Economist David Rosenberg might be the king of the bears, predicting recessions and bear markets year after year without fail. He is painting a very grim picture now.
Earlier this year, before all of this current crisis emerged, we ran an article on the bearish views of economist David Rosenberg of Rosenberg Research, a new company that he just started to provide clients with the most bearish view of the economy and financial markets that money can buy.
Rosenberg has been so far on the extreme edge that we marveled at people actually paying for these outlooks. When you’re calling for a recession every year, without any real basis, and when you end up being wrong year after year, how this could ever be considered reliable information is a real conundrum.
The last time Rosenberg has been right about this was in 2008, but when you’re a permanent bear, you’re going to get lucky once in a while as bears do show up from time to time. He was still calling for a recession prior to the coronavirus, when we ran our article on him, and he just got lucky again, even though no one could have seen this one coming and none of this was organically caused.
With someone who already saw things very gloomy before this current crisis, even predicting deflation on the horizon, it should not surprise us that this current situation, where we actually do have some serious issues now, is really going to ramp up the depression talk from him, and it sure has.
As the situation played out, Rosenberg went from the view that this one might even be worse than 2008, to it will be twice as worse, to his current opinion that it will be ten times worse. When you see monsters under the bed all the time, big ones, when a real one appears, it’s not surprising that it would be magnified greatly and seen as many times bigger than actual size.
Make no mistake though, this monster is the real thing, and we have felt all along that few people seem to really understand how much damage this lockdown will actually end up causing, which we could never say about Rosenberg. As we go deeper into this, more and more people are coming to a better appreciation of this, but David Rosenberg, Chicken Little himself where these things are concerned, has never had any trouble with understating these things, or anything for that matter.
Rosenberg really isn’t that influential, more like a circus side show than anything, but this doesn’t mean that we should just ignore what he has to say, as ridiculously exaggerated as his views may be. There might still be something to learn from him, even if it is only gaining insight from casting light on his very dark views and better illuminate the landscape as a result.
We don’t just want to discount his views completely out of hand, even though his dismal views may be far from anything that is even possible. It’s not that it isn’t possible for him to be right, or even close, although if we kept things locked down for a year or more like many wanted to, we could even commit economic suicide from this to a degree that Rosenberg’s prognostications of doom could even be on the conservative side.
Rosenberg did see the pushback from authorities being a lot more enduring than it has been though, even to the point where he foresaw the protests that we have had against the lockdown escalating to the point where the National Guard would be needed to prevent people from trying to save themselves by returning to work.
This was never realistic though as long as you had at least a little understanding of how this outbreak will progress, seeing it resolve over a little time and then have us starting to re-open. The lockdown was never designed to last all that long, although if you get your economic news from Tony Fauci, it was easy to become confused.
Fauci had an interesting exchange with a reporter recently where the reporter questioned Fauci’s knowledge of economics, which is not his field of course, which he pointed out. It turns out that Fauci knows so little about economics that he believes that we can just brush this all aside, and when you claim such a thing and do not know very much about economics, economics does play a central role in your advice, in the very claim that you can just give it a thumbs down and the ruling has merit.
The right answer would have been for him to tell us that he doesn’t know much about economics, and that he can only provide advice on his area of expertise, and then the decision will need to be left to those who do understand the economic implications as well so that the proper decisions can be made where all important factors can be properly considered.
Instead though, he has put the crown on his head and pointing his mighty thumb downward on economic issues, and the lockdown has been very much an economic issue. He admits that he only knows about medicine, and nothing about economics, and then gives us all sorts of strong advice about matters deeply involving the economy. This takes acting pretentiously to a whole new level for a public official.
Even with this, it still wasn’t realistic that we could carry this on for much longer than we have without showing some mercy. Hyperbole is Rosenberg’s middle name it seems though, and his visions of the need for widespread revolt does at least demonstrate how much he struggles with taking the pulse of what is actually going on, something he struggles with overall as well. He may have been right in that we would have seen these actual revolts if the political pressure did not bend, and the part that it would not is what was missed.
Rosenberg Sees the Economic Recovery Taking Years
His current claims that this crisis will be far worse than the 2008 one is based primarily upon his beliefs about how long the recovery from this will take. While the normal sized bears have been telling us that this won’t happen before we get a vaccine, Rosenberg now sees the recovery taking 5 years, even with a vaccine.
With restrictions being lifted, he believes that people will remain too scared of this virus for years, enough to severely impact demand for a long time. We still have a lot of that going on now, in the midst of the outbreak, where the situation is improving but we still have a long way to go until this finally dies off.
