David Rosenberg's Bold Predictions on Global Markets and Economic Trends

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

Speaker 1: 0:08

My name is Michael Guyatt, publisher of the Lead Lager. Joining me for the rough hour is Mr David Rosenberg, who I know a lot of people are familiar with. I always start off saying, david, introduce yourself. I know a lot of people know you. But maybe before we get into a deeper discussion around markets and the economy, set the record straight because a lot of people I think might be under the impression I know wrongly so that you're a perma bear. Set the record straight on that.

Speaker 2: 0:35

Well, I don't believe that there's a perma anything, because perma by definition means permanent and there is nothing permanent, and especially in this industry of the financial markets. So I think that people get that idea because it's been a long time since I've been bullish on the S&P 500. And people tend to think that that is the only market out there is the market for large cap US stocks. So I'd rather consider myself to be an ideas guy and focusing on risk adjusted returns and I believe in diversification and I believe in capital preservation, which I think has been thrown into the garbage bin over the course of the past 18 months. But this perma bear has been a relentless bull on Japan which, even currency adjusted in the past few years has outperformed the S&P 500.

Speaker 2: 1:38

And we've written a lot of reports on Japan been very bullish on India. We're very bullish on the fixed income market broadly speaking, and there's areas within the market that we like. We like defense stocks for obvious reasons. We are very long agriculture because of the really a secular bull market in in food security and we generally like commodities and we think there is a long-term bull market in commodities and we especially like precious metals. So if I was really a perma bear. I'd be telling everybody to go hide in the Hills. You know, buy a sawed off, shotgun baked beans, canned tuna and go hide underground. I've never done that. That's a perma-bear. I just choose to focus on areas of the capital structure and geographies where I see more tailwinds than headwinds.

Speaker 1: 2:48

If you want to call that a perma bear, go for it. Yeah well, it's funny because I always 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: 3:02

Um and uh, you know there was uh, like right now we put out more of a bullish piece on the UK market, for example, one of the few areas of the world where there is now political stability, both in absolute and relative terms, and a market that isn't screaming for rate cuts because they don't really need it, for rate cuts because they don't really need it. And so we also like sterling because the Bank of England may well be the last central bank to start cutting interest rates. So you know, I span all investments and I span the globe, but, of course, everybody believes that there's only one market out there and it's the S&P 500. By the way, the average stock in the United States is the same level today. It was back on January, the 4th of 2022. So that's basically 19 months of nothing for the average stock. So it's not even the S&P 500 anymore and it might not be the MAG-7. It's probably more like the MAG-5. But it's a very concentrated index and I have my concerns, and the higher it goes, I think, ultimately, the harder it's going to fall. But that date hasn't happened yet.

Speaker 2: 4:15

But there are other areas to put money to work. I said before, it's not just the Treasury market. You can buy the S&P 500 at a 4.6% earnings yield or you can pick up a short dated piece of investment grade corporate paper for five and a half percent with minimal default risk and minimal duration risk, and I think that that's going to prove to be, over time, to have been a better risk adjusted strategy than being all in on the S&P 500 at these nosebleed valuation levels that we have right now. Again, I don't consider that to be bear market thought because I'm not saying just be all in cash. We have been long Japan. That's actually been our highest conviction call and it's amazing because everybody has a home bias and everybody's focuses on, you know, the US market.

Speaker 2: 5:15

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 their earnings yield to where their benchmark bond yields are, it's still a great place to park money. And I've been saying all along to American investors take your profits in the US. No one ever got hurt by booking a profit and move the money to other stock markets around the world. There are some that still have particularly solid characteristics. So I don't think that's really a bear market narrative. It's really in my opinion and I don't want to sound arrogant when I say it, but it's really just being rational and being disciplined and being prudent. So diversification doesn't just mean across your equity portfolio or your asset mix. You should also have geographic allocation in your portfolio as well, and Japan has been a great place to be. So actually, if I'm PERMA anything, I'm a PERMA bull on the Tokyo Stock Exchange.

Speaker 1: 6:25

Speaking about bear narratives, though, the ultimate bear narrative is recession, obviously, and you've been putting out some really good content that's poking the bulls. I actually like the tone with which you're approaching a lot of the stuff I'm going to share. One of the more recent posts that you put out, which looks at the ISM composite PMI and your comment on this from X, is the June ISM indices. Undercut consensus views and the combined levels are where they were in 2001, q1, 2008, q1, 2020, q2. But hey, consensus says there's no recession coming, so I guess it won't come right. Let's talk about the state of the US economy, because if there is going to be a bear narrative around the S&P from a directional perspective as opposed to a relative underperformance perspective, it's got to come from growth.

