious to the fact that both the TSX and S&P 500 are pretty well at the same levels today that they were last November. That is eight months of nothing, except tremendous rounds of volatility because there have been no fewer than six major rallies and selloffs in this range-bound market, and is symbolic of the intense fluctuations we have seen in all the peaks and valleys over the past 12 years with nothing to show for it for a buy-and-hold investor.

So the strategy is not to be “buy and hold”, but to navigate the portfolio in the context of a secular bear market with massive up and down moves. This is done by adopting hedging strategies that actually hedge and with a net short position because, make no mistake, we are still in the throes of a secular bear phase. There are actually ways to profit from this in effective long-short strategies.

Second, we are in a phase where deflation risks trump inflation risks, and this is not a case where cash is king — cash, by the way, has not been king in Japan either for the past two decades — but what is king in a deflationary cycle is income, no matter how you can secure it, whether through classic hybrid funds or through bonds. And, not just government bonds because in some cases, corporate balance sheets today are in better shape than government balance sheets — when I look at classic measures like debt-equity ratios, liquid asset ratios, debt maturity schedules and the ratio of long-term debt-to-total outstanding corporate debt, the corporate balance sheet is as good a shape as it has been in for the past 50 years, and this is coming from a renowned bear.
But corporate bonds are plays off the balance sheet whereas equities are a play off the income statement and I think the income statement, specifically corporate profits benchmarked against where investor expectations, are probably going to disappoint. I think that even if we manage to avert a double-dip recession, it probably won’t be by that much and right now the market is priced for 35% earnings growth in the coming year. That seems too high a hurdle at a time when margins have already expanded to cycle highs in a very short time frame.

The fact the equity markets stopped going up in April, despite how good second quarter earnings season was, is testament to the view that investors have only recently become a little squeamish over the outlook for corporate profits. Guidance has been decidedly mixed.

For corporate bonds, it comes down to credit quality and the ability to service debts. What some analyst at some Wall Street firm does to his or her earnings estimate for Company X, or if Company X issues a profit warning because of a weaker-than-expected economic backdrop, is more a problem for equities as an asset class than it is for corporate bonds. This is especially the case considering the record amount of cash sitting on corporate balance sheets because CEOs understand the economic risks much more than the economists, analysts, strategists and other talking heads you see on bubble-vision.

Moreover, I don’t believe in all the stories about China collapsing. In fact, if there is a bullish story to be told, it is that the secular growth paths in not only China, but India, Indonesia and Korea and that will continue to ensure that the resource sector remains a core holding, with oil and food retaining geopolitical significance and gold remaining a critical hedge against ongoing reflationary policies that weakens the U.S. dollar in coming months as a critical mid-term election approaches.

So, while I continue to advocate underweight positions in equities, a bar bell between basic materials and defensive dividend stocks is a prudent strategy, with the overall emphasis in the asset mix tilted towards bonds, especially the BB sliver or that part of the higher quality non-investment grade space that currently has the greatest unexploited potential for spread compression and capital gains.

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Mitchman's picture

With all due respect to you, Tyler, the best part of the letter is what he had to say about employment:

Instead of declaring an outright war on unemployment, we instead have a government bent on measures to boost spending on cars and homes that nobody really wants since, at the margin, all people want to do is boost their once-depleted savings rates and get out of debt; or at least a half dozen housing plans to help distressed mortgage borrowers. Or infrastructure spending that so far seems to have helped line the pockets of public sector union officials with no obvious payback in terms of job creation. At least FDR paid people to work, even if it meant skyscrapers, bridges, monuments and national parks. They didn’t get paid do sit idle for 99 weeks so they can then drop out of the labour force and into oblivion (almost 45% of the unemployed have been so for more than 26 weeks — in no other recession in the past six decades did this share ever cross above 26%).


redarrow's picture

It is a war that cannot be fought when you have 14% of GDP going towards interest payments on our debt and globalization. The problem FDR did not have is that at that time the rest of the worlds infrastructure was destroyed by internecine war while the USA remained largely intact. Now you have world class competition and your markets are global. What the hell are you going to do by employing people to build more bridges, roads and trains? What are they going to serve? It is obvious that production has been off shored (and it will remain there if you want to compete), all that remains is more debt for infrastructure that serves consumers who do not produce anything but can only emit fiat. 

