Animal Spirits Podcast - Talk Your Book: The Economy is not the Stock Market with David Rosenberg

Episode Date: December 29, 2024

On this episode of Animal Spirits: Talk Your Book, Michael Batnick and Ben Carlson are joined by David Rosenberg, Founder and President of Rosenberg Research, to discuss David's macro track record, thoughts on where the economy is today, what Powell has gotten wrong, why the momentum trade has been working, David’s economic views for 2025, policy uncertainty moving forward, and more. Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Important Disclosures from VanEck: https://www.vaneck.com/us/en/talk-your-book-vaneck-disclosures Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. We're here today with David Rosenberg, the founder and president of Rosenberg Research and Associates.

David, thank you for joining us. Well, thank you for graciously giving me the opportunity. So, all right, we are here today to hear your views on the market. You, as I mentioned to you before we got started, you are one of the reasons why I got into the industry. I started reading breakfast with Dave when you were at a close. Luskin and Chef back in 2008, and I didn't know anything, but I was, I was, you got me hooked, you got me interested in the markets, and so to be sitting here with you today is a real honor.

So enough throat clearing, you're here to set the record straight. So I will give the mic to you and take it away. Okay. Well, you know, setting the record straight is probably, uh, the appropriate title. Uh, and, um, I am hoping that. that after we get through this initial conversation that, you know, we'll talk about my macro market views, but I think the viewers should know that, you know, we're having this call. We can call it a rebuttal from podcast that the two of you did very recently, which came

into my hands. And what was interesting, Michael was, you know, your part about. talking about how I was an influence way back in the day when I spoke at Barry Ritholtz's conference and Barry and I go back about 30 years and we're friends and he's been on my webcast and I've been on his master's business show on Bloomberg and we go back a long way and we have a great relationship and so what was interesting and we talked about this off camera was you know, not that I'm aching for accolades, but you were being very gracious in how I was a source of influence for you positively to enter the industry.

And then came the however. And then the however was like vertical down for Dave Rosenberg, who somehow has had a, what I think is a stellar 40-year career, but obviously I must not know what I'm talking about. So my comment was really just aimed at this. You know, the two of you did an A1 job in doing a hatchet job on me and my bad calls, which I own up to. I don't hide behind a rock, and I never have. But, you know, I'm a human being just like you guys,

and I'm sure that you guys have made your share of bad calls in your professional life. But I've made bad calls and I made good calls. And my response is that you're not alone. You're part of a consensus, a herd mentality, where somehow you're bearish on the U.S. stock market for a variety of rational reasons. But the market continues to fly in your face that you're just bearish in general. You're just a big, bad bear, you hate everything, you've got a horrible personality, and you're just wrong. I think one of you said that I've been stubbornly wrong forever. And I don't know if you guys even read my material.

You know, I've been doing it daily. It's called Breakfast of Dave, and I've been doing it under different monikers for, good Lord, like 25 years. So I don't know if you read my stuff beyond what you might get on social media or in the newspapers. But I wasn't bearish on everything. I have been bearish on the U.S. stock market in the past two years. We all know that wasn't one of my more stellar calls. But I never told anybody, avoid the U.S. stock market, and just buy baked beans, barbed wire, and sought off shotguns. So I said, instead of the U.S. market, let's go to area.

of the world that actually have a positive equity risk premium, where you get paid to take on the risk instead of paying to take on the risk. And I wrote about that incessantly. So we've been long Japan. It's been a great trade. We've been long India. You know, in the spring, when I noticed that the forward P.E. multiple on the hang saying had reached eight, which is exactly where the estimated

of 100 was in the summer of 1982, which then touched off a nearly two-decade uninterrupted bull market, we turned bullish on the hang saying. And on top of that, we've been secular bulls on gold. And the past few years, that's been a stellar call. So I can understand, you know, from your guy's perspective you're trying to excite and your viewers and get them enthusiastic and it's fun to poke holes at somebody's

forecast but it was really incomplete in the sense that although you talked a lot about me being wrong and stubbornly wrong on one market which is the U.S. stock market not once did you mention any of the other things that I had been

recommending that actually worked out. So, you know, look, I've been doing this for 40 years, and people are entitled to their opinions. I get slammed all the time, and I'm used to it. And I always tell the young folks in this business of forecasting, which is a Mug's game, that if you don't have a thick skin, you know, find another profession. But, you know, I expect that more out of like social media, you know, like, you know, Twitter. You know, the hate mail on Twitter is usually over the top, no matter what I say.

