David Rosenberg: Debt Rollovers Could Trigger Economic Shock

David Rosenberg 0:00
Fall analysis. What does the stock market telling you? It comes back to your first question, it’s basically telling you, we have Goldilocks, and that and you see that everywhere, you know, do a word search or Goldilocks, it’s ubiquitous. But we should all just remember that Goldilocks was a fairy tale. And that we are not. This is not a perfect world by any stretch of the imagination, the fact that some more troubled world we’ve had in our hands for many, many decades.

Eric Chemi 0:33
Welcome to Wealthion. I’m Eric Chemi. Today we sit down with David Rosenberg of Rosenberg research, he goes into all the reasons why he doesn’t think buying right now, at the top of the market in the s&p 500 is the way to go. But he does give his investment picks across bonds, commodities, and some international equities as well, as well as some US sectors that he thinks are actually worth buying right now. So we’ll get into that conversation right now with David Rosenberg. David, thanks so much for joining me here on the podcast. You’re here we are at the beginning of the new year. And I am just really confused. We’re at all time highs in the equity markets. You know, Bitcoin is starting to see some new highs, multi year highs, but the economy doesn’t feel that strong to me. Am I Am I mistaken here like shouldn’t should s&p be at all time highs right now, given the the the unsteadiness that we’re seeing about whether there’s a landing or not the Fed is going to have to cut because they can’t, you know, crush growth rates that are so high right now, what’s what’s your take on on the starting level right here?

David Rosenberg 1:33
Well, look, the stock market has really done a round trip and is flat on a two year basis. So yeah, we came back a long way, especially in the final few months of 2023. But the bottom line is that, you know, the stock market has not really cheapened up that much on a price earnings basis. It’s basically, you know, around the 20 on a Ford multiple, you could argue that it was higher than that going into 2022. But this says, it is actually a very expensive market. It’s in the top 10% Most Expensive stock markets in history. And what do investors see? Well, I think that they could probably live with soft growth. I’m not so sure that the market could live with a recession. But everybody and their mother has thrown out the recession cold months ago. So I think what the stock market has on its mind is a perpetual soft landing, that the the growth could be meager but still positive. But we’re going to come out of this with lower inflation, and lower interest rates. And so the stock market spend most of the past few months especially since the Fed started pivoting in its language, you know, basically rejoicing over the prospect that interest rates are going to come down and perhaps forcefully in 2024. What the stock market hasn’t caught on yet is why it is that interest rates will be coming down. And that’s where we get into the big surprise for this year is going to be how earnings expectations come down. And how the economy very likely morphs into that recession. That miraculously didn’t happen last year.

Eric Chemi 3:26
You mentioned this top 10% In terms of the how expensive we are right top 10%. Do you have data that shows what happened after that point, right? Did we did we squeeze more gains at that point? Or did it always end in some kind of severe downturn,

David Rosenberg 3:42
It doesn’t always end in a severe downturn. I think that the multiple is always important, because when it’s low, it means that your expected returns should be robust. And when the multiples are very high, it means that your expected future returns are pretty small. So it doesn’t tell you what’s going to happen with the economy. It just tells you at the starting point, what your what you can expect from a future return perspective, when the multiple is a 20. Instead of say 16 or 17. It means that a lot of that future growth, in terms of profits have already been absorbed by the marketplace. It’s really not not much different than you know, when you look at Treasury yields. And, you know, when you have a 5% coupon, you have a lot of protection going forward. You know, as you found out when your sub 1% as we were in 2020 2021, you don’t have that source of support. And the multiple is very much the same. It tells you about you know what your upside, potential and downside risks are for the coming year from a strictly market perspective doesn’t tell you much about the economy. I guess you could just say that what the multiples are right now. You know where the technical picture is right now? Certainly where the sentiment is right now. It’s a It’s a pretty crowded trade towards the bulls and the bulls certainly have had the upper hand. But the worst thing anybody can do is extrapolate what happened in December into next year, any more than you would have wanted to extrapolate what happened in December of 2021, and 2022, which was a brutal year, or extrapolate, you know, December of, you know, of 2018, which was a horrible month and a 2019, which proved to be a very good year. So I’d say just, you know, understand that we have a market that looks fully invested right now and fully priced. And sentiment is really off the charts. So I think that either a pause or a pullback is going to be the order of the day, at least for the next several months.

Eric Chemi 5:48
When you say sentiment is off the chart, dig a little more deeply than which which sentiment indicator you’re looking at, you know, which chart is it off of

