David Rosenberg

Our discussions (here, here, and here) of the dispersion of deleveraging efforts across developed nations, from the McKinsey report last week, raised a number of questions on the timeliness of the deflationary deleveraging process. David Rosenberg, of Gluskin Sheff, notes that the multi-decade debt boom will take years to mean revert and agrees with our views that we are still in the early stages of the global deleveraging cycle. He adds that while many believe last year's extreme volatility was an aberration, he wonders if in fact the opposite is true and that what we saw in 2009-2010 - a double in the S&P 500 from the low to nearby high - was the aberration and market's demands for more and more QE/easing becomes the volatility-inducing swings of dysphoric reality mixed with euphoric money printing salvation. In his words, perhaps the entire three years of angst turned to euphoria turned to angst (and back to euphoria in the first three weeks of 2012?) is the new normal. After all we had angst from 1929 to 1932 then ebullience from 1933 to 1936 and then back to despair in 1937-1938. Without the central banks of the world constantly teasing markets with more and more liquidity, the new baseline normal is dramatically lower than many believe and as such the former's impacts will need to be greater and greater to maintain the mirage of the old normal.

As I was writing this past weekend's newsletter "A Technical Review Of The Markets" it really dawned on me just how complacent investors have become on the economy, the markets and risk in general.  The mainstream media, and most of analysts, are looking at recent improvements in the economic data as a sign that the economy has begun to make a turn for the better.   This view is further supported by the rise of the stock market. With a couple of breadcrumbs, a sprinkle of "hope" and a cup of optimism - analysts, economists and investors have whipped up the perfect concoction by extrapolating recent upticks into long term future advances.  However, this is a game that we have seen play out repeatedly before. 

The only thing that is as consistent as Marc Faber's message to get out of government bonds ahead of a bout of global hyperinflation which will arrive once the vicious cycle of printing to pay interest finally dawns (which in turn would happen once central planners lose control of an artificially created situation, which by definition, always eventually happens), is the passion with which he repeats it over... and over... and over, like a man possessed, if ultimately 100% correct. In an interview with Bloomberg's Sara Eisen and Erik Schatzker this morning, he does what he does best - cuts to the chase: "if you think it through and you are as bearish as I am, and you think the whole financial system will one day collapse, we don't know if in 3 years, or 5 years, or 10 years, but one day there will be a reset, and everything will be essentially started anew, then you are better off in equities than in government bonds, because a lot of government bonds will either default or they will have to print so much money that the purchasing power of money will depreciate very rapidly." When asked if he feels uncomfortable predicting a calamity in bonds again, as he did back 2009, Faber is laconically empathic: "it is true that last year the 30 year bond returned 30%, and i owe David Rosenberg a bottle of whiskey" but analogizes: "from August 1999 to March 2000, the Nasdaq doubled, but at no time in that timeframe was it a good buy. And after it people lost a lot of money. We have now a symptom of monetary inflation and this is record corporate profits, and the second symptoms is essentially a bubble in high quality bonds: people seem so insecure and so much worried, they would rather be in a US bond with no yield, than in bonds that may not repay me, or in equities that may drop 30%. But it does not make them a good buy longer term." Yep: only Faber can get away with calling the bond market the second coming of the Nasdaq bubble and look cool doing it.

With market dynamics continuing to be virtually identical to the start of last year, many struggle to find what incremental events at the margin may  determine what is not priced in by the market (because apparently everything else is). As we pointed out recently, one such potential factor is that short interest on the NYSE has plunged to practically multi-year lows. And yet the melt up has continued indicating the short covering has come and gone, and at this point it is incremental buying that is probably driving stocks. Yet even that may be ending: since we are looking at the margin, it makes sense to present David Rosenberg's observations on what it is that he is looking at the moment, which appropriately enough, is NYSE margin debt, whose 12 month trailing average has just turned negative: traditionally an important inflection point.

Mario Draghi once again mistakes a Solvency issue for one of Liquidity

JPM's head economist Michael Feroli just joined the bandwagon of other Wall Streeters in cutting Q4 GDP, trimming his prior forecast of 3.5% to 3.0%. However, as this is backward looking, it is largely irrelevant if confirming what we already knew: that the economy was certainly not growing as fast as the market implied it was (yes, the manipulated market is not the economy, no matter how much the Fed would like that to be the case). A bigger question is what should one expect from the future. Yes - an in vitro future, isolated from the daily rumor mill of what may or may not happen to the French rating tomorrow or the day after. It is here that there is nothing good to expect: 'we think growth will downshift from 3.0% in 4Q11 to 2.0% in 1Q12. Looking beyond the first quarter, we expect a growing private domestic sector will contend with a fading drag from the external sector and a persistent drag from the public sector." Yet where JPM falls short, is its optimistic view on the private sector. As David Rosenberg showed yesterday, the ratio of negative to positive preannouncements just hit a multi-year high, with the primary culprit being the strong dollar. Unfortunately for Feroli's bullish angle, the private sector will not do all that well at all if the EURUSD remains in the mid 1.20s or falls further. In fact, corporate earnings will likely be trounced, which in combination with everything else that JPM lists out, correctly, could make the second half of 2012 a perfect storm for economic growth, an event which Obama's pre-electoral planners are all too aware of. What is the only possible recourse? Why more QE of course. The only unknown is "when."

