E50: Uncertainty to Opportunity with David Rosenberg
In the 50th episode of the Unlimited Podcast, host Brian Ginsler interviews David Rosenberg, founder and chief economist of Rosenberg Research. After a standard disclaimer, Rosenberg outlines why 2025 is defined by heightened uncertainty, pinpointing former President Donald Trump’s agenda—potential tariffs, immigration policy, and large fiscal deficits—as the primary source of risk. He notes that the Federal Reserve’s own language of "uncertainty" in recent FOMC minutes reinforces the expectation of higher risk premia across asset classes, urging investors to adopt a more conservative stance. Rosenberg then shifts to market valuation, highlighting that the Shiller CAPE ratio is at 37 (a 2.3‑standard‑deviation event) and that earnings growth expectations are embedded at over 20% for the next five years, a level he deems unsustainable. He warns of double concentration risk: the U.S. market now accounts for over half of global market cap, passive ETFs hold about 60% of U.S. equities, and the top ten stocks represent a disproportionate share of market value. The conversation moves to geographic diversification, with Rosenberg recommending Canada, emerging Asia, and Japan as more attractively valued alternatives. He explains Canada’s lower equity risk premium (3% vs. zero in the U.S.), the impact of a weaker Canadian dollar, and the likely policy response to any Trump‑imposed tariffs. Finally, he offers concrete investment guidance: raise cash positions (roughly 30% of portfolio), seek U.S. Treasury yields (5% on the 10‑year), hold gold and commodities as hedges, and tilt toward defensive, rate‑sensitive sectors such as financials, utilities, REITs, and telecoms. The episode ends with a concise 60‑second takeaway emphasizing diversification, reduced beta, and cash as the primary defensive tool.
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This podcast is brought to you by Ginsler Wealth. The information discussed today is meant to be general in nature and not tailored to your specific investing circumstances. This means that you should talk to your regular Ginsler wealth advisor or your own advisor before acting on any information we discuss today. Nothing in this podcast is intended to be a solicitation and past performance is not guaranteed be to future returns. This is our 50th episode, so I've said this disclaimer 50 times. I have it memorized by now. How about you? Today, the 50th episode of the Unlimited Podcast with returning guest David Rosenberg, founder and chief economist and strategist at Rosenberg Research. Rosie's theme for 2025 is uncertainty. And he's going to tell us why. Let's go. All right, welcome everyone to the 50th episode of the Unlimited Podcast. Very excited on our side and somewhat proud that we got to this point. And we have a couple milestones here. So number one, 50th episode. Number two, one of our most popular and most listened to guests in the history of the podcast, and that's David Rosenberg, president, chief economist and strategist at Rosenberg Research. You know, last time when we interviewed Rosie, as I call him, we went through his whole history and all that. We won't do that today. You can listen to the previous episode. I'll just give you a quick reminder. As I said, David's the founder of and president, chief economist and strategist at Rosenberg Research. Prior to that, with me, he was at Gleskin Chef and Associates, chief economist and strategist there for 10 years, 2009 to 2019. From 2002 to 2009, he was chief North American Economist at Merrill lynch in New York, during which he was consistently ranked in the Institutional Investor All Star Analyst rankings. And prior there too, he was Chief Economist and Strategist for Merrill Lynch Canada, based out of Toronto, where he and his team placed first in the Brendan Wood survey of Canadian economists for 10 years in a row. David may be familiar to folks. He's a for a whole variety of reasons that I've just mentioned, but also he's a frequent contributor to most major financial newsp and publications in North America and makes regular TV appearances in the financial media. And just a reminder, he received a Bachelor of Arts and a Master's of Arts degree in Economics from the University of Toronto. So Rosie, welcome back to the podcast. So happy that you're here, especially at this time in the world. And in January, early January of 2025, because you're going to tell us what, what's going to happen for the next year or so or more.
Well, firstly, Brian, congratulations on number 50. And I've been watching your success from afar and very impressed. And I want to congratulate you on your success with your new business, which isn't so new anymore. And I guess that because the crystal ball is more clouded than normal, I'll probably just talk about what I think is probably going to happen because I really don't for sure what's going to happen. I don't know that anybody who does, but let's take a stab at it.
Okay, perfect. Amazing. And thanks for those kind words. Appreciate it. And actually it's funny because you sort of have a lead in right into my first question. You just said, you know, you're the forecaster, but you also said, you know, you sort of have the crystal ball. Cause that's what we call you, the man with the crystal ball. But you don't, you know, who really knows? And I think your central theme, you know, obviously we're a subscriber to your research. We get it every day, we read it every day. And the central theme I'm hearing from you is actually uncertainty. That's the defining theme for 2025. And typically economists and strategists are not supposed to say everything's uncertain and we're just going to tell you exactly what's going to happen. But you know, you have the, the approach of, you know, you know, suggesting that things are uncertain, they're always uncertain. So maybe tell, tell us why this is your theme this year though, because I don't, I haven't heard you sort of emphasize that so much in the past.