Speaker 2: 7:20

Well, let me just say that the economy is clearly weakening. You know, I'm astounded that Jay Powell continues to refer to the US economy as being solid and strong, but then again, I guess he has to always sound like an economic cheerleader because he is a quasi-politician. The Fed, after all, reports in the Congress for people to think that there's a complete central bank independence. That's actually a bit of a joke. The economy was strong.

Speaker 2: 7:52

Last year we had 3% GDP growth and that was surprising indeed, but the impact of what the Fed had been doing was camouflaged by really rampant fiscal stimulus. Who thought that last year we were going to have a 30% expansion in the fiscal deficit? And that played a very big role in influencing economic growth last year was the government sector, and then we had the last leg of the excess savings file being put to work. You know, historically, when confronted with a stimulus check, the household sector would save half and spend half, and that's why the economists in the White House told Joe Biden back in March of 2022, go big or go home. If you want a trillion dollars of stimulus, you've got to give people a $2 trillion lottery ticket. But they didn't save any of it.

Speaker 2: 8:41

It all got spent in this. I guess a new wave of narcissism. You know YOLO, you only live once. Yolo on Main Street was what FOMO has been on Wall Street, and so that last leg of the savings drawdown was huge last year. And so when you adjust the economy for those two factors, when people say, well, you know that's data mining, and I say, no, I prefer to call it analysis. If I wasn't covering a company and I was, you know, covering their quarterly performance, and I saw non-recurring factors in there, I would put an asterisk saying non-recurring, and so these are non-recurring factors. So the excess savings file is over, fiscal stimulus has turned really into neutral, and so what are we left with? We had 1.4% real growth in the first quarter. We're actually, michael, we're tracking. We have our own now cast model. It's tracking right now. Outcast model. It's tracking right now slight negative for the Q2 real GDP that we're going to get at the end of the month. So I think that the recession that nobody sees is probably starting right now.

Speaker 2: 9:55

And, of course, the one thing that I will say I do not believe in new eras. I do not believe that excesses are permanent. I am a firm believer in the business cycle. I do not think the business cycle has been repealed and I believe that in a credit-driven economy, interest rates always matter, but the economy also always resets to shifting interest rates in both directions with long lags. There is no get-out-of-jail-free card for the economy coming off the most acute policy tightening cycle since the Volcker years in the early 1980s. So staring us in the face is that reset. And just remember that the Fed stopped tightening in the spring of 2006. And then nothing happened in 2007. That was the soft landing. The soft landing is a bridge, really, the transition from the expansion phase of the cycle to the contraction phase. And next thing you know, the recession starts December 2007, which caught a lot of people by surprise. So I think that's really what we're looking at.

Speaker 2: 10:58

I'm probably the only economist that has not thrown in the towel on the recession call, because I don't believe that delayed is the same as derailed, and I can understand that those of us that have been calling for recession. Of course it's been frustrating because it hasn't happened yet, but I had the same feeling when I was calling for recession in 2006, but I stuck to my guns. I didn't throw in the towel. There was only one other economist back then that was calling for recession at the same time. It was Dick Berner at Morgan Stanley, but it was a lonely period of time. So you know I've seen this play out before.

Speaker 2: 11:34

And as far as the comment on the stock market, you know what's interesting is that you have this record concentration of large cap tech, like anything that's touching AI, nvidia and the like Microsoft, apple. We ran these correlations and found that the Mag7 space has a 0% correlation with the economy. But the rest of the market has a 50% correlation with the economy and that might be one reason why the average stock hasn't risen for the past 19 months. But I don't know if a recession, michael, I don't know if a recession is going to undercut the Mag7, because these are the longest duration stocks and people are buying them on an assumption of what the total available market is going to be for AI five to 10 years from now. So these stocks not that I, I mean these are great companies and they have great business models, 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 and 2000,. But it's still a. It's still a price bubble. Otherwise they'd be good stocks if they were more reasonably valued. But I don't believe a recession is going to bring that part of the market down.

Speaker 2: 12:51

Remember when we had the similar situation back in 1999-2000, the NASDAQ peaked in March of 2000. And that was a year before the recession. The Fed had already completed its tightening cycle. Nasdaq went down 12 months, rolled over 12 months before the recession, and that's because of earnings disappointments, order cancellations. Obviously there were problems with vendor financing back then, but that was very idiosyncratic developments related to the tech space at that time that had nothing to do with the economy. The economy came later. So I'm not so sure that if these growth stocks roll over, it's going to be because of the economy. I think it's going to be because we're going to wake up one day and one of these companies will have an order cancellation, some problems with their customer or an earnings miss, and I expect that that'll happen. But that is what is going to cause the bubble of tech to unwind. It won't be the economy, it'll be something specific to the industry.

Speaker 1: 13:52

Yeah, I'd argue just broader volatility. I mean, I've referenced this in other interviews before, but from a behavioral finance perspective, the disposition effect would argue that when faced with uncertainty, first thing traders and investors do is not sell their losers, they sell their winners. There aren't that many winners except those.