I could mention, you know, what the Seattle Seahawks did on Sunday afternoon, and I'll still get hate mail. So there's just haters out there. But, you know, for you two guys, and, you know, you work for Barry, and I'm thinking, well, this is truly got to be about thought leadership. And it was really just, let's take somebody and treat them as if he's a pinata, you know. And frankly, I'll own up to my bad calls. But I do think that when you're going to do that, you should be fair and balanced. Fair enough. Which I don't think you were in the sense that it's as if a viewer would think, well,

Rosenberg got like he's just bearish on everything. and he's just a perma bear, but you didn't mention anything else, which, of course, you know, you're like everybody else where you grade somebody just on their view of the S of EF00, as if not, there's no other asset class in the world that you can deploy capital into.

So, you know, look, I regarded that as an offensive, but just because I thought that the analysis that you guys provided to your viewers was incomplete. But we're really rankled me. And I know that you got this idea from this, I believe was a J.P. Morgan asset management report that you traipsed out from last year. I'm trying to remember. That's correct. Right. And I won't name the author, except he does say that he loves to take shots at people that are bearish. And especially when they're bearish and wrong, then it's open season. And then, of course, when you're at a. When you're on the by side long-only equity, that's what you've got to do. Now, just remember, I worked at Glusman Shep for 12 years, that they were long-only equity,

and I thrive there. How do you like that? What you refer to as a big bad bear, I worked at a long-only equity shop. I was there longer than it wasn't Merrill, and rather successfully. And I don't know if you read my stuff back then. I actually turned bullish. For at least half the time that I was there, I came to the party late after the 09 lows,

but I don't think you guys could have been reading my stuff because I turned bullish. And to tell you the truth, a lot of people thought that I wasn't being serious because I guess, you know, you can't take John Wayne out of the Western and put them into a romantic comedy. But it took a lot of flack.

If you could believe that, it took a lot of flack for turning bullish. I'm not expecting you guys to remember that. But, you know, you took this report and this guy has a bar chart in there about, well, and he has all these bears out there. And I am there. And apparently, I'm just the worst bear of all, that if you took money out of the S&P 500 in 2010, you would have lost clients 60%, which is ridiculous because really what his table showed is if you took money out of the S&P and you put it into the. the bond market, I guess the Barclays aggregate, you would have not lost 60%, but foregone 60% run up in your portfolio. But the assumption is that you took everything out of stocks and put them into bonds.

And I can tell you guys, don't read my stuff because I write about this practically every day where I say diversification is not a dirty 15-letter word that starts with D. I preach it all the time. I preach all the time that you never put all your eggs in one basket, and there is no such a thing as a sure thing. And I teach that to all my employees, and I always have. So I took umbrage with, particularly with the comment. Like, firstly, to say that I've been consistently wrong, not true, and that I'm

bearish on everything not true, that I'm stubborn no, no I just been wrong on the U.S. market but I always said I don't believe in investing in bubbles and of course in my missive that you guys

quoted from which was introspection and accounting it was a personal professional accounting of David Roosevelt for what did I miss? And why did I miss it? What is the explanation? And tip my hat to the bulls. That's what I did. And even when you do that, even, you see, I grew up with depression era parents. Okay. I grew up with a very strong value system. And you own up to your mistakes. And you take the

high road. And here I do that. And I didn't even publish that just for my clients for the general public, including you guys. And it's just, you know, taken out of content. you know, that debating, was it a mea culpa, was it throwing in the towel, was it this, was it that? It was really just a personal accounting. And if you want to call admitting that you're wrong on a certain asset class and explaining why as some admission of guilt, okay, then guilty is charged. But, you know, to mention on your webcast that I lost people 60%.

It just isn't true. That's what really rankle me, because the next thing, you know, I'm getting questions about that this really happened. And this is why words matter. Now, I don't mind that people sleep. If you want to just concentrate on my ESB500 call and how I blew it, you're free to do that. You know, that's an opinion. And you can have that opinion.

If you want to ignore everything else, you're not the only ones that do that. All right. So, David, can I jump in? I'll just finish off by saying that you can have your opinions, but you can't have your own facts. And the fact of the matter is that we have a model portfolio that tracks my views. And actually, we, I've published it. I published the holdings. And I have clients that actually are mirroring what I'm doing. And since inception, which is less than two years ago, it's up the, it's up 30% in aggregate. It's not a concentrated portfolio. It's diversified

across asset classes and geographies. And I'm there thinking like the 60%, I've lost client 60%. How can anybody who is the flag bearer of capital preservation, which is me, ever lose anybody 60%? That is otherwise known as an oxymoron. That could ever happen.

