David Rosenberg - The Potemkin Rally

Tyler Durden's picture

Gluskin Sheff's David Rosenberg exclaims we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress). The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is. Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.” Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for. We are currently witnessing the slowest economic recovery of any post-WWII period. However, It is important to challenge your thought process. Read material that challenges your views. Here are David's rules...


Via Lance Roberts of Street Talk Live blog,

In Part V of the series of reports from the 10th annual Strategic Investment Conference, presented by Altegis Investments and John Mauldin, David Rosenberg presents a rather shocking shift from his primary thesis over the last 3 years.

You can read the previous presentations by clicking the links below.


Part I: Niall Ferguson – The Great Degeneration

Part II: Jeff Gundlach – Why Own Bonds At All

Part III: A. Gary Shilling – Six Realities In An Age Of Deleveraging

Part IV: Mohamed El-Erian – Putting It All Together

David Rosenberg is the Chief Economist and Strategist for Gluskin-Sheff. Here are his views:

“I have good news and bad news.


First the bad news.   I am getting divorced.


That’s right…my 25 year love affair with the bond market is over.


The good news is that Gary Shilling and Lacy Hunt have said they will stay friends with me.”

The Potemkin Rally

{StreettalkLive Note:  At the end of David's speech he stated that this is a "coffee table" presentation.  This view will likely take some time to develop and that from time to time we will need to reveiw it to see where we are.   This should not be taken as something that he expects to happen tomorrow.}

We currently are witnessing the Potemkin rally. For a quick background the phrase Potemkin villages was originally used to describe a fake village, built only to impress. According to the story, Russian minister Grigory Potemkin who led the Crimean military campaign erected fake settlements along the banks of the Dnieper River in order to fool Empress Catherine II during her visit to Crimea in 1787.

The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is.

Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.”

Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. The chart below shows that for every dollar increase in the Fed’s balance sheet it has translated into $1 of NYSE market capitalization to GDP.


There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for.

The Potemkin Economic Recovery

We are currently witnessing the slowest economic recovery of any post-WWII period.

However, It is important to challenge your thought process. Read material that challenges your views.   Here are my rules.


Bob Farrell once stated that

"...when all experts agree something else is bound to happen."

The reason my love affair has ended with bonds is that deflation has become the consensus view. Take a look at the following chart which shows that 80% of shortfall in growth is caused by slower potential.


There has been a secular decline in Potential GDP growth.

Here is a question for you. How does 1.8% GDP growth rate over the last year drop the unemployment rate by 60 basis points from 8.1 to 7.5%? That math simply doesn’t work.

The growth rate of GDP has fallen significantly and this should not be ignored.   Historically, the economy could grow at 4% without creating inflation. With the current makeup of the economy today that is no longer possible. This is why we are likely witnessing the early stages of the transition from deflation to inflation and the end of my “love affair” with bonds.

One of the factors that will be supportive of an economic push will be the end of the household deleveraging cycle. I think that the end of the deleveraging cycle is about 2 years away. As you can see in the next slide borrowing has started to rise once again and will be a tailwind for the economy. This has been the primary goal of the Fed’s QE programs - boost asset prices to stimulate consumer confidence and borrowing. There is a problem though.


We have the weakest growth in the private capital stock in 60 years.   Business spending as a share of GDP is at recession levels


While consumer confidence may improve as asset prices are inflated. It is not the same for CEO’s who are unlikely to make a commitment to the economy anytime soon.   The NFIB survey shows that government regulations are a top concern that is inhibiting investment.

With capital formation low, which drags on productivity, it keeps the labor market weak.  The labor market is plagued by a structural shift in its makeup and type of jobs available.

There are currently more than 90 million people outside the labor force and the available labor supply is shrinking.


Here is the reality. In the last four years we have created 3 million jobs while more 9 million people left the labor force.

The latest employment report showed a rise in employment and a fall in the employment rate. However, the household report showed a surge in the number of “self-employed” – these are individuals who are likely working out of their basement with no customers.

If you take a look at the JOLTS survey you will see that companies are looking for workers. Job openings have been on the rise. However, as we have seen in the recent NFIB surveys they cannot find the skilled workers to fill those jobs. This is why layoffs and discharges are at record lows.  


Streettalk Note: This is known as “’Labor Hoarding” which is also why we are seeing jobless claims fall without substantive increases in employment. Fewer layoffs leads to lower claims but full-time employment relative to the population remains close to 2009 lows.

