Rosenberg On The 8 Areas Of Behavioral Change In 2012

Tyler Durden's picture

It seems the market's psychology has shifted, in its wonderfully temperamental and instantaneous manner, once again as the last great hope of Thomas Lee and his cohorts is removed. What better time than for David Rosenberg, of Gluskin Sheff, in his inimitable way, to introduce his outlook for 2012 in the form of eight behavioral changes that he expects to overwhelm market psychology in the coming months. Political, financial, and economic transitions for the US, Europe, and China respectively will dominate the coming year and as Rosie points out, the ability to recognize change at the margin (such as basis traders in European sovereigns) is going to be critical in 2012. The shift from one of cyclical extrapolation to secular change is always a hard one to navigate and tactical asset allocation will become foremost in most people's minds over longer-term strategic considerations. The global economy will be forced to endure the mother of all deleveraging cycles as we move through 2012 and capital preservation and income must dominate investment strategy as Rosie's 8 themes play out.


The reality of this new paradigm of secular credit contraction may be coming into sharper focus by the general public than it is for the typical economist, strategist or market pundit. And as we have seen in the spreading sovereign debt and banking crisis in Europe, these challenges are global in nature. As such, one can reasonably expect to see standards of living in the developed world in particular pressured by daunting demographic trends and the growing realization that underfunded pension funds will have to be resolved somehow.

The American consumer and the government behaved irresponsibly during the credit bubble era of 2002-07, behavior that we are still paying the price for today. As we found out in 2011, the behavior among European banks, governments and households during the prior bubble era was equally galling, but their current problem of sovereign credit defaults and weak banking structures within a monetary union (that is actually a larger economic region than the United States) has taken the global debt crisis to a new and potentially more dangerous level than we experienced in the aftermath of the 2008 Lehman collapse.



As for governments, they hit the debt wall at various stages in the past year and the list of countries either being downgraded or shut out of global capital markets is growing by the week, if not the day. Suffice to say that the combined OECD government debt-to-GDP ratio, in a span covering just four short years, has soared an unprecedented 30 percentage points to stand in excess of 100% for the first time in the post-WWII era.


One thing seems reasonably certain: the global economy is going to endure a significant deleveraging cycle as we move through 2012 - one that will affect most if not all parts of the developed world. It will be accomplished by some combination of default and write-downs, debt repayment and rising savings rates. All this promises to be very deflationary and we will have to invest with that prospect in mind, and all the behavioral, political and social shifts that are bound to ensue.


1.    Frugality on the part of the global consumer (living within our means; retirement with dignity)

For those who were betting on elevated portfolio returns to deliver adequate retirement savings, time has run out. They will have to save the old fashioned way at some point.


Up until now, it has been difficult to demonstrate a clear, broad-based trend toward frugality on the part of consumers. To some degree the haves are offsetting the behavior of the have-nots, but now that the equity wealth effect is over, the upper-echelon spenders are headed for the down escalator. The most recent resurrection of consumer spending this fall after a first-half lull clearly appears to have borrowed from the future when seen in the light of negative changes in household income and the plunging personal savings rate.

2.    Austerity on the part of sovereigns (spending cuts/tax reform)

It is difficult to unequivocally assert that the fiscal challenges in Europe are any worse than those in the United States. But each country and region does have their own unique circumstances and challenges.


What seems to be common is a relatively high degree of chaos.

3.    Nationalism (an umbrella for protectionism and isolationism: mean reversion for globalization)

Isolationism falls under the umbrella of nationalism, and so does protectionism. An increase in nationalism will mean that we will need to be extremely thoughtful in our selection of dividend paying stocks.    Political movement along the ideological and fiscal spectrum (from gridlock to change)

Increased nationalism will impact trade, defense budgets, business costs, currencies, commodity prices and all the productivity factors that have made globalization such an economic positive, particularly in the post-Cold War era. 

4.    Political movement along the ideological and fiscal spectrum (from gridlock to change)

The outcome of the presidential race may well be the most consequential development of 2012, if not the most important election since Reagan defeated Carter in 1980.

But what we are most interested in determining is how rapidly politics, particularly in the developed world, can escape gridlock. Historically, secular economic peaks are accompanied by political extremes, and this time was no different. If politics can make its way from polarization toward the center, the outlook for economic stability improves dramatically, in almost every case.

