Join James Connor as he sits down with renowned economist David Rosenberg of Rosenberg Research to discuss the dark clouds looming over the US and Canadian economies. Despite recent highs in the S&P and Nasdaq, Rosenberg warns of imminent economic downturns that could have devastating effects. From rising delinquency rates in consumer credit to the bursting of the Canadian housing bubble, tune in to discover a what lies ahead for our economy and your portfolio
David Rosenberg 0:00 I think everybody still believes the economy is rolling right along. I think you mentioned that in your introduction. And of course, I think people are buying into, you know, the sentiments as have been echoed by Jay Powell, when he was at the podium at the last FOMC meeting, when he characterized the US economy is being solid and strong. Those are the two hurts that he used. And yet, when you go to the Feds own Beige Book, it describes the economic backdrop as being slight and modest, which you could argue was not a recession, but things are pretty soft. I tend to find that, you know, almost everybody is still looking at the the lens of the US economy. And here we are in June, like easing or what happened last year. James Connor 0:49 Hi, and welcome to wealthion I'm James Connor. While the US economy continues to be growing held by trillions of dollars in fiscal spending, the s&p and the Nasdaq continue to make new highs every other day. But there's still seems like there's a lot of uncertainty associated with the health of the underlying economy and whether or not we're going to go into a recession. To help make sense of all this. My guest today is David Rosenberg of Rosenberg research. David, thank you very much for joining us today. How are things in Toronto? David Rosenberg 1:21 You know, it's a classic economic assessment. As far as the weather is concerned, it's cloudy with Sunny periods and a chance for rain. James Connor 1:21 I like that. I like that. Well, listen, we have a lot to discuss in a short period of time. So I want to jump right into it and discuss the US economy. How do you think the US economy is doing? David Rosenberg 1:45 Well, my view is different than the vast majority in the consensus. I think everybody still believes the economy is rolling right along. I think you mentioned that in your introduction. And of course, I think people are buying into, you know, the sentiments that have been echoed by Jay Powell, when he was at the podium, at the last FOMC meeting, when he characterized the US economy is being solid and strong. Those are the two hurts that are used. And yet, when you go to the Feds own Beige Book, it described the economic backdrop as being slight and modest, which you could argue was not a recession. But things are pretty soft, I tend to find that, you know, almost everybody is still looking at the the lens of the US economy. And here we are in June, by gazing at what happened last year. Last year GDP growth was 3%. It was an upside surprise. Everybody's still reveling in that. And here we are in the first half of 2024. And looking at the data, it seems as though the pace of economic activity is closer to one to one and a half percent than 3%. So things are cooling off, that includes the AI general AI boom that we're seeing mostly in the stock market, but also in technology order books. But the consumer is starting to sputter in the United States. Not reverse, but sputter. And so we're basically running at rates of growth, James, that, you know, when I started the business in the mid 1980s, we call this stall speed, when we were gripping a one handle and look what was first quarter growth, one, three, and I'm looking at the St. Louis Nowcast model, which I respect a lot more than the Atlanta Fed. And it's running below 1% for the second quarter. And I remember in the old days, when we got to these, you know, 1% type numbers, people come to me and say you don't you think there's going to be a recession? Everybody seems to think that, you know, a recession is a relic of yesteryear will never happen again. But in answer your question, things are soft, and they're softening. James Connor 4:02 So you made mention of you think the GDP is slowing two or 1%. We did see a downward revision in q1 from 1.6, down to 1.3. And I'm going to ask you to look into your magic eight ball. Now. Do you think the q2 number is going to be at 1%? Or maybe even less? David Rosenberg 4:21 We're basically at around 1%. You know, the Atlanta Fed is at three the New York Feds at 1.9. The St. Louis Fed is that point nine. But what's very interesting is that at least the Atlanta Fed gives you the breakdown. And you can see that inventories are likely to add at least 80 basis points to second quarter growth. So actually, if you superimpose that on the headline GDP estimate from the St. Louis Fed, you're talking about real final demand coming in flat. That should be ringing alarm bells. Alarm bells at the Fed. Of course a lot of them are just focused on On lagging inflation indicators, but yeah, I'd say that headline GDP is running around 1% current quarter. And the most important issue for investors insofar as they think the economy still matters, there's a lot of people that think that just you have to throw out the old textbooks and models and the economy doesn't matter anymore. In this post pandemic, pre AI dynamic world that maybe the economy just doesn't matter. I don't believe