Strategic Investment Conference: Luminaries In Finance Presentation Series: Part 2 - David Rosenberg

Tyler Durden's picture

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


“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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mynhair's picture

Oh goody, PDF porn....

Is bankruptcy deflationary, more so than Rosie O'Donnell naked?

Atomizer's picture

Just another episode called "Dry Humping"

John Law Lives's picture

It is really basic:

1. Watch countries falter and get buried in debt


3. Wait for The Great Chairsatan of each Central Bank to print more money

4. Profit

100% Ponzi FUBAR BS...

Rainman's picture

Maybe Rosie has an historical chart on the ouput gap somewhere... it seems he is spot on about the overbuilt capacity in the US versus Europe....smells deflationary to me too.

mynhair's picture

We're only overbuilt cuz Chucky Schmucky, et all, taxed all demand to death.

rocker's picture

I have said it before many times.  It's worth repeating.

We Are Japan Now.  

euclidean's picture

Absofknlutely. The US bond market certainly is. Lifting int. rates back above even 1% is going to be impossibile. Greenspan is marvelling at his prodigal children and what they've accomplished in such a sort time. Transition almost complete.

lolmao500's picture

We shall have doom!

Germany blocks Greek bailout at eurozone crisis summit as debt-ridden country warns it faces ‘slow death’ without £45bn handout
steve from virginia's picture


Energy prices are driven by available credit -- in all markets -- and relationship between rate of increase of supply measured against the rate of increase of demand.

Credit availability determines the ability to bid for crude. It also enables successful auction for crude: only successful bidders can consume. Successful bids have no long-term relationship with ability of consumers to pay for high-priced fuel. This is determined by the productivity of the fuel's use.

Obviously, almost 99% of all fuel has been and is simply wasted for absolutely nothing. There is no return on its use, only a small metering fee payable to various well-positioned cartels who also meter credit (simply coincidence, of course ... right?)

Credit availability also determines short term ability to supply market however this is constrained by two factors: restrictions due to geology and Hotelling's Rule which discounts a resource made available against one that is held off the market.

The world is at the intersection of the counterproductive effects of increasing credit and geologic constraints.

The ripening of the 'credit effect' is to push the cost of energy beyond the point of any possible return on the use of the energy ... which is where the world is right now.

Rosenberg obviously has a nice car, maybe two of them but they are gone.

Crusher, anyone?

Nedly66's picture

53 MB... glad I don't have dial up anymore

mynhair's picture

Welfare is paying for high speed internet(s) too, now?

kito's picture

0 for 2 on any projections of an implosion. these guys are too bullish

centerline's picture

Bah... another nothing burger. At least for those of us who watch this drama unfold on a daily basis. Damn.

Here's my take from a chart/TA perspective... everything bad looks like they are working through nasty continuation pattern (flags, wedges, etc.) with really fugly end targets. There. Done.

mynhair's picture

Whoopie, everything looks bad.  Benske?  Need another $20 billion here, the TA is horrible.

MachoMan's picture

This is the second economist suggesting that consumers are deleveraging by "paying down debt."  I want to see some type of empirical evidence of this...  because everything that has been posted on ZH and that I have seen elsewhere simply indicates that the only material deleveraging to occur has been forced, not voluntary...  through bankruptcy or the like.

mynhair's picture

It's still deleverage; voluntary or forced.  Loans are paid off, or wiped out.

MachoMan's picture

I'm not disputing that, I'm disputing that anyone is actually paying off their debt in any material way (I am personally, but I don't believe I am representative of the whole)

The Real Fake Economy's picture

i agree macho man, i would love to see actual evidence people are paying down their debts.  personally speaking i have had zero credit card debt (no credit card use) for 3 years.  my wife who was a big swiper at anything and everything when we first met her has also been considerably paying down her credit card debt for the last year.  even that's too small of a sample group though.  i'd love to know and hear the average American behavior.  

mynhair's picture

Has the EUR topped?  1.445 seems to be it.

Going in anyway.  1.45 Citi call is BS.

EvlTheCat's picture

"Luminaries" or Illuminati?

Caviar Emptor's picture

Failing to see a bigger picture: when we say "The Economy" these days we are no longer referring to all Americans. There are now two distinct economies which we can over-simplify down to Main Street vs Wall Street, or what I prefer, the Real economy vs the Paper economy. 

