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Excess Returns
We Asked David Rosenberg Why He Owns Almost No US Stocks — and What He Holds Instead
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- [00:01]
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- [01:00]
David Rosenberg
You want to get paid to take on the risk. You don't want to pay to take on the risk. And that's what investors are doing right now. You want to get paid to take on equity risk. Today, the stock market drives the economy, not the other way around. By virtue of the stock market, because it's no longer the housing market. Home prices have stopped going up. It's all about the equity market. And I don't think that people know to the second what their house price is worth, but everybody knows what their equity portfolio is doing. 93% of the growth in the economy last year came from productivity. That's really unusual. That, by the way, is very disinflationary.
- [01:44]
Matt
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, where better questions lead to better decisions. My guest today, a long time coming, founder and president of Rosenberg Research himself, David Rosenberg. Welcome to Access Returns.
- [01:59]
David Rosenberg
Thanks very much, Matt. It's great to be on.
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Matt
I'm super excited you're here, in part because I've felt like for years now that I've got a slightly different understanding of you than I see people often stand you up as and I was at Merrill as an advisor, as an allocator during the global financial crisis. And something that I watched was you pre crisis, through the crisis, and then post crisis, change your stripes. And sometimes you get pegged into this hole of like, oh, that guy's always bearish or that guy's always this or that guy's always that. And I'm like, no, no, no, no. You gotta pay closer attention to what David's saying when he talks about it. So I mean, start me off here. This framing of you as sort of like a cycle watcher and a cycle navigator is how I think of you. How would you put that?
- [02:44]
David Rosenberg
Well, I think that's very kind because really what somebody in my role should be doing is telling people when it is that you differ from the consensus and why and what the trade is on that identifying where exactly we are in the business cycle and the market cycle. Are we early, mid or late? And I had the benefit of starting my career on October 19, 1987. So maybe when people think that I'm Eeyore the donkey, your first day as a street economist, the market collapses 23% and you carry this dark cloud wherever you go. I think a lot of what you talked about, the reputation of being the Perma Bear, you know, it's a label and it's actually one that's that helped my career notwithstanding how weird that might sound because to some people there's a sliver of the population that's not small that sort of understands that really what it is is somebody who is going to help you stay out of trouble and identify tail risk. And there's not many strategists or economists that actually do that. So, you know, that's my stock on trade. I don't think that I really am a perma bear. When I get called that. I sort of, I don't even shrug my shoulders. I just smile because Ira Gluskin, who in Canada, you know, was just a iconic institutional investor who co ran Gluskin Scheffler with Jerry Schaff. But ira was the CIO and Ira was the one that hired me in 2009 and I was there for 11 years. So Ira ran a long only value fund. And I don't think that he would have hired a Perma Bear. And even though I had that reputation, but it's just like what you said because you followed me. Gluskin Chef just had a voracious appetite for my research when I was at Mirri Lynch Canada and Merrill lynch in the United States. I mean they were Merrill Lynch Canada's most profitable center. They, they, they, they, they would do mega trades through the Merrell desk and that's ultimately how they paid. So they happen to be very thoughtful people. So, you know, I think that I don't want to really belittle anybody or preach, but I have found after being in this business of 40 years that sometimes the market for rational thought ends up being a very tiny part of the Market for day traders and people that just want to embark on get rich quick themes. And so I don't fall into that category. So I get labeled the Perma Bear. Okay, I can deal with it.
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Matt
Do you think, do you see, do you see more when you're looking at things the left tail risk versus the right tail risk? Do you think in terms of all tail risk or do you think you're just hyper aware of the left tail risk because of that? Day one at the job was in the crash of 87. Well,
- [06:24]
David Rosenberg
it's really more what's the fat tail, what's the thin tail. But it's more like this. I started my career as the financial economist at the bank of Nova Scotia. First day October 19, 1987. Then I went to become the number two economist at the bank of Montreal. BMO and Esput Burns in 1994. Then I went to Merrill late 99 and was there a total of 10 years. And then in 2009 I got to Gluskin Shaft. So up until Gluskin Shaft I was just a big name sell side economist at large multinational banks. Now the data points I picked up over those decades was that the Wall street or Bay street economist and strategist is really nothing more than a marketing tool for the institutions they work for. They really don't have a lot of influence. And think of what happened at Merrill lynch as an example. When I was calling and I was early on the call, some people would say crazy early and they wouldn't be wrong. And Merrill lynch ultimately collapsed and had to be bought out by Bank America. But one of the epiphanies along the way was in the summer of 2007 before it became evident that things were falling apart. And I was instructed by my superior to no longer use the words housing bubble in my reports. I was advised not to do that anymore. I was making people internally upset and angry. Difficult to get deals done, difficult to get trading revenues in. And it was unpopular also. I just changed the words. I said housing mania. Is that a housing bubble? So maybe I was being a bit too cute. But then I got a call from my, my superior when I was marketing in Dallas and I was asked the question, who is