Speaker 2: 14:12

Well, you can get a fund flow effect, but the question would become what causes that to happen? I'm not so sure A recession will bring down interest rates. Growth stocks love lower interest rates because, as I said, they're the longest duration parts of the market. They might skate right through, especially when you consider why are people buying these stocks? People aren't buying these stocks because of the business cycle. They're buying them because of their bloated estimate of what AI is going to look like and all the spinoff effects, and that transcends the business cycle. It's you know. Basically, I think, this part of the market, if you're looking at this, say, fundamentally, they're being repriced for a whole new world of accelerating productivity growth because of generative AI and the rapid expansion in the GPU space and so on and so forth. The big problem, I think and this is why I'm not a big fan of the value trade All of a sudden people are talking about rotating into value.

Speaker 2: 15:28

Value are basically cyclical stocks. I mean, really, are you going to buy the airlines in a recession? No. Are you going to buy the home builders in a recession? Probably not. Will you buy the banks in a recession? Probably not. These are very cyclical and they're shorter duration.

Speaker 2: 15:46

The value trade works best when three things are happening Inflation is going up, which means pricing power, interest rates are going up, and interest rates and inflation are going up because the economy is accelerating. That is when you want to go along the value trade. So I'm not a big fan of this. People are talking about this rotation. To me it's a short covering technical trade. I don't think it's going to have a lot of legs, and I say that because I'm in a business where your assumptions drive your conclusions. I have an assumption that the economy is weakening, that inflation has come down and will continue to come down, and that the economy is most likely recession bound. You don't normally want to own value stocks in that sort of environment.

Speaker 2: 16:34

And if something happens in the AI space, there is an earnings disappointment. You remember it was not an economic number that brought Cisco down, which ultimately brought the whole sector down back in 2000. Was cisco missing its eps numbers by a penny? That's all it took. So you have so much priced in uh to technology, generally speaking, that it won't take much of a disappointment to cause it to roll over. But I don't think there's going to be a rotation a sustainable one, in the value stocks if the economy rolls over, because, uh, the most cyclical stocks are going to get hurt the most. The areas that you'll want to be in that will at least put a floor under your equity position will be you can call them either the rate sensitives you can point to select REITs. Call them either the rate sensitives you can point to select REITs, you could point to utilities or defensive growth, for example, healthcare and consumer staples. And the only stock that I've gone back decades and decades that never seems to lose your money in a recession. And there's one stock. There's one stock Walmart.

Speaker 1: 18:25

It's a question from a viewer on YouTube. I'll put it on the screen here. By the way, folks, it looks like my video is a little bit grainy. I apologize. Not sure what's happening, but a question from SS McClack Do you think the next recession will solidify a regime change from monetary dominance to fiscal dominance, which is a term you hear a lot fiscal dominance and with it, sustained inflation going forward? I think it somewhat relates a little bit to the point about lags. Fiscal actions tend to have, I think, less of a lag than monetary actions. So how do you think about, sort of the balance of power in terms of stimulus?

Speaker 2: 19:07

Well, that's a great question. A lot is going to depend on the makeup of the legislative and executive branches at the November 5th election. At the November 5th election. So, for example, if you build an assumption that Trump wins with a GOP sweep and you can see that in Trump's fresh policy document, any semblance of fiscal probity that the Republicans used to stand for that's just been washed away, you could argue that we're going to get more fiscal stimulus. The problem is that the debt and deficit relative to the economy is so huge now that you're getting less and less of a bang for the buck from fiscal stimulus. The fiscal multiplier is increasingly shrinking, so we're not going to get the same bang for the buck that we did when we had, for example, had Ronald Reagan and the debt ratio was like 30% and the deficit was like 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 in economics is the laws of diminishing returns. So they may try to fiscally reflate, but the multiplier impact on the economy with all of these fiscal stimulus measures is dissipating over time. You saw that with the Trump tax cut in 2018. It gave you a bit of a sugar high and then nothing happened. After that Stimulus checks, we got a sugar high, nothing happened after that. So I'm not a big fan that we can try and fiscally reflate the economy, but because of the gargantuan size of the deficit and debts, the multiplier impact on the economy is going to be very muted.

Speaker 2: 21:04

And as far as interest rates are concerned, I think that the Fed's going to start to ease policy with or without a recession. And if we get a recession, there's a good chance we'll go right back down to the zero bound. But you see, the problem here is that the average interest rate is about 300 basis points higher than the. I should say that the current funds rate is 300 basis points higher than the average of the past five years. When you look at household lending rates and lending rates for small business, the current rate is about points again above what the average of the past five years have been. So this has been the mother of all interest rate shocks.