Well, you're right in the sense that things are always uncertain, Brian.
As
Yogi Berra famously said, it's always difficult making predictions, especially about the future. So there's always uncertainty and you always have to have a base case forecast, which is the center of the distribution curve of all possible outcomes. And we are in a much more elevated uncertain environment. So those bands are a lot wider than they typically are. And you know the Chinese, Chinese proverb, may we live in interesting times. That's not a blessing, that's a curse. And this is the year in the Chinese zodiac. It is the year of the wooden snake, which happens every 60 years. So I would say that we're probably into a 60 year sort of event. And I think the uncertainty really comes from one specific corner, which is Donald Trump.
Right. I was going to say who's playing the role of the wooden snake. Maybe you've identified him well.
And so, and so the, the big question is, what is he going to do or not do? He has a much bolder agenda that he wants to pursue than is normal for any president, incumbent or newly elected. And I think that he will be more unconstrained at least in the next two years, given that the Republicans have a majority in the House and the Senate. Of course, just a thin one seat majority in the House. But I think that that is the primary uncertainty. Will he embark on tariffs? Will they be as big as he says they're going to be? How will they be implemented? And then what's the reaction function in the rest of the world? Will he end up plunging the world into a global trade war? Or will the rest of the world just, you know, acquiesce and do everything that he wants? Because a lot of the tariff threat is really aimed at getting other countries to fall in the line, you know, whether it's in terms of defense spending, contributions or border security. And we all know that Trump to a core is an economic nationalist. And then there's the big issue about deportation of illegal immigrants and the implications that's going to have on the US labor market. And then layered on top of that is, of course, fiscal policy. And he is a very big budget deficit individual, as big as Biden, probably bigger than Obama. But he is dedicated towards not just extending the 2017 tax relief package which was supposed to sunset at the end of this year. And this is what's true about all governments, whether it's spending or whether it's tax relief. What is deemed to be temporary at the beginning never seems to be temporary once it's about to expire. And so, you know, we've already had back to back years of 6% plus deficit GDP ratios in the United States. He's about to probably make it three in a row, which is unprecedented for a US Economy, not a war, not fighting a financial disaster or a recession. And the bond market has started to take notice of that over the course of the past several weeks, in fact, the course of the past several months. And then what's important to everybody, or should be important to everybody who's an investor, is what is the Fed's reaction function to what Donald Trump is going to do. And what was very interesting because, you know, you wrote up the word uncertainty and we published our Year ahead report before the last set of FOMC minutes from the December 18 meeting. And Jay Powell and his brethren used the term uncertainty, no fewer than a dozen times in those FOMC minutes. So I would just posit that if Jay Powell, who has more information than the rest of us, that much is true. If he's uncertain, then we should all be uncertain. And when you tie that into an investment philosophy, what does uncertainty mean? Uncertainty means, or what it should mean is higher risk premia across all asset classes. Ergo, become more conservative in your investment style. Because we are facing a different environment than we have in the past couple of years. And when things change, you should change. Now, nothing's happened yet. Trump, you know, the inauguration is less than a week away. But if the Fed is making assumptions about what the Fed is going to do or not do, and a lot of it is, still might be guesswork, but you're always playing probabilities, we should all be doing that. So rising risk premia in the financial markets, I think is a necessity. The question is by how much? And then layered on top of that, we should all be asking the question, why is Warren Buffett sitting on a 30% cash position, which he's never done before? So what's Jay Powell saying that all the big bulls out there aren't saying? And why is Warren Buffett positioned the way that he is? Because I don't know anybody else. No, I don't know anybody else with the investment acumen, track record or experience that Warren Buffett has. But I don't know about you, Brian. I don't know anybody else that's sitting on 30% cash right now, maybe, except for me. Okay, The Warren Buffett.
Right. Okay. Well, that's a good overview of uncertainty. And we're going to touch on investment, investment thoughts and strategies. We're going to talk about, you know, what to do in the face of Trump, but maybe we'll continue on this theme. You know, it's smart of you to notice what some of the best investors in the world are doing. You know, you just mentioned get a little bit more conservative. One of the things you've been talking about recently is let's call it the theme of market overvaluation in particular in the U.S. do you want to just give some color what you're seeing in the US Last week you wrote, we think it more likely than not that the US Economy is poised for a recession. Anyways, I won't, I won't answer all the questions on your behalf because you'll do it way, way better than me. But so what? What's it look like in the US what do valuations look like. And again, what always would be great, pull it back to so what should, what should investors do?
