Interview With David Rosenberg: Masters in Business (Audio)

to be right. UM. One of the things I found fascinating about Dave is that in um Or or earlier, he flipped to the bullish side after having been somewhat cautious coming out of the UH financial crisis, and people kicked and screamed, Dave the bear, how can you go bullish? And he said, the data proved it, so I have to go bullish. So I've always respected that, Hey, this position is wrong and I can't stay this way. I'm gonna reverse myself. Not a lot of people on Wall

Street UM do that very comfortably. The other reason I wanted to bring Dave back was we both presented at a conference this weekend and I saw him on a panel. I mean, we hung out and chatted a bit, but I saw him on a panel with three other people and he hinted at some of his views on the FED and the economy and non farm payrolls and inflation and and what we're looking at in the markets. And it was really just a taste, and I wanted to

sit down and have the full meal. For those of you who are interested in economic data, I don't even know how else to describe this. Davi is an idiot savant with data in a way that few economists can. He has an encyclopedic knowledge of how all these different moving parts interact. We didn't really talk about um random dates, but we've had dinner in the past where I said, you know, February two thousand and three, He's like, oh yeah, non farm payroll was a fourteen thousand that month. Not

a great month. The guy is a walking encyclopedia and understands how to put it into context and what it means to both the economy and the stock market. If you like economics, if you like that sort of data analysis, I think you're gonna find this to be a fascinating, albeit wonky conversation. Um So, without any further ado, here is my chat with David Rosenberg. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My guest this week David Rosenberg. You might know him from when he

was chief economist of Merrill Lynch. He's currently chief market strategist and chief economist at Gluston Chef out of Toronto, New York. Dave, Welcome to Bloomberg. Good to be back, Barry. So let me tell you why I'm having Dave on for a second time. You are one of the few repeat guests. The previous repeat guest was some guy named Arthur Levitt who was chairman of the SEC. But other than him, you're the first repeat guest. I think I think I was your first guest. What you almost two

years ago? You were one of, if not the very first guests that we recorded with. We had done a few dry runs and then we brought you in, and I think you were the first guest that we actually recorded and used the podcast of I think I heard you tell somebody, uh, Rosie's my guinea pig. That's right, That's exactly right. So um, let me tell you why I brought you back, Not to be a guinea pig. Dave and I were at a conference this past weekend

in Miami, Florida. I gave a presentation on risk. Dave gave a presentation, as he usually does, on the state of the economy, and it's a holistic every data point you could think of put into really interesting context. And when I sat through a panel that Dave was on with four people, my thoughts were, I want to hear more of what Dave has to say about where we

are in the state of the economy. Talk about non fund payroll talk about the FED, talk about what this means for investors, interest rates, talk about the economic profession. And I didn't get enough Dave, So I said, Dave, why don't you come on the show this week and we'll spend some time. This is really the most fascinating time to be an economist. Um following last week's non farm payrolls and all the angst, uh storm and drang over the FED, so let's let's have at it. Let's

jump right into this. Last week we saw a huge non farm payrolls report, two one new jobs created, unemployment rate effectively cut in half from the financial crisis peak. What does this mean for global economy? What does this mean for the Fed? Let's let's start out simple and say What does this new payroll report mean for the US economy? Well, I think that it needs a little

bit of context. Fire away. Well, if you remember, before we got the October payroll number, just over a month ago, we also got the September number, which at that point was putred media age growth, apparently validating the FEDS no move in September. And actually I started hearing people talking about the prospect of a recession. Now let me let me interrupt you right there, because I know I've been

reading Breakfast with Dave for a million years. That's Dave's daily Market and Economic When I was writing it for t Rex, you made that's exactly right, the the usual inditia of recession that you track. What do you see along those lines? Okay, well you know we'll well, we'll get to the recession indicators. I mean we can we can debate whether the economy slows down or speeds up next year. I think a recession is probably as close

to zero percent odds as anything in this world. Nothing eminent, not seeing any sign, No, not not not at all. But the point I was making when I said about the perspective of the contest next of the October payroll number, which was actually one of the best employment numbers of the cycle. Was you have to take a look at in the context of what we saw in September UH, and the truth is usual somewhere in the middle. I think that the the let's finish the angst after September

number was overdone. I think maybe a bit of the euphoria after the October number could be a little overdone. I think that UM, it just validates the view that the U. S economy is doing okay, maybe a little

bit better than okay. To me, what really stood out was this UH the view that this combination of a super strong US dollar UH and the weakness that we're seeing in various parts of the world, particularly emerging markets, was going to come back and push the manufacturing sector into a downturn that would then cause a generalized malaise in the economy. Well, the reality is that that view has so far been proven to have been wrong, because

we didn't have any manufacturing jobs created last month. And yet somehow, and yet, somehow, an economy that is actually driven in part by construction, you can say, in part by government. Certainly it's a service sector economy outside of manufacturing, still generated, as you said, bury two net new jobs.

Then there's been all the narrative. Well, I would say for the past year, UH that the downdraft in oil was a net negative for the US economy, that it was going to destroy the Montanas, the Dakota's Texas, and to spring down the US economy because apparently over a five year period all the jobs that were created was in shale. Well, once again, we had a month where

no growth in manufacturing. UH, the resource sector actually had a fractually negative job market performance, and the economy, what do you know, generated two seventy one thousand net new jobs. So I think what's happening is that the fallacy UH, that the strong dollar and the weaker mergy markets we're going to bring the U s economy to its knees. Right now, we're putting the rat in the laboratory. That thesis has been proven wrong. I'm quite actually content with that.

And the view that the shale UH contraction was going to create a major domino effect through the economy has been proven wrong as well. So in the last thirty seconds we have in this segment, you you alluded to something earlier, and I want to give you a chance to expound on it. Uh, employment data, it's a fairly noisy series, isn't it. Well, you know, it's interesting. The household survey is certainly volatile. The payroll survey tends to be more stable, which is why the markets have already

paid more attention to it. But it has been a little bit more jumpy, which is why always any economists will tell you focus on the three months, six month, even the twelve month. Friend, the data telling you the economy is in decent shape. Full stop. I'm Barry rid Hult. You're listening to Master's Business on Bloomberg Radio. My guests this week David Rosenberg. He is the chief economist and

strategist at Gluskin Chef. We were talking earlier about the non farm payrolls data and how sometimes that series can be a little bit noisy, especially the household survey. What does that mean for the Fed? That is quote unquote data driven. I think the Fed has already laid down its cards and even the doves are running for cover. So um, my sense now was that the Fed took a pass in September primarily because of the global turmoil. And uh, why is a cute market. Why is that?

Why do we think that emerging market downtown in the Shanghai Index? Why should that impact the Fed? No? No, no, Well it wasn't just the Shanghai Index at that point. I mean you had a situation where credit spreads in the US for widening dramatically. Uh. You had a situation where over half the stock market was down at least from the high. So basically what had happened at that point was we had a major tightening in domestic financial conditions,

and so the FED went to the sidelines. You know, look, reality is this. Uh. You know, we tend to get a little myopic in the marketplace. I'm a market participant. Uh. They do have eight meetings a year. So they took a pass um the economy is in fine shape. The bottom line here is the desperate desire by the FIT to move off of zero. That's what it is all about. Move off of zero normalizing. Just as we don't need QUI anymore, they ended que and once again, let's attack

the narrative. The narrative was that as soon as they ended QUI, which was October of last year, the economy was going to crumble, go down to it sneeze, they ended QUWI. No such thing happened round And if you go back to and Yellen was telling us what the time lag was between the end of QUEI and the first rate hike, she inadvertly had mentioned six months. Well, my good friend Barry, it's already been more than a year, so you know what, it's high time to move off

of zero. And at the same time, when it comes to December sixteenth, and they probably will at this point raise rates. It's what they say that's gonna matter, and they will continue to reaffirm the view that this is not going to be your big brother's, your father's, or your grandfather's tiding cycle. It's going to be truncated. They could easily signal that not that they're one and done, but they're gonna move and then pause an assess so that this is not going to be the fed of old.