David Rosenberg 5:55
All of them, all of them, you look at the the AI the American Association of individual investors, you know, it’s showing that there’s twice as many bulls as there are bears, if you go to the, the, you know, the advisory newsletter, I survey investors intelligence, that might sound like an oxymoron. But that shows about three times as many bulls as there are bears in that survey, you go to the CNN fear greed index, and we are bordering right now on extreme greed. So no matter market vein, for example, is back to levels that we had in the past that actually did touch off an interim correction. So sometimes you just can’t follow the herd. There’s one thing about, you know, chasing momentum, which I think did work in the last few months of of last year. But you know, when you’re at a 20, multiple, which is a 5% earnings yield, when you can pick that up easily across any coupon across the corporate bond market, where you also end up in a superior part of the capital structure. The equity market doesn’t look too compelling. Right now, I didn’t think it was all together that compelling before the big rally late last year. But you know, that’s what animal spirits can do. And that’s what price momentum markets can do. And of course, we have a lot of short covering in some of the lousiest performing stocks in 2023. And that was why the market broadened out. But to be chasing it now at these multiples. I mean, I continue to say that in equity investors, you want to get paid to take on the risk. And right now with these multiple levels, you’re paying to take on the risk. So I would be keeping the powder dry, I wouldn’t be liquid have cash on hand, because I do sense that the danger right now was not that we continue to have a blow off to every new highs in the market, but quite the opposite, that this could unravel. And I’ll tell you why. I mean, when you’re taking a look at the earnings, that if you had to normalize the multiple, which I said is pressing against 20, which is super elevated. The long run mean is closer to 16 or 17. So if you normalize the multiple, it’s telling you that there was 35% earnings growth embedded in equity valuations, does anybody really think we’re gonna have 35% earnings growth next year? I highly doubt it. And the consensus is for earnings growth to be up more than 10%. Next year, at a time when the Feds dotplot forecast for nominal GDP growth is less than 4%. You’re not gonna grow earning six percentage points this year above were nominal GDP growth is. So I think that that’s really going to be the two major things here will be earnings estimates will be coming down. And at the same time I think the markets will be grappling with, and now that they priced in the lower rates, they’ll be pricing in why are these rates coming down. And it’s very clear to me that the Fed is seeing something in the economy that isn’t readily apparent in the government economic data releases that have been coming out. And if you go to the Feds Beige Book, which is the most comprehensive set of economic information that comes out every six weeks in the US economy, you’re gonna see that by late November, in the last Beige Book, two thirds of the economy, were already either in stagnation mode or contracting outright. It was actually the weakest Beige Book that we’ve had that I can remember, since the dark days in the winter and spring of 2020. The tone of the Beige Book was weaker than it was heading into the 1990 recession. The 2001 recession, the 2008 recession, and the Fed is already Hold us that they’re paying more attention to business contacts than they are to the government data, which is getting revised consistently to the downside over the past few months. So that I think is going to be one of the stories that we’ll be talking about. We spent the last few months talking about interest rates coming down. People will say, Well, that’s a justified the multiple where it is. And I would say, Well, the next phase of the story, the next chapter will be Why are rates going to be coming down and 2024? And it’s because the recession that everybody missed last year, much like everybody missed the 2007 recession. Remember what happened in 2008? Everybody missed the recession of 2000. That came in 2001. These are just lags. So I think my biggest concern is this, this sense of complacency in the marketplace. Right now, that has been very unnerved.

Eric Chemi 10:55
There’s a lot to unpack there. So let’s let’s let’s go through one by one, you mentioned corporate bonds has been more appealing than, than the equity market. Right? So like talking about the numbers you’re seeing there sort of yield differences and where your what levels between bonds and equities would change your mind? Like, how far is the gap that keeps compelling for you?

David Rosenberg 11:16
Well, I think that you can pick up, you know, yields of least 5% throughout the spectrum. And it looks to me as though I would say the double B triple B space looks very good. I think that I think bond yields generally speaking would have to come down to at least 200 basis points, to put them on a I’d say equivalent footing to the yield you get in the stock market. And either that, or we have to have just one heck of a earnings boom. To get those valuations on a more attractive basis. The bottom line here, and let’s just look at the Treasury market and look at the historical equity risk premium. The equity risk premium traditionally, is about 300 basis points, three to 400 basis points, it’s now call it roughly 100 basis points. And if you think that the stock market right now is at fair value, if you put it on a comparable footings to say treasuries, the 10 year don’t yield would have to get down to one and a half percent that equilibrate the two asset classes. So either equity markets have to correct down or we have to have one heck of a profits boom. Or bond yields have to come down rather dramatically. But you’re gonna ask me at what point will we reach some sort of equilibrium or mean reversion between, say, yields in the corporate market or treasuries, visa vie the equity market, we’d have to have interest rates come down across the curve at least 200 basis points, if not more?

Eric Chemi 12:48
What about 200 basis points there? What are people thinking that right? Because I think the more in your boat that? How can we be at these levels, what you’re expecting in terms of the equity side, and you’re saying, Hey, it’s 35% earnings growth, or at least you know, 20, multiple, it should be typically like 16, or 17. So it feels about it’s, let’s say 60, instead of 20, where 20% downturn, we’re looking for REITs instead of at 4800. Maybe we’re at 4000, on the s&p, what is in the mindset of that buyer who’s like, hey, it’s at 4800, I want to keep buying more of this, you talk to guys like this, what are they saying that that they want to still be buying at these levels?

David Rosenberg 13:27
I think that what they’re saying is that we’re not going to have a recession, growth is not going to speed up, but it’s going to remain positive. And that inflation and interest rates are going to come down. So I mean, that’s your your bullish case for equities, a use case for equities is really that the Fed will be cutting interest rates and bond yields will be coming down just because of lower inflation. So that’s what the bulls are looking at.

Eric Chemi 14:01
Like, it’s like you’re seeing the Beige Book stuff right there. The feds going to cut rates because it’s not the stuff that good out there. And and the equity guy is saying, well, it’s gonna be good because they’re cutting rates, right. But there’s a reason why they’re cutting rates. And it feels like real chicken in that.