that, but a lot of people do. Question is, if you are interested in the economy is what is what exactly is the catalyst for a reacceleration and growth. The case last year was double digit growth in credit cards, the last leg of the excess personal savings file that all got spent, and that kept the consumer afloat. And of course, we had a 25% expansion in the fiscal deficit, which was hugely stimulative. When those three items GDP growth last year would have been flat. Now people will say to me, well, Rosenberg, you know, that's data mining, I say, Well, no, it's actually analysis. Because if I was looking at US GDP, as an equity analyst would be looking at this specific company, I'd be putting some Asterix is next to what happened last year as non recurring factors. What's the catalyst, we still haven't seen the full lags of the damage the Fed has done. That takes sometimes two to three years, as we saw, you know, in in oh six, and oh seven and oh eight, it can sometimes take a few years for everything the Fed has done to percolate through the economy. But there is no more antidote, fiscal policy at best is neutral. Deficit is still high, but it's still longer stimulant of credit cards. We just saw in the month of April, a startling statistic in America, where credit card balances outstanding actually went negative month over month, that hardly ever happens in narcissistic country, America, as I call it. So what's happened, of course, is that delinquency rates and credit cards, and it's a $1.3 trillion dollar class of debt is as big as subprime mortgages, were back in the mid 2000s delinquency rate is back to where it was James in 2012, when the unemployment rate was 8%, not 4%. So it tells you a lot about the spurious credit behavior of last year. But what's happening now is that the banks are rejecting credit card applications and rejecting credit card limit requests from people that have credit cards. So that game is changing. And SanFran Fed said back in May in its report, all the excess savings have already been put into the economy. So that's in the rearview mirror. So my big concern is, what's the catalyst for the acceleration. And actually, I don't even need to have a recession call if the economy is growing just a 1% on the demand side. And we know looking at labor force participation and productivity that the supply side of the economy is growing 3%. At a time when the demand side is growing 1%, you don't need to be a mathematical genius to know that how these aggregate demand aggregate supply curves are shifting is going to lead to much lower inflation. It's not a straight line. But I think that will be the big surprise, the big surprise will not be the economy, the big surprise will be the things that people don't talk about me because they're too complex. And I talk consistently like an economics professor about aggregate demand, aggregate supply and their interaction, and it is intensely disinflationary. So frankly, if the economy just manages to muddle through at 1% Plus growth, looking at the supply side dynamic in the United States, inflation is going to trend lower for not just the next few months and quarters, but probably for the next few years. James Connor 8:44 And just to clarify something you said about GDP growth and also government spending. You're saying because the government has implemented so many programs and spent so much money, trillions and trillions of dollars with the inflation Reduction Act and the chips act and many other programs, it's not real growth, this is just a one off. And if we get a change in government come November, that could change drastically come 2025? David Rosenberg 9:10 Well, I'm not gonna say it's not real growth, because government is part of the economy and government spending is part of GDP. What I am saying is that the impetus to headline GDP growth from government, and the antidote that provided from what the Fed has done was not something I would deem to be permanent, it was temporary. And so a lot of that showed up the last year's growth, which admittedly was anticipated really strong. But the main point is that visa, whether it's government, whether it's double digit growth in credit cards, which that was a little bizarre, but it's over and the excess savings file, I mean, you don't know that the savings rate the personal savings rate that decision between how are you going to treat your after tax dollar earnings. I mean, the American consumer is now just saving three cents of every after tax dollar, they're earning their only saving three cents, historically, they saved eight to 10 cents. So, you know, a lot of that wild behavior, which really was a COVID impact of, you know, YOLO YOLO. Spending, you only live once YOLO. And Main Street is what FOMO is to Wall Street, revenge spending, anger spending, and a lot of that went into services that's basically dissipated. So that's the primary reason, of course, and take a look when people that say all well, interest rates don't matter anymore in the new economy. Sure. Tell that to anybody in the housing industry right now in the United States, or Canada, for that matter. Housing is actually in a fundamental downtrend, south of the border, and not home prices, but housing activity, that filters into GDP, auto sales are going nowhere. When you look at the classic credit sensitive sectors of the economy, interest rates are biting. So that's really the big