When it became an exercise of eating potato chips, you just can't stop. At one, two thousand five, two thousand six, two thousand seven. We saw once the tightening cycle began, it was pretty much straight up right into the teeth of a recession. Same thing. This is a very different cycle. Low and slow. Is that the big difference, Barry. You go back to the uh. You know, you go back to look at you did have a big inflation problem

that had to be circumvented. You go out to the late ninety nineties, we had a tech bubble that the FED had to get ahead of. Um. You go back to that period, You're quite right to look two thousand and four, they start to raise rates. They went from one percent to five and a quarter in two years. And not the most ardent hawk or bond bear saw that coming. Um. But the FED had a big bubble on its hands. It was the housing incredib bubble. I'm

looking around trying to find where the bubble is. There might be little pockets of bubbles here and there, but nothing and certainly no inflation bubble just yet to cause the FAT to have to raise rates at every single meeting. So my sense is that they raise they reaffirmed this notion lore for longer. Uh and um. And we'll take it from there. But what I will say is that comes back to your question about the recession. Recessions have never started after the first rate hike. The recession start

after the last rate hike. So if you're worried about the rate hike December six and sure there'll be more volatility. We're gonna stress test liquidity in the bond market, no question about that. You might want to have a little more cash on hand going in next year for optionality purposes. It doesn't mean that it's the end of the cycle. The cycle ends every time after the last rate hike because it's the last rate hike that ultimately brings the

economy to its knees. So if that's your view, then you have to believe that the first rate hike is going to be the last rate hike. And I don't believe that for a second. So let's take the other side of the trade. What happens if they don't hike in December. What sort of a signal does that send? What are the implications? Well, if they don't hike, and if they don't hike on December sixteenth, I'm nervous, and I'll tell you why. And it's not because of what

happens on December sixteenth. That's that's something happened and the lead up to December sixte that caused them not to raise rates. So basically, the picture you're painting Barry is that U is a repeat of a cosm to go on the sidelines in September, which is that we have once again a major tightening of financial conditions. So stock market correction, widening spreads, or something nefarious is happening because they are right now once again setting the table for us.

If they don't follow through, they suffer a credibility problem. Uh. If they don't follow through borrowing a credibility problem, it's because something else happened along the way that if your long risk is not going to make it too happy, it's gonna make people think, what do they know? That? What are they seeing? Then I'm not seeing? Well, no, I don't well, you know. The thing is that that's what people were saying in September. But the reality is that it's not what do they see, We don't know.

We know what we know. What is that half the stock market was down and credit spreads are widening inexorably. So the fact is the fact is that some people thought that the febs just going to look through that tightening of financial conditions and still raise rates. But the reality is that they didn't look through that tightening of financial conditions. They weren't sure if things are going to subside or not. Well, they have subsided. Now the prospect of the first rate hike in nine years is on

the table if they don't move at this stage. Look, they basically set the bar very low. It's not as if things have to get better. They just don't have to get worse. And they are going to race rates. But if we haven't another going to go, they're going to go to fifty. Because so we're really well, let's look they people are talking they can go in eighth. I mean, we're we're in arrange. Look there's other mechanisms also, what do they do with the U uh, with the

interest rate in excess reserves? Uh, you know, we're we're in a whole new realm of healthy operating monetary policy. But my sense is that if we're talking about my view on what it will mean for basis point impact, it's probably going to be twenty five basis points, all right. And we didn't really get to talk about earnings yet.

Since the financial crisis lows, we've seen earnings rise over a hundred percent from their bottom and stocks have risen over two You mentioned energy before, what are you looking at in terms of this so called earnings recession driven by energy verry, you have earnings contractions in about half the market, earnings positive and half the market. And it's been a very usyncratic stock specific um sector selection market this year. It's not been a market that you buy

the index. The bottom line is at stay away from the areas UH that have excess valuation, that are hits to the foreign economy, that are vulnerable to the US dollar. The bottom line is that for all the talk of what a bad market it's been this year, in earnings procession, the best performing sector is consumer discretionary over ten percent capital appreciation this year over ten percent earnings growth. Now understand the consumer discretionary might be between ten and of

the SMP market cap, but it represents seventy GDP. How bad can things possibly be when consumer cyclicals are seeing ten percent plus earnings growth and ten percent price appreciation all the same year. I'm Barry rid Help. You're listening to Master's Business on Bloomberg Radio. My guests this week David Rosenberg. He is the chief economist and strategist at Gluskin Chef in Toronto, Canada, and pretty much around the world. And previously we were discussing um, the energy contraction, that

we've had a huge drop in oil prices. Let's talk a little bit about commodities. Copper cut in half, oil cut in half, a lot of the industrial metals iron zinc doing really poorly now a generation ago. That would be a warning from Dr Copper that a recession is coming. But you're saying there's no sign of a recession on the horizon. What does it mean that the various um commodities are getting gobsmacked like this? Well, you know, I never would have said that copper price alone would have

signaled a recession. Every recession has been presaged by one thing and one thing only, which is an inversion of the yield curve full stop. So I'm not so sure that you can look at the price of anything, uh and just say it's demand contraction. Every price is determined by two lines worthy intersect, which is supply and demand. And so it's interesting you talk about oil for example, throughout this say sevent collapse in the old price, global demand has us gone up? Botolines us We're pretty too

much oil. The swing producer, that's the saudiast told the Americans a year ago, you're the swing producer. Not US shale America. You are the swing producer. We've given that up. Every single bottom in the old price go back to go to, go to two thousand and two to two thousand and nine, it was always the Saudies leading, oh pack. In fact, you just go back to two thousand and nine, who cut output from ten million to three umbrels a day with the Saudis. The saudiast told the shale guys

in the US you are now the swing producer. We're out of that business. And then throughout that and despite that, going into last summer when oil was hitting, it slows and right now we're putting a bottoming process, American producers were still producing five thousand barrels a day more in the summer than they were last November. So um, okay, look and you look at the contango. You look at the inventories, and they could explain contango for the lay

person who doesn't understand backwardization or contanging. Well, just looking at you know the fact that the forward curve is possibly steep. So it's telling you in terms of the nutterm pricing that there's still some supply pressure putting some downward impact on the spot price of term you expect

longer term. Well, I think that. Look when you're taking a look at the rig count and the types of rigs that are now being shuttered as opposed to the type that we're the inefficial ones being shuttered say six months ago. The fact that drilling and exploration activity is down over the past year in the US by six and never well, every time this happened in the past, oil is put in the bottom. We're just still going to get a v shape recovery. But I think oil

is putting in a bottoming formation. It's it's not you know, the next time you get towards sixty. This fracking revolution, the technology is sophisticated that it's not going to take much to really trigger the output. So I think we're in a broad forty to sixty dollar range. I'm not in the view that we're going down to thirty. Barring a global collapse in demand or or a recession near term prices remain week. I think that within a year, I think there will be opportunities. I think there will

actually be another run towards sixty. It'll be temporary and it will be a trade. Energy is a trade. Commodities you're a trade, They're not an investment. The twelve year supercycle courtesy of China is reeally yesterday's story. If you're gonna play the next supercycle into China, you're gonna be playing services, okay, because that's where their economy is gravitating to their gravitating away from industrialization, away from exports, towards

consumer spending most services. So that's the new supercycle. Internet services, media services, education services, health services, the service sector side of the Chinese economy that apparently people are telling me it's crashing and burning because people just tend to look at commodities and manufacturing diffusion indicries, which gives you a very small app shot. For the first time in China's modern history, service sector accounts for over half of their GDP.

