July 15, 2024 • 58 mins
Curious about why David Rosenberg is shedding his "perma bear" label? Join us for an eye-opening discussion with the esteemed economist as he challenges conventional wisdom and shares his optimistic outlook on markets outside the S&P 500. David dives into the hidden opportunities in Japan, India, and the commodities sector, emphasizing the importance of diversification and capital preservation. He also offers a fresh perspective on the often-overlooked UK market, providing valuable alternatives to the overvalued S&P 500.
Discover the surprising factors behind last year’s 3% GDP growth and prepare for a potential recession on the horizon. David sheds light on the connection between rampant fiscal stimulus, excess savings, and the resulting YOLO spending mentality that temporarily boosted economic figures. As he draws on historical economic patterns, David warns of the disconnection between large-cap tech stocks and the broader economy, suggesting that looming recessionary pressures could impact their long-term valuations.
Explore the intricate dynamics of Federal Reserve rate cuts and their far-reaching impacts, from the US dollar’s anticipated bear market to the robust performance of Japan’s equity markets. David offers keen insights into the structural changes within Japan’s corporate sector, the bullish outlook on India’s economic growth, and the intricate dance of commodity markets. The episode concludes with a lively Lead Lag Live discussion where David answers audience questions, offering a deeper understanding of today’s financial trends. Don't miss this engaging and informative episode with David Rosenberg!
The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:08):
My name is Michael Guyatt, publisher of the Lead
Lager.
Joining me for the rough houris Mr David Rosenberg, who I
know a lot of people arefamiliar with.
I always start off saying,david, introduce yourself.
I know a lot of people know you.
But maybe before we get into adeeper discussion around markets
and the economy, set the recordstraight because a lot of
people I think might be underthe impression I know wrongly so
(00:29):
that you're a perma bear.
Set the record straight on that.
Speaker 2 (00:35):
Well, I don't believe that there's a perma anything,
because perma by definitionmeans permanent and there is
nothing permanent, andespecially in this industry of
the financial markets.
So I think that people get thatidea because it's been a long
time since I've been bullish onthe S&P 500.
(00:58):
And people tend to think thatthat is the only market out
there is the market for largecap US stocks.
So I'd rather consider myselfto be an ideas guy and focusing
on risk adjusted returns and Ibelieve in diversification and I
(01:18):
believe in capital preservation, which I think has been thrown
into the garbage bin over thecourse of the past 18 months.
But this perma bear has been arelentless bull on Japan which,
even currency adjusted in thepast few years has outperformed
the S&P 500.
And we've written a lot ofreports on Japan been very
(01:41):
bullish on India.
We're very bullish on the fixedincome market broadly speaking,
and there's areas within themarket that we like.
We like defense stocks forobvious reasons.
We are very long agriculturebecause of the really a secular
(02:05):
bull market in in food securityand we generally like
commodities and we think thereis a long-term bull market in
commodities and we especiallylike precious metals.
So if I was really a perma bear.
I'd be telling everybody to gohide in the Hills.
You know, buy a sawed off,shotgun baked beans, canned tuna
and go hide underground.
(02:28):
I've never done that.
That's a perma-bear.
I just choose to focus on areasof the capital structure and
geographies where I see moretailwinds than headwinds.
Speaker 1 (02:48):
If you want to call that a perma bear, go for it.
Yeah well, it's funny because Ialways make that point that you
can be bearish and still long,because, to your point, it's
more than just one market right,there's uh, you know there's a
whole other world out there.
Speaker 2 (03:02):
Um and uh, you know there was uh, like right now we
put out more of a bullish pieceon the UK market, for example,
one of the few areas of theworld where there is now
political stability, both inabsolute and relative terms, and
a market that isn't screamingfor rate cuts because they don't
(03:22):
really need it, for rate cutsbecause they don't really need
it.
And so we also like sterlingbecause the Bank of England may
well be the last central bank tostart cutting interest rates.
So you know, I span allinvestments and I span the globe
, but, of course, everybodybelieves that there's only one
market out there and it's theS&P 500.
By the way, the average stockin the United States is the same
(03:48):
level today.
It was back on January, the 4thof 2022.
So that's basically 19 monthsof nothing for the average stock
.
So it's not even the S&P 500anymore and it might not be the
MAG-7.
It's probably more like theMAG-5.
But it's a very concentratedindex and I have my concerns,
(04:09):
and the higher it goes, I think,ultimately, the harder it's
going to fall.
But that date hasn't happenedyet.
But there are other areas to putmoney to work.
I said before, it's not justthe Treasury market.
You can buy the S&P 500 at a4.6% earnings yield or you can
(04:29):
pick up a short dated piece ofinvestment grade corporate paper
for five and a half percentwith minimal default risk and
minimal duration risk, and Ithink that that's going to prove
to be, over time, to have beena better risk adjusted strategy
(04:50):
than being all in on the S&P 500at these nosebleed valuation
levels that we have right now.
Again, I don't consider that tobe bear market thought because
I'm not saying just be all incash.
We have been long Japan.
That's actually been ourhighest conviction call and it's
amazing because everybody has ahome bias and everybody's
(05:11):
focuses on, you know, the USmarket.
Japan is a very liquid market.
It has a higher all in yield.
It has a super cheap currency,of course, and when you compare
their dividend yield and theirearnings yield to where their
benchmark bond yields are, it'sstill a great place to park
(05:32):
money.
And I've been saying all alongto American investors take your
profits in the US.
No one ever got hurt by bookinga profit and move the money to
other stock markets around theworld.
There are some that still haveparticularly solid
characteristics.
So I don't think that's reallya bear market narrative.
It's really in my opinion and Idon't want to sound arrogant
(05:57):
when I say it, but it's reallyjust being rational and being
disciplined and being prudent.
So diversification doesn't justmean across your equity
portfolio or your asset mix.
You should also have geographicallocation in your portfolio as
well, and Japan has been agreat place to be.
So actually, if I'm PERMAanything, I'm a PERMA bull on
(06:21):
the Tokyo Stock Exchange.
Speaker 1 (06:25):
Speaking about bear narratives, though, the ultimate
bear narrative is recession,obviously, and you've been
putting out some really goodcontent that's poking the bulls.
I actually like the tone withwhich you're approaching a lot
of the stuff I'm going to share.
One of the more recent poststhat you put out, which looks at
the ISM composite PMI and yourcomment on this from X, is the
(06:50):
June ISM indices.
Undercut consensus views andthe combined levels are where
they were in 2001, q1, 2008, q1,2020, q2.
But hey, consensus says there'sno recession coming, so I guess
it won't come right.
Let's talk about the state ofthe US economy, because if there
is going to be a bear narrativearound the S&P from a
(07:11):
directional perspective asopposed to a relative
underperformance perspective,it's got to come from growth.
Speaker 2 (07:20):
Well, let me just say that the economy is clearly
weakening.
You know, I'm astounded thatJay Powell continues to refer to
the US economy as being solidand strong, but then again, I
guess he has to always soundlike an economic cheerleader
because he is a quasi-politician.
(07:41):
The Fed, after all, reports inthe Congress for people to think
that there's a complete centralbank independence.
That's actually a bit of a joke.
The economy was strong.
Last year we had 3% GDP growthand that was surprising indeed,
but the impact of what the Fedhad been doing was camouflaged
by really rampant fiscalstimulus.
(08:03):
Who thought that last year wewere going to have a 30%
expansion in the fiscal deficit?
And that played a very big rolein influencing economic growth
last year was the governmentsector, and then we had the last
leg of the excess savings filebeing put to work.
You know, historically, whenconfronted with a stimulus check
(08:24):
, the household sector wouldsave half and spend half, and
that's why the economists in theWhite House told Joe Biden back
in March of 2022, go big or gohome.
If you want a trillion dollarsof stimulus, you've got to give
people a $2 trillion lotteryticket.
But they didn't save any of it.
It all got spent in this.
I guess a new wave ofnarcissism.
(08:46):
You know YOLO, you only liveonce.
Yolo on Main Street was whatFOMO has been on Wall Street,
and so that last leg of thesavings drawdown was huge last
year.
And so when you adjust theeconomy for those two factors,
when people say, well, you knowthat's data mining, and I say,
(09:08):
no, I prefer to call it analysis.
If I wasn't covering a companyand I was, you know, covering
their quarterly performance, andI saw non-recurring factors in
there, I would put an asterisksaying non-recurring, and so
these are non-recurring factors.
So the excess savings file isover, fiscal stimulus has turned
(09:29):
really into neutral, and sowhat are we left with?
We had 1.4% real growth in thefirst quarter.
We're actually, michael, we'retracking.
We have our own now cast model.
It's tracking right now.
Outcast model.
It's tracking right now slightnegative for the Q2 real GDP
(09:49):
that we're going to get at theend of the month.
So I think that the recessionthat nobody sees is probably
starting right now.
And, of course, the one thingthat I will say I do not believe
in new eras.
I do not believe that excessesare permanent.
I am a firm believer in thebusiness cycle.
I do not think the businesscycle has been repealed and I
believe that in a credit-driveneconomy, interest rates always
(10:11):
matter, but the economy alsoalways resets to shifting
interest rates in bothdirections with long lags.
There is noget-out-of-jail-free card for
the economy coming off the mostacute policy tightening cycle
since the Volcker years in theearly 1980s.
So staring us in the face isthat reset.
(10:33):
And just remember that the Fedstopped tightening in the spring
of 2006.
And then nothing happened in2007.
That was the soft landing.
The soft landing is a bridge,really, the transition from the
expansion phase of the cycle tothe contraction phase.
And next thing you know, therecession starts December 2007,
which caught a lot of people bysurprise.
(10:54):
So I think that's really whatwe're looking at.
I'm probably the only economistthat has not thrown in the towel
on the recession call, becauseI don't believe that delayed is
the same as derailed, and I canunderstand that those of us that
have been calling for recession.
Of course it's been frustratingbecause it hasn't happened yet,
but I had the same feeling whenI was calling for recession in
(11:16):
2006, but I stuck to my guns.
I didn't throw in the towel.
There was only one othereconomist back then that was
calling for recession at thesame time.
It was Dick Berner at MorganStanley, but it was a lonely
period of time.
So you know I've seen this playout before.
And as far as the comment on thestock market, you know what's
(11:37):
interesting is that you havethis record concentration of
large cap tech, like anythingthat's touching AI, nvidia and
the like Microsoft, apple.
We ran these correlations andfound that the Mag7 space has a
0% correlation with the economy.
(11:58):
But the rest of the market hasa 50% correlation with the
economy and that might be onereason why the average stock
hasn't risen for the past 19months.
But I don't know if a recession, michael, I don't know if a
recession is going to undercutthe Mag7, because these are the
longest duration stocks andpeople are buying them on an
(12:19):
assumption of what the totalavailable market is going to be
for AI five to 10 years from now.
So these stocks not that I, Imean these are great companies
and they have great businessmodels, but they're not great
stocks as far as I'm concerned.
We can even people say well,it's not as big a bubble as it
was during the late nineties and2000,.
(12:41):
But it's still a.
It's still a price bubble.
Otherwise they'd be good stocksif they were more reasonably
valued.
