To his credit–and, if the bullish consensus is right, his doom–David Rosenberg is sticking by his guns.
Below, from Gluskin Sheff’s “Breakfast With Dave”, is Dave’s outlook for 2010.
OUR THOUGHTS ON THE OUTLOOK
The credit collapse and the accompanying deflation and overcapacity are going to
drive the economy and financial markets in 2010. We have said repeatedly that
this recession is really a depression because the recessions of the post-WWII
experience were merely small backward steps in an inventory cycle but in the
context of expanding credit. Whereas now, we are in a prolonged period of credit
contraction, especially as it relates to households and small businesses (as we
highlighted in our small business sentiment write-up yesterday).
In addition, we have characterised the rally in the economy and global equity
markets appropriately as a bear market rally from the March lows, influenced by
the heavy hand of government intervention and stimulus. But in classic Bob
Farrell form, 2010 may well be seen as the year in which we witness the inevitable
drawn out decline that is typical of secular bear markets. There may be some risk
in industrial commodities if global growth underperforms, but the soft
commodities, such as agriculture, may outperform in the same way that consumer
staple equities should outperform cyclicals in an environment where economic
growth disappoints the consensus view. Gold is operating on its own particular set
of global supply and demand curves and should be an outperformer as well,
especially when the next down-leg in the U.S. dollar occurs. We are not alone in
espousing this view — have a look at Why Consumes Are Likely to Keep on Saving
on page C1 of today’s WSJ.
The defining characteristic of this asset deflation and credit contraction has been
the implosion of the largest balance sheet in the world — the U.S. household
sector. Even with the bear market rally in equities and the tenuous recovery in
housing in 2009, the reality is that household net worth has contracted nearly
20% over the past year-and-a-half, or an epic $12 trillion of lost net worth, a
degree of trauma we have never seen before.
As households begin to assess the shock and what it means for their retirement
needs, the impact of this shocking loss of wealth on consumer spending patterns
in the future is likely going to be very significant. Frugality is the new fashion and
likely to stay that way for years as attitudes toward discretionary spending,
homeownership and credit undergo a secular shift towards prudence and
While hedge funds and short-coverings have been the major sources of buying
power for the equity market this year, what has really impressed me is what the
general public has been doing with their savings, which is to allocate more
towards fixed-income strategies. Looking at the U.S. household balance sheet,
what I see on the asset side is a 25% weighting towards equities, a 30%
weighting towards real estate and there is obviously a lot in cash and deposits,
life insurance reserves and consumer durables, but the weighting in fixed-
income securities is less than 7%. So my contention is that this is the part of the
asset mix that will expand the most in the next five to 10 years and I am
constructive on income strategies.
What also makes this cycle entirely different from all the other ones experienced
in the post-WWII era is that this is the first consumer recession we have
witnessed where the median age of the baby boom population is 52 going on
53. The last time we had a consumer recession in the early 1990s, the boomer
population was in their early 30s and they were still expanding their balance
sheets. The last time we had a bubble burst in 2001 they were in their early
40s. Now they are in their early 50s, the first of the boomers are in their early
60s, and we are talking about a critical mass of 78 million people who have
driven everything in the economy and capital markets over the last five decades.
This cohort realise that they may never fully recoup their lost net worth, and yet
they will probably live another 20 or 30 years.
So, what is happening, which is at the same time fascinating and disturbing, is that
the only part of the population actually seeing any job growth in this recession are
people over the age of 55. Everyone else can’t get a job or are losing jobs — there
is a youth unemployment crisis in the United States of epic proportions and a
record number of Americans have been out of work for longer than six months in
part because the “ageing but not aged” crowd is not retiring as early as they used
to. My contention is that many retirees who took themselves out of the workforce
because they believed that their net worth would provide for them sufficiently in
their golden years are redoing their calculations and coming back to the workforce
to make up for their lost wealth. They are seeking income in the labour market,
not because they want to but because they have to in order to satisfy their
So, instead of being tempted into capital appreciation equity strategies, for every
dollar that the household sector has allocated to these funds since the March
lows, over $10 dollars has flowed into income funds — bonds, hybrids, dividends
and the like; the areas of the investment sphere that we have been recommending
this year. We can understand that there are concerns over inflation, but the
history of post-bubble credit collapses is that even with massive policy reflation,
deflation pressures can dominate for years — this was certainly the case in the
U.S.A. and Canada in the 1930s, and again in Japan from the 1990s until today.