The service sector in China. Service sector is now and it's growing um. Consumer spending in China accounted for almost six of the overall growth they generated. This is not the China people you see. People are just they take the latest experience of the extra polading in the future. The new supercycle is consumer spending and consumer spending on services. If I'm not mistaken. We just printed what was it, like, a year of a year retail sales number in China.

The US hasn't printed the number like that in in almost three decades, and on somehow China's crashing and burning. Look, China's got they've got they do have leverage problems. Uh, you know they're they're they're still liberalizing. Uh. It is a it's a it's it's a work in pro in

in process. But the reality is at as Ali Baba showed you a few weeks ago with their blow at earnings that if you're playing China in the future, it's not the al Coa's and it's not the John and DearS, and it's not the caterpillars, it's who are the global champions that will penetrate. If I would have said to you five years ago, Dave, the Fed's going to take rates to zero and keep them there for five years.

We're gonna do three rounds of quantitative easing, and five years from now you're gonna have no inflation and the dollar at multi year highs. What what would you say to that sort of forecast? Well, I would have said that maybe if you wanted to figure that out. You'd read the rogue offf Reinhardt classic, or you would read the work of this time Mackenzie. Well, this time it's different.

So the bottom line is that when you go back centuries of of recessions that are not classic inventory cycles but are process credit and an implosion of asset values, this is what happens. If you want to take the most uh I think, you know, dramatic example, go back to the nineteen thirties. Okay, Now, look, we don't have the people living in the land. We didn't have a dusk ball. We actually, um, you know, actually have the deposit insurance, and we have unemployment insurance, we have a

social safety net. Um. I'm sure that without all that it would have been practically just as bad. We didn't let every single bank fail. We didn't have a massive run on banks, despite the fact that some institutions were allowed to falter. So the bottom line is that when you take a look at the history of financial crises of this magnitude, Yeah, you drop industrates to zero, you

keep there for a long time. Uh and um. The only reason why the central banks, well let's just take the FED as an example, had to do as much as it did was because fiscal policy was so ineffective or non existent. It is very little compared to what I think some people like your buddy wanted to know, very very you know, the sad reality is that our politicians created so many roadblocks in the US unnecessarily. Look

on from Canada. You know, we have socialized healthcare there, But to really invoke a complicated healthcare plan because you couldn't get it done when Hillary was in the White House back in the early nineties. And this wasn't even

about President Obama. This is more Pelosi and read and I'm not going to discuss the social fairness of this, but to enact legislation that's so complicated that froze the small business sector in time, literally two years after the capital markets and the housing market detonated, bad timing that delayed the recovery. Then we had to basically swing the pendulum the other way. We had libertarians running the Fed. Uh that we built the wild West and the financial

markets and the sheriff left town. So then what do we do in this cycle swing the pendulum between Basil three, the vocal rule dot frank. So we basically now are regulating the banks like utilities, and so every step of the way, we haven't even been able to pass a budget. The government has about operating on continuing resolutions with every few years. What do we have the risk of a government's out down and debt default that again causes businesses.

I'd rather just buy back my stock, thank you very much. An issue debt to actually commit capital to an economy where there's basically no fiscal visibility. So that's been a big part of the problem is that you did not have the utopia which would have been fiscal policy. Working with Monterey policy. We have Larry Summers, who now has been saying for a while they were in secretar stagnation.

He was the one telling President Obama not mistaken to go targeted and timely and transitory with the fiscal response, the infrastructure spending that ever went anywhere. The President should have gone big. He had a big tail wind behind his back. He should have gone really big back then towards a real new deal to get the economy moving. The fiscal response was tepid, and to put all the

burden of responsibility on Monterrey policy. You're listening to Masters in Business on Bloomberg Radio my guest today Gluskin Chef's David rosen Burg. He is their chief economist and market strategist, operating out of Toronto and worldwide. You know, every time I speak to you, Dave, you're in a different part of the world. How many countries are you in a year? Your travel less than you used to, but you're still

all over Europe and elsewhere. Well, I'm actually going with our investment team to mccow in Hong Kong at the end of the month, but mostly like most of our businesses in Canada and the States, so I don't do the the European and Asian road shows like I used to. But you're back in in the in the US. Uh. You know, a good chunk of our business, at least ten percent, is in the States and used to when you're with Merrill Lynch, you used to be around the

world pretty regularly. You were quite the globetrotter, my friend. I think I was either platinum, gold or silver on on six different airlines back when we used to have six different airlines. That's right, all right, So let's talk a little bit about economics, not the economy, but economics and the economics profession and one of the questions that came up at the friends we were both at were

forecasting the economy into the forward year. And I want to I don't want to ask you what your forecast is. I want to ask you a more philosophical question, which is why is forecasting so difficult? What makes thinking about and projecting the markets and the economy forward a year all but impossible? Well, firstly, there's there's always a certain level of uncertainty around your forecast. That's like Yogi Bevera famously said, Uh, making forecasts uh is very difficult, especially

when it comes to predicting the future. So there's always a certain level of uncertainty. And I'll get into that in a second. I think also we live in a in a very fast money world and a world where uh you have to pay attention to geopolitics more than you used to before. Uh, And it's just um, you know, the information gets transmitted much more quickly there. You mean, it's incredible that sometimes you get moves that in the old days, well you'd get in a year, cannot actually

happen in like a week now. And and look the onset of program trading and all the electronics and that go along with that. Let me just say this, um if I had to present a forecast today like I used to when I was on the south side at Meryland before that, Bank of Montrail, Bank of Nova Scotia. After six years on the bye side of Glaskon Chef, sitting down seven with our portfolio managers, I finally figured

out I used to. I used to think, you know, when you're chief economist to Mary Lynch, you you you think that you're like the starting pitch of the New York Yankees. You have it all figured it out. I realized when I got to Glaskon Chef how much I didn't know. And it was a revelation I had in my first meeting when I gave a particular forecast and the portfolio manager I forget what it was exactly, said so,

how much conviction do you have in that call? And I said what, Well, he said, well, certainly you know you don't have it's iron clad. What is your conviction level? And then what scenario B, C or D if you're gonna be wrong where you're gonna be wrong? So you see, if you're managing money for a living, if you are an investor, portfolio manager. Your whole world is one job, probability curve. And the economist job is not to get

the base case right. It's to help the investor make an informed decision, and that comes down to helping tighten in the probability bands. So I will go to a meeting today, a glaskon chef where basically I will have the same base case forecasts, but I'll say, hey, fellas, whereas I used to have eight percent conviction, it's down to oh, by the way, scenario B is now D and D is now C and and everybody in the room will be running down like they'll be sweating writing

down what I'm saying. And I didn't even change my base case scenario. It's all about your conviction level, how that changes over time. And if you're wrong, we're you're gonna be wrong. What is your what scenario B, C or D? Because your forecast And this is what gets

economists into trouble. You know, you read these spreadsheets, you read a daily, read a weekly, a monthly out of a classic seuth Side Wall Street economics house, and you think, well, that GDP growth in the fourth quarter, that's got to be there, iron clad. But you don't get to ask them how much confidence do you have in that forecast? Or if you're wrong, say you're calling for three, will it be too or will it be four? Meaning you're you're gonna be wrong because it's hotter or wrong because

it's colder. You've got the whole life of a portfolio manager. Their brain is one giant distribution curve of outcomes, and the economist role is not to focus just on the base case. It's to focus on the whole range of outcomes. Is it a fat tail curve, it is a thin tail curve. And actually sometimes just shifting your second your well what what what? The next two possibilities are huge in terms of what that could mean for portolio management.

