David Rosenberg on Emergency Policy Decisions (Podcast)

off with those harnesses removed. And you know the old expression with horses has given them their head, meaning loosening up the reins and let them run where they want. Uh. And he's finally pulled the trigger and done that funny story. In the process of hectoring him to launch his own firm, we were chatting one day and he said, well, what would the name be. I'm like, that's Odds Rosenberg Research.

And I nagged him to go out and reserve that domain name, which, being Dave, he never got around to doing it. So I grabbed it. I grabbed want to I think it was said, go daddy, I grabbed Rosenberg research dot com and forgot about it. You know, every year just automatically renews. And one day he says to me, I've been thinking about going out on my own, but I can't use the name Rosenberg Research. Someone has that domain.

And I said to him, really well, let me show you how to look it up and you could see who owns it. I show him the who is search feature and he goes through this whole process to identify who owns it, and he says, wait a second, that's you. And my response was, yeah, I know what a high functioning idiot you are, and you would never get around to doing it, and someone else would have grabbed it. So I thought I would grab it for you, and lo and behold, Rosenberg research dot com is where his

uh website us. I don't know anybody with a greater facility for economic data numbers. Dave can reel this information off the top of his head. What was the U three unemployment rate in seven in February. He knows that he's he's a little bit of a rain man when it comes to that. Nobody understands this data better than him. Nobody understands how it interacts with the financial markets in as great detail as Dave. So rather than me babbling

with no further ado, my conversation with David Rosenberg. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest this week is an old friend. His name is David Rosenberg. He is probably best known as the former chief economist for North America for investing Giant Merrill lynch Uh. He is now running his own shop called Rosenberg Research, headquartered in Toronto. David Rosenberg, Welcome to Masters in Business. It's great to be on the show, Barry,

thanks for inviting me. Right, you can't say here anymore because no one knows where here is. So let's jump right into it. Based on that comments prior to the COVID nineteen pandemic, prior to the lockdown, how did you

see the state of the economy, let's call it fourth quarter. Well, I had seen the situation before the calamity hit, as I've seen the entire cycle all along, which was a cycle that was very weak, very weak structural underpinnings, a decade of very little productivity growth, very little capital spending. In fact, I was saying most of last year even

though it wasn't a technical recession. Verry I was saying that there was certainly a recession in corporate profits, there was recession in capital spending, there was a recession in non residential construction. And really what was keeping the glue together was the consumer, which is d P and you just don't get a plane procession in a real sense without the consumer playing a part. But it was a very uneven economic performance. It continued into the opening months

of this year. It's very interesting when I hear people say, well, you know, just wait till the pandemic ends and we get the vaccine and will revert back to what the economy looked like previously. But the economy what it looked like previously was very uneven, an economy where the corporate sector embarked on the most pronounced debt requity swap of all time. You know, when I went to school, you learned about how companies would issue debt to finance capital expenditure.

But the record debt issuance in the business sector went for stock buy backs. So really the whole bullmark, when you think about it, um was in financial engineering. I called it the Potempkan bull market. In the economy and in the stock market. But actually what was very interesting to me, that's how we had one of the pronounced bull markets of all time and equities in the context of the weakest economic expansion. So did I see the pandemic hitting at no? Did I see that we were

going to be shutting down the economy? The answer is no. I did always in my mind have fragility as part of my theme, and that even the smallest shock could send that the economy into a downturn. And I want to take you just back to that period in the final months of two thousand and eighteen, when God forbid, all G. Powell did was take the funds rate to two and a half percent. And that two and a half percent, Oh my god, how can we get survived

with rates that high? Well, that's the point that I think we have to come to grips with is that once again we continue to fight these cycles of of debt with even more debt, and we're doing it now for a host reasons which are probably justified for the here and now. We'll have to clean up this mass at some point in the future. But I think that's the major point, is what sort of cycle is it

for all the bulls out there? What does it mean when you have a new Central Bank Chairman J Powell telling you repeatedly when he took over the helm in early two thousand and eighteen, and he kept on saying over and over again, it is time to normalize interest rates and normal to the fat back then was three percent plus two and a half percent peak in the fat funds rate was the lowest peak in the fat

funds rate since the nineteen thirties. UM. That tells you a lot that we could not even withstand a normalization of interest rates, and it's because the whole economy, despite the facade created by the stock market, the economy was actually still in an abnormal state UM coming out of the Great Recession. Notwithstanding you know how well capitalized the banks were. The banks became well capitalized, but they also became regulated utilities, and so the debt boom didn't happen

