Full Interview: David Rosenberg on the Unlimited Podcast by Ginsler Wealth

This podcast is brought to you by Gensler Wealth. The information discussed is meant to be general in nature and not tailored to your specific investing circumstances. This means that you should talk to your regular Gensler 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 does not guarantee future returns. This podcast may include scary topics including inflation stagflation, rising interest rates and housing bubbles, and may not be suitable for some listeners. Listener discretion is advised. Let's go. Welcome everyone to the Gensler Wealth Unlimited podcast. You know, as we sit here today, the COVID pandemic is still keeping China locked down. Inflation is at record highs and shows no signs of abating. Russia continues to engage in a war with Ukraine and resulting in very high energy and gas prices. Governments are raising interest rates at a rapid clip. The stock markets have fallen dramatically since their highs, and some former market darlings have fallen 80% or more. The bond market has similarly been in a major rut, and Canadians are facing dramatic increases in the price of food and other daily necessities if store shelves are stocked at all. So in other words, what a great time to be speaking with David Rosenberg, president and chief economist and strategist at Rosenberg Research. Sorry, I didn't mean to be a downer right off the bat, but you know, a little bit of context. So let me give a quick intro to Rosie, as I call him. Rosie and I go back 10 plus years and I'll give you a lit before, before I, you know, roll it open to Rosie here. I want to give you a little bit of a story as well as a little bit of a picture or window into David Rosenberg. So for those who don't know, and I assume most do, Rosenberg is the chief economist and strategist at Rosenberg Research, which is his own company that he founded a number of years ago after being chief economist and strategist at Gluskin Sheff and prior to that, chief North American economist at Merrill lynch and I guess bank of America Merrill Lynch. And you know, for me though, the intro to Rosenberg was while I was at Gluskin Chef a number of years ago, I was the chief operating officer and was advised that we're gonna hire David Rosenberg. You know, the, the, the man who called the housing bubble. He had a, A, a publication that he did every single day without fail. And the one directive to me as chief operating officer was David is going to leave his previous place on a Friday. He's going to show up at Gluskin Shaft two days or three days later, I guess on Monday. And he is adamant that there will not be one business day break or I guess lapse in sending out his daily, let's call it Breakfast with Dave, which is what it's called now. I think it may have been called that as well back then. We were not going to have one day of a break for his loyal readers and the people who depended on him for his thoughts, thoughts and views. So that was the first introduction I got to David and his work ethic and his care and focus on his client base and making sure he shared his thoughts with, with, with the world at large. So after that long winded intro, David, thank you so much for joining us. Just really pleased, especially given our relationship and friendship to have you here. It means a lot. So thank you very much.

Well, Brian, thanks for inviting me on. It's great to reconnect like the old days. And it was actually the daily was called Morning Market Memo because I loved alliterations. But the thing is that I don't think Merrill lynch would have ever allowed me to go as far as to call it something folksy like Breakfast with Dave, which a little shout out to my youngest son Michael, who came up with that since he says you do get up early in the morning to do it. People are eating when it's call it Breakfast with Dave. And I remember saying that in the boardroom you were there and everybody just howled with laughter. But, and look, you were behind the scenes. You know, you created the whole template and the got the ball rolling for me. So I am forever in your debt. And yeah, it's still called Breakfast with Dave as of today.

And now there's more.

It's a dog's breakfast and fits in well, I think with your poster behind you. Because when I, when I see the Beatles, I'm thinking right now in the market sense, it's like it's Helter Skelter.

Well, there's many Beatles quotes and we can maybe get there, you know, the long and winding road to interest rate hikes. Who knows? We'll, we'll, we'll touch on all that, I'm sure. But before we dive into the world and economics though, I think it would be valuable maybe to hear a little bit of how you got to, you know, Rosenberg research and in particular and you know, going back to even the introduction, like there is something special about you and well, lots of things special about you, but there's something very special and I think lessons to be learned from Your work ethic. And you know, I saw you in action when we worked together a number of years ago. By 7 in the morning, you had, you know, 5,000 words written. And that's I think, been every day for what, 20 plus years. And you know, anyone that dedicates that amount of time and does something every single day, you know, like the question is, how do you do it? Like how, how do you, how do you get up every single day without fail and make sure that, that you spend hours and putting this all together, like give us some words of wisdom on that because that, that's, that's what I define as a successful, a trait of a successful person.

Well, I think it's a case of me being fortunate that I love what I do and I have a great passion for the financial markets and I have a great passion for economic analysis and strategy and combining economics with investment decision making I've always found to be very exciting. And to this day, and it's no different than I tell, you know, my kids or my friends kids, you know, it's obviously very important to, you know, have a make a living, but also make sure that you really enjoy what you do. You know, life is short. Time is our most critical resource and you don't want to be wasting it on something that you just don't have a passion for. And like when I do my own hiring and when I do my hiring, in the past I've always said, you know, EQ matters at least as much as iq. And part of the EQ is the energy level, the dedication, but also, you know, the passion. You know, I can see how passionate people are. And so that's really what drives me. You know, there's, you know, there's all different types of economists out there. Like, there's different types of medical professionals and there's different types of various professions. You know, there's academics, there's people in economics work at the conference board, they work at the Bank Canada, they work in government, they work in industry. But you know, as you said, what I've been doing, and I've been in the financial sector since October 19, 1987. That was my, my first day was the tell that story too. Well, that's, that's always my own people say, why are you so bearish? I said, well, if you started on Black Monday, you'd carry this dark cloud wherever you went to.