The U.S., like much of the developed world, will be forced to find ever-creative ways to pay down accumulated debt. Inevitably "taxing the rich" and/or wealth confiscation cannot be ruled out, especially if social stability is threatened by lingering high rates of unemployment, particularly on the youth, adult males and the uneducated.

5.    Geopolitical change (wars, elections and regime changes)

Already in Europe, seven governments have been toppled by the debt crisis; Greece and Italy are now run by caretaker technocratic leaders and a political crisis is brewing in Belgium


We also have French presidential elections this spring and Germans head to the polls a year later. The Arab Spring has unleashed rounds of instability, as evidenced by recent events in Egypt, Turkey, which has drifted away from the West in several crucial respects in the past year. Vladimir Putin's renewed ascendancy in Russia can hardly be construed as a settling development. We will be looking for geopolitical improvement in 2012, even if that is not saying much.

6.    Changes in inflationary/deflationary expectations

If a recession is in store for 2012, then the bear market in equities, real estate and most cyclically sensitive parts of the investing landscape has certainly resumed.

The dilemma for policymakers this time around is that they are out of bazookas. Perhaps 2012 will be the year when investors stop fearing inflation and instead embrace the more obvious fundamental conditions that are leading to deflation: declining credit in the face of ongoing expansion in the supply of goods and services.

7.    Changes in growth expectations

Consensus estimates for GDP growth have been on a roller coaster for the last few years. The fear of a "double-dip" has alternated with the hope for "escape velocity" frequently since the recovery officially began in mid-2009.



We will be watching for evidence that consensus expectations gravitate toward acceptance that we are deeply entrenched in recession before we expect to see the next low in the equity markets and, conversely, the next (and possibly last) low watermark in bond yields. Because profit margins are either at cycle highs or all-time highs, even a mild economic contraction could end up exerting a powerful dampening impact on earnings growth.

8. Changes in asset allocation preference (fund-flows/de-risking)

Many investors increasingly want preservation of cash flow as well as preservation of capital. We concur and have consistently recommended a focus on S.I.R.P. — safety and income at a reasonable price, with a primary focus on stability and prudent risk-taking.


1.    Focus on safe yield: High-quality corporates (non- cyclical, high cash reserves, minimal refinancing needs). Corporate balance sheets are in very good shape.
2.    Equities: focus on reliable dividend growth/yield; preferred shares ("income" orientation).
3.    Whether it be credit or equities, focus on companies with low debt/equity ratios and high liquid asset ratios - balance sheet quality is even more important than usual. Avoid highly leveraged companies.
4.    Even hard assets that provide an income stream work well in a deflationary environment (ie, oil and gas royalties, REITs, etc...).
5.    Focus on sectors or companies with these micro characteristics: low fixed costs, high variable cost, high barriers to entry/some sort of oligopolistic features, a relatively high level of demand inelasticity (utilities, staples, health care — these sectors are also unloved and under owned by institutional portfolio managers).
6.    Alternative assets: allocate significant portion of asset mix to strategies that are not reliant on rising equity markets and where volatility can be used to advantage.
7.    Precious metals: A hedge against the reflationary policies aimed at defusing deflationary risks— money printing, rolling currency depreciations, heightened trade frictions, and government procurement policies.

For 2012, tactical strategies will also be crucial, at least as much as in the roller- coaster ride of 2011 (when strategists talked of 20% price appreciation in the classic third year of the presidential cycle).



Investors should be making a special effort to fight dogma and keep an open mind in the coming year — looking to take advantage of both long and short opportunities, focusing on dividend growth and yield in the equity market, and sticking to fixed-income — though we must be acutely aware of when this strategy becomes a "crowded trade" and a widespread consensus viewpoint.

Deflation has re-emerged as the dominant trend — not inflation —
as the deleveraging cycle that is ongoing in the United States has now
engulfed much of Europe


  Frugality has also reared its head again as it pertains to the broad retail sector, another deflationary force, at a time when the U.S. unemployment rate remains stubbornly stuck above 9%. As such, it is absolutely imperative to remain focused on high-quality investments with preservation of capital attributes, and to use the inherent market volatility that is part and parcel of every post-bubble deleveraging cycle to one's advantage by becoming ever more tactical and opportunistic in long-short "relative value" strategies.

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Coke and Hookers's picture

He forgot some:

- Debt slavery

- Oppression

- Tyranny

- Social breakdown

- Rampant crime

- Civil wars

johnu78's picture

Is this Rosenberg related to the Rosenbergs who stole the nuclear secrets in the 1950's?