We're discussing fun with Gaussian distribution curves with Dave Rosenberg. I love this new or not so new philosophical way of looking at the world from a probabilistic perspective. Often wrong, seldom in doubt is the expression that comes to mind about the people on the sell side who are full of conviction, but there is no plan B, there is no distribution. Here's my forecast right or wrong? Well, that's um and that's what gets economists in the hot water.

And that's uh, and that's the bad rap in the profession. That's why if I had to go back to that, UM, I guess profession of publishing forecast us, which thankfully I don't have to do anymore, I would do it completely differently. I think the one way, how would you how would you do it different? Well, as as I said I would, I would UM. I would provide scenarios. I'd attached probabilities and attached scenarios. What's important once again you talked about

this Spajan economics. It's actually it should be so elementary for economists that actually go through and take statistics, econometrics. We all did this in university. Is it's all about expected values. It's about across the continuum of possibilities, across

the distribution curve. What is the reward of being right benchmarked against the cost of being wrong spread across that um Ultimately, if you're a street economist, and whether it's Wall Street, Bay Street, Montgomery Street, House Street, UH, your job is basically as the economist to help portfolio managers make effective decision making. What I like to say at Gluskin Chef is that our portfolio managers are the goalies, and I'm the goalie coach. I can't I can't stop

the puck for them. They actually are the ones that wear the goals against average. It's their portfolio. Our job as economists, as street economists, UH, in the realm of providing cogent and coherent and cohesive investment advice, is to help portfolio managers stay out of trouble and to make

effect of decision making. So if I had a new role where I provided forecast UM, they would look like probability curves and you wouldn't be wed to one particular view, although you would have a base case with a probability attached to it. There's something else that's very important to my profession, which is this UM. It's admitting when you're wrong.

I love that I have that as a question. How do you, as an economist admit error but you're saying you're building that in Speaking of errors, here's an economist who's frequently wrong, Richard Yamaron rich pull up a seat and join us for a conversation about why most economists are so terrible at forecasting UH the markets. They've just

explained what you do wrong as a professional economist. Well, I was actually gonna say, Richie am ron Is is about my best friend in the world, and so I can't possibly it's a good thing he's here, because I would never take a shot at rich behind his back, I know, but I was doing it on your behalf. I know what you were implying about Rich. I only came in because I heard there were free donuts or something in that. That's that's exactly, very very ate them all.

So so we were so we were just discussing looking at economics as a probabilistic distribution as a proposed to being all right or all wrong, and much of the Wall Street universe doesn't take that approach. Um, is this a failure of traditional economics or is it just marketing? It's marketing, and it's you know, I guess this human nature of having to be force fed numbers as opposed to a thought process. But here's what's important. Uh As I found out working on this on the by side.

And you know, every cell side firm has an economist. Uh not every by side firm has an economist. I'm pretty sure that in Canada, Glaskon Chef is probably one of the few. It's about scenario building, uh and uh and and what happens I think with a lot of economists is a certain level of arrogance in your forecast, that that is basically the base case, and that's the way it's gonna be here. I'll just say this much. You cannot marry your forecast, Mary, your partner, don't marry

your forecast. It will often not love you back. And have a plan B. Have an escape clause in case you're wrong, and have the discipline to admit that you're wrong. And when you admit that you're wrong, because we're human beings and we will be wrong. Have the insurance policy in place for the portfolio manager. What's that scenario be that they can flip into when you are going to be wrong. We've been speaking to David Rosenberg. He's the

chief economist and market strategist for Gluskin Chef. If you want to find, by the way, more of his writings, you can go to Gluskin chef dot com. Is that right? That's the website dot com dot com. It's uh. Go to just google Gluskin Chef and you can find the website or google Breakfast with Dave which is the daily commentary that Dave Rosenberg puts out my staple. If you enjoy this conversation, be sure and stick around for the podcast extras, where we let our hair down and keep

the tape rolling. Check out my daily column on Bloomberg View dot com or follow me on Twitter at rid Halts. I'm Barry Rid Halts. You've been listening to Masters in Business on Bloomberg Radio. Okay, welcome back to the podcast. My guest today Dave Rosenberg. We have a special special guest, rich Yamarone. He's the chief economist at Bloomberg. What's your title best looking economists? Best looking economists. That's a low bar. That's like smartest bush, low bar. I say that just

to torture Dave. I know he's a huge gem. It's all right, let's do this over again because I'm gonna get everybody in trouble with that. Welcome back to the podcast. Uh, I'm speaking with Dave Rosenberg. Is my special guest this week. My extra special guest just dropping in. One of the economists here we keep down in the basement, rich yamar And say hello to the people, Yamaron, Hello people, fantastic

Yammy and Dave are old buddies. They went to uh economics grammar school together in um parts unknown, Toronto, Toronto, usually usually someplace where wine is pouring. Um. So, the funny thing about the conversation about traveling. When you and I first met a hundred years ago, you were on the road. I want to say two weeks a month, maybe three weeks a month, something crazy like that. I'd say half the time, a hundred thousand miles a year.

Uh that's uh that you know that could be the under Really yeah, it was a look at that job between equities, fixed income, derivatives, commodities, middle markets, Uh, the the private client. There were so many constituents to serve. Uh, that was crazy. Plus, don't forget very my my wife and kids were back in Toronto, so I was I was freely available to market seven So and with that, look, it was a global firm travel You travel like the globe. Well, look it was um you know, uh, no guts, no glory.

So let me ask you a question similar to what I asked our friend Michelle Meyer, who's now a senior economist at Merrill Lynch and she's phenomenal, rising star, phenomenal, not not rising star. She's a star. So what is a day in the lie if of a chief economist at a place like Merrill Lynch with fifteen or twenty thousand advisors and a trillion dollars in assets under management?

What time did your day start? Back then? Well, my day probably um is as an outlier, because because I did the daily which back then was called Morning Market Memo, although internally it was called Rosie's Tidbits. Uh, my day started, um, I got up at four in the morning. Four in the morning, morning, four in the morning. Yeah, well, any time you getting up today, if it depends what I

was doing the night before. But now you're up. I think you're up about three because I get breakfast with Dave and it looks like it's a couple of hours of work. And I get that at you know, before noon. Well, I get up at h I get up at four thirty. But I've always been well, firstly, I'm not a very good sleeper. Uh am, I as I get maybe that's t M I uh and uh, well, as only you would know. And uh and and I've always been I've always been I've always been worried that way. As as

a as a morning person. Same here, use a long clock, you just wake up. You know. It's a you know, I have a real passion for this business. And look, you asked before about what's all the best change, But it's really the markets don't sleep, and so therefore I have trouble sleeping, so I get up early. And um, I've got a lot of stamina and on a lot of engines. So the reality is that, um, you know, it's not just about look your your work ethic, uh has to be there. I guess you have to have

a reasonable level of intelligence. You have to read a lot because it's important to be informed. Some people think that you're smart when all you really do is you read eight newspapers and you know what's going on around the world. Being informed, though, is important part um of what I do. And then it's a uh, I'm matter of um of serving all your constituents. Look at Glasgow Chef, my most important client, or our portfolio managers. I sit right out there with them. I don't have to travel

around the world to see portfolio managers. I sit next to ours, and I say the most important client because they're the ones that drive the performance of the firm. And then of course I see the clients of our firm, which are are wealthy families in North America at Merrill Lynch, I mean a million different constitutions all over the world. Oh yeah, it was just look, the most important time, the most important, the most important challenge for me. You know, Look,

you had to manage up. You have to manage down. I had a big team. I had a team in Toronto and a team in New York. Um, how do you manage up? But the well, how do you manage up? Is you have to make I I had multiple bosses at the well, I don't know do we do we have all night? Because well, the donuts are gone. So so let's let's let's about who you have who Look

