Comments
Transcript
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eaHe presents a relatively benign resolution to the corporotate debt issue, compared with Raoul's "doom loop" scenario....
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NSExcellent job laying out the thesis. Well done discussion
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BNBig fan of David’s thought process! Great interview. Thanks. BN
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BSDear Real Vision, I commented a couple of months ago asking for quality improvements in transcription. It seems like your transcriber for this video had trouble with David's Canadian accent-- DR>Well, I almost feel like just maybe hanging up my Hewlett Packard calculator and calling it a day and that's almost like a market hop for me.. (Correction: ..almost like a market top for me..) DR>There's no look that those are obviously also risky in the sense if you're wrong on your forecasts, you can get smacked around. (Correction: There's no doubt..) Can you please take another look at your QC process for transcription? Maybe your presenters could be tasked to read through the draft transcripts for all their own episodes, for errors like these? If that's too much of an ask, do you have anyone on staff who can competently catch these types of annoyances? Thank you for your consideration.
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MSLove hearing david
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RWListened to the audio today on a car drive and was thoroughly annoyed with the interviewer. 1) multiple times interrupted Rosenberg 2) interrupted to mention "who I am talking to" --> like I give a fuck about a nameless source 3) interrupted a blossoming conversation on fixed income to talk about equities (like you couldn't have waited until Rosenberg brought that up) 4) felt like the interviewer had an ear piece and someone was guiding this "conversation" Just let the interviewee talk... I don't want to hear about how Rosenberg "nailed it in the past" (though talking about previous theses and how they may have changed is beneficial--clearly Real Vision audience follows the market and can understand the P/L on these older ideas). I don't want the conversation to be directed by the interviewer or third party... because Rosenberg probably had some really root level thoughts that got rushed over or skipped by... What I want to hear: hunches, instinct, "variant perception" ... any thing that gets me thinking... not getting walked through trades.
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DWThis isn't my favorite series but I have to give props to Ed Harris as an interviewer. He lets his guests speak but asks the right questions and has great insights of his own. Well done.
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MBDave misspoke the most important line of the interview when he was describing the 45 days after the first rate hike. He said you get an initial pop up 3-5% then on to the lows down 35-40 BP then said percent. Is he saying his mild recession call is going to cause a 35 to 40% drop in the market?
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MBIve listened to this interview three times. Each time it makes more sense as it sinks in. Give it another listen.
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MKWell Done Ed Harris. I kept my tongue bit about making naturally cynical comments that come too easily because I miss Grant and Raoul on a constant basis, and in this interview you showed more historical context, self reflection, and not just asking questions but questioning the questions.
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CMGoodbye to Crypto Week, this is what I am talking about. Great interview, highly relevant to markets today. Loved it.
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SUGreat interview, David Rosenberg was brilliant. Also big shout out to Ed Harrison he was brilliant as well. I hope Ed stays at RV for a long time.
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VSExcellent David -someone who speaks clearly and gives you the bottom line!
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BFWouldn’t the most important ratio for corporate debt be interest expense to EBITDA. I would be interested to see a chart if that over a long time horizon. I know that the debt needs to be refinanced. And there will be casualties in that rollover process. But ultimately those yield starved asset managers are still hungry, so as long as the cashflows are there they will supply the debt. Rationally there should be mass downgrades but historically the ratings agencies have shown considerable flexibility to serve the people paying their bills so it’s likely they find a way to spin this unless regulation prevents them.
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DSThere is, of course, some cause and effect with the Fed and the business cycle. Is it possible, however, like most folks they just do not know what to do? Their approach is often just as wrong as everyone else. It seems to me that the business cycle may be somewhat independent of the Fed, they just make each business cycle worse/better depending on the situation. The place where they can shine is the first reaction to major disasters. I believe that QE1 did help ground the situation, but thereafter they should have let more people go bankrupt to show there are consequences to bad management. DLS
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THRosie is not a permabull nor a permabear. Permaright is quite accurate term, instead :-)
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SBWith checking the history of Fed Funds target cuts. Many of these did not turn into a recession and were immediately followed by higher 10Y yields. I could name 5 or 6 in the 80s and 90s alone.
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TBGreat interview from both. Please try to have David on once a quarter. Cheers!
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fcAwesome interview! He have the data, no much of "feelings" ! Also big thumbs up to ED always very informed and prepared to interview!