I think even a jobs bill will not do much, its time to pack up or find big breakthroughs in alternative energy, modular and local energy technologies which take the production and consumption to the site of use in small, safe, renewable, low carbon footprint packages. Unless you can do that you can kiss recovery goodbye, we will have a lost decade like Japan.

A Man without Qualities's picture

A lost decade like Japan?  No, it would be much much worse than that....

Temporalist's picture

Japan has been in an economic funk for almost 2 decades now...  They are still seeing deflation. 

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Leo Kolivakis's picture

Vindicated? If you think actual selling is really going on today, you're crazy. This market is so manipulated, it's disgusting. The only thing I see happening today is the HFT is on overdrive so the big hedgies can scoop up more shares at these levels. I will repeat, keep buying these dips and stop fighting the Fed.

jkruffin's picture

Leo, no one wants to hear you come on here crying when your stawks crash.

Tyler Durden's picture

Great point. As pointed out repeatedly, there is no conerted selling as there are very few if any actual market participants left, and the whole concept of capital creation is meaningless (ergo corporate thrift). Flash crash type days are all algo driven. Also, anyone betting the Fed with its 2 trillion balance sheet and, as much as Bernanke would hate to admit it, limited dollar printing power (yes, there are other countries out there), can control the 40 trillion global equity and 80 trillion global bond market, and "speculating" accordingly, deserves the wipe out coming their way.

Leo Kolivakis's picture

That all depends where you are investing as there are excellent, profitable companies with solid revenue growth. To throw the baby out with the bathwater is foolish. And the Fed's balance sheet is expanding allowing banks' prop desks to reflate risk assets. Nothing has changed, the game plan remains the same, only thing is computers are driving volume.

Mitchman's picture

My response to that Leo is that in a market where fundamentals no longer mean anything and the creation of corpotrate capital for growth is no longer the purpose of the stock market, the risk/reward ratio of owning any those companies is way out of kilter to the downside risk. Further, once you get outside of the purview of the European companies and their relatively sound accounting system (ex the financials) I don't trust the numbers put out by any company on the other side of the International Date Line. 

LePetomane's picture

By hook or crook, the Fed is going reinflate assets.

There's no point fighting against Ben, as he buys ink by the barrel. 

I'm shifting gears and looking to buy assets that are insensitive to inflation. 

Oil stocks in particular.


johngaltfla's picture

Uh Leo, they did not expand the balance sheet; they simply maintained the status quo and changed the structure.

GoldmanSux's picture

Don't fight the fed was a dumb idea at S&P1,500 and it's a dumb idea now. Bonds have outperformed stock by 8% annually for 10 years. Until you ask the questions as to why this has happened can you come up with a roadmap of where to go. Your arguments are speculation, not investing.

Attitude_Check's picture

Do you REALLY want to buy a fraudulent, manipulated market.  Isn't that what the "smart investors" did with Bernie Madoff, they thought he was front-running?  Both were/are Ponzi's and both have/will collapse!

-1Delta's picture

Where is alchemist or whatever his title is? moneyflow means nothing right? LOL! I am up 296% for today alone BITCHES!!!!!!!

Zexe's picture

Well Rosenberg says people will start switching little by little from equities to bonds as the deflationary drive becomes more evident...So I think there are real sellers in this market - funds redemptions etc, otherwise how can one explain the ICI equity outflows?



traderjoe's picture

On the one hand, you seem to be legitimately bullish on the economy - though your GDP and NFP numbers missed very, very badly. And train car loadings y/oy aren't the end all be all (and auto sales are stalling). 

On the other hand, you want to ride the Fed pumping the stock market. 

Really thin reasons to buy stocks. Massive demographics waves against stocks (though your pension plans might be buyers). People sense the system is breaking down. BTW, LDK now lower off the AH pop. 

What happens if your PPT wants to dump stocks lower so the Republicans can win some seats? Are you going to see into the future and see where they want to take the market. 

I love to see reasoned arguments for and against stocks on this board. I just don't find the "stocks are manipulated higher - so buy" argument fulfilling at all. 

walküre's picture

Oh, I'm buying the dips alright.

I'm buying the dip when the P/E valuations make sense and I can get solid companies for 1/10 of the current share price in 2012.

Consider the other 9/10 in share prices as mark-up. Like that $30 i-pad made in China that's selling retail for $450 over here.

The bottom line is the Chinese price of labor and is about time our stock markets reflected that so people can really start to rebuild their wealth.

