David Rosenberg and Richard Bernstein — former Merrill Lynch colleagues — recently had a big debate about the markets.
“I would say that over the long haul, Rich and I tend to share very similar philosophies regarding global events and how they will play out over time,” writes Rosenberg. “But when we differ, we differ big time.”
Bernstein has said we are on the verge of a 1982-2000 style secular bull market.
Rosenberg concedes that Bernstein beat him to the bull call for the current bull cycle on stocks, but thinks he is wrong about his call on the long-term bull market. Here’s his point-by-point breakdown of why Bernstein is wrong.
First, Bernstein pointed out that national debt (government and household) is down to 340 per cent from 370 per cent in 2009. But Rosenberg writes that this has been bad for domestic demand and is one of the reasons the economic recovery has been so slow.
“To be sure, correlation does not imply causation, but there can be little doubt that the proliferation of credit products and ever-greater accessibility to leverage contributed immensely to economic growth and corporate profits during that virtually non-stop two decade period of unbridled prosperity. Today, and tomorrow, the movie is continuing to run backwards and will prove to be an enduring drag on the pace of economic activity, not just in the USA, but globally.”
Photo: Gluskin Sheff & Associates
Second, Rosenberg points out that baby boomers that were on average 25 years old at the start of the secular bull market, are now about 55 or 56 and therefore more risk averse. And that economic growth isn’t going to maintain the same pace and because the deficit is much higher.
Third, those two decades were about “industry deregulation” and about boosting global trade, quite the opposite is true now. Instead, the current stock market experience has been a “classic reflexive rebound from a depressed oversold condition, aided and abetted by radical government intervention”.Fourth, in the 80s and 90s, the Fed was focused on disinflation, now Rosenberg writes “the Fed is covertly attempting to create inflation so as to monetise our debt morass. …We have on our hands today, not just the Fed but many major central banks manipulating interest rates and relative asset values.”
Photo: Gluskin Sheff & Associates
Even for those bullish on stocks now, Rosenberg writes that they should be aware that stocks aren’t being pushed by corporate earnings, which are contracting.”If you are bullish on equities, at least be bullish for the right reason. For the here and now, the correlation is dominated by the size of the Fed balance sheet. From 2000 to 2007, the correlation between the Fed’s balance sheet and the direction of the S&P500 was less than 20%. Since 2007, that correlation has swelled more than four-fold to 86%. This is the missing chapter in the classic Graham and Dodd textbook on value investing, published 80 years ago.”
Bernstein also made the contrarian argument that now is a good time to buy since investors are pessimistic. But Rosenberg doesn’t necessarily agree. For one, many surveys point to optimism among those in the financial industry, and market positioning shows that many are at the same levels seen during the market peak.
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