Here is my contention. At 7.5 % unemployment we are likely much closer to full employment than the Fed believes. The number of firings is 10% lower now than it was when the unemployment rate was at 4.4%. Think about that.

This is why the workweek has begun to expand. Businesses are running at minimum levels of employment so they are working current employment longer. This is leading to rising wages which is one of the key components of inflation.


Productivity growth is heading lower because of lack of capital formation. However, unit labor costs are rising which, as I said, has a high correlation to inflation.  The bad news is that rising wage costs negatively impact profit margins.


The Fed funds rate has been pushed to zero. During that same period the Fed’s balance sheet has exploded. Just FYI – the fed’s balance sheet has jumped by 40% at an annual rate in the last 3 months which is why the market has hit new highs.   The bottom line is that the Fed’s balance sheet is replacing the fed funds rate.   Ben wants assets to go up to stimulate confidence.


However, the most compelling argument for stocks – yield spread.

But think about this - junk bonds are trading with a yield of 5% - really?  That’s where AAA treasuries were 5 years ago.  What is that telling you about investor risk taking?

Here is another question?  What correlates with bond yields the closest? You guessed it - Fed policy.  


The Fed has been talking about the Journey since 2009.   Now they are talking about the destination with specific targets on inflation and employment.   However, the problem for the Fed is that they may get more than they wish for.   When inflation begins to rise it is extremely hard to stop.

While I agree that the Fed should be stimulative…the extent of the stimulative action so far has been too radical. This will lead to inflation in the future.

Currently, the U.S. is sporting a near 6% output gap. The problem is that an output gap of nearly 6% doesn’t correspond with a 1.6% inflation rate.   At that level we should be seeing negative inflation rates. From my work I think that the output gap is more likely 2-3% which means that the Fed should be tapering off their actions now…rather than later.

Here is the problem currently. The real fed funds rate is very negative. The last time this occurred was when Author Burns was Fed chairman. The following two decades were not kind.


Furthermore, negative real rates in the past...


...have always led to asset bubbles.


The reason I am getting divorced from my love affair with bonds is that when inflation eventually rears its head - those individuals long high yield bonds, and unhedged, will lose.

My view since joining Gluskin-Sheff has been “Safety & Income At A Reasonable Price” which I am now shifting to “H.I.R.P - Hedged Inflation Risk Protection.” 

These are the areas that should perform the best should this longer term view of the world begin to develop.

  • Real Estate
  • TIPS
  • Art/Collectibles
  • Gold/Silver
  • Banks
  • Staples
  • Energy
  • Metals
  • Agriculture
  • Credit Arbitrage
  • Long-Short Strategies
  • Volatility
  • Lonnie/Aussie/Kiwi

Equity Sector Selection In A Cost-Push Stagflation Environment

  • Staples
  • Consumer Discretionary
  • Utilities
  • Telecom
  • Cable/Media
  • Oil & Gas
  • Industrial Conglomerates /Electrical Power
  • Road & Railroads
  • Machinery
  • Airlines
  • Basic Materials
  • Precious metals
  • Specialty chemicals
  • Paper packaging.


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SheepDog-One's picture

All markets green....they give a fuck not....like Simple Jack out frolicking in the corn fields smashin butterflies with a wooden mallet. 

Simple Jack (2009) Full Extended Trailer - Official/High Quality - YouTube

Anyway...yea we know it's fake we've been saying that month after month...the part I'm wondering about is how it all flies apart into a million pieces, arms legs and asses strewn everywhere, like some Rube Goldberg-ian contraption flying down the hiway at 200 mph when it hits a pothole? 

kaiserhoff's picture

I don't know how, SD.  There are a million possible triggers,

  but when... that's when we all least expect it.  Not a good time to be a politician.


fonzannoon's picture

you seem to be lumping politicians in with "we". big mistake. this may be the best time in history to be a politician.

kaiserhoff's picture

Not when the shit hits the fan.

Manthong's picture

A Maestro followed by a Hero…   we are so very, very fortunate.

I feel like breaking open some bubbly.

macholatte's picture


the part I'm wondering about is how it all flies apart into a million pieces


Maybe it's more like surgery. "THEY" professionally take the subject apart, piece by piece and feed on it for a while. But keeping some life in the carcass is what's important. Otherwise, they lose their food supply. So the technique is to not allow it to fly apart or get gangrene and die.  Slow motion train wreck is really what's happeneing.