it you think you work for? And I said Mirror Lich clients. And the rebuttal was no, you work for Mirror Lich. And then I realized, wow. And that stuck with me to this day. So I, I get to gluskin chef in 2009 and you know, I had a lot of the big banks on Bay street, because I was in New York, I had a young family, I was gone for seven years and commuting on the weekends, it just wasn't enough. And I was losing track of having balance in my life. And I was also thinking at that point, starting my own business, which was always my dream. And then just out of the blue, Gluskin Chef gives me an offer to be their chief economist and strategist. And then I thought, maybe as I'm turning 50 at that point, you can teach this old dog new tricks. Because it's the one thing I didn't have. I had B Street, Wall Street, I had commercial bank, investment bank, but did not have buy side experience. And I took that opportunity because I realized that it was going to make me a better economist and a better strategist and that I'll put my dream on hold because this will actually make things a lot better for my clients. What I do, I'm going to learn a lot more. And boy, did I ever. I learned more at gluskin chef in 11 years than I did in the previous, like 25 combined. And I'm going to get to the comment about the tail risks because what happened was that in my first presentation to the investment team, McGluskin Chef, and it was after I'd been there a month and I was formulating my view and putting together my chart deck, and I'm meeting with the investment team in the very swanky boardroom that they had at Gluston Chef. Mahogany table, everything was mahogany or oak. And they had group of seven paintings everywhere. I think they were Jerry's. It was really, it was really a special place in. The presentation ends. And then Ira leads the Q and A. And he says, so Rosenberg, and that's all he ever called me. Never call me Dave, Never call me Rosie. Rosenberg, what's your plan B? I said, plan B. He says, well, yeah, he says, rosenberg, what if you're wrong? What do we do? Where are you going to be wrong if you're wrong? And what do we do about it?
- [11:23]
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- [11:43]
David Rosenberg
And I was frozen, which happens very rarely to me. And he says, you don't have a plan B, you don't have a plan. So I requested that I come back a month later with something a little more elaborate. And I realized right then and There how the brain of a wealth manager, portfolio manager, institutional investor. I used to think that I had to figure it out. Because of course they say, leave your ego at the door. You're chief economist Demara lynch, but then you're thinking, I'm Sandy Koufax on the LA Dodgers. But you think you have to figure it out, but you don't. And I realized, and this after 11 years of sitting down with the portfolio managers and with the cio, I learned how to create and communicate a set of forecasts that is actually valuable for somebody who is putting money on the line. And it is all about probabilities there. You have to have a base case. You have to have a base case. So you have to have your plan A. But I realize it's not just plan B. You got to have plan C, D or E. And I realized that just from what Ira said to me, constructive criticism is a wonderful thing. And then thinking about it and then learning from the people who you are supposed to cater to, and it was empowering because I realized their brain of an institutional investor or a wealth manager is just one giant probability curve, just one giant distribution curve. What does that curve look like? What's its shape? How is it moving? And as you said, what is the left tail versus the right tail across the whole continuum? What is the risk of being right or wrong benchmarked against the reward? So I used to therefore go into meetings and I could say, you know, I could be on anything. Let's say it's the s and P500. That's all anybody wants to look at, but it could be anything. And I'd say, look, I want everybody to know that my conviction level in this particular forecast, I was at 85%. Now it's 65, but it's still my base case. And by the way, what I said last week, well, scenario B is now E, D is C. And the analysts and the PMs would be writing down furiously. And I never once changed my base case forecast. I just changed my conviction. And I flipped around what I think are the most likely scenarios, that the base case is wrong. And I could see what I was doing was changing the shape of the distribution curve of outcomes for them. And so, you know, when I was there at Gluskin Chef, I got all the Wall street and B Street research. I saw my former competitors, I got to see all their research. And I realized at their back page of their weekly say, they have all their forecasts, all their forecasts, whether it's GDP, the 10 year note yield, the oil price SCP of 100, you name it, the DXY, but they never tell you what their conviction level is, is it weak or strong conviction, that's important. And of course there's not enough room in the publication to put all your scenarios, but I know that nobody on, in the jobs that I had in the past ever really did that. So that was a great learning lesson. Beyond the fact that, you know and why I started my business was I realized I had a real void to fill in the marketplace beyond just the scenario building and understanding the importance of what the brain of a portfolio manager looks like. And my clients are all investors, you know, they're not academics. And that was particularly useful. But I also found that the vast majority, I mean everybody on Wall street and Bay street at these big banks, they cling to the consensus. And I realized because of the politics and desire for career longevity that they were all a commodity. They all sounded alike. So I thought at some point, I mean, I started my business in 2020, but I realized there was a, a niche that needed to have somebody out there. Talk about tail risks, talk about risks in general and about opportunities. It's not always dark clouds. And so, you know, that was, that's basically the, the evolution of my thought that really, despite all the accolades and all the awards I got from the II vote and the Brendan woods vote, that it wasn't until I reached the age of 50 at Gluskin Chef that I really began to figure it out. Better late than never.
