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Finally. The moment David Rosenberg has been waiting for…
As the Gluskin Sheff economist stated in his regular Breakfast with Dave note on Wednesday (our emphasis):
Well, it took some patience but it looks like the economic environment I was depicting this time last year just shortly after I joined GS+A is starting to play out. Deflation risks are prevailing and a growing acknowledgment over the lack of sustainability regarding the nascent economic recovery. Extreme fragility and volatility is what one should expect in a post-bubble credit collapse and asset inflation that we endured back in 2008 and part of 2009.
And those who have followed the great bear’s analytical musings since he joined Gluskin Sheff will know — he was almost the last bear standing about half a year ago (with a few notable exceptions).
Rosenberg, of course, always stood defiant against the recovery enthusiasts who claimed his analysis was too bearish.
But with the Fed and Bank of England now acknowledging an economic slowdown may be on its way… it seems Rosenberg may be the one laughing now.
Not that there’s actually any reason to be laughing.
As Rosenberg points out, the US — if not the world — is simply not in Kansas any more:
I'm not saying that we are into something that is entirely like the 1930s. But at the same time, we're not in Kansas any more; if Kansas is the type of economic recoveries and market performances we came to understand in the context of a post-World War II era where we had a secular credit expansion, youthful boomers heading into their formative working and spending years and all the economic activity that went along with it, and periods when recessions were caused by excess inventories and overzealous central banks fighting inflation "” a war that can always be won with traditional interest rate weapons.
Now we are in the process of unwinding the excesses of a parabolic credit cycle of the prior decade, the first of the boomers are now retiring with nobody around to buy their monster homes and the Fed is now fighting a deflation battle that is prompting comparisons to Japan for the past two decades.
Moreover, here we have the Fed unexpectedly cutting its forecast for growth and inflation in the past month-and-change, and then we had Ben Bernnake tell us that the macro outlook is "unusually uncertain".
The world's most important monetary authority, with all deference to the People's Bank of China, is now openly contemplating more experimental quantitative easing measures to propel economic growth at a time when policy interest rates are zero, the size of the Fed's balance sheet is already triple its normal size, at $2.3 trillion, and at a time when the budget deficit exceeds $1 trillion, or 10% of GDP, and there are cries now even from incumbent Democrat senators for Obama to extend the once vilified Bush tax cuts. You can't make this stuff up.
And with deflation fears now trumping inflation ones, there’s only way to navigate against the expected volatility that’s likely to endure for at least some while, says Rosenberg. That’s by capturing yield — any yield – in a hedged position.
As he reminds investors:
…we are in a phase where deflation risks trump inflation risks, and this is not a case where cash is king "” cash, by the way, has not been king in Japan either for the past two decades "” but what is king in a deflationary cycle is income, no matter how you can secure it, whether through classic hybrid funds or through bonds.
And, not just government bonds because in some cases, corporate balance sheets today are in better shape than government balance sheets "” when I look at classic measures like debt-equity ratios, liquid asset ratios, debt maturity schedules and the ratio of long-term debt-to-total outstanding corporate debt, the corporate balance sheet is as good a shape as it has been in for the past 50 years, and this is coming from a renowned bear.
Which means shifting out of assets like equities and commodities (bar gold) and looking into corporate bonds.
After all, a profit warning for equities as an asset class is much more of a problem than it is for corporate bonds.
And in Rosenberg’s opinion, the higher quality non-investment grade space now has the greatest unexploited potential for spread compression and capital gains of all.
Related links: Who’s capturing yield? - FT Alphaville Rosenberg, damned "“ FT Alphaville Dave's gonna hit someone "“ FT Alphaville Poor Dave "“ FT Alphaville Fuming with Dave "“ FT Alphaville Dave's furious "“ FT Alphaville
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