they were they were they were. Look, you had to make the head of research happy and they had a research also had their constituents, which uh, you know, they had equity analysts reporting into them. You had had a fixed income head of equities, you know, So you had the head of research and then you had all the producers. So look, you had to balance a lot of things. You also had the CEO of Merrill Lynch back when they were a standalone entity. I recall the days when

you would get called into. Um, I'm trying to think of which Ceo O'Neill you would get called into, Dave, what's this nonsense about this or that? What were those days? Look, I'll tell you this much okay, Um, Look, I was not a threat to Stan O'Neill, uh you know, And it's all been written about. But Stan O'Neill and the time I was there at the time was that he was there treated me with the utmost of respect. And I'll tell you that I was probably in his office

once a month, and uh we got along famously. Well. Um, you know, so we're going into a realm that you know, where there's the narrative and there's the reality. Uh Stan and I got along very well, you know, after he left a short period with John Thane, and we got along well. But I look, I knew Stan O'Neill very well. And look when he was making money for the firm, and of course he was taking a lot of risk, but people would kiss the ring in his finger everybody

loves and so well that's what I mean. And then and then, uh, I've seen it all. But I'll tell you this, uh Stan um brilliant man. Uh and uh you can say in quotes, well why did he not listen to Rosie? And uh, look it's all behind us now. But the reality is that when you want to at Merrill Lynch, uh start to compete with the Goldman Sachs on R O e s and r oays and half your business as a thunderbring herd which is a stable uh you know o pe business. Um, you got to

dial up a lot of risk. But I'll tell you this much, and I'll say it for the record. My relationship with Stan O'Neill was phenomenal, uh. And he treated me with respect. Whether he agreed with me, and purely he disagreed with my view, we were in position for my view. That's a different matter because people could also say that I was wrong and I was way early on the call, but stand every step of the way

treated me without most respect. Coming up next week, we interviewed Stan O'Neill and find the real story about the relationship with Dave and stand on Masters in Business. Actually, I would love to get Stan O'Neill in here. That would be a fascinating conversation because he was really talk about the middle of the vortex when everything was hitting. That would be quite insane. No, Dave, I'm kidding, but that would be just unbelievable. To get him in here.

I tried to get in touch with him. Actually, don't you know who I would love to speak to one of your men tours in one of my favorite old Bob. I was gonna say Richard Dmaron. But since you brought up Bob Farrell, let's talk about one of our favorite analysts. One of the mentors that you had at Meryl, a gentleman named Bob Farrell who put out first time everyone writing you actually put it wrote it up, Bob Farrell's

ten Rules for the Market. I thought that was one of the most insightful pieces of here's how to be a better trader, manager, investor I've ever seen. What was it like working with Farrell? Well, you know, we had a just a short stint working together because he was in the limelight of his career when I started at Meryll Canada back in the late nineties. He used to write this report Bob did called Theme and Profile Investing, which was um like, truly am like, I would say, apparticly,

a bible, heartbreaking work of Stack. But but he he years ago at decades Go, had written about Bob Farrell's ten market rules to remember, which are the ten commandments. I've had to stay at a trouble uh. And that's what's important in the investing business, is that sometimes most of the time, Bury, it's what you don't own in the portfolio as much as what you do own in the portfolio. Bob Farrell, I would there were three mentors

that I had in my thirty year career. One of them was Warren Justin At, the chief economist at the bank in Nova Scotia. He's about to retire in February. He brought me on base freedom in n Don Cox, who was the chief strategist at at Harris Investment Management, which was part of the Bank of Montreal family firms out of Chicago. He runs his own consulting firm now and is keyed up to be a future guest on the show. And um and and and and I would say that there's he he might be, But the only

genius I truly do well. I say Don is a genius. What about Yamaron? Yamaron is um a genius divided by ten uh and um and and Bob. Bob Ferrell had a profound influence in my career. We actually twice a year, UH we co host an investor lunch here in New York. One's coming up in mid December. He's still a going concern um and UH and putting out research and then doing work and UH a sound of mind. The last time I spoke to him, as he's been at any time since I've known him. Uh. He is a true legend. UH.

The operative word is discipline. He is a disciplined UH strategist. And UH doesn't get him passioned. Um. He basically UH lets the markets and the charts and the patterns, UM do the dictating. He's a he's a rare breed. And UM, I've learned a great deal from him. I would love love love travel. I would love love love Dave. Cute girl goes by that's got your name on it. I can't believe you're gonna make a face with that. I

would love love love to get Bob farrellon here. He's one of these guys that doesn't do media, doesn't speak to the press, just cranks out with a relentless standing. This over half a century intelligent, common sense market wisdom, and there are so few people like that. Well, I think what makes them even more special is the fact that he does not make himself available to the to the press. So maybe that adds a little to the mystery. Uh, but um, it also makes his um, his material that

much more exclusive and therefore that much more important. He's a fascinating guy. And I know in December during lunch you'll you'll put in a good word for us. I'll bring good doggy back. So we've discussed your early mentors. We've discussed um, the three people who are who are most influence unchil, and we've talked a bit um about a day in the life of of a economist at Meryl, managing up, managing down. Um, how do you like the

transition to the by side? And for lay people who may not know the difference, the sales side is a tendency to be transactional, commission driven. You're selling something to a willing buyer, as opposed to the by side, where people give you assets to manage and you go out and buy on their behalf. So mutual funds, hedge funds, r A s are by side, broker dealers, transactional business are our sales sides. How did you find that transition? What was that like? Well, I've been in the financial

business now for twenty eight years. I've been a Gluscon chef for six. I would say that I've learned more in the past six years of Glusk and chef as as you said a bye side strategist and economist. I've learned more in the past six years in the previous twenty two combined, because I figured out how to produce and communicate a forecast that's meaningful for somebody who manages money for a living. And I want to let me

stop you right there. I want to reiterate what Dave said before about this because A it was so refreshing and be it was so important when you're and correct me if I if I sum this up incorrectly, you're doing beautifully so far. When you're an economist on the sales side, you make a forecast. Your forecast is out there. It's right or wrong, and if you get it wrong, so what. If you get it right, so what? It doesn't matter when you're advising people on the buy side.

It's not a black and white win or lose forecast. It's a probability matrix with all sorts of shades of gray. Here's my highest probability forecast, along with my this degree of conviction. If I'm wrong, here's how I'm likely to be wrong. And here's here's the next most likely scenario. Here's plans C. Here's Plan D that's very different than g d. P is gonna be three point two and the Dow is going to be at eighteen two. You're either dead right or dead wrong, and it's meaningless to

to an investor. Is that a fair summation? Okay? Um, yeah, you you you're like the guy co guy over my shoulders. So um you said that. Well, let me just add this that in my previous you know, incarnation, I went around the world talking to other portfolio managers at other firms, and uh and invariably, because you're a human being, you're going to be wrong. And I've had my share of bad calls. When you work at a small firm and we manage eight and a half billion dollars, we're not

Mery Lynch, Mary Lynch. You see you've got a call wrong. Um, it really just hurt your pride when you get a call wrong at a small firm where your clients are families. Uh, and those are relationships that become personal. I developed some close relationships when I was at Meryl with other portfolio managers.

Of course, they're managing money for other people, so you're like two or three or four, you're just you're really separated when you're actually firstly, UH, Commandment Number one O Glaskin chef is that we own the same funds that our clients owned, so we eat what we kill. We're invested alongside our clients. So when I make a bad call, I feel it on my own portfolio, but not just that.