But I don't believe a recessionis going to bring that part of
the market down.
Remember when we had the similarsituation back in 1999-2000,
the NASDAQ peaked in March of2000.
And that was a year before therecession.
(13:03):
The Fed had already completedits tightening cycle.
Nasdaq went down 12 months,rolled over 12 months before the
recession, and that's becauseof earnings disappointments,
order cancellations.
Obviously there were problemswith vendor financing back then,
but that was very idiosyncraticdevelopments related to the
tech space at that time that hadnothing to do with the economy.
(13:24):
The economy came later.
So I'm not so sure that ifthese growth stocks roll over,
it's going to be because of theeconomy.
I think it's going to bebecause we're going to wake up
one day and one of thesecompanies will have an order
cancellation, some problems withtheir customer or an earnings
miss, and I expect that that'llhappen.
(13:44):
But that is what is going tocause the bubble of tech to
unwind.
It won't be the economy, it'llbe something specific to the
industry.
Speaker 1 (13:52):
Yeah, I'd argue just broader volatility.
I mean, I've referenced this inother interviews before, but
from a behavioral financeperspective, the disposition
effect would argue that whenfaced with uncertainty, first
thing traders and investors dois not sell their losers, they
sell their winners.
There aren't that many winnersexcept those.
Speaker 2 (14:12):
Well, you can get a fund flow effect, but the
question would become whatcauses that to happen?
I'm not so sure A recessionwill bring down interest rates.
Growth stocks love lowerinterest rates because, as I
(14:33):
said, they're the longestduration parts of the market.
They might skate right through,especially when you consider
why are people buying thesestocks?
People aren't buying thesestocks because of the business
cycle.
They're buying them because oftheir bloated estimate of what
(14:54):
AI is going to look like and allthe spinoff effects, and that
transcends the business cycle.
It's you know.
Basically, I think, this partof the market, if you're looking
at this, say, fundamentally,they're being repriced for a
whole new world of acceleratingproductivity growth because of
generative AI and the rapidexpansion in the GPU space and
(15:18):
so on and so forth.
The big problem, I think andthis is why I'm not a big fan of
the value trade All of a suddenpeople are talking about
rotating into value.
Value are basically cyclicalstocks.
I mean, really, are you goingto buy the airlines in a
recession?
No.
Are you going to buy the homebuilders in a recession?
(15:38):
Probably not.
Will you buy the banks in arecession?
Probably not.
These are very cyclical andthey're shorter duration.
The value trade works best whenthree things are happening
Inflation is going up, whichmeans pricing power, interest
rates are going up, and interestrates and inflation are going
up because the economy isaccelerating.
(15:59):
That is when you want to goalong the value trade.
So I'm not a big fan of this.
People are talking about thisrotation.
To me it's a short coveringtechnical trade.
I don't think it's going tohave a lot of legs, and I say
that because I'm in a businesswhere your assumptions drive
your conclusions.
I have an assumption that theeconomy is weakening, that
(16:23):
inflation has come down and willcontinue to come down, and that
the economy is most likelyrecession bound.
You don't normally want to ownvalue stocks in that sort of
environment.
And if something happens in theAI space, there is an earnings
disappointment.
You remember it was not aneconomic number that brought
Cisco down, which ultimatelybrought the whole sector down
(16:44):
back in 2000.
Was cisco missing its epsnumbers by a penny?
That's all it took.
So you have so much priced inuh to technology, generally
speaking, that it won't takemuch of a disappointment to
cause it to roll over.
But I don't think there's goingto be a rotation a sustainable
one, in the value stocks if theeconomy rolls over, because, uh,
(17:05):
the most cyclical stocks aregoing to get hurt the most.
The areas that you'll want tobe in that will at least put a
floor under your equity positionwill be you can call them
either the rate sensitives youcan point to select REITs.
Call them either the ratesensitives you can point to
(17:28):
select REITs, you could point toutilities or defensive growth,
for example, healthcare andconsumer staples.
And the only stock that I'vegone back decades and decades
that never seems to lose yourmoney in a recession.
And there's one stock.
There's one stock Walmart.
Speaker 1 (17:51):
It's a question from a viewer on YouTube.
I'll put it on the screen here.
By the way, folks, it lookslike my video is a little bit
grainy.
I apologize.
Not sure what's happening, buta question from SS McClack Do
you think the next recessionwill solidify a regime change
from monetary dominance tofiscal dominance, which is a
(18:13):
term you hear a lot fiscaldominance and with it, sustained
inflation going forward?
I think it somewhat relates alittle bit to the point about
lags.
Fiscal actions tend to have, Ithink, less of a lag than
monetary actions.
So how do you think about, sortof the balance of power in
terms of stimulus?
Speaker 2 (18:33):
Well, that's a great question.
A lot is going to depend on themakeup of the legislative and
executive branches at theNovember 5th election.
At the November 5th election.
So, for example, if you buildan assumption that Trump wins
(18:53):
with a GOP sweep and you can seethat in Trump's fresh policy
document, any semblance offiscal probity that the
Republicans used to stand forthat's just been washed away,
you could argue that we're goingto get more fiscal stimulus.
(19:15):
The problem is that the debtand deficit relative to the
economy is so huge now thatyou're getting less and less of
a bang for the buck from fiscalstimulus.
The fiscal multiplier isincreasingly shrinking, so we're
not going to get the same bangfor the buck that we did when we
had, for example, had RonaldReagan and the debt ratio was
(19:36):
like 30% and the deficit waslike 3% of GDP.
You know we're now over 100%debt to GDP, deficit 6% to 7%
GDP.
So it's otherwise.
The first thing you learn ineconomics is the laws of
diminishing returns.
So they may try to fiscallyreflate, but the multiplier
impact on the economy with allof these fiscal stimulus
(19:57):
measures is dissipating overtime.
You saw that with the Trump taxcut in 2018.
It gave you a bit of a sugarhigh and then nothing happened.
After that Stimulus checks, wegot a sugar high, nothing
happened after that.
So I'm not a big fan that wecan try and fiscally reflate the
(20:20):
economy, but because of thegargantuan size of the deficit
and debts, the multiplier impacton the economy is going to be
very muted.
And as far as interest rates areconcerned, I think that the
Fed's going to start to easepolicy with or without a
recession.
And if we get a recession,there's a good chance we'll go
(20:41):
right back down to the zerobound.
But you see, the problem hereis that the average interest
rate is about 300 basis pointshigher than the.
I should say that the currentfunds rate is 300 basis points
(21:02):
higher than the average of thepast five years.
When you look at householdlending rates and lending rates
for small business, the currentrate is about points again above
what the average of the pastfive years have been.
So this has been the mother ofall interest rate shocks.
So when it comes time for theFed to ease the first at least
(21:23):
200 basis points maybe 300 basispoints of those rate cuts,
they're just going to be takingout the excessive restraint.
It's not even going to be realstimulus, going to be taking out
the excessive restraint.
It's not even going to be realstimulus.
I don't think you'll get realstimulus until they take the
funds rate below their ownestimate of neutral or the
R-star two and three quarterspercent.
So everybody's going to getexcited that the Fed's going to
start to cut rates in Septemberand they probably will, but they
(21:43):
have a long road to haul beforethat turns into real stimulus.
So I think you'll probably endup getting both.
You'll get both fiscal, you'llget both monetary stimulus I'm
not so sure one replaces theother.
But fiscal is going to sufferthe laws of diminishing returns.
As I said, it will not be aspowerful as it's been in the
past and the and and you knowfor the first two to three
(22:04):
hundred basis points the Fed isis not really going to be
stimulating anything.
It's just going to be takingaway all this excess policy
restraint that they put in overthe past couple of years.
Speaker 1 (22:15):
So another question I'm going to put up from a Kant
Antala on YouTube the comingrecession, in David's mind,
would be similar to and thisperson corrected themselves
afterwards 1982 slash 1990, not1999, or more like 2000, 2008,.
As far as severity and drawdown, any parallels or thoughts on
duration and magnitudecomparisons?
Speaker 2 (22:38):
Well, it's certainly it's not.
Well, it's definitely not 2008,because you know we don't have
a gigantic mortgage bubble inour hands and insolvent banks,
so it's not anything like 08.
(22:59):
1982, the Volcker era.
I think that's probably themost apt comparison to tell you
the truth.
That's probably the most aptcomparison to tell you the truth
, and I say that because,throughout that tightening cycle
that we just endured, who didPowell compare himself to
(23:19):
repeatedly?
It was Paul Volcker.
So what did Paul Volcker haveto do?
He wasn't fighting anyparticular bubble, he was
fighting a massive inflationshock.
And what did Jay Powell do?
Well, he wasn't really fightingany particular bubble, he
fought an incredible inflationshock.
So they have those similarities.
(23:40):
The difference is that debtratios across the economy are
much higher now than they wereback when Volcker was in charge,
when he took over in 1979, wehave a lot more leverage in the
economy and so the economy ismuch more intrasensitive.
It's been camouflaged becauseso many people locked in, but
(24:01):
there's no get-out-of-jail-freecard from this tightening cycle
that we've had.
It's just the lags takinglonger than normal to play out.
The lags taking longer thannormal to play out.
The difference also is that waymore exposure, way more
exposure to the equity marketthan we had back in the early
(24:23):
1980s.
We didn't have a big negativeequity wealth effect back then.
Not as many people were in themarket.
What concerns me the most, ofcourse, is that back in the
early 80s the boomers were intheir 30s and today the boomers
are in their 70s.
And what concerns me the mostactually is and again, this
didn't take place in the early80s in the sense that you have
(24:48):
over half the stock market nowis passive index investing and
that's compounded the upwardpressure in equities.
But once we go on the otherside of the mountain it's going
to have an equally negativeimpact on the other side.
The passive investing bullmarket is actually quite
(25:08):
worrisome.
You have a lot of people thatare throwing money into the
stock market not based on anyfundamental analysis, but just
based on passive investing, andthat's how the market gets
increasingly concentrated.
So I'm a little nervous morenervous this time around about
the severity, not just becausethe economy is more credit
sensitive and coming off a 500basis point interest rate shock
(25:32):
and it was a shock and wehaven't seen the full impact yet
but if and when we get a bearmarket and I'm talking about
inequities, given the exposure,because the household balance
sheet right now people don'tknow this Over 70 percent of the
US household asset mix isinequities right now.
And for the baby boomers intheir mid 60s into their 70s,
(25:54):
who normally, when I start onthe business people of this age
range would have 30% of theirasset mix and equities, it's now
over 60%.
People in their 70s have over60% exposure in the equity
market and so I'm really nervousand this is important because
(26:15):
the baby boomers are this 80million pig in a python that's
driven everything over thecourse of the past six decades,
from economics to politics, themarkets.
So that's on my mind as wellthat we coupled this interest
rate shock with the bear marketinequities.
(26:35):
Now look what's happening.
The economy is alreadyweakening.
We're down almost zero growthright now in the second quarter.
We're actually I said, we'reactually negative.
That's, of course, the laggedimpact of the interest rates.
Imagine what happens if thestock market begins to roll over
and there's going to be a hugenegative wealth effect on
(26:58):
spending.
