David Rosenberg joins Anthony Scaramucci on Speak Up to warn and explain why a recession is looming. Highlighting the dangers of a widespread “soft landing” complacency and overexposure to equities, David, the Founder and President of Rosenberg Research, draws parallels to past crises and explains why current conditions are setting investors up for a major downturn. Together, they discuss the risks of the Federal Reserve’s policy mistakes, rising unemployment, and why the past decade’s passive investing boom could be the next bubble to burst.
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David Rosenberg 0:00
What I’m most concerned about is the complacency, widespread complacency that’s out there that we’re going to get an elongated soft landing, or some economists say no landing, that there’s no recession. But I think this recession nobody sees is actually staring us in the face. When you look at the history of recessions, they start actually with the unemployment rate right where it is today.
Anthony Scaramucci 0:32
Welcome to speak up. I’m your host, Anthony Scaramucci, and today here on the wealthion network, I am joined by a dear friend of the network, and somebody I see is an intellectual Sherpa on Wall Street, David Rosenberg. David is the founder and president of Rosenberg research, and as many of you know, it’s an economic consulting firm that he established in January of 2020 he he and his team have been providing investors with great analysis and well informed investment decisions for multiple decades, but on his own since 2020 was an auspicious time be starting that business. David, as a fellow entrepreneur, I’m sure that was exactly what you expected to go into a global pandemic a few months after you started the business. But in any event, thank you for coming back. And we always love having you on I want to, I want to start with a little bit about yourself, because we’re adding new viewers every month. Tell us a little bit about yourself, why you got on Wall Street, how you got focused on research. And then we’ll go into some of the macro things. Well,
David Rosenberg 1:40
you know, in terms of, you know, the career path and making it on Bay Street in Toronto and then Wall Street, I I fell into it more than anything else. It’s not something that I really pursued. I didn’t come out of school saying, Well, I want to, I want to be an economist on on the street or even in the financial markets. There’s nothing that we do say in the realm of economics, in terms of financial markets that they ever teach you in college or university. So it was just like the books behind me. It was just, you know, one chapter after another. I started off my career actually working in the government in Ottawa, at the Canada Mortgage and Housing Corporation, which is like America’s version of Fannie Mae. And I was a housing economist, but I grew bored and tired of working in the public sector, and I just flooded my CV to all the chief economists at the big banks on Bay Street in Toronto, and I hit the lottery ticket to the bank of Nova Scotia on October 19, 1987 so I was grounded early my first day as a street economist, being on on Black Monday. But I just quickly figured out after that that, you know, being an economist, being a market economist, and the audience say that you and I have just combined a lot of the talents that I bring to the table, and not just research, but also analysis and writing, and then being able To communicate a view, and then realizing that your effectiveness as an economist on the street is you don’t stop at GDP. You have to take every forecast that you make on the economy and attach a market call to it. So it was just basically a game of snakes and ladders in my career and how I ended up where I am, how I ended up as the chief economist to Merrill Lynch. To this day, I still don’t even know how that happened. It was never something that I aspired to. But I guess to some extent, there’s always a lot of luck involved and being at the right place at the right time. Well, I
Anthony Scaramucci 4:20
mean, it’s interesting, because I think as we get older, we get humbled by life, and we realize that some of our success is based on our decisions, and some of our success is based on luck, and also bad things happen to us that we can’t control either. So it’s a lot, lot of things are going on, but you have been amazing at spotting things early. You’ve been amazing at looking at data and synthesizing trends, you know, going back to many different times, but really the 2007 2008 global financial crisis, you correctly predicted the recession in oh seven, and you. Let people know that we’re very worried about the subprime markets and then the ensuing explosion there. What do you see right now? Do you see echoes of that or fed, the Fed? Has it under control? Or is there? Is there a black swan out there that we’re not thinking about that we should be thinking about. Well,
David Rosenberg 5:23