in the banking sector this time. It happened outside the confines of the banking sector, which was in public sector but was in public issuance of corporate debt, which took it up to fifty percent of GDP, which we've never seen before. I want to stay with the idea that low interest rates are a key aspect of what's been

going on. Is it safe to say that you believe the recovery off of the O nine lows are due in part to the engineering by the Federal Reserve and the unusually low rates longer for lower Is that a

fair statement. Well, I would actually say that the primary reasons for the recovery that we saw, you know, really stemmed from the dramatic increase that we saw in corporate debt showance that went into stop buy backs create this illusion of a fundamentally based equity market rally, and that you had some trickle down impact in terms of equity wealth effects on spending. On top of that, we had

tremendous physical stimulus through most of the period. UH. It started in China trying to continue to pump the system with physical stimulus throughout the entire bull market in the global economy, and you had the Obama UH physical stimulus in terms of the infrastructure spending early on, which took a while to percolate. UH. And then of course the book ends with the historic tax cuts in two thousands and eighteen by the Trump administration. So we had a

tremendous stimulus. I'm not. You know, the question becomes, I guess you know, we're low interest rates a cause of whatever economic growth that we saw. You know, it's um. You know, I'm almost gonna talk like a classic economist here. It's it's a one hand another hand. It's really be a two sided argument because you could argue all low interest rates give you the impetus um to issue debt um.

Certainly low interest rates gives you the impetus to go and buy risky assets because all we heard also belong was tina uh, there is no alternative. So there's that aspect to it too. It's called financial oppression. You want to punish traditional risk reverse savers, to push them in the risk curve, to get animal spirits up and to generate a recovery that way. And there's a good part of the reason why we had an expansion was because

of that. But at the same time, what do little interest rates as a price signal tell you an interest rates there's certainly something that you borrow at is something that you certainly will do your calculations on your dividend discount model, or you will do your long term discount and earnings projections off the discount rate. But the interest rate itself isn't just a lending rate or boring rate. It is a price signal, just like in Japan, or

just like in Europe where we've had negative rates. What do these extremely low interest rates tell you about the economy? It tells you that we have a very weak long term economic outlook. That's what it's telling you these low interest rates. It doesn't it also say that the credit worthiness of the United States is good and the bond market doesn't see any inflation any time left in the future. I think that there's a good part of that that

you've got. Look, you've got various components of what makes up, say the interest rate. There's the term premium, which is related to your expectations of the FED. There is inflation expectations, which you actually just mentioned. But there's also a real interest rate component, which tells you something about expectations of

real economic growth. So really there's all three. Now you can say to me, well, jeez, you know, it's so great to have low inflation expectations, to have low inflation, you do look back in the nineteen seventies and eighties, very we were for lower inflation. We couldn't week to have lower inflation. And now over the past number of years,

we had just too much of lower inflation. But lower inflation means lower inflation epso facto means lower pricing power, and lower pricing power means that we have compressed margins. So how you kept the gravy train growing throughout this whole period? Remember last year, last year, we had a bona fide earnings recession. There was no pricing power last year, and yet the stock market finished with a run up. And that had to do with the Powell pivot and it had to do with the re expansion of the

Fed balance sheets starting in the fourth quarter. So let's talk about this lockdown, quarantine, pandemic situation. This is Memorial Day week. What is the state of the economy today? Well, I say that we are right now still in the are coming out of called the vertical down phase. Here, that we really were hit with a double vammy of a shock that affected the demand. Because even before the lockdowns, the economy was starting to sputter because people were getting

panicky over becoming sick over the coronavirus. And then so even before call it the middle of March. Already things are starting to really cool off. You can see that in the data through February and in the March. And then look, we've shut down most of the economy and there's no precedent for this. There's no playbook for I mean, there's a playbook for a pandemic, but you've got to

go back at least a century. But a playbook for shutting down really, when you think about the entire global economy for a period of time, well that we haven't seen before, and especially an economy globally that's so intertwined. So this was simultaneously a demand shock and a supply shock. So Dave on that note of demand shock and supply shock simultaneously, give me a snapshot. What is the unemployment rate today? You forget the b L S D. What

do you think the unemployment rate is? What do you think US GDP is and what do you think global GDP is? Well, I think that you know the unemployment rate right now. I think as well over if it's measured accurately and on its way soon above and look, these are numbers at the St. Louis bed was talking about even a couple of months ago, and as far as GDP is concerned in the US, I think you're talking at least negative for the second quarter. It could be worse than that, and I think that the entire