It actually hurts more when you see the impact I could have on your client's portfolio, because invariably it becomes a personal relationship. Um, most of our clients are UM high net worth. When I was at Meryl or before that at the Bank of Montreal, I would spend most of my time with institutional portfolio managers, and if I ever saw high net worth clients or what they call private clients retail clients, it would be a thousand of them herded into a ballroom of a hotel and I

would go up and do my dog and pony show. Today, you actually sit right across from them, face to face, and these relationships have become personal. So when you're asking about what the primary differences at a personal level, it's exactly that. It's that when I get a call wrong, I feel a little lot more. Uh. Look, when you get these big institutions losing a client, it's rounding herror.

When we actually lose a client, you'd be amazed at m at the uh, at the analysis that goes on afterwards, assessing where is it that we went wrong and how will we make the effort to not make that mistake again. So the bottom line is that today when I make an error, I take it more personally and I feel it more than I did when I was a sell

side economist. That's really fascinating. You know. We had an interesting conversation in the office today in my office today about something very similar to what you're talking about, which is the ministers without portfolio The people who are not managing assets are directly working with portfolio managers, and they're free to say as whatever outrageous thing they want to say. I won't mention him by name on the air, but there he's in my slide deck and someone keeps forecasting

a seven like crash. He's forecasted every year for the past five years. Last year he felt felt the need to step it up a notch and he said, even worse than a seven like crash. And you could say that, you could say that when you're not managing money, you could be out of the market for five years when you're not managing money, But when you're actually dealing with families and pms or managing the money yourself, you can't be in cash for five years. You can't be stone

throwers like that. You have to be a participant. And if I'm hearing what you're saying correctly, being that close to the ultimate person whose money is at risk changes the way you view the world, changes the way you operate. Well, you know, just uh, you know, maybe round out the discussion. What's different that Gluskin chef for me regarding our clients is that, um, it's more personal than it used to be. And what does that do to impact your thought process,

impact how you look at, uh, the economy in the market. Well, look, I always I always like to believe that that I was on my game, but at this level, at a personal level, when the clients actually are either family members or friends, or they become friends who developed these personal relationships. Um, it means that I have to sharpen my focus that much more, all right, So let's sharpen your focus a little bit and talk about some specific things. We didn't

get to in the broadcast portion. So we didn't get to talk about the housing market, which is a key part of what's going on. What do you see in the housing market in the US and North America and globally? Okay, US, North America, globally, well, you know, I guess that, um talk. I'm not gonna talk about the Mexican housing market because frankly,

it has no bearing on how we invest. A Gluskin chef, the US housing market looks very interesting to me, and notw withstanding the fact that mortgage rates are backing up courtesy of the Bontom market adjusting to the FED beginning it's tightening phase, it's still very historically low, right, very

historically cheap. Well, you know that's uh. I love the narrative, but you know, markets and the economy operate at the margins, So it's the change that matters, not the level, and not compared to some historical average But what's interesting is that employment in the key UH first time home buying cohort is running about thirty faster than is the rest

of population. So these boomerangs that have been sitting in the basement at mon pause watching repeats of breaking bad are now going out and um and getting into the housing market. The interesting situation we have right now is that the trend in household formation that also information is running towards one and a half million units. Housing starts are running at one point two UM. You have housing

inventories roughly five months supply, very well balanced market. So I don't think that the home builders which have of course we've got those great numbers from Poulty and d R. Horden in the past forty eight hours. But the homebuilders are corrected fairly hard in the past several weeks. My senses that are they're not priced for the prospect the next two years of seeing residential construction rise as much

as story in cana is a little different. Um. You know, housing is a share of us GDP is at a low level from historical proportion in Canada. You cannot possibly be more over housed than you are today. The story in the United States is one of domestic demand, consumer spending, capital spending, commercial construction, which by the way, is in an uptrend, and housing. In Canada, it's going to be less about housing and it's going to be more about

the strength in US domestic demand. Don't forget Canada ships its GDP at the US and a competitively supercharged currency helping out the beleaguered manufacturing sector and exports. That would be the story. In Canada, You're still getting a huge influx of overseas buyers of real estate. I'm using Vancouver as an example. But is that is that Canadian my friend, my friend, my friend, Canadian dollar is at a discount of the US Canada. Canada has this giant for sale

sign right in front of it. But Canadian, you know the from our perspective, Canada never had the same housing crash that the US had. It it kept going and going. Canadian home prices are fairly yet you says yeah, around, Canadian home prices are are fairly aggressively priced, especially in the in the really attractive cities. You asked about US investors, so you're talking about what they look like in US dollars,

not Canadian dollars. No, No, What I'm asking is our overseas buyers snapping up, still snapping up all of these Most of the most of the buying in Vancouver is coming out of China. Yes, and yes, you are getting US buying into Canada. Canada. Is c h E A P for a US based investor. Very interesting, Yameron, you were jumping out of your chair. You disagree with Dave's Taklan housing. I've disagreed with Dave, and I've been wrong on that part for a good number of of those arguments,

um for for well over a decade. But you know, I see the house is a little different. You know all those right now? Multi unit around a panel again, Dave, and multi units are are are soaring because people cannot afford to buy a home. Rentals way up. So the Boomerang kids leaving their parents basement. Are they first time

homebuyers or are they renters? They're renting and rental rental units of five or more construction of new construction of five or more unity family are the highest since nineteen eighties six compared to something that if you break, if you pull out of that housing start number you pull out the single family units very different I won't even ask him about copper oil coast. Will all want to commit suicide after it? Well, like I'll say this much

the the you know, we talked. A world doesn't revolve around. We talked around, We talked. We talked about Bob Ferrell Rule number one was everything reverts to the mean at least ratios, and usually that means that you break through the mean in both directions. When we got up to almost a home ownership rate back at the peaks, that was one extreme. Now we've gotten to the other extreme. We're pretty well at historic lows in the home ownership rate. And I'm not Yes, i am really not in the business.

I've never made it a business to take the most recent experience and superimposed it into the future. My sense is that quite right. UM, rental construction has been very strong. It's been the rental demand that's been the big story. But UM, we have very tight apartment vacancy rates. Rents. One of the reasons why core service inflation is as strong as it's been is because of rents. So the rent home price ratio is altered in a certain respect.

We are starting to get income growth, and I'm making this point that the key first time home buyer category, twenty five to thirty four year olds. Their growth of employment in the past year is running thirty, not thirteen, faster than it is for the rest of the population. Now, there are lags involved, but with a lag they will for themselves into homeowner household units and I think that is going to be the next leg of the housing market. Now.

I want to give you props about that, because not this summer, the previous summer, you, in a presentation at Camp Coo Talk up in Maine, talked about the building demand for for employees and the future wage push which was a couple of quarters away and year of a year we see up two point five percent in US wages. You talked about that before anybody else was speaking about it, and you got it right. You said, it's inevitable that

we're going to start to see wage pressures. You can have this sort of GDP activity and this title labor market without seeing that sort of shift that plays into that first time home buyers. What does that going forward for the economy. Well, look, it's a uh, it's a bit of a double let sword because for the equity market will have to get used to living with with with probably lower profit margins, doesn't mean that the market's going down, but that will be like straint um because

there's only two sources of income in the economy. The government doesn't create income taxes it, but there's corporate income and then there's labor income. Labor income is picking up across almost every measure. This is actually a debate. If you remember a camp Co talk with me and Philippa Donne, who absolutely love and I think she is the resident

labor that's right, you know. And um, what I'll say is what I was focusing on back then was this one are Keen statistic called a quit rate that we know that only green Span I've looked at repeatedly, like twenty three years ago, which is the percentage of the unemployed that are quitting their jobs voluntarily in search of

greener pastures elsewhere. It's basically what I call the take this job in shove it index, and it's a reflection to some extent of worker uh insecurity or alternatively worker confidence. You see, everybody focuses, everybody focuses on the on the unemployment rate, the classic measures of tightness in the labor market. Everybody's always saying, well, the unemployment rate has gone from