Speaker 2: 21:52

So when it comes time for the Fed to ease the first at least 200 basis points maybe 300 basis points of those rate cuts, they're just going to be taking out the excessive restraint. It's not even going to be real stimulus, going to be taking out the excessive restraint. It's not even going to be real stimulus. I don't think you'll get real stimulus until they take the funds rate below their own estimate of neutral or the R-star two and three quarters percent. So everybody's going to get excited that the Fed's going to start to cut rates in September and they probably will, but they have a long road to haul before that turns into real stimulus.

Speaker 2: 22:21

So I think you'll probably end up getting both. You'll get both fiscal, you'll get both monetary stimulus I'm not so sure one replaces the other. But fiscal is going to suffer the laws of diminishing returns. As I said, it will not be as powerful as it's been in the past and the and and you know for the first two to three hundred basis points the Fed is is not really going to be stimulating anything. It's just going to be taking away all this excess policy restraint that they put in over the past couple of years.

Speaker 1: 22:49

So another question I'm going to put up from a Kant Antala on YouTube the coming recession, in David's mind, would be similar to and this person corrected themselves afterwards 1982 slash 1990, not 1999, or more like 2000, 2008,. As far as severity and drawdown, any parallels or thoughts on duration and magnitude comparisons?

Speaker 2: 23:12

Well, it's certainly it's not. Well, it's definitely not 2008, because you know we don't have a gigantic mortgage bubble in our hands and insolvent banks, so it's not anything like 08. 1982, the Volcker era. I think that's probably the most apt comparison to tell you the truth. That's probably the most apt comparison to tell you the truth, and I say that because, throughout that tightening cycle that we just endured, who did Powell compare himself to repeatedly? It was Paul Volcker. So what did Paul Volcker have to do? He wasn't fighting any particular bubble, he was fighting a massive inflation shock. And what did Jay Powell do? Well, he wasn't really fighting any particular bubble, he fought an incredible inflation shock. So they have those similarities.

Speaker 2: 24:14

The difference is that debt ratios across the economy are much higher now than they were back when Volcker was in charge, when he took over in 1979, we have a lot more leverage in the economy and so the economy is much more intrasensitive. It's been camouflaged because so many people locked in, but there's no get-out-of-jail-free card from this tightening cycle that we've had. It's just the lags taking longer than normal to play out. The lags taking longer than normal to play out. The difference also is that way more exposure, way more exposure to the equity market than we had back in the early 1980s. We didn't have a big negative equity wealth effect back then. Not as many people were in the market. What concerns me the most, of course, is that back in the early 80s the boomers were in their 30s and today the boomers are in their 70s. And what concerns me the most actually is and again, this didn't take place in the early 80s in the sense that you have over half the stock market now is passive index investing and that's compounded the upward pressure in equities. But once we go on the other side of the mountain it's going to have an equally negative impact on the other side. The passive investing bull market is actually quite worrisome. You have a lot of people that are throwing money into the stock market not based on any fundamental analysis, but just based on passive investing, and that's how the market gets increasingly concentrated.

Speaker 2: 25:56

So I'm a little nervous more nervous this time around about the severity, not just because the economy is more credit sensitive and coming off a 500 basis point interest rate shock and it was a shock and we haven't seen the full impact yet but if and when we get a bear market and I'm talking about inequities, given the exposure, because the household balance sheet right now people don't know this Over 70 percent of the US household asset mix is inequities right now. And for the baby boomers in their mid 60s into their 70s, who normally, when I start on the business people of this age range would have 30% of their asset mix and equities, it's now over 60%. People in their 70s have over 60% exposure in the equity market and so I'm really nervous and this is important because the baby boomers are this 80 million pig in a python that's driven everything over the course of the past six decades, from economics to politics, the markets. So that's on my mind as well that we coupled this interest rate shock with the bear market inequities.

Speaker 2: 27:09

Now look what's happening. The economy is already weakening. We're down almost zero growth right now in the second quarter. We're actually I said, we're actually negative. That's, of course, the lagged impact of the interest rates. Imagine what happens if the stock market begins to roll over and there's going to be a huge negative wealth effect on spending. And you're asking me that that's one of the tail risks for the economy that a lot of people aren't talking about.

Speaker 1: 27:43

And actually to that point that dovetails nicely with something Jeff said Will a half or full point drop in rates really impact the consumer in a meaningful way? The answer is probably not.

Speaker 2: 27:55

You know that Greenspan cut rates 50 basis points on the first trading day of the year, january 3rd 2001. You couldn't. Three months earlier, you could never have thought that that was ever going to happen. And of course, the stock market I mean the NASDAQ peaked February, march of 2000. The S&P peaked that September. We were just coming off the peak. Everybody thought things were just fine. Peaked that September. We were just coming off the peak, everybody thought things were just fine.