world is probably pretty well very close to that. I mean, China has already come out of its worst detonation from this and the world's second largest economy, So it could be just a timing thing that the US economy is contracting a sharper rate than is everywhere else is because China's come out. But you know you're talking about for this year. I think global GDP is going to be

down at least ten percent for the year. Now. Where we are right now, well, look, you're seeing a pulse in the economy now, so it's not surprising that we're probably going to get some sort of a bounce in the third quarter. You know, I think that we're going to be down four in the second quarter and then um, we're probably up maybe twenty or better in the third quarter. It's going to be a heck of a bounce. But

you know, it's like turning the light switch on. Um, you know, after you've turned up the all the electricity off in the house for a period of time. So I think it's going to end up being a square root sort of a recovery. We're going to get some sort of a bounce. It's logical because we are reopening there will be some activity, but there is no return to normality until we either get a vaccine, which would

be preferable, or some sort of effective treatment. Because we can reopen the economy, but we're not going to get a perpetual increase in production and hiring and get going to play right back down without demand. The demand has to show up, and that's the wild card. Because we can reopen the economy, and I frankly don't believe that even if we get a second wave, we're not going

back to locking things down again. That might happen sporadically and in some hotspots, but there's no more national lockdown. That's not going to happen. But for the economy to regain any verve whatsoever on a sustained basis, we need to demand. And uh, you know, when you're asking me the question about you know, where are we there's no

playbook or something like this. This isn't like waiting like in March of oh nine, we have the ha moment, the ring fence in the banking system, we capitalize the banks, we could move on. You know, in two thousand and two, we we mop up all the excess capacity and the technology sector of Valla, we're off to a new bull market. When the RTC was created and cleaned up the mass left over by the savings alone crisis and commercial real estate, well there we had the event that we could point

to that. Okay, now we can start getting things back to normal. This is this is this has to do with a vaccine basically. So let's say we get a vaccine by the end of the year. Let's say December, there's a vaccine. How long beyond that does it take for us to regain the economic peak of Well, the whole was created is so big that could still take a lease a year. But if we got a vaccine, I mean, look, the stock market is telling you that

right now. The stock market is telling you that they're expecting there's going to be an announcement on a vaccine by Labor Day that will be ready for a broad distribution no later than early next year. So if we get a vaccine in the next six or twelve months, I mean that's a game changer. That is a game changer basically, UM, that will take us on the road

back to normality. Not everything will return to normal, because you know, months of isolation and lockdown has had some impact on psychology and UH and has had an impact on how we're going to approach our commercial and our personal lives going forward. There will be I'm not gonna even say scars, but there's going to be a second or change in behavior that comes out of this be that as the mate. A vaccine is a game changer because think of a vaccine, we can actually go to

Yankee Stadium and watch a baseball game. We can actually open up the malls. We're not going to be fearful of getting the disease anymore, neither getting sick or post and possibly dying. I mean, depending on the demography. But the vaccine is the game changer. So I'll tell you right now, Barry, I will turn if I start getting the signs. Now, everybody speaks to everybody. Everybody's got the group of infectious disease specialists they speak to. We will

watch Scott Leave and Fauci on TV. UM. You know, my sources for whatever they're worth. It's telling me that a vaccine is going to be coming. Most of the people I speak to that are knowledgeable are you know, there's no such thing as a percent. But a vaccine is coming, probably not un till the spring or summer of next year. And that's good news and bad news because it means they're going to have a vaccine, But it does mean that the big recovery is going to

be delayed. And the longer it takes for that to happen, you know, unless the government continues with the fiscals big, it's the more bankruptcy and unemployment we're going to see along the way. So let me address something you brought up earlier about weakness in the economy and the pre pandemic economy. You know, if we look at the Milan meals, they're the biggest demographic group at least since the baby boomers,

and they're now answering their thirties. We just saw them start to increase household formation and housing demand was starting to tick up amongst that demographic. What does it mean for this group that was potentially starting a secular growth story for this pandemic? Is this just temporarily delay them a year or two or does this scar them as as you implied earlier. Well, I don't think it scars them. It really comes down to where they working. If these

are skilled millennials, they'll be fine. I mean, I estimate that ten million jobs I've been eliminated permanently. Okay, one thing that we wait, wait wait, ten million out of the thirty nine million who were laid off or ten million across the whole economy. Well both, I'm saying ten million out of the rough and ten million out of

