Economist Sees Recession and Bearishness on the Horizon
Economist David Rosenberg has been seeing weakness in the economy and has been bearish on stocks for several years now. Being wrong over and over doesn’t bother him.
David Rosenberg considers himself a contrarian, which in itself isn’t necessary a bad thing and can often be a good thing, depending on what side of right you are on. The consensus view is often mistaken, and often very mistaken, and that’s when it pays to at least be willing to question conventional thinking and at least try to justify their positions and beliefs.
The world of investing is riddled with beliefs that remain unexamined, at least by conventional thinking, so being contrary to these beliefs usually is a good thing, provided that you at least have thought things through enough and come to some better conclusions based upon your insights.
We’re not sure if Rosenberg deserves to be considered all that much of a contrarian when it comes to investing, and as we examine his thoughts in more detail, we may even want to consider himself more of a traditionalist than some traditionalists, at least when it comes to the way he tries to explain things. There’s no question though that his investment outlooks are contrarian, and the fact that he’s been a bear throughout the bull market that is in its 11th year is plenty testimony to that.
Rosenberg is predicting yet another bear market with stocks in 2020, and when you’ve been wrong about this for 10 years in a row, it’s not likely that you will be too bothered about making it 11. In spite of how ridiculous this is, people still pay him for his advice.
He spent several years as an economist for Merrill Lynch, and is credited by some for warning people about the financial crisis, although if you cry wolf every year and one eventually does come, that doesn’t mean anything other than you’re wrong a lot more than you’re right.
He moved on to become chief economist of a Canadian wealth management firm, Gluskin Sheff and Associates, in 2009, and has been telling us that the sky is falling with stocks ever since. He’s got his own company now, Rosenberg Research, but after having a look at what this research is telling us, his true calling seems to be as an economic science fiction writer.
You don’t see many economists who consider themselves completely contrarian, but Rosenberg proudly does, and anyone who has believed that the economy has been weak all this time certainly would qualify. It is one thing to predict the direction of the stock market wrongly year after year, as a lot of people make bad predictions about stocks, but economics is more of a science, or is more of one compared to the bad science that so many investment analysts practice, so being wrong over and over with the economy stands out more and involves denying the truth in a more troubling way.
It’s another year, and it should be no surprise that Rosenberg still thinks that the economy is weak and still is bearish on stocks. He recently shared his thoughts in an interview and we did not want to pass up taking a closer look at them, as opportunities like this don’t come around every day.
The volume of his cries for a recession have picked up this year, and while there are plenty of people who are concerned about this happening over the next couple of years, Rosenberg displays a confidence about this that is difficult to match in the business. Flying in the face of the beliefs about stocks is one thing, but it takes real courage to dismiss all the science we have about the economy right now, and take such a stand against mainstream economics, including those who work for the Federal Reserve.
We never want to assume anything though, and we need to keep an open mind even in a case like this, as it’s possible that just about everyone else is wrong and he is right. We therefore need to look at the quality of his arguments with both the economy and the stock market, to see if there is at least any merit with his views.
It turns out that his predictions end up just being that, predictions, as he tells us to prepare for the worst. He ends up seeing monsters that aren’t really there, and then forgets the role of central banks to manage these issues as they occur. These two mistakes together can paint a twisted picture indeed.
The fact that the economy has slowed is not lost on anyone, even though we’ve seen it slow even more than this at various times over the last decade. Even though the economy has been managed pretty tightly, and we have achieved a level of economic stability like none before, within such a range you still see variations as things do still bounce up and down somewhat.
With that said, we are not at such a period, at least when it comes to the economy of the United States. China’s economy is coming back down to earth, and Europe continues to struggle somewhat, but the U.S. looks rock solid here, as solid as we might even be able to imagine.
The Odds of Inflation Staying Positive are Overwhelming
Inflation has averaged 2.1% over the last 4 years, with the high being 2.3% and the low over this time being 1.9%. 2020 is predicted to come in at 1.9%, with 2021 and 2022 both being projected to have an inflation rate of 2%.
This is all well known, but Rosenberg claims that deflation is knocking on the door as we speak. He claims that current inflation rates do not have any staying power, but like his other predictions, there isn’t anything to really support this.
Inflation has had a lot of staying power lately and we’re expected to maintain it, and is being managed so tightly that it dropping just a little below their target rate of 2% has brought out the big guns from the Fed to beat any thought of it going much lower back. We did get some pretty low numbers in 2014 and 2015, 0.8% and 0.7%, and that’s pretty close to zero, but we still held up just fine and things have strengthened since.
Deflation, going below zero to produce a negative inflation rate, is very uncommon, and even during the 2008 crisis we didn’t get there. The last time this happened was all the way back in 1954 in fact, and other than during the Great Depression, has only happened once more, in 1949.