Okay, well look, the, the recession so far has been averted and I've been calling for one, but it's like waiting for Gado. But I remember being in the same position in 2006 and 2007. Where's the recession? Where's recession? And then in 2008, 2009. Oh boy. Getting hit by a two by four. Yeah, let's talk about the valuations in the US market because the bubble and people don't like the word bubble, so I can always call it a mania. But the evidence is always in the price and what you're paying for. So price is what you pay. Value down the stream is ultimately what you get. So firstly, I think that we can compare the backdrop we have right now, and I'm putting Trump aside right now and talking about the very big inflection point. Of course we had an inflection point five years ago with COVID and then we had just a massive policy response from governments and central banks that overwhelmed Covid and the lockdowns and we had this monumental liquidity based rally. Then of course in 2022 we get the inflation and we get the central banks tightening. And heading Into October of 2022, we were in a serious correction, especially in the most cyclically sensitive stocks. And then that bear market or correction in 2022 engineered by the central banks for the most part and inverting the yield curves. And we all know that story and the pernicious inflation, we know that it ended in late 2022. So what happened was of course, that is when generative AI and ChatGPT. That's when that file really started to proliferate. And we witnessed the onset of what I refer to as an inflection in the technology curve, not unlike how you would date the onset of the Internet on mania, which was 95, 96, right after Netscape went public. And you had the widespread usage and again proliferation of anything related to the Internet. So there's a lot of comparisons between this period and that period in the sense that we hit a model change in the economy or certainly in perceptions about the economy. But we have hit a new slope of the line when it comes to technology innovation. And that curve is always going up. Innovation is something that never takes a step back. I mean, you had up until the 1960s, the most patents that ever got through the United States was in the 1930s. Now think about that. You know, the Hoover vacuum cleaner Named after Hoover. The 1930s was exceptional decade. It was the Great Depression. Technology curve is always sloping up, but we've gone through a new shape of that curve, just like we had in the mid to late 1990s. It's very similar. I'm not going to say that generative AI is necessarily going to be the same game changer as what we have with the Internet, but we all know that it's going to be significant. We don't know how it's going to be regulated. We know that it's going to be a major disruptor in many respects, but it's going to have a huge impact on productivity, cost cutting, and what happens when you get these technological innovations. And frankly, we can go back in time. We can go back to the cotton gin and the steam engine and the railroads and electricity. This is what we're living through right now. It's a very special time period and what the markets do, because the markets will always shoot first and ask questions later. The economy moves glacially. Even in a boom year. You're talking about 3% growth in the economy. And if you had 3% growth in the stock market, that's not usually a very good year. The stock market is more volatile and in both directions. In a recession, the stock market goes down 30%. GDP does not go down 30%. So look, the stock market, which we love to invest in and brag about our winnings, the cocktail parties, is a different animal than the economy. Which brings me up to John Maynard Keynes, who famously coined the phrase animal spirits, which is investor perceptions about the future. The economy is not driven by animal spirits. But you see, the stock market is. And what happened in the 1990s is it wasn't just a dot com bubble. People always say, well, you can't. That was just.coms.coms with no business models and no cash flows, no earnings. No, it wasn't about pets dot com. You go back to that period and everything got caught up in an overall technology bull market, morphed into a mania and then an actual price bubble. And you had companies back then with cash flow, profits, business models, bona fide great companies like Cisco, like Microsoft, like intel, light Dell, like IBM, that got swept up in that technology bubble. And we know what happened next. These stocks went down. And then, you know, after the beginning of 2000, when the bubble burst, these stocks, which were bellwether companies that are still around today, went down between 60 and 80%. And then from 2003 to 2013, for about a decade, they were in the penalty box. And this was even as the Internet was changing our personal life and improving productivity and having impact on the economy. And even in that period, these built weather tech stocks after diving substantially and creating a lot of pain for all those investors that thought they could time the exit back in the winter months of 2000. Well, that's the history of what happens with a technological innovation that is a model changer. It shifts the technology curve and the market just gets carried away with itself. And that's what we're seeing right now. Now, I can't tell you if we're in 1996 or 97 or if we're 98 or 99. But what I will tell you this when we talk about valuations. I had ascertained that because of this technological shift, investors were naturally, as they do in periods like this, were lengthening their time horizons because the impact on productivity and corporate costs and earnings take place over a long period of time. So we got 100 years worth of data, Brian, and went back to estimate what is the normalized five year earnings growth embedded in the stock market? What is it normally and what is it today? Yeah, well, normally the five year normalized earnings growth embedded in the S&P 100 is 7 to 8%. It's right now over 20%. And at the end of 2022, as people were noticing Nvidia and all the spinoffs, it was less than 10%. We've doubled since then. So even if you're willing to acknowledge that investors have lengthened time Horizons, we have 20% earnings growth embedded over the next half decade, which is about triple the historical norm. And by the way, very similar growth in long term earnings projections that were being embedded in the S&P 500 and the NASDAQ and the Dow back in the late 1990s and it proved to be unsustainable. Earnings growth over time does mean revert. But we have 20% priced in right now. So I just say to my clients, look, if you believe that generative AI and all its after effects are going to generate 20% growth per year for the next five years, then this market is for you. I have some people saying 20%, we're going to have 30%. I say this market's for you, not for me, but this market's for you. So that's my big concern. And it's just basically human nature that the markets go in and overprice what is going to be delivered. There is just a lot of growth priced in with the stocking market. Market right now. Not just from a one year perspective, but from even a five year perspective. Even if you account for the fact that investors have late night time horizons, this is not a bargain. And these are companies. Look, we talk about American exceptionalism and we hear that all the time, American exceptionalism. Tell me, when has America not been exceptional? It's always been exceptional. American exceptionalism. And this is just a case where strategists, economists and analysts always feel the need to attach a narrative to the price movement. So it's about exceptionalism. Well, it's really just about this inflection point in the technology curve and how investors have behaved. When we take a look at the classic PE multiples and you look for example at a one year trailing 25 multiple, that's nosebleed. One year forward 22 multiple vats, nosebleed. My favorite indicator is the Shiller price earnings multiple, what's called the Cape, the Simplicity adjusted price earnings multiple, which is a 10 year smooth PE. So it's 10 years. So it covers the cycle. The data go back to the 1920s. That multiple is now at 37. 