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Rosenberg's View For 2010 "A Return Of Volatility"

Tyler Durden's picture


For those strapped for time, here is a comprehensive 4 minute Bloomberg TV interview with David Rosenberg which recaps some of the recent trends the Gluskin Sheff Strategist has been discussing, including the sovereign debt crisis, corporate earnings, and small business performance.


For those wishing to dig deeper into the observations, below is the key take home from today's Breakfast with Dave (full piece here).

In several of my recent musings, I put forward the idea that economic, political and market trends are likely to continue the pattern of alternating direction from one year to the next. In other words, what worked in 2010 is not likely going to work in 2009 any more than what worked in 2008 did not work in 2009; in a nutshell, we are still on this post-bubble roller-coaster ride. If you go back to the initial bounce off the depressed bottom in the early 1930s, what we had for a decade off the bungee-jump was intense volatility. The same holds true for Japan in the early 1990s, and ever since. Considering the volatile, alternating character of the financial markets over the last three years there should be no need to back away from an overall cautious investment strategy that involves capital preservation and income generation, notwithstanding the sharp but inevitably fleeting market rallies that are typical in a post-bubble credit collapse.

From my lens, it now looks like the global economy is going to weaken after a few quarters of bounce-back that was caused principally by massive government intervention and stimulus. For illustrative purposes, we ran some simulations and found that absent the massive amount of monetary, fiscal and bailout stimulus last year, real GDP in the U.S. would have likely contracted as much as 4% in 2009 instead of the posted 2.4% decline; the third quarter would have contracted 1% (not gained 2.2%) and Q4 would have been down 1.5% (not the ripping 5.7% jump that is destined to be revised in any event).

The stimulus we experienced in 2009 is unlikely to be repeated in 2010 for a number of practical and political reasons. Scott Brown’s recent victory in the U.S. Senate race was a message for the government to go easy on the public purse, among other things like socialized health care. In addition, economic growth will be increasingly burdened by all of the government debt that has been created to cushion the private sector collapse.

Moreover, all of a sudden the viability of the Euro is now being called into question because of the massive deficits and debts that have been accumulated by countries like Greece, Spain, Portugal, and even France and Italy, and while sovereign credit risks are not really a Canadian problem, when you are a small open economy in a highly integrated global capital market then it is hard not to get caught up in the crosscurrents as we saw during the Asian crisis just over a decade ago and the global financial meltdown this time last year.

Within the next three years, expect to see more than half the U.S. fiscal deficit to be accounted for by interest costs on the growing stock of government debt. This implies that the fiscal problem will become increasingly structural over time and the need to bring deficits and debts in the public sector into more manageable levels relative to GDP will entail significant cuts to program spending, higher taxation (or both), which in turn is going to have significant implications for U.S. domestic demand and the flip side of that, Canadian export growth. (This may be one reason why the Bank of Canada is willing to nurture a red-hot housing market as a partial antidote, especially as Finance Minister Flaherty begins to tighten up on CMHC guidelines).
It may be prudent to view the January selloff in risk assets in general and equities in particular as a microcosm of what to expect for the rest of the year. However, at the same time, I would contend that the most dangerous mistake anyone could make right now would be to extrapolate the bounce off last year’s market bottom into the future. Many of the tailwinds that powered the stock market to a 70% gain from the March low have morphed into headwinds that have already caused the bear market rally to stall.

When the economy and financial markets were in free fall, global central banks and governments took drastic steps to fix the problem, using record-low interest rates and trillions in stimulus money. The goal of stabilizing the financial situation worked wonders bringing markets back from the brink of collapse. But nearly 12 months after the March 2009 stock market bottom, those same remedies are in the early stages of being taken back. Credit-tightening moves are not just happening in China but in India as well. The Federal Reserve, which now holds about $1 trillion in residential mortgages on its balance sheet and has offered unbelievable support for the housing market, is embarking on an exit strategy; and there is a high expectation that the Canadian federal budget on March 4 is going to unwind some of the dramatic fiscal stimulus that Mr. Flaherty has unleashed over the past 18 months.

As a result, investors are growing more risk averse as they question the macroeconomic outlook as the government withdraws its support. Moreover, as last year’s sugar high continues to wear off, what we can expect to see is a return to what can only be described as heightened volatility in the markets, and the need to shift towards less cyclical and more defensive and income-oriented strategies that work well in a period of increased economic uncertainty.