This isn’t to say that we know for certain that 2020 or 2021 won’t be the year, but the odds of this are extremely remote, based upon what’s going on now at least. Even Bernie Sanders would have a tough time pulling this off this soon, even with his being so hell-bent on throwing the economy under the bus in favor of his socialist agenda.
We don’t really know what will happen politically, and therefore we can’t put this potential damage into play just yet, but Rosenberg isn’t either, as he believes the collapse will be organic without the aid of anything but a little time.
He is particularly worried about consumer spending, and somehow became alarmed by the fact that it went from growing at a 0.2% rate in October, to 0.4% in November, and to 0.3% in December. Somehow this is showing a collapse in spending, even though consumer spending continues to rise notably every quarter over the last several years. Consumer confidence also just rose to an 8-month high.
You can’t just look at these numbers in isolation though if you want to understand them, as we also want to consider inflation rates. Spending and inflation, as well as GDP, have moved pretty much in lock-step lately and this is even more the case now. Things are so stable these days economically that this is almost beyond belief, and up until the last few years, no one would have thought this much stability to be even possible.
When the economy is humming along nicely like this, this is exactly what you want to stay away from things like deflation or recession. It also keeps us well away from interest rates going too high, which is the actual cause of the significant economic contractions we call recessions.
Inflation puts interest rates up, it costs more to pay back debt, spending gets cut by this, which produces less growth. If, for instance, the Fed rate went up to more traditional levels this year, this would produce a recession as sure as the sun rises.
We’ve got none of that though, and far from it. Growth and inflation are exactly at the level that we would ask for if we were allowed to just make up a number and then have it made so. How could Rosenberg be so confused?
Aside from seeing an economic contraction that no one else is seeing, perhaps from looking into his crystal ball, his main argument for deflation rests with declining treasury yields. It is if bond traders have crystal balls as well and are seeing negative inflation in our future and pricing this in.
Rosenberg Puts Himself on the Wrong Side of Everything
If you know very little about how the bond market works, you could miss how absurd this is, but an economist should know that bond prices are simply where supply meets demand, and these traders do not have access to any secret information that no one else does, including the Fed. They are using the same data we all are, to the extent that these things are seen to matter by the market.
Rosenberg is supposed to be some sort of expert on bonds, so he should know that bonds move up in price due to greater demand, and a lot of this is just price speculation where traders are just looking to hold bonds due to a higher price expectation, and don’t even care about anything else other than the ride continuing. If our economic outlook is derived from speculative bond trends, we are in real trouble.
Bonds going up in price does not mean deflation or a recession, it just means that people are betting more money on their going up rather than down for a while. While Rosenberg remains a committed stock bear, he is telling us that bonds will be hot again this year, with returns as good or better than last year, with no regard to the fact that bonds have a pretty low ceiling indeed when you are already at record high prices.
There are limits to how much people will pay for bonds, and this is the point where yields just get too low to sustain the rally, and we are clearly near this point now. Bonds aren’t very good investments at the best of times, unless you are a big institutional investor leveraging them 10:1, but even this has its limits as the risk increases as the price starts to go too far, like where we’re at right now.
This might be the worst time to buy bonds, unless you are a highly leveraged short-term trader, given that they are so overbought, or you are just looking for a place to stay out of all the rain that is falling on stocks this week, and overbought with bonds is a bigger deal than with stocks to be sure. We can keep bidding up the price of stocks forever, and we actually have been doing this all along, but bonds are not like that at all and are subject to some real limitations by economic fundamentals at some point.
We’ve shaved over a point off of the 10-year yield with this past bull market with bonds, and to replicate that, we’d need another point, taking us from around 1.32% to pretty close to zero. That’s just not going to happen or anything close. There is a good reason why the yield on the 10-year hasn’t ever gotten below 1.32% up until now, and if people think it can go much below this, they are really dreaming, and no one is dreaming this other than those on the true fringe.
Nothing is certain though, and given that we’ve seen negative yields elsewhere, that’s theoretically possible with U.S. treasuries as well, but this market is simply way too big to drive down that far, as this would require demand well in excess of capacity. This is the reason why people are so smug about not seeing this happen here.
Rosenberg’s views on the stock market are also plenty interesting. He definitely earns his self-appointed title of contrarian with the economy, and may even qualify to be named the king of contrarians, but he hasn’t been able to break free of conventional thinking very much with stocks, even though these views have produced such bad predictions for him year after year.
His discussion of stocks starts with his belief that if stocks are misbehaving so much that he can no longer fathom fundamentals playing much of a role, there is nothing for an economist to do. He then throws down his economist hat and starts really getting mixed up.
He actually comes pretty close to realizing what the role of an economist with regard to stocks actually is, to study the actual economic forces that go into stock prices, instead of looking to insist on his mistaken belief of their being fundamentally determined and then throwing that down in disgust when his illusion comes apart at the seams.