IMHO we will look back on this day 5 years from now and little will have changed.  The poor will be poorer, the rich richer and the politicians will still be lying to save their own asses with central banks firmly in control.

Fish Gone Bad's picture

How it all falls apart is the fruit flies in a jar (with fruit) analogy.  Originally there were fruit flies flitting around, eating fruit (other countries buying our debt).  Then a lid is placed on the jar (countries stop buying our debt).  The fruit rots a bit more, fruit flies party til their pants come off.  More babies are born (prosperity) but the flies can not get out and there is limited oxygen and limited food (monetizing debt).  Eventually the usable oxygen is depleted, the food is no longer available or inedible, and the babies are either dead or perhaps eaten by the unforseen bacteria, yeast and mold.  Meanwhile, outside the jar, life goes on.

macholatte's picture

the fruit flies in a jar


OK..... the flies get technology and print fruit, recycle oxygen, invent birth control and war.

Life goes on inside the jar.




There is a theory which states that if ever anyone discovers exactly what the Universe is for and why it is here, it will instantly disappear and be replaced by something even more bizarre and inexplicable.There is another theory which states that this has already happened.

Douglas Adams

fonzannoon's picture

the shit has been hitting the fan for years. just not their fan.

Stoploss's picture

Dave, any idea how long the HIRP out breaks last??

McMolotov's picture

It's not just the market that's fake, it's the entire country.

People are buying iShit and taking out excessively long-term loans for their new Government Motors automobiles as a way to keep up appearances. Meanwhile, we're experiencing record numbers month after month for food stamp enrollment, and people are increasingly turning to disability claims as their unemployment runs out.

Fake, fake, fake. This imaginary debt-fueled prosperity will collide with reality at some point, and it will be epic.

Spastica Rex's picture

like when Omar Sharif finally catches up with Julie Christie?

prains's picture

and the only thing that won't be fake will be the TPTB front running the coming implosion

Fish Gone Bad's picture

Frontrunning will not be equal.  This is where the real money players shine.  Those informed on the inside will do fine.  The big entity that fails will be carved up and eaten by the likes of JPM. 

Hopeless for Change's picture

"Will you walk into my parlour?" said the Spider to the Fly...


$699 stock trading course for the low low price of 25 bucks cheap on Living Social.  Such a deal!!!!! 

kaiserhoff's picture

Real estate should perform well?

Not in Illinois, Florida, or Virginia, three states I know quite well.  Take a look at carrying costs, demographics, the insane premiums along the blue ridge, your new illegal neighbors in Fort Meyers or Orlando, and think again.

spastic_colon's picture

he must mean real estate in off balance sheet portfolios.....cuz most folks think in nominal terms, what does he think will happen to nominal real estate prices when rates rise?

Professorlocknload's picture

On RE, I beg to differ in Portland, Silicon Valley and San Diego.

Looking at Phoenix about now, as well, specifically Scottsdale. (Old demographics go for the arid Sun Belt)

It's Location, Location, Cap Rate.

kaiserhoff's picture

The West does seem to have some life to it, or maybe it's just the flippers.

Doesn't everything out there depend on California wheezing along as usual?

Yen Cross's picture

    You can tell what a ' utopian unicorn ranch' the markets have become, when you go over to RTRS or BBG and their message boards are full koolaid swilling retards discussing what color they paint their toenails in an article about Unemployment Benefits.

     What a buch of dumbshit,(first generation to walk upright) ignoramus idiots with the IQs of fruit bats...

DeadFred's picture

Don't be so rude to fruit bats

francis_sawyer's picture

Howz about 'Potemkin Village Idiots'...

dontgoforit's picture

I read this and somehow feel like I've been punched in the mouth.  Real estate?  Really?

Shizzmoney's picture


we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress)

It's like China, except with lube.

aminorex's picture

standard & potemkin 500

Zymurguy's picture

"We are currently witnessing the slowest economic recovery of any post-WWII period."


Flawed assumption... we are not in a recovery whatsoever.

fonzannoon's picture

yes rates are going to rise as bond traders decide that rather than banking those big checks the would rather blow their brains out and take the exonomy and monetary system down with them. 


NIRP Bitchez, now please sell your bonds to Rosie who knows it's coming.

DeadFred's picture

Grigory Potemkin tried to impress out the Empress with fake waterfronts and his name will be famous for centuries. In the year 2313 will people talk about the Bernank or will history follow the route of not saying the Devil's name out loud.