Paladin en passant's picture

John, are you related to that "John" guy that tried to murder President Reagan to impress Jody Foster?

Robot Traders Mom's picture

Wittiest response I have ever seen on here. Hands down.

AldousHuxley's picture

What do you call your unmanned military aircraft in foreign airspace? WAR.


China is going to reverse engineer them and sell it back to Iran so that they can fly US drone copies in US!

Odd Ball's picture

What do you call your unmanned military aircraft in foreign airspace? WAR.

WAR?  War is so 20th century.  It's an overseas contingency operation.

LongBallsShortBrains's picture

"...War is so 20th century.  It's an overseas contingency operation."

It is an overseas peace seeking, freedom loving bullish for the world markets contingency operation.

Joseph Jones's picture

And remember the so-called "Mid East Peace Process"...hahahahahhahah

jeff montanye's picture

went the way of the sadat/begin, arafat/peres/rabin and obama nobel peace prizes.  

Caviar Emptor's picture

Ah yes, but what about the newly discovered planet Kepler-22b, with earth-like qualities? 

THere's a chance they could intervene. And Blackrock has an ETF for that

Snidley Whipsnae's picture

No doubt, Blackrock is too late. Kepler - 22B has probably been claimed as 'intellectual property' by the astronomers that found it... Regardless of habitation by 'intelligent life' or not.

After a lifetime of watching human actions and interactions, I have concluded that there is little sign of intelligent human life on earth, and that this orb is merely a stage on which various human actors display their egos and, more rarely, their altruism.

Watch closely enough and the same egoistic tendencies can be found among the various other life forms that inhabit this ball. Leading me to believe that if any 'intelligent life' exists on Kepler - 22B they are just as fucked up as we are here... A possible reason SETI has yet to intercept a single message from life elsewhere in the universe. Although, it would be interesting to know what stage of the economic cycle the (possible) residents of K - 22B are currently experiencing... and, how badly their citizens are being screwed by their banking cartel and government (s).

"And here we are, with one thumb up our ass, a bag full of holes, and a big grin on our faces to pass the time of day"... Edmund Obrien



CrazyCooter's picture

Am I the only one that noticed the charts are a bit biased "up and to the right"?

I thought Rosie was a deflationist!



Vengeance's picture

By far and away the best comment on the thread so far!

J 457's picture

And with QE, it suddenly becomes all bullish.  What a scam.  How big will this inflate before it pops....taking all pensions, 401k, and IRA's with it.

TheSilverJournal's picture

What Rosy fails to understand is that deleveraging can only take place up until when depositors are about to lose their money. At that point, printing must ensue, or the fiat ponzi collapses (see 2008).

player333's picture

Correct, the Fed will print it takes currency to kick the can and they will kick it and hope for a mircle as it rolls. Deflation will be smothered with fiat $.

Newsboy's picture

"Low overhead."

Got it!

rickson's picture

I just can't get onboard with the deflation outcome.

We have all these entitlements and wars raging on with an ever rising cost.  We can't pay for them as is the only way we'll be able to pay for them is to get some money from thin air.

I do see how the defaulting of debts that are leveraged and their corresponding derivatives imploding can be deflationary but it doesn't appear to be over-riding the growth in government spending.

Anyone care to convince me on what I'm missing?

ElvisDog's picture

Here's an example of why "printing" won't work. Government can't pay for food stamps out of tax revenues, so they print. The printing causes commodity inflation. Bread, which used to cost $3 a loaf, now costs $6 a loaf. The poor still can't buy bread, so they demand that the government increase food stamp aid. The more the government prints, the more bread goes up, the more the government has to print.

There is no free lunch or solution that comes from printing. Why is that concept so hard for people to understand?

dwdollar's picture

Many ag commodities are now flat to negative for the year. There is tremendous deflationary pressure right now. Where the fuck did all that money go that was printed? That is the question.

Caviar Emptor's picture

Where the fuck did all that money go that was printed? That is the question.

Don't ya know? Wall Street, banks and other FIREs were like parched deserts waiting for the QE rain. The money disappeared into the sand within a nanosecond, all to keep the moribund Ponzi alive. Well, we can feel happy that at least the banksters are booking into all the elite winter resorts this month

AldousHuxley's picture

banks are hoarding cash

corporations are hoarding cash


they know shit's now over yet.


war is coming.

