Bull and bear statues are pictured outside Frankfurt's stock exchange in Frankfurt, on Dec. 17, 2015.Ralph Orlowski/Reuters
David Rosenberg’s first day of work as an economist was Oct. 19, 1987 – Black Monday, when stock markets plummeted 23 per cent. The crash had a firming effect on the then-27-year-old Bank of Nova Scotia employee (especially as half his department was shortly let go). It taught him always to have a Plan B (and a Plan C), to be as up-to-the-moment as possible, and to stick to the data and resist the herd.
Those lessons still underpin Mr. Rosenberg’s now globally renowned Breakfast with Dave newsletter, the pricey but respected daily market analysis whose flinty and sanguine calls, since 1998, have gained him a reputation –undeserved, in his view – as a “perma-bear.”
Pessimist or not, Mr. Rosenberg’s advice has been much coveted. He was Merrill Lynch’s chief economist and strategist, first for Canada and then North America, for 15 years. He did the same thing for Gluskin Sheff + Associates for another decade until private equity kingpin Gerry Schwartz snapped up the firm and took it private for $445-million last November. By January, 2020, Mr. Rosenberg had started his own company, Rosenberg Research, where he still gets up every morning at 4:30 a.m., inhales six newspapers and a vast array of conflicting online data, and produces between five and 15 pages of trenchant and unsentimental analysis.
He took time out last week to speak to The Globe and Mail’s Ian Brown about divining the financial future in the middle of an unprecedented global pandemic.
I know most of the world exists in a state of sorry ignorance as far as predicting what’s going to happen in the economy. But does the pandemic make the economy even harder to understand?
The problem is that we went into this pandemic completely unprepared. There’s no doubt that it was a massive negative exogenous shock on both the demand and supply side of the economy. But whether you’re a Canadian or whether you’re an American, the government was just simply not prepared. The WHO [World Health Organization] told us it was a pandemic well after it was even obvious to the most passive reader of the medical journals.
We had very poor preparation and overextended balance sheets. We just love to pat ourselves on the back in Canada over what a great national balance sheet we had, because we only focused on the federal government. But the provinces, I’d say outside of British Columbia, are up to their eyeballs in debt. Corporations are much the same; the private sector in Canada is massively overextended. The Bank of Canada, every single year in its reviews, would talk about how overextended Canadian consumers were, over 60 per cent of GDP. And yet we go into a pandemic with record low savings rates, and record high debt loads.
The stock market isn’t taking any notice of that.
This is a flash-in-the-pan bear market rally. And actually, it’s a rally that’s been concentrated in a handful of growth stocks, megacap stocks. It’s hard for me to wrap my head around the idea of a bull market when you have financials, consumer services and industrials still in bear markets. The small-cap stocks are in a bear markets. The transports are in a bear market. The bull market is largely concentrated in health care stocks, on these vaccine hopes. And you’ve got a bull market in technology companies that are disguised as utilities: Amazon or Microsoft or Alphabet.
But it's the most narrowly based rally of all time. And I don't think it has a lot of legs. The parts that you like, which are technology and delivery service and the growth stocks, which have great business models, are trading at nosebleed multiples, and are too expensive. And the stuff that's cheap, the value trade, is cheap because they have no earnings visibility. So I think that you want to be disciplined and you want to exercise tremendous patience. And I know that it must take incredible resolve not to join the herd. But there are times where you don't want to join the herd. This market, right now, is in the process of rolling over.
Have you seen anything in the pandemic that gives you comfort?
When you really think about it, society is hanging on by a thread. And the thread is called massive government deficits. We’re hanging on here because the government is borrowing record amounts of money that’s been largely financed from the central banks to pay people not to work. It’s necessary, but that’s really where the story is. There’s no way you can live with this situation. The glue holding the system together is the fact that unskilled, uneducated people laid off from their jobs were deemed to be non-essential. We learned how much of the economy turns out to be non-essential.
What do you mean by non-essential?