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Matt
You know, you and Walter White, the age of 50 does magical things. I wanted that as preamble. So thank you so much for walking us through this because that probabilistic way of thinking and the way you approach it, where it clusters around consensus and then you have to think about the tails, is the way that I would hope. That's the way I've always encountered your research and this is the way I would hope other people would encounter it too. So I'm now bringing us all the way to 2026 and let's flesh out some details because in your outlook for the year ahead, you called it the sixth mega bubble. It's hard to say the sixth mega bubble of the last hundred years. Now, people hear bubble, they're going to auto tune that out of their mind or are they going to frame it up in a different way? What are you seeing in the outlook? Unpack the probability distribution and why you're using the words you are? Well,
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David Rosenberg
the bubble is not in the technology generative AI is not in a bubble. The Internet was not in a bubble. Electricity and the railways, the printing press, the shift in the technology curve, and this is a very significant one, that's not where the bubble is. The bubble is in investor behavior. So it comes down to this. What is the price you're going to pay for probably what you're going to get? What's your ex ante expected return on the money you're putting in for the payback? And nobody really knows fully what the total addressable market the TAM is going to be. But when I was taking a look just at multiples, whether it's median or average, price to earnings, price to sales, price to book, people have problems with all these different measures. So you look at all of them. My favorite one is the cyclically adjusted price earnings multiple, the tape that was pioneered by Robert Shiller, that goes back more than 100 years and it smooths out the business cycle. And that's what I like about it. And you should do that because although everybody's become a day trader, the equity market, at least theoretically, is a long duration animal. And you know, at the time that we wrote that report, the cape was, was 40. And that equates to call it a two and a half percent real yield at a time when the real yield on a long bond was 2.5%. So the equity risk premium was zero. So there's two things that I call a bubble. I call a bubble, say in the stock market. When investors are pricing the stock market as if it's a riskless asset, I consider that to be a bubble. And when the multiple exceeds a two standard deviation event, and we got up more like between three and four before the war, well, that classifies as a bubble. And it doesn't mean the bubbles can't last. You can have this period of hitting the 2 SD event and you could be there for another year or two before things rolled the other way. Because these sorts of multiples are not sustainable. If the sort of standard deviations we had in 1929 and sort of standard deviation we had in 1999, it even exceeded what we had going into 2008. So the technology is real. The extent to which it wreaks havoc on the labor market, I think we're seeing early signs of that. Over 90% of the growth in the economy last year was productivity. Usually in a normal economy, economic growth is split evenly between capital and labor. This time around, it's all capital, it's all productivity. So there's a lot of strange things happening that I don't believe are sustainable. And I guess because I lean on my mentor and hero Bob Farrell and One of his 10 marker rules is that there, there are no such things as new eras and excesses are not permanent. And that applies to valuation in the stock market. So when I talk about that there's a bubble, it's really about where the pricing is against the reality and then where that is trading against historical norms, which is why I'm always taking a look at what's the sigma of this particular event. So, so it's got elements of the Internet, there's differences, but the valuations are not quite as crazy. But it actually is the second most egregiously priced stock market in the United States in recorded history. And people always say, well, valuations aren't a timing tool. And they're right, it's not a timing tool. Nobody gets market timing that effectively. Some people do, but it's like once in a lifetime, it's like hitting a hole in one. Maybe some people do it two or three times, but time in the market, not advisable for most of us, for most of us mortals. And the multiple though is the starting point for telling you what your expected returns are going forward. Now this is going to sound very bearish, but know when you get to these standard deviations in the Cape multiple and you look over the next 1, 3, 5, 10 years, your total return in nominal terms is zero to negative. Like it's just not an attractive proposition for me. And how can it be? How does it make sense to anybody? And what else would you call it? In a bubble, when the earnings yield, the real earnings yield is equivalent to the real interest rate and the risk free rate. So the market's telling you, if you believe it, you believe that equities have become a completely safe asset class. Treasury bills don't yield a lot, but they're perfectly safe. So that's a bit of a problem I have. Of course I'm using the 30 year bond as cause duration. For duration, the real Yield is like 2.6, 2.7 and it's like 2.6, 2. 7 right now in the stock market, when appropriately valued, don't you want to get paid to take on equity risk normally? And I think Harry Markowitz would agree with me. He won Nobel Prize on his work on the, on the market you want to get paid to take on the risk, you don't want to pay to take on the risk. And that's what investors are doing right now. You want to get paid, to take on equity risk. And so that's where this sort of, you know, bubble might be a strong word. So you know what, I'll, I'll say I'll call it a mania. How's that?
- [24:51]
Matt
From one former Merrell person to another, we can call it a mania.
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David Rosenberg
I'll slip back into the mania aspect of it.
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Matt
We'll slip back into that for a second. What I think is most fascinating about the framing is especially with the cape, that tells you sort of the market story, the way it's being valued, the flight into capital, the reduction of labor and that ties into this economic theme you're also writing about of the silent contraction. Can you unpack what that means?
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David Rosenberg
Well, I think that people like to just talk about headlines and they look at headline GDP growth and they think everything is fine or they look at the headline unemployment rate and they think everything is fine. But when the data come out from the BLS or the Commerce Department, these are full reports, they're not just a headline. And I don't quite understand why people treat economics differently than, I mean, if you own Microsoft stock, would you really like it if the analyst writes a report with one line telling you what the headline or dig beneath the veneer to find out what's going on under the hud?
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Matt
Surely don't people want nuance?