David Rosenberg 14:13
Well, I Well see, the bulls will say, well, they’re cutting rates because inflation is coming down. So you get that combination of rates coming down inflation coming down. And they would argue, well, that justifies the multiple, maybe they would argue that the multiple could even expand. You know, I mean, I’m not in their camp, but I spend most of my day trying to understand what the other side of the trade is. And that’s what they would be saying. My point is that it comes down to what you said, you didn’t really have it both ways, because inflation is coming down. Inflation represents pricing power. And so inflation is coming down. We’ve come down a long way from 9% down to three. I think we’ll be down close to zero 1% By the end of this year. That doesn’t I’m really speak to how we’re gonna get double digit earnings growth. Unless there’s going to be massive cost cutting, how are you going to get in declining inflationary environment? We’re already down to three. How are you gonna get 10% growth? That’s basically the analysts projections, or the 30% plus that’s embedded in equity valuations, how are you going to get there in the declining inflationary environment unless you cut costs dramatically. And if you cut costs dramatically, cost cutting is actually what ends up tipping the economy into recession. So I think you’re quite right. The logic is very circular. But since when did the stock market really ever have to have a lot of logic attached to it? A lot of this is just animal spirits. Pete, you know, you go on CNBC, or you look at Fox Business, or you go to Bloomberg TV 95% of the time, it’s just the equity market that’s up on the screen. You rarely see anything on corporates, you don’t you were, you know, treasury yields will pop in. It’s all about the stock market. But I mean, what do you what are you going to do I have clients and non clients for the past couple of years, well, not so much in 2022. So that didn’t work, you know, for nine months of the year, but FOMO FOMO is FOMO like to the Teach FOMO when you do your CFA classes, is, you know, in the you know, Graham and dog book on value investing does FOMO show up FOMO or Tina, or dry powder made FOMO fear of missing out. Tina, there is an alternative This is This is today’s investor, right? It’s become tell you the truth has become a bit of a game and a bit of a casino. You know, when I started in the business in the early to mid 80s. I mean equities. Nobody was too fussed about being a month behind your bogeys recorder, people had a long term view, today long term view on equity investing as lunch tomorrow, it’s become more of a trading vehicle, or, as you saw with the meme stocks and get rich quick scheme. Historically, the stock market was a means for companies to issue equity to finance capital investment who does that anymore. The companies are buying back their stock theatre actually stopped for capital investment. And then on the investor side, it’s become almost like a get rich quick scheme, as opposed to building wealth over time. So I’d say yeah, so you know, the the market, quite a hitting in the final few months of last year caught on to this fed verbal pivot. And if it was a case where they were thinking, I’m talking about the equity market crowd that, well, this is a Fed easing cycle that is going to involve recession, it would mean, you know, get out of dodge quickly, because in recessions, the stock market goes down between 20 and 30%. And you can argue the recession hasn’t started yet. You know, there’s some measures that suggest that it may have there’s most have suggests that it hasn’t. But the reality is that if we get a recession, and I don’t believe the business cycle has been repealed, and I don’t believe in new areas, we get the recession. And that’s my still my base case. I know I was talking about it last year, but last year, there were some special factors at play that mitigated the lag from what the Fed has already done, those legs still are going to be confronting us and there’s going to be a mountain of rollovers and commercial real estate and corporate debt. That’s going to impair the economy in the coming year debt servicing costs, no matter what happens with interest rates are going to be siphoning off money in the private sector that would otherwise go into spending which is part of GDP and into servicing the debt that will be a big story for the for the coming 12 months. But the stock market sees continued economic growth and interest rates and inflation going down you know, which is why it’s called Goldilocks again, another term you never heard here these in the bond market if you ever heard of a bond market person talk about FOMO fear of missing out on the bond rally Have you ever heard of that or there’s no one’s ever heard anybody say you know, Tina, when it comes to the bond market, and when it comes to the bond market, nobody talks about Goldilocks these are all terms saved for the equity market because it just captures our imagination. And they’re very sexy. In bitcoin is also very sexy anything with a speculative feel to it. Is as a lot of sex appeal. I And the final analysis and final analysis, what is the stock market telling you it comes back to your first question, it’s basically telling you, we have Goldilocks, and that, and you see that everywhere. You don’t do a word search, or Goldilocks, it’s ubiquitous. But we should all just remember that Goldilocks was a fairy tale. And that we are not, this is not a perfect world by any stretch of the imagination, the fact that some more troubled world we’ve had in our hands for many, many decades, and the stock market is priced for perfection. So look, there are some times where you got to sit back and let the you know, let the momentum take its course momentum will only take you so far, performance chasing will only take you so far, even liquidity will only take you so far. When push comes to shove, the fundamentals are going to win out and when talking about the fundamentals and talking about earnings growth and earnings expectations. And I think that they are ripe right now, for downside surprise for 2024. That’s the challenge for the stock market from here.

Eric Chemi 21:06
The I like what you said earlier about inflation is pricing power, I feel like people don’t, don’t talk about it in that way. The idea thing about like a like a raise, right? If you can get a 10% Raise, that means you the worker has pricing power over the company, right. And if you can only get a 2% Raise, it means you don’t. And I think when you make that point on the broader macro scale, inflation means there’s pricing power of the people who set those prices right. And when it’s lower means they don’t have it. So I think that’s a good point to, for people to remember to think about the the idea that you said, you don’t believe in new areas, right. And I’ve heard arguments recently on hey, you know, ever since oh eight, the Fed changed the game, you know, things that we used to look at like a twos 10s curve. And what that means doesn’t matter anymore, you know, the way that the debt is the way that they are stepping in, they’re part of the government now, this is a new era. So I’ve heard that I’ve heard AI makes this a new era. I’ve heard well, you know, we have 401 K’s now we have IRAs, we’ve got different kinds of spending patterns and rules that didn’t exist 50 years ago, that makes it Where are you saying that none of those things fundamentally matter or change, change your way of thinking about things?