Within his illusion of the big economic contraction that is allegedly at our door, he tells us that the Fed lowering rates isn’t a positive, it’s a negative that forebodes some very hard times, he tells us that he believes that following the Fed gives us a much better view into how prosperous our economy is than looking at the stock market.
We could just look at the actual economic data, which tell us these things directly, but somehow the Fed’s dovish stance these days is supposed to be bad, as in looking at these rate cuts and thinking this is a forecast for a recession. These things work the other way around in real life, as when you see the rates go up too much, now we’re in trouble, as far as recession risk goes, but the interesting thing here is the fact he thinks the stock market is supposed to be a good measure of economic prosperity in terms of its scale.
Stocks are certainly sensitive to economic trends, especially negative ones, but the very idea that stock market growth and economic growth are proportionate is a crazy idea period. We just need to look at how modestly the economy has grown over the last decade compared to the explosion of stocks to understand how the two very often do not move at the same rate, and there’s no reason why they should and many good reasons why they do not.
He calls the disparity an illusion, and doesn’t realize that the idea that stocks should only be expected to move at a similar rate as the economy is the actual illusion. As the light from reality peaks through his thinking, he does glimpse it a little at least when he remarks that stocks are behaving like they are being moved by supply and demand like commodities are.
There is no other explanation for the movement in stock prices though, and given that the concept of supply and demand is so central to economics, this should be a lot more obvious to him than his just seeing it as the world gone wrong. Ironically, commodity prices are influenced ultimately by the supply and demand of the commodities itself, where stocks are purely subjective and are only subject to the whims of the market, whether he finds that distasteful or not, so his example didn’t even show what he wanted to. Comparing stocks to Bitcoin would have been a lot more accurate, even though that surely would have his face screwing up.
Rosenberg is particularly upset with what he sees as artificial influencers on supply and demand with stock prices, all that borrowing by companies and especially their buying back stock. These things have raised stock prices beyond what Rosenberg believes should be happening, and he doesn’t like it at all. Why he believes that his opinion counts for anything here is left unexplained.
Somehow, these cuts end up being bearish for stocks, staying true to his nature of wishing to be a contrarian to the facts as well. He also sticks to his contrariness by believing that the energy sector is now bullish, just because prices are so low now. The demand for these stocks is certainly low, and with that remaining, this isn’t just another crystal ball act, this crystal ball has some big cracks in it, and the cracks are getting larger every day, as if they would need to for all the water to spill out of his show shaker ornament.
We cannot confuse a company with its stock, as these are two separate goods, as related as they may be. The current demand for a company’s output and the current demand for its stock are very distinct things, as the company’s current demand is just one factor and not even a very big one with all of the things that influence the demand for its stock.
This is influenced by things like stock buybacks, how much money people are investing overall, macroeconomic and geopolitical factors, the future outlook of the company, interest rates, what others have to say about it, the overall mood of the market, how the market itself is trending, and more, including whatever may influence such things.
We’re in the midst of dealing with the market’s digestion of the coronavirus issue in China, but this is only expected to shave a tenth of a point off world GDP in 2020, which is merely a wiggle and is the sort of thing that can either be left to play out without any response, or perhaps provoke another rate cut to steady the ship from the effect of these little waves.
The stock market will always exaggerate things and does have one eye on fundamentals, and the 7% drop we’ve seen so far on this second round of coronavirus fears that has gripped the market once again is certainly not appropriate for something so minor overall. That’s the way it works though, as we see both the mood improving and deteriorating being magnified, depending on which way we are leaning. You can’t understand stocks unless you understand the role that these beliefs play and how they intersect and interpret all of the data at their disposal.
Just like we cannot understand how the economy is trending without looking at the data, we cannot understand how stock prices move without at least realizing that they are determined by the supply and demand of the stocks themselves. Anything else leads to confusion, the sort that Rosenberg is so desperately clinging to.
We can neither explain why stocks go up so much or why they can go down so much, as they have over the last few days, by looking at fundamentals. At best, they can point us in the right direction as far as the trend goes, but you’ll never be able to do any calculations as far as magnitude goes because there is just so much more involved in stock prices than just this stuff. Amazingly, very few people understand this and the rest are left puzzled.
We love people thinking outside the box, as long as they don’t travel to a place that is so far from what actually goes on that it makes the stuff that goes on in the box look good. Maybe after enough years go by, Rosenberg may be willing to accept that the price of everything, including stock pricing, is indeed a function of supply and demand, the thing they teach you on day 1 of a high school economics class, but something that is not always remembered it seems.
Editor, MarketReview.com
Robert really stands out in the way that he is able to clarify things through the application of simple economic principles which he also makes easy to understand.
Contact Robert: robert@marketreview.com
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