The Ten Things That Would Make David Rosenberg Bullish On America

David Rosenberg submits a list of the ten things that would make him bullish on the US economy. As precisely zero of these have a snowball's chance in hades of happening, we are not too concerned about Rosie leaving the "realist" fold any time soon.


  1. An energy policy that truly removes U.S. dependence on foreign oil (shale case, coal, nuclear).
  2. A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment. That is crucial. But it will take political courage (ask Brian Mulroney).
  3. A credible plan that reverses the runup in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any … they became wards of the government nearly three years ago and there is still no clarification on this file (slightly more important than these periodic consumer spending gimmicks that have surfaced over the past few years). We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable. Plus, people are not going to learn to live within their means if our politicians continue to set a bad example. The act of dipping into Social Security, incentivizing companies who are already cash-rich to spend more on new equipment and extending a Bush tax cut that always had a 10-year expiry date at the expense of the already severely strained public purse was political expediency at its worst.
  4. A massive mortgage write-down by the banks — a Jubilee of biblical proportions — that provide much-needed equity to upside-down homeowners.
  5. A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.
  6. Tort reform. The only way to rationally bring down health care costs to more manageable levels.
  7. And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.
  8. Financial sector regulatory reforms that actually have some teeth.
  9. Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!
  10. Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential. This is where Japan’s decade of lost growth became two decades but its decision to resist immigration rule changes is more cultural in nature. The U.S.A., like Canada, is already extremely diverse. But as economists, what goes into economic growth is both simple and complicated. The simple part is merely identifying the two ingredients: growth in the population (more specifically, the part of the population that is working) and productivity (what most of the other nine ideas listed above would attempt to generate). But the dependency ratio is working against the U.S.A. and a smart immigration policy would help at least stem the runup.

And his commentary:

I refuse to be labelled a perma-bear even if I have been bearish for a long time. Having been a bull in the 80s and 90s I do know what it feels like to wear rose-coloured glasses. But the reality is that U.S. policy has been adrift for over a decade and it looks like all we have are measures that merely kick the can down the proverbial road. So it looks like 2012 will be the critical inflection point if there is one, not unlike, hopefully, what 1980 ushered in which was a complete about-face from the ruinous policies dating back to the early 1970s. What we have on our hands right now is a recovery built of straw instead of bricks. An economic expansion and bull market built on rampant expansion of the Fed and Federal governments’ balance sheet is neither sustainable nor desirable. I am desperately looking for reasons to turn more optimistic, but to do so, some major policy shifts have to take place, like the ones above.

I am convinced that we will, before long, be replaying something along the lines of the reversal of the tech mania and the reversal of the housing mania, which were equally unsustainable. Those fully invested in the stock market today thinking they
have it all figured out are going to be faced with a deep quandary and are putting their clients at huge risk.

No doubt there are some opportunities and we have identified them and they include large-cap companies with impressive cash flow streams, trade inexpensively, have nice dividend payouts and are non-cyclical in nature. We also like basic materials for the longer term, and hedging out the inherent volatility via long-short strategies makes perfect sense. And since corporate balance sheets are still in reasonably good shape, it also is completely sensible to be deriving income gains from the credit universe.

But now is the time, with the S&P 500 doing in 22 months what it took 60 months in the last bear market rally to accomplish (which is to double from the recession lows), to start reassessing the beta and risk in the overall portfolio and what your tolerance level is at the highs. Remember, we have witnessed a bear market rally, not the onset of a full-fledged secular bull market where you can close your eyes and go to sleep for 16-18 years as opposed to nimble trading strategies to get you in and out. If and when we see the sort of policy shifts that deliver secular growth, as we did in the 1950s and the first half of the 1960s and again in the 1980s and 1990s, then it will be time to re-evaluate the landscape and, dare I say …. become secular bulls!

Rest assured nobody is looking forward to that day more than yours truly. Until then, the bond-bullion barbell and S.I.R.P. strategies (safety and income at a reasonable price) are perfectly acceptable investment themes, and can be captured across every asset class, even in equities!

Finally, it is worth stating that my concern over the sustainability of the current economic expansion is not without support from some fairly impressive individuals, even those that worked for President Obama. I strongly feel that Peter Orszag’s column today on page 9 of the FT is a must-must read (America Must Brace Itself For Turbulence).

His conclusion:

“The bottom line is that there may well be U.S. public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear. I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will. “


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