Speaker 2: 28:32

But Greenspan all of a sudden started seeing things happening that told them that this was just not an inventory correction in technology, but actually a significant erosion in capital spending, which of course, then led to job loss and the recession which started in March of 2001. So the Fed starts cutting rates, and their first move in January of 2001, for those that are old enough to remember and the recession starts in March of 2001, two months later. So it was too late. Even 50 basis points, and don't forget that cycle. We went from something like 6.5% all the way down to 1% on the funds rate by 2003. Too little, too late. And, believe me, when they went 50 basis points that day, the markets rejoiced like it was nobody'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 maybe November. Like I said before, I looked at the data and it's just not rocket science. If you look at the five year average of the funds rate, historically and right now it's 2 not rocket science. If you look at the five-year average of the funds rate, historically and right now, it's 2.2%, and you look at the spot funds rate, which is now call it 5.3, 5.4. So there's like a 300 basis point gap between those two numbers. The Fed in an easing cycle, by the way, whether there's a recession or not, they always close the gap between the moving average, the five-year moving average and the spot funds rate. So they have a long road to hoe. So 50 basis points will get people excited, but I think it's going to be the first sign that the Fed actually sees the whites of the eyes of the economy and there'll be a lot more rate cuts At some point. They'll cut rates enough, they'll steepen the curve enough. We'll get to the other side of the mountain.

Speaker 2: 30:28

I said before, the business cycle has not been repealed. Recessions come to an end, expansions come to an end. It's just the cycle. Thankfully, expansions tend to be long, recessions tend to be, you know, three or four quarters. It's not going to last our lifetime, but there's nothing, I think, that the Fed can do right now to stop it because of all the lags that are still kicking in from what they've done over the past couple of years.

Speaker 2: 30:54

People don't even realize that even by staying on the sidelines, by staying on the sidelines over the past 12 months as inflation fell, and you look at what that did to real interest rates, even though the Fed, in quotes, was on the sidelines, it was actually a backdoor 50 basis point tightening in real interest rates. In any event, they're ridiculously behind the curve. I know it's not evident. They were behind the curve and nobody talked much about inflation. Next thing you know we have 9% inflation in the summer of 2022. They allowed themselves to get well behind the inflation curve and now they allowed themselves to get well behind the economic curve. So by staying too loose for too long, we got the inflation and by staying too tight for too long, we're going to get the recession.

Speaker 2: 31:46

I think it's actually now becoming a reality. I'm seeing it in the data. You surely saw it in the CPI data. You're seeing what's happened to pricing power. It is deteriorating and I know people 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 in the household survey. There's no doubt about that.

Speaker 1: 32:09

Also seems to be showing up in terms of pending home sales. So I'm going to share another post of yours from X, which hopefully shows up here. There we go Pending home sales, and this is what you said Pending home sales, the quintessential leading indicator for housing with all its powerful multiplier effects, dropped 2.1 percent month over month in May and but there's no recession coming right now. I I often talk about lumber because historically, lumbers are leading indicator because it's tied to construction, housing. Very much seems similar to me recently, this downturn in pending home sales with lumber's pricing. Is there any chance at this time? It's different when it comes to housing because of the lock-in effect and all these strange nuances with mortgage demand. Or is the housing market still the biggest tell-all?

Speaker 2: 33:07

with mortgage demand or is the housing market still the biggest tell-all? Well, the problem once again is interest rates and there is no more interest-sensitive sector of the economy than housing. So the fact that people locked in and they're prisoners in their home, it's why there's been such little turnover in the resale market. People are basically they're locked into their mortgages and you can't refinance because then you're going to be stuck with a 7% mortgage rate instead of your 4% mortgage rate. And that's why all sorts of numbers on labor mobility and moving and freight, you know everybody is just basically stuck. So that's created this illusion of prosperity as far as home prices are concerned, because when you have a totally inelastic supply curve, you don't need much demand to drive home prices up. This is not like the home price appreciation we had in the mid 2000s when it was a lot of demand. There's just no supply. Demand, there's just no supply. And so what's happening is that the marginal buyer, the people sitting on the fence, they can't afford to buy a home. The qualifying income to afford a home is way beyond their reach. Qualifying income for a mortgage is like 30% above what the median income is right now for this group of people. So the affordability ratio has collapsed to practically historic lows. So there's no demand and so that obviously has an impact on home building activity and you're seeing that in the housing start numbers.

