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8/14/2019 Zero Hedge_ Parting Thoughts From Rosenberg - Ver 1.0
1/4
http://zerohedge.blogspot.com/2009/05/parting-thoughts-from-rosenberg-ver-10.html
Monday, May 4, 2009Parting Thoughts From Rosenberg - Ver 1.0Posted by Tyler Durden at 6:56 PM
Some of David Rosenberg's last thoughts as he is putting the bubblewrap in his boxes. It is not surprising that his parting gift to his
bank is a moderate shift to a slightly bullish outlook, likely
designed to make life for his "Economic Strategist" replacement a
little easier. However, reading between the lines allows for the real
Rosie to shine through. And is, as always, a breath of fresh air in an
environment where the MSM has become utterly useless.
We are in year 9 of an 18-year secular bear market
The S&P 500 peaked in real terms back in August 2000. Adjusted for the
CPI, it is down 58% since that time. So, we would say that we are in
year 9 of what is likely to be an 18-year secular bear market, becauseif you look at long waves in the past, they tend to last about 18
years with near perfection.
What happened during the last secular bear market
As an example, go back to the last secular bear market, and you will
see that the S&P 500 peaked, again in real terms, in January 1966 and
bottomed in July 1982, 18 years later. But there were plenty of mini-
cycles in between. In fact, there were four recessions and three
expansions during that entire 18-year period and unless you were a
completely passive investor, you definitely wanted to be in the gameduring the three expansions because the S&P 500 rallied an average of
50% during those phases. Again, it is important to note that these
were rallies you
could rent, not own, but they did last an average of 20 months. So,
its not exactly as if they have an extremely short shelf life.
Playing a game of devils advocate
With all this in mind, we went through an exercise over the weekend
and played a game of devils advocate. If Rosie had to face off
against Rosie, what would we say if we were forced to take the other
side of the debate, keeping in mind that in fact, we may be overlybearish at the present time. And believe it or not, we did manage to
come up with some pretty compelling material.
Past the half-way point in the recession
First, our in-house model of predicting where we are in the cycle, for
the first time, gave us a signal late last week that we are past the
half-way point in the recession. Considering that the stock market
bottoms 60% of the way through, this is an encouraging signpost.
Weve worked through the effects of the Lehman collapse
Second, our propriety proxy for private sector interest rates has come
down from 8.11% at the nearby peak to 7.18% now despite the backup in
Treasury yields, to stand at their lowest since last September. The
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TED spread is back to where it was last September, as are most credit
spreads. The VIX has finally broken to 35, back to where it was last
September. 10-year TIPS breakeven levels, which were predicting
deflation at the end of last year, are now forecasting 1.5% average
inflation rates for the next decade. Again, we last saw this in
September of last year. This is interesting because even though the
economy and the markets were clearly in the doldrums back in
September, the fact that so many market barometers are back to where
they were then means that at the very least, we have worked throughthe ill-effects of the post-Lehman collapse.
Stock market has lagged relative to other asset classes
All an equity bull really has to do is point to the fact that the S&P
500 last September was trading around 1200. The only difference is
back then we were looking at it from the perspective of being 20% off
the highs whereas a move back to September levels, which, after all,
would only mimic what many other market indicators have accomplished,
would be viewed as an 80% surge off the lows not to mention another
35% potential upside from where we are today. Even the CRB rawindustrials are now back to where they last October when the S&P 500
was hovering around the 950 level. So again, if we were equity bulls,
and maybe we should be, we would simply point out that of all the
asset classes that have bounced back to life, the stock market has
actually been a laggard.
Three indictors that suggest cyclical bear market is over
Third, we found three indicators that have stood the test of time and
strongly suggest that the cyclical bear market in equities and the
economy have drawn to a close: the ISM, the Conference Boards
coincident-to-lagging indicator and the University of Michiganconsumer sentiment survey. The ISM bottomed in December 2008 at 32.9
and is now 40.1. Going back to 1950, we found that recessions end
within three months of the ISM hitting bottom, and never by more than
six months. The coincident-to-lagging ratio just turned in successive
lows of 89.6. The data go back to 1960 and we found that recessions
ended within two months of this indicator, 100% of the time. And, the
U of M consumer sentiment index bottomed at 55.3 last November. As we
saw on Friday it had rebounded to 65.1 as of the end of April. The
data show recessions end typically within six months of the bottom in
this key leading indicator, and not once was the lag longer than eight
months.
We could be on the precipice of a cyclical upturn
This is not to say that our secular views have changed. However, we
could well be on the precipice of a cyclical upturn, and whether it is
sustainable or not may have to be a story for another day. We dont
see as many green shoots as others do, but then again, we endured more
than a year of jobless recoveries following the market lows of 1990
and 2002.
The most glaring example
The most glaring example of all is the fact that the S&P 500 bottomed
in the summer of 1932 and yet by the end of the 1930s, seven years
after New Deal stimulus, the unemployment rate was still 15%,
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consumer prices were deflating at a 2% annual rate, and lets face it,
the Great Depression did not actually end until 1941. But for
investors, the worst was over in the summer of 1932 in the immediate
aftermath of the acute government intervention at the time. While
there were recurring setbacks along the way, including the severe bear
market of 1937-48, the fundamental lows had already been turned in
long before.
Investors have been able to price out financial tail risks
Fast forward to March 2009, and the same mantra was heard
nationalization, depression and deflation. As was the case with
FDRs early days as President, what the last half of Obamas first
100 days managed to accomplish was to eliminate these words from the
investment lexicon. The degree of intervention from the Treasury and
the Fed has been so intense that investors have been able to price out
financial tail risks that had dominated the market landscape through
much of the first quarter.
The market is gravitating to a new mean
So, the way to look at the situation is that by removing the tail
risks of an outright systemic financial collapse, the market has
gravitated to a new mean (in the sense that at any given point in
time, market prices reflect some expected distribution of possible
outcomes a very bad potential outcome has been taken out of the
probability distribution, at least according to Mr. Market). This is
why if the bulls have a solid argument, it is the prospect that the
S&P 500 can indeed approach those pre-Lehman levels, which back in
September, seemed rather bearish, but is only bullish today
benchmarked against where we are.
Still not sold on the bull case for equities
Despite all these powerful arguments, we are still not totally sold on
the bull case for equities. Valuation is not compelling, in our view.
Sentiment has completely swung towards a bullish consensus (which is a
contrary negative). Home prices and employment are still in freefall,
the former undermining the balance sheet and the latter exerting a
drag on the income statement and suggestions that a mild improvement
in the negative growth rate is something to be excited about seems off
base.
Difficult to ascertain who the marginal buyer will be
It seems hard to believe that after being burned by two bubbles seven
years apart that the baby boomer is going to line up at the trough one
more time. So, its difficult to ascertain who the marginal buyer is
going to be. Disposal of durable goods assets to pay off a record
household debt burden seems like a multi-year deflation story as far
as we are concerned. Since the boomer household is income constrained
and underweight fixed-income securities on its balance sheet, we
believe that demand for high-quality bonds is going to strengthen in
coming years. Government policy will remain highly pro-cyclical but
there is no match for the contractionary effects from a shrinking UShousehold balance sheet.
Deflation will win out over inflation
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We are concerned that deflation will win out over inflation this time
around. While the data cited above are indeed impressive in terms of
their track record, since this is not a manufacturing inventory
recession but rather a downturn deeply rooted in asset deflation and
credit contraction, we may find out that the economic releases that
were tried, tested and true in the other post-war cycles may not be
appropriate today given the overpowering secular trends of consumer
deleveraging and frugality.
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