Even if this virus doesn’t die off on its own, we will achieve immunity one way or another, whether it be by way of herd immunity or by the widespread administration of a vaccine. Whether or not it makes sense to think that COVID-19 will even be an issue a year from now, at the earliest time where a widespread vaccine may be available, this is what the fearful are asking for to make them feel comfortable, so it’s not clear where the much more persistent widespread paranoia that Rosenberg foresees is supposed to be based on.
There will always be a segment of the market that remains afraid, but in order for this to have a significant impact upon overall demand, we need a large percentage of people to remain this afraid, and this is where his argument crumbles. He compares this to the fear of flying after 9/11, but that only affected a small percentage of flyers, and didn’t take that long to die down.
There are still people who are afraid of being hijacked, and we only have to look at the ridiculous additional measures that we have taken since to protect people from these extraordinarily rare events, the probability that your flight will be hijacked and used as a weapon for terrorism. Our response has been wildly disproportionate to the risk, but it at least worked, and quickly reduced this to a virtual non-issue.
As long as the need for a vaccine continues to be so widely promoted, there will be some people who will continue to withhold their consumption in some areas, those that they perceive aren’t as safe as they wish. We might take away the middle seat in planes to social distance, but that won’t be enough for some, who will choose to wait.
Rosenberg clearly believes that “nothing will be back to normal without a vaccine,” and tells us this with a strong air of certainty. This is vague though, as it depends on how we define normal, and there will always be people who will retain a certain amount of reticence for a while. If what we are wondering about is whether things will come close to normal, that’s a much bigger question, and if we are going to make assumptions like he is, we need to think this through and not just say it and have some nodding their heads.
We have been listening to this talk since the start, and people don’t seem to realize that the landscape with this outbreak may change dramatically in the year or more this will take. The reason why some would want to wait for a vaccine involves the assumption of a serious enough risk to want it, but if the risk goes away, so does the need for a vaccine.
If you are worried about flying on a plane or attending a live event, and are concerned about being infected with COVID, this requires that there actually is a risk to get infected. If the virus is no longer around or is present at such a low level that it is well beneath the threshold of meaningful risk, there is nothing to be protected from.
As we continue to see the outbreak wane, there is at least good reason to believe that this story will be over in a year and probably in even less time, and even though we may throw out hypotheticals such as it comes back later in a way that is a big enough threat, we need to at least understand this as a possibility of some magnitude and not something we know will happen.
The most we can therefore say is that there may be a need for a vaccine if our worst fears are realized, but there also might not, and given how things are trending, there is a strong possibility that it might not. Statements such as we need a vaccine to be all right again are therefore well out of alignment with probability, as the probability of the need for this is less than 1, and based upon the current data we have, considerably less.
Whatever further waves come, we know that they will be considerably less impactful than the first one, because so many people have been infected already. People will glibly tell you that we do not know whether getting COVID will protect you against getting it again, but we actually have studied this already with primates and found that the antibodies from natural infection with COVID are indeed protective.
This is typical, as natural infection from other viruses almost always confer lifetime immunity, and if not, last several decades at least. The reason why people need booster shots for vaccines is that the protection that they provide, if they provide any, is of a much shorter duration, and we can’t confuse this with natural immunity as natural immunity has been shown to be much more powerful and durable.
We Need to Be Basing Our Projections on Evidence, Not Just Fear
No one was protected from the first wave, but with subsequent waves, there will be less potential candidates for infection, and given the very high spread rate of this virus, that means that any further waves will be of much smaller scope and also do far less damage given that so many at risk for this have already succumbed to it.
We are actually moving at a pretty brisk pace this early on in the game as far as getting things back to normal, and although we still have a long way to go, a few months from now things should look very different and much more normal.
This virus may linger for quite a while but simply because it is still out there does not mean that it is above the threshold of concern. Once the risk becomes only a tiny percentage of that with common infectious diseases like influenza and pneumonia, and pneumonia kills two million children and over a million elderly patients every year worldwide, this will surely serve to change things. We don’t have a vaccine for pneumonia but we go about our lives not worrying about this, even older people where the risks of this are pretty high.
COVID-19 still pales in comparison to the 3 to 4 million people that die of these two infectious diseases each year, and while this isn’t to look to minimize the COVID deaths, as losing 350,000 people to this already is a big deal, but we’re talking about a time where COVID deaths drop down to near zero and a time where worrying about it would indicate some serious mental health issues.