Right?

But I just, you know, I just always found it to be challenging. You know, I think that if I wasn't doing this, I probably would be a detective. I just like trying to come up with solutions for, you know, for, I wouldn't say problems, but, you know, come up with decision making trees for people as it relates to their investments. That's really the burden of responsibility on say, whether it's the Bay street economist or the Wall street economist is to take the economic data points and connect the dots towards a cogent and cohesive investment strategy. Connect those dots. And so that's really what my stock and trade has been, has been to take my economic knowledge, how I see the tea leaves, and then tie it into how do you invest around this particular forecast and how do you make money and how do you save money? People always think that it's easy to make money. Sometimes it's. And the cycle we're in now where capital preservation should be, I think top and center of everybody's mindset. There'll be another opportunity to go long and strong in the next bull market, but that'll be the next cycle. So it's just, you know, that's what drives me. I love what I do. So I feel very fortunate. I know so many people that actually it's a 9 to 5 or it's just a daily grind. And you know, I just, I was just blessed that I was in the right places, the right times. I made the most of it. But to be able to get up every morning and. Look, I get up at 4:30 in the morning every day to write that newsletter.

Oh my gosh.

But when they call it Breakfast with Dave, you know, you're reading it. Okay, Brian, you're reading it when you have breakfast. When I'm writing it, even the roosters are still asleep.

Right. Wow. Are you doing that at home or you're in your office?

Well, this, it's a. I always joke that this is a mural behind me, but it is actually a real bookcase. I'll get to these books.

An artist makes a lot of money for putting together pictures that look like that. But you got the real thing.

Yeah, I'm actually, I'm a gifted painter too, but this is the home office. You know, when I started Rosenberg Research, January 6, 2020. Talk about great timing. You know, two months before the pandemic, right. We had an office downtown and, and so, you know, two months later, all working remotely. But you know, in this industry of, of pumping out information, you know, I call it economic intelligence. Although that might sound like an oxymoron to a lot of people. But you know, it, it just so happens that, you know, what Do I? Do I. I put my thoughts and my views in print in various forms, and I do podcasts, webcasts, conference calls, just like we're doing now. And you could do what? You know, my. I don't need a factory, right? And I just need to have my data sources. I need to have ability, a laptop and be able to see my Bloomberg and I'm just fine. And so it's been actually seamless. We are actually working towards getting some space downtown Toronto, but there's no need to be in a rush because, you know, I never would have given a second thought that you can actually do this sort of work remotely. But it's really been seamless, tell you the truth.

And how's the world changed for you as an entrepreneur now? You spent much of your career at a big bank and then a large wealth management firm. And right now, now you're, you're the banner. Frankly, you're probably the banner at the other places too. But now it's your, you know, your own. And any thoughts for maybe some entrepreneurs out there who are soon to be entrepreneurs?