And you're asking me thatthat's one of the tail risks for
the economy that a lot ofpeople aren't talking about.
Speaker 1 (27:09):
And actually to that point that dovetails nicely with
something Jeff said Will a halfor full point drop in rates
really impact the consumer in ameaningful way?
The answer is probably not.
Speaker 2 (27:21):
You know that Greenspan cut rates 50 basis
points on the first trading dayof the year, january 3rd 2001.
You couldn't.
Three months earlier, you couldnever have thought that that
was ever going to happen.
And of course, the stock marketI mean the NASDAQ peaked
(27:43):
February, march of 2000.
The S&P peaked that September.
We were just coming off thepeak.
Everybody thought things werejust fine.
Peaked that September.
We were just coming off thepeak, everybody thought things
were just fine.
But Greenspan all of a suddenstarted seeing things happening
that told them that this wasjust not an inventory correction
(28:04):
in technology, but actually asignificant erosion in capital
spending, which of course, thenled to job loss and the
recession which started in Marchof 2001.
So the Fed starts cutting rates, and their first move in
January of 2001, for those thatare old enough to remember and
(28:27):
the recession starts in March of2001, two months later.
So it was too late.
Even 50 basis points, and don'tforget that cycle.
We went from something like6.5% all the way down to 1% on
the funds rate by 2003.
Too little, too late.
And, believe me, when they went50 basis points that day, the
(28:51):
markets rejoiced like it wasnobody's business and that was
the time really to take profits.
And so no 50 basis points,which I'm hearing the Fed might
do, if not September then maybeNovember.
Like I said before, I looked atthe data and it's just not
rocket science.
If you look at the five yearaverage of the funds rate,
(29:11):
historically and right now it's2 not rocket science.
If you look at the five-yearaverage of the funds rate,
historically and right now, it's2.2%, and you look at the spot
funds rate, which is now call it5.3, 5.4.
So there's like a 300 basispoint gap between those two
numbers.
The Fed in an easing cycle, bythe way, whether there's a
recession or not, they alwaysclose the gap between the moving
(29:31):
average, the five-year movingaverage and the spot funds rate.
So they have a long road to hoe.
So 50 basis points will getpeople excited, but I think it's
going to be the first sign thatthe Fed actually sees the
whites of the eyes of theeconomy and there'll be a lot
more rate cuts At some point.
They'll cut rates enough,they'll steepen the curve enough
(29:52):
.
We'll get to the other side ofthe mountain.
I said before, the businesscycle has not been repealed.
Recessions come to an end,expansions come to an end.
It's just the cycle.
Thankfully, expansions tend tobe long, recessions tend to be,
you know, three or four quarters.
It's not going to last ourlifetime, but there's nothing, I
(30:13):
think, that the Fed can doright now to stop it because of
all the lags that are stillkicking in from what they've
done over the past couple ofyears.
People don't even realize thateven by staying on the sidelines
, by staying on the sidelinesover the past 12 months as
inflation fell, and you look atwhat that did to real interest
rates, even though the Fed, inquotes, was on the sidelines, it
(30:35):
was actually a backdoor 50basis point tightening in real
interest rates.
In any event, they'reridiculously behind the curve.
I know it's not evident.
They were behind the curve andnobody talked much about
inflation.
Next thing you know we have 9%inflation in the summer of 2022.
They allowed themselves to getwell behind the inflation curve
(30:59):
and now they allowed themselvesto get well behind the economic
curve.
So by staying too loose for toolong, we got the inflation and
by staying too tight for toolong, we're going to get the
recession.
I think it's actually nowbecoming a reality.
I'm seeing it in the data.
You surely saw it in the CPIdata.
You're seeing what's happenedto pricing power.
(31:21):
It is deteriorating and I knowpeople will say, well, it's not
showing up in the jobs numbers,but it's only not showing up in
non-farm payrolls.
It is definitely showing up inthe household survey.
There's no doubt about that.
Speaker 1 (31:35):
Also seems to be showing up in terms of pending
home sales.
So I'm going to share anotherpost of yours from X, which
hopefully shows up here.
There we go Pending home sales,and this is what you said
Pending home sales, thequintessential leading indicator
for housing with all itspowerful multiplier effects,
(31:56):
dropped 2.1 percent month overmonth in May and but there's no
recession coming right now.
I I often talk about lumberbecause historically, lumbers
are leading indicator becauseit's tied to construction,
housing.
Very much seems similar to merecently, this downturn in
(32:20):
pending home sales with lumber'spricing.
Is there any chance at thistime?
It's different when it comes tohousing because of the lock-in
effect and all these strangenuances with mortgage demand.
Or is the housing market stillthe biggest tell-all?
Speaker 2 (32:33):
with mortgage demand or is the housing market still
the biggest tell-all?
Well, the problem once again isinterest rates and there is no
more interest-sensitive sectorof the economy than housing.
So the fact that people lockedin and they're prisoners in
their home, it's why there'sbeen such little turnover in the
(32:56):
resale market.
People are basically they'relocked into their mortgages and
you can't refinance because thenyou're going to be stuck with a
7% mortgage rate instead ofyour 4% mortgage rate.
And that's why all sorts ofnumbers on labor mobility and
moving and freight, you knoweverybody is just basically
stuck.
So that's created this illusionof prosperity as far as home
prices are concerned, becausewhen you have a totally
(33:18):
inelastic supply curve, youdon't need much demand to drive
home prices up.
This is not like the home priceappreciation we had in the mid
2000s when it was a lot ofdemand.
There's just no supply.
Demand, there's just no supply.
And so what's happening is thatthe marginal buyer, the people
sitting on the fence, they can'tafford to buy a home.
The qualifying income to afforda home is way beyond their
(33:42):
reach.
Qualifying income for amortgage is like 30% above what
the median income is right nowfor this group of people.
So the affordability ratio hascollapsed to practically
historic lows.
So there's no demand and sothat obviously has an impact on
home building activity andyou're seeing that in the
(34:04):
housing start numbers.
So when I talk about themultiplier impact, I'm not
talking about the fact that homeprices have been rising and
rising because of no supply, butmore because of that number is
telling you.
The pending home sale number istelling you what's happening to
marginal demand, and change isalways at the margin, and so the
demand for housing is not justcontracting, it's really
(34:28):
collapsing.
That's a record low for pendinghome sales and that's a leading
indicator that's going to feedright through to residential
construction.
And although it's maybe only 3%of GDP, as you mentioned, the
multiplier impacts to the restof the economy.
When you have no home buildinggoing on, you don't have real
estate agents doing anything,you don't have construction
(34:50):
workers, trades, people.
It has an impact on the legalcommunity, mortgage brokers.
They lose their jobs.
There's so many powerfularteries from housing to the
rest of the economy.
So what I'm talking about isthe real side impact on GDP and
the multiplier effects that has,broadly speaking, and that's
what that chart actually speaksto.
Speaker 1 (35:17):
I think usually in a recession, the dollar tends to
strengthen against othercurrencies.
It's kind of a risk-offcorrelation causation.
How do you think about currencymovement?
Because one of the more you canargue relative to history
somewhat unusual aspects of thisis that, despite all of the
(35:38):
higher inflation, the dollar hasonly gotten stronger.
Other currencies have gottenweaker, the yen in particular,
which we'll talk about.
But how do you think currencymovement plays out for the US
under a slowdown currency?
Speaker 2 (35:50):
movement plays out for the US under a slowdown.
Well, I think that as the Fedcuts rates, I think the Fed will
end up cutting rates more thanother central banks around the
world, maybe outside of Canada.
(36:15):
Canada's got a lot of problems.
I think the Fed will be cuttingrates more.
Now the futures market somehowbelieves that the terminal rate
is 4%, that the Fed will stop.
They'll go from, say, 5.38 downto 4.
I'm saying no, no, they'regoing to go a lot more than that
.
So what's going to happen isthat, as the expectations of
where the destination is goingto be for the Fed funds rate
goes way below what is currentlypriced in the dollar, the DXY
(36:37):
is going to go down.
It's not going to go up.
We're going to be in afundamental bear market in the
US dollar, based on the mostimportant relationship in the
currency markets, which isrelative industry differentials.
They're going to work againstthe greenback.
Speaker 1 (36:57):
All right Now.
You had mentioned you werequite bullish on Japan and
that's been on fire.
I think there's a clear linkbetween that and yen
depreciation.
I mean you were way better offobviously hedging out the yen
and really benefiting from thatmove from the US perspective.
From the US perspective, I havemyself been wrong, but maybe
(37:20):
just early on my concerns aboutthe speed with which the yen is
falling, particularly when itcomes to oil priced in yen, and
I've argued before that I thinkit's only a matter of time until
Japan panics because they can'tcontrol the price of oil but
they control the yen to someextent and maybe spark a short
covering rally where there's alot of shorting on the yen,
(37:44):
which brings down the price ofoil and yen but might also spark
a reverse carry trade.
How much more is left, youthink, for Japan's markets?
Because I think that's verymuch tied to how much is left on
the downside for yen.
Speaker 2 (37:56):
Well, I'll just tell you that.
You know.
Well, I'll just tell you thatyou know before I mentioned that
you know the household assetmix in the United States is over
70% oriented towards equities.
It's a fraction of that and afraction of that in Japan.
The Japanese household isprincipally in cash and bonds
(38:20):
and what's been really drivingthe Japanese equity market over
the past couple of years hasbeen foreign inflows.
So we haven't even seen thepublic participation yet.
I mean, could you ever imaginewhat the Japanese stock market
would look like if they actuallydeveloped an equity culture
that exists in the United States, in the United States, and
that's going to happen.
You know, back in 1982, youknow, when the P multiple was
(38:48):
eight in the S&P 500, and wecame off really a three-year
bear market.
I mean, if you were a broker onWall Street and you cold called
a client to sell them stocks,you would have been arrested,
they would have called the copson you, and so we haven't even
seen the household sector startto participate.
(39:08):
So I think there's a verystrong fund flow argument
because this is just beginningto start that the Japanese
personal sector is starting torebalance their asset mix in
favor of equities.
As I said before, the all-inyield, with dividend payouts and
buybacks, japan is superior,way superior to where the US is
(39:33):
on this score.
And we're still seeing thisfinal stage of Abenomics and
especially the pressure that'sbeen put on the corporate sector
there to increase transparencyand also take cash off their
balance sheets and deliver it toshareholder returns.
(39:57):
Shareholder returns, I mean,that is, you know, up until a
couple of years ago that wasunheard of, that was an oxymoron
.
That you have the structuralchanges taking place in terms of
capital allocation in Japan andmuch greater efficiency.
This is a real secular story.
Japan looks like the structuralstory that we had in the United
(40:21):
States in the 1980s.
By the way, I was a perma bullduring the Reagan revolution.
Well, you know, abe isn'taround anymore, but his legacy
lives and it's been extremelytransformative for the Japanese
equity market.
Transformative for the Japaneseequity market.
(40:44):
So you know, when we map out,even if, even if the Japanese
nevermind looking like the US,even if they look like Europe in
terms of equity allocation onthe household balance sheet,
you'd be talking at leastanother 20 to 30% upward
pressure from buying activityjust from that comparison.