Well, the government decided who was going to stay open and who was going to be locked down. So a bar, non-essential. Restaurant, non-essential. Movie theatre, non-essential. There were some parts of the production sector that were essential. The medical sector, some stores. It was really quite subjective. I never realized so much of the economy was non-essential. And that’s because we really built an economy that has hinged on conspicuous consumption. And I would say it’s probably even more acute in the United States.
The question is, how long can this go on? Our social stability really comes down to these massive fiscal deficits down the road. These will have to somehow get repaid. The whole future of taxation and spending is going to have to go through multiple reviews.
And we’ve just scratched the surface of what this recession is looking like. And it has been muted, because the government has doled out so much money, the way they measure income in the national accounts is actually running stronger now than it was before COVID appeared. Look at the United States, because we have up-to-date numbers. In the United States, personal income is up 12 per cent so far this year, even though wages and salaries are down 17 per cent.
How is income up 12 per cent? Because government transfers to the personal sector have ballooned 230 per cent. It’s no different in Canada. The government is creating income by borrowing money and transferring it to the personal sector. Will the cupboard ever get bare? What if it does?
Keep in mind here: FDR [Franklin Delano Roosevelt], in the Great Depression, never ran a deficit in the 1930s of over 7½ per cent of GDP. Even the Democrats that started the New Deal knew when to say enough was enough. The deficit in the United States is going to be over 20 per cent of GDP this year. And this is with a Republican President. So that’s why I say it’s a castle built on sand.
Will a vaccine mean we can go back to fiddling while Rome burns?
A successful vaccine is a game-changer. But I don’t think it changes everything, because in this period of the pandemic and the lockdown there have been behavioral changes that I think are going to be permanent. Nothing is going to go back to normal. A vaccine is the gold standard, but it has to be effective. And we have no clue as to when it gets developed, or what the time line is to it being distributed. But there will be general euphoria, no doubt, if we get a vaccine. Ultimately, we’re going to get through this, either through herd immunity or through a vaccine. The bottom line is, by the late 1920s, nobody was talking about the Spanish flu anymore.
So what gives you comfort in what you see?
Anybody that claims this is actually a joyous occasion – I have some advice for those people, but it’s probably not appropriate to print.
But there are some lessons here: about being prepared for the next pandemic from a health perspective, about just-in-time inventories and having stockpiles on hand, about the risks of maybe having too globalized an economy.
And I think we’ll come out of this with a greater appreciation of savings and liquidity, and having cash on hand, than we did before. There’s nothing actually wrong with frugality. It comes at the expense of GDP growth, but it means that we’re going to start to learn how to live within our means.
There’s no restaurant that’s going to like what I have to say on this score. But we’ve learned how to cook. That’s part of what I call the homebody economy. And I think this is going to be a secular trend. We’ve become more self-sufficient. Even as auto sales were plunging, what was doing extremely well were retail auto parts. All of a sudden we become a nation of mechanics, a nation of upholstery repair experts, experts in cooking.
And of course, working from home has become more than just a fad. It’s become a way of life. That’s going to have obviously negative repercussions for parts of the economy, like office real estate, but very positive implications for delivery services and cloud computing and technology in general. I think there’s just a greater awareness that a lot of the things we farmed out to other people we can actually do ourselves. Unfortunately, that’s less income for the person who used to do stuff for you.
You seem to be identifying the emergence of some kind of ethical sense of responsibility.
Yeah, I think how households and businesses approach finances and their balance sheets is going to go through a long-term structural shift. There’ll be a greater appreciation for savings, cash and liquidity. The debt-financed spending spree that underpinned economic activity these past number of years has fallen by the wayside. That is going to constrict aggregate demand growth for a long period of time. But it doesn’t mean that we’re not going to be a happier society, just a society that’s going to learn to live within its means.
And your reputation as a pessimist?
A friend of mine asked me if I would speak to her son who just got a job at the Bank of Nova Scotia, their capital markets division. She says, “Can you give him a pep talk on how to succeed on Bay Street?” My conclusion was that the more successful people have a higher level of paranoia. Dodge the arrows and you’ll do just fine.
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