Speaker 2: 34:39

So when I talk about the multiplier impact, I'm not talking about the fact that home prices have been rising and rising because of no supply, but more because of that number is telling you. The pending home sale number is telling you what's happening to marginal demand, and change is always at the margin, and so the demand for housing is not just contracting, it's really collapsing. That's a record low for pending home sales and that's a leading indicator that's going to feed right through to residential construction. And although it's maybe only 3% of GDP, as you mentioned, the multiplier impacts to the rest of the economy. When you have no home building going on, you don't have real estate agents doing anything, you don't have construction workers, trades, people. It has an impact on the legal community, mortgage brokers. They lose their jobs. There's so many powerful arteries from housing to the rest of the economy. So what I'm talking about is the real side impact on GDP and the multiplier effects that has, broadly speaking, and that's what that chart actually speaks to.

Speaker 1: 35:51

I think usually in a recession, the dollar tends to strengthen against other currencies. It's kind of a risk-off correlation causation. How do you think about currency movement? Because one of the more you can argue relative to history somewhat unusual aspects of this is that, despite all of the higher inflation, the dollar has only gotten stronger. Other currencies have gotten weaker, the yen in particular, which we'll talk about. But how do you think currency movement plays out for the US under a slowdown currency?

Speaker 2: 36:24

movement plays out for the US under a slowdown. Well, I think that as the Fed cuts rates, I think the Fed will end up cutting rates more than other central banks around the world, maybe outside of Canada. Canada's got a lot of problems. I think the Fed will be cutting rates more. Now the futures market somehow believes that the terminal rate is 4%, that the Fed will stop. They'll go from, say, 5.38 down to 4. I'm saying no, no, they're going to go a lot more than that. So what's going to happen is that, as the expectations of where the destination is going to be for the Fed funds rate goes way below what is currently priced in the dollar, the DXY is going to go down. It's not going to go up. We're going to be in a fundamental bear market in the US dollar, based on the most important relationship in the currency markets, which is relative industry differentials. They're going to work against the greenback.

Speaker 1: 38:00

All right Now. You had mentioned you were quite bullish on Japan and that's been on fire. I think there's a clear link between that and yen depreciation. I mean you were way better off obviously hedging out the yen and really benefiting from that move from the US perspective. From the US perspective, I have myself been wrong, but maybe just early on my concerns about the speed with which the yen is falling, particularly when it comes to oil priced in yen, and I've argued before that I think it's only a matter of time until Japan panics because they can't control the price of oil but they control the yen to some extent and maybe spark a short covering rally where there's a lot of shorting on the yen, which brings down the price of oil and yen but might also spark a reverse carry trade. How much more is left, you think, for Japan's markets? Because I think that's very much tied to how much is left on the downside for yen.

Speaker 2: 38:59

Well, I'll just tell you that. You know. Well, I'll just tell you that you know before I mentioned that you know the household asset mix in the United States is over 70% oriented towards equities. It's a fraction of that and a fraction of that in Japan. The Japanese household is principally in cash and bonds and what's been really driving the Japanese equity market over the past couple of years has been foreign inflows. So we haven't even seen the public participation yet. I mean, could you ever imagine what the Japanese stock market would look like if they actually developed an equity culture that exists in the United States, in the United States, and that's going to happen. You know, back in 1982, you know, when the P multiple was eight in the S&P 500, and we came off really a three-year bear market. I mean, if you were a broker on Wall Street and you cold called a client to sell them stocks, you would have been arrested, they would have called the cops on you, and so we haven't even seen the household sector start to participate. So I think there's a very strong fund flow argument because this is just beginning to start that the Japanese personal sector is starting to rebalance their asset mix in favor of equities.

Speaker 2: 40:26

As I said before, the all-in yield, with dividend payouts and buybacks, japan is superior, way superior to where the US is on this score. And we're still seeing this final stage of Abenomics and especially the pressure that's been put on the corporate sector there to increase transparency and also take cash off their balance sheets and deliver it to shareholder returns. Shareholder returns, I mean, that is, you know, up until a couple of years ago that was unheard of, that was an oxymoron. That you have the structural changes taking place in terms of capital allocation in Japan and much greater efficiency. This is a real secular story. Japan looks like the structural story that we had in the United States in the 1980s. By the way, I was a perma bull during the Reagan revolution. Well, you know, abe isn't around anymore, but his legacy lives and it's been extremely transformative for the Japanese equity market. Transformative for the Japanese equity market. 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 on the household balance sheet, you'd be talking at least another 20 to 30% upward pressure from buying activity just from that comparison.

Speaker 2: 42:04

So yeah, the cheap yen has certainly helped the large cap exporters, but it's also creates a lot of losers and cause. Japan is a big exporter, but it's also a big importer. But the yen has been, I say, an artificial source of stimulus. That's not the reason. I mean. The Japanese yen could go up and I'll still be bullish on Japan for the same reasons I have. I've not been saying buy Japan because they cheapen their currency and it's great for earnings and that's why you want to own them.

Speaker 2: 42:39

I think that the Japanese yen is the most grossly undervalued currency on the planet.