ten percent to five percent. No matter what measure you want to use, they've all come down rather significantly, even the broader measures. And yet up until recently, there hasn't been a big wage response because what these classic measures of resource um uh, utilization capacity and labor market they don't show is how comfortable you are going to your

boss asking for a race. It doesn't measure insecurity. What's happening is at this quit rate, and it went up again in the last month, which correct me if I'm wrong. I think it's almost a ten percent, the quit rates rising. And when I was having that debate a year ago, I was saying, the quit raids rising, that actually is

the best leading indicator for wages. But you see the question, well, the question, like everything else, is always the lags, and how long does it take for the information that the working class has um better prospects uh than they actually think. You see that the labor market is not like commodities, and it's not like stocks or bonds. You're talking about people, and so at what point do people start to realize that, hey,

my market for labor is actually tighter. I actually have the confidence now to go to my boss and ask for a raise. So the quit rate is actually a great When you plot the quit rate against wage growth, you might aso plot income and consumption, but the legs were longer this time around, so we are actually now

starting to see more discernible science. Look bottom line, look at the n f I B index that just came out, the Small Business Index, and you've got that the net share of companies saying they're going to raise compensation in the next six months at its highest level for the cycle. So one of the metrics that I used to track UM was the Jolts Index. It's the job opening, labor turnover whatever of A and UM. How how parallel is

that to UM? You take this job in shoving in depth in terms of what we're seeing, uh, employee confidence, availability of better jobs, wage wage pressures. Well, how do you contentionalize that looks? So for example, you said before that we quotes created a net two and seventy one jobs,

uh say, in the month of October. What's missing in that comment is that we destroyed millions of jobs and we created millions of jobs, and then that number was to seventy one so what you're missing is the churning that goes below the surface of that headline number. So the Jolts number is valuable because it tells you what that churning. Well, it looks like how many people are actually quitting their jobs, how many people are getting fired from their jobs, how many people are getting hired. So

it gives you, UM, you know that the churning. So we know, for example, that through the Jolts numbers that most of the improvement in labor market this cycle did not come from new hires as much as it came from a lack of firing. Uh. Companies have begun to hoard labor. The firing rate is extremely low, by the way,

corroborted by what we're seeing in the job is claimed numbers. UH. What I always like to look at UM was always the UH the the the the number of of people that UM that are unemployed, UH normalized by the number of new hires. And I was telling me, actually that taking out all the other noise and adjusting for the labor force, that the labor market was tightening significantly. The

question all along was which nobody, I mean people? And actually, if you take a look at the title of my of my employment report last week was, uh, you know, the Phillips curve comes back from the grave, maybe appropos because of Halloween that people were throwing out the Phillips curve as a as a as something you can hang your hat on. All that separated the tightening of labor, more conditions to the wage rate or the lags, and and basically, uh, the level of worker in security that

existed through most of the cycle. We seem to be shedding, Uh, those fears. The proletariat seems to be a little more emboldened right now, and so wages are now with a longer legs, starting to respond. So you alluded to, but we didn't talk about the change in the labor force participation rate. Is that a secular factor that we've been losing people for demographic and global trade reasons or is there something more significant thing now? There's Look, there's two things.

There's the first of the boomers turn sixty two thousand eleven, and that's going to be reality for decades, and so the the demographic element to it. Second, early we've created, through municipal, state, federal benefits, um a whole myriad of incentives for people to leave the labor force um where you get paid very well not to work? How well do you get paid not to work? I mean, it is some money there, but it's not like earning a real living. Can you really live comfortably on on disability?

And if you add up, if you add up everything, I think that the Cato Institute did a report. All right, so that's strike one, but keep going. But but there's be another, uh scholarly research showing that the incentive systems, whether it's not just disability, but Medicare benefits and childcare benefits and look, you go back to work these days, Barry, and you give up a lot of benefits and some of the numbers I've seen or as high as forty dollars, like you've really got a bit up the wages to

get people to come back in the labor market. And that's why it doesn't happen. Now, maybe you'll start to get maybe if the wage rate starts to come back, which it looks like it's happening, the participation rates starts to be a comeback, and the unemployermate stops going down. I think that's a reasonable premise um. But there's no question and whether you agree with the kido in student

or not. They did show that. I think in thirty eight states you make more by tapping all the benefits at all levels of government then you do as a starting salary as an admit assistant thirty eight states. So look, you can say the kid and stut they have a certain extra grind um. But you know, unless you did

I certainly implied it. You implied it. But unless you've done your own research, you know it's But but there's been other um, there's been other analysis done that's come to similar conclusions that you could really cry if you're on full disability, you can really crank up. Don't forget, don't forget. In two thousands and thirteen we had a fairly certificly increase in tax rates on income. The reality

is a space economics. The more you at tax, the less supply you'll get your tax work, you'll get less work. So there's a marginal jersey is you know you're telling me someone's not going to take a starting job because they're they're Capital gains tax went up to from fifteen. That's a calf gains tax. The marginal increase just like the marginal decrease. Is someone going to say, well, you know, I used to be taxed at thirty six, but now it's thirty eight. I'm not going to start a new job.

I've always thought that behavioral aspect of it was wildly overstated. So, Barry, you asked the question and you answered it yourself. So what what's your just Well, I'm trying to give you an answer, but you're answering it yourself. The answer is that it's mostly structural, largely demographic, largely related to uh, you know, look at if you don't like my answer, get Larry lindsay On here. We gave a presentation at

this I saw his presentation two years ago. Get Peter book for On here and get Larry lindsay So again him to show you the press. Peter, well, yeah, I mean you were making faces, So well, hold on. You can't conduct an interview by cutting the person you're asking. Okay, I think that's where you're wrong. Said okay, well you as well. At first you asked a question, then you answered to yourself. So it's a good thing. It's a good thing we're friends. The answer is that it's mostly structural.

They're mostly mostly changes and if you actually take a look at at the and actually the beauty of the household survey is it does show you the discouraged workers, and they've been going down. So it's not the number of discouraged workers has been going down. Didn't I just say that. I'm repeating it for people who didn't understand. So let's let's talk about you six, because we haven't gotten there. Last report under ten percent for the first

time in who knows how long, how long? Oh? Nine, that's a huge drop because people have been screaming about, well, you know, there's still a lot of people who want to work, but they're discouraged under ten percent nine points something. Look look look at the at the at the narrower measures, like the U one and you two is down to two and a berry. We can slice this and dice this. I'm billion ways. The labor market is tight and it's tightening.

