David Rosenberg

In the world of fiction, the most famous threshold may be that of 88 miles per hour. In the non-fictional world of economics and finance, however, an even more important threshold is that of 5% unemployment. At that moment everything changes. Wall Street's most prominent former converted permabull, Jim Paulsen, explains.

“To the intelligent man or woman, life appears infinitely mysterious, but the stupid have an answer for everything.” ~Edward Abbey

While it is hoped that the economy can continue to expand on the back of the "service" sector alone, history suggests that "manufacturing" continues to play a much more important dynamic that it is given credit for.

"The strong stock market rally during the last few days has pushed the S&P 500 near its highest closing level since the correction began in late August. This has boosted optimism that the recent selloff may be ending. While this could certainly prove to be the case, we remain less sanguine that the vulnerabilities, which initially produced this correction, have yet to be resolved. Ultimately, we expect a more fearful investment culture suggesting a final capitulation and more importantly, a lower stock market valuation level able to withstand a less hospitable recovery as the economy nears full employment."

The recent peak in profits, combined with substantially elevated P/E ratios, is likely suggesting that forward return expectations should be revised sharply lower.

With the Federal Reserve now indicating that they are "really serious" about raising interest rates, there have come numerous articles and analysis discussing the impact on asset prices. The general thesis, based on averages of historical tendencies, suggests there are still at least three years left to the current business cycle. However, at current levels, the window between a rate hike and recession has likely closed rather markedly.

The reality is, like dominoes, that once one of these issues becomes a problem, the rest become a problem as well. Central Banks have had the ability to deal with one-off events up to this point by directing monetary policy tools to bail out Greece, boost stock prices to boost confidence or suppress interest rates to support growth. However, it is the contagion of issues that renders such tools ineffective in staving off the tide of the next financial crisis. One thing is for sure, this time is "different than the last" in terms of the catalyst that sparks the next great mean reverting event, but the outcome will be the same as it always has been.

The economic data has continued to disappoint on virtually all fronts, earnings are weak and markets are grossly extended. Yet, investors are more bullish than ever...

No matter how bad the overall profitability picture got, S&P500 earnings per share (assisted almost exclusively by a record amount of stock buybacks in 2015 putting downward pressure on the PS in EPS) would grow by the tiniest of amounts, just so the profit recession stigma could be avoided in a world in which the stock market is the last remaining bastion of faith in central planning and confidence in the economy. No more. Overnight, Deutsche Bank finally did the unthinkable, and "broke the seal" of optimistic groupthink, when its strategist David Bianco became the first sell-sider to forecast that not only will 2015 EPS not grow (at 118 on a non-GAAP basis, this will be unchanged Y/Y), but "down a bit ex bank litigation costs."

Why Monetary Policy Is Failing

The "conundrum" between lower gasoline prices and retail sales is not really one at all. Furthermore, the real story behind the weakness in retail sales also suggest that something is "amiss" within the broader economic backdrop. When combined with the deterioration in earnings, the risk of a "gotcha" moment in the market has risen markedly.

"The median New York Stock Exchange (NYSE) stock is currently at a postwar record high P/E multiple, a record high relative to cash flow, and near a record high relative to book value!  As of June 2014, the median U.S. stock was priced at a post-war high at slightly more than 20 times earnings! Similarly, at about 15 times, the median stock is also currently priced at a record high relative to cash flow. Finally, the median price to book value ratio has only been higher than it is currently in two years since 1951 (in 1969 and in 1998 which were both followed by significant declines)!" - Jim Paulsen

It was less than a week ago when Zero Hedge broke the news that for CNBC, 2014 Was The Worst. Year. Ever. Much to the embarassment of CNBC, its staunch defender David Rosenberg, and not to mention its advertisers who realized they overspent substantially for the reach they were promised and received instead, the report promptly went viral. Five days after our Nielsen-sourced report before the Comcast-owned channel announced it would no longer be subject to the humiliation of Zero Hedge periodically revealing its crashing viewership and, as WSJ revealed today, "CNBC will no longer rely on TV ratings specialist Nielsen to measure its daytime audience, beginning later this year. Instead, it has retained marketing and research firm Cogent Reports for the task."

David Rosenberg, formerly of Merrill Lynch and currently of Gluskin Sheff, who famously flip-flopped from being a self-described permabear to uber-bull last summer for the one reason that has yet to manifest itself in any way, shape or form, namely declaring that wage inflation as imminent (it wasn't, but perhaps Mr. Rosenberg was merely forecasting the trajectory of his own wages) and generally an end to deflation, has a rhetorical question for his paying clients, as asked in his letter to investors from January 2. To wit: "THIS IS WHAT PASSES FOR ANALYSIS?" We too follow up with an identical question not only for Mr. Rosenberg's clients, but for our own readers.

Say what you want about the gold price languishing below $1200 (or not, as the case may be, after this week), and say what you want about the technical picture or the “6,000-year bubble,” as Citi’s Willem Buiter recently termed it; but know this: gold is an insurance policy — not a trading vehicle — and the time to assess gold is when people have a sudden need for insurance. When that day comes - and believe me, it’s coming - the price will be the very last thing that matters. It will be purely and simply a matter of securing possession - bubble or not - and at any price. That price will NOT be $1200. A “run” on the gold “bank”  would undoubtedly lead to one of those Warren Buffett moments when a bunch of people are left standing naked on the shore. It is also a phenomenon which will begin quietly before suddenly exploding into life. If you listen very carefully, you can hear something happening...