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David Rosenberg
Well, it's basically the question is beyond the headline of anything. Now I'm not a securities analyst, but this is the way if I was I'd approach it because this is how I approach my own work. What is the quality? What is the quality of this number? And I don't care if it's 2% or 5%. So we are seeing very strange things happen in the US economy. For example, there's no doubt that the AI boom and its direct and indirect effects are pretty well accounting for all the growth in the economy just directly. When you look at business capital spending, you'll see that in the past year, and this is in real terms, adjusted for inflation, that AI related capex is up 15%. But what about old economy capex? The old economy industrials negative one. So when we talk about a K shaped economy, it's not just about the low end and high end consumer. There's KS everywhere, a huge split. When we talk about the consumer, how about trying on this size to try this on for size. What if I told you that consumer spending in real terms in the past year is up two and a half percent? Do you think that's a pretty good number? What would you say? Not bad, pretty good.
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Matt
I'd love to say not bad or pretty good.
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David Rosenberg
Okay, what if I told you that real consumer spending was up 1% year over year?
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Matt
That sounds like less than half of my pretty good scenario.
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David Rosenberg
Okay, but you see, because we're all narcissists and we judge the success of the economy based on spending, but we don't judge it based on income. What if I told you that real disposable income is only up 1%? You're seeing the cracks of, call it the stubborn inflation if you want. Nominal wage growth is coming down. And over the past year, employment growth is barely up. And in fact it's down 400,000 when you strip out health and education workers, which is where the employment boom is. But 83% of the US economy, 83% of the US labor market has lost jobs on net in the past year. Now there's another K right there. You've got a boom in health and education, that's 70%, 17% of the labor pie. 83% is actually negative. So the K is just this wide divergence, the wide divide. But the wide divide I was talking about before is 2.5% consumer spending growth benchmarked against 1% real after tax income growth. That's a huge difference in a $30 trillion economy. So what I'm saying is that how you explain that is by this arcane, but I would argue the most powerful and important behavioral aggregate in the national accounts called the personal savings rate. Now when you talk to a person on the trading desk about the savings rate, their eyes just sort of glaze over. But its movement is very powerful because just think about the fact that if it wasn't for the savings rate going down, it would mean that people were spending within their means and consumption growth, which is 70% of the economy, would only be growing at 1%. Now, I don't think most people say 1%. 1% is called stall speed. You get to 1% consumer spending, people will start asking is are we going to recession? But it's two and a half. Why? Well, because this time last year the savings rate was over 5%. You go back two years ago it was 6% and today it's down to 4. I mean the long run mean going back decades is like 8%. It's half that level. So it means that people feel confident to spend more and more and more of their after tax income on fun and games and goods and services. This also is not normal. But it's because of the equity wealth effects. People are looking at the 401ks, they listen to President Trump and of course a lot of this is geared towards the high end. So you've had this very powerful stock market rally, got interrupted temporarily by the war. And that wealth effect on spending has caused the savings rate to go down. And so there's your other indirect impact of the AI boom. Because a lot of this, because it's when people were even talking about the market broadening out through a good part of last year into this year. Well, the tentacles are spreading like all the deals that the banks are doing, AI related, utilities, AR related, you know, even before the war, all the energy intensity and AI energy and so the industrials. Right. You know, same thing, all related to AI. And this boom in the construction of AI data centers, it's had a multiplier impact. And you had this stock market boom in the past several years, has had a dramatic economic impact. You know, I talked about when I started in the business in 1987, you know, back in those days, it was a different market. Right. Back in those days, the, you know, the, you know, the people who are in the stock market would ask me for my GDP view, the equity strategist would ask me for my GDP view and use that as an input to call the stock market. But now the causation runs the opposite direction. Today the stock market drives the economy, not the other way around by virtue of the stock market, because it's no longer the housing market. Home prices have stopped going up. It's all about the equity market. And I don't think that people know to the second what their house price is worth, but everybody knows what their equity portfolio is doing and they're checking it like 10 times a day on their phone. And when you feel richer, you spend more of your income. And that's actually sentiment driven. You know, it's interesting that, you know, GDP doesn't move like the stock market and the stock market's driven by sentiment, but the savings rate is all about sentiment. I feel richer. I'm going to spend more of my after tax income. And that process alone has added well over a percentage point per year to consumer spending growth in real terms. That's big when you consider the consumers like $20 trillion of the economy. So that's something else to consider. We're just watching history in the making. Historians will be writing about the period we're in right now. So what I'm saying is that beneath the veneer, there are a lot of very funky things going on behind the scenes in say these GDP numbers, they're not really what they seem to be. The other part of this of course is what about the fiscal side? How sustainable is that? Do you know we've run in the United States six consecutive years of the deficit to GDP ratio being over 5%. That's insane where we've been running deficits. I mean, the last recession lasted a few months and it was the COVID recession in the winter and spring of 2020. We're running deficits right now that we used to run to fight recessions, but there's