37. And it's only been here three other times in the past. Okay, 1929, 1999, and again very briefly back in late 2001, which of course presaged the hefty pullback in the market in 2022. This classifies as a 2.3 standard deviation event. Now, don't take it from me, Jeremy Grantham has written about this, that anytime you get in any asset class A2SD event, it is by definition a bubble. We are in the United States and it's the only stock market, by the way, that has this characteristic as being in a price bubble. And when you look historically, once again, the only times that you've been in the two standard deviation event on the S&P 100 was 1929 and 1999 and again back in 2021. It's extremely rare. Now, the bubbles can sometimes last one or two years. That two SD event can last longer than you think. But the question is, will people be able to time when to get out? It reminds me of when Chuck Prince, the CEO of Citigroup, famously said in July of 2007, you gotta keep dancing till the music stops. And I'm not so sure he even realized at the time that the music was going to stop less than three months later.
Right, So I listened to your webinar or I watched your webinar last week with Jeremy Grantham, and he said exactly what you Said I was going to mention that too. But he says whenever you see, he calls it a two sigma event, I think that's what you mean by 2s standards, standard deviation. He said whenever you see a two sigma event, 100% of the time, the trend reverses to mean. That's what I believe what he said.
That's what he said.
So if that's the case, what does that mean? What's the mean? Maybe just remind us, where are we at now? What's the mean? And so what could that mean for the equity market in the us?
Well, don't forget that mean reversion necessarily means that you don't just go to the mean, you go through the mean.
Right.
Because the mean is the average and the average is a horizontal line. Yeah. And what you tend to find is that you go through the mean on the upside and go through the mean on the downside. And what it means is that, you know, the next bear market is going to be pernicious. And I'm not going to say it's going to look exactly like what it did in the late 1990s. I would say that that price bubble was bigger than this one. But a lot of people are going to be surprised. Nobody knows what's going to cause the dam to break, except to know in the lifetime of the markets, we have bull markets and bear markets. And bull markets are long and strong. Thankfully bear markets are short, but they are severe. A bull market is akin to an escalator going up. But bear markets slice off your head. They are an elevator going down. Now, for people that have, for your grandchildren, you have a 10, 20, 30 year view. Just look at the long term chart of stocks. Not that you and I are talking about gonna make a difference, but if you're taking this year by year, you know, we talked about the Chinese zodiac. Let's face it, the calendar year is just a fluke of history. We made up the calendar year, but people always plan for the year ahead. I mean portfolio managers always plan for 4pm at the market close. Most of us always think it's always about the New Year's resolution. It's not about the resolution for the next decade. So we look year by year and I think it's going to be a very challenging year. It could be a very challenging next several years. And this is what I mean is that when you get to the cape, multiple of 37 and you look at the stroke or record of all the times we were this high and you look at the return in the SV of 500 in 1 year, 3 year, 5 year or 10 years, the market is usually down, it's not up. So it's hard to make book as to how deep the next bear market's going to be, except to know that we're closer to it now than we were a year or two ago, but that the US stock market right now is a very difficult proposition. And what we know about valuations is that, no, no, they are not timing tools, but nobody is a consistently great market timer. But the valuations are helpful because at any moment in time they'll tell you whether the future potential returns are one of headwinds or tailwinds. And I'd say that we have a very significant headwind in front of us. I don't even go into the numbers as to what the SB could look like if we go through the next bear market, except to say that in a normal bear market, and it might not be a normal bear market, considering that all speed lip valuations that the market is usually down 30% peaked a trough. But as we saw in the early 2000s, as we saw in the other bursting of the bubble, it was a different bubble. It was a housing mortgage and credit bubble back in the mid to late 2000s. The market could go down a lot more than that. And I'll tell you something else that has me unnerved is that we have double concentration risk on our hands. We have a situation again very similar to what happened in the, in the technology mania and bubble of the late 1990s. Is that the top largest stocks, I mean, we have companies now that are $3 trillion plus companies in terms of their valuation. When you look at the top 10 stocks or you look at technology, and invariably the bubble is in technology because that's the most exciting part of the market, that the concentration share is as high today as it was back in the late 1990s. And what's happened is with the double concentration risk, it's not only the fact that the market is so concentrated in one sector or a couple of sectors, if you want to count Amazon, which is in consumer discretionary, it is a very highly concentrated marketplace, much like what you had with the Nifty50 back in the early 70s. The breadth, although it's improved somewhat in the past several months, the breadth is still overall very disturbing. The concentration in the market is very disturbing. And how people are reacting is disturbing because active fund managers are bleeding because there's no way that they could match or beat the index. Because to match or beat the Index would mean it's late In Canada, late 1990s, you could only beat the index if you were choking on Nortel stock. Look what happened next. So you have to take on as a portfolio manager, an active manager, extreme concentration, risk to meet or beat the index. And active fund managers get paid to focus on risk, to focus on minimizing downside potential and diversification. But index funds don't do that. Index funds do not do any homework for you. They are not trained. They never took a cfa. But everybody's been lured into these passive indexes, investing funds to the point where these passive ETFs, in terms of their share of the overall market capitalization in the United States, is getting up towards 60%. 60% in passive investing as a share of the market unheard of. When John Bogle first introduced the Vanguard ETF back in the mid to late 1970s, he said, this market will never get above 20%. We're getting up to 60%.