issue is that after a year in which the Fed rate hikes were more than offset by a lot of other things that were happening in the economy, which are just mentioned, those other things in the economy. They're done. But, as I said before, all the lags from what the Fed has done on interest rates, the reset of the economy fully to this new interest rate regime that has yet to take place. And that's what I think the macro bulls are missing. In this picture. James Connor 11:36 Yeah, you brought up an interesting point about the housing market, both in the US and also Canada, I actually spoke to somebody recently who is involved in residential construction within the Greater Toronto Area. And his revenues are down 25% year over year. And he's he's what I would call a medium sized builder, but and I'm sure you also saw the lumber prices, they're down I believe, 30% in the last three months. So all of these things are starting to percolate through the system. David Rosenberg 12:03 Right and as you would expect, and it's even more remarkable in the Canadian context when you consider what immigration has done to demographics. But the Bank of Canada, I mean, I always like to say that, you know, Jay Powell, always compared himself to Paul Volcker throughout that entire tightening cycle. And if I remember correctly, Paul Volcker is renowned for being the ultimate inflation, Dragon Slayer. But he did that by creating the conditions for back to back recessions in the early 1980s. And I always said that tough Macklin resembled John crow back in the late 1980s, early 1990s. And remember that housing is the most interest sensitive sector of the economy than the most credit sensitive. And I get this question all the time as to whether you know what the bank is starting to cut interest rates, well, that's going to reignite the housing market, to which I say no, no, no, no, because it's not just the cost of credit that matters. For housing. It's the availability of credit. And now, as you're seeing the loan losses and the provisioning pile up, and the Canadian banks, they're pulling in their horns, and that means they're tightening credit standards. And you can see that in the data, because you look at mortgage growth, mortgage growth in Canada, which historically is usually running late, you know, near double digits, because we're so housing centric in this country. But mortgage growth in household credit growth in general is was running now basically, flat to negative, it adjusted for inflation, like you're seeing actual contraction in Canada, in credit volume. So it's the availability of credit that matters as well. And bank Canada staffers just put out a report showing that there's still a lot of mortgage borrowers who have yet to totally refinance into this much higher interest rate environment that we had in our hands a year ago, two years ago, three years ago, five years ago. So there's going to be a lot more pain. And what that means is that people are going to be compelled to either downsize or sell their property. So we're going to have any seen it already in the data, you're seeing it in the new listings data in Canada that you're seeing, and this is something that's brand spanking new, just in the past few months, is a new listings relative to sales have really picked up quite a bit. That is going to put downward pressure on home prices. And at the same time, it's going to lead to because of that more supply coming on the market, which of course is going to put a cap on what residential real estate can really provide for the Canadian economy over the course at least over the next year. James Connor 14:38 David, those are interesting comments on the Canadian economy and the housing market. I want to have a deeper discussion on that. But before we leave the US I want to first ask you about the the Fed meeting that's coming up at the end of July. As you know, at the end in the June meeting, they left rates unchanged, but what are your thoughts come July and maybe even September? Do you see them cutting rates anytime soon. David Rosenberg 15:01 Well, I don't think they're gonna cut rates in July. But I do think especially as we're getting more evidence that that Jay Powell was right after all that the earlier the earlier, run up in the CPI and core numbers, the PCE deflator, it looks to have been an earlier seasonal skew a lot of it related to insurance of all types. We just got a really great CPI number, we're about to get a very great PCE deflator and corn number roughly flat. And I think that if we get a couple of more like those will be on track for the Fed to be cutting rates, I think the sequence of events would be July, probably will be less hawkish than the previous press statement was, I think Powell, will say that the Fed is getting more confident. That's the new operative word confidence over the disinflation trend. And then we're going to hear from him at Jackson Hole in August, where I think he will start to lay the groundwork, and he won't call it easing. They'll call it taking away the excessive policy restraint. So I'm still thinking that they're going to start cutting rates in September. I know that sounds controversial, because the Fed doesn't want to get involved in politics, and the election is November the fifth. But in the final analysis, the Federal always just do what's right for the economy. So I still think in September, and I wouldn't be surprised, by the