Uncertainty to Opportunity with David Rosenberg on The Unlimited Podcast by Ginsler Wealth

Foreign. 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 does not guarantee 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. All right, welcome everyone to the 50th episode of the Unlimited Podcast. Very excited on our side and 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 and 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 institution 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 woods 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 newspapers 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, 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 don't really know 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 because that's what we call you, the man with the crystal ball. But, 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. We're just going to tell you exactly what's going to happen. But you know, you have the, the approach of, 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 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 the big question is, what is he going to do or not do? He has much more 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 acquiesce and do everything that he wants? Because a lot of the tariff threat is really aimed at getting other countries to fall in a 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 up 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 a year ahead report before the last set of FOMC minutes from the December 18th 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, 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 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 answer all the questions on your behalf because you'll do it way, way better than me. But, so what's it look like in the US what do valuations look like? And again, 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 GTO. But I remember being in the same position in 2006 and 2007. Where's the recession? Where's the recession? And then in 2008, 2009, oh boy. Getting hit by a two by four. Yeah. So 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 fit 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. 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 at 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, bonafide 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, 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 buildweather 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 can 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? 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 into 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 latent timer license, 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, that's nosebleed dot My favorite indicator is the Shiller price earnings multiple, what's called the CAPE, the simply 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 estimate of 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 2 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. 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 two sigmas. Standard deviation of the same standard. 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. You know, 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, you know, 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 this big blip 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, of the bubble, it was a different bubble. It was a housing mortgage and credit bubble back in the, 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 and 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 like 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, you'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 mania 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 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 it's a, 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 is 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, shall 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, 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, their economy, as weak as it is in Canada, it's.