Speaker 2: 42:44

We all know that. What's the catalyst? The catalyst is not going to be FX intervention. It's going to be that the Bank of Japan is going to have to raise interest rates, and probably by quite a bit, and Japan is one of the few countries 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 that pricing power in corporate Japan is improving, but it also means interest rates have to move up. Well, you're going to say, well, interest rates moving up isn't that bad news? Well, not necessarily, because it's going to give, it's going to certainly help margins in Japanese financials. Of course, japanese financials is where Warren Buffett has his stake. So actually there's still lots of reasons to be bullish on Japan. I would not change my recommendation if the yen manages to reverse course. In fact, it just means that you want to take a naked long position in the Nikke or the topics, or, as opposed to, hedging the currency. But I think this is, I do believe that this is a secular bull market.

Speaker 1: 43:52

Speaking of culture of buying equities, I'll relate this to a question, also from YouTube, from an individual here what do you think about India's stock market? You touched on India a little bit. There there is definitely a culture of buying equities from what I've seen when it comes to traders in India. Maybe small amounts, but in aggregate that makes a big difference. India has been among the stars. Obviously, Secular bull market continues there. Are we going to have some relative underperformance? What do you think?

Speaker 2: 44:23

Well, so long as the coalition that Modi has had to put together doesn't upset the apple cart in terms of what it means for budgetary policy and especially the vast upgrades they've made towards infrastructure, then I think everything's going to be fine. Uh, and the, the, the. The growth in india's capital stock in the past several years has been tremendous. Um modi has really been. I mean we could.

Speaker 2: 44:57

I'm not going to talk about his nationalistic tendencies and what a divisive character he could be, but for the economy and the markets again, he's been like a different version of Ronald Reagan very much supply side, very much supply side. You have supply side economics going on in India and it's one of the few areas of the world that has growth of 8% and it's being driven principally by productivity. Imagine having productivity led growth. That's around 8%. A young and vibrant educated population that mostly speak English they have. When you look at their future and you look at their dependency ratios, for example, you know the share of the labor force that is young versus old. It's so much different than it is in the West and especially in America and through white swaths of Europe, india has one of the most impressive dependency ratio profiles for the next 10 years of any country on the planet, which is very important for fiscal stability, but also very important for their potential GDP growth. So, just like Japan, for different reasons, I'm also bullish on India.

Speaker 1: 46:15

You and I, I think, are aligned into this idea that it's only a matter of time until a 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 that to play out. And a credit crisis doesn't have to mean like oh wait, it's just spread, widening. I mean that's in a potentially overreactive type of way. And yet, despite people being aware of that risk, they keep buying high yield corporate credit. Is that the sleeper risk that? Maybe there's just too much money that's been chasing these high risk debt issuances. Obviously, a lot of money has gone to private credit as well, but is there a risk there that when the proverbial shit hits the fan, that's where it's going to most show up? When the proverbial shit hits the fan?

Speaker 2: 47:04

that's where it's going to most show up. Well, probably well. For one thing, I do tend to agree with that and I think spreads are stupid tight really across the whole credit spectrum. I include investment grade in there as well. But one of the mitigating factors, of course, is that you probably have in the high yield space a higher share of double B credits in there than we've had in the past. So it's called junk, but it's probably a higher quality junk bond market than it's been in the past. That's acted as a bit of a weight on where those spreads are.

Speaker 2: 47:40

But I agree with you that you're not getting paid, in my opinion, for the risks to be in credit in general. But the canary in the coal mine might not be the traditional high yield. It might be in the triple C bond market and there in the past several months we have started to see spreads widen out. That is the canary in the coal mine. If you're looking just as we were looking at those mortgage bonds, those spreads that were widening out well before the bear market back in 2007, the triple C's will be the leading indicator. Keep an eye on that. Those spreads have been widening out lately.

Speaker 1: 48:25

The make of those triple Cs are primarily consumer, discretionary, industrials and energy right. I think that's sort of the mix you mentioned, being bullish on commodities. It doesn't sound to me like the energy side would be a source of risk. It's probably much more on the industrial, discretionary end.

Speaker 2: 48:42

Yeah, the energy. You know oil prices. I think in a recession you can get oil down to, you know, 60, 65. I think we're just broadly in a range right now when you, when you think about it, and even with the economic weakness, like I said, the US economy right now at best is flatlining and you know wti is north of 80 a barrel. Um, and that's just talking, telling you about the fundamental supply demand balance, uh for crude, but that also exists for a lot of commodities. Um, it's just basically uh identifying which of the commodities are in a long-term uh deficit position when it comes to their supply demand balance. And there's been hardly any capital investment in the basic materials sector, really, for many, many years.

