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.
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.