I mean, it’s if it was, if I could identify the Black Swan, it wouldn’t be a black swan anymore. And you know, frankly, when I was making the call in oh six and oh seven, he was looking at all the excesses and the residential real estate market and how household balance sheets were so radically exposed to residential real estate, and then coming off a pernicious interest rate cycle from, you know, the summer of 2004 to the summer of 2006 actually, a very similar interest rate cycle that we just endured in the past couple of years, you know, you’d have asked me back in Oh, six, you know, what’s the, what’s the black swan event? And I would have said, Well, all I can tell you is that periods of national home price deflation, you know, never end well. And I thought there was going to be a credit crunch, but then I think there is going to be, you know, significant bank failures that I think that the whole global system was going to freeze up. I didn’t predict at the time that my own company that I worked for, Merrill Lynch, was going to have to get swallowed up by Bank of America. So you could have asked me about the Black Swan back then, and I would never have thought about how bad it was going to get, but I knew it was going to be bad for the economy, and I knew that interest rates were going to go down and that we’re going to have a bear market in equities, but it went far further than than I ever thought. I mean, I got the call right back in 2001 I was viewed as a Luddite back in the late 1990s because, of course, I didn’t understand the, you know, the internet wave and the dot coms, but I saw bubble brewing then too. But if you’d asked me back in 2000 what’s the Black Swan, I wouldn’t have said, world, common. World, common, Enron. You know? I mean, however, I would say this time around. You know, what I’m most concerned about is the complacency, widespread complacency that’s out there that we’re going to get an elongated soft landing, or some economists say no landing, that there’s no recession. And you know what’s interesting is that people think that the financial crises that we get generate the conditions for the recession, but actually it’s the other way around. It’s the recession that caused the impairment in cash flows that triggers the financial crisis, and that’s when you get this negative loop that causes the Fed each and every cycle to take rates down towards zero, and then the last couple of cycles embarking on balance sheet expansion. So I think that the big concern I have right now it’s not about that households are overly exposed to real estate, it’s that they’re overly exposed to the equity market. And that has me very concerned the boom, or I could call it a bubble in passive index investing, when people are just blindly buying equities without doing any homework, any analysis, any work on valuation, nobody cares about valuations anymore, and so the fact that over half the market cap today is passive index investing has me concerned the fact that equities on the household balance sheet look like what residential real estate on the household balance sheet did back in the mid to late 2000s the household sector, and it’s been the right call, but will it remain the right call, and what happens if we go into a bear market in equities? So never before, not even the late 1990s says everything rested on this bull market and equities being perpetuated, as far as what it means for household balance sheets and then confidence in spending. So that’s my big concern, is that you have in terms of the household financial asset mix, over 70% is in equities. Hardly anybody owns any treasuries. You have maybe 10% that’s in cash. And the layered on concern is the aging, but not necessarily aged, baby boomers. They should be closer to 30 to 40% of their portfolio in equities, they’re over 60% so I’m concerned about the complacency. I’m concerned about the fact that through this significant bull market, nobody has rebalanced their portfolios. Nobody. Least rebalanced. And it’s that mismatch between, especially between age and composition of the asset mix and portfolio, that has me most concerned. Okay,
Anthony Scaramucci 10:14
so, so it’s a different time then it’s you’re you’re worried about. Let me, let me say it in my own words and see if I’ve got you right. It’s a top heavy market, 678, stocks moving the market. Everyone’s dumped their money into those indexes, and valuations are historically based on different metrics, very high, and even if the Fed moves a couple 100 basis points, still, if you looked at it from that perspective, my old boss, Leon Cooperman, would say, okay, still very high. And so, you know, bull markets don’t end from that. They end from the exhilarating blow off and then the ensuing depression. But, but it’s still a metric that you’d look at and say, okay, it would cause some, you know, a pause for a concern of you a cause of concern. But what do you think about the Fed? Be in the mind of the Fed for a second and say, Okay, what’s the Fed thinking they have to be worried about similar things, because you and I are worried about them, and we’re old enough now to be more worried and less oblivious. What do you think the Fed’s thinking?