the thirty million workforce. I think that we've we've lost ten million jobs permanently, Okay, in the sectors of the economy that are not going to come back nearly as much. And they'll be and that includes some of the offsets will see because some Amazon like companies and industries will be hiring. Look at what we did, what we discovered

in this it's great to have discovery. Even though this was a horrible situation that we we shut down economy that was called a non essential economy because they left the essential economy open. So here we figure out, well, that's very interesting that of the economy isn't essential. Well, that's a revelation, isn't it. We're talking about, you know, in this whole two thousand and nine jobs boom, Uh, the jobs boom that brought the unemployment of three and

a percent. As anybody ever bothered to see where these jobs were created, they were created in low skilled, low value added consumer cyclical industries. Okay, we don't produce anything anymore now. Maybe as we on shore manufacturing in some areas that will come back, but look at the industrial production and manufacturing, look at the realifed sport data. We've become really a society and economy that was really geared towards entertainment and leisure and restaurants and retail and so

a lot of these jobs aren't coming back. But when you're talking about the millennials, they're going to benefit from one thing, which is that interest rates you're gonna remain at the floor for a longer period of time than they ever would have where you have a deflationary gap to deal with. UH, and Powell's already said that they are not going to raise interest rates as far as the eye can see. So if you have a job, if you're skilled, you have a job, and you have

job security. I mean, your financing constantly gonna be close to zero to perpetuity. So I think actually in terms of housing, and that's going to be what type of housing and what's going to come out of this, and probably more positive for single family than it is, say for condos or apartments. I think the multiples take a hit because once again, uh, we went through an experiment what is it like to be isolated and to have your mobility restricted in a condominium or an apartment against

the single family house with a backyard. And then of course I think there's gonna be a lot of sensitivity about what sort of density, what sort of urban density

do you want to be living in. So I think this is going to be very good for suburban dwelling, and I think that actually housing is going to come out of this just fine, you know, as you're seeing already in some of the numbers housing and for the millennials that actually are in uh, the areas of the economy that are essential or utility like and look, a

lot of millennials are in the technology industry. And as we've seen in the cycle, the text talk sells up well because we found out that tex stalks are a lot like consumer staples, they are a necessity. So um, I think that they'll be just fine. Job security is going to be the key though, but they're going to have the low financing costs that's going to escape them onside. So Dave, we were talking about policy decisions. I can't help,

but notice you're in Toronto. It seems that Canada did a much better job responding quickly to the COVID nineteen pandemic than than we did down here in the US. What sort of impact will this delayed response of the US have, What does it mean to the state of the economy today, and what does it mean to how

quickly we'll be able to recover? Well, you know, it's it's a I don't even know if I look at it country against country, because I mean, there are some areas of the states that did better than than others. You know, I think that you know, you can point to Ohio, say in Canada, British Columbia is actually way ahead of Ontario in terms of bending the curve. So

it's hard. It's hard to say, you know, Canada, it's going to be I think a tougher slog here because we're not gonna when it comes time to getting the vaccines, I'm sure that they're going to be just first and foremost in the in the States, then they're going to be in Canada. And I would just say in the Canadian situation, you know, here in Toronto, I mean we're still pretty well on lockdown mode. And you know, look we're doing a delicate balance here. You know, Uh, do

you reopen to early, get a second wave? But if you don't reopen you destroy the economy. Uh. You know here in Ontario, which is called it, you know, over a third of the Canadian economy. You know, we're still locked down. There's there's nothing here that's really opening yet. But it's a it's a double ledged sword. Only history we will be able to tell whether or not the U S reopened early. Only history will tell whether Canada

waited too long to reopen. I mean, we don't really know, and I don't I don't know, you know, if if it matters really from an economic standpoint, because we can point to Sweden. People like to look at the Sweden example. Sweden had a much more lacy, fair attitude um much higher mortality rate than anywhere else, including its European neighbors.

And while people had greater freedom and they didn't really go through a lockdown outside of recommended social distancing, Sweden's economy is still poised to contract ten percent this year, which is what they're saying. All of Europe has going to contract. So there's there was no evidence that even not having your economy lockdown, that it did a lot of good for your economy. And I'll just say why, because there's a supply aspect and I said earlier demand

aspect um. We had a supply and demand shock, but in Sweden they didn't have a supply shock, but they had a pure demand shok. Because if people are fearful and people are cautious, it doesn't matter whether they lost down or not. They're just not going to expect. Quite fascinating, Dave. Let's talk a little bit about launching your own firm and full disclosure, I've been begging you to do this for I don't know a decade. How long have you and I've been talking about this, So so tell us

what made you decide to go independent? Well, you know, it's a it's aunt percent true, Barry, and you were. You were a great inspiration. You still are Uh. You know. Look, I left mary Lynch in two thousand and nine uh to come back home from New York. The truth is I didn't really like my long absences from my young family. They were still in Toronto, and after a decade at Merrill, I achieved all the goals I set out anyways, Uh.