Well, you know, let me just say that when I came back to Toronto from New York full time in beginning of 2009, in that transition between Merrill lynch and Gluskin Chef, I was approached by a lot of people to start my own research consulting firm. And at that point, I don't know if I was really ready. For me, what was really special about making the transition back to Bay street was that I was not going to a bank. I started off at the bank of Nova Scotia, then the bank of Montreal, then Merrill Ledge. Big banks, big institutions, multinationals. That was my life. Huge bureaucracies. And Gluskin Chef was small compared to them, but still a reasonably sized company. What I wanted to do was round out my knowledge was to. I didn't feel I was quite there yet to start my own business. And I say that with a degree of humility because I'd spent my entire Life up until 2009 working on what they call the sell side. The sell side, which are basically the banks. And I had the opportunity to go what's called the buy side, which are like the mutual funds and the hedge funds. And so I always thought that I had figured out when you're the chief economist to Merrill lynch, you try and keep your ego checked at the door. Not always easy to do, but you feel like you're the starting pitcher on the, on the New York Yankees and you think that you have everything figured out, but you know what I. What I had really learned was, you know, I'd flown around the world. I'd go from one conference room speaking to nameless faces and faceless names. I shouldn't say that a lot of these Portfolio managers and CFOs are friends of mine, but you're just hopping from one room to the next. I think you have it figured out. And I remember one of my first days when I was at Kluskin Chef and I was giving my base case scenarios on a bunch of different variables, and somebody put up their hand from the investment team and said, okay, that's your base case, but it can't be your only case. What's plan B and what's plan C? I learned early on what's important for a portfolio manager, for any investor, is all about probabilities of outcomes. What's the expected values of being wrong against the expected upside of being right across that continuum. And I realized that if you don't have a plan B, you don't have a plan. So what I learned was that it's not always about the base case scenario. Sometimes you have a scenario that is so ironclad, it's got an 80% chance of happening, and the distribution curve outcomes is very narrow. Then there's sometimes where there's so many, there's a multitude of outcomes that your base case is only 40% chance. There's so many other items that you have to pay attention to. So I learned that the brain of a portfolio manager, I didn't know this before I started on the buy side, is just one giant probability curve of outcomes. And that you cannot ignore anything. There's no such thing as zero percent chance, no such thing as a hundred percent chance. Everything is in between, and there's always shades of gray. So I learned how to talk about scenario B, scenario C. And sometimes I'd go to a meeting and my base case wouldn't change, but I would lower my probability and shift more into scenario B and out of C into D. And I remember people would be writing down feverishly. And even though I didn't change my base case scenario, just altering, say, my confidence level over that base case scenario was just enough. And so that was a great learning experience. I would say that. I would say that, you know, what I could offer in terms of people that are going into an entrepreneurial setting is I mentioned before, passion is very important, but you do have to have a business plan. I said, don't have a plan B. You don't have a plan. You need to still Have a plan. I was fortunate enough that when I was a Gluskin Chef, I had a stable of my own subscribers that had nothing to do with Gluston Chef. And of course, custom chef clients got my stuff for free as part of the service. So I was lucky enough that when I started the business in early 2020, I was already playing from the frontiers because I already had a client base. But it just comes down to, you know, have a, I'd say have a, have a, have a business plan in place, keep your costs in check. Have a, have a, have a good sense of, of your revenue sources. And that's what I say to everybody. And tap into your mentors. I have a stable of mentors and I think that that's also very important that you seek advice from other successful people, you know, that have been in your life, especially in this case, in your professional life. So taking advice from your mentors, very important. And I would say that, you know, and look, you know this as well as anybody, Brian Kyc know your client. Not just ny, not just Kyc know your client, but Kyc know your competitors. Know your competitors. So I would add to everything I just mentioned in terms of whatever advice that I could give is, and especially this relates to my business, which is really, what is it? It's research, consulting, it's economics, it's financial market strategies. There's so much free content on Internet. And economics is a real commodity. So what you have to do, what I have to do is be original, be unique, do not be a commodity, be something that nobody else can copy. And that's really the critical thing about success, is that you provide something. Now, whether it's a hard or as a soft. I'm in the. More the soft business. I'm in the services business. But you have to provide something that people can't get somewhere else. That's ultimately the most critical thing, not just for success, but also for survival.

Yeah, amazing. Okay. Well, what you provide is amazing insight along with your, you know, great writing, sense of humor, et cetera. So maybe we should ship to the world of economics, you know, against their wealth. You know, speaking of, know your client, you know, one thing that I've learned over time is we have a huge, you know, a great base of really, really smart clients that are experts in their industries, experts at what they do, successful entrepreneurs, sold businesses, etc. Etc. But it doesn't necessarily mean that they're experts in all the financial stuff and the economic stuff. And obviously that's where they rely on us. But what I try to do whenever I'm interacting with anybody is sort of go back to basics a little bit on some of the core concepts. So I thought first of all, who better to give us a little bit of back to the basics in the world of economics than the guru here? You. And it also will help us maybe frame the conversation around what's going on in the world. So because as I said in my introduction, sort of tongue in cheek, although it was real, but didn't want to bum anyone out, lots and lots of different things going on in the world. So, you know, if I think back to my first economics class, which was actually in university, first year university, I don't know, you know, what's happening in high school these days, but I remember distinctly the first sort of few pages of the textbook Supply and demand curve. And so I'm not saying that's the most basic sort of concept in economics, but like, if, if you had to, you know, explain to someone what should you be thinking about, focused on looking at from a really core level as you think about the state of the world and economy, what is the concept to go back to? Is it supply, demand or what would you say it is?

Well, I mean, Brian, it's always supply and demand and yeah, fairly basic concepts. But the reason why people want to listen to economists, despite the fact that we're, you know, just a bunch of fun loving people, is that, is that if you're, is that we get trained in, in drawing those supply demand curves, what they look like, and if you don't have a supply demand framework, how can you ever come up with a price of anything? Because the price of anything naturally is going to be the equilibrium of where that supply and demand curve meets. So whether you're talking about gold or oil or real estate or the equity market or inflation in general, which is like the overall economy, you don't have a supply demand framework. Well, you don't have a compass. So that's what makes economists useful. Now it's incumbent on us to make sure that those supply and demand curves, that the shape are correct.

And what does that mean? The shape? Like I'm picturing lines. So when you say shape, what does that mean?

Well, I mean, you know, I mean, if I had a whiteboard, I could draw the curves for you. There's the. One of the basic things that you learn in economics is, you know, is the, whether it's demand or supply, is the curve elastic or inelastic? Is it flexible or inflexible? Is it Responding to change circumstances. You know, think of it as the human body. Is the human body. Is your body flexible? Can you do your stretches?

Not as much as it used to be.