So yeah, the cheap yen hascertainly helped the large cap
(41:07):
exporters, but it's also createsa lot of losers and cause.
Japan is a big exporter, butit's also a big importer.
But the yen has been, I say, anartificial source of stimulus.
That's not the reason.
I mean.
The Japanese yen could go upand I'll still be bullish on
(41:27):
Japan for the same reasons Ihave.
I've not been saying buy Japanbecause they cheapen their
currency and it's great forearnings and that's why you want
to own them.
I think that the Japanese yen isthe most grossly undervalued
currency on the planet.
We all know that.
What's the catalyst?
The catalyst is not going to beFX intervention.
It's going to be that the Bankof Japan is going to have to
(41:48):
raise interest rates, andprobably by quite a bit, and
Japan is one of the fewcountries in the world where
inflation is actually going up,not down Now from a very low
level.
Is that terrible?
No, it's telling you thatpricing power in corporate Japan
is improving, but it also meansinterest rates have to move up.
(42:09):
Well, you're going to say, well, interest rates moving up isn't
that bad news?
Well, not necessarily, becauseit's going to give, it's going
to certainly help margins inJapanese financials.
Of course, japanese financialsis where Warren Buffett has his
stake.
So actually there's still lotsof reasons to be bullish on
Japan.
I would not change myrecommendation if the yen
(42:31):
manages to reverse course.
In fact, it just means that youwant to take a naked long
position in the Nikke or thetopics, or, as opposed to,
hedging the currency.
But I think this is, I dobelieve that this is a secular
bull market.
Speaker 1 (42:49):
Speaking of culture of buying equities, I'll relate
this to a question, also fromYouTube, from an individual here
what do you think about India'sstock market?
You touched on India a littlebit.
There there is definitely aculture of buying equities from
what I've seen when it comes totraders in India.
Maybe small amounts, but inaggregate that makes a big
(43:09):
difference.
India has been among the stars.
Obviously, Secular bull marketcontinues there.
Are we going to have somerelative underperformance?
What do you think?
Speaker 2 (43:20):
Well, so long as the coalition that Modi has had to
put together doesn't upset theapple cart in terms of what it
means for budgetary policy andespecially the vast upgrades
they've made towardsinfrastructure, then I think
everything's going to be fine.
(43:40):
Uh, and the, the, the.
The growth in india's capitalstock in the past several years
has been tremendous.
Um modi has really been.
I mean we could.
I'm not going to talk about hisnationalistic tendencies and
what a divisive character hecould be, but for the economy
(44:01):
and the markets again, he's beenlike a different version of
Ronald Reagan very much supplyside, very much supply side.
You have supply side economicsgoing on in India and it's one
of the few areas of the worldthat has growth of 8% and it's
being driven principally byproductivity.
Imagine having productivity ledgrowth.
That's around 8%.
(44:21):
A young and vibrant educatedpopulation that mostly speak
English they have.
When you look at their futureand you look at their dependency
ratios, for example, you knowthe share of the labor force
that is young versus old.
It's so much different than itis in the West and especially in
(44:43):
America and through whiteswaths of Europe, india has one
of the most impressivedependency ratio profiles for
the next 10 years of any countryon the planet, which is very
important for fiscal stability,but also very important for
their potential GDP growth.
So, just like Japan, fordifferent reasons, I'm also
(45:05):
bullish on India.
Speaker 1 (45:12):
You and I, I think, are aligned into this idea that
it's only a matter of time untila duration crisis becomes a
credit crisis.
It's taken a long time for that, until a duration crisis
becomes a credit crisis.
It's taken a long time for thatto play out.
And a credit crisis doesn'thave to mean like oh wait, it's
just spread, widening.
I mean that's in a potentiallyoverreactive type of way.
(45:34):
And yet, despite people beingaware of that risk, they keep
buying high yield corporatecredit.
Is that the sleeper risk that?
Maybe there's just too muchmoney that's been chasing these
high risk debt issuances.
Obviously, a lot of money hasgone to private credit as well,
but is there a risk there thatwhen the proverbial shit hits
(45:57):
the fan, that's where it's goingto most show up?
When the proverbial shit hitsthe fan?
Speaker 2 (46:01):
that's where it's going to most show up.
Well, probably well.
For one thing, I do tend toagree with that and I think
spreads are stupid tight reallyacross the whole credit spectrum
.
I include investment grade inthere as well.
But one of the mitigatingfactors, of course, is that you
probably have in the high yieldspace a higher share of double B
(46:28):
credits in there than we've hadin the past.
So it's called junk, but it'sprobably a higher quality junk
bond market than it's been inthe past.
That's acted as a bit of aweight on where those spreads
are.
But I agree with you that you'renot getting paid, in my opinion
, for the risks to be in creditin general.
But the canary in the coal minemight not be the traditional
high yield.
(46:49):
It might be in the triple Cbond market and there in the
past several months we havestarted to see spreads widen out
.
That is the canary in the coalmine.
If you're looking just as wewere looking at those mortgage
bonds, those spreads that werewidening out well before the
bear market back in 2007, thetriple C's will be the leading
(47:13):
indicator.
Keep an eye on that.
Those spreads have beenwidening out lately.
Speaker 1 (47:22):
The make of those triple Cs are primarily consumer
, discretionary, industrials andenergy right.
I think that's sort of the mixyou mentioned, being bullish on
commodities.
It doesn't sound to me like theenergy side would be a source
of risk.
It's probably much more on theindustrial, discretionary end.
Speaker 2 (47:39):
Yeah, the energy.
You know oil prices.
I think in a recession you canget oil down to, you know, 60,
65.
I think we're just broadly in arange right now when you, when
you think about it, and evenwith the economic weakness, like
I said, the US economy rightnow at best is flatlining and
you know wti is north of 80 abarrel.
(48:00):
Um, and that's just talking,telling you about the
fundamental supply demandbalance, uh for crude, but that
also exists for a lot ofcommodities.
Um, it's just basically uhidentifying which of the
commodities are in a long-termuh deficit position when it
comes to their supply demandbalance.
And there's been hardly anycapital investment in the basic
(48:21):
materials sector, really, formany, many years.
So I think that, look, in arecession, you definitely you
don't want to touch commoditiesin a recession.
I'm not going to say it's goingto be different this time.
I just think that the damage isgoing to be a lot lighter and
probably provide a great buyingopportunity for an area of
commodities, broadly speaking,that probably has a five to 10
(48:45):
year tailwind behind it.
So when we're talking aboutbuying dips, buying dips and
commodities are going to be, Ithink, holding in good stead for
the next several years.
The supply demand balanceacross the spectrum are just far
too compelling.
That's really if we're going tosay it's different this time,
it's the fact that we go intothis cycle with a supply deficit
(49:08):
across most of the resourcesector that we haven't seen
before, so that holds it in arecession and then we come out
the other side and demand growthpicks up again.
It's going to be in a secularbull market.
So yeah, we're fans of theresource sector broadly speaking
.
Speaker 1 (49:26):
Will you expect that, since that's what people like
to talk about gold ends up beingthe top performing from an
asset class within the assetclass perspective?
Because I think the movie'sinteresting with gold, right,
because gold tends to really dowell.
When you have negative realrates, you don't have negative
real rates.
Maybe this is in anticipationof negative real rates, right?
Right, so if you have arecession, then those negative
(49:48):
real rates come.
Then that's a whole otherreason for gold to move.
Speaker 2 (49:51):
Well, you don't need negative real rates, you just
need real rates to come down,and real.
I believe you know, beingrational, about where the
economy is going, what the Fed'sgoing to be doing.
I think real rates will becoming down Check.
The US dollar will be goingdown Check, and at the same time
, I think that the central banksglobally will continue this
(50:14):
reallocation and their FXreserves towards gold.
That's not going away.
That is a long-term strategicshift.
And then I think India is goingto remain the strongest economy
in the world for many, manyyears.
And retail demand in Indiathat's the one thing that never
goes away.
(50:36):
And then you're taking a look atthe production costs.
People don't focus on howexpensive it is to mine gold in
the world today.
The marginal average cost ofproduction is moving up
inexorably, and so we havereally a fundamental floor under
the gold price and lots ofreasons why this trend that
we've seen in the past severalmonths is going to be sustained.
(50:58):
And it's not just gold but alsosilver which has broken the $31
an ounce.
So the precious metals that isone of our high conviction calls
so, and I think that thereasons to like precious metals
because there's been reasons tolike them already.
I think that they are going tomultiply over the course of the
next several months, andprobably years too.
Speaker 1 (51:24):
One more question before we wrap up here from Toyn
I apologize if I'mmispronouncing that From YouTube
have the financial marketsproperly priced in the
commercial real estate debacle?
What does it see that thestreet actual sales price
doesn't?
Speaker 2 (51:39):
Street actual sales price doesn't.
Yeah, I think that.
I mean, from what I'm seeing,we have a trillion dollars of
maturities that are just goingto be hitting the wall.
Yeah, it's going to be, andit's going to have cascading
effects.
No, I don't think that this ispriced in and actually nobody's
really talking about it.
And it does.
It does trouble me, I guess youknow, looking at how the
(52:01):
regional banks have behaved inthe past couple of years, and
that's really, you know, theposter child for the problem.
But it's much, it's much biggerthan that.
Just like in residential realestate, this is going to have
other impacts on the economy andon the markets, and so the
answer to the question is that,no, that is not priced in A
(52:22):
recession, is not priced in Arecession, would not be priced
into a stock market with a 21.6Ford multiple or high yield
spreads at 300 basis points orIG at 100 basis points.
Basically, it's a marketplacein terms of risk assets where
(52:42):
you have goldilocks priced inand I don't know why, um,
there's not more talk or morepriced in about what?
The cre debacle, which isbasically this story, is not
over by a long shot.
It's very deflationary and it'sa principal reason why you know
how do you shelter yourself.
I'll tell you like that's why Italked a lot about a lot of
(53:02):
things that I like, and I talkedabout gold.
Gold, by the way, uh, is a nicehedge against rising
uncertainty.
Um, and so are.
So are long-term governmentbonds.
I like the 30-year treasurybecause the cre situation is
hugely deflationary.
(53:22):
The whole curve is going tocome down, led by the Fed, but
because of the convexity, thebest total return is going to
come in the detested andmaligned long bond.
So that's why our biggest callis called the bond bullion
barbell.
So that's why our biggest callis called the Bond-Boolean
barbell.
I love alliterations, but thatis going to provide you with a
(53:45):
margin of safety.
And the CRE is a big problemthat is not totally factored in,
absolutely.
Speaker 1 (53:55):
Great question, david , for those who want to track
more of your thoughts, more ofyour work.
Speaker 2 (53:58):
I know there's also the Substack I'm sharing on the
early morning with davecom, but,um, just talk about different
ways that people can track youand some of the benefits of
subscribers that subscribers getyeah, well, um, you know, what
I would uh suggest is, um peopleon the call, if they want to
learn more about what I do uhevery day, just come on to
(54:23):
information atrosenbergresearchcom, or you can
just Google Rosenberg Research.