Yeah. I think in Canada there's more ETFs than there are actual stocks at this stage.
And so people don't even know what they own in their portfolio. Used to be that you'd have a broker, you'd have a fund manager, they'd have 20 stocks in your portfolio. They would say to you, we're going to sell this and buy that. They'd be on the phone, they'd call you and say, I'm getting nervous about the market. We're going to move in a 10% in the cash. An ETF doesn't do that for you. Most people don't even know what they have in their 401ks. But more to the point on the double concentration is you reached a point where over 70% of the US household financial asset mix is in equities. Roughly 10% is in bonds. Believe it or not. Who talks about bonds at the cocktail party? You're going to be ignored. That's not interesting. The rest is in ca. 70%. You have a higher concentration on household balance sheets and equities today than you had actually back in the Internet media in the mid to late 1990s. So concentration on the household balance sheet in terms of equity risk, and then on top of that, the equities they own is highly concentrated in the technology sector. So double concentration. What really unnerves me is what happens when we go to the other side of the mountain, and we will go to the other side of the mountain. What's the date? Who knows? But I know that it's in front of us. And everybody that I talk to believes that they will get out at the peak. And this is again, human nature. It's the chalk prints. You got to dance till the music stops. But the concentration, the concentration, especially in ETFs on household balance sheets is that when the panic sets in and remember that the two things that have not gone away in thousands of years is the primal emotions of fear and greed. Now, now we've got the greed. We had the extreme greed, and then what comes next? And so what happens is that when everybody tries to sell at the same time, because everybody is all in, there's not going to be enough buyers on the other side. We're going to have a liquidity crisis. There will not be enough liquidity to support the selling, which is going to reinforce the downdraft in prices. And that's what I said before. The one person who gets it is Warren Buffett. Warren Buffett, the classic value investor, will be there to pick up the pieces, by the way, so will I. But I'm not big enough to move the markets like he is.
So, you know, you've identified obviously the risk here. It sounds like it's obviously pretty focused on the US and the Mag 7, although maybe others as well. And then a lot of your writing and your research is all about, okay, so where should you be? And amazingly, you know, good news you just mentioned last week, you know, Canada. Let's look at Canada for a minute. So why is Canada maybe a good place to be now, equity markets or otherwise, especially as we sit here with, you know, almost no government, no leader, no election, we got Trump with tariffs, you know, lots of uncertainty, as you said at the beginning. But I think you're, you have maybe a little bit of a case for Canada right now, maybe share that with us because, you know, yeah, you could get, investors can get out of equities if, you know, because of this potential bubble as you describe it, or, you know, in our view, it's not necessarily get out, but move to other areas that may not be as frothy. Canada, maybe international, which I think you've talked about as well, anyways. But let's talk about Canada because we're sitting here in Canada. It's always good news when, you know, you say there's a case here.
Well, you know, the US Market is now, I think, over half the global market. So if they, we've never seen that before. I think since 2008, the share of the US market relative to the size of the overall global stock market has Doubled. It is the elephant in the room. But there's no other market on the planet that had that's over a two sigma event. Only the, only the U.S. we find the valuations much more compelling in emerging Asia. Although we are very concerned about China. We prefer Hong Kong. If you're going to play China, be in Hong Kong, which has less, we say, political uncertainty and there's ways that you could do that in the portfolio. But emerging Asia and Japan. Japan is a secular long term call for us. It's worked out nicely Europe notwithstanding the moribund economy and the fiscal problems. Well, the US has similar fiscal problems, but it is the reserve currency so it gets a pass. But almost every other corner of the world is trading at much more alluring valuations. Notwithstanding whatever the fiscal risks and political risks, especially in Europe and the fiscal risks, a lot of that is priced into the multiples. You have a lot of bad news priced into virtually every other market in the world and you have Goldilocks priced in to the United States. So if you're, if you have even a remote contrary antenna, you know what to do. And so when I advocate diversification across asset classes and across equity sectors, I also advocate diversification across geographies.