David Rosenberg 22:19
Oh, well, they they, they don’t actually change my mind about anything. I mean, general AI is going to be very significant on a long term basis, in terms of what it can mean for productivity and the corporate cost curve. And it could be a game changer. But with all deference, we’ve had technological technological change, you know, for centuries, if not decades. I mean, Microsoft going public in 1986. That was a bit of a game changer, right? Apple computers, game changer. You know, the Netscape going public in the mid 90s and unleashing the internet? Did the internet alter the business cycle? No, we had a recession in 2001. And it took two years to get a recovery going that was with the Internet. And then we had another recession in 2007 2008 and 2009. That was with the Internet. So if the internet couldn’t prevent two recessions that were you know, separated six or seven years apart, what will how does Gen vi influence the business cycle? And the answer is that it doesn’t it will have long term supply side productivity effects. It’s not even as big as the internet. Did the internet change the business cycle? answer is no. I’ve heard all sorts of new eras. So yeah, you’re brought up okay, the Fed’s balance sheet. It’s it’s every central bank’s balance sheet. That much is true. But how much? How much did that? How much did that change things in terms of Japan’s growth, the fact that Japan’s balance sheet has been so enlarged and 0% interest rates? What about Europe, which has been in and out of a recession for years, it sounds as if the ECB hasn’t been involved with QE. So did these things really mitigate the business cycle? Central bank balance sheets? No, I guess you could say it created an environment of financial repression. You know, we had a situation for example, where we had a huge fed balance sheet and 2019. And yet the Fed was so concerned about the economy. And that was the first Powell pivot that he cut rates three times. And as before COVID. And I got news for everybody, that when you look at the sequence, the pattern of the economic data going in towards the end of 2019 and early 2020, the economy seems to me was heading into a mild recession, we were at a mild recession with Oh COVID By virtue of the fact that the Fed tightened aggressively in 2018. And ultimately, the yield curve didn’t work. In the summer of 2019, we were heading there. So and then, you know, we had the pandemic, I guess, everything we’re talking about, pandemic was much bigger, I guess, in the technology are much bigger the Fed’s balance sheet, we had a recession because of a global health scare. But the thing is that we were heading into a mild downturn. In any event, so no, I don’t, I don’t believe in new eras, I believe that cycles have their similarities, and they have their differences. And but the notion that the business cycle is dead, is almost akin to saying that, you know, we, you know, Mother Nature doesn’t exist anymore. As you know, I think they probably maybe the best economist of all time was a physicist named Albert Einstein, who famously said that interest rates are the eighth wonder of the world. We are in a credit driven economy. And we’re in an economy where assets are valued based on interest rates, and we just came through the most pernicious interest rate cycle since 1981. That way,

Eric Chemi 26:36
what why did why did Einstein say that? I feel like I’ve maybe heard that quote, and then forgot it. I tell me more about that 1/8 Wonder of the World interest rates.

David Rosenberg 26:46
So, yeah, he famously said that the power of compound interest is the eighth wonder of the world. I don’t know what year he said it in. He was a he wasn’t he was beyond just a scientist. He was into arts, science religion, he was a renaissance man. But that’s a famous quote of his. And, and but it’s 100%. True. Either you believe, look, either you believe interest rates matter, or they don’t matter. I think that they matter. I don’t think anything else matters more. And I believe in business cycle theory. And I also believe in policy legs. So the answer is no, I think that there are similarities, and there are differences and each cycle. But if you’re taking a look at what caused recessions, every recession in the past, and there’s always been technology, we can go all the way back to, you know, semiconductors in the 1960s. I mean, there’s always been technology, there’s always been technological improvement. You know, some sometimes you get three recessions in a decade, like in the 70s. And sometimes you go 10 years without one like we did in the 60s. But when you go through these recessions, they’re all caused by the central bank. And when you go through an industry cycle on the upside to the point where the yield curve inverts, is the bond markets message to everybody out there, that we’re going to have a recession now it could be 12 months could be 24 months. The lags, as we all say, are long and variable. But we have to know that recessions do exist. They’re not unicorns, they’re not fairy tales, they’re part of the business cycle. And if we escaped this one, irrespective of the Fed’s balance sheet, which is now shrinking, by the way, irrespective of technology, in general AI, on a near term basis is going to wreak some havoc in the labor market, it could create more uncertainty, and cause consumers to save more, as opposed to spend more because the uncertainty is what it means in terms of what they’re, you know, what it can mean for their job as an example. But, you know, general AI is not again, the jail free card for the economic expansion any more than the internet was. And that’s the point I’m trying to make. What caused the recession in 2001, was we came off after the, after the Asian crisis ended and long term capital and the Russian debt default. GREENSPAN went into rate hiking mode, and when you know the yield curve that everybody says we should ignore now, they were saying that back then ignore the yield curve, it doesn’t matter anymore than on issuing long bonds. So why would we worried about the yield curve? And yet it got the story right. Yet again, and there’s countless examples. But the bond market already gave us the signal that the recession was coming in will clog that up last year was the fact that we did have Biden omics. We did have a year of gargantuan fiscal stimulus last year. And that was a huge antidote to the lag. So What the Fed has already done. So that’s the things you should be talking about what influences economic growth at the margin, and not over the next 10 years, we can talk if you want to talk about productivity, which moves glacially, you’re talking about general AI, we can do that. The Fed’s balance sheet has nothing to do with it. This is classic old fashioned interest rates that households and businesses are are paying. And then we have to assess all the distortions, because everybody in the mortgage market locked in at those lows and yield in mortgage rates, and now they’re prisoners in their home. So there’s no turnover in the resale market. So if you looked at the new housing market, or you look at the homebuilding stocks, are we thinking hallelujah, what the housing market is great. And then you’re taking a look at, you know, at, at existing home sales are flirting with levels that we haven’t seen, you know, in, in well over a decade, and down 6%, year over year. So this is where, you know, the run up and rates at some point, this is going to create debt servicing impairment, it’s going to cause companies to shelve their capital spending plans, because the hurdle rate is just too high. And the ability to finance, you know, expenditures on the household side, but not stuff that you would borrow, you know, you’re still gonna get your hair cut, and you still might go out to eat. In terms of appliances, furnitures autos, housing, it’s it’s going to be a pretty rough year. And hopefully, the Fed will cut rates aggressively, and that’ll breathe life into the economy and 2025. But I think that’s a 2025 Story. 2024 Story, I still will say, if we don’t get a recession, if we don’t get a recession by the second quarter, or the first quarter, the quarter read, I’d be very, very surprised. And like I said, the complacency. Wow, the belief that we basically are not going to have a recession, because it hasn’t happened already. is like saying in Toronto, Canada, it didn’t snow in December, therefore winter has been called off. It’s pretty, it’s pretty, it’s actually very unnerving. How, how investors are positioned right now, and instead of, you know, taking profits somewhat they’ve on their long position. i It looks to me going into this year, everybody is is doubling up at these at these valuations. But that’s the belief mechanism, no recession rates coming down inflation melting. The sky’s the limit.

