Over the past few months this blog has summarized the views of several market observers, mainly those with bearish, deflationary views. It's time for an update, this time from David Rosenberg, the Chief Economist at Gluskin-Sheff, whose "Breakfast with Dave" letters you may have seen quoted from time to time in the financial news. He continued to lay out a cautious, deflationary line in the May 24 letter and a recent interview on Bloomberg Radio.
Regarding the markets at present, Rosenberg advises investors "to be patient and disciplined" and avoid the often-heard advice to buy at the lower prices offered by the recent market selloff. In his view, another decline in the financial markets is coming due to economic risks, in contrast to the financial risks (European debt concerns among them) that triggered the latest nosedive in stocks.
In support of this view, he cites an impressive list of leading economic indicators suggesting that the two-quarter long V-shaped recovery will turn south. Just a few of the indicators that have already peaked include the leading economic indicators of the Economic Cycle Research Institute and the Conference Board, the orders/inventory ratio of the Institute for Supply Management, and mortgage purchase applications.
"One of our primary themes has been deflation," at least in part because of price trends, extreme low interest rates, and declining real income excluding government transfers. This fits into Rosenberg's view that current economic problems are more structural than cyclical in nature.
Given the structural problems with the economy, the next recession is coming soon, rather than years away, and it will lead to "pernicious deflation", in Rosenberg's view. With so few policy options left, healso thinks that to counter these pernicious effects the Fed will be forced to engage in quantitative easing again and expand its balance sheet even more.
As Rosenberg said in the interview "that's why gold is going to be making new all time highs." Despite this long term view, in the near term he advised caution because gold has become "a very crowded trade; better pricing points likely lie ahead." It is no wonder that he is bullish on gold in the longer term, given that he says (not surprisingly) that "critical issues at the sovereign level" and "a crisis in confidence" are the root of the troubles in the financial markets.