Groundhog Day's picture

The history books will never have a banker at fault.  They will read how , due to a terrorist organisation like Al Caida, the US had to spend trillions of dollars protecting the sheep (although I read i am 8x's more likely to killed by a cop then a terrorist) and the debt overload caused the system to implode. 

prains's picture

Bernank isn't building fake villages, he's burning the real ones to the ground everytime he pushes Ctrl-P

Law97's picture

Don't you mean Al CIAda?

saycheeeese's picture

asset price inflation is good for the central bankers, the bankers, the tax man and eventually the asset holders....      as long as consumption inflation is.. tame.  So the business model is to steal from the savers and disciplined people in favour of the bankster and the ones who could not afford to leverage but did.

making bubbles... is the way of life.. until when?

Tie-The-Tubes's picture

NY Fed even stated that excess liquidity is impeding on market efficiency; uh...no shit?!

Groundhog Day's picture

Could Rosie throwing in the towel on Bonds be the contrarian indicator for equities?

fonzannoon's picture

a guy smart enough to know interest rates can never rise betting on a rise in rates? I call BS.

gwar5's picture

Answer to your question from yesterday: Yes, you can take physical possession of PMs in a self directed IRA.

fonzannoon's picture

Hey thanks gwar...interesting I thought the had to be held at some registered custodian or something.

Professorlocknload's picture

I can't find much on holding physical in my possession in an IRA. Can you provide a link?

All I can find requires a Trustee hold them. Everything else states I can take possession after retirement age is reached, but is treated as a cash out (Or distribution)


Auntie Lo's picture

Other people know more than I do on this. When I looked into it, it seemed like you had to set up an LLC(?) for a self-directed IRA. Then as trustee, you decide what to invest in. Seems like it's more sophisticated than any one in my town can handle, no one i asked here knew how to do it!

I don't have a lot of assets and decided that I would just pull my funds and pay the taxes. I'm old enough that there is no longer a penalty in addition to taxes.

Professorlocknload's picture

Thanks for that, Lo. I think the LLC set up is also a way to hold RE in a self directed IRA.

I'll keep digging.

spine001's picture

I read long time ago that you can even have real state properties in your IRA. The key was to find a trustee that allowed it. It may be similar with Gold.

Professorlocknload's picture

Dunno, fonz. Hendry stated along the lines of 'Some $trillion sometime will do it.'

If the owner of the currency wants inflation, I wouldn't stand in front of that steam roller.

I'm going to have to lighten up the GNMA's a tad here. Been a good run. Why tempt fate?



fonzannoon's picture

If anyone anywhere wanted inflation they would break that 85 bil a month up and send each one of us a check.

Instead they will give that money to the banks and those banks will buy up everything in sight as each of us coughs it up to them as we deflate ourselves to the poorhouse. Then they massively revalue the currency overnight and that precious inflation they were trying so hard to get will hit US like nothing we have ever seen.

Professorlocknload's picture

fonz@ " they would break that 85 bil a month up and send each one of us a check."

I would expect just that at the end of this, and that being sooner rather than later. It will be indirect, through cash infusions into EBT or SS or Disability or FNMA or VA or all of the above?

But it will be here as soon as they get the psychology flipped to critical mass. Those around me are already purchasing new vehicles and looking at RE again.  

When the liars loans re-emerge, it will be on. Here's a puff piece now;


And judging our new Fannie Chief, I'd expect another paper storm soon.

Seems to me, for most intents and purposes, the Fed is now the Lender of Only Resort here. Sky's the limit?

1. Originate 'em.

2. Buy 'em back.

3. Burn 'em.

When it's all "In House" there are no rules, no?

ps. The several construction contractors I maintain contact with here in the west are all booked through summer. Humm?

I'll try and check back here later this evening for any appreciated comment.



fonzannoon's picture

Great comment. I wish I had one back for you. All I see is the big money grabbing everything in sight. The poor just checking out of society and half the middle class trying to speculate and ride the bubble and the other half clutching everything with dear life......and it just seems to go on with no end.

Professorlocknload's picture

For sure, it's uncharted rekoning here. These psycho's are capable of most anything.

I've been light risk for sometime now and don't plan on exposing a thin dime to this chaos.


Tsunami Wave's picture

Off Topic.. But The Economist has come out with a slanderous hit-piece on Nigel Farange and the UKIP's recent victories:

Title: Send in the Clowns!