Because it's sporadic. Well, yeah, exactly. Well, that's how you got to think about. So let's say you have to think about the. What is the shape of the curve? Is the curve steep? Is the curve flat? That matters a lot. And then is the curve shifting? So there's two things. The shape of the curve and which direction is it shifting. Those are the things that you have to pay attention to if you want to forecast anything. And really, the. When we talk about the elasticity of either supply or demand really relates to, you know, how fast are those curves responding? So, you know, we're talking. I'm sure we're going to talk about inflation. This is classics. This is not about booming demand. That was partly last year with fiscal policy. So the supply curves become very inelastic. It's become, you know, almost vertical. And what that means is that you don't need. What this all means in layman's terms is the supply curve globally. It's not just in Canada or the United States, it's global. Even Japan, inflation has been going up not as much as everywhere else, but inflation has gone from negative to positive in Japan for the first time in decades. So it's a global phenomenon. And it relates to when you hear about global supply chains, global supply chains and the difficulty in sourcing supply. Well, that's telling you something about the supply curve being very inelastic, very steep. And it's telling you that it is shifting to the left. So it means that you don't really have to have a lot of demand growth to generate the sort of inflation that we're getting right now. I guess some people would call that stagflation. I guess technically that could be true. But back to your initial point, that's what you need economists for. And sometimes I'll be a little tongue in cheek when somebody gives me their forecast on something and they're not an economist, I'll say. So tell me, when you're talking to me about how you view this particular price, what's your supply demand framework? Of course, they usually come back, you know, with a baffled look, but I don't have that in mind. So which economists are you talking to? To. To guide you? Because you can't forecast the price. You might have an opinion that Toronto home prices are going to go up another 30%. And I'll say, okay, I Could buy into that. Show me what your demand supply framework is for that. We're going to talk, we're going to talk about that or is that just intuition? Right, so, so yeah, we're going to.

Talk about that too. So, so then talk about inflation now a little bit. And again, let's start back to the basics. This is super basic, but like what is inflation, what causes it? And then what's happening today with you know, the state of prices and inflation? Because it seems to be pretty historic, right?

Well look, there's different measures of prices. When people talk about inflation, they're talking about most of the time they're talking about the consumer price index, which exists for every country in the world. And so whether it's inflation or deflation, it's about the rate of change. Okay. So inflation, say the inflation rate is 6%. What it means is that the consumer price index, consumer prices and aggregate went up 6% in the what time period? An inflation rate is usually a 12 month trend.

12 months. Okay.

Yeah. So over the past, so an inflation rate. So you know when people say, oh well, we gotta get inflation back down. Yeah. So the central banks would like it to get it back down. They had this arbitrary target they've had for many years, 2% inflation. Right. So they're not talking about getting prices down, they're talking about getting the rate of change. So really the inflation rate is a momentum, it's a second derivative. So even Paul, Paul Volcker is viewed as the, you know, the inflation dragon slayer. Prices never went negative. He just basically brought, you know, it was double digit inflation down at midgets. So it's a, it's a, it's, it is a, it's a rate of change. It's not like the stock market, you know, stock market goes down 20%. Okay. You're in a bear market, prices don't go down 20%. We'd be in a outright depression if that happened. So it's really a rate of change concept and it's usually calculated on a year over year basis.

Okay. And it seems to be a dirty word. Though, seems to be something that people don't want to hear. It scares people, government starts taking action. Is it always sort of a negative thing to have? I mean some inflation, large inflation. How do you think about, how do the governments think about it?

Well, I think that's really just a matter of being very subjective. It depends on the levels of inflation that you're coming off of. When we had, call it 13, 14% inflation, we would have Just died to get down to 8%. And then of course we went down even further. When you're starting at 0 to 2% and you go up to 8%, that's a problem. The problem is basically less about what's inflation done in the past year, but more about its persistence. Because once you get a situation where people believe that inflation is permanent, forget the level, Brian. I mean, it's basically, I think that most economists will tell you anything from 1 to 3% is, is really a range where you get the most optimal economic results and you get much above 3%, not so much. You get below 1%, not so much. That's really the optimal range. And if you're taking a look historically, in the decades where the economy performed well, the labor market performed well, inflation was generally in that range. Doesn't have to be negative, doesn't have to be zero. Once you start getting much above, you know, 3%, 4%, 5%, it becomes problematic in this particular way. You don't want to have inflation come to dominate your thought process, especially as a business. Once you start getting inflation expectations and you think inflation's going to go up year in, year out, you start. So what you do is you start building inventory. You build inventory because you want to buy the cheaper goods or the inputs to put on your shelves or put in your warehouse because you don't want to pay those higher prices later. But you see what happens because it becomes a self fulfilling prophecy so that as a business, as you're thinking, oh, inflation's gonna go up, I gotta add more inventory, your demand is creating that inflation and it's no different than if you're a consumer. If you're a consumer and you start thinking, oh my God, we are into a multi year inflation process, what are you gonna start to do? I'll start buying everything now, I'll buy all those canned goods now, I'll buy everything now so that I won't have to pay the higher prices later. And then what happens is you get into an inflation spiral that's very difficult to get out of without creating a recession where you destroy demand. And that way you get the inflation back down. It's a very tough way to get inflation back down. But the problem is that it distorts. When you get inflation that is deemed to be permanent, it doesn't matter what the level is, it's really just about the permanency or the perceived permanency. If it starts to distort people's economic behavior, this leads ultimately to the very poor Economic results. And that's really why you don't want to have inflation. You don't want to have deflation either. That has other pernicious consequences. The central banks, everything they could obviously in the past few decades to lean against that. It's been some time that the central banks, since the bull free years had to fight inflation of this magnitude. But their big concern is not the number people Talk, whether it's 7% in Canada, 8% in the United States. It's not so much about the level. We could be talking about much lower inflation rates a year from now. If you go back for example, to an oil prices hit $150 back in the summer of 2008 and inflation got in, the United States was getting up towards 6%. And back then that was unheard of. In the following year, inflation was actually below zero. So we had an inflation scare. We've had other inflation scares in the past. It's not the first. I mean the numbers right Now, I mean 8%, wow. We haven't seen that. A lot of people, I mean I've seen it in my lifetime, a lot of people haven't. But for central banks and I think probably for the markets, the question is how persistent is this going to be? And then you get the other elements of inflation. Really you're asking about what is the evil about inflation? Why don't you just let inflation run? Well, inflation is a tax on the most vulnerable in society. It's a tax on the poor, especially this sort of inflation in food when you consider what low income households spend on food out of their budget. And it's a tax on the elderly. And so that's really the distributive effects of inflation hits the most vulnerable the hardest. So it has very negative social effects at the same time.