not been a recession in five years. But maybe you'd be right to argue, well this is mitigated a recession having all this fiscal largesse. But at what point does that morph into a debt crisis? So it's all very interesting to me that we've got all these things. We just got the bank started reporting this week and you could see the bank earnings outside of Wells Fargo were very good. But really it was trading revenues up 17%. Trading revenues was just. It doesn't reflect anything in the economy, it reflects volatility in the markets, but it's a real low multiple part of the banking business. But that's what drove the earnings just over this past week and the limited sample size that we have. So I mean, I look at the data the same way. Is it a low quality gdp, is it a high quality? But it's being skewed by things that might not have that long of a shelf life. Like we know that for this year the capex budget for AI, I mean it's gone from 400 billion last year to 700 billion. But what's it going to be in 2027? Like at some point we're going to be choking on too many data centers and that's been a huge part of that growth. Will the stock market, will the multiple continue to, Will it go from a 3 standard deviation event to 4 or 5? Like will it get that crazy and generate more and more of a wealth effect on spending? I mean, these are assumptions that you have to make. And what about it? What about employment? What's going to cause that to turn around? I mean, that's the interesting thing is that heading into the Iran war, employment growth was zero and it was negative for 83% of the labor market. As I said before, this is before the war, and yet I'm told that with no employment growth, real income growth at 1% for the working class, that this is some sort of discrete economy we have in our hands. And of course when you hear people at the Fed like Jay Powell only talks about how solid the economy is, I think it's on shakier ground than people think. And and then what happens in November if the Democrats sweep, which looks like they probably will, and then all of a sudden five years and does anybody do the analysis on where would the economy be? Where would the economy be? Where would the markets be if the government and these are Republicans, we're not running up 5% plus deficit GDP ratios, where would things be? But there's going to be a classic Bob Farrell mean reversion trade I think after the November elections because what are things going to look like when we enter into a prolonged period of fiscal gridlock and then in 2028, what do things look like if we actually have the Democrats taking the White House and both chambers and you're seeing what the governors are doing right now with millionaire taxes and maybe that's the right thing to do. I don't know. Somehow we have to mean revert things and maybe we want to redress the K shaped economy. I think no taxes on tips, just maybe moves the ball maybe a couple of inches. So some big things are going to be happening. Donald Trump was great for the stock market and the risk on trade and crypto, but the United States, there's the business cycle, there's the market cycle, the move in sine waves but there's the political, political cycle. And the reason why we have mean reversion is to reestablish balance. But it does mean that it's going to come probably at the expense of spending at the high end. Think about spending at the high end as underpinned the economy, all the AI capex like basically like I said before, I hear about a capex boom, but hello, no old economy, industrial capex is actually in a recession. So it's a very narrowly based economic expansion that we're in right now. And when you take these pillars away, I don't think there's going to be anything there to provide the cushion. It's just very difficult to time but just know that it's out there.
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Matt
So let's further gaslight some fellow narcissists then with this, the outlook then for 2027 between valuations, between the precarity of income, between the labor situation, between the midterms coming up at the end of this year. I mean we have the biggest small government ever operating right now and that's going to go through a wild change here, likely in November. What do you think 2027 holds you've been talking about. You take away a couple of these pillars or crutches, I believe you referred to them as there's your recession. And again, not predicting this, but explain the nuance here of how we get to that outcome.
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David Rosenberg
Well, it's like what happens when you take the training wheels off your kid's bike. They'll learn to ride the bike, but they're going to fall down, at least initially. So the economy's got a lot of training wheels. I think that probably my assumption is that we're heading into the peak of the AI spend in terms of incremental impact on the economy. What we don't know in the future is how much excess capacity there's going to be, because that always happens. That happened with the railroads, that happened with the canals, that happened with the Internet. You build out too much. That's just human nature. So maybe when I said that there's no bubble in actual AI, usually you get the over construction based on inflated estimates of the tam, like I said before. So peak AI spend, peak fiscal policy. And the question is going to come, what sort of fiscal policy are we going to be seeing? Will the November midterms have investors thinking what's in store for 2028 and what that means for tax rates, what that means for corporate tax rates and what that means for tax rates at the high end of the income spectrum? I expect all these things are going to change now. Will it generate a recession? Hard to say. But you know, I think that you've got for 2026 something like 19% earnings growth baked in by the analysts and something not far off that for 2027, I don't know how long and nominal GDP probably will do no better than 4 or 5%. So the assumptions, of course, is that profit margins, which are already at record highs, go to new record highs. So I don't know so much about the recession call right now for 2027. But as I said at the outset, what I look at is what's priced in and what do I think is going to happen? If we're talking about how does that probability curve look like, I think there's a higher chance of recession than there is a renewed economic boom. So we know what the curve looks like. But it's not hard for me to make an assertion that we're not going to see that sort of deviation of profit growth. And ultimately investors pay for profit growth. I don't think we're going to go through another sharp deviation like that. Where profit growth is going to