You know. One of them was, of course, this daily market note that's now called Breakfast with Dave that I had started back and by the time I left mary Lynch in two thousand nine, uh, much to my surprise, actually, I was told that it was the most widely read piece of research coming out of the Meryl system. So when I left Meryll, I had numerous folks, by the way, including you, uh, urging me to start my own firm. Uh.

And we both remember that. So the bottom line is that starting Rosenberg Research spend on my mind for many years. The reality, though a decade ago, is I wanted to spend more time with my family. Starting a new business would have conflicted with that, uh, And instead I chose

to take an offer from Gluskin Chef. They gave me the work family balance that I was looking for, but the beauty about my relationship with my prior firm, UH was that we sold my research to the outside world, as in to non Glusk and Chef clients, whether they are a conference called speeches or my daily We went to the paywall and we split the proceeds, and it turned out to be a very nice business. So I really already had an existing business that I just spun

out at the beginning of the year. I guess you'd ask me about the timing and or the even the rationale, and you know, I've long identified a shortage out there of truly high quality, un biased research and research that takes the economics to the financial markets and provides investors with the degree of clarity that they're not going to get anywhere else. And this realization often makes me think

that I probably should have done this earlier. UM. But I'm grateful to have had made a decision to strike out to my own because it also comes down to better late than never. But in that period when I was a buy side economist, I had the luxury of reading uh everybody else, whether it was on Wall Street or Bay Street, or Montgomery Street or Wilson Street, UM, and I just found that it all sounded the same

to me. And so many economists out there. I found over the past decade, in particulars I could read my former competitors research, and I guess my current competitor's research is that there's so many economists out there that are just too fearful of being wrong to make a call. And I guess that is what has set me apart. I really just wanted to take the opportunity now at fifty nine years of age UH, to produce research that is unique. Of course, it's provocative, but also uncovers things

around the bend that other people aren't looking at. Because so much of economics is a commodity, and so the most important thing is to make the research a non commodity, to make it unique and to make it differentiated. And that's always some of my ethos going back thirty years. But now I had the financial resources to do it myself, and and and the opportunity, and it's been a phenomenon. We're only four months into this, and it's been great to direct my own traffic and to allocate the research

initiatives this tour. I think it's most appropriate for our client base. Dave, what's been the biggest prize of launching your own farm. Both positive and negative. Well, look for you know, the positive really has been um, you know, the the ability to uh you know, staff up. I would say with the best macro team I've ever had under my wing. I know that's a big statement, that's true. Uh And so that's been a big part of it. Uh. You know, I'm staffed up with the conomics and strategists

and I've got a hold uh marketing team. They're all in their thirties. So they most positive thing is that they make me feel young again. Uh And um, you know we are. I'm learning a lot about being an entrepreneur. Uh. And that's the roller coachter ride and uh as I was warned it was going to be um, but it's um, you know what we were expanding. I mean, you know, when I left Gluskin Chefs, we had a subscription lest globally we're in Ford countries by the way, Um, we

had almost two thousand subscribers. Now we have north to four thousand people reading our material. So I'm very proud of that that you know that we have, that we

have that reach. So that's probably the proud of the cousemen so far has been our ability through almost little effort to expand our readership, which means that we are we're hitting the right the right nerve points with investors out there in terms of you know, looking at anything that's negative or anything that is Has it met my expectations? I mean it's early days yet, but so far, i'd have to say that all the check marks are in the plus column. How has the pandemic impacted what you

would normally be doing running a research shop? And I know you travel, you speaking a lot of conferences, you visit a lot of clients. Now that we're especially in Toronto, still in a lockdown situation. How has that impacted running a service business like yours? M hm, you know that's a that's a great point. Well, listen again, is as part of really assembling a great team um and um and uh, you know, everybody knowing you know, uh, you know what they have to do and and coming to

a variety of consensus. And that comes not just to say when we're formulating a forecast, but what we're going to do regarding the business. Uh. You know. So we were early and very well prepared, and I'm going to tip my hat to my entire team because we had a feeling that something like this might happen. We had a We didn't know that, you know, there was going to be a situation where one evening the NBA says season is over, and then it's lights out for the

entire economy. But we had a plan, uh. And I got to thank my team for that. We had a plan as to what would happen if So we had a plan B. And we were already set up with our server and with our technology that if we had to work remotely, uh, we could work remotely. And so you know, we had a really nice office in downtown Toronto right by the lake in Brookville Place, really one of the prime a commercial space in the city. Uh.