way if they go in November and December. So I'm still pending in I know that mostly everybody on the Fed will everybody in the fed through and throughout the three rate cuts that they had in their the dot plots, I still think that they're going to move in three times between now and the end of the year. James Connor 16:47 And there's an ongoing debate on whether or not the US is going to go into a recession. What are your thoughts on that? David Rosenberg 16:55 Well, you see, I have a belief system, which is this, I believe that the business cycle has not been repealed. And I believe that interest rates matter, but that the economy resets to interest rate regimes new regimes in both directions with long legs. So no, I haven't thrown in the towel on the on the recession call, people tend to forget that between the end of the between the beginning of a tightening cycle and the recession that could often take two to three years. And the Fed started tightening in March 2022. So I still think the lags have to play out. So without trying to time it. Because of course, we're seeing all the data being revised lower. And that's why the NBR wait so long, to give us the timing of the recession when they start and when they end is because of the revisions, which are squarely to the downside and every economic indicator for many months now. So yeah, I am still in the recession camp. And admittedly trying to say whether it's going to be next quarter, or the final quarter of this year or even next year, as federal, always difficult to time. And then you look behind you say like, you know, people didn't realize that the recession started in December 2007. Everybody thought the recession started in the summer of Oh, eight when Lehman and Merrill and AIG they all collapsed? Well, no, the recession actually started even before Bear Stearns went down for the count in March of Oh, eight. So maybe we should not be surprised if the NBR maybe ends up dating the recession starting right now. So I'm being a little coy when I say that, but I would say that I have not thrown in the towel on the recession call. So the answer the question is yes, without identifying exactly what month or quarter is going to land. And it's I think it's still staring us in the face. James Connor 18:51 So let's move on now and have a deeper discussion on the Canadian economy and also the housing market. And recently, the Bank of Canada, cut the cut their interest rates, it was only by 25 points. But do you think this is a reflection of the bank's concern of what might be looming on the horizon? Do you think the bank is thinking maybe the Canadian consumer is under duress? David Rosenberg 19:15 Well, it has to be part of it. But you know, the senior brass of the bank Canada, just like the Fed are never going to openly talk down the economy. These are public. They're not elected officials. But these are still civil servants and they have to put on a happy face at all times. Remember, remember Ben Bernanke that the home prices never go down nationwide and the problems and subprime straw man contained and in that process, they took the funds rate down to zero and expand on the balance sheet like it was nobody's business so they're not going to talk down the economy. I think that for the time being I think they've been very impressed with the with the disinflation, I mean, you could argue yes, and may we had a hiccup but I don't think that's true. I think that'll get reversed. And the overall broad trends and Canadian inflation are heading down much more sharply than in the United States. It says a totally different kettle of fish in Canada in the sense that we do not have fiscal stimulus in this country, the deficit GDP ratio is a fraction what it is in the US. And we don't have 30 year fixed rate mortgages in Canada, interest rates here hit the economy a lot more dramatically than is the case south of the border. And you're seeing that in the data. So my sense is this the bank Canada let the cat out of the bag. Not at the last meeting, but at the April meeting, when they first invoked the term excess supply at the April meeting, they should have started cutting rates in April, because they invoked excess supply, and then they doubled down on that term at at the last meeting just a few weeks ago. Well when you are in excess supply, which means you have a disinflationary output gap, you as a central banker, usually you're cutting interest rates and more than just once. And in fact, Canada entered into this excess supply, supply over demand situation last summer. And the bank went on to raise rates two or three more times in the face of that because they were so shamed, and ridiculed because they miss transitory, like almost every other central bank did. So, yeah, I would say that the Canadian economy right now is running year over year point 5% On the demand side, and when you're tacking on, I mean, we don't have productivity in Canada, but we sure have labor force expansion. So demand, just like in the United States, right? Well below supply. So these inflation numbers are going to come down whether the economy goes into recession or not, in the classical sense, inflation, unless you're going to take economics and throw into the wastepaper basket, which since it's my profession, I'm not going to do the laws of supply and demand are going to be taking inflation a lot lower, and the next year, so the bank Canada's is not