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PBThanks a lot Ed & David!
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NIGreat interview Ed. I wish you would have asked Rosie about MMT. I would really appreciate hearing his thoughts on that topic.
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PJSharp, informative and on point. Great interview.
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DVLOVE Breakfast with Dave! Please continue bringing him on!
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JDThanks RV. Interesting that DR's positioning is exactly the same as Hedgeye's (Quad 4 positioning). Two excellent Macro Resources who use different methodologies and have come to the same positioning conclusion. Worth taking note of. Only difference is that DR didn't mention gold in this interview, however, he did earlier in the week on Hidden Forces (Hedgeye is long GLD and GDX). Cheers John.
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HvThanks for the Canadian content. It’s hard to find integral POVs up here as our man-child trust-fund leader sputters more about gender positions than equity positions. Please consider hosting more Canadian content.
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DSGreat interview. What will be the normal effect on treasury bond yields when many BBB bonds are downgraded to junk bond status? Thanks. DLS
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SVMy only argument against a rate cut is they should stop the balance sheet unwind first, but nothing the Fed does makes sense, so it will be interesting to see what happens.
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AMI do love David. I always thought he was a bit of a permabear and didn't look at swings in liquidity - '16-17 especially. But regardless, this is fantastic and a good value add for sure. and it remains to be seen whether CBs can simply repeat the Shanghai Accord - and what appetite there is given the trade war etc.
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HHAnyone’s audio off?
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ABWhat a great job with this interview, Ed. You were so prepared! Thank you both, gents, for some great info.
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BMClassic DR! So my question is...how come the 2 thumbs down??? Like...why would anyone argue/disagree with, the best main street economist in the land?
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JHtotally agree
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JMExcellent.
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agDavid is generally worth listening to. Thanks to RV for getting him on again.
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RERosie is very solid and always has evidence for his views, right or wrong. This is his type of market.
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GHFantastic update by David and great questions by ED. Well done gentlemen
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RMFantastic interview Ed (as usual)! Rosie is one of the few (and I do mean few) economists that "gets it"! He is not always 100% correct but he is usually close to it, and always backs up his thesis with real time relevant data. Please do make this a quarterly occurrence to keep us updated on Rosie's outlook. Many thanks.
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CCHe's right! ;)
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SSThank you David and Ed. Enjoyed this very much. Makes a lot of sense. Ed always does a great interview.
ED HARRISON: Welcome to Investment Ideas. I'm your host, Ed Harrison, and we are talking to David Rosenberg, chief strategist at Gluskin Sheff. He actually spoke to us three months ago in March and gave us a view that said his investment thesis was long bonds, that is treasuries, and also long on a barbell strategy, defensive dividend paying stocks in equities. So, the question is, is that still his strategy today with the changed environment? Let's take a look.
Welcome back. David Rosenberg, it's very good to talk to you again about investments. I want to talk to you because there's been a lot of changes in the economy since we talked, just to refresh everyone's memory, what you were basically saying is, is that we're going to get a capital expenditure recession, and maybe that was going to lead to actual real economy recession. But at a minimum, you wanted to be somewhat defensive on your equity position, and also go long on the long bonds. The first question I have is, how is that playing out in terms of the whether or not that investment is doing well? And do you still think that that's the way to go?
DAVID ROSENBERG: Well, I almost feel like just maybe hanging up my Hewlett Packard calculator and calling it a day and that's almost like a market hop for me, because those calls have worked out remarkably well. Let's take a look at each one of them. You talked about the capex recession, what was the big surprise in the first quarter GDP? Oh, that great GDP with a three handle that was boosted by lower imports and military spending and soybeans, and lower imports. Real final sales, private sector sales were barely more than 1%.
Well, capital spending negative 1.1. And you're looking at the core capex shipments data so far for the second quarter, negative 1.3. So, the capital spending recession has already started and is joining the housing sector, which has been in a downtrend for the past five quarters. And if you take a look at most of the survey data, for example, they're all showing that capital spending is going to go down for the remainder of the year. And there's going to be knock on effects on the rest of the economy. The consumer right now was hanging on by a thread, still hanging on. But there's lags between one part of GDP getting hit with a negative sign and the impact that has on the rest of the economy.