After the reflexive rebound in global equity markets, and considering the lofty valuations in many risk assets, we need to be extremely thoughtful about our asset allocation decisions in the context of the likelihood that the primary trend is still one of deflation, both in consumer prices and asset values, especially in residential and commercial real estate. What is ongoing is the trend toward household balance sheet rebuilding and bad loan resolution, and now coupled with sovereign default risks, especially in Europe.

Overall, if the primary trend for the economy, credit and equity prices is down and 2009 was indeed a countertrend bounce, then the appropriate exercise is to consider ways to capitalize on the spectacular rally in risk assets off the lows last March and determine how we can all still make money in 2010 on a risk adjusted basis.


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Wed, 02/17/2010 - 14:15 | Link to Comment Crab Cake
Crab Cake's picture

"Moreover, all of a sudden the viability of the Euro is now being called into question because of the massive deficits and debts that have been accumulated by countries like Greece, Spain, Portugal, and even France and Italy,..."

All of a sudden? I guess you find state and muni insolvency surprising as well?  The CRE meltdown is/will be a total out of the blue shocker too?

Come on already.  The writing is on the wall, and not just in Europe.  The whole enchilada is insolvent.  We've been had.

Wed, 02/17/2010 - 15:06 | Link to Comment Postal
Postal's picture

*sings* "It's the end of the world as we know it!"

Wed, 02/17/2010 - 17:08 | Link to Comment baserunr
baserunr's picture

And the Banksters Refrain: "It's the end of the world as we know it ,and I feel fine".

The rest of us, not so much.

Wed, 02/17/2010 - 14:16 | Link to Comment BlackBeard
BlackBeard's picture

Didn't momma ever tell Rosie that he shouldn't slouch?  He's practically melting into that suit he's got on there..

mmm...yumyum Becky.  Look at those incisors!! I'd let her bite me anytime.

And who was the lucky fellah that got to put that "pearl necklance" on her?

Wed, 02/17/2010 - 14:35 | Link to Comment Hephasteus
Hephasteus's picture

He doesn't slouch when he analysis. That's all that counts.

Wed, 02/17/2010 - 14:44 | Link to Comment 4shzl
4shzl's picture

Professional talking-heads learn early to sit on their own coattails.  Otherwise they look like neckless wonders that have been beaten over the head -- as Rosie has by his top calls for the past six months.  Yes, he makes perfect sense -- but what has that got to do with the stock market?

Wed, 02/17/2010 - 14:28 | Link to Comment Anonymous
Wed, 02/17/2010 - 16:59 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

I don't think anyone here would dispute the possibility of a summer rally.  What you might hear is dispute concerning the drivers of such a rally, and a discomfort with trading on the basis of "feel good" propaganda and government printing presses running overtime.  If you want to trade on your feeling that everything will be just peachy, go ahead.  If you see reasons for a rally, please share them. But for many, the  current equity pricing seems irrational and unsustainable based on normal drivers. But we live in abnormal times- one only needs to look at the Fed's most recent balance sheet disclosures to see we are not in Kansas anymore, and that what we may have thought important fundamental concepts in investing are quite possibly irrelevant at this point in time.

Wed, 02/17/2010 - 17:29 | Link to Comment Anonymous
Thu, 02/18/2010 - 07:17 | Link to Comment Anonymous
Wed, 02/17/2010 - 17:24 | Link to Comment Anonymous
Wed, 02/17/2010 - 17:53 | Link to Comment Anonymous
Wed, 02/17/2010 - 14:42 | Link to Comment John McCloy
John McCloy's picture

So I guess Rosie did not get the message from President Obama today that " He saved the economy and a depression is off the table."

Gee thank O. Now lets all get back to buying LCD's, overpriced homes, SUVs and book those Sandals vacations..Anyone who actually believes that billions of rushed out dollars will not be wasted in an American economical structure where nobody has any sense of responsibility and has learned zero lessons from what occured in 2008 is overly optimistic at best. Now they are discussing extending unemployment benefits once again.All sorts of ideas like 1/2 pay extension. It is laughable that they honestly believe extending health care coverage, Food stamps coverage and benefits will do anything long term to stimulate the economy. All it is doing is the equivalent of a sedative for clueless Americans who they refuse to allow to accept reality.

Can you think of a bigger beauracratic money hole than health care? Sure you could with unions. I just do not understand the logic here and the most revolting aspect of this is he praise they throw around to each other. For God's sake Romer just said a few months ago that "The stimulus package had run it's course" but now the best is en route?