Everybody on this call iseligible for a 30-day free trial
.
So you see the deflation I'mtalking in my book 30 day free
trial for people on this call.
Uh, and if you want to, uh youknow, come on the website uh
(54:45):
Rosenberg researchcom.
If you want to email usdirectly, information at
Rosenberg researchcom and uhsomebody on my client service
team, uh, we'll get back to ASAP.
Speaker 1 (54:58):
Uh, appreciate everybody joining again.
This will be an edited podcastunder lead lag live.
I always enjoy listening to mrrosenberg and I appreciate those
that uh ask thoughtfulquestions.
So thank you, david.
Thank everybody, and I'll seeyou next time on lead lag live.
Thank you.
My name is Michael Guyatt, publisher of the Lead
Lager.
Joining me for the rough houris Mr David Rosenberg, who I
know a lot of people arefamiliar with.
I always start off saying,david, introduce yourself.
I know a lot of people know you.
But maybe before we get into adeeper discussion around markets
and the economy, set the recordstraight because a lot of
people I think might be underthe impression I know wrongly so
(00:29):
that you're a perma bear.
Set the record straight on that.
Speaker 2 (00:35):
Well, I don't believe that there's a perma anything,
because perma by definitionmeans permanent and there is
nothing permanent, andespecially in this industry of
the financial markets.
So I think that people get thatidea because it's been a long
time since I've been bullish onthe S&P 500.
(00:58):
And people tend to think thatthat is the only market out
there is the market for largecap US stocks.
So I'd rather consider myselfto be an ideas guy and focusing
on risk adjusted returns and Ibelieve in diversification and I
(01:18):
believe in capital preservation, which I think has been thrown
into the garbage bin over thecourse of the past 18 months.
But this perma bear has been arelentless bull on Japan which,
even currency adjusted in thepast few years has outperformed
the S&P 500.
And we've written a lot ofreports on Japan been very
(01:41):
bullish on India.
We're very bullish on the fixedincome market broadly speaking,
and there's areas within themarket that we like.
We like defense stocks forobvious reasons.
We are very long agriculturebecause of the really a secular
(02:05):
bull market in in food securityand we generally like
commodities and we think thereis a long-term bull market in
commodities and we especiallylike precious metals.
So if I was really a perma bear.
I'd be telling everybody to gohide in the Hills.
You know, buy a sawed off,shotgun baked beans, canned tuna
and go hide underground.
(02:28):
I've never done that.
That's a perma-bear.
I just choose to focus on areasof the capital structure and
geographies where I see moretailwinds than headwinds.
Speaker 1 (02:48):
If you want to call that a perma bear, go for it.
Yeah well, it's funny because Ialways make that point that you
can be bearish and still long,because, to your point, it's
more than just one market right,there's uh, you know there's a
whole other world out there.
Speaker 2 (03:02):
Um and uh, you know there was uh, like right now we
put out more of a bullish pieceon the UK market, for example,
one of the few areas of theworld where there is now
political stability, both inabsolute and relative terms, and
a market that isn't screamingfor rate cuts because they don't
(03:22):
really need it, for rate cutsbecause they don't really need
it.
And so we also like sterlingbecause the Bank of England may
well be the last central bank tostart cutting interest rates.
So you know, I span allinvestments and I span the globe
, but, of course, everybodybelieves that there's only one
market out there and it's theS&P 500.
By the way, the average stockin the United States is the same
(03:48):
level today.
It was back on January, the 4thof 2022.
So that's basically 19 monthsof nothing for the average stock
.
So it's not even the S&P 500anymore and it might not be the
MAG-7.
It's probably more like theMAG-5.
But it's a very concentratedindex and I have my concerns,
(04:09):
and the higher it goes, I think,ultimately, the harder it's
going to fall.
But that date hasn't happenedyet.
But there are other areas to putmoney to work.
I said before, it's not justthe Treasury market.
You can buy the S&P 500 at a4.6% earnings yield or you can
(04:29):
pick up a short dated piece ofinvestment grade corporate paper
for five and a half percentwith minimal default risk and
minimal duration risk, and Ithink that that's going to prove
to be, over time, to have beena better risk adjusted strategy
(04:50):
than being all in on the S&P 500at these nosebleed valuation
levels that we have right now.
Again, I don't consider that tobe bear market thought because
I'm not saying just be all incash.
We have been long Japan.
That's actually been ourhighest conviction call and it's
amazing because everybody has ahome bias and everybody's
(05:11):
focuses on, you know, the USmarket.
Japan is a very liquid market.
It has a higher all in yield.
It has a super cheap currency,of course, and when you compare
their dividend yield and theirearnings yield to where their
benchmark bond yields are, it'sstill a great place to park
(05:32):
money.
And I've been saying all alongto American investors take your
profits in the US.
No one ever got hurt by bookinga profit and move the money to
other stock markets around theworld.
There are some that still haveparticularly solid
characteristics.
So I don't think that's reallya bear market narrative.
It's really in my opinion and Idon't want to sound arrogant
(05:57):
when I say it, but it's reallyjust being rational and being
disciplined and being prudent.
So diversification doesn't justmean across your equity
portfolio or your asset mix.
You should also have geographicallocation in your portfolio as
well, and Japan has been agreat place to be.
So actually, if I'm PERMAanything, I'm a PERMA bull on
(06:21):
the Tokyo Stock Exchange.
Speaker 1 (06:25):
Speaking about bear narratives, though, the ultimate
bear narrative is recession,obviously, and you've been
putting out some really goodcontent that's poking the bulls.
I actually like the tone withwhich you're approaching a lot
of the stuff I'm going to share.
One of the more recent poststhat you put out, which looks at
the ISM composite PMI and yourcomment on this from X, is the
(06:50):
June ISM indices.
Undercut consensus views andthe combined levels are where
they were in 2001, q1, 2008, q1,2020, q2.
But hey, consensus says there'sno recession coming, so I guess
it won't come right.
Let's talk about the state ofthe US economy, because if there
is going to be a bear narrativearound the S&P from a
(07:11):
directional perspective asopposed to a relative
underperformance perspective,it's got to come from growth.
Speaker 2 (07:20):
Well, let me just say that the economy is clearly
weakening.
You know, I'm astounded thatJay Powell continues to refer to
the US economy as being solidand strong, but then again, I
guess he has to always soundlike an economic cheerleader
because he is a quasi-politician.
(07:41):
The Fed, after all, reports inthe Congress for people to think
that there's a complete centralbank independence.
That's actually a bit of a joke.
The economy was strong.
Last year we had 3% GDP growthand that was surprising indeed,
but the impact of what the Fedhad been doing was camouflaged
by really rampant fiscalstimulus.
(08:03):
Who thought that last year wewere going to have a 30%
expansion in the fiscal deficit?
And that played a very big rolein influencing economic growth
last year was the governmentsector, and then we had the last
leg of the excess savings filebeing put to work.
You know, historically, whenconfronted with a stimulus check
(08:24):
, the household sector wouldsave half and spend half, and
that's why the economists in theWhite House told Joe Biden back
in March of 2022, go big or gohome.
If you want a trillion dollarsof stimulus, you've got to give
people a $2 trillion lotteryticket.
But they didn't save any of it.
It all got spent in this.
I guess a new wave ofnarcissism.
(08:46):
You know YOLO, you only liveonce.
Yolo on Main Street was whatFOMO has been on Wall Street,
and so that last leg of thesavings drawdown was huge last
year.
And so when you adjust theeconomy for those two factors,
when people say, well, you knowthat's data mining, and I say,
(09:08):
no, I prefer to call it analysis.
If I wasn't covering a companyand I was, you know, covering
their quarterly performance, andI saw non-recurring factors in
there, I would put an asterisksaying non-recurring, and so
these are non-recurring factors.
So the excess savings file isover, fiscal stimulus has turned
(09:29):
really into neutral, and sowhat are we left with?
We had 1.4% real growth in thefirst quarter.
We're actually, michael, we'retracking.
We have our own now cast model.
It's tracking right now.
Outcast model.
It's tracking right now slightnegative for the Q2 real GDP
(09:49):
that we're going to get at theend of the month.
So I think that the recessionthat nobody sees is probably
starting right now.
And, of course, the one thingthat I will say I do not believe
in new eras.
I do not believe that excessesare permanent.
I am a firm believer in thebusiness cycle.
I do not think the businesscycle has been repealed and I
believe that in a credit-driveneconomy, interest rates always
(10:11):
matter, but the economy alsoalways resets to shifting
interest rates in bothdirections with long lags.
There is noget-out-of-jail-free card for
the economy coming off the mostacute policy tightening cycle
since the Volcker years in theearly 1980s.
So staring us in the face isthat reset.
(10:33):
And just remember that the Fedstopped tightening in the spring
of 2006.
And then nothing happened in2007.
That was the soft landing.
The soft landing is a bridge,really, the transition from the
expansion phase of the cycle tothe contraction phase.
And next thing you know, therecession starts December 2007,
which caught a lot of people bysurprise.
(10:54):
So I think that's really whatwe're looking at.
I'm probably the only economistthat has not thrown in the towel
on the recession call, becauseI don't believe that delayed is
the same as derailed, and I canunderstand that those of us that
have been calling for recession.
Of course it's been frustratingbecause it hasn't happened yet,
but I had the same feeling whenI was calling for recession in
(11:16):
2006, but I stuck to my guns.
I didn't throw in the towel.
There was only one othereconomist back then that was
calling for recession at thesame time.
It was Dick Berner at MorganStanley, but it was a lonely
period of time.
So you know I've seen this playout before.
And as far as the comment on thestock market, you know what's
(11:37):
interesting is that you havethis record concentration of
large cap tech, like anythingthat's touching AI, nvidia and
the like Microsoft, apple.
We ran these correlations andfound that the Mag7 space has a
0% correlation with the economy.
(11:58):
But the rest of the market hasa 50% correlation with the
economy and that might be onereason why the average stock
hasn't risen for the past 19months.
But I don't know if a recession, michael, I don't know if a
recession is going to undercutthe Mag7, because these are the
longest duration stocks andpeople are buying them on an
(12:19):
assumption of what the totalavailable market is going to be
for AI five to 10 years from now.
So these stocks not that I, Imean these are great companies
and they have great businessmodels, but they're not great
stocks as far as I'm concerned.
We can even people say well,it's not as big a bubble as it
was during the late nineties and2000,.
(12:41):
But it's still a.
It's still a price bubble.
Otherwise they'd be good stocksif they were more reasonably
valued.
But I don't believe a recessionis going to bring that part of
the market down.
Remember when we had the similarsituation back in 1999-2000,
the NASDAQ peaked in March of2000.
And that was a year before therecession.
(13:03):
The Fed had already completedits tightening cycle.
Nasdaq went down 12 months,rolled over 12 months before the
recession, and that's becauseof earnings disappointments,
order cancellations.
Obviously there were problemswith vendor financing back then,
but that was very idiosyncraticdevelopments related to the
tech space at that time that hadnothing to do with the economy.
(13:24):
The economy came later.
So I'm not so sure that ifthese growth stocks roll over,
it's going to be because of theeconomy.