David Rosenberg 11:31
Well, I think the Fed is thinking about the path towards getting the funds rate back towards neutral, whatever that number is, it’s inherently impossible to observe, but at least they provide an estimate in their dot plots, and they moved it up fractionally to two and seven eighths. So the question for me is, on the destination, it’s really the timing. You know, we heard from Powell. Powell is there saying, you know, you know we’re not going to be going at 50 beats for an increments. We’re comfortable moving 25 and I’m not going to debate the size of the moves or whether the skip a meeting or don’t skip a meeting. I have a good feeling where the destination is. And by the way, of a staking suspicion that as I draw the probability curve, we’re going to close this cycle with the funds rate well below where the perceived estimate of neutral is. So what’s the Fed? The Fed is thinking this. And actually, Austin Goolsby, at the Chicago fed, and I actually think he’s the most thoughtful FOMC member by a country mile, gave a speech last week in Chicago, where he basically said that if he could freeze where the unemployment rate is right now and where underlying inflation is right now, he would do it in a heartbeat otherwise, saying, you know, we pretty well got to where we want to be in terms of the dual mandate of full employment and price stability. But the odd man out here is the funds rate. Then, therefore, what’s the funds rate doing more than 200 basis points above neutral? Because if we’re in that Goldilocks of balance between inflation on one hand and unemployment on the other, we should be below 3% on the funds rate today. And that’s an additional concern I have is just how far the Fed has let itself get behind the economic curve. You see, it’s not evident to the naked eye today, any more than it was when the Fed lag so far behind the inflation cycle. Back when the Fed lagged behind the inflation cycle in 2021 and early 2022 it didn’t seem like inflation was going to become a problem, and it became a big problem. And now nobody believes the economy is going to be a problem, but I do think it’s going to become a big problem. That’s where my big concern is on the equity market, because if it goes down, we’re going to get this double negative impact from the negative effect, the negative wealth effect on household spending, which is roughly 70% of GDP, and that’s when you get this do loop of of markets and the economy exacerbating each other towards the downside. Nobody’s thinking about that. Nobody’s talking about it, nobody’s forecasting it, because everybody has got Goldilocks and the soft landing or no landing, as their base case, that is the widespread consensus, yes, before what’s the Black Swan? I don’t know what the black swan is in terms of, you know what we can pinpoint. I mean, we know that credit cards are certainly an item of radical excess auto loans, default rates there, in both cases, are at their highest level in 13 years. And that’s, I’m not going to say that there’s anything out there that’s going to bring down a bank. That’s not going to happen and lightning doesn’t strike twice, but you’ve had what, 10 recessions since 1950 not every one of them had. That be part and parcel of a financial calamity. Everybody always fights the last war, and is asking me, could this be another 2007 2008 No, it’s not going to be. And we had, you know, a recession, a mild recession. It wasn’t a mild recession for the stock market, but as a mild recession for GDP back in, you know, 2000 2001 it was actually a short and mild recession. But of course, the valuations were so extreme that it wasn’t that milder recession for the stock market. It didn’t involve a calamity. No bank went down in that period. So I’d be the first to tell you that the banks are well capitalized and will guard it. I don’t think we’re going to get a cascading financial crisis. But as far as the economy is concerned, as far as what this could mean for society, because I have a problem, everybody is all in on this bull market. And I come back to that nobody’s rebalanced. There is a massive bear market in rational thought, and the degree of concentration, not just within the stock market, but the degree of concentration on household balance sheets. I come back to that, especially for the 78 million picking a Python called the boomers that have dominated everything from economics to politics to finance, and we can talk about the Gen Z crowd, and we can talk about all the echo boomers, and we can talk about Generation Y, but it’s the boomers that still basically are the dominant force, and I cannot believe how exposed they are to such A risky asset class, when they should be de risking their portfolio. That’s really my, my principal concern come back to that, but my, my other big concern is that, and it’s not again evident to the naked eye, is just how high interest rates are and the Fed is, I think, being quite sanguine about the whole thing. You know you have, you have Powell telling you in their forecast from a couple of weeks ago that we’re going to have the unemployment go up 100 basis points from the low. We’re going to go from 3.4 to 4.40 Anthony, I get this all the time, but then employment is so low. But you know that when you look at the history of recessions, they start actually with the unemployment rate right where it is today. People don’t know that