You know, I am not Henry Blodgett in 1999 or Mary Meeker in 1999 or Chuck Prince in 2007, I could never lose anybody 60%. Now, I may cause you some pain because you will forego. I didn't tell anybody to buy Bitcoin, okay? But I've always advertised myself, and I can tell once again that you guys don't read my research. In baseball parlance,

I've always advertised myself for probably 30 years through the thick and thin that I'd bunt for singles. I'd bun for singles. The odd time, if I'm lucky, I'll get a double. I don't hit triples. I don't have home runs. If you want that sort of market strategist economist, go somewhere else. Okay?

That is not who I am. I now are in the bounds of volatility, and I'm always near where cognizant of preserving capital. Because I do believe that losing money is different than not making enough money. The major point is that I never lost anybody 60%. over any interval and in fact in my own personal portfolio so that you know i've only had one down year in my entire life and it was 1987 okay because i focus on risk risk adjusted returns and i always aim to do this limit downside capture and make money in a bull market although in a

bull market because my beta is typically low, unless I'm super duper bullish. That's the way it is. I play the bands very narrowly. And I come back to the thesis of not putting all your eggs in one basket and that there is no such thing as a sure thing. And so we have to understand, you know, the elements of uncertainty and risk. So, David, I gave credit to you in your letter. I was not trying to pile on. I thought it was the Mia Colbor, whatever you want to call it. I said, good on Dave for being transparent and truthful and reflecting. I thought that was well done. But for our audience who might not know who David Rosenberg is and your story 40-year career on Wall Street, you got your start in 1987, which I don't know if there's something in the water

or what. I was with a CEO of a publicly traded financial company yesterday. And the other one I mentioned his name is because the episode's not out yet. He started in 1987 in October. last week we had Rick Reader from BlackRock also started in 1987 now you mentioned you had depression at our parents did that have more of an impact on how you view the market or was it your start in 1987 that shaped your views well I mean I'm 64 years old and I could tell you that you never stop learning and your thought process is always evolving so you know the start date is just an accident of history. I guess you'd say, well, in my particular case, I started on Bay Street at the Bank of Nova Scotia as the financial economist on October 19, 1987.

The day. So you could say that, well, boy, is that, well, that's a dark cloud that you or the donkey. You'll carry around with them to eternity. But actually, I had come from three years in government in Ottawa at the Canada Mortgage and Housing Corporation when I was a housing economist and more of an academic and then I got my first job on a on Black Monday. I didn't know the first thing about the financial markets. I don't even know how I managed to get the job. I knew a lot about housing, obviously,

but I didn't know a lot about the financial markets. I had to find out in a big hurry, but on that very first day, I followed the chief economist and the assistant chief economist who was my boss all throughout the trading floor. I had never been to a trading floor before. That was quite an experience. And it was pandemonium. And we went to all the senior heads of all the different departments. And my two bosses had these charts showing that this was a liquidity event.

It was not a fundamental macro event. And they were telling everybody that the time to go back. and add-on risk was like right now that this was not going to be the end of the world. And let me just tell you that the CEO and the head honcho was the vacant over Scotia, about a month later, sliced one-third of the research budget. Everybody thought it was going to be Armageddon. And meanwhile, I need be surprised to know that I was born into a department that was actually very bullish on the equity market.

And if you waited out a couple of months, because it wasn't really clear until we were, were into, say, January, February, that this actually did not turn into the end of the world. It felt like it at the time. And I thought, well, these two economists have ice in their veins. I mean, can you imagine at the age of 27 realizing that the term cool economist was not an oxymoron, after all, and to be able to tie the macro with the markets, and that's what got me think in the young age as to how are you relevant as an economist to wealth managers and money makers is you have to take these economic data points and the policy data points and formulate a cogent coherent investment strategy out of it.

But this was not an economic event. And we had for a bunch of technical reasons, valuation reasons, a lot of reasons, but not fundamental, the market. collapsed. And then it rebounded spectacularly. And so I realized the difference between liquidity issues in the market and what are more fundamental economic issues that impair that servicing capacity and generate the conditions for a contraction in earnings. It's funny that that quarter where we had that epic collapse in the stock market, the day I started, you know, that S&P earnings were up 50% year every year. In 1987, it was?

In 87, and the GDP was like 5%. So ultimately, ultimately we had the recession starting in 1990. So the business cycle was never repealed. It's just that, you know, that was not the right time. And then we had the recession for a bunch of other reasons. And then we had the bear market, which didn't last forever either. I remember that day vividly. It's indelibly etched in my mind probably forever.

So the answer to the question is that yes, that was, that put me in in really good starting blocks for my career because it gave me an understanding of the symbiotic relationship between the economy and the markets and the markets in the economy and the importance of liquidity. So that would be a good segue for where we are today, and I do want to get your views on where we are today, but I would be remiss if I didn't mention your time at Merrill. You said you're a baseball fan. You were part of the 1927 Yankees, as far as I'm concerned.