I think it's going to bebecause we're going to wake up
one day and one of thesecompanies will have an order
cancellation, some problems withtheir customer or an earnings
miss, and I expect that that'llhappen.
(13:44):
But that is what is going tocause the bubble of tech to
unwind.
It won't be the economy, it'llbe something specific to the
industry.
Speaker 1 (13:52):
Yeah, I'd argue just broader volatility.
I mean, I've referenced this inother interviews before, but
from a behavioral financeperspective, the disposition
effect would argue that whenfaced with uncertainty, first
thing traders and investors dois not sell their losers, they
sell their winners.
There aren't that many winnersexcept those.
Speaker 2 (14:12):
Well, you can get a fund flow effect, but the
question would become whatcauses that to happen?
I'm not so sure A recessionwill bring down interest rates.
Growth stocks love lowerinterest rates because, as I
(14:33):
said, they're the longestduration parts of the market.
They might skate right through,especially when you consider
why are people buying thesestocks?
People aren't buying thesestocks because of the business
cycle.
They're buying them because oftheir bloated estimate of what
(14:54):
AI is going to look like and allthe spinoff effects, and that
transcends the business cycle.
It's you know.
Basically, I think, this partof the market, if you're looking
at this, say, fundamentally,they're being repriced for a
whole new world of acceleratingproductivity growth because of
generative AI and the rapidexpansion in the GPU space and
(15:18):
so on and so forth.
The big problem, I think andthis is why I'm not a big fan of
the value trade All of a suddenpeople are talking about
rotating into value.
Value are basically cyclicalstocks.
I mean, really, are you goingto buy the airlines in a
recession?
No.
Are you going to buy the homebuilders in a recession?
(15:38):
Probably not.
Will you buy the banks in arecession?
Probably not.
These are very cyclical andthey're shorter duration.
The value trade works best whenthree things are happening
Inflation is going up, whichmeans pricing power, interest
rates are going up, and interestrates and inflation are going
up because the economy isaccelerating.
(15:59):
That is when you want to goalong the value trade.
So I'm not a big fan of this.
People are talking about thisrotation.
To me it's a short coveringtechnical trade.
I don't think it's going tohave a lot of legs, and I say
that because I'm in a businesswhere your assumptions drive
your conclusions.
I have an assumption that theeconomy is weakening, that
(16:23):
inflation has come down and willcontinue to come down, and that
the economy is most likelyrecession bound.
You don't normally want to ownvalue stocks in that sort of
environment.
And if something happens in theAI space, there is an earnings
disappointment.
You remember it was not aneconomic number that brought
Cisco down, which ultimatelybrought the whole sector down
(16:44):
back in 2000.
Was cisco missing its epsnumbers by a penny?
That's all it took.
So you have so much priced inuh to technology, generally
speaking, that it won't takemuch of a disappointment to
cause it to roll over.
But I don't think there's goingto be a rotation a sustainable
one, in the value stocks if theeconomy rolls over, because, uh,
(17:05):
the most cyclical stocks aregoing to get hurt the most.
The areas that you'll want tobe in that will at least put a
floor under your equity positionwill be you can call them
either the rate sensitives youcan point to select REITs.
Call them either the ratesensitives you can point to
(17:28):
select REITs, you could point toutilities or defensive growth,
for example, healthcare andconsumer staples.
And the only stock that I'vegone back decades and decades
that never seems to lose yourmoney in a recession.
And there's one stock.
There's one stock Walmart.
Speaker 1 (17:51):
It's a question from a viewer on YouTube.
I'll put it on the screen here.
By the way, folks, it lookslike my video is a little bit
grainy.
I apologize.
Not sure what's happening, buta question from SS McClack Do
you think the next recessionwill solidify a regime change
from monetary dominance tofiscal dominance, which is a
(18:13):
term you hear a lot fiscaldominance and with it, sustained
inflation going forward?
I think it somewhat relates alittle bit to the point about
lags.
Fiscal actions tend to have, Ithink, less of a lag than
monetary actions.
So how do you think about, sortof the balance of power in
terms of stimulus?
Speaker 2 (18:33):
Well, that's a great question.
A lot is going to depend on themakeup of the legislative and
executive branches at theNovember 5th election.
At the November 5th election.
So, for example, if you buildan assumption that Trump wins
(18:53):
with a GOP sweep and you can seethat in Trump's fresh policy
document, any semblance offiscal probity that the
Republicans used to stand forthat's just been washed away,
you could argue that we're goingto get more fiscal stimulus.
(19:15):
The problem is that the debtand deficit relative to the
economy is so huge now thatyou're getting less and less of
a bang for the buck from fiscalstimulus.
The fiscal multiplier isincreasingly shrinking, so we're
not going to get the same bangfor the buck that we did when we
had, for example, had RonaldReagan and the debt ratio was
(19:36):
like 30% and the deficit waslike 3% of GDP.
You know we're now over 100%debt to GDP, deficit 6% to 7%
GDP.
So it's otherwise.
The first thing you learn ineconomics is the laws of
diminishing returns.
So they may try to fiscallyreflate, but the multiplier
impact on the economy with allof these fiscal stimulus
(19:57):
measures is dissipating overtime.
You saw that with the Trump taxcut in 2018.
It gave you a bit of a sugarhigh and then nothing happened.
After that Stimulus checks, wegot a sugar high, nothing
happened after that.
So I'm not a big fan that wecan try and fiscally reflate the
(20:20):
economy, but because of thegargantuan size of the deficit
and debts, the multiplier impacton the economy is going to be
very muted.
And as far as interest rates areconcerned, I think that the
Fed's going to start to easepolicy with or without a
recession.
And if we get a recession,there's a good chance we'll go
(20:41):
right back down to the zerobound.
But you see, the problem hereis that the average interest
rate is about 300 basis pointshigher than the.
I should say that the currentfunds rate is 300 basis points
(21:02):
higher than the average of thepast five years.
When you look at householdlending rates and lending rates
for small business, the currentrate is about points again above
what the average of the pastfive years have been.
So this has been the mother ofall interest rate shocks.
So when it comes time for theFed to ease the first at least
(21:23):
200 basis points maybe 300 basispoints of those rate cuts,
they're just going to be takingout the excessive restraint.
It's not even going to be realstimulus, going to be taking out
the excessive restraint.
It's not even going to be realstimulus.
I don't think you'll get realstimulus until they take the
funds rate below their ownestimate of neutral or the
R-star two and three quarterspercent.
So everybody's going to getexcited that the Fed's going to
start to cut rates in Septemberand they probably will, but they
(21:43):
have a long road to haul beforethat turns into real stimulus.
So I think you'll probably endup getting both.
You'll get both fiscal, you'llget both monetary stimulus I'm
not so sure one replaces theother.
But fiscal is going to sufferthe laws of diminishing returns.
As I said, it will not be aspowerful as it's been in the
past and the and and you knowfor the first two to three
(22:04):
hundred basis points the Fed isis not really going to be
stimulating anything.
It's just going to be takingaway all this excess policy
restraint that they put in overthe past couple of years.
Speaker 1 (22:15):
So another question I'm going to put up from a Kant
Antala on YouTube the comingrecession, in David's mind,
would be similar to and thisperson corrected themselves
afterwards 1982 slash 1990, not1999, or more like 2000, 2008,.
As far as severity and drawdown, any parallels or thoughts on
duration and magnitudecomparisons?
Speaker 2 (22:38):
Well, it's certainly it's not.
Well, it's definitely not 2008,because you know we don't have
a gigantic mortgage bubble inour hands and insolvent banks,
so it's not anything like 08.
(22:59):
1982, the Volcker era.
I think that's probably themost apt comparison to tell you
the truth.
That's probably the most aptcomparison to tell you the truth
, and I say that because,throughout that tightening cycle
that we just endured, who didPowell compare himself to
(23:19):
repeatedly?
It was Paul Volcker.
So what did Paul Volcker haveto do?
He wasn't fighting anyparticular bubble, he was
fighting a massive inflationshock.
And what did Jay Powell do?
Well, he wasn't really fightingany particular bubble, he
fought an incredible inflationshock.
So they have those similarities.
(23:40):
The difference is that debtratios across the economy are
much higher now than they wereback when Volcker was in charge,
when he took over in 1979, wehave a lot more leverage in the
economy and so the economy ismuch more intrasensitive.
It's been camouflaged becauseso many people locked in, but
(24:01):
there's no get-out-of-jail-freecard from this tightening cycle
that we've had.
It's just the lags takinglonger than normal to play out.
The lags taking longer thannormal to play out.
The difference also is that waymore exposure, way more
exposure to the equity marketthan we had back in the early
(24:23):
1980s.
We didn't have a big negativeequity wealth effect back then.
Not as many people were in themarket.
What concerns me the most, ofcourse, is that back in the
early 80s the boomers were intheir 30s and today the boomers
are in their 70s.
And what concerns me the mostactually is and again, this
didn't take place in the early80s in the sense that you have
(24:48):
over half the stock market nowis passive index investing and
that's compounded the upwardpressure in equities.
But once we go on the otherside of the mountain it's going
to have an equally negativeimpact on the other side.
The passive investing bullmarket is actually quite
(25:08):
worrisome.
You have a lot of people thatare throwing money into the
stock market not based on anyfundamental analysis, but just
based on passive investing, andthat's how the market gets
increasingly concentrated.
So I'm a little nervous morenervous this time around about
the severity, not just becausethe economy is more credit
sensitive and coming off a 500basis point interest rate shock
(25:32):
and it was a shock and wehaven't seen the full impact yet
but if and when we get a bearmarket and I'm talking about
inequities, given the exposure,because the household balance
sheet right now people don'tknow this Over 70 percent of the
US household asset mix isinequities right now.
And for the baby boomers intheir mid 60s into their 70s,
(25:54):
who normally, when I start onthe business people of this age
range would have 30% of theirasset mix and equities, it's now
over 60%.
People in their 70s have over60% exposure in the equity
market and so I'm really nervousand this is important because
(26:15):
the baby boomers are this 80million pig in a python that's
driven everything over thecourse of the past six decades,
from economics to politics, themarkets.
So that's on my mind as wellthat we coupled this interest
rate shock with the bear marketinequities.
(26:35):
Now look what's happening.
The economy is alreadyweakening.
We're down almost zero growthright now in the second quarter.
We're actually I said, we'reactually negative.
That's, of course, the laggedimpact of the interest rates.
Imagine what happens if thestock market begins to roll over
and there's going to be a hugenegative wealth effect on
(26:58):
spending.
And you're asking me thatthat's one of the tail risks for
the economy that a lot ofpeople aren't talking about.
Speaker 1 (27:09):
And actually to that point that dovetails nicely with
something Jeff said Will a halfor full point drop in rates
really impact the consumer in ameaningful way?
The answer is probably not.
Speaker 2 (27:21):
You know that Greenspan cut rates 50 basis
points on the first trading dayof the year, january 3rd 2001.
You couldn't.
Three months earlier, you couldnever have thought that that
was ever going to happen.
And of course, the stock marketI mean the NASDAQ peaked
(27:43):
February, march of 2000.
The S&P peaked that September.
We were just coming off thepeak.