Sure.
So we like a lot of other markets in the world and you know, the reality that what makes Canada special is that, you know, you know, Donald Trump calls us the 51st state, but you know, that's not a term we haven't heard before. And you know, we are very closely tied to the US and you know, as far as I know, our biggest export isn't energy, it's the million plus snowbirds that leave Canada every year for the balmy weather of Florida. We really are tied to the hip and a lot of people are very reluctant about Europe. Big question marks over political stability. As I said before, the economy as weak as it is in Canada, it's probably even weaker in Europe. I understand the concerns there. The emerging markets are typically volatile and a lot of people believe it's like investing in the wild West. But Canada is none of those. Canada really is in many Respects is the 51st state. It's just that we have our own healthcare system, we have our own regulatory system, we have our own currency, we have our own monetary policy. But Canada's economy is more than 90% correlated with the United States economy and our markets traditionally are about 90% correlated. So if you're looking for a surrogate or a proxy to the beloved, people just can't part with their US equity position. But you see, if you are thinking that I want to switch from growth to value, Canada is a bellwether value. The TSX is a bellwether value index. And you're investing right next door to the US in a much more attractively priced stock market. So if you want to minimize your risk, you want to sleep at night and you're thinking, I want to invest in North America, I don't really want to go abroad. The relative price earnings multiple discount between Canada and the United States has rarely been as this wide. Today, Canada is not trading anywhere close to a two sigma event. Our stock market is actually fairly valued. It's about a 15 multiple. Looking at the one year the US is 22, it's a 7 multiple discount. The United States, the S&P 500 trades with a zero equity risk premium. In other words, the earnings yield on the US stock market is equivalent to the yield that you're going to get in the treasury bill market. Think about what that means. If you're a US investor, think about what that means. The market, I said before, the market is telling you that we're going to have 20% plus earnings growth annually for the next five years. That's a tall order. I tell people, if you believe that this market's for you, what does it mean when the ERP is zero? Because in Canada it's not zero ERP in Canada, the equity risk premium is 3%. Right? And this is what the equity risk premium is. The compensation you're getting as an equity investor over the risk free interest rate. I think that being rational people, we would want to be compensated to take on equity risk in the United States, the S&P 500, you are getting zero compensation for taking on equity risk. The earnings yield, which is the inverse of the PE multiple is the same as the 4.5% treasury bill yield. So once again, what's the stock market telling you? The stock market is telling you, and this is how nutty it's become, Brian. The market is telling you that equities are on the same risk parity as the treasury bill market. But we know as rational people that the treasury bill market has no capital risk and it has no duration risk. It's the risk free interest rate. And when you're at 0erp, which by the way we were in the late 1990s, nobody listened to me back then either that there's a problem when the stock market believes that it is a riskless asset class. When the ERP is zero by definition, what it means is that the collection of stocks in The S&P 100 are trading as a zero beta community. That is not rational. Remember that Alan Greenspan talked about irrational exuberance in 1996? Well, 1996, the ERP was a zero. This is maybe beyond irrational exuberance. But you see in Canada, the equity risk Premium is not zero, it's 3%. In Canada you have a 15 multiple competing against a bond yield which is about 100 basis points lower than it is in the United States. So the valuations alone are extremely compelling in Canada. So I wrote a report just a couple of months ago and I wrote a sequel to it that was really aimed at my US audience, which was basically saying, leave New York and come to Toronto. Now, the comeback, which I'm sure your comeback will be, what about the Trump tariffs? Okay, let's say that he invokes a 25% tariff. Let's say that happens. And it may well happen. It probably will happen. So that's going to be a 2% hit on Canadian GDP. We will go in. If we're not in recession already, we'll go into recession. Okay, we export $600 billion worth of goods in the United States. Do the math. We will have a 2% hit. It will mean more than 400,000 jobs lost and the unemployment rate going from just below 7% to 8% or probably higher in that environment, depending on what happens to labor force participation. But 8% unemployment has been the touch off point for every recession going back to the early 1970s. Okay, you would say to me, well, why on earth. Why would you be bullish on the Canadian stock market? Well, bullish relative to the US Stock market. But let me explain why. The TSX is not gdp. The TSX is not gdp. The TSX is really a value index. It's not a growth index. The US Stock market has double the sensitivity to economic growth that the TSX does. I'm not saying the economy is not important. What I'm saying is that the GDP in Canada matters a lot less of the TSX, that the GDP in the U.S. matters for the S&P, because the U.S. is growth and we are value on top of that. What is much more powerful for the stock market because the stock market is a long term asset class, a long duration asset