it’s not about the level, it’s about the change. So everybody’s preaching a soft landing. But if it’s a soft landing in the economy, the unemployment rate goes up between 30 and 50 basis points from the low. It doesn’t go up 100 basis points. We’re already up 80 basis points from the low. And so the Fed’s telling you soft landing, but the employment is going up a full percentage point. Whereas 100% of the time in the past, when you’ve had the unemployment rate up that much you’ve gone in a recession, and then when you go up 100 base points in the unemployment rate, you never stop there. You never you never once stop there. You keep on going. Eventually it does stop when the Fed, or say, fiscal policy gets aggressive enough, and when you’re not in a soft landing, and then employment rate goes above 100 basis points. It peaks out 360 basis points above the cycle low. So you know what I’m saying here. I’m saying that employment rate is going to go to 7% in the next year or two. Well, so then what do you do as an economist? Well, you have to map out what the lags are from that degree of excess capacity in the labor market towards something very critical to the economy, which is called wages. So wages decelerate, and all the folks out there that talk about how great household balance sheets are, remember that the denominator is income, and as unemployment rate rises, that denominator goes down, which means your debt income goes up, and the Fed has lagged too far behind. And something else that concerns me when we talk about, say, Black Swans or the big risks, is just as the Fed stay too easy for too long, and 2001 into 2002 they stay too tight for too long. Like I said, it’s not evident in the current economic data. This is all about what is the crystal ball telling me about the future, and when you’re taking a look at where is the normalized level of interest rates in the economy, look the five year average of the Fed funds rate of business loan rates, residential mortgages, auto loans, were between two and 300 basis points above the normalized level. So you do not complete an easing cycle with the level of interest rates this far above the normalized level. You actually go to and then. Through the normalized level, which means that rates have a long way to go. They have a long way to go. That’s my highest conviction call is that interest rates and Treasury yields have tremendous room to move lower from where they are today. This
Anthony Scaramucci 20:15
show is sponsored by better help. A rate cut has arrived. It finally happened that it was only four years in the making, the Fed has cut rates by 50 basis points. It surprised some, but many cheered it for sure, there will be some bumps in the economy going forward. There always are, and maybe there are bumps in your personal life, financially that are weighing on you, or maybe there are other things on your mind keeping you awake at night. It happens to all of us. We walk around with the weight of the world on our shoulders, and we look at others thinking their lives are perfect with no worries or cares in the world. Of course, that isn’t true. Everyone has worries and things they can’t get off their mind. You can’t let those things get in the way of the fun things in life, the things you are curious about and want to tackle talking to someone helps to ease some of the negative thoughts and gain a new perspective on some of the things that are floating around our heads. And believe me, there’s plenty. If you need to talk to a professional, or you are thinking about giving therapy a try. Give better help a try. It’s easy, online, convenient and flexible. To fit your schedule, just fill out the questionnaire and get matched to a licensed therapist. Anytime. Rediscover your curiosity with BetterHelp, visit betterhelp.com/wealthy on today to get 10% off your first month. That’s better help, H, E, l, p.com/wealthion, okay, and in your I mean, the content so good that I’m not interrupting at all, but I just want to get you to react to something. And so this is Ben Bernanke talking about the mortgage crisis in 2007 he’s being he’s at a testimony in the Congress. Market rallies on this. He says, I’m not worried about the mortgage crisis. They say why, it’s a $90 billion crisis. He actually uses the words, I can ring fence the problem, and the Fed can figure out a way to absorb the bad loans and will clean up the economy, but he waits, and this $90 billion crisis, the prairie fire starts very similar to what you’re saying about how things can get extended and things could be made worse just by the reflexivity of markets, we go from a 90 billion, $90 billion problem to a $6 trillion global financial crisis. So I guess everything that you’re saying policymakers have to think about, and a lot of these policymakers have been around since the last crisis. So in your research and in your discussions with people, are they thinking along the lines of David Rosenberg, or how are they thinking? Well,
David Rosenberg 23:14
if you go back to that period, right? And of course, you know Bernanke also said, right, the problems of subprime remain contained. Remember contained.
Anthony Scaramucci 23:25
I remember the word contained. I remember the word ring
David Rosenberg 23:28
fence. Neville. Neville.
Anthony Scaramucci 23:30
I was I was on every I was on every syllable of every sentence that he said back in those days.
