What's Rosie Thinking These Days?
A Summary of David Rosenberg's latest views - Article #88
In this 14-minute article, The X Project will answer these questions:
I. Why this article now?
II. What does Rosie think of the labor market?
III. What about the lag effects of interest rate changes?
IV. What are Rosie’s thoughts on the equity market?
V. What does Rosie say about fiscal stimulus?
VI. What does he think about the bond market and yield curve?
VII. What does he think of the “soft landing” narrative?
VIII. What about inflation and immigration?
IX. What does The X Project Guy have to say?
X. Why should you care?
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I. Why this article now?
It has been six months since I last highlighted the views of one of my favorite economists, David Rosenberg, in the article “Is a Recession Coming in 2024? David Rosenberg is One of the Last Analysts Still Calling for One.” He is known as “Rosie” and is one of the investment community's most well-respected and highly regarded economists. He “is the Founder and President of Rosenberg Research & Associates Inc., an economic consulting firm he established in January 2020. He and his team have as their top priority providing investors with analysis and insights to help them make well-informed investment decisions.
Prior to Rosenberg Research, David was Chief Economist & Strategist at Gluskin Sheff + Associates Inc. from 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. Prior thereto, 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 ten years in a row.”
I caught up with Rosie’s latest thinking by watching the following interviews with him on YouTube:
Hiring Rate Has Caught the Fed's Eye, Rosenberg Says on Bloomberg Television, September 23, 2024 (14,222 views)
"This Is COMING..." - David Rosenberg on LiveWorthLiving, October 2, 2024 (8,345 views)
David Rosenberg Warns: Recession Ahead—Complacent Markets Are at Risk on Wealthion, October 4, 2024 (25,167 views)
David Rosenberg: Boomers Sleepwalking Into A Bear Market + Recession with Adam Taggart | Thoughtful Money, October 10, 2024 (28,323 views)
Here are his top talking points and thoughts.
II. What does Rosie think of the labor market?
Rosie argues that the current state of the labor market is more fragile than it appears. While the unemployment rate remains historically low, he emphasizes that the key indicator to watch is not layoffs but the hiring rate. A low unemployment rate can mask underlying economic issues when companies hoard labor instead of expanding their workforce. According to Rosie, the hiring rate has declined significantly over the past year, which is a precursor to broader economic challenges. When companies hesitate to hire, it reflects uncertainty and concerns about future economic stability.
He explains that hiring rates often serve as a leading indicator of economic performance, preceding overall employment and economic growth changes. In previous cycles, when hiring rates dropped as they are now, it eventually led to negative job growth and a rise in unemployment. This decline in the hiring rate has already caught the attention of the Federal Reserve, which sees this as a riskier economic indicator than the low unemployment figures that many analysts focus on.
Rosie suggests that a shift in focus from layoffs to hiring rates provides a clearer view of the labor market's health. As companies reduce their hiring ambitions, they signal a lack of confidence in the economic outlook, possibly anticipating lower consumer demand or tighter financial conditions. This trend could precede a recession, where employment data shows weakness not from increased layoffs but from a consistent drop in new hiring. This nuanced view reveals why the current low unemployment rate is insufficient to measure labor market health.
III. What about the lag effects of interest rate changes?
The timing and effects of interest rate changes are crucial to understanding economic cycles, and Rosie highlights the importance of recognizing these lags. While partially reversed, the Federal Reserve’s recent rate hikes have long-term implications that have not yet fully impacted the economy. Historically, Rosie notes that it takes about 30 months from the first rate hike for its effects to ripple through the economy. He compares this timeline to past tightening cycles, such as those in the 1980s and mid-2000s, to illustrate that the economy often appears resilient initially, only to falter later as the lagged effects manifest.
Rosie cautions against assuming that recent rate cuts will provide immediate relief. He argues that the aggressive rate hikes enacted earlier created economic conditions that will continue to unfold over the next couple of years. Drawing parallels to the period before the 2008 financial crisis, he warns that the previous tightening phase can still exert significant pressure on economic activity even when rates are cut. The Fed’s past mistakes, such as acting too late or easing too soon, have prolonged economic pain rather than alleviating it promptly.
Rosie explains that understanding lag effects is essential for investors and policymakers alike. It underscores the need for patience and vigilance when interpreting economic data, as the real impact of interest rate adjustments often takes time to reveal itself. Policymakers might appear to respond preemptively, but Rosie warns that they usually react to data that reflects conditions from the past, not the future. This insight is critical in assessing economic forecasts and understanding why a recession could still be on the horizon despite recent policy reversals.
IV. What are Rosie’s thoughts on the equity market?
Rosie expresses deep concern about the overvaluation of the U.S. equity market, primarily driven by passive index investing. He describes this phenomenon as similar to the housing bubble of the 2000s, where irrational exuberance and concentration of investments led to a bubble that eventually burst. In the current market, passive index funds have directed vast sums into a handful of mega-cap stocks, creating a precarious situation where market performance heavily depends on a few companies' fortunes. Rosie argues that this concentration increases systemic risk, as any downturn in these stocks could have outsized effects on the broader market.