class. And so even small shifts in interest rates have a big influence on those future discounted cash flow streams. I mean, you talked about Canada. Yes, we're going to be rudderless politically for the next few months. It's not going to be for the next few years. I would couple your mark with what happens if we get a pro business pro coming out of this uncertainty that Justin Trudeau was created by really having no functioning government for the next few months. True enough, it's a pimple in the course of time and the payback will be a conservative government that is pro business, pro market. Well, that might be a pretty fair trade off. But let's talk about what I, what I said that he puts on the tariffs. Clear, negative. It's a matter of where in the TSX you want to avoid. Well, you want to avoid the areas that are going to be hardest hits from the tariffs. Okay, so materials, industrials, consumer staples, consumer goods. That's 25% of the TSX that you want to avoid. But what's going to happen is the bank of Canada is going to be forced to slash interest rates even more. They've already cut rates 175 basis points. They will have to minimally cut rates 200 basis points as an offset. And the Canadian dollar probably goes to 150 or worse than that, which is, call it 67 cents or maybe lower. So as Isaac Newton famously said, every action has an equal and opposite reaction. Well, the reaction to tariffs will be much lower rates here and a much weaker Canadian dollar. So what will happen with that? Well, for example, lower interest rates are going to be a huge benefit and a steep yield curve to the financials, the financials. He's not going to tax what the banks are doing. He's going to tax imports coming across the border. Well, what does, what is, what do the banks export in the United States? They already have branches there anyways. So financials, telecom, utilities, REITs. Brian, that's 50% of the market. So the parts of the TSX that will benefit from lower rates are double the areas that are going to get hurt by the tariffs. Then you got to layer on what about the weak Canadian dollar. Think about who is going to benefit from the weak Canadian dollar. I'm not going to sit here and say, well, the weak Canadian dollar is going to be a pure antidote for the areas being hit by the tariffs. But think about a weaker, think about what a 67, 65 cent dollar is going to do to Americans who are going to look at Canada as a super duper cheap destination for their vacations. So you're going to find Americans flocking. Unless, you know, unless Trump's going to put border controls preventing Americans from vacationing in Canada. So no, it's going to be a huge boon so basically you want to be long because the dollar is going to go down. This, you know, airlines, the airlines are not going to be hit by tariffs, but you're going to find a lot of people flying into Canada and you're going to find that the hotels and the motels and the restaurants are going to be filled with tourists. There's going to be a tourism boom in Canada as a result of the Trump tariffs.
So is that your sort of main view right now on the currency? Like we have a number of clients actually already, clients and other folks that we talk to asking, should we be converting Canadian dollars to US Dollars now even at these historic lowish levels? Yes. That's your view.
My view is that where we are now, what, 144 or thereabouts or. Yeah, we've gone from 130 to 144. And that's been premised on the fact that inflation's come down faster in Canada than in the US Predicated on the fact that the Canadian economy is growing basically just over 1% versus 3 in the United States. They have a ton more fiscal stimulus that's been supporting the economy. Let me think of the 6% deficit, GDP ratios, what is it in Canada? Roughly 2%. So the fact that the bank has cut rates 175 basis points. The Fed's gone 100. We've driven that negative interest rate differential at the front end of the curve and that's driven the Canadian dollar lower. Well, that's one part of the story. The next part of the story is what happens if we get the tariffs now, if he backs away for whatever reason?
Right.
No, maybe, maybe we raise defense spending a lot. Maybe we put more money into the border. Or maybe he says, okay, you've done enough. Maybe he'll, he'll, he won't go 25% right away, but go 2% a month. And it's just basically a slow drip, water torture to get us to come in, align with what he wants us to do on, on the border and on national defense. And we finally say uncle after a few months. Well, you know, it's a fluid situation, situational. But the 25% tariff, what it does to the economy, what it does to the job market, what does, the bank of Canada will basically take you to 150 on the Canadian dollar. So you're talking about, you know, you know, it's, we could, we could be down, I would say another three to five cents. We already had a very big move. So most of the move is over. But to say to me, well, you know, if you haven't already done the conversion to USD, you know, I would say it's not too late to do it. You know, we could be in the sixth or seventh inning of the baseball game, but most, you believe after the baseball game is over. And as far as the Canadian dollar depreciation is concerned, the baseball game's not over. Right.
We may be in the seventh inning stretch. Just speaking of Trump and tariffs, and I know we're running out of time here because you're going to have to go in a few minutes. If you were an advisor to the new prime Minister of Canada, whoever that might be, what would you be telling the prime minister to do right now in the face of Trump and whatever else is going on as it relates to our country, but mostly Trump and what's happening there?