David Rosenberg 23:35
It was Neville Chamberlain’s piece in our time, yes, and but he also said that home prices nationally never go down. And that was another, you know, Charlie Brown and Lucy episode with the football. So you go back to that period in oh seven, and I am certain that the only people that were calling for recession were me and Dick Berner over at Morgan Stanley for different reasons, but Anthony, everybody was in the soft landing camp back then. Okay, that was the widespread consensus narrative. And in fact, the consensus did not shift towards a recession view until the summer of oh eight, when the recession was already eight months old, sometime between the conservatorship Fannie and Freddie to the failure of Lehman and AIG and Merrill, sometime the consensus finally got it, but it was too late. And yeah. So asking me, do I feel like the lone wolf? I’ve been here before 100% when I was at the when I was back in Merrill, Canada in the early 2000s I was laughed at for calling recession in 2000 and you’re right when you said before that I’m early. I’m always early, sometimes too early to a fault. Uh, however, you know, the thing is, about bull markets, right? The bull markets are an escalator going up and a bear markets, an elevator going down, and the next thing you know, you have your head sliced off. So, yeah, I am, I am concerned. I can’t say I’m going to sit here and talk about, you know where, you know where the what sort of financial crisis we can get out of this. It’s, it’s not something that I’m I can’t identify it right now. I just know that we have an economy that is inherently interest sensitive and credit sensitive. And we’ve had a whole bunch of other things from fiscal policy and people having locked in those low rates. We’ve had the lag sort of clogged up now interest rates, the interest rate cycle, the market cycle, the economic cycle. These are centrifugal forces the their sine waves over time that overlap with each other, but they’re not always necessarily in sync, but they overlap with each with each other. And I have continued to say, and I say today, that there is no get in a jail free card from the most pernicious tightening cycle by the Fed since the Volcker era. There were things and including, I didn’t mention, of course, the excess savings file, when you do without a $2 trillion stimulus check to anybody with a pulse back in the winter months of of 2021 that is going to provide a lot of firepower for an extended period of time. Just like look how long it took for the recession to take place back in Oh, seven It took years because everybody till the last second wasn’t about fiscal stimulus. Was about extracting home equity and cash flow refinancings right to the last drop in the last drop ended in december 2007 so the something else that is on my mind is that people have forgotten about that the lags between rates and the economy are long. They’re long. People say, Well, they’re long and variable. They’re just long. And historically, it’s about 30 months from the time of the first rate hike, remember, which was back in March of 2022 to the timing of the recession. It’s not 30 days and it’s not 30 weeks, it’s 30 months. Well, we’re pretty well staring it on the face right now. I mean, just think back to that last cycle where I was laughing stock at Merrill Lynch for daring to call for recession. Back then, people dreamed of different reasons why the business cycle has been repealed. The Fed started hiking rates in June of 2004 Well, the recession started in December of 2007 how is that different than right now? Now, I would say that some of us out there that were calling for recession last year, it didn’t come. We’re being tempestuous and impatient. But you know, to say that we’re not going to have a recession. And of course, the Fed believes that too. Somehow, somehow the Fed wants to have it both ways. We’re going to forecast 100 basis point increase in the unemployment rate, but there’ll be no recession, which has never happened before. But there’s a lot of people that believe that this time is different. That is the one thing I hear consistently, from colleagues, from clients, from just watching bubble vision, that this, this is a different sort of a cycle, and I and when I hear that, I head for the hills, because every cycle has the similarities and has had its differences, but the one thing that has never changed over time is the powerful impact that interest rates have on the economy. And the legs are long, but I think this recession nobody sees is actually staring us in the face. You know, we have what we had second quarter, GDP growth of 3% and people are just dancing around the kitchen table without realizing firstly that GDP does not even go into the NBR definition of recession for one thing, of course, we’re just telling focused on GDP. However, when you look at the first quarter of every recession going back to 1950 the average quarter the recession starts is 2% with a plus sign, not a minus sign. So I just find that, yeah, where is this black swan? This black swan is in this incredibly entrenched complacency that the business cycle has been repealed and that therefore I am not going to rebalance my portfolio, but I’ll be all in, all in on one asset class, and really want. Index, otherwise known as the S, p5, 100.