And so the cure, I guess I'm using air quotes here, the cure, it seems, or at least the number one way to attack inflation seems to be governments raising interest rates. So first of all, is that correct and maybe explain why they do that and what do you. And we'll get into, you know, feel free to sort of move over into sort of what's going on in the world today. And what do you see the government's doing with interest rates? But that seems to be the go to move to try to tame inflation.

Well, the central banks can only influence inflation through demand, right? I mean, I don't think Tiff Macklem or Jay Powell, I mean they're very talented men. I just don't think that they know how to grow wheat. And I'm not so sure they know how to build a semiconductor factory. And I'm not so sure they're the ones we want to have going over to top Vladimir Putin out of leaving Ukraine. So they can only influence inflation through the demand side, the supply side. So you talked about demand, but the government can certainly have an influence through the supply side, through taxation policy, regulatory policy. What can the government do to incentivize people to go into the labor force, for example? You know, we. It's interesting that you know, you bring this up. I was just watching, I think it was CNBC the other day talking about what happened over the long weekend in the US and the calamity related to all the cancellations, the air travel cancellations.

Right.

And I didn't realize how, you know, these, during the worst of the pandemic in the winter and spring of 2020, that all these airline pilots were offered early retirement. So they retired and now they don't want to go back to work. Wow. So the question becomes what can the government do to stimulate the supply, the supply of labor? What can the government do to stimulate the supply of energy? Look, I roll my eyes as I see President Biden today unveil his anti inflation plan. And I wrote a tweet saying this basically reminds me of General Ford handing out whip inflation now buttons back in the mid-1970s, the first thing that Joe Biden did by edict when he became president was to kibosh the Keystone pipeline which constricted energy supply. And so the question becomes what can governments do? This isn't central banks, what can governments do to either raise the non inflationary potential of the economy. That's classic supply side economics. So look, I'll just tell you Brian, that when we look back at the 1980s and we give Paul Volcker all the credit for the disinflation, breaking the back of inflation. Ronald Reagan is hardly ever in that conversation and yet look what he did to the supply side of the economy. He deregulated, he cut income tax rates. So he encouraged people to look for work. And that's the thing, is that when you cut taxes, you'll get more supply of what you're cutting the tax taxes on. And he got it cut top marginal rates, he deregulated the economy, which again was tremendous supply side effects. And look what he did with the air traffic controllers. So he took a very unionized, I would say that very protected labor market and made it much more competitive. So there's things you can do with regulatory policy, there's things you can do with taxation policy from a government standpoint to improve the supply side. Unfortunately, the sort of inflation we have now is what can we really do when the EU imposes a partial ban, as they did today on Russian oil and next thing you know, oil prices are ratcheting higher. I mean, you look at the statistics, miles driven and gasoline usage and volume terms is not even back to where it was pre pandemic. Pre pandemic oil prices are $75 today. They're like $120 supply. That shows you about, well, but then again, you think about it, energy, I mean people always say, economists say, well, don't worry so much because you know, and energy as a share of the economy is so much lower than it's been in the past. But that doesn't matter because the spinoff effects to other industries because fuel is still such an important input. So when the central banks are telling you now that they're, they have to get inflation, headline inflation back to their target and they have really no control over food and energy. I mean, look in the central banks do do about the fact that say in the United States it's the slowest harvest for whether it's soybeans or wheat or corn that we've had in decades. And this is compounded by all the droughts and floods that you're seeing worldwide. For those that don't believe in climate change, it's having an impact on food inflation. So it is very complicated because it means that the things that the central banks can actually control in terms of prices, those prices might have to deflate. It's the profits in those companies that are going to be at risk. And so that's very difficult to offset food and energy inflation, that's 20% of consumer prices. You're going to have to create a lot of disinflationary deflation in the other 80%. And that's where the big risks are, is how far will these central banks go given the nature of this sort of inflation?