Then you talked about the markets. Okay, let's look at the stock market. So, we've gone back to a new nominal high, but in reality, the S&P 500 is really back to where it was August of last year. So, 10 months of nothing, the price advances 40 basis points. And of course, I'm picking the time period, but we've been here before the total return really has come down to your dividend.
So, what have been the top performing sectors in the past 10 months or even in the past year? Utilities, telecom, healthcare, real estate, the parts of the stock market you want to own in either in a recession or sluggish growth, lower rate environment. What have been the worst performing sectors? Energy, materials, industrials, and financials. So, there's a real bifurcation here, but it's been the defensive areas of the market that have dramatically outperformed. And then we talked about interest rates.
And I think last time we're on here, I said the next move by the Fed was going to be to cut, not to raise and I said that I love long duration, high quality bonds. And I'm pretty sure that the 10-Year Note Yield is down 60 basis points or so for the last time that we spoke, and it's not over yet. So, the call so far, well, I'm sure you can point out the calls here, you're very gracious. This wasn't rehearsed. But I always appreciate when the interviewer ask me what the calls that I made that were right. I'm grateful to you for that.
ED HARRISON: Well, so far, you are batting 1000. But now, you're updating us on what's going to happen going forward. Would you double down on that particular- especially given the move that we've seen on the Treasury side on the long bond? Or do you think that you might make some shifts there?
DAVID ROSENBERG: Well, let's talk about the bond market, because that's my highest conviction call. And it's not really called the Japanification, you hear that over and over again, and you don't have to go that far out. I call it the UK-nification. Because the question people should be asking is- and we speak the same language. Why is the 10-Year Treasury Note Yield at 2%? Up until a few weeks ago, it was 2.2. Are you saying 2.2, and now, it's 2.0? And that UK's at 80 basis points.
And so, well, here's the answer. The answer is that where does Mark Carney have the cost of overnight funds pinned in the UK is 0.5%. Jay Powell and company, for all the talk of the pivot and the dovishness, they raised rates nine times this cycle. How many of the central banks raise rates nine times in a couple, the quantitative tightening, which by the way, they're still doing at the margin. So, the overnight rate in the United States is two and a quarter, two and a half.
And actually, when you run regressions on the 10-Year Note Yield, and you could do it across a lot of variables, one of the most important explanatory variables is your expectations of where the Fed Funds Rate is going, the overnight cost of funds. Now, it's acted as somewhat as a little constraint, of course, the yield curve is inverted, if you look at from overnight, say to 10 years. But it's act as a constraint in how far the Treasury note can rally. But what I'm going to say is, the Fed is going to go 50 basis points on July 31st.
ED HARRISON: That's a big call.
DAVID ROSENBERG: Well, but it's- okay, let me ask you a question.
ED HARRISON: Because I've heard two people say- at least two other people saying 50 basis points, they're going to do that. They were going to cut big early in order to get us out of it.
DAVID ROSENBERG: Okay. But see, it's interesting. Let me ask you a question. They went 50 in September of 2007. And we'd be talking at that time, and you'd be saying, boy, they went 50. And it was early. Was it early? Or because it was early, how come we had a recession two months later? They went 50 basis points the first meeting, January 3rd. The first rate cut was 50 basis points, January 3rd of 2001. And you would have said, boy, they moved aggressively early. But if it was early, how come the recession started in March of '01, two months later?
So, we're just replaying history here. They've moved 50 basis points as their first move each of the last two cycles. And they'll move 50 basis points and Jay Powell- this is actually handed to us on a silver platter. When you talked about the effect of lower bound, he was asked a question during the Q&A, where he was asked a question about, well, aren't you supposed to be going big with all these rates? And he basically said, what did he say? He said, the ounce of prevention for the pound of cure?
So, 50 basis points I think is- nothing is ever hundred percent sure, but I'd say that's the base case scenario. And not just that, because the markets already got what? The markets got 75 basis points price in for the end of the year. And they've got some more price in for next year. But they're not stopping until they get back down to zero. We're doing a round trip. And then we don't even know how much more aggressive they'll have to get this cycle, there's a lot of risk. And yet, behind closed doors, they're even looking at the prospect of maybe going to negative interest rates.
ED HARRISON: I was thinking that was the next thing, QE, negative interest rates.