This will go down as the most mishandled propaganda intelligence operation in modern history. What if the market collapses and even more wealth is destoryed because they allowed those with anything left in 401ks to believe the worst was over?It is a dangerous game they are playing and for a government that has repeadelty gotten to many things wrong to have faith in them to pull off this miracle through lies and counterfeiting is laughable with these political headwinds.


Wed, 02/17/2010 - 14:50 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

Two realities, one official, the other lurking inside. 

Wed, 02/17/2010 - 15:04 | Link to Comment John McCloy
John McCloy's picture


And only 2% of the population at best are aware of the one lurking inside. The other 98% neither care, know or want to believe. Only when they are forced to awaken because of prolonged job loss and poverty will we see just how "Civilized" us Americans are. When the herd of the middle class get moving and ar emotivated by anger you better believe Wall Street and those responsible are going to be loading the Lear Jet with all their money and they will burn the house down before they go. I think most on Wall Street are just idling buy waiting for the populist anger to go parabolic. They are expecting it and waiting to see it before they exit stage left


Wed, 02/17/2010 - 17:01 | Link to Comment MarketTruth
MarketTruth's picture

Here is what at least 35% of Americans think:

Obama Is Going To Pay For My Gas And Mortgage!!!

So yes, they will be like deer caught in the headlights when the REALITY of actually needing to working for a living or going broke and starving as TSHTF. Sadly, these will be the same people that will make you glad you have 'invested' in brass and lead futures.

Wed, 02/17/2010 - 17:09 | Link to Comment Andrei Vyshinsky
Andrei Vyshinsky's picture

OK, we've heard Rosenberg on markets, here's Michael Hudson's latest commentary on the economy:

Wed, 02/17/2010 - 15:17 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

Clash of the Titans coming up at the Grant's Spring 2010 conference.

James Grant vs. David Rosenberg

Zip-a dee-doo-dah versus deflationary boo-yah!


Thu, 02/18/2010 - 07:18 | Link to Comment Anonymous
Wed, 02/17/2010 - 15:30 | Link to Comment Paul S.
Paul S.'s picture

"the need to bring deficits and debts in the public sector into more manageable levels relative to GDP will entail significant cuts to program spending, higher taxation (or both)"

Or covert debt monetization, which it seems to me will be the most likely scenario.


Wed, 02/17/2010 - 16:14 | Link to Comment hettygreen
hettygreen's picture

I agree with much of what Mr. Rosenberg has to say however, as a Canadian, I do not share his sanguine attitude on our dollar and commodities (although he has toned down his advocacy of the latter of late).

We have a housing bubble of historic proportions, record high household debt levels and disturbingly persistent under/unemployment. And yet our Finance Minister dreamily insists there is no bubble and that he will not permit the citizens of this fair land to make the same mistakes as the good folks south of the border. Earth to Finance Minister: Too late. They already have.

Once the Olympic boondoggle is over, the Chinese economy has been revealed as a sham, and our world class banks have to take back more than a few of the problematic mortgages they thought they had cleverly fobbed off on CMHC, look out below TSX, Loonie and Canadian real estate.


Wed, 02/17/2010 - 18:30 | Link to Comment BaseLine
BaseLine's picture

But, just like in Jan. when everybody was ready for the melt up we got hit 10%. that sucked. But the buy up was such crapola and we knew it because of the volume.

same story now methinks. I dont trust it farther than I can piss.

Good articles 4 slow news day:

Wed, 02/17/2010 - 23:41 | Link to Comment Grand Supercycle
Grand Supercycle's picture


The impending dollar rally that I warned about from mid 2009 onwards has only just started.

USD Index daily and weekly charts remain bullish.

Vice versa for the EURO and DOW/SP00.

Thu, 02/18/2010 - 01:22 | Link to Comment chindit13
chindit13's picture

It says a lot about where we are when a Rosie Post that would previously garner a million eyeballs and 200 comments now collects dust faster than a tray of James Blunt CD's (and the comments the article does get are full of Grand Supercycle and iamned sales pitches).  Maybe there is a contrary play developing when those most prone to Rosie's message (ZH'ers) give him a pass by.

Thu, 02/18/2010 - 07:03 | Link to Comment Fibozachi
Fibozachi's picture

silver still "the new gold" ?  chuckle, chuckle.

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