Well, I'd be looking for a solution. I would not be doing. I would not be saying, you know, if you do this to us, we're going to do this to you. You know, like, you know, some politicians are saying, you know, we'll stop exporting energy or electricity or natural gas, critical minerals. That's, you know, I know that people will say, well, that's how you have to fight a bully. But, you know, we all know as kids, you fight the bully, the bully will just beat you up even more. And we don't have a leg to stand on. I think that, yes, we could hurt the US but not like they could hurt us. So we don't want to get into a tit for tat. That bothers me. I think we want to sit down and figure out what we have to do. And if it means going down on hands and knees to beg, we should do that. What do we have to do to avoid the tariffs? Just tell us what do we have to do? You know, despite the fact that people, you know, discuss Canada's big fiscal problems, you know, we're actually nowhere near where most of Europe is and we're nowhere near where the US Is. If they want us to meet our obligations on national defense, just do it. If they want more, you know, officials at the border, just do it. Just say to Trump instead of tit for tat or whatever, what can we do? What can we do to stop you from the Twitter and, and if it means that we have to, you know, eat a lot of crow and, you know, beg. Yeah. You know, the reality is that Trump will not be president forever. He could do a lot of damage. You know, I mean, he's got the majority in the Congress for two years, but he'll be around for four years. So I think that we have to acquiesce. We have to acquiesce. And that's what I would do. I would just say to Donald Trump, what is the laundry list of stuff beyond say your desire to annex country and turn it into the 51st state officially? What is it we can do? What is it we could do immediately to resolve the situation? Okay, so I would basically be extremely deferential, understand who you're dealing with. You are dealing with a bully. But we don't want to get beaten up and then get beaten up again. So I want to avoid a trade war. Trade war would be the worst thing for us beyond just the initial tariff shock. I think that's what we have to do. That's what I would do is okay, the negotiation is one sided. It's not we're negotiating, it's what can we do for you so that you won't do this to us? I don't know why that's so complicated. Yeah.
Okay, well, last minute here. I mean, I think your key messages have come through pretty strongly. But if you had 60 seconds just to tell investors, what should you do now? As you know for 2025, this is where you're going to be best positioned or this is my best advice in 60 seconds or less. What would that be?
Well, look, it's the year of the uncertainty. It's the year of the wooden snake. So I say again, when we are in a heightened, uncertain environment, whatever your thresholds are, you should be positioning your portfolio much more concertedly than you have in the past or what your average tolerance level is. Risk tolerance should be, I'm not going to say put in a lockbox, but should be reduced. Diversification is not a dirty 15 letter word. So I would say with your winners, and I know it's painful to sell the winners, I'm going to get a tax hit. You know, thank the good Lord that you're in a position to pay taxes because it meant that you had a very successful past year or past two years with the S&P100 in particular generating 25% returns. So I would say that reduce the beta of your portfolio, reduce the cyclicality of your portfolio, move into cash. I'm not going to say it has to be 30% Warren Buffett cash, but I'm not far off that mark. But I would say raise cash. Especially in the United States where cash pays you, you know, 4.5% but we had the last bear market in 2022, didn't last that long. But you didn't get paid 4.5% to be in cash. Cash is not trash. I think you're getting a very nice buying opportunity in the US treasury market and again I'm focusing on the US dollar, but you're also getting 100 basis point premium in the US bond market over the Canadian bond market. So I like the US bond market over the Canadian bond market and I think heading back up towards 5% of the 10 year note. Last time we did this in April of last year was a very nice buying opportunity. Gold as a long term hold. I think that commodities are very good hedge. Commodities are a very good hedge and so I do like the commodity space and in Canada I outlined that there is a stronger case for Canada, irrespective of whether we go into recession or not. The fact that interest rates, short term rates will come down dramatically are going to be very good news, especially as I said before, especially for the, what I call the bonds and drag in the tsx. So if you're going to be invested in the stock market, I'd say move to defensive. But also some of these rate sensitive sectors, financials which have had a nice run but they are influenced primarily by interest rates. The bank account has got more to go. Utilities, REITs, selectively telecom, the rate sensitives I think will hold you in well. So move to cash, reduce your equity exposure and move as a Canadian investor towards those bond proxies in the stock market and I think you'll do just fine.
Amazing. Well, diversification not only not a dirty word, it's one of our favorite words over here actually, and maybe a little bit different than other folks out there. Our clients have a lot of options around diversification which we hunt out and seek for them. Anyways, Rosie, thank you so much. I know we're out of time. You gotta run, you're in high demand. I really, really appreciate your time for the second time and wish you all the best and we'll see what happens in 2025. I'm not certain, it's uncertain, but we'll see.
Well, we'll have to check back. Thanks for having me on. You know, the hour went by quickly, uh, which means that the two of us were having a lot of fun like we used to in the old days. So all the best to you and all the best to your clients.
Okay, thanks Rosie. Talk to you soon.
Bye bye. The Unlimited podcast is hosted and produced by Brian Ginsler and is edited and mixed by myself, David McMillan. This podcast is not to be taken as investment advice. If you like what you heard, don't forget to rate the podcast and follow us on Social medianslerwealth. Thanks for listening and see you next time. Sa.