outstrip normal GDP growth by a factor of four. I put very low odds on that. That's a high conviction call. So for me to have a more cautious call on the risk on trade, I don't really need a recession. I just have to have things not go as rosy posey as it's being discounted right now. But I'm not factoring in the possibility of any shocks, just factoring in the I think elevated probability that things don't play out as positively. And really what I'm expecting to see in the domino game is a lot of the props fiscal policy, which has been tremendously supportive for the risk on trade. I firmly believe that's going to change. And the question is if that changes enough to undercut the stock market. The savings rate's not at 4% anymore. What if it goes back to 6% where it was two years ago? Well, the math on that is pretty daunting. Unless we get some sort of miraculous turnaround in the labor market. You're talking about taking off probably a point and a half from GDP growth right there. And the run rate on GDP growth right now is basically in and around 2%. So you're getting pretty close to zero on growth, which you'd say, well, that's not a recession, but it's the next rung up in the ladder and there's no way you're going to get that sort of pace of economic activity and get the earnings that are embedded in the stock market right now. So I don't have to go and yell out, recession, recession, recession. I did that back in 2022, and I was dead wrong. But I'd underestimated the extent to which everybody was going to spend the $2 trillion of those pandemic stimulus checks. That blew me away. Every penny got spent and that offset what the Fed did on interest rates. And that's why the yield curve inversion didn't work. It's because we had fiscal policy on steroids. But that doesn't exist. That will not be existing. I don't believe the next couple of years. And that's the business that I'm in. You asked me at the beginning really what it is. What is it? Well, it is a lot of guesswork. I like to say educational guesswork. But it's funny that you'll say, Well, I bring 10 economists into a and I'll be lucky to get 10 different answers, you know? Well, it's because we all have the same data. We all look at the same reports, but the assumptions differ. That's why you have various forecasts is your assumptions drive your conclusions. So those are my assumptions behind not necessarily a recession call for next year, but for a disappointing year benchmarked against what's priced in. Yep, the market was priced for a recession. I would say, hey, you know, I think we're going to have a very weak economy, but we're not going to have a recession. So you know, start adding some risk. But it's basically comes down to what I said before. What is the value of the economist or the strategist is to identify what is priced in. What's your view, how big is that gap and what do we do about it? But it works in both directions, good and bad, better or worse.
- [46:33]
Matt
So back in financial crisis era we had the peak oil thing and we had all this stuff about inflation and if it was going to be sticky or not or how it was going to pull through and blah blah, blah, blah blah. And right now we have this giant oil spike again. And you again are kind of pushing back on some of those sustained inflation calls or forecasts. Unpack what that is, tie that into how you're thinking of inflation right here, right now.
- [47:00]
David Rosenberg
We just won't call it transitory. Well you see the reason why it wasn't transitory was not transitory back in 2021, 2022, 2023. Now it depends how you want to define transitory. I mean that inflation run up was 18 months. But you know what, it wasn't like three months like the Fed thought it wasn't the 1970s. A lot of people were talking about that. So they weren't right either. But it was 18 months, probably not transitory and going from 0 to 9%, really big move. But you see what happened then was we had the supply shock. We had global supply chains impaired because of COVID and that was the initial inflation shock. But then we got the vaccine and the supply chain started coming back basically everywhere outside of China for a while. But in their infinite non wisdom, the government handed out stimulus checks of size like $2 trillion. I mean think about that. It's like you know, 7% of the economy, stimulus checks and also extended unemployment insurance, beefed up payments and you can stay out of work for years. And that led to a total dislocation in the labor market. So you had all this demand from the fiscal side bumping against what happened on the supply side. But the supply side, just as it was started to ease, we had the demand boost, but the big deal we Talk about, of course giving free money to people. And I didn't think they were going to spend all of it, especially after, you know, basically, you know, something like half of the American public didn't have enough savings on hand to get through three months of idle employment, you know, coming into the, coming into the COVID situation. So I thought it was natural because you know, economics is a lot about behavior to behavioral science. You know, what, what were people going to do? I thought they were going to save at least half of it and they ended up spending all of it. But the really big kicker here was that the price shock back in 2021, 2022 and 2023 happened because the government was paying people not to work. So companies couldn't get for them to attract their labor back in and the demand was coming back and the supply chains were starting to ease. Well, because the government was paying you to lie on the couch, they had to pony up and pay more. So what happened is that that inflation shock fit into wages and we had not a 1970s decade long, but we had an 18 month period of a wage price spiral. So that was what undercut the Fed that they didn't see. And you could argue that I didn't see that. When it feeds in the wages, it's a big problem. Big problem because it becomes self reinforcing this time around. Why I think it's different is we have a much different labor market. You can see it in the job openings numbers, in particular the indeed job posting numbers. You can see that the hiring numbers from the Jolt survey, labor demand is declining. The reason why employment hasn't been even weaker is that companies aren't firing people either. It's just total inertia. And they don't have to fire people because they're getting a lot of productivity out of their existing workforce. I mean like I said before, 93% of the growth in the economy last year came from productivity. That's really unusual. That by the way, is very disinflationary. You know, and when you hear Scott Besant or you're here, it's the one thing I do agree with