And so that's where we were uh. And at any moment of time, though, we could all just do this from our from our home offices where I'm for example, calling you right now. And so it went out without a hitch, Like I was amazed on day one, crossing my fingers when we were putting out our variety of research material. Nothing went out late. There wasn't one blitch. Um. So look, it's a matter of road working remote Lee. We're keeping in touch with each other in a variety

different ways. You know, I've had a bunch of speaking engagements in a lot of places, especially in the States, that turned into doing it on zoom or just doing conference calls like I'm doing with you. I remember years ago doing a radio interview with you, you know, at the at the Bloomberg office, and you know, I wish I was there right now. So you know, everything right now is just be done remotely. It's either done you know,

via teleconference or via zoom, just like everybody else. So i'd have to say, though, Look, I'll tell you right now, it's not like I don't enjoy traveling, but um, I don't miss going to airports. I mean, I mess who I missed. I missed the human interaction, I missed the applause, I missed the booze, I missed the cat calls. If it's weird giving a speech that you know, there's a thousand people out there, but you know you can't hear them, you know, you can't gauge their body language, and that's

pretty weird. Um. But you know, so we're all learning about this this new phenomenon called work at home. But I can tell you that you know, we're going to have some sort of consensus once things that we get past the eye the storm and things in trying to open up, and will come to some sort of consensus as to you know, what we'll do with that office downtown, or we'll probably have something rotational, I imagine. But things are not going back to the way that they were,

that much is for sure. You know, our mutual friend John Walden held his strategic investor conference recently and I interviewed somebody for that event, and you could see at the bottom of the screen how many attendees are present, and it just doesn't feel like you're talking to a room of a thousand to two thousand people. It's like a zoom call. And it definitely is going to take a little getting getting used to. Yeah, and uh, I think frankly that we're going to see a lot more

of that. And that's because I think that even if we start to go back towards something that's quasi normal, even I think the one thing that comes back the the longest is going to be air travel, especially business air travel and conferences and events. Um So for people like me and you, this will be a a new normal for a lot longer, to say the least, So I don't want to call this a v recovery in the stock market. We had one of the fastest collapses on record in the month of March, and here we

are within spinning distance of all time highs. What do you think of this decline and rebound. I think that the first leg of the rebound was policy driven, with the fad, with all the fiscal support. And you have to remember then in that period from mid February to mid March, there was a lot about the coronavirus we didn't know about, and all of a sudden, we went from complacency in February uh to panic. Uh. I mean people were comparing it to the Black plague, and people

are comparing it to the Spanish flu. Of course it's it's needed one of those, but we didn't know it was it going to mutate? Um, you know, what was the mortality rate going to be? And then you looked at all these official projections, which of course proved to be wrong. It created a commendous amount of fear, and then when we had the lockdown, you know, it was really a frightening experience. You know, it's interesting that the stock market as a whole didn't even go down uh

during that period. Um, and uh, you know we went down in the last cycle, we went down in attack wreck. This was vertical down. But there were a lot of sectors of the market that held in reasonably well, parts of healthcare, you know, biotech, big tech, and you know consumer staples. And then of course you had all the the deep cyclicles. Uh they were in a deep dive, but they had such a small share of the stock market that it didn't really register with a complete collapse.

But people talked about, well, it was the biggest decline in the stock market in a short period of time. Um, there were some sectors of hungan really well, and then there were other ones that just detonated. And of course uh um they've taken the longest to sort of come back.

And you've got this rotation right now happening towards these more value cyclical trades because people have gotten excited about the reopenings, and people are getting excited about a treatment or vaccine coming to the fore you know, by the end of the summer. That's what the market's got priced in right now. So look, I would just say, and as I said, earlier. You're always trying to identify, you know, what is the inflection point, and the inflection point is

always built initially off of expectations. Will the expectations come to fruition or not. If you remember, we thought the market bottomed in October of two thousand and eight after the Lehman collapsed because we thought we had TARP one and that was going to be enough, and the market rallied and then rolled over the lows and it didn't hit the lows until TARP two, which we then deemed well, that was enough ring fence the banking system, we capitalized