That was quite a group of people that you worked with at Merrill. So for our listeners who might not be familiar with your time there, can you share a little bit about that? You want me to talk about my time with the 1927 Yankees is my hair giving away my age? Am I like, I mean, the people that you worked with at Merrill were like really superstars? Well, I mean, there were, I had a very strong team behind me,

point number one. But, you know, the two people that the biggest influence were, obviously Bob Farrell, who was the twilight of his career at that point, but still a major influence on my thinking, and Rich Bernstein, who I was the chief economist, he was a chief strategist, and we co-marketed together, and we co-authored publications together, besides becoming really great friends. So those were, you know, I'm going to ask me my two favorite memories were those two individuals. I learned a lot. at the time at Merrill.

And what I learned was the importance of ranking in the I-I survey. That is for an analyst or strategist or economist, that's the Oscars. And I realized that the way to do that is you had to connect with the sales desk because quite often portfolio managers and CIOs would give the votes to the sales folks to allocate to who they wanted to. to in research. So I learned how to liaise between my research function and helping the sales folks do their job because they were at the front window of the client base.

So that just comes down to interaction, understanding the symbiotic relationships, again, between various departments at a very large multinational institution. but it also meant that you had to extract a couple of pounds of flesh because making yourself available to sales was time absorbing because it meant you had to do a lot of marketing. So the marketing function was really important. And it taught me in that period of Merrill that you could be the greatest economist in the world or greatest strategists, but if you don't have the communication skills,

then it's basically. basically all for not. You know, go into academia. You have to really distill your ideas. You have to be succinct and concise. And you have to be esoteric and erudite and interesting. And so I learned a lot. I learned a lot at Merrill. And I got a lot of this, by the way, from both Bob Barrel and from, from Rich Bernstein, was how to combine sizzle and steak when you're providing your analysis. That was really a great learning lesson. And so you've got to be, do your work, be out of the consensus when it's necessary. Be original, be unique for the marketplace, have a differentiated view, be able to back it up. But being able to write well and to be able to speak well, that's hugely important. And not easy. It's not easy.

You have to hold people's attention on topics that are quite often rather mundane. So you have to make it interesting. And I say that across any profession. You're a biochemist, you know, or you're a literature major or, you know, you're a rocket scientist. You've got to be able to communicate your ideas. So, David, to the extent that you've been wrong about the U.S. market. And listen, I started writing, I remember a piece that I wrote in 2015. about preparing for lower returns going forward based on some of the similar things that

you had been looking at, valuations, growth, GDP, all that sort of stuff. And I think with the benefit of perfect hindsight, one of the things that I could not have foreseen, and I don't think you could have foreseen or anybody for that matter, was the fact that there was going to be a disconnect between the growth of the economy and the growth of the stock market and the growth of these 500 giant companies and their ability to continue to widen their moat, particularly the tech. giants to continue to raise their margin to levels that had never been seen in history was if you could have seen the future, you would have gotten right, but of course we couldn't.

So with that said, is that sort of how you viewed the disconnect between the economy and the market, or how did you view it exactly? Well, look, the market is not the economy and the economy is not the market. I mean, are we really here to talk about GDP when so much of GDP is. is government spending. And in fact, government spending at the federal level is up 20% year every year to the first two months of the fiscal year, 20%. But I don't see a ticker on the SCB of 100, the NASDAQ or the Dow or the Russell,

that's GOV. So we talk about GDP, but what does that matter? It's really about earnings. It's about earnings. Equity investors aren't paying for GDP. They're paying for earnings. stream and actually a future earning stream. But, you know, I was bearish in 2022, was right.

Who wasn't? I don't know if that made it on your podcast. I was more neutral in 2023. Our models were actually neutral. And they started turning quite bearish towards the end of 2023. And then our models have been bearish all year long. But we found other areas of the global stock market to invest in. So I want to come back to that because I know that we're just all U.S. centric, American exceptionalism.

There's nowhere else in the world to deploy money. I want to make the point that we made money in almost every other aspect of our investment recommendation. And I'm not going to say that it matched what the S&P did, although our gold calls sure did. So, Dave, you're... But because it has a may, because it's a diversified portfolio, it's not aimed to be benchmarked against the S&P. So your point about us now. not, sorry, your point about us not knowing your investment calls is the right one. I've mostly read just your macro calls over the years. And I've seen a handful of recession predictions from

you over the years. And you said that you're a big person on capital preservation. So let's say that you go out on limb and you make a forecasting and say the U.S. is going into recession and it's wrong. What do you then recommend investors do if that is the call and then that allows them to continue to preserve capital? Is it going to cash? Is it gold? Is it international stocks? Like, what do you do if you make a recession call? and it's wrong, but you still have to allocate assets somewhere. Well, it's interesting that you say that because, yeah, we had the recession call. By the way, I haven't, I mean, I feel like I'm waiting for God, though, you know, that

and I've written about the reasons why this cycle's been stretched, and the policy lags are longer this time, and so I say this has been delayed, it's not been derailed, and it reminds me a lot of what happened at Merrill. when I started calling for the recession in 06 and didn't come until December of 07. And believe me, I took a ton of criticism at Flack back then. And the recession started in December of 07. And back then, of course, the lags.