them on. Steve and Myron, one of the few things I agree with them on is that it makes no sense to be talking about a productivity led economy, which is what this is. I mean 93% of the economy's productivity growth, how is that inflationary? Because it suppresses labor costs, which is the mother's milk for real inflation. So right now we don't have wage inflation. We have commodity Inflation. We had inflation because of what's happening with energy. It'll feed into food, it'll be with us. The inflation readings the next few months will be pretty ugly. We had the tariffs, interestingly enough, that Jay Powell at the panel he was at, I think it was the Harvard panel a few weeks ago, said that inflation outside of the tariffs is between a half and a full point. It's been skewed half to a full point by the tariffs. Ergo, inflation is just for the tariffs, which are not going to go on forever. In fact, the effect is peaking out. Not that the tariffs are going away, but the incremental impact. Because inflation is a rate of change. It's not a level that's going to come out. So if you're saying, well, the tariffs added half to whole point, that's telling you right there that inflation is actually a target. I don't understand why the Fed is as hawkish as it is. They're like the deer in the headlights. But I think it's a case of fool me once, shame on you, fool me twice, shame on me. So they're never going to use the word transitory again, but I'll use it because that's what this is. Because this will not get transmitted into the labor market. The labor market is cracking, not imploding, it's cracking. You're seeing it in the hiring rate, you're seeing it in the job opening rate, and you're seeing it in the quit rate. And if you remember the quit rate, the voluntary quit rate, which I always called, you know, the take this job and shove it index. People were, people were job hopping because companies couldn't find labor. And the workers had all the bargaining power. Workers had all the bargaining power. And we had a wage cycle. The quits rates has come way down, like it's a completely different labor market today. So then I think everybody on the call's got to think about, well, what happens with this price shock coming out of the war if it doesn't feed into the labor market because the labor market is weakening. And don't look at the 4.3% U3 unemployment rate. It's not going to help you out. Nominal wages are slowing down. You gotta look at the price. Don't look at the unemployment rate. And by the way, the U6, the broader measure is infinitely higher. It's telling you that slack is building up the labor market. What does that mean? It means this price shock is going to hit the wall the labor market and what we'll end up with at least for a while, depending on what happens now and if the war gonna end. What is this, you know, this ceasefire turn into a deal? What does the deal look like? Of course the markets are laying down their bets right now, but they're. There's still enough unknowns. But this price shock hits the wall in the labor market means that real wages and then real consumer spending are going to contract. Now that won't necessarily entice me to call for recession because I don't know how long that's going to last. But you get a couple of quarters of a situation like that and you will get a recession. But I don't believe that this inflation will be sustained because of the shape of the labor market right now. It can only be sustained if it feeds into wages, which is why we had that inflationary episode last 10 years in the 1970s. But the Teamsters were in control, most of the economy was unionized and everybody had COLA clauses. So you had built in inflation back then. You had built in inflation in the US economy through the 1970s and that doesn't exist today. So no, I don't have a big inflation story for you. I have a disinflation story for you. I think what people tend to forget, just arithmetically is that a third of the CPI and 40% of the core is shelter. It's rents and owner's equivalent rent. And now after years of seeing negative rental data and it feeds into the CPI with a lag, we're starting to see a shift right there in the data that's going to cause. I think people will be very, very surprised at how low inflation is by the end of the year. But everybody's got inflation on the brake. And of course the Fed's talking very hawkishly, but that's only because they fear they're going to make the same mistake they made in 2021. That's just human nature, but I think inflation is going to be a lot lower. The big risk when you're talking about the inflation call is that the Fed lags too long behind the inflation decline and causes real interest rates to go up. And that's something I'm watching very closely.
- [56:12]
Matt
Got two more questions for you. The first is for equity investors or allocators with the equity sleeve. Take risk down, be extra conscious of it. Are there certain places that you would just say wholesale avoid or places that you see as opportunistically. How should investors and allocators just be looking at the market midway through 26?
- [56:34]
David Rosenberg
Well, you know, at Roosevelt Research. For the past three plus years, I've been running a model portfolio. It's a unitholder of one. I seeded it with my own capital. It's on our website. We just did a modest shift just the other day. But it's a, if you want to call it a fund or call it a model. A lot of my clients, I have 2,300 clients in 40 countries and a lot of them are actually mimicking this. This portfolio, it's up more than 60% since the beginning of 2023. So it's matched the S&P 500 with the beta of 0.4. It's 40% of the volatility and that's because it's an ideas basis. Our top conviction, When I talked before about if you don't have a plan B, you don't have a plan, but this is, this is basically all plan A, this is all our top conviction calls, I would say that I'll just talk about how that's constructed right now. I mean it's basically, you know, it's got like a 1.4, 1.5 Sharpe ratio, it's got a 0.4 beta. So the risk is dialed pretty low. It is Probably, I'd say 40% equities, 50% fixed income and 10% other and other being exposure to rare earths, you know, uranium. We have clean energy and energy infrastructure. So like it's a very esoteric, it's very esoteric portfolio that really is not making a directional bet on the economy or on the markets. And that's what you want to do. You want to be non correlated and you want to be diversified and diversified globally coming out of this mess. You know, I think that China has emerged as a winner, just not by doing anything. And I think the US has been weakened. I mean here you got, I mean Trump's going cap in hand for like 1.5 trillion to refund the