Anthony Scaramucci 30:02
So we’re going to take questions from the audience, but I think is just a brilliant exposition of where we are. And of course, I want to, I want to ask you, before we say goodbye, a little bit about the election. Your thoughts there. But let’s take some questions of the audience first and and then we’ll finish up with that. Let’s start with the first question, David, are there specific defensive sectors that you recommend investors consider? This is Scotty from Canada. You’re
David Rosenberg 30:34
Yeah. I think that my preference is to be in the defense of rate sensitives. And of course, look, I operate in a world where your assumptions drive your conclusions. If your assumptions are wrong, your conclusions are going to be wrong, but we are going into a new declining interest rate cycle. Therefore, you’d want to be in utilities, you’d want to be in selective REITs. You’d want to be in telecom. You want to be in non cyclical areas of the market with solid dividend yields and solid dividend payout ratios. Ordinarily you’d say to me, Well, if rates are coming down, are you not bullish on growth stocks, since they’re the longest duration stocks in the market, and ordinarily I would be, if we weren’t for the fact that the valuations are just too expensive for my liking. But right now, those are the sectors that I’d be focused on, mostly in the equity portfolio right now,
Anthony Scaramucci 31:33
okay,
David Rosenberg 31:34
what I call the bonds and drag.
Anthony Scaramucci 31:36
Okay, let’s go to the next one. You think we’re at risk of stagflation? This is Jason Orr from Minnesota.
David Rosenberg 31:44
No, I don’t think we’re at risk of stagflation. I think we are at risk of a classic recession. I think just looking at the charts and looking at the leading indicators, inflation is melting away. It will continue to melt away. I can tell you that. Then in the next three months, the frustrating and stubborn rental components are going to start to slow down more materially, and the auto insurance costs that cause the Fed to have so much concern at the start of the year, margins in the auto insurance industry have moved up high enough that that’s not going to be a factor. And then, you know, you’re taking a look at, I mean, right now, of course, you’ve had some of the base metals moving up because of what’s happened in China. But look, we’re Why is WTI flirting with $70 a barrel? What happened all the oil bulls told us were going to be 100 $120 by now? That’s not happening. So oil prices coming down has all sorts of other spin offs on business costs. I can’t wrap Anthony I cannot wrap stagflation around. My view, when productivity growth in the United States is running close to 3% you know, that’s actually where Dave Rosenberg the bull starts to comment on some of the positives. How is it that productivity and this is even before any benefits from Ai. A lot of the productivity growth is coming from actually what happened during covid. Post covid, usually stagflation involves no capital formation and no productivity. But productivity right now is one of the bright spots for the US economy, which is why I think inflation has lots of room to come down, both from a cost perspective and from a demand perspective, but productivity growth where it is right now. No, Stagflation is not a problem. I think that we might even be talking a year from now, Anthony, we’re talking about deflation. Okay. I think that we will see well, the Fed overdid it as much on the easing as it did on the tightening. So I would say that recession is more principal risk, disinflation, slash deflation, more principal risk. I’m not going to put zero odds on anything, but Stagflation is pretty well at the bottom of my worry list. Okay, all right, let’s
Anthony Scaramucci 34:01
go to the next one. Given the fiscal spending is still high, will the Fed’s policy alone be able to curb inflation effectively? George H New Jersey, well,
David Rosenberg 34:13
you know, that’s a that’s a legitimate question. But you see, what is inflation? Inflation is a rate of change. You know, Paul Volcker is known as the Great inflation Dragon Slayer, but during his eight year tenure, the price level went up 60% what he did was he brought inflation down from 12 down to three. So the level of spending is high, ergo the level of prices is high. There’s no doubt about that. But what drives markets are the rate of change and the rate of change. Change in terms of fiscal stimulus is slowing. I’m not saying the stimulus isn’t there in terms of level. It certainly is, but it’s the change at the margin that matters. Now I will be very concerned, okay, about my outlook on this, and that’s why it’s a great question, based on what happens on November the fifth. And I’m not talking so much about is it going to be Harris, or is it going to be Trump? Neither one of them is really paying much attention to deficits and debts. But if we get one of those presidents in the White House and it’s a clean sweep and it’s a clean sweep, I’m going to be really worried about my call, and I’m willing to change it. I’m willing to change it if we have one party rule, because that one party rule, especially when you consider Kamala Harris is willing to get rid of the filibuster, which means anything is going to go in the Senate, but in both cases, there’s going to be tremendous additional fiscal stimulus, not in level terms, for rate of change. That’s going to cause me to scurry heading into the morning on November the eighth and change my forecast. I think that we’ll have split government. It’s my expectation. It’s actually my hope. I think that’s would be best for America. However, if we don’t, if we don’t, then the fiscal stimulus, creating a demand growth relative to supply is going to cause me to reconsider my inflation call 100%
Anthony Scaramucci 36:33
okay. I mean, it’s great, great commentary. Let’s keep going. Do you see opportunities in emerging markets given the current macro environment. This is Lauren R from Florida.