Remember, the Fed took the funds rate from 1% in June of 04 and then went all the way to 5.5% or so. five and a quarter by June of 2006, over a two-year period. And recession didn't start until the end of 07. And of course, back then, it was more about the last vestige of the housing bubble and the ability of the household sector to continue to draw cash flow out of their superinflated home. Remember, a mortgage equity withdrawal. We called it Mew, cash out refinancings, and that lasted until it didn't last anymore.

But everybody was surprised when the lags from what the damage the Fed had done, that's true, oh, six and 2007, it was the same today. We beat the business cycle. There's no recession. And then everybody was shocked to find out when the NBER declared the recession in December of 08, which I know everybody will laugh about, but of course they wait for all the revisions to come in. They're not dummies at the NBER. just wait for all the revisions. The first sample of all the data that we all trade off

are based on very small samples. And the fact, the response rate post-COVID is historically low levels on just about everything. So there's a massively wide error term around the data. I talk about this to people. They just roll their eyes. They don't know that they're the data that you trade around. Just look at the size of the revisions, the non-farm payrolls, just to give you indication. So in December of 2008, they declare the recession. Everybody, you know, and you mentioned Ed Yardinney, who I debated quite a bit at that point, whether it was Ed Yardinney or Ed Hyman, if you name, didn't have to just be Ed. Everybody in 2008, everybody believed that we were going to be in a soft landing. Even after Bear Stearns collapsed in March of 08,

We got through that, and it was still this pervasive view that we were in a soft landing. If you remember the Fed and the summer of 08 in the June of 08 meeting, the Fed was so confident that there was no recession that they switched to a tightening bias and Trichet, who was discredit race rates. Do you remember that, right? I remember it. I remember it. I don't know if they ever got excoriated. Ben Bernanke, who's always fatted today, switched to a tightening bias in June of 08. And then everybody believed that the recession started in September of 08 with the collapse of Leban and AIG and Mother Merrill.

Meanwhile, in December of 2008, the NBR declares the recession started in December of 07. After the revisions, they were right. It started December of 07, and people were shocked. And I told everybody, well, I'm not one that will ever say I told you so. But the thing is that I did feel exonerated, okay? And I could tell you, I feel like I'm reliving that right now. Are we in a recession right now? Well, here's a, are we in a recession right now?

It's hard to say. It's hard to say that we're in a recession right now. And certainly if you believe the BLS data, then we're not in recession. And I would say that we're certainly not in an earnings recession. But let me just go back to that earnings comment. a second. There's a big disconnect between the BLS data. I always say, I think I want to take the L out of BLS and maybe call it that because when you go to the base book for the past six months, it's describing the economy as flat, as flat and with no corporate pricing power.

Now, that's why I said in my piece today. Post-Pallel calls the economy solid, but the Fed's base book called economic activity slight. Now, I would say slight is not negative, but slight is close to stagnant. Slight is small positive. Slight is not solid or strong, which are the words that Powell used after the FMC meeting,

To which I say, well, you know, the base book has only been around for almost 60 years. It is the most comprehensive qualitative assessment of the economy that comes out every six weeks. And it doesn't get revised. And it's showing an economy that is not contracting by very close to flatlining. So we can call it a growth turn down as opposed to an official. NBR defined recession. And you got J. Powell telling everybody it's solid and strong because, of course, they're focused on the BLS data, but he never talks about the error term and the low response rate

across the data and how much faith should we have in the data. And he doesn't talk about the basebook. The basebook is on a different planet than the data that you guys and everybody else. What about GDP today? It was over 3% for the latest quarter. Let me just continue the thought because it begs the question, if you're going to spend Mr. Powell, if you're going to spend so much time, money and resources on the basebook, and then not listen to it. Why bother doing it?