Nate H's picture

there was about 200 billion that was actually printed (currency in circulation) in past 3 years. This is in relation to 60 trillion in 'what people think they own' (aggregate of financial claims in US). Sure you could make an argument that ALL 3 trillion on fed balance sheet was expansion of money supply (but it wasnt), but even that and we run into deflation relative to aggregate debt. the big debt deflation hasnt come yet - it will and soon - when policymakers realize they are hamstrung. Only after debts have devalued and been written off will govt truly print - and then we have hyperinflation - but big big deflation comes first. I could see gold at $1200 SP at 600 and oil at $40 within 12 months..then gold to $3000, sp to 1000 and oil to $100 (of course, thats if things stay linear)

fnord88's picture

Yeah i broadly tend to agree, the problem is whether any gold or silver will be available for purchase. Here in Australia, we produce a shit load of gold considering our population. Last year orders took about 4 or 5 working days to be filled. My last order arrived yesterday, I paid on the 14th November.

Where the fuck is all our gold going?

Saro's picture

My guess (and I'm just now coming up to speed on this whole mess, so take this with a grain of salt):

The inflation exists, but is currently dormant.  From the beginning, global economic problems have been characterized by mainstream economists (read: hacks) as a global liquidity crisis, and so they started "easing" (read: printing) to try and restart the flow.  But because the issue is not liquidity but solvency, most of this excess cash has not hit the streets and resulted in higher prices as would normally be expected.  Instead, this cash eventually ends up being hoarded by banks who are desparate to remain afloat.  This has lulled the people at the printing press into a false sense of security, as they are not immediately seeing the feared after-effects of their QE binge.  Ironically, to the extent the crisis gets better (fat chance, I know) and banks decide to go risk-on again and start lending to the populace rather than holing up their money with the fed, I would expect this money to come boiling out of the bank vaults in short order.  

So if we avoid complete collapse, it might be that any recovery brings with it slight case of hyperinflation.  Damned if you do . . .

CrazyCooter's picture

You are half right!

The way I see it is a super-massive tug of war. I mean, really epic forces. The consumer/economy rolled over (deflation) but the government is borrowing to replace the decline (inflation).

Something is going go give at some point, and its going to be crazy deflation time or crazy inflation time.

Consider what would happen if we got a RP presidency and the spending stopped. Inflation gets shut down and deflation wins. If the next president is sympathetic to spending, we get the inflation scenario. Maybe Benny hits the nuclear <CTL-P> button before then.

Who knows! No one! But we are going to find out really soon!



Caviar Emptor's picture

You are beginning to see Biflation, grasshopper

CrazyCooter's picture

If you mean right now, yes, however I fully expect one force to "win" at which point it will be all inflation or all deflation.



Caviar Emptor's picture

That would certainly simplify things. There's a playbook for either one of those. There's no playbook for biflation and unfortunately I think that's what we're going to get

CrazyCooter's picture

I see. I guess I see it in more binary terms. The forces in contradiction are so epic in magnitude, I discount harmony between them as an outcome.

We will find out soon either way!



Snidley Whipsnae's picture

Velocity of money is very low and velocity is as important as how much money is 'in circulation' ; ie, not being hoarded by banks and corporations on balance sheets. However, there is always some leakage from hoarders and this normally enters the Main St economy about 18 months after the printing episode is ended. So far, printing is continuing and interest rates remain near the zero bound... and the interest rates cannot be raised without destroying what is left of jobs and the economy... not to mention that every 1% rise in interest rates adds $140 Billion to yearly gov debt service costs.

What has been printed by central banks is a pittance compared to the amount of claims, in the form of derivative bets( ~ $700Trillion), that are hoovering above the real economy. In addition there is the entire shadow banking system to consider, unknowable trillions more of fiat equivalent.

If all of this paper experiences deflation we will see an event similar to a black hole sucking in all counter parties within gravitational reach. The counter party risks are off any chart one cares to draw and the amount of claims on real assets are equally enormous. The amount of 'printing' any government or central bank can undertake to off set such a deflation is miniscule, for faith in the paper would disappear long before enough new paper fiat/bonds are printed.

Rosanne Rosanna Danna: "What a mess"

DoChenRollingBearing's picture

Or both deflation and inflation (biflation/stagflation).  Or sequential.