There will be people who will suffer from this paranoia, just like there are people who are so afraid of germs in general that they may restrict their activities, but when we reach the point where the outbreak ends and we’re down to a statistically meaningless number of deaths from this, it just isn’t reasonable to think that people will still be afraid of this enough to bring down demand meaningfully, and especially not in the way that Rosenberg is assuming.
We don’t know these things for certain and the best we can do is make some educated guesses, but making guesses that appear less likely and not even realizing that they are guesses isn’t educated at all.
Rosenberg is also concerned about the high number of bankruptcies that we will see from this, enough to have him calling a real depression and not just a recession, and without all the stimulus out there, that might actually happen. He is well aware of the impact of this stimulus but has not seemed to compare whatever residual unemployment that is left with our degree of stimulus, as this stimulus will not only cushion the impact of our lockdown, it will also help to repair the damage.
Rosenberg’s much more dire than average prognostications aren’t really any more noteworthy than his usual recession talk that he engages in full time, and if that was the only story we were looking to tell here, this would hardly merit our dedicating another article to.
However, Rosenberg made a very interesting comment in an interview on Friday, which really raised our eyebrows and is what really inspired this article. Many are marveling at the stock market recovery in the midst of a pandemic and economic shutdown, where the fundamentals have been so trashed. Rosenberg told us that the correlation between stocks and fundamentals is 0, and although that should be no secret, the myth that they are correlated is wildly popular, so much that you never hear this pointed out.
It’s not exactly zero, but it’s pretty low indeed, and people speak of this correlation as if it is a very strong one. We congratulate Rosenberg for his insight though, and this also completely reconciles what is going on now.
Rosenberg particularly mentioned what he considers is poor economic growth over the last decade leading to a strong and enduring bull market with stocks, and although the economy has actually been pretty strong, and even ideally so, you can’t look at the growth numbers and predict the market, something we always look to point out.
He also told us he believes that stocks are correlated at 0.90 with quantitative easing, and although that’s not right, if we just change this to monetary policy, this really makes sense as well. While this correlation isn’t quite this high, we do get a pretty strong correlation indeed between the two.
We share these views, because that’s what the data says and it’s just better to be on the side of reality than live in fantasy land, but there’s one more step involved to connect the dots here. It actually doesn’t make sense to say that economic fundamentals aren’t correlated but monetary policy is, because the goal of monetary policy is to influence these fundamentals.
We need one more valuable insight to reconcile this, and while Rosenberg did come up with two of the three, the third one is a real challenge because it requires us to re-think and correct our views of stocks. The price of stocks is actually an arbitrary process where the market decides whatever it decides, and they have chosen to not pay much attention to economic fundamentals but pay a whole lot of attention to changes in monetary policy.
If the market decided to move stock prices according to the average temperature changes in the United States, or anything else, it would be so. Temperatures would trend up and this would have people more excited about stocks and we’d have a bull market. Once temperatures dropped, stock prices would as well and they would join the bears in hibernating for the winter.
Discovering what moves markets therefore becomes a task of observation, where we watch them move, look to make the connections, and then look to take advantage of these trends. This could involve changes in fundamentals, monetary policy, or anything else.
Monetary policy does happen to be something the market puts great weight on, so much that the market may not care that most of our economy is shut down and we are in the middle of a genuine pandemic and not the toy versions like SARS, and still bid stocks up. Some are even expecting new all-time highs this year, and they may be right, and it is indeed Jay Powell and his band of merry men that is stoking this desire to go higher.
The upshot of all this is that so many of us, just about all of us, have sought to understand the market in a normative way, how well it correlates with the norms they try to place upon it, rather than treating this as the factual matter that it is.
Every time we hear the word “should” when we talk about where the market is, we make this mistake, thinking that it is out of alignment when we are the ones that are. The market should not have recovered in the way it has for instance, because it does not conform to the way we think it should act, but it has acted this way, and our thinking that it should not is no different than our thinking that it should not rain tomorrow, and still maintain that view as the rain falls on our heads.
We do not deepen our understanding of the facts by ignoring them and trying to replace them with our half-baked ideas that are not fact-based, and as wildly negative as Rosenberg is, we stand and applaud him for at least having a much better idea of what is going on in the stock market than most. If only he tempered his bearishness with the continued efforts of the Fed, where they are expected to be hard at work keeping the mood of the market up for some time, we’d really have something to clap about, as would he.