Everybody thought things werejust fine.
Peaked that September.
We were just coming off thepeak, everybody thought things
were just fine.
But Greenspan all of a suddenstarted seeing things happening
that told them that this wasjust not an inventory correction
(28:04):
in technology, but actually asignificant erosion in capital
spending, which of course, thenled to job loss and the
recession which started in Marchof 2001.
So the Fed starts cutting rates, and their first move in
January of 2001, for those thatare old enough to remember and
(28:27):
the recession starts in March of2001, two months later.
So it was too late.
Even 50 basis points, and don'tforget that cycle.
We went from something like6.5% all the way down to 1% on
the funds rate by 2003.
Too little, too late.
And, believe me, when they went50 basis points that day, the
(28:51):
markets rejoiced like it wasnobody's business and that was
the time really to take profits.
And so no 50 basis points,which I'm hearing the Fed might
do, if not September then maybeNovember.
Like I said before, I looked atthe data and it's just not
rocket science.
If you look at the five yearaverage of the funds rate,
(29:11):
historically and right now it's2 not rocket science.
If you look at the five-yearaverage of the funds rate,
historically and right now, it's2.2%, and you look at the spot
funds rate, which is now call it5.3, 5.4.
So there's like a 300 basispoint gap between those two
numbers.
The Fed in an easing cycle, bythe way, whether there's a
recession or not, they alwaysclose the gap between the moving
(29:31):
average, the five-year movingaverage and the spot funds rate.
So they have a long road to hoe.
So 50 basis points will getpeople excited, but I think it's
going to be the first sign thatthe Fed actually sees the
whites of the eyes of theeconomy and there'll be a lot
more rate cuts At some point.
They'll cut rates enough,they'll steepen the curve enough
(29:52):
.
We'll get to the other side ofthe mountain.
I said before, the businesscycle has not been repealed.
Recessions come to an end,expansions come to an end.
It's just the cycle.
Thankfully, expansions tend tobe long, recessions tend to be,
you know, three or four quarters.
It's not going to last ourlifetime, but there's nothing, I
(30:13):
think, that the Fed can doright now to stop it because of
all the lags that are stillkicking in from what they've
done over the past couple ofyears.
People don't even realize thateven by staying on the sidelines
, by staying on the sidelinesover the past 12 months as
inflation fell, and you look atwhat that did to real interest
rates, even though the Fed, inquotes, was on the sidelines, it
(30:35):
was actually a backdoor 50basis point tightening in real
interest rates.
In any event, they'reridiculously behind the curve.
I know it's not evident.
They were behind the curve andnobody talked much about
inflation.
Next thing you know we have 9%inflation in the summer of 2022.
They allowed themselves to getwell behind the inflation curve
(30:59):
and now they allowed themselvesto get well behind the economic
curve.
So by staying too loose for toolong, we got the inflation and
by staying too tight for toolong, we're going to get the
recession.
I think it's actually nowbecoming a reality.
I'm seeing it in the data.
You surely saw it in the CPIdata.
You're seeing what's happenedto pricing power.
(31:21):
It is deteriorating and I knowpeople will say, well, it's not
showing up in the jobs numbers,but it's only not showing up in
non-farm payrolls.
It is definitely showing up inthe household survey.
There's no doubt about that.
Speaker 1 (31:35):
Also seems to be showing up in terms of pending
home sales.
So I'm going to share anotherpost of yours from X, which
hopefully shows up here.
There we go Pending home sales,and this is what you said
Pending home sales, thequintessential leading indicator
for housing with all itspowerful multiplier effects,
(31:56):
dropped 2.1 percent month overmonth in May and but there's no
recession coming right now.
I I often talk about lumberbecause historically, lumbers
are leading indicator becauseit's tied to construction,
housing.
Very much seems similar to merecently, this downturn in
(32:20):
pending home sales with lumber'spricing.
Is there any chance at thistime?
It's different when it comes tohousing because of the lock-in
effect and all these strangenuances with mortgage demand.
Or is the housing market stillthe biggest tell-all?
Speaker 2 (32:33):
with mortgage demand or is the housing market still
the biggest tell-all?
Well, the problem once again isinterest rates and there is no
more interest-sensitive sectorof the economy than housing.
So the fact that people lockedin and they're prisoners in
their home, it's why there'sbeen such little turnover in the
(32:56):
resale market.
People are basically they'relocked into their mortgages and
you can't refinance because thenyou're going to be stuck with a
7% mortgage rate instead ofyour 4% mortgage rate.
And that's why all sorts ofnumbers on labor mobility and
moving and freight, you knoweverybody is just basically
stuck.
So that's created this illusionof prosperity as far as home
prices are concerned, becausewhen you have a totally
(33:18):
inelastic supply curve, youdon't need much demand to drive
home prices up.
This is not like the home priceappreciation we had in the mid
2000s when it was a lot ofdemand.
There's just no supply.
Demand, there's just no supply.
And so what's happening is thatthe marginal buyer, the people
sitting on the fence, they can'tafford to buy a home.
The qualifying income to afforda home is way beyond their
(33:42):
reach.
Qualifying income for amortgage is like 30% above what
the median income is right nowfor this group of people.
So the affordability ratio hascollapsed to practically
historic lows.
So there's no demand and sothat obviously has an impact on
home building activity andyou're seeing that in the
(34:04):
housing start numbers.
So when I talk about themultiplier impact, I'm not
talking about the fact that homeprices have been rising and
rising because of no supply, butmore because of that number is
telling you.
The pending home sale number istelling you what's happening to
marginal demand, and change isalways at the margin, and so the
demand for housing is not justcontracting, it's really
(34:28):
collapsing.
That's a record low for pendinghome sales and that's a leading
indicator that's going to feedright through to residential
construction.
And although it's maybe only 3%of GDP, as you mentioned, the
multiplier impacts to the restof the economy.
When you have no home buildinggoing on, you don't have real
estate agents doing anything,you don't have construction
(34:50):
workers, trades, people.
It has an impact on the legalcommunity, mortgage brokers.
They lose their jobs.
There's so many powerfularteries from housing to the
rest of the economy.
So what I'm talking about isthe real side impact on GDP and
the multiplier effects that has,broadly speaking, and that's
what that chart actually speaksto.
Speaker 1 (35:17):
I think usually in a recession, the dollar tends to
strengthen against othercurrencies.
It's kind of a risk-offcorrelation causation.
How do you think about currencymovement?
Because one of the more you canargue relative to history
somewhat unusual aspects of thisis that, despite all of the
(35:38):
higher inflation, the dollar hasonly gotten stronger.
Other currencies have gottenweaker, the yen in particular,
which we'll talk about.
But how do you think currencymovement plays out for the US
under a slowdown currency?
Speaker 2 (35:50):
movement plays out for the US under a slowdown.
Well, I think that as the Fedcuts rates, I think the Fed will
end up cutting rates more thanother central banks around the
world, maybe outside of Canada.
(36:15):
Canada's got a lot of problems.
I think the Fed will be cuttingrates more.
Now the futures market somehowbelieves that the terminal rate
is 4%, that the Fed will stop.
They'll go from, say, 5.38 downto 4.
I'm saying no, no, they'regoing to go a lot more than that
.
So what's going to happen isthat, as the expectations of
where the destination is goingto be for the Fed funds rate
goes way below what is currentlypriced in the dollar, the DXY
(36:37):
is going to go down.
It's not going to go up.
We're going to be in afundamental bear market in the
US dollar, based on the mostimportant relationship in the
currency markets, which isrelative industry differentials.
They're going to work againstthe greenback.
Speaker 1 (36:57):
All right Now.
You had mentioned you werequite bullish on Japan and
that's been on fire.
I think there's a clear linkbetween that and yen
depreciation.
I mean you were way better offobviously hedging out the yen
and really benefiting from thatmove from the US perspective.
From the US perspective, I havemyself been wrong, but maybe
(37:20):
just early on my concerns aboutthe speed with which the yen is
falling, particularly when itcomes to oil priced in yen, and
I've argued before that I thinkit's only a matter of time until
Japan panics because they can'tcontrol the price of oil but
they control the yen to someextent and maybe spark a short
covering rally where there's alot of shorting on the yen,
(37:44):
which brings down the price ofoil and yen but might also spark
a reverse carry trade.
How much more is left, youthink, for Japan's markets?
Because I think that's verymuch tied to how much is left on
the downside for yen.
Speaker 2 (37:56):
Well, I'll just tell you that.
You know.
Well, I'll just tell you thatyou know before I mentioned that
you know the household assetmix in the United States is over
70% oriented towards equities.
It's a fraction of that and afraction of that in Japan.
The Japanese household isprincipally in cash and bonds
(38:20):
and what's been really drivingthe Japanese equity market over
the past couple of years hasbeen foreign inflows.
So we haven't even seen thepublic participation yet.
I mean, could you ever imaginewhat the Japanese stock market
would look like if they actuallydeveloped an equity culture
that exists in the United States, in the United States, and
that's going to happen.
You know, back in 1982, youknow, when the P multiple was
(38:48):
eight in the S&P 500, and wecame off really a three-year
bear market.
I mean, if you were a broker onWall Street and you cold called
a client to sell them stocks,you would have been arrested,
they would have called the copson you, and so we haven't even
seen the household sector startto participate.
(39:08):
So I think there's a verystrong fund flow argument
because this is just beginningto start that the Japanese
personal sector is starting torebalance their asset mix in
favor of equities.
As I said before, the all-inyield, with dividend payouts and
buybacks, japan is superior,way superior to where the US is
(39:33):
on this score.
And we're still seeing thisfinal stage of Abenomics and
especially the pressure that'sbeen put on the corporate sector
there to increase transparencyand also take cash off their
balance sheets and deliver it toshareholder returns.
(39:57):
Shareholder returns, I mean,that is, you know, up until a
couple of years ago that wasunheard of, that was an oxymoron
.
That you have the structuralchanges taking place in terms of
capital allocation in Japan andmuch greater efficiency.
This is a real secular story.
Japan looks like the structuralstory that we had in the United
(40:21):
States in the 1980s.
By the way, I was a perma bullduring the Reagan revolution.
Well, you know, abe isn'taround anymore, but his legacy
lives and it's been extremelytransformative for the Japanese
equity market.
Transformative for the Japaneseequity market.
(40:44):
So you know, when we map out,even if, even if the Japanese
nevermind looking like the US,even if they look like Europe in
terms of equity allocation onthe household balance sheet,
you'd be talking at leastanother 20 to 30% upward
pressure from buying activityjust from that comparison.
So yeah, the cheap yen hascertainly helped the large cap
(41:07):
exporters, but it's also createsa lot of losers and cause.
Japan is a big exporter, butit's also a big importer.
But the yen has been, I say, anartificial source of stimulus.
That's not the reason.
I mean.
The Japanese yen could go upand I'll still be bullish on
(41:27):
Japan for the same reasons Ihave.
I've not been saying buy Japanbecause they cheapen their
currency and it's great forearnings and that's why you want
to own them.
I think that the Japanese yen isthe most grossly undervalued
currency on the planet.
We all know that.
What's the catalyst?