nearly done yet. James Connor 21:58 And what about the health of the Canadian consumer? What are your thoughts there? You made mention earlier of the US consumer and how they're taking on a lot of credit card debt? Are we seeing the same things in Canada? David Rosenberg 22:08 In Canada, you're starting to see the early signs of a credit contraction. So consumers here are becoming more frugal, and they are starting to pay down debt. Now, of course, it's a long road a whole because, I mean, the the household debt to income ratio in Canada is is like 100 and collard 170%. You know, it peaked in the US in the biggest credit bubble of all time in the mid 2000s. At 130%. We come off, I don't know how the authorities and candlelit it happened. We came off a massive, unsustainable, very unstable debt binge, not as when people always look at the government sector know that it was in the Canadian household sector. And the Canadian household debt bubble is bigger than it was in the US in the in the mid 2000s. Federal people recognize that. And then, of course, we've come off the most aggressive bank and a tightening cycle because of the pandemic and lockdown related inflation since the late 1980s. So how do you think this is going to add it also, we've just reached a situation where and this has got to be in the bank, Canada's mind, where in the aggregate 15% of disposable income in the personal sector in Canada is now being siphoned into debt servicing charges. And that is the same ratio you've had before all the recessions deeding back in time. So households, people say households have been squeezed by, you know, energy and property taxes and rents. Food and that's under percent true, there's a lot of things you can subtract away from, where the price levels are punishingly high. What's really crushing the consumer now, keeping in mind that, you know, most Canadians don't have a mortgage, most Canadians are debt free. But you know, a recession is always the change at the margin. Not everybody loses a job in recession, right? It's that small fraction that moves the needle. Because the recession after all, is just like a one to 2% haircut on GDP, it doesn't go to zero. But it's the change at the margin. And for the most stressed out borrowers, just like we had in the US back in 2007, 2008, 2009. It's always a small group, that that gets the ball rolling on the recession. It's not the majority, it's the minority but the minority. We're looking at the overall numbers right now and we're going to be heading into an already in a delinquency and default cycle. And then if you don't default on your debt, you're gonna have to find ways to pay back your lender at these more exorbitant interest rates as you reset into them. This is just how the cycle works. But this is a very unusual cycle because we never got into a recession before in Canada with household balance sheets so stretched you know people talk about what great shape the American balance sheet is on the consumer side, not so much on the government on the consumer side. The Hustle Balance Sheet in Canada is about the most stretched in the world. And we're bumping up against interest rates that we have not seen really since the CRO years. And it's not the level of rates that matters. But it's the change. And this is really ongoing, the economy is not fully reset into this extreme environment. So debt service, and what it does to discretionary spending is a big part of it, you can come and say, well, but what about incomes? Isn't income growth? Well, where's income growth going to go in Canada? Once again, unless you believe that we're going to take the laws of economics and throw them away? Where do you think wage growth in Canada is going with the unemployment rate has already gone up 140 basis points from the low we've gone from 5.8%. And the cycle lower 6.2. Right now, that'll play me this higher now than it was before COVID hit in early 2021, the bank Canada rate was 175, not 475. So everything operates with a lag. So wages are going to adjust to this excess labor environment by decelerating. And that's going to make the debt service ratio that much more onerous. So you know, in Canada, you know, the consumer is not 70% of GDP, we're not conscious America. But it's more like, let's call it 60% of GDP, it's still bonks large and the numbers and the Canadian consumer is going to be in a very rough spot, the penalty box for an extended period of time. And what's interesting is that the senior brass at the bank Canada will never talk about this. I mean, don't forget that the bank, Canada Governor reports into the finance minister, who was an elected politician, but the bank kind of staffers, I'm amazed that the bank Canada, even let this be published to the public, wrote a whole report on what what things are going to look like for people with a mortgage, and what's going to happen with their spending over the course of the next couple of years, not the next couple of quarters. So this problem of excess supply and excess capacity in the Canadian economy, which is fundamentally disinflationary, I'll tell you the truth seems I cannot believe I read all these other base read economists. And I read what happened after the May CPI number and it's like, Oh, my God, the bank can't cut rates. Now. Look at the CPI number. The Press, it's so myopic, so myopic. If I'm at the bank, Canada, I'm not looking at one data point, I'm looking