Speaker 2: 49:28

So I think that, look, in a recession, you definitely you don't want to touch commodities in a recession. I'm not going to say it's going to be different this time. I just think that the damage is going to be a lot lighter and probably provide a great buying opportunity for an area of commodities, broadly speaking, that probably has a five to 10 year tailwind behind it. So when we're talking about buying dips, buying dips and commodities are going to be, I think, holding in good stead for the next several years. The supply demand balance across the spectrum are just far too compelling. That's really if we're going to say it's different this time, it's the fact that we go into this cycle with a supply deficit across most of the resource sector that we haven't seen before, so that holds it in a recession and then we come out the other side and demand growth picks up again. It's going to be in a secular bull market. So yeah, we're fans of the resource sector broadly speaking.

Speaker 1: 50:28

Will you expect that, since that's what people like to talk about gold ends up being the top performing from an asset class within the asset class perspective? Because I think the movie's interesting with gold, right, because gold tends to really do well. When you have negative real rates, you don't have negative real rates. Maybe this is in anticipation of negative real rates, right? Right, so if you have a recession, then those negative real rates come. Then that's a whole other reason for gold to move.

Speaker 2: 50:53

Well, you don't need negative real rates, you just need real rates to come down, and real. I believe you know, being rational, about where the economy is going, what the Fed's going to be doing. I think real rates will be coming down Check. The US dollar will be going down Check, and at the same time, I think that the central banks globally will continue this reallocation and their FX reserves towards gold. That's not going away. That is a long-term strategic shift. And then I think India is going to remain the strongest economy in the world for many, many years. And retail demand in India that's the one thing that never goes away.

Speaker 2: 51:38

And then you're taking a look at the production costs. People don't focus on how expensive it is to mine gold in the world today. The marginal average cost of production is moving up inexorably, and so we have really a fundamental floor under the gold price and lots of reasons why this trend that we've seen in the past several months is going to be sustained. And it's not just gold but also silver which has broken the $31 an ounce. So the precious metals that is one of our high conviction calls so, and I think that the reasons to like precious metals because there's been reasons to like them already. I think that they are going to multiply over the course of the next several months, and probably years too.

Speaker 1: 52:26

One more question before we wrap up here from Toyn I apologize if I'm mispronouncing that From YouTube have the financial markets properly priced in the commercial real estate debacle? What does it see that the street actual sales price doesn't?

Speaker 2: 52:42

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 going to be hitting the wall. Yeah, it's going to be, and it's going to have cascading effects. No, I don't think that this is priced in and actually nobody's really talking about it. And it does. It does trouble me, I guess you know, looking at how the regional banks have behaved in the past couple of years, and that's really, you know, the poster child for the problem. But it's much, it's much bigger than that. Just like in residential real estate, this is going to have other impacts on the economy and on the markets, and so the answer to the question is that, no, that is not priced in A recession, is not priced in A recession, would not be priced into a stock market with a 21.6 Ford multiple or high yield spreads at 300 basis points or IG at 100 basis points. Basically, it's a marketplace in terms of risk assets where you have goldilocks priced in and I don't know why, um, there's not more talk or more priced in about what?

Speaker 2: 53:53

The cre debacle, which is basically this story, is not over by a long shot. It's very deflationary and it's a principal reason why you know how do you shelter yourself. I'll tell you like that's why I talked a lot about a lot of things that I like, and I talked about gold. Gold, by the way, uh, is a nice hedge against rising uncertainty. Um, and so are. So are long-term government bonds. I like the 30-year treasury because the cre situation is hugely deflationary. The whole curve is going to come down, led by the Fed, but because of the convexity, the best total return is going to come in the detested and maligned long bond. So that's why our biggest call is called the bond bullion barbell. So that's why our biggest call is called the Bond-Boolean barbell. I love alliterations, but that is going to provide you with a margin of safety. And the CRE is a big problem that is not totally factored in, absolutely.

Speaker 1: 54:58

Great question, david, for those who want to track more of your thoughts, more of your work.

Speaker 2: 55:01

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 you and some of the benefits of subscribers that subscribers get yeah, well, um, you know, what I would uh suggest is, um people on the call, if they want to learn more about what I do uh every day, just come on to information at rosenbergresearchcom, or you can just Google Rosenberg Research. Everybody on this call is eligible for a 30-day free trial. So you see the deflation I'm talking in my book 30 day free trial for people on this call. Uh, and if you want to, uh you know, come on the website uh Rosenberg researchcom. If you want to email us directly, information at Rosenberg researchcom and uh somebody on my client service team, uh, we'll get back to ASAP.

Speaker 1: 56:01

Uh, appreciate everybody joining again. This will be an edited podcast under lead lag live. I always enjoy listening to mr rosenberg and I appreciate those that uh ask thoughtful questions. So thank you, david. Thank everybody, and I'll see you next time on lead lag live. Thank you.