Income strategies in both cases worked well with minimal volatility.
Of course, all the talk right now is about reflation and all the efforts from the
central banks to create inflation, but the facts on the ground show that the
inflation rate for both consumers and producers has turned negative for the first
time in six decades. Perhaps inflation is a consensus forecast but deflation is the
present day reality and often lingers for years following a busted asset and credit
bubble of the magnitude we have endured over the past two years. So, to protect
the portfolio in this deflationary landscape, a pervasive focus on capital
preservation and income orientation, whether that be in bonds, hybrids, or a focus
on consistent dividend growth and dividend yield would seem to be in order.
Be that as it may, what has also become crystal clear is the attitude that the U.S.
government has taken over the beleaguered U.S. dollar, which can only be
described as benign neglect. After all, 2010 is a mid-term election year in the U.S.
and the Administration will do everything it can to squeeze every last possible
basis point out of GDP growth and to prevent the unemployment rate, the most
emotionally-charged statistic of them all, from reaching new highs.
The decisions to give 57 million social security recipients another $250 and to
not only extend the first-time homebuyer tax credit but to expand the subsidy to
higher-income trade-up buyers smacks of populist economic policies that will
stop at nothing to generate growth, even with the budget deficit-to-GDP ratio is
already at a record of over 10%. While I still believe that a sustainable return to
inflation is a long ways away, there is little doubt that we will see continuous
efforts at policy reflation, which means that the U.S. money supply is going to
continue to expand rapidly, which in turn is positive for commodities, which are
after all priced in U.S. dollars.
On top of all that, it does appear from a volume demand perspective, that the
secular growth dynamics in Asia, China and India in particular, have reasserted
themselves and this part of the world is the marginal buyer of commodities. This is
the key reason why the Canadian stock market, given its resource exposure, has
continued to do very well in comparison to the United States, especially when the
positive trend in the Canadian dollar enters the equation, and I expect this
outperformance to continue.
Typical of a post-bubble credit collapse, I see the range of outcomes in the
financial markets and the economy to be extremely wide. But one conclusion I
think we can agree on in this light is the need to maintain defensive strategies and
minimize volatility and downside risks as well as to focus on where the secular
fundamentals are positive such as in fixed-income and in equity sectors that lever
off the commodity sector, under the proviso that the “experts” are correct on this
particular forecast — that China and India remain the global growth leaders.
With that in mind, we were encouraged to see this on page B1 of today’s NYT —
Cutting Back? Not in China: Rising Incomes Make it Easier to Splurge. As Dennis
Gartman pointed out yesterday, there was a time (1820) when the U.S.A. was 2%
of global GDP and Asia was 33%. That is tough for a lot of folks to swallow but
maybe we will see in our lifetime a period when the Chinese economy does
surpass the size of the U.S.A. (with 1.3 billion people, four times the U.S.
population that actually seems quite likely).
After all, for the first time ever, China is going to be buying more vehicles than
Americans will this year (then again, 20% of the Chinese aren’t exactly three-car
families either) — 12.8 million units in China compared to 10.3 million in the U.S.
And it’s not even fair to compare appliances any more either with consumption in
China now up to 185 million (we are talking about washers, dryers, refrigerators,
etc) versus an expected 137 million in the American market.
In Q3, Chinese consumers bought more computers (7.2 million) than the U.S.A.
too (6.6 million). So while China is indeed still export-dependant and relies
heavily on government infrastructure projects, there may be something to be
said, at the margin, that consumer demand is also becoming an important
contributor to its economic growth. Now keep in mind that most of this stuff is
made in China and not in the U.S.A., so this is more of a commodity-input story
than it is a U.S. export story.
China’s strategy of deploying its surpluses in assets around the world is quite a
bit different than what Japan did with its surpluses in the 1980s. China is not
into golf courses or movie studios as much as in gaining ownership of global
resources in the ground. At last count, the country has signed trade deals with
Africa to the tune of $60 billion (heck, that’s only 8% of the size of TARP, which
is now going to be diverted towards a government-led job creation program in
the U.S.A.). Have a look at the nifty article on the topic on page 11 of the FT —
Africa Builds as Beijing Scrambles to Invest.