BEARABLE
WHY DAVID ROSENBERG IS HAPPY TO BET AGAINST THE MARKET CONSENSUS AGAIN.
Iwas being interviewed on CNBC last week when I was told that my views were diametrically opposed to the consensus and how the markets are positioned. To which I exclaimed that it’s been many years since I was this excited about going against the herd. I had just enough airtime to work in Bob Farrell’s Rule No. 9: “When all the experts and forecasts agree, something else is going to happen.”
Of course, this was all about the debate over runaway growth, inflation and the call on the United States Federal Reserve and the Treasury market. I didn’t take the bait on the stock market, as the bubble just gets bigger and bigger, with the cyclically adjusted priceto-earnings (CAPE) ratio now pressing against 37x, only surpassed historically by the late 1990s’ tech frenzy.
Yes, I am not positioned the way the dominant “Roaring Twenties” crowd is, that much is for sure. But I have been here before. When I turned bearish on tech at the height of the dot-com bubble back in 2000, my partners at the time thought I was nuts.
In the early months of 2002, when visions of post-9/11 reconstruction and rebuilding alongside massive monetary and fiscal stimulus had the bond vigilantes out in full force, the second half of that year saw a monster Treasury market rally instead, as expectations of Fed tightening swung around to easing. The economy was far too fragile as it turned out to withstand the run-up in market rates, though that wasn’t evident to the consensus during the winter and spring that year when it looked as though a classic inventory investment cycle appeared to be taking hold a tad prematurely.
Then-fed chair Alan Greenspan actually messaged to the market in early 2000 that it was in over its skis on the big economic recovery view, but, as is the case now, investors guffawed. And then they gasped.
But it was during the mania in the mid-2000s that my resolve was truly tested. All I had to do was sift through the data and the charts to know we had a U.S. housing bubble of epic proportions on our hands. Home price-to-income, home price-to-rent and residential real estate/household asset ratios were in the stratosphere. If you’re talking about oneto-two standard deviation events, you know you are in major excess.
Leverage, speculation, valuation, sentiment and public participation all fit the classic definition of a bubble, yet — believe it or not — it reached a stage where I had peeved off so many people by not being part of the bullish consensus that I was forbidden from using the “B” word in my published research (we settled for “mania” instead).
I faced multiple internal reviews (including a 360) and disdain for years (the head of the bond desk once threw my chart presentation at me in anger in a boardroom). I was encouraged to change my Fed forecast to a tightening in the fall of 2007, though I pushed against the view that rates were going higher. One of the prouder moments in my 35 years in this business is not succumbing to that pressure since I had this strong sense that the credit cycle was soon to collapse.
But during that period in the summer and fall of 2007, it was daring to not join the crowd in calling for a tighter Fed and an extended bear market in Treasuries, which was the overwhelming consensus at the time.
I recall being told by one of my superiors that the equity research analysts were complaining that if they were to input my economics department’s forecasts on retail sales, industrial production and housing starts into their own models, they would be forced to have “sell” recommendations on 75 per cent of the companies they covered. “Maybe they should,” I responded. That didn’t trigger a very warm reaction, to say the least.
It was around that time that I was marketing in Houston and visited a very large mutual fund company. I was giving one of my usual “fire and brimstone” chats, loaded for bear, going through all my housing charts and saying why it would all end badly and that the only investment worthy of consideration was the long bond. Halfway through my spiel, the chief investment officer stood up, interrupted me, and shouted, “Rosenberg, I’ve heard enough. You don’t know what you’re talking about.” Ouch. “Well, there’s an institutional investor vote out the window,” I quickly said to myself.
In any event, it’s probably not as bad as having the head of bonds at your own firm do almost exactly the same thing, the difference being that he physically threw my chart package at me in front of about 30 others (I thought it was me who was supposed to be giving the “pitch”). I’ll never forget what he said: “Do you enjoy being wrong all the time?” Well, truth be told, I proved to be spectacularly correct, and he didn’t last much longer at the firm.
Look, nobody is right all the time, and nobody is wrong all the time. More often than not, it really comes down more to timing, and I am historically early to a fault. But experience goes a long way in this business and so it is important to identify bubbles — we have two now, in residential real estate and equities — and then understand that excesses will always go further than you think (where we are now) and that no bubble ever corrected by going sideways.
It is fanciful to believe that we will come out of the first global pandemic in more than a century into a world of newfound sustainable inflation. Or that a massive surge in public-sector deficits and debts, producing little more than a short-term sugar high, have assured us an economic future replete with the Roaring Twenties and “Goldilocks” economic scenario. The vaccination rollout is impressive, and the reopening of the U.S. economy is both welcome and impressive. But once this so-called “pent up” demand is filled in the four per cent of GDP known as the Covid-19-affected “consumer services” sector, and once these short-term stimulus cheques run out, the economic emperor becomes disrobed, as was the case in last year’s fourth quarter. By July-august, the markets, both stocks and bonds, will start to see what I already see around the bend. Why? Because “something else is going to happen.”
As for inflation, remember that this is all people talked about during the asset and commodity boom in 2006 and well into 2007. There reached a point once the asset and commodity boom turned to bust where CPI and PPI inflation didn’t really matter anymore (lagging indicators in any event). Keep in mind that the recession back then started nearly two years after the Fed had last touched rates, so sometimes these bubbles just end up bursting under the weight of their own overvalued excess. As Bob Farrell would say: “The markets make the news; the news doesn’t make the markets.”
The market consensus is so overwhelmingly one-sided that I don’t find it one bit difficult to bet in the other direction. I’m having the same gut check I had in 2000, 2002 and 2007. The pushback is incredible, but it is actually increasing the intensity of my resolve. All I ask everyone is this: please don’t throw any chart-books at me.