And the only thing that's separated the tightening to wage growth was the level of worker insecurity, which is measured by the quit right, which is going up. So workers are starting to feel emboldened. If you go to the Conference Board Consumer Confidence Survey and you see the percentage of people expecting their income to go up in the

next year. That ratio is going up. If you go to the National Federation have been a business to their survey showing companies willingness to start to pay people more money, that ratio is going up. So the stars are aligning that in the coming year, wage growth is going to be accelerating. The question really is going to be by how much? So what does that mean for future inflation? Is the Fed behind the curve? Are they endangered twelve months from now of not recognizing this? Tell me what

this wage pressure is gonna mean one year from now. Well, I never believed that that wages lead inflation. Um. My sense is that there's going to be offsetting forces from the lagged impact of the strong dollar. The weakness and commodity prices is going to ensure that of the CPI that is goods oriented will remain very low or maybe in mild deflation. I think we will continue to see service sector inflation. My sense is that you know, inflation is zero right now. A year from now, I think

it'll be one and a half to two percent. Is that behind that's increase? My friend? We don't have to two percent? Is like nirvana. I mean, don't forget there's the FED wants it to two, and there's some on the left side of the equation that wanted towards three. Well, I'm not looking at the level. I'm looking at the marginal change. Well, don't forget that. A lot of the reason why we're zero is because of commodity prices. Unless you think oil's gonna go down another fifty from here,

we're not gonna get that out of thrust. I think oil is gonna be stuck in a arrange between forty and six. So then what happens that is that in and the dollar impact will dissipate over time. Goods inflation will no longer be minus for it will be zero. Core server sector inflation probably gets up towards three percent. Put in the Martini shaker and it comes out to roughly one and a half two percent underlying inflation. And uh yeah, I guess if you're long duration bonds, you're

not gonna like to hear that story. But it actually isn't a bad overall story for the economy. You're telling a goldilocks scenario of full employment, rising wages, low inflation. Well, I don't like Goldilocks because the story also had three bears. I'm one of them. That's right, he's still one of the bears. Are still in here, all right? We touched

on housing, we touched on inflation. Um During the panel discussion in UH in Miami, you described what you thought was going on at the Federal Reserve in great detail, but with a very abbreviated answer because there were four people on the panel. I want to delve back into that. Let's talk a little bit about Janet yelling and what's going on at the FED and what's the thought process here. I know we briefly touched on it, but you gave an answer as to what you see over the next

twelve months? Is it? Is it every third meeting? Tell me what you see happening, uh, over the next twelve months. As soon we get a quarter point increase December? What does look like from the data dependent FEDS perspective? My sense is that, uh, they'll probably skip every other meeting. Like in other words, could I see them going a

hundred basis points next year? Once a quarter? In other words, I could see that, and and then I you know, and and then little we'll see what happens going forward. You what you're asking about being behind the curve, It's always answer that question through the rear view mirror, and I would say that, um, you know they the tips, break even levels will give you some indication. The steepness of the yield curve will give you some indication. Commandity

prices will give you some indication. The dollar will give you some indication. A whole range of variables will tell you if the FED is behind the curve. Classically, if you go through a bare steepen or of the Yelk curve, that would be a classic sign of the Feds behind the curve and we're not there. What do you think

is the most hated sector of the market these days? Oh, the most hated sector of the market, Well, I would say that the part of the world that is most out of favor right now is my beloved country, Canada. I've never seen the Canadian banks with such a huge short position by the US hedge funds. I've never seen. I can't pick up a newspaper and not hear about how energy will drag Canada into a pernicious and perennial recession,

how housing is dramatically overvalued and destined for a collapse. Um, I would say that the last time I remember the view on Canada and I think it's way overdone by the way. Um, the last time I had the view in Canada was this negative. I think you have to go back to the early to mid nineties when Canada was truly a fiscal basket case. We almost had a failed auction in and of course we had the Quebec refredum, so we had the political uncertainty. Um. But Canada right

now standalone. Um, if you're a value investor looking for a turnaround situation, Canada looks very good to me right now. You like Canada here and you think that's a it's a investment. I say that it is a You know, if I love the baritone Homediveland that is Richie Amarone on vocals. I think Canada, I think Canada is a is going to be by definition an upside surprise. Yes.

So that that assumes that no major disruption. Oil firms continues to uh, you know what the key Once again, as I said, before, you know, the Saudis told the shale guys in the US, you are the swing producer. When I see exploration and drilling activity down six in the US your vie and again, well, and there's lags. People may be surprised that a year from now we're more in a fifty sixty dollar range can and dollar will responding kind Uh, there'll be a lagged impact on

all these concerns on energy credits, regarding the Canadian banks. Um, and don't forget that, you know, this new Liberal government. Uh, that's question, that's right justin Trudeau, but not about him, but what his economics team and the choice of Bill Murnau as finance minister, which well, I know it's not surprising it very Americans. It's a surprise. Well, you know, I don't even know if Americans even knew who he was. Most most Americans, most Americans don't even know what the

auto was. The capital so it's Toronto. So you're you because when we first were talking about Trudeau getting elected, I know you were not enthralled with that. But this seems fairly constructive that uh you like the finance Well, look, I'm not going to disclose publicly how I voted it, but I will say that out of the three parties, out of the three parties, the Liberals did have the most pro growth fiscal plan. Really, that's kind of surprising. Well,

I thought you read my daily. I do read your daily. It's a blur after after ten years of it. It's kind of a So it takes some of the pressure off the bank. Not only do I read your daily, but let me remind you that I republished your entire analysis of the Canadian election on the Big Picture because I thought it was so strong. Do you recall that conversation. That's why we're moving this conversation into let's discuss the minister appointment. I am forever indebted. I think that he's

appointed a strong economics team. It's one of these situations where I think that you know, look, the Liberals got elected in on almost a socialist manifesto which never saw the light of day. You couldn't have sold the story that Jean Cratchin and Paul Martin would have been the fiscal dragon slayers. That would have they would have been the duo that made Canada the poster child for fiscal integrity.

So what I will say is that Canada, the federal government has a thirty one debt to GDP ratio the media and the media O. E. C. D is eight percent. They're really running on a platform of roughly five billion dollar deficits annually for the next four years. I actually put on my report they should be running twenty five billion dollar deficits. And they could do that and not even spin the dial on the debt. This is like I would saying before. This is what I was saying before.

We've had a detonation in the energy capital stock. It's thrown Alberta into a terrible recession. And this is where public sector infrastructure spending is really in a pack of powerful punch. They should actually do more. It's what I told Barack Obama he should have done. Of course, you know back in two thousand nine. Um let me let

me get that for you. That that actually, um so your deep Akinsian when it comes to it, Well, what does that mean about being a Kinsian that during a recession the government steps into make up the shortfall and grow and call it Kansian or you can call it this common sense. I don't disagree with you either. Look, I am not Look I'll tell you right now, I am not a tea party advocate. I am not a libertarian. I am a right I'm a conservative. I'm a John

Cask type of conservative. Uh, you could say liberal and social issues and conservative and economic issues. But it's foolhardy and actually dangerous policy to think that you're going to run the same fiscal stature throughout the business cycle, irrespective of the negative shocks that come our way. How can you not respond your job? Okay, this is not that responded well, it did respond, It didn't respond, It didn't

respond enough. Look, this is Monday morning quarterbacking, and I would say to the federal government Ottawa, don't make the same mistake. We have had a huge negative shock to the economy from the energy sector, and Canada is look when it's not maybe it's uh, not quite right of center, it's maybe just a debt center. Under the Harper government, it was more right a center that has been historically um.

But there is a public private partnership in Canada and Canada, the Canadian government has tremendous capacity to borrow money at historically low interest rates, and not for programs spending or welfare, but for productivity enhancing UH, infrastructure spending, which will have a long term payback if it's successful in terms of boosting the long term growth potential of the country. You will get on the right side of the Laugher curve and actually end up garnering more revenues down the road.

All right, we've been speaking with Dave Rosenberg. He is the chief economist and market strategist at Gluskin Chef in Toronto, Canada. If you enjoy these conversations to be showing, look Up an Inch or Down an Inch on iTunes and you'll see all of our previous chats with various notable folks. Be sure and check out my daily column on Bloomberg View dot com. Check out my blog on at Ridholts dot com. Follow me on Twitter at Ridholts. Dave, you're

gonna start tweeting. I know you just occasionally have someone in your office. It looks like tweets something out for you. But why don't we get you on Twitter? Uh? Well, once again, you just have to, uh get on the Gluskins Chef website and uh it's all there for the viewing there it is. I want to thank my engineer, Reggie, my producer, Charlie Vohmer, my head of research, Michael bat Nick. I'm Barry Ridhults. You've been listening to masters in Business on Bloomberg Rate. Yeah.