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Gluskin Sheff economist David Rosenberg is known for his bearish views, and he’s not afraid of an epic sell-off in the bond market anytime soon, even though the idea is beginning to play pretty significantly into the evolving market discourse right now.Needless to say, Rosenberg is not convinced by the “Great Rotation” story (the idea that investors will stage a big rotation out of bond funds and into equity funds as the economy picks up and the Federal Reserve begins to normalize monetary policy).
In a note to clients today, Rosenberg weighs in on the “Great Rotation” directly. He says that the “impact of fund flows are so overblown,” and essentially agrees with John Hussman’s argument that those touting a “Great Rotation” don’t really understand the mechanics of the market.
Moreover, Rosenberg says investors should be careful what they wish for–the rotation could go in the other direction.
Here is his take (emphasis added):
However, our own empirical research points to little more than a marginal statistically significant relationship between the general public’s appetite for risk and the eventual move in the equity market (in some cycles, the correlation is inverse so for the ‘rotation-asistas’ among us – this could be a classic case of beware what you wish for). After all, did the lack of retail investor participation this cycle prevent the S&P 500 from rebounding 120% from its depressed lows (as it did three times in the 1930s)?
Again, citing our empirical research, nothing has been as correlated with the equity market over the past four years as the Fed’s balance sheet. Lo’ and behold, is it really coincidence that the Russell 2000, the mid-cap stocks, the unweighted S&P 500 and Dow Transports all hit new all-time highs the same week the assets under management at the Federal Reserve Hedge Fund reached $3 trillion for the first time (I mean, that even puts PIMCO and BlackRock to shame). Money printing creates illusory wealth and buys time, but if it was truly the answer to a deleveraging cycle, Zimbabwe would be a member of the G10 (forget where I first saw that, maybe it was Proverbs, but it deserves mention at the very least).
Rosenberg says investors bullish on equities had better be aware of the reason why they are bullish: either they expect earnings growth, or they expect the valuation multiple to expand.
SEE ALSO: Bernanke’s Ideal Great Rotation >
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