Well, you spend a lot of time talking about sort of the way governments can influence supply. And again, this is where I defer to you. I'm not the expert here, but the interest rate increases I believe are more a impact on demand. They want to try to taper down demand for things, but you haven't really talked about that too much. So it seems to me you're way more concerned about the supply side of the, of the curve going back all the way to the first thing we talked about. Is that fair?

Well, not necessarily. I just was trying to. Comes back to our initial conversation about when you're forecasting inflation, you need two curves, not just one. You need supply and demand. So I was trying to separate fiscal policy, regulatory policy, which is not under the purview of central banks, but actual government elected officials, and what they can do on the supply side. So I gave the Ronald Reagan, I could have given the Bravo Roni, the same thing. Deregulation, lower taxation, these things actually help reduce inflation from the supply side. But it takes time. The central banks are not waiting around this. Inflation they thought was going to be transitory, however you want to define transitory, took an extra leg up this year because of the omicron. And then we had the Russian invasion and then of course we had these lockdowns in China. I mean, what are you going to do? There's so the central banks, but the central banks are telling us their reaction function. They're not saying this too shall pass. They are basically now saying that we are really unsure as to whether there's been a real fundamental shift in what the aggregate supply curve looks like in every country and how it's shifting. So the aggregate supply curve has shifted to the left. I'm talking like an economics professor. Right now they're very concerned that at this point they have to create an equal and opposite leftward leaning move in the demand curve. And that's what the central banks, through interest rates, and you can argue also through the balance sheet, right, most of your interest rates, they can create the conditions for reduced demand. And the question is going to be how far do they have to go? The more inelastic and the more we continue to see these supply curve shifts, like who knows whether where's this going to go? I mean, is Putin going to stop at Ukraine? You know, what's going to happen, for example, you know, with China? You know, that's the thing is that even more, the even more pernicious effect was, you know, China, China at one point, just a couple of weeks ago had shut down cities with a 400 million population. And these are important port cities that are part and parcel of the global supply chain. So this is like, this is like I'm not hearing anything. Oh, demand is booming. Demand is booming. No, this is all supply side and that's what makes it tricky. Look, I'd be a lot more comfortable if this was in the cycles past or we have booming demand and so the central bank can raise rates and cause demand to slow. There won't be a recession. We're just gonna cut demand growth. But this isn't about booming demand. This is about constricted supply. It's very tricky to do this without getting a recession. So to answer your question, yes, I am very concerned about how far central banks will go to fight inflation that is not caused by what's under their domain, which is demand. They're fighting supply side inflation with demand side measures.

Right.

And how we get through this without a recession. And I'll tell you, Brian, the recession, you know, if transitory was viewed as a big joke. If I talk a recession to somebody, I talk to the recession. People look at me like it's as if the response is, you know, telling that their kid is ugly. I try to say, you know, recessions are actually part of the landscape. I know they're not pleasant, I understand that. But every expansion was followed by a recession. Every recession was followed by expansion. Every bull market's followed by a bear market. Every bear market's followed by bull market. My friends, it's just the cycle. We don't have to get emotional about it. I know. I'm passionate about what I do. Try to help people. People do not want to hear. Even though, Brian, even though we've had 11 recessions since 1950, you speak to most people, they don't think they exist or that they should exist, but they do exist. And 80% of the time in the past when the Fed is tightening monetary policy, guess what? 80% of the time we land the economy in a recession. This time around. When you look at what the Fed is saying, between interest rates and what they're going to do with their balance sheet, $95 billion of quantitative tightening per month, that's going to be the equivalent of this year of raising rates 400 basis points. Well, that's going back to what Volcker did in the early 80s. And how did Volcker kill inflation? How did Volcker kill inflation? Back to back recessions in 1980 and 81, 82. That's the road we're heading down.

And so let's go back to the long and winding road, then back to the Beatles reference here. So what are you foreseeing over the next number of years for the world economy, Canadian economy, North America? And what are you advising investors then? Bring it all the way down to the next level? What do you advise investors to be doing at this stage? Well, first of all, investors, but even secondly, just, you know, everyday folks who are, you know, working hard, trying to, you know, pay for what they need to pay for, live their lives, et cetera. You know, what do you foresee and what do you advise?