LongBallsShortBrains's picture

All debts are dollars that must be repaid. Very few new loans means less currency. With fractional reserve banking, more loans must be made to keep the ball rolling. There is a huge shortage of dollars to repay the amount of debt, and very few new dollars to do so. Dollar short squeeze means all things priced in dollars must fall. It took a while to wrap my brain around this. Study fractional reserve banking. Watch this video, it describes the problem well.

The more they print, the more must be repaid ( with interest added) making an even greater shortage of dollars. Crazy.

Lucius Cornelius Sulla's picture

Deflation will win out because the Federal Government depends on low interest rates for its very survival.  If they print too much interest rates will rise.  Even a 1% move in short rates will wreak havoc on the budget.  A 2% move will put debt servicing at or above military expenditures.  In the short-term (maybe a few more years) the Federal Government will benefit from the "flight to safety" as the junk bond market implodes -- and it will.  ALL junk bonds will be worth NOTHING at the end of the next deflationary storm.  The collapse in debt through defaults will shrink the money supply which gives the government even more latitude for printing ... which they will.  But that is why I say it will be short lived.  Because once the junk debt is destroyed, higher quality will be threatened so risk premiums will rise, which will threaten the very survival of the government.  So they really don't have a choice.  Deflation will win because they have to walk a tight rope.

Piranhanoia's picture

I would like to take a poke at summing it up since the author left out the war with Eurasia and Eastasia.

"all bets are off"  

my puppy for prez's picture

September/October....count on it!

bank guy in Brussels's picture

A counterpoint to Rosie's deflation thesis:

« QE will move towards infinity in the entire Western World of finance. End of story! »

- Jim Sinclair, Mineset, 7 December 2011

Caviar Emptor's picture

Even Helicopter Ben balked at QE which everyone was expecting to be announced in August. 

QE, it turns out, was more problematic than expected. Not without consequences that detract from the goal. 


blu's picture

In a race to the bottom you need to arrive last.

Bennie is saving his next two QE bullets for sometime after the collapse of the EU. But he will use them oh yes. Timing is everything here, I'd put the next QE at Q2'12 and the last (absolutely the last forever and evar) at the very end of 2012. But it will be tiny in scope and intended only to enrich no more than 200 people in the entire world. This will be the nest-egg that relaunches global civilization sometime in the next century.

2013 will be Hell. Simply. Hell. Ben and the Inkjets will be utterly forgotten and we'll all be trying to remember what the discussion was about.

Then, three generations of fire.

Yeah I have an active imagination. You better hope.

Caviar Emptor's picture

There's a chance Ben will announce a Fed stimulus program: to rebuild the nation's fleet of helicopters. His shock n awe program's tagline would be "let's put a bird in every crib" 

Lucius Cornelius Sulla's picture

Even if there is a QE3 and it is as big as QE2 it will not be enough to keep up with the debt destruction from mass defaults.  Deflation will over-power them.

no life's picture

Too many assholes.

DutchR's picture

Are we there yet?


Yes we can.

But it looks like we won't, unless we have to.



Damn, this one's is gonna hurt.

Stax Edwards's picture

How the hell did they get a copy of my playbook?  Rosies on point tonight by dog!

WonderDawg's picture

You and I see this thing playing out the same way, Stax.

blu's picture

A lot of the inflation/deflation debate revolves around what happens within individual nations as they print their way to short-term survival.

However we are now locked in a GLOBAL economic environment, and the actions of individual nations are both less important, and hard to extract from global positions. Treaties, monetary unions, trade balances (or lack) and resource wars are really jacking things around. Vast sums of money are sloshing like bildge water from one side of the Atlantic to the other, probably twice a day. We see this manifest in seeming random herks and jerks in equities. Well it's not random to someone out there!

I wonder if some abstract eigenvector precessing slowly in phase space might suddenly resolve itself and immediately throw some nations into massive inflation, others into massive deflation, and all the world's wealth flowing quickly from unsustainable ponzi towers and into less energy-rich valleys of safer haven. Something like that would collapse like a quantum foam; you chance to look and -- poof -- it melts.

Yeah I know that probably doesn't make much sense. It helps if you can operate in 17-dimensional space, I guess.

WmMcK's picture

My eigenwerts never passed N=5.  That anyone can operate in even 10 dimensions is incredible to me.  Sometimes it seems 3 is too many -- Flatland, bitchez.