Pentagon. We'll see if that gets done. But China's fiscal situation, nothing. I mean you could argue that if the war was prolonged and there were oil needs from Iran, sure. But they're way ahead of everybody in the game when it comes to clean energy of all sources. And they had stockpiled a lot of oil to begin with. But I just find, for whatever reason, and I'm not big rah, rah, rah. China, China, China. But it seems that Xi Jinping is always a step ahead of everybody else. We don't own China directly, but we own the Ex, Japan, Asia, MSCI index and China is the biggest component there. So we like Asian equities, I like the equity market. We just don't have a lot of exposure to the U.S. probably 15% of our equity exposures in the U.S. but you know, we have, as I said before, energy infrastructure, pipelines, rare earths, uranium, we have global defense, global healthcare. It's basically a portfolio that mirrors my client base which is global and diversified. So we have commodities, we have fixed income and we have equities. We're still basically with a higher and we're not constrained. Okay, but we have a higher fixed income. We don't own the long bond. We do think there's going to be this elongated elevated fiscal risk premium at the long end of the curve. But we have some 10 year notes. But mostly like when I look at our Canada US 35% of the portfolio is in two year notes in both countries because we don't and all the central banks have to do is not increase interest rates. And when I look at the math as to what's probably going to happen because I think the Fed will be cutting later this year and into next year that probably is going to generate a 6, 7% total return. And a year ago people would have said 6, 7%, is that it? And so I think today. So it's better than cash. If rates really come down then you would have been much better in the 10 year. We still have money in the 10 year but we just like a high conviction call. So Ira Gluskin, here's scenario. A high conviction that the central banks will be cutting rates. We think there's too much tightening priced into the Australian curve. So we own short term bonds in Australia and we like the currency, we'll take on the currency risk. So that's really how it's constructed right now. I would not get too carried away with this frenzy, frenzy crackhead momentum that we're seeing right now based on headlines and sentiment. That's not how I invest and I'm not a FOMO investor, really just invest around our top conviction calls. I'd say half our portfolio is tactical, like making the bet against central banks, raising rates in Canada, United States, too much priced in. That's tactical. But a lot of the other stuff, defense, healthcare, energy, infrastructure, rare earths, uranium. So half of it is also just thematic. That is classic family office. That's a three to five year and I'll put gold in there as well because gold is part of the other. So like I've been saying all along, diversification is not some dirty 15 letter word. So what I'm preaching, diversification, preservation of capital and the preservation of cash flows. And when you really look, if you go on the website and you look at this, you'll see it's really, it's a hard asset portfolio that's trimming off a cash flow stream. That's how I would describe it.
- [62:40]
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- [63:13]
Matt
All right, one more for you. I want to take you back with Ira when he asks you about what's the plan B and you said I'm going to get back to you in about a month. He didn't try to answer on the spot. Reflective, pensive, whatever it was. What was the instinct that you didn't want to answer on the spot and that you wanted to come back with research and talk to them later?
- [63:36]
David Rosenberg
Well, I had to. Well, because, well, I really couldn't give a really fulsome answer to what he said on the spot. It required work and thought and so I'm quick on my feet, believe me. But all these portfolio managers, they had the client's money on the line. I'm not going to sit there and bullshit my way through. So it took me about a month to go back and actually construct a whole. Like I said, the title of my presentation was this and my first slide. I get it. So I just came back with various scenarios and probabilities of what I thought was going to happen. And so you know that's a. You never stop learning in this business. You know, I started, I started my business at age 60. I'm gonna be co launching an ETF based on this model portfolio in the next few weeks at the age of 65. And I, by the way, I just wrote a book that's gonna be published in the summer and it's called uh, a How a How a A Bear Survived in the Bullring. So we'll send you an autographed copy when it's out.
- [65:10]
Matt
I'm taking it. I think that's six reasons to have you come back on. I'm also proposing the alter ego of Rosie Posey deserves to be out there.
- [65:19]
David Rosenberg
I. I like that one, too. I'll put that on the back.
- [65:22]
Matt
All right, let's go. Let's get that out there, too. David, if people want to read more of your stuff, they want to bug you on the Internet. Where should we send them?
- [65:29]
David Rosenberg
Right. Well, look, I'll tell you what you can do. You can. I mean, I mean, I got a Twitter handle. I don't even know what it is, but it's just, that's for social media, just for, like, marketing purposes. You can find me on LinkedIn. But I'd say if you want to know about the research, because we were. We're going to offer everybody on this call a free trial. Free. So putting my disinflation view to work. Free trial. Just Google Rosenberg research. Click on. Or go to informationosenbergresearch.com, click on. You'll get your promo code, Bob's your uncle. And you can check out what it is that me and my team are saying every single day. We span the world of geographies, economies, and all capital markets. And I'll just do this. I'll throw this in there. I won't give my phone number. Okay, That's a little too personal. But if you want to reach me personally, my email address is drozenbergosenbergresearch.com and I'd be happy to take your questions, comments and criticisms and be nice to start a chat. So feel free to email me personally if you so choose.
- [66:40]
Matt
If you so choose, and indeed you should. David Rosenberg. This has been a long time coming. I can't thank you enough. Thanks for coming on Excess Returns.
- [66:48]
David Rosenberg
Thanks a lot, Matt. Take care. Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com. if you have any feedback or questions, you can contact us@excessreturnspodmail.com no information on
- [67:09]
Sponsor/Advertiser
this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of the firms of the hosts or their clients.