Well, I think that we're going to be living in a, in a period, I think, of elevated uncertainty and I would say also think about the geopolitics. But think of how the world's been turned upside down. I mean, you got two axes right now. You can argue that the Putin invasion of the Ukraine has brought the west closer together. Okay, that's fine. NATO is stronger now, I guess, than you would have said under Donald Trump's leadership. But then you've got, you know, China, China and Russia becoming buddies is a problem for the world. And that's, and now they've got India as part of the, of this new alliance. That's a lot of, there's a lot of geopolitical risk that's out there in a period of very weak global leadership. Where's the global political leadership right now? Do we have Margaret Thatcher? Do we have Ronald Reagan? Do we have Brian Mulroney? Do we have Mitterons? Do we have Helmut Cole? Like, there's a vacuum of global leadership. So I have a worldview, I guess, that tells me, Brian, that I want to own gold. And I also know that military budgets are going up around the world, even in Germany and Japan. So I want to own aerospace and defense stocks, I guess. Not ESG friendly, I would admit, but military budgets are going up. The world's becoming more unpredictable. And this new, this, this new axis between the west and China and Russia together, I mean, Putin and Xi Jinping consider themselves to be buddies. This is something that's brand spanking new. So we are in a whole new global order. I am concerned about. And this is, this is, I guess again, you can argue a cost push inflation viewpoint, but coming out of the pandemic and then coming out after the pandemic into the Chinese lockdowns, very aggressive, but has global repercussions because China has still been a major source of sourcing globally in these supply chains.

And then you have a, do you have a. Sorry to interrupt you, but do you have a sense of how much of the supply chain has been sort of locked, let's call it locked down, I guess because of the China lockdown or how much is missing. What, what percentage of world goods are not getting manufactured or created as a result of what's happening in China?

Well, it's, it's not just about China. It's also, look how, look what's happened in terms of the supply disruptions. That's come out of the Russian invasion of Ukraine. You know, to give you a number that it's 30% or 50%. It's, it's that, that's, that's not a meaningful number. It's, you could see it in the inflation data. You could see that the impact. I mean, you could argue last year we had inflation coming out of fiscal monetary policy, but then it went almost parabolic this year because of the issues that I'm talking about. So I don't have the answer to you that oh, 30 or 40% came from. It's a combination of the two. And these are the two new inflationary shocks. Now I think we have to pay attention to is how this is going to have an impact on globalization and just in time, inventory and outsourcing and so, and especially in critical areas of not just the economy but society. Food security. I mean you're finding Malaysia just putting an export ban on chickens. You're seeing this across in many parts of Asia about export restrictions on agriculture, security of food supply. I mean, what that tells me right now is that people should definitely be investing in, in agriculture in areas of the world where there's fresh water and there's social and economic stability. By the way, Canada actually stands out. Security of food supply coming out of the pandemic. Vaccines, security of pharmaceutical supply coming out of the. What was the poster child at the beginning, you know, when the COVID was spreading through Asia. And this is the situation, Brian, where you could say 60 or 70% wasn't even coming out of China, but through Asia in general. Taiwan and Korea with semiconductors, most of the production is coming out of that part of the world. So now you're starting to see what's either called onshoring production back home, but there's a limit to that because the United States and Canada aren't exactly low cost producers. But I'll tell you what's on the radar screen and the stock market that's done very well. And a currency that's done well. Of course, also benefiting from its petrol currency status has been Mexico. Mexico is attracting a lot of investment because it's right next door, our amigo to the south. They have low unit labor costs in US dollar terms and there's production from Asia moving to Mexico. They're a big beneficiary of this. But you gotta be thinking that's in some ways you ought to be thinking not just across what sectors or what asset classes, but what regions do I want to be investing in. So the Globalization theme is something that we have to consider for putting our big picture hats on. I mean in terms of the economy and the markets, it's going to be I think a very rocky road. I do believe that inflation will come down because I think the central banks will be successful in bringing inflation down. They've always been successful. It's no matter how far they're going to go. And I think the central banks are telling you that they're willing to sacrifice the economy for the greater good. They're going to sacrifice the economy for the greater good. It's no different than say to the population if you had to. It's no different by the way than what John Crackin and Paul Martin said to Canadians in the 1990s. Short term pain for long term gain. We're going to actually squeeze spending. Of course a lot of that was pushing it down to the provinces. But there was tremendous spending restraint in the 1990s that had a huge impact on aggregate demand. And then Canada comes out into the 2000s, late 90s, actually one of the few countries with a balanced budget that we had for many, many years. And so back then it was short term pain for long term gain. That was through fiscal policy tightening. So now it's going to be the same thing. It's going to be, well, we'll see how short term the pain is. It'd be much better if this was an inflation that was still brought on by fiscal policy. We can type fiscal policy. Central banks know how to deal with demand led inflation where it's something new here. The last time that the Fed fought supply side inflation, cost push inflation. We'll think of what happened in the 1970s, except back then it was just basically repeated oil price increases out of opec. This time around it's a much, much broader array of commodities because we don't just have energy but we also have food. So it's a very tricky situation. And so I think that what's going to happen is that they're going to push the economy into recession to cure this inflation situation and then they're going to have to basically then ease monetary policy again to get the economy on a footing what happens in the rest of the world geopolitically. I mean those are the big question marks. But there's no doubt in my mind that front and center what's going to be very important for the next say year or two is how the central banks. It's not a matter of if, it's just as you said, Brian, it's how far are they willing to go to fight this sort of inflation. And I'm positing that there's not a snowball's chance in hell that they could actually combat this sort of inflation, which is not going to go away automatically without generating a contraction in demand. In other words, an outright recession. So how do you invest in a recession? Well, you become as defensive as possible. You raise cash and you move into the most defensive sectors as you possibly can, which could mean utilities, it could mean the pipelines, consumer staples, healthcare. You want to invest in areas of the market that don't have a whole lot of economic sensitivity. And you want to invest in companies that have earnings visibility but also pay out their earnings in dividends. So you want reliable cash flow streams. And so I'd say that you should be having a smaller segment of your portfolio and equities right now, but within that be very specific towards reliable dividend payers and areas of the market that don't have a high correlation to the economy. And so I think that's going to be very important. And I would say then you want to get into special situations for sure. The geopolitics I mentioned before, gold, defense, technology, aerospace, defense, I think that there's room for that on the portfolio. And I would say that we come out of this situation understanding more than ever the thin supply of energy that we have in ordinary times with demand as weak as it is. Look at China's borderline recession. Europe is borderline recession. The US just printed in the first quarter negative gdp. And here you have oil prices going up. So it's telling you just how thin for so many years it was such an underinvested sector and everybody's saying stay away, we're going to all be driving electric vehicles. Well, that's clearly not going to be happening overnight, but we realize that actually this is energy, which is energy has screened well. Canada, United States, the energy stocks. We've not been bullish on the stock market, but that's been the one sector that has stood out amongst all others.