at what are the underlying pressures on inflation? What does that telling us about our inflation forecast? I'm sick and tired of central bankers, or people who call the central bank say, well, they're data dependent, you know how ridiculous that is to say that your data dependent, when all the data are contemporaneous or lagging, the bank can and should be forecast dependent, forecast dependent, and they're telling us some valuable information that cainy economy has slipped into excess supply excess capacity. I talked to non economists about this, and their eyes just glaze over No, this is actually really important. Because it matters for where interest rates are going, it matters for how the bank Canada will be independent relative to the Fed and why that's going to put downward pressure on the Canadian dollar. There's so many important things out of these powerful words for two meetings in a row called excess supply. But here's the problem that excess supply is going to be widening. And that's going to be creating either disinflation pressure, or God forbid deflation pressure in the Canadian economy over the course of the next several quarters and years. And nobody's got that factored into their forecasts. James Connor 28:22 You you made mention of the fact that the Canadian housing bubble is worse than the US bubble in 08, 09? Can you quantify that? David Rosenberg 28:31 Well, look, you're you're taking stuff I wrote probably a year or two years ago. The the bubble isn't being prepped, but the bubble in Canada is the the helium is coming out of the balloon. But yeah, when we looked at at the peak, and the peak is behind us, we look at the peak of the housing bubble in Canada, and you looked at Classic measures of home prices to rents or home prices to income. All these ratios. Yeah, it was bigger than the US. And then we did all this affordability analysis and said, Well, you know, if incomes and interest rates aren't going to help help us out, home prices in Canada would have to come down between 20 and 30% equilibrium rate, but is an ongoing Lee super strained homeowner affordability ratio. And those were the sorts of numbers I was using in the States back in the mid 2000s. When people like Ben Bernanke were saying, well, home prices never go down. Oh, well guess what they did? So yeah, but I'd say that right now. The housing market is gradually moving into better balance but but part of this equation is going to mean lower home prices. So look, bad news for existing homeowners, your your the the price of your prized assets going to be going down, but it's like money illusion because you know, your neighbor's house price is gonna go go down to what it means is that those people who have been sitting on the fence who've been renting that couldn't afford to come into the homeownership market are gonna get that chance. And you'll finally I mean, the silver lining is that the kids will finally move out In the basement and find their own place. James Connor 30:01 So let's talk about Canadian politics now because a lot of the issues that we're experiencing right now has to do with the current government. And it's a for those American viewers who are not familiar with Canadian politics, politics. We have a coalition between the Liberal government and the NDP s. And we recently had a by election in Toronto, which was a liberal stronghold for many years, I believe, since 1993. And the Conservatives took over that seat recently in the by election. But do you think this is the beginning of the end for this liberal NDP coalition government? David Rosenberg 30:35 Well, it was a close election, but was the first time that the Liberal Party lost this writing since 1993. It was a liberal Stranglehold. And so I think it is. It is, I think, an important litmus test for sure. But every single poll, every poll, not just one is showing that the Liberals are behind the Conservatives by at least 20 percentage points. You know, most of the polls are suggesting that the Conservatives are going to, you know, it's going to be a very significant sweep unless something changes between now and October 20 to 25. I don't know why it will, because the economy in Canada is going to go from bad to worse. And the Liberals are going to are going to wear that I think that if I was advising them, I guess they feel that they can have a fairness budget, and that'll sell to the public. So they raise capital gains taxes, just as the economy is making a transition to recession. I mean, I've never seen that before heading into recession, let's raise taxes, in the name of fairness. However, when you raise taxes, on entities of the economy that are job creators, you're not going to get very good results. So yeah, I think that, you know, they say, Well, you know, post 2016, with Trump, surprisingly, beating Hillary that, oh, you can't believe the polls can't believe the polls? Well, I'll tell you this much. I think that the pollsters have done a better job than they did back in 2016. And let's wait and see what happens. I think July The fourth is the UK election. And there is going to be labor overtaking in the conservatives. They're also 20 percentage points up in the polls. Let's see how well the polls do there. But that could be another litmus test. But you know, you seeing around the world, there's political change taking place. So you see us on a Mexico, you saw it even in India, where Modi had to cobble