DAVID ROSENBERG: Well, hopefully, you'll have me on again in these different intervals. And we're just rewriting chapters of this book, let's take it a step at a time. What I'm saying is that if they go back down to zero on the funds rate, which I think they're going to do at a minimum, the yield curve is going to steepen but the whole thing is going to melt. We're going to have a situation where the 10-Year Note Yield will be converging on where the UK is right now at .8. And most people, especially in the equity market, have no idea how much money you can make being long duration in the bond market.
ED HARRISON: I was telling you off camera before that Gary Shilling came on and his big calls, he's like you want the longest duration you can get, zero coupon bonds. If you actually looked at the bull market in equities from '82 forward, it's five times outperformed the equities. Because that's the longest duration that you can get.
DAVID ROSENBERG: Yeah. And Gary's 100% right. There's no look that those are obviously also risky in the sense if you're wrong on your forecasts, you can get smacked around. But he's not wrong. I'm looking at plain vanilla, 10-Year Treasury Notes. Well, let's take a look at what I said before. I said before that- we were last year 2900 and change on the S&P back in August of 2018, 10 months ago. Total return with the dividend is 2%. Total return in the 10-Year Treasury Note, we'll just take the 10-Year plain vanilla, is 10.5%.
And you can only imagine what the total return will be if we go from here. That was going from say 280 down to two. And now, imagine if you go from two to below one, and the power of convexity at these low levels of interest rates. So, I think the bond market will be a very good place to be. If you go actually to the Commitment of Traders Report, that comes out weekly. And you take a look at the net speculative short position on the 10-Year Treasury Note on the Board of Trade, two weeks ago, that net short position was something like 340,000 contracts net short. This past week, it's gone down to 240,000.
There's people out there that have been shorting the bonds and they're hurting. And so, we're saying the mother of all short covering rallies right now in the Treasury market and it's nowhere close to being over. So, from a frontal perspective, that alone, data aside, the short squeeze in the Treasury market is going to be very significant, yields are going a lot lower irrespective of what's happening to the economy as these shorts run for cover.
ED HARRISON: Now, what about the equity side of that? Because you were talking defensives in particular and dividend players? Do you think that that actually is going to be the play going forward now that we are at new nominal record highs again?
DAVID ROSENBERG: Well, look, I'm not a day trader and I don't call things day to day. But here's what I know. And it's just based on the history of the financial markets. If you go to those periods back in the summer of 1989 and you go to the period of early 2001. And then you go to the last period of say, September of 2007. When the Fed cuts rates, that first rate cut, the market gets a pop. It's a reflexive move to the upside, and it's usually between three and 5%.
So, if you're into chasing dimes in front of the steamroller, well, but there's a dime to be chased. Because in those situations, within the span of about 30 to 45 sessions, you have three to 5%. And everybody gets so exuberant. Remember, the Fed cut the funds rate in mid-September 2007 with 50 basis points and the market popped, and it peaked. It hit the new nominal high back then, October 9th, like about three weeks later. And you knew what's going to happen next, right? But same thing happened in '01 and '02, same thing happened in 1990, '91.
And so, you're going to get initial pop, and you can play that pop. But then you want to get out pretty quickly, because on average, the market rallies three to 5% on the first rate cut. You enjoyed that for 30 to 45 days. And then you're down about 35, 40% to the lows. So long as I'm correct on the recession call, that's how it's going to play out. And this is why Mark Twain famously said that history doesn't necessarily repeat. But it rhymes.
ED HARRISON: Right. But I remember in October, it was Stan O'Neal and Merrill in October, that's when people are like, holy cow, this is where rate cuts are not going to do anything about this whole thing.
DAVID ROSENBERG: With that point, are you talking about October of '08?
ED HARRISON: '07. Because it was when Stan O'Neal said, by the way, we're going to write down massive amounts. That was in '07?
DAVID ROSENBERG: That was in '07.
ED HARRISON: Yeah. So, October '07, that's when they were like these rate cuts, it's not going to happen. It's not going to get us there. Now, let me let me ask you about the capex thing, because I think that's interesting that you were talking about business sentiment, and the real question is whether or not these capex cuts are going to stabilize or accelerate, because some of the data that I've seen are horrific. For instance, the Morgan Stanley Business Confidence Index was down the most ever from month to month recently. And it's at this lowest point since the last recession, first of all is, do you think that this is going to stabilize or it's going to accelerate? And then