Rosenberg: Deflation Is Reality, The Consensus View Is Garbage


David Rosenberg has put out a somewhat humble special report about the difficulty of forecasting, and what he sees everyone else forecasting for the coming year. It’s titled, provocatively, “Year Ahead, Can You Handle The Truth?”

Here’s a chunk of it:

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.  The fact that China’s
voracious appetite for basic materials will continue to exert upward pressure on
commodity prices does not detract from this view, especially given the
widespread excess capacity in the manufacturing sector and the new frugality
that has gripped, and in many cases, been embraced by the retail sector.  Higher
raw material prices, owing to developments in Asia as opposed to demand
pressures here at home, will prove to be a sustained source of profit margin
compression for many sectors and companies linked to finished consumer
goods and sevices.

So, much of what I have read in various Year-Ahead Reports predict corporate
earnings, GDP growth here and abroad, interest rates and relative values of
currencies.  As I mentioned earlier, the error term is bound to be very wide in this
new paradigm (since WWII) of a secular credit collapse.  GDP growth in 1934
was 10%, but the Depression wasn’t over until 1940.  

Since 1989, the Japanese stock market has had no fewer than four 50%-plus
rallies and there still has been no period of growth that can be called a
sustained expansion.  Today, we have our own special set of conditions and it is
bound to be tricky as is typical during a post-bubble credit collapse, no matter
how intense the government reaction.  Prematurely committing to the ‘risk’ trade
is probably going to be the most lamentable action over the next few years.
Suffice it to say, we believe that the dominant focus will be on capital
preservation and income orientation, whether that be in bonds, hybrids, hedge
fund strategies, and a consistent focus on reliable dividend growth and dividend
yield would seem to be in order.  To reiterate, I see the range of outcomes in the
financial markets and the economy to be extremely wide at the current time. 
But one conclusion I think we can agree on 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.  

This, in turn, underscores my primary focus of favouring Canadian dollar
based investments over the U.S. because at no time in my professional life
have the downside risks — economic, fiscal, financial and political — been so
low on a relative basis and the upside potential so high as is the case today. 
The near-2,000 basis point gap this year between the TSX and the S&P 500 —
the former leading — should be taken in the context of being just past the
halfway point of a secular (ie, 16-18 year) period of outperformance.  Northern
exposure never felt this hot.    

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