Main Street is languishing badly. It's going to continue in a grinding downward slump I call The Downsizing of America. 

But in the parallel universe of the paper economy, things are rosy. 

Unfortunately we can't go back to the economy in the state it was before the crisis of 2008. The door has slammed shut. The middle class will be decimated over the next few years. 


gwar5's picture

Well yeah, deflation is the trend and that's why Ben already printed $2.5 trillion trying to overcome it. Lucky for us  it won't be hyperinflationary unless people find work and show up at the grocery store all at once. And Ben can stop them from eating in 15 mintues.

It was just a fluke in 2007 that Ben couldn't see the entire economic disaster coming and Greenspan had to come out of retirement to get him up to piggy-back speed. 

Eireann go Brach's picture

Who gives a shit! There is a new season of Dancing with the Stars and jersey Shore coming out says the US Public!

PulauHantu29's picture

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.

From what I see, no one wants the high costs of buying and maintaining a house. Add to that the average American moves every 3-5 years will these pople sell their houses? whom?

Add to that prices are still decreasing so why pay more now when you can pay a lot less later?

Renting is still incredibly cheap and hassle free.

GiantWang's picture

Somebody please, please, please explain the deflation thesis to me.  Everywhere I look, prices are increases--from the grocery store to the car dealership to the cost of rent in my apartment complex.  Prices do nothing but go up.  I guess that the overall real estate market has deflated, but it's not to the point of affordability, so I have to keep paying an escalating rent bill.

So again, if prices keep going up, what is the deflationary thesis?  I'm at a loss but trying to understand.

tom's picture

Currency is up around $80b over the past year, or about 9%. M1 growing faster, M2 slower due to ZIRP squashing demand for less liquid forms of money. That's enough to drive the current stagflation. Of course if all $600b of QE were literally printed, that would be a lot more inflationary. But it's not as if money supply is standing still.

alexwest's picture

far asshole Rosie is running out of excuses..

##Getting the long bond yield down to 2% would be very ##stimulative for the economy

sure.. and 1% rates will be even better.. just ASK THOSE LUCKY JAPANESE.. they have been run 1% policy rate what 15 years and counting ..

what an asshole.. stupid idiot can admit that in 5 years all bond oriented funds will bite the dust...

what an idiot would buy bond fund investing in 10yy yeilding 3 % ( minus fees) where in the real world real inflation is 10/15/20 % ?

buyers beware

Zero Govt's picture

One hugely deflationary force which Mr Rosenberg forgot/failed to mention is War and the wealth sapping area of the bloated US war machine. This is yet another economic zone where politicians and vested interests piss away huge amounts of an economies productive wealth (other peoples money) chasing ideological ends or playing power-games that all in the end prove miserable failures (politicians in a nutshell)

War is so expensive economically nearly all the first taxes (robbery) of society were introduced to fund delusional leaders whose ambitions were greater than their economic means to fund them. Indeed most Empires came to abrupt ends in bankruptcy as a result of excessive spending on War and foreign escapades

While most loony elites are content funding/fighting 1 war at a time our beyond delusional US State (and its lap-dog Britain) is waging 3 expensive, and let's be crystal clear illegal, foreign occupations around the globe. History teaches us 1 war is usually enough to bankrupt the country but it looks like our out-of-control thugs are wanting to make it 5

When the history books are written of our time these delusional wars will be sited as a big economic factor in our demise. So Mr Rosenberg would be wise to include this important matter in his subjects

War is 'uber-deflationary' as every penny spent is the destruction of productive wealth at home and the vandalism abroad. And the US Govt also pisses away yet more productive wealth on Homeland Security, funding foreign terrorism and civil wars, propping up crony puppet regimes and of course the 70 years of US State aid to the bankrupt thugs of the Israeli State. I'm sure Mr Rosenberg would agree pouring money into the nonsense of ideological black holes and playing geo-political power-games are both deflationary (and illusory ends given 70 years of complete failure by Isrealis State thugs)

Peace is productive, War is a waste (and deflationary)

Does Mr Rosenberg, one of the few deflationists/economists i agree with, not see war and political ideology as deflationary forces well worth a mention (rather than exclusion) in his economic round-ups?