Yesterday, in a must read post, Gluskin Sheff's David Rosenberg played the devil's advocate and presented a much needed experiment in contrarianism, attempting to unravel what it is that bulls may be seeing in the economy and the market (an analysis which may have to be revised after today's pro forma 400K in initial claims and deplorable retail sales update). While we don't know if anyone was converted into the permabullish fold as a result, it certainly was useful to have a view of what "sliding down the wall of satisfaction" means currently . Today, Rosie is back to his traditional skeptical self with today's publication of the "Laments of a Bear", which is yet another must read inverse view of everything that yesterday was not. Our advise to readers: be aware of both sides of the argument and make up your own mind. Plus at the end of the day the only thing that really matters is what side of the bed Bernanke wakes up on...

While we have long asserted that any attempt to be bullish this market (and economy) by necessity should at least involve the thought experiment of eliminating such pro forma crutches as trillions in excess liquidity from the Fed, not to mention direct and indirect intervention by the central planners in virtually all asset classes, which in turn drives frequent periods of brief decoupling between various geographies and asset classes (which always converge) and thus economic performance (because as Bernanke will tell you gladly, the economy is the market), an exercise which would expose a hollow facade, a broken market and an economy in shambles, in never hurts to ask just what, if anything, do the bulls "see" and how do they spin a convincing case that attempts to sucker in others into the great ponzi either voluntarily, or like in China, at gun point. Alas, our imagination is lacking for an exercise such as this, but luckily David Rosenberg has dedicated his entire letter to clients from this morning precisely to answer this question. So for anyone who is wondering just what it is that those who have supposedly "climbed the wall of worry" see, here is your answer.

While the market continues to simply fret over when and where to start buying up risk in advance of inevitable printing by the US and European central banks, those of a slightly more contemplative constitution continue to wonder just what it is that has allowed the US to detach from the rest of the world for as long as it has - because decoupling, contrary to all hopes to the contrary, does not exist. And yet the lag has now endured for many more months than most thought possible. And making things even more complicated, the market which doesn't follow either the US nor European economy has decoupled from everything, breaking any traditional linkages when analyzing data, not to mention cause and effect. How does reconcile this ungodly mess? To help with the answer we turn to David Rosenberg who always seems to have the question on such topics. His answer - declining gas prices (kiss that goodbye with WTI at $103), and collapsing savings. What happens next: "in the absence of these dual effects — lower gas prices AND lower savings rates — we would have seen real PCE contract $125 billion or at a 3% annual rate since mid-2011 (looking at the monthly GDP estimates, there would have also been zero growth in the overall economy). Instead, real PCE managed to eke out a 2.7% annualized gain — but aided and abated by non-recurring items. Yes, employment growth has held up, but from an income standpoint, the advances in low paying retail and accommodation jobs have not compensated the losses in high paying financial sector and government employment." Indeed, one little noted tidbit in the monthly NFP data is that those who "find" jobs offset far better paying jobs in other sectors - as a simple example the carnage on Wall Street this year will be the worst since 2008. So quantity over quality, but when dealing with the government who cares. Finally, will the market continue to decouple from the HEADLINE driven economy, which in turn will decouple from everyone else? Not unless it can dodge many more bullets: "As was the case last year, the first quarter promises to be an interesting one from a macro standpoint. The U.S. economy has indeed been dodging bullets for a good year and a half now. It might not be October 26, 1881, but something tells me we have a gunfight at the O.K. Corral on our hands this quarter between Mr. Market and Mr. Data." Read on.

There has been a large debate as of late about the economy going into 2012.  Will it "muddle through" at a sub -2% rate, rebound sharply to more than 3% as currently estimated, or will we decline into a secondary recession?   Cases can clearly be made for all three scenarios and only time will tell who is correct.  However, this debate entirely misses the essence of what we are most concerned about - our investment portfolios and the risks to those investments from economic pressures. I have clearly made the case in past missives about the potential for a recession in 2012.   When real GDP has declined below 2% growth on a year over year basis the economy has normally been, or was about to be, in a recession.   With today's downward revision to Q3 GDP we have now had two consecutive quarters of sub-2% GDP growth.  There are only two instances in history (Q3-1956 and Q1-2007) where there were two consecutive quarters of sub-2% GDP annual growth and the economy wasn't already in a recession.  In 1956 the economy rebounded for one quarter to 2.93% annual growth in Q4, slipped to 1.88% in Q1 of 1957, rebounded once again to 2.99% growth in Q2 1957 as the recession officially started.   The other was in Q1 and Q2 of 2007 and we all know how that worked out in next couple of quarters.  These are the only instances where the economy "muddled"  along for a period of time before way to the recession.  The reality is that an economy cannot muddle along - it will either grow or contract.  "Muddling" isn't historically an option.