Eric Chemi 32:52
Were you surprised? You know, you go back last year was a lot of people thought the recession was coming in 23 didn’t come or the market downturn didn’t come. And you said you gave the examples of you go back 15 years or 20 years, there was that one year lag? I think people tend to want to predict these recessions and these downturns a year too early. Could you make the argument that that almost 20% downturn we saw in the s&p that happened, you know, for second half of 22, first half of 23. And then it came back? Could you make the argument that that was the economy’s forecasting of a recession? They went through it, they flushed it out. And now they’ve gone back because usually the markets tend to, you know, forecast recessions in terms of the bottom out and peak and move forward before the economy’s done it. Could you say that, that was the move already?

David Rosenberg 33:41
I don’t think we can say that right now. Because you’d be telling me that, okay. The market peaked January of 2022. forecasting a recession that’s going to come when I mean, the recession, at least the NBR defined recession doesn’t look like it’s happened yet. And the stock market does lead but doesn’t lead by two years, right? At least know what when did we peak we peaked in October of 2007. recession started two months later. You know, the stock market peaked in September of 2000. The recession started five months later. So the stock market gives you call it maybe three to six months lead time. And it’s not unusual at all to find the market. Do a dip in the initial dip, which we saw and it was you know, we’re down roughly 20% some stocks were down even more and we’re talking about back heading into the lows in October of 2022. That was just the interest rate shock. That was the rate shock and that was the impact that had on on multiples. So it’s unclear as to whether or not that was the stock market’s Uh hum. Over pricing in a recession was basically interest rates and the multiple getting into a realign them with each other. You could you could hurt really say to somebody, well, we’re going to have the same stock market with a 5% interest rate as we had the stock market with a 0% interest rate. So, you know, bonds, for example, they did took a hit, they took a shot from what the Fed did the stock market took a hit. You could argue that commodity prices took a hit, the US dollar went on a nice upward spiral. So this is all what happened after the Fed started raising rates in the opening months of 2022. So I’m not so sure that there was a recession call you and I could see that because the multiples the P multiple never got down or anywhere close to a recessionary level. You had a you had a haircut on the multiple but nothing close to what you get in a recession. So no, I would say that the stock market readjusted and repriced for a new interest rate regime. But the recession really never got fully priced in. And so I think that that’s the question mark for the coming year. Will the recession get repriced? And my sense is that there’s a serious risk that it will, we have to understand that what happened last year was very unusual. We had the fiscal side, the Biden omics, the industrial subsidies. And then we had all the lingering stimulus from the, from the checks that were handed out during the darkest days of COVID. But that was a Energizer Bunny that kept on giving through all of last year, that the fiscal side last year, was responsible for two thirds of the economic growth that we saw. When you look at the security adjusted deficit, the primary deficit to GDP ratio widened out more than four percentage points in a year where nominal GDP was 6%. So you know, you strip that out. And really, you were left with 2% nominal growth, or call it negative 1%. real growth. Now, this isn’t just fun with figures just explaining why the recession people, including me were wrong last year, we totally underestimated the extent to which we’re going to see with these gargantuan deficits and debts even more stimulus piled on.

Eric Chemi 37:23
Will you keep losing that battle, though? You wonder if the government continues to do this, right. More deficits, higher debt, more stimulus, more fiscal packages, right. It’s the COVID relief that it’s Biden omics, and we’re just going to keep dumping Chileans, can they keep delaying the inevitable, right? Can they keep making you optically look wrong? Because they’re gonna be cheating the system and they keep cheating it year in year out?

