David Rosenberg Wonders If Fed "Will Remain A Serial Bubble Blower"

In his forecasts for 2018, David Rosenberg, chief economist and strategist at Gluskin Sheff warned his clients - and our readers - that they should “enjoy the next 12 months” because contemporary market conditions, characterized by investor complacency, volatility, high valuations and a tight labor market, are eerily similar to 1988, 1999 and 2006 - years that immediately preceded major market reversals.

Given these similarities, Rosenberg concluded that “we are 90% through the current cycle” and advised that clients should focus on counter-cyclical companies with strong balance sheets...or consider deploying their money outside the US.

However, in a note to clients published Thursday, Rosenberg added that the Jerome Powell Fed could make a policy error that inadvertently sets the market up for a painful drop.

In his note, Rosenberg wondered whether the Fed will "remain a serial bubble blower."

"The elephant in the living room remains the central banks," Rosenberg wrote. "The prevailing view is that balance sheet tapering will be mild and that Jerome Powell will prove to be a dove. This may well be the most important psychological driver for the market — that a new and inexperienced Fed will not take the punchbowl away in the coming year."

The Fed has been misguided, Rosenberg says, by its inflation target of 2% growth, which it has failed to reach despite a decade of historically accommodative policy. And investors have entered the year believing that the Fed will more or less stick to its projections (something that, in the past, it has proven unwilling to do).


David Rosenberg

But, as Bank of America highlighted earlier today, financial conditions are looser today than when the Fed starting reining in its post-crisis money printing program - despite the central bank hiking interest rates now fewer than six times.

With this in mind, Rosenberg worries that Powell could overreact and raise interest rates too quickly, causing the asset bubble in equities (and presumably bonds as well) to burst.

Earlier today, outgoing New York Fed Chairman William Dudley said something similar. The fact that monetary conditions have remained lax "suggests that the Federal Reserve may have to press harder on the brakes at some point over the next few years. If that happens, the risk of a hard landing will increase."

Rosenberg admitted that GMO’s Jeremy Grantham “might be onto something” with a theory that he published yesterday in a research note of his own.


In it, Grantham posits that a cautious Fed could set the market up for a “late bubble surge” causing equity price gains to accelerate and the market to climb another 60% before valuations come crashing back to earth.


Bes overbet Fri, 01/12/2018 - 16:57 Permalink


The incentive is to KEEP buying up real assets

like real estate, yachts, jets, wineries, golf courses, companies, countries, etc....

with fake monopoly, QE, ZIRP, fractional reserve, FIAT, paper money (shithole money)

for as long as they can before it all collapses.

But they will be fine because they will own everything after the fact.

That is more than enough incentive.

In reply to by overbet

overbet Bes Fri, 01/12/2018 - 15:52 Permalink

Trump correctly stated the market was in a bubble over a year ago, PRE tax cuts. When the landscape changes, POST tax cuts, one has the right to change their opinion. 

In reply to by Bes

undercover brother spastic_colon Fri, 01/12/2018 - 15:45 Permalink

Why is anyone wondering about this any more.  The Fed has been late on every economic cycle in the past 40 years and their catch up game has resulted in bubble after bubble, including this one.  At some point the people must wise up and determine whether the feds role should be modified and, whether or not the fed is even necessary.  Since the Fed's founding, boom-bust cycles which it was chartered to prevent, have not only continued unabated, but they're arguably orders of magnitude worse,  and the purchasing power of the dollar, which the fed was also chartered to preserve, is a fraction of what it was just 20 years ago.  

In reply to by spastic_colon

yogibear spastic_colon Fri, 01/12/2018 - 17:51 Permalink

And the answer is yes.

Fed is currently stepping in to keep the bond market stable.

Buying Treasuries, Munis, corporates and whatever else they deem necessary. 

 The Federal Reserve is no longer a responsible financial institution.

Just a  bunch of Phillip curve academics that are US government currency printing enablers

Zimbabwe economics American style.

In reply to by spastic_colon

Countrybunkererd SmittyinLA Fri, 01/12/2018 - 15:40 Permalink

I raise my index finger to my lips.  move it up and down and...


oh, and sh**hole and stuff.  We got to 200pts on the Dow... I now want 300 a day next week, 400 a day to the end of Jan. We can discuss 500 a day on 2/2/18.  I guess this negates my comment related to more critical thinking and discussions comments on ZH.

In reply to by SmittyinLA

wmbz Fri, 01/12/2018 - 15:49 Permalink

"new inexperienced fed"

~ I for one do not understand how much "experience" you need to run a money pump. All of the assholes in the past have not had a problem manning the pumps.

U4 eee aaa Fri, 01/12/2018 - 17:24 Permalink

There is no one left to buy the $1T in treasuries they have to sell this year. Either the Fed buys and shows themselves for the liars they are or they are sold into a vacuum. Maybe this is part of Trump's plan to show the Fed for what it is