together a coalition rather surprisingly, look what's happening in France, and within the EU right now, and what's about to happen in the UK. But the other part about in Canada is that you take a look historically and you know when you're when you have a when your power 10 years, you know, it's game over. I don't know why Justin Trudeau would want to subject himself to the Nestel next election, but generally in the same thing happened to his father, the same thing happened in Brian Mulroney. You know, after 10 years, even if you don't have faulty policies, and I will send into popularity, people just basically get tired of a government after 10 years. And I think that's what we're seeing right now. James Connor 33:06 And, David, if you were Prime Minister tomorrow, what would be the first three things you would do to stimulate the economy and make it stronger again? David Rosenberg 33:14 I mean, believe it or not, you know, Canada, at the federal level has a lot more latitude to do things to stimulate than the US does. I mean, I mean, the US, I mean, look, the America is the reserve currency, but their debt ratio is so far above ours. I mean, it's I think it's almost triple and our deficit to GDP ratio is pretty, pretty low, especially on the g7. Ladder. But I wouldn't do it through spending, that's for sure. We have too much big government in this country to begin with. And that's one of the things that concerns me is that over this past decade, the corporate share the business share. No look, I am an unabashed capitalist, I believe in, in, in the free enterprise system. And so I think that there's always a problem when the business sector share GDP is going down and the government share GDP is going up. That's why productivity is a big problem in this country. We have to rely on immigration to boost growth because we can't do it through productivity, because we have a government that doesn't try to promote capital formation. You do that by cutting taxes. So you do it by cutting top marginal rates. You can do it through depreciation allowances. I think that finally in Canada, we have to cobble together with the provinces to reduce interprovincial barriers to trade. But I think that you know, what you want to do is in look, we have massive direct investment outflows out of the country. And you see this by the way to take you know, go interview Canadian hockey teams, they can't attract that. There's a reason I mean, the orders came close. However, you speak to cunneen hockey teams, they can I compete with American hockey teams, because the tax regime in this country is crazy. So that's the first thing I would do is I would do fundamental tax reform that would reduce, that would reduce the tax burden. And I would prevent the deficit from spiraling by cutting spending, not the growth cutting spending outright. It's incredible that all the spending that was supposed to be temporary coming out of COVID, is meant to stay on the books. I think the spending level is like 30%, higher than what the government was predicting it was going to be, even when COVID was hitting, it was supposed to be temporary. But you see, in the in the government sector, no spending is ever temporary. Now, this wasn't the case of the 90s under a different liberal regime. But let's face it, John Chretien and Paul Martin, were, were fiscal conservatives and the Labour Party. And that's what we have to get back to. So I would say, classic classic reduction of the government share of the economy, let the business sector flourish and allow their share of the economy to grow. And broad banks, broad based top marginal tax rate reductions. That's exactly what I would do on on day one. James Connor 36:11 Well, David, you don't paint a very positive pitch for the for the US and especially for Canada. But how do you suggest investors prepare themselves for what might come? David Rosenberg 36:21 Well, I think that you want to take the greed factor, and lock it into a box. And certainly, if you have been long, the US market, which is extremely concentrated, I mean, look, the average stock in the s&p 500 is unchanged from wasn't early 2022. That's been really you're called the Mac seven, you can call it the mag three or maybe the mag one. So I'm very concerned about the concentration risk in the US market. That said, I'm very bullish on interest rates variable. So within the equity market, I would say on the rate sensitive so you can own utilities, you can own telecom services, I would say even some of these select REITs. I think that, you know, energy like pipelines look attractive and sort of their dividends a dividend yield. So I am by no means saying that my forecast is telling you to go buy, you know, baked beans, canned tuna, barbed wire and sawed off shotguns, okay, there's places to put your money. I think that there is secular growth tailwinds in other parts of the world. Wide swathes of of emerging Asia, which is trading like an eight multiple, there are markets in Asia that you could buy, that are trading at the same multiple the US was back in the summer of 1982, which was the second or low. So there's different regions, you know, the emerging Asia looks good. Japan is a long term play. They're being rerouted because of the last leg of Abenomics. And what that's doing the shareholder returns. The US market is way overvalued. I think that commodities look interesting from a long term perspective. So