Certainly supported the Canadian market for the last little while for sure.

Right, of course. And I would say, by the way, that sacrificing liquidity to invest in farmland and that's becoming increasingly more popular investment vehicle that's not correlated with the public stock market. That's something that you also want to consider.

Wow, okay, great. I think we only, or you only have a little bit more time, not much before we get sort of to the end. I think we have to touch on housing Housing market in Canada in particular or, or wherever you think is best to discuss. But house prices over the last number of years have gone, I'll use your term parabolic. I'm not sure if that's actually what's happened, but they've gone pretty, pretty straight up. What happens as governments, or let's say the Canadian government, central banks are increasing interest rates. I've got to believe, like, people start to get really stretched on their mortgages or their, you know, well, really mortgages. I assume most people have taken on some pretty big mortgages to afford the, the houses. Given the increase in house prices, any thoughts on how, you know, how much support do we have here? Do homeowners have and how precarious are their situations?

Well, look, it's a, I mean, when you take a look at Canadian household balance sheets and most of the debt is mortgage debt, it's a bigger credit bubble than it was in the United states back in, oh, 6 and 07, where I was pounding my fist on the table over the credit housing level in the U.S. brian. This is bigger in Canada and it's actually, it's global. Canada's not alone. But we, we have, we have, we're right up there in the top three and we've written on it. And when you're taking a look at home price to incomes, home price to rents, home prices normalized by anything, it's, it's, it's a crazy, crazy chart. I mean, you remember John Crow was raising rates and sort of the last time we had, last time we had a real serious correction in Canadian home prices was back in the John Crow days. So John Crow to Canada was what Paul Volcker was to the US back in the early 80s. And that was not a pretty picture in terms of what happened to home prices, especially in south central Ontario. But this is, this is truly national. And if you believe in the concept of mean reversion, remember, mean reversion is just a horizontal line. Mean reversion means that you go from one extreme to the other in both directions. And I know people say to me all the time, boy, you know, Rosenberg, you're the boy who cried wolf. To which I say, yeah, but the wolf does show up at the end of the story. You know, Brian, Brian, just, you know, it's been 30 years. It's been 30 years. And what's happened is that, and this, I actually put this at the feet of the government. I put it at the feet of cmhc. Because it wasn't just. Brian, it was not just Low interest rates. It was also the easy accessibility to credit. And that's what got the US into trouble back in the mid-2000s, the easy access to credit. And you've got a lot of people that are loaded their eyeballs in debt. But it's also 40% of these mortgages are short term mortgages. So they bribed to take short term mortgages because rentals are higher rates, it's pay the pipe retirement. And look, it's going to be when you consider what's happening with food inflation, energy inflation, now we're having an interest rate shock on top of those quotes, inflation shocks, good luck trying to negotiate a wage hike that's going to compensate for all that.

So this is not going to end house prices coming down potentially.

Well, what I'm saying is that. And look, it's the same in the United States. I put a report today. Look, in the United States, their bubble is not even as big as Canada's. Do you know that in the United States, no matter what measure you look at home price to wages, I mean it takes 10 years of income. Ten years of income and it's 12 years in Canada, by the way, to buy an average single family home is crazy. It's crazy. That's double the historical norm. That's how crazy it is. People will say, oh well, we have to capitalize these numbers because interest rates are so low. Yeah, exactly. No, the wrong tents. They were low, they're not low any longer and they're going higher. And so that's what I'm trying to say is just like the equity market, the housing market is your longest duration asset. What does that mean for investor or for anybody? It means the longer the duration, the more impact interest rates have on the valuations. And so you got a situation where home prices could go down at 30% or more. And once again I get to look back a glazed look. Like I called there, I called your kid ugly.

Right.

That's basically Bob Farrell's rule number one. Remember I talked about the mentors, Bob Farrell.