David Rosenberg joins DoubleLine’s Jeffrey Sherman and Samuel Lau to share, among other topics, his view on the (dim) prospects for a sustained V-shaped recovery; his choice of indicators for how the economy is progressing; the 10-year divorce between the U.S. economy and stocks; and, beyond the COVID-19 crisis, a future of stagflation. Mr. Rosenberg is the President and Chief Economist & Strategist of the economic consulting firm Rosenberg Research & Associates Inc. The podcast was recorded June 8, 2020.
In regard to his near-term view of the markets and the economy, Mr. Rosenberg argues, “The stock market and the economy became divorced a decade ago.” The rally off the March low, he says, “is all about Fed-induced liquidity.” “We have a lot of hopes over a vaccine,” he says. “Maybe the ‘V’ recovery stands for ‘vaccine.’ But let’s face it: This is the mother of all liquidity rallies that we’ve ever seen.” To illustrate, he cites M2, an important Fed measure of the size of the U.S. money supply. He notes that the Fed has boosted M2 by $2½ trillion since mid-March. “And what do you know … the market cap of the S&P 500 has gone up in that same time period by $2½ trillion.”
Mr. Rosenberg expects the economy, as measured by conventional economic metrics and data points, to stage a “reflexive rebound” in the months ahead with the turn in the weather and all 50 states out of lockdown. “The question is, beyond the third quarter, will it be prolonged? And that’s going to be dependent on demand,” Rosenberg says. Rather than looking at coincident indicators, he advises watching spending intention surveys and consumer confidence. He was unimpressed by the prior week’s positive nonfarm payroll report, which was fraught with reporting irregularities and other problems. The critical determinant for demand, he says, is the timely arrival of a vaccine or effective treatment.
Over the long term, Mr. Rosenberg sees no return to the state of the economy pre-COVID-19. “There is no such thing in this business as a get-out-of-jail-free card,” he says. “This is only a business of Newtonian physics where every action has an equal and opposite reaction, but there are lags.” At some point in the future, he expects aggregate to stabilize, and “we’re going to be left with a regulatory, (flatter) world and shrinking globalization that is going to mean cost-push inflation, and localized supply chains taking precedence over globalized supply chains. The corporate cost curve is going to look different, and the aggregate supply curve is going to be looking a lot more inelastic or sclerotic than it has in the past. So, we’re going to supply-side inflation. We’re going to have a form of stagflation in the future.”
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