there's areas that that you can poke at, you know, I think I'd rather be in the commodity market then in the equity market right now. Because I think there's just a, there's something in the commodity market that is a secular, you know, demand supply tailwind for prices doesn't mean that these commodities won't go down in recession, but not as much as they have in previous recessions. Because there's been no capital investment. In the basic material sector for so long. I like gold. I like silver. I think that once the Fed starts to play catch down and interest rates with these other central banks, the US dollar bull market ends. And that's gonna be very good news for precious metals. And on top of that, I think that you want to start chipping away at the bond market, not much value in the Canadian bond market where the yields are so much lower than they are in the US Treasury market. The US Treasury market on a relative basis looks like a high yield market right now. So I like treasuries, I like treasuries and you're going to be at least for the time being a better currency better to be in the US dollar, the Canadian dollar right now. And that's for the euro. Now, that's my investment strategy, but I wouldn't be taking profits. If you've been buying the index funds, count your lucky charms that a few stocks have carried your wealth along for the ride. I don't think it's sustainable. And nobody ever got hurt by booking a profit. So that's the one thing that really unnerves me more than anything else. James is that nobody in this bull market especially this last leg, where the market is up 25% with earnings up 6% It's been a largely a multiple driven market. Nobody's rebalanced. James, nobody. I don't know about you personally. Nobody's rebalanced. Everybody is all in. You know, I'm looking at the baby boomers. These people in their 60s and 70s heading into their 80s Do you know that over 60% of their asset mix is in equities? You when I started the business in the mid 80s, someone in their 60s and 70s would have more like a 30% equity allocation. It's now more than 60%. And I'm very concerned, very concerned, what happens when the term comes because bear markets are not fairy tales. They exist. And so the bull markets, obviously, we're just living through one right now. I'm worried what happens when the movie runs in reverse. And the implications this has on the 80 million pig in a Python, you know, call the baby boomer class. And this is gonna have a lot of social problems. Nobody talks about that. But I'm very concerned about the fact that older people retirees have bought in hook line and sinker into this, this wild technology, which is real however, we don't what happens even a technology that the the impact on the economy is real, but it doesn't mean that you don't go into these financial bubbles and the markets just extremely overvalued right now. So that's my bit my big concern. And that's why I'm advocating to start, especially if you're long equities, to start thinking about taking profits, and redeploying them, and focus on risk adjusted returns, and not just on getting rich quick. James Connor 41:21 Well, David, that was a fascinating discussion. I always enjoy our conversations. And as we wrap up, if someone would like to learn more about you and the various services that you and your firm offer work, and they go? David Rosenberg 41:32 Right. Well, everybody who's viewing this, by the way, is eligible for a one month free trial of everything that we do at Roseburg research. And so you can google Rosenberg research, go surf the website, or you can just contact us at information at Rosenberg research.com. And one of my clients, service professionals will get back to you and we'd be happy to sign you up for a trial and you're going to kick our tires. James Connor 42:00 And you're also very active online on Twitter and x. What's your Twitter handle? David Rosenberg 42:06 To be honest with you, I don't even manage that myself. I send in my comments to the team and then they usually will take out some of the expletives and then post it. But yeah, I'm on LinkedIn. And I'm on Twitter. I don't know the exact handles because I'm a bit of a Luddite. But, you know, I've got I can't remember what Jacob told me how many hundreds of 1000s of followers I have on Twitter. So I don't know what the handle is. But James, you or anybody else wants to find me on Twitter, you'll find me. By the way, Twitter is just what a Twitter is just there to, you know, be out there. That's not real research. You want real research and real recommendations and you want to interact with me, either come to the website or go to information at Rosenberg research.com. And that's where the real meat is sought on social media. James Connor 43:01 Well, I hope you enjoyed that discussion with David Rosenberg gonna give you some sense on what to expect in the economy in the coming months. As David mentioned, he's very bullish on gold. And if you would like to learn more about gold and how it can benefit your portfolio during times of uncertainty, consider visiting our sister company hardassets.alliance.com. Hard Assets Alliance is a trusted platform that's being used by over 100,000 institutional and retail clients to buy and sell gold bullion and gold coins. Once again, that's hard assets alliance.com I want to thank you very much for being with us today and I look forward to seeing you again soon.