Now, let me just come back to the earnings for a second, because it comes back to Michael's comment about the stock market. This is what I had to explain. This time last year, the consensus for this year was that earnings were going to be up 10%. Right now, it looks like earnings year-over-year are going to be up eight and a half percent. So this is like an earnings driven. So earnings at the margin actually fractually disappointed. People don't remember what quotes they were saying, as in the bottom-up consensus, this time last year. They're calling for double-digit growth, and we're not going to get it.

but the market is up until this latest little corrective phase we've seen was up almost 30%. Up almost 30%. This time last year, because maybe everybody should be taken out to the woodshed, I don't know what your forecasts were. Were you calling for $6,000 plus in the S&P 500 because the consensus this time last year was $4,900? And then we get almost a $6,100 just last week. And now they're calling for $7,000. And so everybody tries to fit a narrative to the price action.

And so everybody's got to follow because you're going to follow. It's just the momentum trade. You've got to follow the herd. So you have a five point multiple expansion, which is a two standard deviation event over a 12-month period. and in my quotes what you refer to as a mea culpa which you can call whatever you want I call it a personal accounting and reflection and introspection and by the way everybody should do it no better time that at the end of every calendar year and that's what that was but you know I had to explain why people are still piling into a two SD event market

what has changed and I entertain the notion that the market is telling you that something has changed and maybe the way that the market is valuing equities has changed. And I tip my hat that they could be right. I never once in my whole piece, which you didn't mention by the way, I didn't change anything. I didn't say, hey, I'm taking everything out of Japan, everything out of India, everything out of emerging Asia, I'm selling my gold and I'm going all in on the stock market. I was actually putting out a thought piece, admitting I was wrong on the U.S. stock market, explaining why it was wrong, but also in my sequel, which I don't think you guys read, which came out the next day, because then I explained why is it that despite everything David Rosenberg said the day before, entertaining the notion that the bulls may be onto something, which is all I really did, if you read it carefully, why David Rosenberg is not changing. his asset mix and that was the sequel um so in any event that's the bottom line uh i question whether

or not see what happened was that i said maybe maybe because of generative ai and the boom and r and d spending and all the future projections of productivity growth maybe they're right maybe Maybe Goldman Sachs is right. Maybe there's been a structural change in the future on productivity because of AI that we've hit some sort of, you can call it model change if you want, or an inflection point in the technology curve, which happens every several decades or maybe every century. And I entertained all that. And I said that it could well be that looking at 12-year trailing, 12-year forward multiples,

well, let's face it, that's what I looked at. I looked at price to sales, price to book, price to EBITDA. Price to cash flow, price to earnings, because you're paying for earnings, and I was saying all year long, why are people piling in to a multiple on a one-year forward basis that has only happened three other times since the early 1990s? we're in the top 5% value agents of all time and the stock market is actually trading as though real rates are still negative but real rates are over 2%. Like there's a big disconnect there

when you're taking a look at the most important determinant of the bare value multiple, it's real interest rates. I've only done 25 years of work on that. And the market's behaving as though the Fed's still petting Real rates below zero. But that train left the station several years ago, but the market continued to fly in my face. I had to, in the name of good conscience, explain to the world where I got wrong.

Because it is a very unusual circumstance, what's happened, especially in the past year. And it's not as if we didn't see this in the mid to late 90s. Does there need to be a catalyst for the recession, for the multiple contraction, for investors to start selling the rip? Or can it happen gradually? You don't need a recession. Let me just finish the thought that I had said, I tip I had to say that perhaps investors have lengthened their time rise, which by the way they did during the internet media. Then we went back and collected a hundred years worth of data. And here's what we found.

that on a five-year forward basis, for the valuations to make sense, earnings have to expand at a 20% average annual rate over the next half decade. If that, and I posited, if that's your view, this market is for you. If that's your view, this market is for you, that's what's priced in. And it's not impossible, but looking at history, long history, it's a one in 20, David, I don't know who said this, but you're going to love this quote, time horizon. I saw somebody tweet, time horizons compressed to zero at the bottom and expand to infinity at the top. It's a great line. You know, so let's just say that what does it mean? You see, again, like in your

previous podcast, you said, okay, you could have said, well, you know, he's bears on the U.S., but he's done this and that. We isolated parts of the world that have positive equity risk premiums, because in the U.S., the ERP is either at zero or close to zero. You know, what does it mean when the ERP is zero? It means that investors are willingly, or maybe blindly, because we have a situation, right, another situation which I wrote about, which are the fund flows. We're up to nearly 60% of the market cap is in these passive index ETFs. And the index funds have to buy the market.

It's a self-fulfilling prophecy, but it may well be a prophecy on the other side of the mountain, too. When John Bogle introduced the ETFs back in the mid to late 80s, and the Vanguard funds, he said, this market will ever be more than 20%. It's up to almost 60%. And we know that the household balance sheet, looking at the Fedflow funds data, over 70% of the household asset mix is inequities. Only 12% will even not as in bonds. And it's never been.

this is a higher concentration of equities in the household balance sheet in the United States. Nobody else has this concentration, by the way. It's higher than it was during the dot com for the technology craves back in the late 1990s. So I preach diversification and I preach rebalancing. Nobody, you see, where did I get it wrong? I thought investors would rebalance. They didn't rebalance. I thought they would diversify.