Even as it is ending, the fourth quarter of 2011 has been one of dramatic inversions and dislocations, the two main ones being the decoupling between corporate profits, which have for the first time in years started sagging, as ever more companies pre-announce misses or outright disappoint on the top and bottom line, while paradoxically Q4 GDP is expected to post its best quarter of the year, and print somewhere north of 3%. Which in turn has led to the other great inversion: contrary to 2010 when the US growth was lagging and investors (who still harbor the foolish atavism of believing the market reflects the economy) were told to ignore the US and focus on the rest of the world, now we are seeing the traditional reverse decoupling being blasted from every legacy media mouthpiece: namely that the US can withstand the economic crunch gripping Asia and Europe (incidentally, neither forward nor reverse decoupling has ever worked in the history of the globalized world but knock yourself out). How does one explain this paradox? Simple - as David Rosenberg shows, the payroll tax cut, with its gargantuan $10/week benefit is completely irrelevant. The far more important one is that the average price of gas has tumbled from $3.77 ten months ago to $3.29 currently: "That is practically equivalent to a $70 billion tax cut (at an annual rate) for the consumer sector, and happened right in time for the most important part of the year for retailers." The problem - the benefit is only felt while the price is declining; once it stabilized it has no incremental boost. So unless crude collapses (recall Saxo Bank's outrageous forecasts - it just might), there is no more exogenous boosting to economic growth. And if inversely gas starts rising again, then that $70 billion tax cut will become a tax hike. Long story short, the "US Economic Decoupling" is ending. Furthermore, even if tax manages to pass the payroll tax extension, it will at best not detract from growth. But it certainly will not add to it. Which is why the market which has so staunchly been ignoring what happens in Q1 2012, may want to reconsider. And with 9 days left in the year, it may want to do it soon... just in time for tax selling purposes.

While part of Merrill Lynch, David Rosenberg was always an outlier, in that he never sugarcoated reality, and could always be relied upon to expose the dirt in the macro and micro picture, no matter how granular or nuanced, and how much it conflicted with other propaganda research to come from the bailed out broker. Then three years ago he moved to Canadian investment firm Gluskin Sheff, transitioning from the sell side to the buy side, yet for all intents and purposes his daily letters, so very appreciated by many, never ceased, in essence making him a buysider with an asterisk - one who daily shares his latest vision with the broader public, in addition to his personal investment team. In one of his last letters of the year, Rosie presents a detailed breakdown of all the key differences between the sell and buyside, at least from his perspective, and also how, now that he manages other people's money, he is investing in the future. To wit: "In my former role as chief economist at Merrill Lynch, I flew all over the world and saw all the legendary portfolio managers from Paul Tudor Jones to Jeremy Grantham to John Paulson to Bill Gross — at least three or four times a year. Now the only PM's I speak to are our PM's. Not that they "have to" agree with all of my calls, but I am here as their economic concierge 24/7. The same holds true for our clients. In my previous life on the "sell side", it was very rare for me to sit down one-on-one with private clients. Today, that takes up a good part of my day — helping our client base make investment decisions that will build their wealth in a prudent manner over time." As for what he likes (and dislikes) we will leave it up to the reader to find out, but will note that Rosie appears to take issue with being labelled a permabear. And why not: he has been far more right than not since the December 2007 start of the Second Great Depression.

For the first time in while, Gluskin Sheff's David Rosenberg recounts his always informative chat session with Bob Farrell and shares Farrell's perspectives on the market ("his range on the S&P 500 is 1,350 to the high side and 1,000 to the low side. He was emphatic that there is more downside risk than upside potential from here. His big change of view is that we have entered a cyclical bear phase within this secular downtrend (he sees the P/E multiple trough at 8x). Rosie also looks at Europe and defines the term that we have been warning against since May of 2010: "implementation risk" namely the virtual impossibility of getting 17 Eurozone countries (and 27 broader European countries as the UK just demonstrated) on the same page when everyone has a different culture, language, history and religion... oh, and not to mention animosity to everyone else. So yes: Europe in its current format is finished, but what will it look like in its next reincarnation? And why does he think the European liquidity crisis will become a full blown solvency crisis in Q1 2012? Read on to find out.

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.

Last week, while the market was soaring as news of the upcoming Fed's FX swap lines was being leaked, the general media's narrative goalseeked to the stock spike was that it was a function of "record" Black Friday sales. Alas, as often the case, there is some unpleasant fine print to go alongside this seemingly bullish proclamation. David Rosenberg explains why the shopping bonanza hangover is coming, and why, just like in the cash for clunkers case, it means that a late November shopping record means an imminent plunge in retail traffic...as soon as the bills come in.