David Rosenberg 37:49
Look, the government is part of the economy. And so I don’t I wouldn’t call it cheating as much as explaining, explaining it. You know, it’s not every single year does fiscal policy at more than four percentage points to headline nominal GDP growth was extraordinary. And you could get that in the context of an economy in a recession where the government is fighting tooth and nail but there was no recession last year, this is all basically part parcel of, you know, the, you know, the inflation reduction plan, the, you know, the, the industrial subsidies. All this stuff, we had a boom if there’s one part of the US economy that boomed last year, it was industrial construction, which skyrocketed. And yet it’s interesting that manufacturing production is actually going down, you could actually argue that manufacturing has been in a recession. We’re building all these plants because of course, we’re we’re going to become a new superpower in semiconductors didn’t you know? And yet, we’re building all these plants and we’re not producing anything. I’m wondering if they’ll all just basically get mothballed. This had a dramatic impact on growth last year, I think the recession would have started without the fiscal stimulus, but you see, it’s over. And when you look at the numbers for next year, fiscal policy is going to be more than a percentage point drag on GDP. And that’s what people are factoring in I get all the time Well, it’s an election year of course there’s going to be stimulus No there’s not I mean, Joe Biden does not have control over Congress anymore when he did all this other stuff. The Democrats were in control that’s over and so you’re not gonna be able to stimulants to stimulate the economy fiscally through executive orders and as you can see whether it’s on the border or it’s on a to Israel Ukraine that I mean the Republicans are not playing ball with the Democrats have no incentive to when you look at the election year you look at Where’s Biden weakest? I mean, he’s weakened weaken a lot of areas but for whatever reason, the average Joe and Jane on the street seem to have You know, years of mind view on the economy that is sort of stuck in the mud. It’s not evident in the data, that data continues to get revised lower, by the way, some of the data. See, the main point is that is that if you’re going to tell me that we’re going to get more stimulus this year, you’re going to be telling me that the Republican is a little play ball with the Democrats to be able to assimilate, it’s just not going to happen this year. And that’s the thing that’s interesting is that when people talk about, well, the stock market, always up in an election year, the election year effect, it’s because normally fiscal policy in an election year is adding more than a percentage point to GDP growth is they’re juicing up juicing up the economy. And those prior periods go back 40 5060 years, you had bipartisan support, and all the incumbents when they get elected, the Republicans right now they’re smelling blood in the water. So there’s no stimulus on the fiscal side. But what we’re left with is a mountain of debt rollovers. And maybe everybody’s locked into their mortgage, that’s fine. There’s a whole economy outside the mortgage market, there’s a lot of personal debt that rolls over, within a year, a ton of corporate debt and commercial real estate, that’s going to be rolling over, no matter where interest rates go, there’ll be a lot higher than they were upon origination, that is going to cause a default cycle, you’re starting to see it, you know, they basically, you know, how do you square these numbers? Everybody talks about how great the household balance sheet is. But they look at averages, and then look at aggregates, you know, and so everybody looks at averages, yeah. So, you know, between, you know, average out me and Bill Gates,

Eric Chemi 41:43
you and get average,

David Rosenberg 41:46
everything gets changed at the margin, I’m actually just amazed at what you’re taking a look at, specifically at autos and credit cards. The delinquency rates are back to where they were more than a decade ago, you know, when the when the, you know, and then a point where it was well over 6%, you know, not 3.7. Imagine, he says, so it just goes to show you all the bad lending behavior that took place when rates were at zero. And the Fed was pledging a couple of years ago that rates were gonna stay at zero to perpetuity Oops, that was like Lucy and Charlie Brown with the football. They’re still a price to be paid. People don’t realize that this is the one thing that caught my eye is something that Powell talked about at the last meeting in December, which was that there’s still a significant pipeline of tightening coming into the system. And what we’re not going to see this year is the antidote from aggressive fiscal stimulus. So I’m not going to call it cheating. But we are going to see what the Emperor looks like disrobed this year disrobed in the sense that I’m not so sure we’re going to be seeing any offset to the accelerating debt service payments, we’re going to be seeing from the damage that the Fed has already done this cycle.

Eric Chemi 43:04
And you mentioned, like you said, the Beige Book looks weak when you actually get into the individual stories, right? If you take the aggregates out, and you look at these different household behaviors, you’re seeing a lot more, buy now pay later, right? Because people can’t really afford debate pay what they want to pay right now, on a proper typical credit card spending. You look at like you said, I think in some of your research, the financial distress that a lot of adults and households are having right now. And you sort of wonder where that’s all where that’s all going to go? Because it does seem like it’s on aggregate and aren’t using it. But it does seem like it’s getting a little bit weaker, as opposed to a little bit stronger. When you look at maybe that average family.

David Rosenberg 43:43
Yeah, well, you know, the the other part of it is the the Buy Now pay later has stemmed from the fact that the banks are tightening credit standards at an alarming rate. And if you look at the data, you’ll see that even though the application rate by the household sector for credit cards hasn’t come down. The rejection rate by the banks has gone way up. And of course that would make perfect sense when you’re taking a look at you know, where the the delinquency rates one month, two month, three month delinquency rates on credit cards, which was a huge factor last year in terms of repelling the consumer. Because look what happened. What happened was that at the margin people run out of their excess savings, not everybody. But when people talk about their steal money leftover, it’s really among the upper echelons that haven’t even noticed that they had that money. Who does the spending in the economy really the the lower half the upper half do the investing lower half do the spending. And so their excess savings ran out? What do they do? They ran up the credit card bill. They’re not meeting their payments on time the banks are now constricting credit especially in this part and in plastic and credit card are. So what do they do next? Will the retailer say well fill the valve with Buy now pay later, but you’re just kicking the can down the road? And this is going to create whether it’s by now Balian, are you still gonna pay later? And with the credit cards, well, you’re paying later, but with over 20% interest rate. So look, there’s all sorts of question marks, I would say this much I hear all the time, I hear all the time how great household balance sheets are in and everybody to looks at the debt income ratio, and says, Well look where it is relative to where it was back in 2006 2007. And I say, we’ll knock your cell phone, if you want to compare it today, to the most acute credit bubble peak of all time, which was back in the mid 2000s. So the mid 2000s, the debt to income ratio in the beloved US household sector that everybody thinks has a pristine balance sheet, the debt income ratio is harder today than it was at the peak of every other cycle going back the past six decades outside of oh six and oh seven. So I would actually posit that no, sorry, household balance sheets are not in great shape. They’re only in great shape when you compare it to, you know, the the Vorster acute credit bubble of all time. And, and you’re seeing it now in terms of not debt, but the debt service ratio and the impairment. And the fact that you’re seeing this visible increase in delinquencies. Now, I’ll say even in mortgage Jesus is more residential, more delinquency rates have started to pick up in the past several months. But when you taking a look at other tranches of the consumer space, autos and personal loans and credit cards, it’s a little disturbing, you don’t normally see delinquency rates going up like this with uniform rate this low, which comes back to what I said before, that just tells you about all the bad lending behavior, reckless go, we’ve seen this time. And again, this is what the years of 00 interest rates do, is they promote excessive risk taking by both parties, borrowers and lenders. And so I think that that’s what we’re going to be staring at, you know, for the coming year, and I’m starting to think what happens God forbid if the unemployment does go up, because this is what you’re getting delinquency rates and over decade highs, with sub 4% unemployment rate, where did these go? What does that mean for the financial system? Where does it go, and then primary really goes up for good? Well, if you go to four, four and a half, or 5%, on the unemployment rate, and then there’s all sorts of knock on effects in terms of what this means for the financial system, loan loss, provisioning, credit, availability, so on and so forth. And that’s when you get into the self reinforcing downward looping economy, which, of course, is not in anybody’s mind right now. Except maybe for me.