The catalyst is not going to beFX intervention.
It's going to be that the Bankof Japan is going to have to
(41:48):
raise interest rates, andprobably by quite a bit, and
Japan is one of the fewcountries in the world where
inflation is actually going up,not down Now from a very low
level.
Is that terrible?
No, it's telling you thatpricing power in corporate Japan
is improving, but it also meansinterest rates have to move up.
(42:09):
Well, you're going to say, well, interest rates moving up isn't
that bad news?
Well, not necessarily, becauseit's going to give, it's going
to certainly help margins inJapanese financials.
Of course, japanese financialsis where Warren Buffett has his
stake.
So actually there's still lotsof reasons to be bullish on
Japan.
I would not change myrecommendation if the yen
(42:31):
manages to reverse course.
In fact, it just means that youwant to take a naked long
position in the Nikke or thetopics, or, as opposed to,
hedging the currency.
But I think this is, I dobelieve that this is a secular
bull market.
Speaker 1 (42:49):
Speaking of culture of buying equities, I'll relate
this to a question, also fromYouTube, from an individual here
what do you think about India'sstock market?
You touched on India a littlebit.
There there is definitely aculture of buying equities from
what I've seen when it comes totraders in India.
Maybe small amounts, but inaggregate that makes a big
(43:09):
difference.
India has been among the stars.
Obviously, Secular bull marketcontinues there.
Are we going to have somerelative underperformance?
What do you think?
Speaker 2 (43:20):
Well, so long as the coalition that Modi has had to
put together doesn't upset theapple cart in terms of what it
means for budgetary policy andespecially the vast upgrades
they've made towardsinfrastructure, then I think
everything's going to be fine.
(43:40):
Uh, and the, the, the.
The growth in india's capitalstock in the past several years
has been tremendous.
Um modi has really been.
I mean we could.
I'm not going to talk about hisnationalistic tendencies and
what a divisive character hecould be, but for the economy
(44:01):
and the markets again, he's beenlike a different version of
Ronald Reagan very much supplyside, very much supply side.
You have supply side economicsgoing on in India and it's one
of the few areas of the worldthat has growth of 8% and it's
being driven principally byproductivity.
Imagine having productivity ledgrowth.
That's around 8%.
(44:21):
A young and vibrant educatedpopulation that mostly speak
English they have.
When you look at their futureand you look at their dependency
ratios, for example, you knowthe share of the labor force
that is young versus old.
It's so much different than itis in the West and especially in
(44:43):
America and through whiteswaths of Europe, india has one
of the most impressivedependency ratio profiles for
the next 10 years of any countryon the planet, which is very
important for fiscal stability,but also very important for
their potential GDP growth.
So, just like Japan, fordifferent reasons, I'm also
(45:05):
bullish on India.
Speaker 1 (45:12):
You and I, I think, are aligned into this idea that
it's only a matter of time untila duration crisis becomes a
credit crisis.
It's taken a long time for that, until a duration crisis
becomes a credit crisis.
It's taken a long time for thatto play out.
And a credit crisis doesn'thave to mean like oh wait, it's
just spread, widening.
I mean that's in a potentiallyoverreactive type of way.
(45:34):
And yet, despite people beingaware of that risk, they keep
buying high yield corporatecredit.
Is that the sleeper risk that?
Maybe there's just too muchmoney that's been chasing these
high risk debt issuances.
Obviously, a lot of money hasgone to private credit as well,
but is there a risk there thatwhen the proverbial shit hits
(45:57):
the fan, that's where it's goingto most show up?
When the proverbial shit hitsthe fan?
Speaker 2 (46:01):
that's where it's going to most show up.
Well, probably well.
For one thing, I do tend toagree with that and I think
spreads are stupid tight reallyacross the whole credit spectrum
.
I include investment grade inthere as well.
But one of the mitigatingfactors, of course, is that you
probably have in the high yieldspace a higher share of double B
(46:28):
credits in there than we've hadin the past.
So it's called junk, but it'sprobably a higher quality junk
bond market than it's been inthe past.
That's acted as a bit of aweight on where those spreads
are.
But I agree with you that you'renot getting paid, in my opinion
, for the risks to be in creditin general.
But the canary in the coal minemight not be the traditional
high yield.
(46:49):
It might be in the triple Cbond market and there in the
past several months we havestarted to see spreads widen out
.
That is the canary in the coalmine.
If you're looking just as wewere looking at those mortgage
bonds, those spreads that werewidening out well before the
bear market back in 2007, thetriple C's will be the leading
(47:13):
indicator.
Keep an eye on that.
Those spreads have beenwidening out lately.
Speaker 1 (47:22):
The make of those triple Cs are primarily consumer
, discretionary, industrials andenergy right.
I think that's sort of the mixyou mentioned, being bullish on
commodities.
It doesn't sound to me like theenergy side would be a source
of risk.
It's probably much more on theindustrial, discretionary end.
Speaker 2 (47:39):
Yeah, the energy.
You know oil prices.
I think in a recession you canget oil down to, you know, 60,
65.
I think we're just broadly in arange right now when you, when
you think about it, and evenwith the economic weakness, like
I said, the US economy rightnow at best is flatlining and
you know wti is north of 80 abarrel.
(48:00):
Um, and that's just talking,telling you about the
fundamental supply demandbalance, uh for crude, but that
also exists for a lot ofcommodities.
Um, it's just basically uhidentifying which of the
commodities are in a long-termuh deficit position when it
comes to their supply demandbalance.
And there's been hardly anycapital investment in the basic
(48:21):
materials sector, really, formany, many years.
So I think that, look, in arecession, you definitely you
don't want to touch commoditiesin a recession.
I'm not going to say it's goingto be different this time.
I just think that the damage isgoing to be a lot lighter and
probably provide a great buyingopportunity for an area of
commodities, broadly speaking,that probably has a five to 10
(48:45):
year tailwind behind it.
So when we're talking aboutbuying dips, buying dips and
commodities are going to be, Ithink, holding in good stead for
the next several years.
The supply demand balanceacross the spectrum are just far
too compelling.
That's really if we're going tosay it's different this time,
it's the fact that we go intothis cycle with a supply deficit
(49:08):
across most of the resourcesector that we haven't seen
before, so that holds it in arecession and then we come out
the other side and demand growthpicks up again.
It's going to be in a secularbull market.
So yeah, we're fans of theresource sector broadly speaking
.
Speaker 1 (49:26):
Will you expect that, since that's what people like
to talk about gold ends up beingthe top performing from an
asset class within the assetclass perspective?
Because I think the movie'sinteresting with gold, right,
because gold tends to really dowell.
When you have negative realrates, you don't have negative
real rates.
Maybe this is in anticipationof negative real rates, right?
Right, so if you have arecession, then those negative
(49:48):
real rates come.
Then that's a whole otherreason for gold to move.
Speaker 2 (49:51):
Well, you don't need negative real rates, you just
need real rates to come down,and real.
I believe you know, beingrational, about where the
economy is going, what the Fed'sgoing to be doing.
I think real rates will becoming down Check.
The US dollar will be goingdown Check, and at the same time
, I think that the central banksglobally will continue this
(50:14):
reallocation and their FXreserves towards gold.
That's not going away.
That is a long-term strategicshift.
And then I think India is goingto remain the strongest economy
in the world for many, manyyears.
And retail demand in Indiathat's the one thing that never
goes away.
(50:36):
And then you're taking a look atthe production costs.
People don't focus on howexpensive it is to mine gold in
the world today.
The marginal average cost ofproduction is moving up
inexorably, and so we havereally a fundamental floor under
the gold price and lots ofreasons why this trend that
we've seen in the past severalmonths is going to be sustained.
(50:58):
And it's not just gold but alsosilver which has broken the $31
an ounce.
So the precious metals that isone of our high conviction calls
so, and I think that thereasons to like precious metals
because there's been reasons tolike them already.
I think that they are going tomultiply over the course of the
next several months, andprobably years too.
Speaker 1 (51:24):
One more question before we wrap up here from Toyn
I apologize if I'mmispronouncing that From YouTube
have the financial marketsproperly priced in the
commercial real estate debacle?
What does it see that thestreet actual sales price
doesn't?
Speaker 2 (51:39):
Street actual sales price doesn't.
Yeah, I think that.
I mean, from what I'm seeing,we have a trillion dollars of
maturities that are just goingto be hitting the wall.
Yeah, it's going to be, andit's going to have cascading
effects.
No, I don't think that this ispriced in and actually nobody's
really talking about it.
And it does.
It does trouble me, I guess youknow, looking at how the
(52:01):
regional banks have behaved inthe past couple of years, and
that's really, you know, theposter child for the problem.
But it's much, it's much biggerthan that.
Just like in residential realestate, this is going to have
other impacts on the economy andon the markets, and so the
answer to the question is that,no, that is not priced in A
(52:22):
recession, is not priced in Arecession, would not be priced
into a stock market with a 21.6Ford multiple or high yield
spreads at 300 basis points orIG at 100 basis points.
Basically, it's a marketplacein terms of risk assets where
(52:42):
you have goldilocks priced inand I don't know why, um,
there's not more talk or morepriced in about what?
The cre debacle, which isbasically this story, is not
over by a long shot.
It's very deflationary and it'sa principal reason why you know
how do you shelter yourself.
I'll tell you like that's why Italked a lot about a lot of
(53:02):
things that I like, and I talkedabout gold.
Gold, by the way, uh, is a nicehedge against rising
uncertainty.
Um, and so are.
So are long-term governmentbonds.
I like the 30-year treasurybecause the cre situation is
hugely deflationary.
(53:22):
The whole curve is going tocome down, led by the Fed, but
because of the convexity, thebest total return is going to
come in the detested andmaligned long bond.
So that's why our biggest callis called the bond bullion
barbell.
So that's why our biggest callis called the Bond-Boolean
barbell.
I love alliterations, but thatis going to provide you with a
(53:45):
margin of safety.
And the CRE is a big problemthat is not totally factored in,
absolutely.
Speaker 1 (53:55):
Great question, david , for those who want to track
more of your thoughts, more ofyour work.
Speaker 2 (53:58):
I know there's also the Substack I'm sharing on the
early morning with davecom, but,um, just talk about different
ways that people can track youand some of the benefits of
subscribers that subscribers getyeah, well, um, you know, what
I would uh suggest is, um peopleon the call, if they want to
learn more about what I do uhevery day, just come on to
(54:23):
information atrosenbergresearchcom, or you can
just Google Rosenberg Research.
Everybody on this call iseligible for a 30-day free trial
.
So you see the deflation I'mtalking in my book 30 day free
trial for people on this call.
Uh, and if you want to, uh youknow, come on the website uh
(54:45):
Rosenberg researchcom.
If you want to email usdirectly, information at
Rosenberg researchcom and uhsomebody on my client service
team, uh, we'll get back to ASAP.
Speaker 1 (54:58):
Uh, appreciate everybody joining again.
This will be an edited podcastunder lead lag live.
I always enjoy listening to mrrosenberg and I appreciate those
that uh ask thoughtfulquestions.
So thank you, david.
Thank everybody, and I'll seeyou next time on lead lag live.
Thank you.
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