Enough with the excessive mark-ups.

mamba-mamba's picture

Apple pays more like 260 bucks for an ipad. At least according to issupli.


johngaltfla's picture

Sold to you.

Let us know how long it takes those knife wounds in your knees take to heal up. Catching them is something I wish not to participate in.

walküre's picture


The hedgies want to 'scoop up shares' .. hahaha. That's a good one!

Dude, the hedgies are sweating bullets right now because they've loaded up on shares and don't know how to sell them or to who. I get investment recos daily from companies looking for straight funding and offering 'preferred shares' at discount bargains just to get in.

Fact is that there's very little liquidity and access to funding because many investors, like myself have gone into cash, bonds or pure commodities.

Good luck trying to pump shares in this market!

Cognitive Dissonance's picture


I get your point BUT.

It's unfair and not true to think or imply that Rosenberg has (or had) advised his clients to remain out of the market during the 18 month run up. He has done nothing of the sort, nor did he say stocks peaked last year. What he has done is consistently advised caution while repeatedly pointing out that the emperor had no clothes.

And he has advised from a technical and fundamental view that stocks shouldn't run much further at various points along the run because of his analysis. But he's also repeatedly said that stocks were exhibiting irrational exuberance, which combined with artificial manipulation could very well go higher.

So many people today (not saying it's you) assume that if you are not star struck with stocks, you must be short or out of the market completely. This is a broad sweep of the brush and most often not true.

Mitchman's picture

As a daily reader of Rosenberg's letter, I can confirm that he has advocated two primary themes: a) this market is, at best, to be rented and not owned; and b) the focus should be on income and not on capital gains.  A full reading of today's letter further emphasizes the investment themes he has been advocating throughout.

Cognitive Dissonance's picture

And the market did peak that week. And then consolidated for 3 weeks before it got another kick in the butt and moved higher. May I suggest you read his articles on a daily basis. May I also suggest that you're judging Rosenberg based upon when Tyler highlighted his articles.

Three weeks later, Rosenberg said that it appeared stocks were off to the races again. I didn't see that article highlighted by Tyler. Maybe some of your argument lay with Tyler's selection of when to publish Rosenberg. There are weeks when Tyler doesn't publish Rosenberg so if you don't have a subscription, you don't know what Rosenberg is saying.

I agree that Rosenberg has been negative on stocks. But again, what his opinion is and what he's advising his clients to actually do with respect to his opinion are not the same thing. While he can be negative on stocks, he can and has said to his clients, use the market lifts to make money. Just don't believe the fairy tale being sold. This is what I tell my clients as well.

robert_paulson's picture


Rosenberg's recommendations have been four:

(1) Buy Treasuries (when he first started this, he was the ONLY one) (2) Be VERY wary of equities, the risk/reward is poor (3) Focus on income-producing equities (4) Buy gold (this came slightly later, I think when gold was around 1050)

Let's review how he did:

(1) Absolutely, 100% spot-on

(2) Too early to tell for sure but looking more likely by the day

(3) Has worked out on an absolute basis, and looking better relative to other equities

(4) Again, spot-on Now how many of those folks telling you to buy equities also told you to get out above 1150?  Rosenberg is great because he is willing to be wrong for a month, a quarter, or even a year, if it means he gets to be right in the end.
Cognitive Dissonance's picture

To be sure, we had a tremendous short-covering and a government induced equity market rally on our hands and it’s really nothing more than a commentary on human nature that so many people rely on what the stock market is doing at any moment in time to base their conclusions on what the economic landscape is going to look like.

Pretty much says it all right here. Manipulation by the desperate powers-that-be at the top combined with desperate hope and confirmation bias by everyone else. Now that reality has it's ugly puss pressed tightly to Alice's looking glass, time for a little shock and awe, coming to a market near you.

43 Steelie's picture

"Anyhow, dear grizzlies…….bet your worried about today’s rally?   See u later."

I will never get over that one. Makes me laugh every time. 



The Axe's picture

without any volume--Who can tell what the HELL is going on..right today--wrong on Thursday---who know?? You could drive the 30 year to 3.5% and no one will buy a home...crazy times..

firstdivision's picture

Take your short profits this week as the next week or two will be up-up-up.  Next month, IMO, will be a blood bath even with mid-terms coming up. 

mephisto's picture

Great advice. This isnt going to be a straight line

Dr. Copper's picture

If you think things are bad now, wait until your long-awaited dream of an equity market meltdown comes to fruition.  Let's see what great shape people are in then.  Why don't you come back from Switzerland or wherever the fuck you are and come up with some solutions rather than ripping everything in your passive-agressive fashion.