Eric Chemi 47:53
So how are you positioned that or how are you telling clients to be positioned? Yeah, that’s the classic 60-40. I know, you mentioned staying in cash thing, liquid, what’s, what’s a good place to be? If if someone is asking you, you know, for real, like, where should I put my money? You mentioned corporate bonds, you know, what’s you gotta be you got to participate? Right? You can’t be short the market, you can’t, you can’t be just completely out of it. So how would you? How would you position right now?

David Rosenberg 48:18
Well, I mean, I’m not telling anybody to short the market. But, I mean, if you’re in a market neutral, long short fund by a manager, who knows what they’re doing, just there’s nothing wrong with that. But I would say that I look, I don’t I don’t believe in zero or 100. There’s always Shades of Grey, and I’ve been in the business long enough to know that there’s no such thing as a sure thing. And you don’t put all your eggs in one basket. I would say that within your equity portfolio, I would say two strategies. The first is own sectors that will correlate with declining interest rates. And so that would involve utilities. And that would involve Telecom, and that would even involve REITs. And then at some point, especially when you consider that the US banks are trading at or below book value, you could argue there’s a sector where a recession has been priced in. And if the Fed cuts rates and re establishes a positive slope yield curve, or you could argue financials at some point, will be less of a trade and more durable than that. I think what we had in the past last few months was more of a trade. But I think there might be other positive reasons to go into the banks at some point next year. So I mean, I’m fairly bearish on the cyclicals. I think the growth stocks, technology were are the companies are great. I mean, the companies the tech companies in the US are amongst the best in the world. But you gotta sometimes draw a distinction between a great company and a great stock I think there’ll be better opportunities. I mean, you’ve got some of these companies, you know that Apple, for example, being one, Microsoft, their their multiples are double their historical norm. But I don’t think that their growth prospects are double the historical norm. I think it’s just gotten a little wonky. But at some point, they might be the first places that I redeploy money into, but not at these valuations. So I think that, you know, I’d want to focus on the rate sensitive sectors of the stock market. That’s not a big share of the stock market, but that’s what we focused on. And then I’d be focused on long term thematics that transcend the business cycle. The world is a troubled place. The world is a very troubled place. military budgets are going up everywhere. They’re going up in Japan, they’re going up in Europe, they’re certainly going to be going up in in the United States. They’re going up everywhere. And so I’d say that aerospace defense, I think a very good place to hide. I think that as the Fed cuts rates, the US dollar will roll over as it already has that I think that precious metals, especially gold, will be a very good place to be the gold mining stocks have lagged gold was up 13% Last year, but the gold mining stocks Weren’t they got some catch up to do. There’s some opportunities there. So I like precious metals. I think you could argue that, you know, we have multiple wars going on around the world. And that should net on that be positive for the commodity complex. You want to be selective. And then there’s the other part, which is what’s not going to go away, obviously, which is nuclear and uranium, which isn’t a full fledged bull market. So I think there’s secondary themes out there, food security, cyber. There’s places that you can put money. I think that globally. I do believe that Japan is in a secular bull market, that we’re seeing the last leg of Obi nomics may rest in peace, coming to the fore dramatic shifts in corporate governance, that large parts of the world don’t quite understand. I’ve been reading about Japan for the past couple of years. So they had a phenomenal year. But we’re all focused on the NASDAQ 100, the Japanese market had a very good year. And I think that when the Bank of Japan normalizes interest rates or starts that road, it’s gonna be very good news for the financials. And let’s face it, I don’t think you want to make a bet against a warren buffett on that score. India is also in the secular bull market for for different reasons they are going through I mean, Modi might be divisive character, but he has. He has overseen a dramatic improvement in infrastructure. Everybody always said that India was an investable next to China because of the lack of infrastructure, but that’s changing and product, the productivity numbers, because I look at the supply side of the economy, the productivity numbers in India are running around two and a half percent. So they’re seeing a secular rewriting on their assets to so I’m looking at Japan, I’m looking at India, Mexico was a huge beneficiary from the so called French shoring and this ongoing move towards diversifying global supply chain. So regionally. Those are three markets that I like, and people think because I don’t like the s&p 500. I must be some sort of radical perma bear. No, there were three reasons that we actually wrote about that we like last year, that did quite well. On top of that, I’d have to say that I think the bond market, we started to see a reversal in interest rates, or reversal in the bear market in bonds, I think bonds are in a new bull market. And you want to participate primarily by being at the long end of the curve. I think that if you’re looking for a 15 to 20% return next year, I think that the longer run with the Treasury market is going to deliver that and that that might be my highest conviction call is that the whole yield curve shifts lower, and pivots to a more normal shape. Remember that the yield curve is only inverted, historically 15% of the time, but because of the power of convexity, you want to be in the long bond. Or if you want to buy it in the stock market, you can go buy TLT. Yep. Yeah. So I think that the bond, I think the long end of the bond curve is going to be I think duration. I would say ordinarily, you’d say, well, you should be bullish on Kathy woods and be bullish on the, on the growth stocks. And ordinarily, I would, because there’s a longest duration, stocks in the market, and they will benefit from lower yields. However, the valuations are just not compelling right now,