and we drove on UH. This time around, it's really Barry. It's all about the vaccine, and if you take a look at the market, it's a very interesting situation that we have on our hands that you know, whenever we've had i'd say since the middle of April, we've had four days when there were some exciting major market movie news over a vaccine or treatment. UM. You know, we had a couple of them related to Gilead. We had

the Maderna, we had novovax UH and UM. Every time we get UM something major, whether it's a first trial or a second trial, the market just rips. And in fact, in the four days that we had something that was announced an announcement effect, the down in those four days collectively, and this is just since the middle of April, the collective rally was almost three thousand points in the Dow,

including the five point rally we saw yesterday. Um so actually it wasn't for these announcement effects that that would be below twenty four thousands a day instead of call it twenty plus. So the markets are given a float of information here and it's called hope and it's called fate. But you know, the the stock market is a beast that is often influenced by expectations and by sentiment, and that's what animal spirits are all about. It doesn't have

to be really anything more fundamental than that. So clearly biotech is leading the end Pharmaceutical and hopes on a vaccine or a treatment is what's giving the animal spirits some hope. What do you think about more discretionary sectors? And what is oil and the energy sector telling you about the future path of the economy. The energy sector is only telling me about the discipline at OPEC and OPEC plus, so there's nothing really telling me much about

demand as far as the old price is concerned. This is really all came after the Emergency meeting and the draconian production cuts. And by the way, not just among OPEC and Russia, but also the shale guys unlike two have also cut production dramatically. So, um, that just tells me there's more pain in the energy sector from a real economic standpoint. But obviously we needed to have a supply shock in this direction to revive the old price.

What about some other commodities. What do you think of gold, which has held up really, really well and is close to decade long highs Well, I say that that's one of my key investment ideas for this current state of the world. I think that the gold gold is a very good hedge against the instability that the extremes of deflation and inflation. Brain If there is deflation, and the almost certainly is, interest rates are going to remain low or go negative, and that's going to make the opportunity

cost of holding gold basically nil. Historic inverse correlation between real interest rates will will go more negative and the price of gold, and it's not going to be a straight line up. Um. But the second or bull market that I really begin six years ago with the basic formation is going to be intact now if there is inflation, gold, as we all know, will do very well as a store of value, and we've got a view all this central bank alchemy has led to I think these ever

increasingly unstable markets. I mean, the volatility has been dramatic in both directions. People don't only think about volatility when the market's going down, but it's been a roller coaster ride really for the past couple of months. And I think gold will work well against the hedge in an

increasingly unstable financial market environment. So I'd say Barry's actually at this point my highest conviction call, and I'd had that if for any of the reason that you have to look at gold today is a currency that is no government's liability. You look at gold. Why has gold always been viewed as something that you want to be measured against is because the production growth of gold runs at a pretty reliable and constant one percent annual rate.

Look at the production of money right now, look at M one M to look at all the money numbers. In fact, globally they're running it over a thirty percent annual rate. So as I look at it as an economist, at the relative supply fundamentals now and in the future between gold production and the production of FIA money, I think the conclusion is rather obvious, quite quite fascinating. You mentioned technology earlier, which leads me to the question about

the dominance of growth over value. Is value investing dead and if not, what's going to eventually turn it around for value investing. Well, it's interesting because you know, you get a few days of value stocks, you know, recovering, you know, from their lows, and there's been a dramatic increase recently in the airline stocks and the casino stock, the hotel stocks because the economy has the economy has reopened, and there's a view that people are going to be

spending more money. And as it reopens, the value stocks are going to do better because the growth stocks are so populated with these uh work at home thematics. The answer is that, no, I'm not a believer that this value trade is going to have a lot of legs. It's really being premised on the reopening of the economy, but also on the view that there will be a vaccine and that people will start to spend again, and there's hard to spend on these value areas in consumer

civil services that were so downbeat. I'm not so sure about that. I think that I want to be focused on, as I said earlier, things that people are going to need, not what they want. People don't need restaurants. Of course, there'll be an initial rush because we've been in our homes and we've been locked up. There'll be an initial rush.

But I found it very interesting, and again because economics at its root is a behavioral science, and I found actually that behaviorally speaking, look at what consumers have spent their money on in the past two months of the lockdown, besides canned food, toilet paper and booze, garden supplies, bread makers, jigsaw puzzles, and anything related to warring up your home to become your new office. Dave, you have clients in over forty countries. Your firm is an international no firm.