SteveNYC's picture

The inevitable can't be stopped, like it, hate it, be ambivalent toward it. It matters not.

All that matters are previous conditions and their current manifestations, current conditions and what they will manifest etc etc. The seeds have been planted, the outcome is already assured.

Think of this as a huge fuckin asteroid hurtling through space on a collission course with the earth. The outcome was assured a billion years ago when that fucker let rip from the Andromeda galaxy at a certain speed, a certain angle, certain direction, and so on. The outcome of it collapsing the earth was already assured.

Look deeper into what is happening. And relax, we can't control shit.

lieutenantjohnchard's picture

he did offer investing solutions. you just didn't like the ones offered. btw: i'm not using his solutions. i have a strategy of my own.

Dr. Copper's picture

I wasn't referring to Mr. Rosenberg

lieutenantjohnchard's picture

sorry if i misrepresented your take. in a vacuum it looked like you were taking a swipe at rosenberg's bear view. btw: it won't be my last mistake. being a bear i'm "always" wrong according to some even as i trade from the long side.

Hunch Trader's picture

"35% earnings growth in the coming year"


LOL...while the depression has been about private sector and private capital this far, it has only now spread to the municipal/federal sector. There's a whole new group of people only starting to come to terms what's going on in here. That earnings growth is going to be NEGATIVE 35%.

LoneStarHog's picture
Reminder: Today is the anniversary of the beginning of the Mayan Calendar ( August 11, 3114 BC (Gregorian). -- Party on, HFT computers!
CrashisOptimistic's picture


1) The market is down about 2% YTD.  That's all.  It's not freefall.

2) Oil's global production has not reached 2005's levels, despite higher price (to encourage production) every single year since then, and some of that period did not have depressed demand.

3) It doesn't matter who wins Congress.  The increased GOP seat total will preclude any action towards further stimulus unless there is a panic situation considerably beyond September/October/November 2008.

4) Earnings projections are presently absurd and presume GDP numbers far stronger than what can possibly occur without trillions of more stimulus, which simply cannot happen with the new congressional configuration.

5) When you owe 14-15 Trillion dollars, a single point of interest rate increase is 150 billion in new annual spending.  There is no way in hell this will take place, and I'll go so far as to say EVER -- because oil absence will begin to demolish civilization globally soon.


johngaltfla's picture

So which hedge fund just got a margin call gang? Care to speculate? Look at the candles on gold at 1100....

walküre's picture

Buy the rumor, sell the news.

QE is here, QE Lite or whatever.. and nobody is buying "it".

Instead the selloff begins on the news.

QE is not going to save the markets. What will commodities do? Depends on how many commodity producing countries follow the lead of Iran and refuse to deal in Euros and Dollars.

The Iranian intelligence agency is reading ZH and learning. Good for them.

101 years and counting's picture

Vindicated?  S&P falls 2% and everyone is doing party laps?

Thanks, but I'll save my party hat for S&P 800.

Then, Rosie will be vindicated.

william the bastard's picture

when the july lows fall you can go to the window and cash that 800 ticket.

firstdivision's picture

I am personally waiting for low 700's to mid 600's to go long again.  If anything the market is always good for is an overreaction.  2009 low was a bit of an overreaction, and the markets substanial melt up was also an overreaction. 

Dismal Scientist's picture

So, a big fail at resistance on the SPX and the SX5E finally. Back down towards the bottom of the 10% to 15% range we have been playing in since May. Sold my longs today, left the put protection there. Happy to buy stocks cheaper in a few weeks again. Meantime, lets see how many other IB's will follow BarCap's lead. Most of them should, since they ramped up employment last year. Time to let go all those people whose fixed component got boosted versus variable in the UK for tax avoidance reasons, I think...

Attitude_Check's picture

I will consider buying equities when the SPX hit's 500, and buy on the way down.  P/E's should bottom around 6, based on REPORTED EARNINGS not the manipulated operating earnings.  Oh, and once there is massive debt repudiation to reset debt levels to something sustainable.  Of course that would imply I won't be buying for a while......

Grand Supercycle's picture

DOW/SP500 daily charts are now bearish.

So the downtrend I first mentioned in early May this year, can now resume.