Eric Chemi 54:39
Before we go. Pick a book from from back there or another book, what’s the book that you would recommend people read right now they get to get their heads straight for this current environment that we’re in?

David Rosenberg 54:53
Oh, boy, well, look, I think that firstly,

Eric Chemi 54:57
if you need to cheat if you need to sit behind the chair If you’re going to

David Rosenberg 55:00
cheat over ever I, at least I read the I read the last last chapter or at least half those books. I’d say that, well, firstly, in one book, it’s not there, I think that we should we should be reading George Orwell’s 1984. And make sure our kids are reading it too, because I’m not so sure they teach at a school anymore. I think that we are in a real troubled time. And I’m starting to think about, you know, were people talking about World War One, you know, with Sarajevo, in, in, in 1914. Are the talking about World War Two with Denton land in 1938. This is a we are in a, this is the most troubled world that we’ve had. And I’m talking about that is, you know, this whole situation we have in our hands, is all sponsored by Iran. Okay. You ran a sponsoring this war in the Middle East, and I’m very fearful that it’s going to spread and pull the US in. And well, look who started the other war in the Ukraine, Russia, you have Russia, China, and Iran, otherwise known as Oceania. And then there’s the rest of the so called civilized world, I think that people can’t see past the tip of their nose. So I I’m, I would say that, let’s go back and reread George Orwell 1984. Let’s pick up a couple of history textbooks. Okay. You’re telling me about new eras? No, I don’t think so. I don’t think so. I think that, that, that the war that we’ve had between the good and the bad, that has really never gone away. And the thing about these dictatorships, they like to hang around with each other, and exploit the weakness in the rest of the world, especially because there is no there is no real leadership, no strong leadership, globally. So I’m a little concerned. That’s why I would say my, you know, I said treasuries, and then, you know, the best hedge against a troubled world, really, you could argue gold, you could argue oil and, and defense stocks, which have done remarkably well. That’s how you hedge in a world that’s becoming more troubled. I think that there’s a book that’s behind me, I don’t know where it is. The Daniel Kahneman book, I think everybody I buy copies for presents. This is this book is just that was a game changer for me. And it was called Thinking Fast and Slow, Thinking Fast and Slow. So what’s really great about the book is it helps you understand how to cope with rationalizing situations. You read that book by Daniel Kahneman, Nobel laureate, you read that book, Thinking Fast and Slow. It is a phenomenal book on how to basically approach how to deal with all the things you and I were just talking about for the past hour.

Eric Chemi 58:28
I think you’re right. Those are some good ones. I read the Kahneman book, I need to get back to 1984. I read it many years ago, I think it’s a good one to review again and just remind people, where can they? Where can they find you? It’s the Rosenberg Research website. Is there a social media if people want to follow more of you,

David Rosenberg 58:45
I’m on I’m on. I’m on Twitter, and I have my own YouTube channel. LinkedIn, obviously, but the best thing for anybody to do if they want to kick my tires, and check me out, and check my firm out, you could just Google Rosenberg research and let’s take your right there. Or you can email us to information at Rosenberg research.com. And viewers on the show all the viewers on the show should know that you contact us and we will be happy to give you a 30 day free trial on everything that we do.

Eric Chemi 59:23
That’s great. That’s amazing. Thank you, David, thank you so much for the generosity of your time for for really breaking down your ideas and for just helping us think through the craziness that I think 2024 will be thank you so much for joining me today.

David Rosenberg 59:36
Happy New Year. Thanks for having me.

Eric Chemi 59:38
Thanks. Again, my guest David Rosenberg, of Rosenberg research. Of course, if you’re listening to this, and you’re wondering, I need help with my family’s finances with my investments, please go to wealthion.com there’s a short form right there. We can connect you with investment advisors that we endorse that we have vetted, that we think that you might actually tick it off well with there’s no obligation. There’s no commitment. There’s no cost it’s totally free. You can just fill out the form. You can have a short conversation, see if you like them, see if they’re a fit for you and your family. And if not, that’s totally fine too. We just provide this as a free public service for you to check out once again that is at wealthion.com also wealthion.com/ask Anthony, you can submit your questions for the Anthony Scaramucci live call in show, which is speak out with Anthony scare Moochie. That’s every Friday at 11am. Eastern. You can go to the website to get your questions in there or you can just call directly live on the show. If you liked this episode, please feel free to share it like it subscribe, forward it comment, engage, tell your friends, those are all the ways that we can get this content out to as many people as possible. Thank you so much for watching and listening Eric Chemi, we’ll see you next time.