David Rosenberg: "This Is The Pain Trade"

It was a breath of fresh air when last Friday, in the aftermath of the spectacular June jobs report, a "bearish" David Rosenberg reemerged and, turning a critical eye to the BLS data, asked clients of Gluskin Sheff "what if I told you that employment actually declined 119,000 in June and has been faltering now for three months in a row?  Yes, that is indeed the case." Judging by the market reaction, his analysis fell on deaf ears.

In any event, in a follow up analysis, this time looking at the disconnect between stocks and underlyhing fundamentals, David Rosenberg sat down with Chris Puplava of Financial Sense and said he is approaching the rally with a “high dose of skepticism" even while investors are hoping and praying for helicopter money to drop from the skies. The reason: the large disconnect between earnings and stocks at present which according to Rosenberg, “if you're buying this market right now you ipso facto have a view that earnings are going to rebound 25% from here in the next year.” Since the former Merrill strategist ascribes only a 10% chance of that happening, he is pessimistic.

Here is an abbreviated version of what else Rosenberg told Puplava.

Financial Sense: What are your thoughts on the US stock market given that we’ve now broken out to new all-time record highs?


David Rosenberg: Well, this is the pain trade. What's remarkable is that here we had the Brexit—this is really the first real big shock since we were worrying about Greece in the past couple of years—and the most you get out of it is a 5% correction over a 2-3 week timespan. When you think about it, the stock market is a bend-but-not-break animal and, yeah, the S&P has gone to a new high [but] I'm skeptical...


When I look at valuations and I see PE multiples north of 20…I'm not going to say that the markets are in bubble territory but it's just a little too expensive for me right now. When you really back it out, if you're buying this market at this point you ipso facto have a view that earnings are going to rebound 25% from here in the next year. Well, we've seen earnings go up 25% in a year one-tenth of the time historically so that to me is not really a fair bet so...I'm looking at this rally I would have to say with a high dose of skepticism.

Financial Sense: How much further do you think this economic expansion and current business cycle has to go?


David Rosenberg: I wouldn't be surprised if this cycle actually ends up rivaling one of the longest ones we've had in the past several hundred years. This cycle hasn't been renowned for its magnitudes but it's certainly been renowned for its duration. This is a seven-year-old cycle but it's the economic growth rates that have been so anemic and it's like that globally, which is why you're seeing these political strains emerge all over the place. A lot of this comes down to the fact, no matter where you look, even in China, which used to be the hotbed of growth for the previous fifteen years up until the past couple of years, the problem globally...is the fact that we are still burdened by a humongous level of debt at every level of society to the point where when you look globally at the total debt to GDP ratio at every level of society from corporates to households to governments, that ratio that got us into trouble in 2007 when it got to 220%, today that global debt to GDP ratio is 230%. So we've never resolved this debt albatross that remains really a tourniquet on global growth so this may continue to be because of all the policy stimulus and look now the hope is that Abe in Japan is going to be coming around with a huge round of fiscal stimulus after his electoral victory over the weekend but the reality is that what is constraining growth globally at every level of society and practically every country is that there's still too much debt sloshing around the world. So maybe this expansion continues for the next several years but until the debt situation is resolved, expect more of the same which is really stuck in the mud rates of economic growth.

His full interview can be seen here.