David Rosenberg 36:45
Well, that’s a great question right now that the Chinese stock market has moved from the floor and into a technical new bull market, I think that the emerging markets. I mean China trading with a 10 multiple, Hong Kong with an eight multiple. These markets are very cheap. Uh, historically, emerging markets are good places to be when interest rates are coming down. What asked me concerned is if we go into a global recession, and I’m really concerned that nobody, nobody has this in their forecasts. Nobody. Then what happens is that emerging markets become markets that you can’t emerge from in an emergency. So the problem I have with emerging markets has more to do with if my forecast is right, you want to be extremely liquid, and the emerging markets, well, very attractively priced on any virtual multiple basis, that’s what concerns me. So I would tread very carefully. You know, there’s a if we don’t go into recession, and everything hinges on the recession call. If we don’t go in recession, rates come down. So this comes down to really, your personal view. If you don’t have recession view, the one thing we know for sure is rates are coming down. We just might not know by how much emerging markets will be a great place to be. I tend to be more conservative. I do still have a recession call, so I’m backing away from exposure to emerging markets for the most part, but a lot of that will come down to your own macro call. We avert a recession. Rates coming down, looking at these valuations, emerging markets will be a great place to be, but I have a preference for liquidity right now, and that’s why I’m sort of shying away from that group. All right,
Anthony Scaramucci 38:39
see any more questions asking the producers, what’s your view of gold? Charlie from California, David,
David Rosenberg 38:47
right, well, that’s my wheelhouse. Been bullish on gold for 10 years. Was one of the first calls that I made when I formed Rosenberg research back in early 2020 as you mentioned before, I remain bullish. And it’s interesting that the complexion of gold has completely changed. It’s trading less as a commodity and more as a currency. Anthony, it’s trading as a currency that is no government’s liability. And so what was interesting to me in the past year is that gold had a new high in every single major currency term, so its complexion is changing. The two tailwinds for gold, lower rates and a weaker dollar, and we’re getting both. And so I can’t give you a price target. People ask me, will we get to $3,000 I think we’ll blow through that. But gold is something that’s very difficult to value. Just you mentioned Bitcoin before. You know, hard to value these things that don’t have a cash flow stream, right? However, I’ll start to turn bearish on gold, or certainly. I talk about how I’m pulling back from my bullish call, once I see the tailwind subside, and that will be the interest rate cycle and the dollar cycle. Now, even if those things happen, there are other things occurring that should make you bullish on a fund flow perspective, and that is the fact that global central banks, by the way, not just the BRICS, but increasingly developed country central banks, after years and years of depleting their gold reserves, are now diversifying back in the gold and the one thing we know from QE is that you don’t want to fight central banks with deep pockets, but that’s third on the list in terms of why I’m bullish. We’re in a bear market on the dollar. Certainly it’s not a bear market a correction face, and the dollar, as the Fed plays catch down to the rest of the world, and interest rates and rates coming down has a time warn, time warn, inverse relationship with the gold price. So I say stick with the program until these until these tailwinds become headwinds.