Nobody diversified. So we have extreme concentration of risk. In my age cohort, the baby boomers, the baby boomers, their asset mix right now is over 60% in equities. It should be 30% or 40% is over 60%. Everybody is all in. I'm trying to explain in that report. And, well, now you have me on. Okay, it wasn't just about, well, the guy's wrong.

He's a dumbass. You know, he cost people money. No, it was none of that. It was actually trying to explaining what happened and then leaving it to the reason. including you guys. Does this make sense to you? The ERP being zero means that investors are treating equities as a riskless asset class. They're treating it the same as they are Treasury bills.

If that's your view, then this market is for you. It's no different and they look at the bond market. The bond market right now, you can buy a Genie Mae, implicit government guarantee, mortgage yield at the same yield that you could buy a BAA corporate. So the market's telling you in credit land, the same thing, that basically we've turned the concept of risk completely upside down. Now, if that works for you, if that works for you, then this market is for you. It's just not for me.

And I want to employ you guys. Don't impel me for that. It's just not for me. I'll go off and buy other things, okay? So in answer to the question about the recession, so we've got to go back there, I think the economy is far weaker than commonly perceived, point number one. And I'm still, I'm not throwing in the towel on the recession call. I think that the lags, and I've written about why the lags are longer this cycle, for different reasons. This is exactly what happened back in the heading into the 2008 recession.

I think people will be surprised, very surprised that outweak the economy is next year. And just wait until we start getting the revisions. We already know from the QCW that non-farm payrolls have been overstated by $1.2 million. Now, we're going to get that number, the revised number in time for the March meeting, where I think the Fed's going to go from their two rate cuts. They were four to two. Then they'll be back at four again because they just mark to market. I mean, there's this total data dependency.

They're not dependent on any except the current data. So March will be something totally different. But, David, what if somebody said, what does not farm payrolls have to do with Apple's earnings? Let me make this point that you don't need, as I said before, you don't need a recession to have a serious correction. I agree with that. We did not have a recession in 2022, but it was a godawful stock market. And you can point to other periods of time, of course, in recessions, you definitely get bare markets. okay we have to identify what is a necessary condition a sufficient condition and a necessary

and sufficient condition you could definitely get a significant drawdown look what happened in 2018 look what happened in the fourth quarter of 2018 so there's a whole bunch of things that go into your stock market determination of course earnings fundamentals are one of them but But I am concerned about the economic outlook more than love. How concerned? How concerned? In terms of, in terms of, so we could have a, I'm using quotes, garden variety recession, or are you expecting something a little bit more serious?

Like when you say that you're expecting recession, how bad are we talking? There's a look, there is a lot, massive volume of low-cost debt in the household and business sector that was taken on in 2020, 2021, 2022, that will be coming. We're going to have a lot of this quotes money on the sidelines being diverted towards debt servicing. So that's point number one. We haven't seen all the lags kick in. Remember, the Fed started raising rates in June of 2004. Recession started December of 2007.

And nobody believed we were ever going to get a recession. Now, don't think in that time period, I didn't have my doubts. Of course I had my doubts. I never changed my call. And I wasn't being stubborn. You know, I think one of you guys said I was been stubbornly wrong. Well, yeah, I got a backbone. But I have been known to change my views too.

But I have a backbone. And the Fed started racing rates in March 2022. And now we're heading in 2025. And I just think everybody has basically, can't see past the tip of their nose. The lags are long and the lags are variable. And I was saying then, I say now that there is no get-at-a-jail-free part from the damage the Fed did in 2022 and 2023. We have not seen all those lags kick in. Now, on top of that, we have tremendous policy uncertainty, tremendous policy uncertainty.

Now we have uncertainty over monetary policy because the Fed, and it's amazing. Everybody thinks the Fed's doing a great job. Everybody thinks that at the FOMC meeting that Powell was 100% right. They bungled the rate cut by going too much back in September. And why? Why? Because of two moderately above expected core CPI prints for September and October. And then Powell, of course, tells us that we should get a very good November reading on the core PC deflator.