We've seen international stocks lagging US stocks, and we've seen the international economy lagging the US. Is that a permanent change or is that something that is cyclical and eventually the rest of the world catches up to the United States. Well,

I'm not so sure. About the premise bury that that the rest of the world has done worse than the U S from an economic standpoint, because China, uh, China is already recovering, and we're going to see second quarter numbers in the US that are gonna be negative forty negative. The ID to storm in China was back in the first quarter, and you think of the US reaction, in some sense, they were quite a bit later than other countries.

I mean, countries like Germany and even Japan ultimately had much better testing and tracing procedures, and it wouldn't surprise me if they probably come back ahead of the US does. But look at its uh, we're just talking. We're talking minus thirty, minus coorting minus fifty. You know, what's a handful of basis points. But the U S stock market is not the U S economy, and the U stock market is chock full of the sort of stocks that you probably want to own in this environment where you're

talking about defensive growth. You know how many other countries in the world have like a Microsoft, which is defensive growth. Amazon is a US company. Well, Amazon, as we found out if we didn't discover earlier, Amazon has become a utility. How many other stock markets in the world have a have a company that big that has become an essential I guess you could argue that Google has become a utility.

So I say that when you look at these parts of the market, you look at healthcare, you look at big tech, but big tech that have taken on utility characteristics, which is something that we have to take an appreciation of during the past couple of months. And we focus on consumer staples and brand names. Well, stock A surprised to me that the U S stock market in the land of the line, the one eyed man is king, and so that is the market if you're bullish on stocks.

They want to focus on the most quite quite interesting, all right, I know I only have you for a few moments left, so let's jump to our speed round. These are our five lockdown questions we ask all our guests, and let's bang through them as quickly as we can. Speaking of essential utilities, what are you watching on Netflix and Amazon Prime? What are you streaming these days? Well,

I really liked the last dance. I really liked Unorthodox and um and Ozarks I thought was actually uh um, you know, not quite up here with breaking bad, but it was kept me engaged. You know. At some point though, I think maybe we should hold us basically, you know, pick up a couple of books and not gauge the TV set so much. So let me jump right to that question. What are your favorite books? What are you reading now under lockdown? And what are some of your

favorite all time books? My favorite book as far as uh, you know, this businessess concerned was the classic that was written by Charles Kindlerberger Mannix, Panics and Crashes, and I think everybody should be reading that. The one that I was just getting through was the classic by Robert Gordon, The Rise and Fall of American Growth, And uh, I'm going to be getting on to uh, the latest biography that was penned by Henry Kissinger. So those are the

ones that are on the shelf right now. Fascinating. What sort of advice would you give someone who was a recent college graduate who was thinking about going into economics as a profession. Yeah, I'd say that you want to make sure that as you become quantitatively proficient in this profession,

and that's where a lot of the emphasis is. I would say, spend as much time as possible learning about history ja as many economic and financial and market history courses as you possibly can alongside your statistics and your econometrics, because I found over the past three decades looking at these recurring patterns in the markets, in the economy, understanding that these extremes of fear and greed have always been with us, and how the influence behavior that I think

that you want to constantly focus on history, read as much about history as you possibly can. Quite fascinating. And our final question, what do you know about the world of economics today and econometrics today that you wish you knew thirty or so years ago when you were a green, young economist. Well, you know, I wish there was a way that we can actually forecast our way through an

event that we've never seen before. You know, that would be something brand spaking new, because usually we're running regressions that are based on a sample size of things that actually have happened before. So wouldn't it be nice to actually have with the samplifies of one which is today's pandemic and the reaction uh as, to actually take that

and model something into the future. Because I'd say that right now, the confidence intervals run any forecast or as why as I've ever seen In the thirty five years in this business, I've seen a lot. Thanks Dave for being so generous with your time. We have been speaking with David Rosenberg. He is the founder of Rosenberg Research. If you enjoy this conversation, well look up an inch or down an inch on Apple iTunes and you could see all of the previous three hundred plus conversations we've

had over the past six years. You can find that at iTunes, Spotify, Google Podcast, Overcast, Stitcher, wherever final podcasts are sold. We love your comments, feedback in suggestions right to us at m IB podcast at Bloomberg dot net. Check out my weekly column on Bloomberg dot com slash Opinion. Follow me on Twitter at Ridholtz. Sign up for our daily reads at Riholts dot com. I would be remiss if I did not thank the crack staff that helps

put this conversation together each week. Michael Boyle is my producer. Michael Batnick is my head of research. A. Tiko val Bron is our project manager. I'm Barry Riholts. You've been listening to Masters in Business on Bloomberg Radio