Anthony Scaramucci 41:06
Let’s go to the next question. I’m a big bull on gold. I appreciate you being bringing up all those wise comments. Mets are winning. See the Mets. So, David, unfortunately, I’m going to have to have to keep you on my show through the World Series, because when we started this podcast, the Mets were losing, and they’ve had an explosive comeback. So so they’re teasing me, but I live in a house of pain, which is why I’m a good Bitcoin investor. I can take pain, having been a 50 year meth fan. So before I let you go, though just 30 seconds each Donald Trump wins the presidency. What’s good and bad about that economically? Is it all good, all bad, or what’s the mixed bag? And then conversely, what happens to the economy of Vice President Harris? A sense of the President’s Well,
David Rosenberg 42:01
you know, you set me up for ensuring that 100% of the viewers are going to be angry with me no matter what the I think the the only negative that I see with Trump’s economic plank is the size of the tariffs, and I don’t think he’ll go through with them, but it’s just, you see, the tariffs are not inflation, in the sense that tariffs are not raised every single year. It’d be a price level shift, but it’ll brutalize the economy. If he goes it would be
Anthony Scaramucci 42:38
regressive not to jump on it, but it would also hurt lower middle income families harder than any other family of
David Rosenberg 42:44
that, there’s no doubt. And look, he, he did. He did embark on tariffs in his first presidency, but not, not this size. And then we don’t know how much of it hits the foreign producer, how much of it hits retailer margins and how much of it lands on the consumer, but either way, it’s going to produce a big negative shock. I would hardly advise against it, but I think again. And you know, you know the President better than I do that it sounds to me more tactical. I just don’t think it’s realistic, but that’s the biggest negative part of his policy playing I think cutting corporate tax rates to 15% it sounds crazy to most people, but that’s where the top marginal tax rate was for the business sector before World War Two. And of course, tax rates go up and then, well, they didn’t start to come down until Reagan. Reagan’s epic tax reform in 1986 so all he’s really doing is saying, I’m taking, actually, the top corporate tax rate where it used to be back in like the early and mid 1930s so I have no problem with that. And of course, he is the poster child for, well, hard to say poster child with somebody in their late 70s, but the poster child for deregulation. And so, you know, people will say, well, the immigration wall against will constrict labor supply. But you know what? He did that from 2016 to 2020 we never got big inflation. We never got a wage spiral. And what happened was that a lot of unemployed Native Americans end up getting employed in terms so. So in actuality, I think his policies are probably over time would be less bad. That’s that’s how I would portray it. Visa V what the Democrats want to do in terms of principally raising top marginal rates to 28% people say, well, it’s still low. No, no, no, no, it’s not low anymore. When you when you count in all the state taxes, and what happens with that policy is the net effect of top. Marginal rate for the business sector that, let’s face it, does most of the employing in the economy. It takes it about 40% so all of a sudden, America, in terms of total net, effective corporate tax rates, the Democrats take the America from being competitive to the very high end of the OECD scale. I don’t think that’s going to be very good news, because if you tax corporate income and you tax profits, what is employment and wages paid out of Anthony what are they paid out of? That’s not money out of the sky, right? It’s paid out of profits. So what you tax to get less of so out of everything you know that’s out there, I think that the Trump’s tariffs would just be, you know, would be a a big, big price shop for the economy, but it wouldn’t last more than a couple of quarters. Raising corporate tax rates at the margin are going to have more pernicious multiplier impacts on the economy than most people think, right? But we
Anthony Scaramucci 46:01
both know that a divided government sometimes great, right? If you get a Democrat and a Republican Senate, not going to happen, and you won’t get the Trump tariffs in place. I mean, he could put some in through executive action, but it’ll still won’t be as broad if he’s the president and there’s a Democratic Senate, which is why we love Wall Street loves David divided government, as we both know so well. You’ve been a brilliant guest for us, and I just want to thank you again for joining us on speak up, and I may need you, even if I have to FaceTime you during the playoffs, David, I may need you. Okay, you’ve been a great crutch to me as I’ve been dealing with the pain of living as a Met fan my whole life.
David Rosenberg 46:44
You see that this is what I wanted to hear, because although I never planned to be an economist on Wall Street, I always plan to be your good luck charm. All
Anthony Scaramucci 46:52
right. Yeah. I mean, you’re also cheaper than my therapist Rosenberg, so I want to point that out as well, but, but thank you very much for joining us,
David Rosenberg 47:00
pleasures all mine. Thank you very much.
Anthony Scaramucci 47:02
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