And I agree with that. But we had two months, two months, and all of a sudden, next year's turned on its head. And the rhetoric was such that the bond market is now basically pricing out almost all of next year as far as the Fed's concerned. So for some reason, two months, of core TPI data or PC deflator data caused the Fed to take its core inflation forecast next year from 2.2 to 2.5. I think the Fed's made a serious error. But that's fine. That is going to make it that much tougher for the economy. The level of interest rates, when you're taking a look at where the debt was originated,

those rates, the debt was originated, and what they're rolling into for next year, you're going to see more pain and more absorption of cash flow in the debt service than I think a lot of people realize. And then we have all the policy uncertainty. So J. Powell just injected policy uncertainty on the monetary side. And we have all this uncertainty on trade policy. under Trump and on fiscal policy. Now, look, I don't think we're going to be getting all the stimulus that people are talking about.

I don't think that's going to happen. Now, I work on a business where your assumptions drive your conclusions. I said before, you look at the federal budget numbers, came out for November and October. Government spending under Biden is up 20% year every year. So when you guys talk about American exceptionalism and you're talking about how great the economy is, Do you know that government spending is up 20% over the past year? Now, is that going to be recurring? I don't think Elon Musk is going to want to make sure that government spending is up 20% this time next year.

I don't think that's going to happen. And everybody thinks we're going to get the tax cuts. But the question is, how will they be scored? And before anything happens, the 2017 tax relief is going to sunset next year. and the question is, is Congress going to extend those tax cuts if they're not to be sunsetted again? But Trump wants to make them permanent, which then puts the CBO in a bind because they have to score this thing. And then once they score it, you got 37 Freedom Caucus fiscal fanatics that don't exactly feel beholden to their election success this, time, based on Donald Trump, we don't know if they're going to dig in their heels.

I think there's a good chance they will. I think that people have overestimated how much Donald Trump is going to get through this Congress, especially because this House representatives is replete with mega fiscal conservatives. But I think the markets have built in the view and so of economists that we're going to get fiscal stimulus. I don't think that's going to happen. I think it's going to be the reverse.

And then, of course, we're not going to be getting the same spending. A lot of that spending is out of the Chips Act and the oxymoronic inflation reduction. All that stuff is going to fall by the weight side. I think that actually one of the drags on the economy over and beyond the fact that we're probably going to have at least $50 billion of incremental cash flow drainage in the private sector from rolling over previous debt into the current rate environment is we're going to have fiscal restraint, fiscal stimulus. And people have underestimated the extent to which the government played a significant role in this, well, what we call American exceptionalism. R&D spending has been doing very well, but this is a small share of GDP. You can argue that the consumers have run down their savings rates because of the equity wealth effect. But let's see what the equity market does going

forward. So the multiple, not exactly, the starting point of the multiple is not exactly 15, 16 or 17, right? It's spurting on 23. So, you know, we'll see. There's lots of assumptions, but I don't even need, I don't, I, but I don't need the recession call, right? I just need right now the market, you know, we had a five point multiple expansion.

What do you guys tell me? We're going to go up another five points. Consensus is a double digit earnings growth for next year. Well, they missed a fractional. this year, I think it'll be a year of earnings disappointments. At a time when the starting point on the multiple is what, like equity risk premium is zero, like risk for reward. All I'm saying is that looking at the relative valuation between what is risky and what

is not risky, I think you're better off on treasury bills right now to tell you the truth. So, David, for people that want to hear directly from you instead of getting out of context takes from us, which we will not do again, where do we send them? How do they sound up for your research? Well, look, the first thing, you know, it would be great. You see, if you guys were actually subscribers to my research... Give Ben a free trial. We have a free trial.

We have a free trial. But then again, you know, I have a payroll I have to make. So unfortunately, if you become a subscriber, I have to charge you. But it's not anything you guys can't afford. But you see, it will actually... I saw the Canadian dollar is crashing, though, so maybe it's getting cheaper for us. Is that fair? That's fair.

it's a it's a it's a fair comment but we at 70% of our clients are in uh the u.s we we have 3,000 clients in 40 countries but 70% are in the states and only 10% are in Canada even though we're headquartered in Toronto you know we're viewed as an american firm most people think i'm still in new york uh and if you ever read our research it's it's not it's not american it's not Canadian spelling. Like, labor is not L-A-V-O-U-R. It's L-A-V-O-R. Favorite of the U-2 in Canada, I noticed. So when Donald Trump

says Difty first state and Governor Trudeau, I say okay. So, David, where do people find your research? So, two ways. You can just Google Rosenberg research and come right on the website,

surf the website, and you'll see that you can sign in right there, get your promo code. And you've got a one-month free trial. And I like people kicking our tires, or just go to information at rosambergrearche.com, you know, take 20 seconds to fill it out. And one of my customer service people will get right back to immediately. Well, David, like I said, if you would have told me back in 2008 that one day I would have you on my podcast to set the record straight for something that I said, I would certainly not have

believed you. So I appreciate your understanding and coming on and setting the record straight. So thank you for your time. Thank you guys very much for having me. I appreciate it.