Talk Your Book: The Economy is not the Stock Market with David Rosenberg

0:04Welcome to Animal Spirits, a show about markets, life and investing. Join Michael Batnick 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 Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:34We'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 Coloscan and Chef back in 2008, and I didn't know anything, but you got me hooked. You got me interested in the markets. And so to be sitting here with you today. It's a real honor.

1:10So 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 the appropriate title. And I am hoping 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, your part about talking about how I was an influence way back in the day when I spoke at Barry Ritholtz's conference.

2:09And 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 of 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 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 a 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.

2:55So 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.

3:54You'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. I've been doing it daily. It's called Breakfast of Dave, and I've been doing it under different monikers for years. 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.

4:35But I never told anybody, avoid the U.S. stock market and just buy baked beans, barbed wire, and sawed-off shotguns, okay? So I said, instead of the U.S. market, let's go to areas 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 PE multiple on the Hang Seng had reached 8, which is exactly where the S &P of 100 was in the summer of 1982, which then touched off a nearly two-decade uninterrupted bull market.

5:33we turn 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 from your guys' perspective, you're trying to excite 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 US 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.

6:27I 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 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 leadership.

7:13And it was really just, let's take somebody and treat them as if he's a pinata. 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. When you grade somebody just on their view of the S &P 500. as if there's no other asset class in the world that you can deploy capital into.

8:00So, you know, look, I regarded that as inoffensive, but just because I thought that the analysis that you guys provided to your viewers was incomplete. But what really rankled me, and I know that you got this idea from this, I believe it was a JP 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 of course, when you're on the buy side, long only equity, that's what you got to do.

8:50Now, just remember, I worked at Gluscon Sheffield for 12 years. They were long only equity. and I thrive there. How do you like that? What you would refer to as a big bad bear, I worked at a long only equity shop. I was there longer than it was at 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 can't take John Wayne out of a Western and put him into a romantic comedy.

9:33But it took a lot of flack. If you can believe that, it took a lot of flack for turning bullish. I'm not expecting you guys to remember that. But 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 bearer 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 bond market, I guess the Barclays aggregate, you would have not lost 60 % but foregone 60 % run up in your portfolio.

10:21But 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 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.

11:12I've 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 Rosenberg 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.

12:00And it's just, you know, taken out of context, you know, that debating, was it a mea culpa, Was it a throw 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 rankled me because the next thing you know, I'm getting questions about, did this really happen? And this is why words matter. Now, I don't mind if people sleep.

12:43If you want to just concentrate on my S &P 500 call and how I blew it, you're free to do that. 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, I've published it. I've 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 30 % in aggregate.

13:25It's not a concentrated portfolio. you it's diversified across asset classes and geographies and I'm there thinking like the 60 percent I've lost clients 60 percent how can anybody who is the flag bearer of capital preservation which is me ever lose anybody 60 percent that is otherwise known as an oxymoron that 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.

14:18I've always advertised myself for probably 30 years through the thick and thin that I'd bunt for singles. I'd bunt 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. That is not who I am. I narrow in the bounds of volatility, and I'm always and everywhere 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.

15:04Okay, 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, I, uh, I gave credit to you in your letter. I was not trying to pile on. I thought it was the mea culpa or whatever you want to call it.

15:54I 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 storied 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 reason why I'm not mentioning 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 repair.

16:27Did 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 can 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 19th, 1987. The day. So you could say that, well, boy, that's a dark cloud that you or the donkey will 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 Black Monday.

17:32I 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.

18:08It 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 honchos of the Bank of Nova Scotia, about a month later, sliced one third of the research budget. Everybody thought it was going to be Armageddon. And meanwhile, and you'd 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 into, say, January, February, that this actually did not turn into the end of the world.

18:52It felt like it at the time. And I thought, wow, 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 thinking in a 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 and 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.

19:42And 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 debt 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, that S &P earnings were up 50 % year over year. In 1987 it was? In 87, and the GDP was like 5%. So ultimately, we had the recession starting in 1990. So the business cycle was never repealed, it's just that that was not the right time. And then we had the recession for a bunch of other reasons.

20:27and then we had the bear market, which didn't last forever either. I remember that day vividly. It's undoubtedly etched in my mind probably forever. So the answer to the question is that, yes, that put me 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 and 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.

21:07You 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, I'm my thinking, and Rich Bernstein.

21:49who I was the chief economist, he was the chief strategist, and we co-marketed together, and we co-authored publications together, besides becoming really great friends. So those were, you know, you can 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 in research.

22:42So 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 strategist, but if you don't have the communication skills, then it's basically all for naught.

23:38You 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 Farrell and 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 do your work, be out of the consensus when it's necessary, be original, be unique to 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.

24:56You've got to be able to communicate your ideas. So David, to the extent that you've been wrong about the US 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.

25:30And 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 it 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 government spending?

26:08And in fact, government spending at the federal level is up 20 % year over year to the first two months of the fiscal year, 20%. But I don't see a ticker on the S &P 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 an earnings stream and actually a future earnings stream. But I was bearish in 2022, was right. 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.

26:58And 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 US-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 be that as it may, because it's a diversified portfolio, it's not aimed to be benchmarked against the S &P.

27:35So your point about us 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 a limb and you make a forecast and you 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?

28:04What 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 feel like I'm waiting for God, though. And I've written about the reasons why this cycle has 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 it didn't come until December of 07. And believe me, I took a ton of criticism of FLAC back then.

28:45And the recession started in December of 2007. And back then, of course, the lags. Remember, the Fed took the funds rate from 1 % in June of 2004 and then went all the way to 5.5 % or so, 5.25 % 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 super inflated home. Remember mortgage equity withdrawal, we called it MU, cash flow refinancing. 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 06 and 07.

29:43It 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. They just wait for all the revisions. The first sample of all the data that we all trade off of are based on very small samples. And in 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.

30:19They just roll their eyes. They don't know that the data that you trade around, just look at the size of the revisions of non-farm payrolls, just to give you an indication. So in December of 2008, they declared the recession. Everybody, you know, and you mentioned Ed Yardeny, who I debated quite a bit at that point, whether it was Ed Yardeny or Ed Hyman, 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 there was still this pervasive view that we were in a soft landing.