He further highlights that many households, especially baby boomers, are overexposed to equities. The shift toward equities as a primary asset class for retirement savings has left many portfolios vulnerable, with insufficient diversification into safer assets like bonds or cash. According to Rosie, baby boomers should reduce their exposure to equities as they approach retirement, but instead, their portfolios remain heavily skewed toward stocks. This misalignment creates a scenario where a market correction could have devastating consequences on their financial security and, by extension, the broader economy.
This overreliance on equity markets is concerning not just for individual investors but also for the economy as a whole. A correction could trigger a negative wealth effect, reducing consumer confidence and spending—critical drivers of economic growth. Rosie suggests that the lack of portfolio rebalancing indicates widespread complacency and a failure to recognize the risks inherent in such high market valuations. He warns that without proactive measures to diversify investments and reduce equity exposure, the impact of a market downturn could be severe, leading to a broader economic recession.
V. What does Rosie say about fiscal stimulus?
Fiscal stimulus has significantly supported the U.S. economy over the past few years, but Rosie cautions that it is a temporary measure. The injection of government funds, particularly in stimulus checks during the COVID-19 pandemic, helped sustain consumer spending and delayed the effects of the economic slowdown. However, he argues that this fiscal support merely postpones economic pain rather than providing a permanent solution. As stimulus measures wind down and consumer savings deplete, the economy may face a period of adjustment that reveals underlying structural weaknesses.
Rosie notes that the personal savings rate has fallen significantly as households have relied on stimulus funds and stock market gains to sustain spending. While this has kept consumption high, he warns that it is unsustainable in the long term. Once these supports fade, consumers may pull back sharply on spending, especially with rising costs or job insecurity. This dynamic could create a negative feedback loop where reduced spending leads to slower economic growth, which pressures employment and wages.
Furthermore, he points out that continued reliance on government intervention could exacerbate fiscal deficits, complicating the Federal Reserve’s efforts to manage inflation and stabilize the economy. Rosie argues that while fiscal measures have helped bridge economic gaps temporarily, they have not addressed the fundamental issues of productivity and sustainable growth. Without a shift towards policies that enhance long-term economic resilience, such as investments in infrastructure or education, the economy remains vulnerable to the withdrawal of fiscal support.
VI. What does he think about the bond market and yield curve?
Rosie identifies the bond market as a critical area of concern, noting its unusual behavior in response to recent monetary policy actions. Typically, bond yields decline when the Federal Reserve cuts rates; however, Rosie points out that bond yields have risen despite rate cuts, signaling investor skepticism. He interprets this as a warning that the bond market is factoring in the fiscal deficit implications of continued stimulus and the potential for long-term economic challenges. This divergence between bond market behavior and the Fed’s intentions indicates that investors may not share the Fed’s optimism about future economic stability.
The yield curve, a common recession predictor, has been inverted for an extended period, suggesting that the bond market anticipates economic slowdown or recession. Rosie parallels past cycles where similar yield curve inversions preceded recessions, arguing that the bond market often acts as a more reliable economic indicator than short-term economic data. He explains that the bond market’s reactions are informed by a broader assessment of fiscal policy, inflation expectations, and global economic trends, which provide insight into longer-term economic risks.
By monitoring the bond market closely, Rosie believes investors can gain a clearer perspective on the economic outlook. He cautions against relying solely on immediate economic indicators like GDP growth or employment rates, which fiscal or monetary interventions may temporarily boost. Instead, he suggests that the bond market’s signals should be taken seriously as they often reveal underlying vulnerabilities that are not yet visible in other data. This insight reinforces his cautionary stance on the economy despite optimistic short-term trends.
VII. What does he think of the “soft landing” narrative?
A recurring theme in Rosie’s analysis is the widespread complacency surrounding the idea of a soft landing or "no landing" scenario for the U.S. economy. He warns that this optimism is reminiscent of past periods, such as before the 2008 financial crisis, when analysts and investors believed the economy would avoid recession despite mounting risks. Rosie argues that the enthusiasm for a soft landing ignores several leading indicators that suggest underlying economic weakness, including declining hiring rates, the lagged impact of interest rate hikes, and bond market signals.
Rosie explains that the concept of a "no landing" scenario is based on a misunderstanding of economic cycles. Just as the economy seemed stable in the early stages of past recessions, current data may not reflect the full impact of previous policy decisions. He emphasizes that GDP growth and low unemployment are coincident indicators, reflecting current or past conditions rather than future trends. In contrast, leading indicators such as the bond market’s behavior, declining hiring rates, and the yield curve suggest that the economy could still be heading toward a downturn.
To combat this complacency, Rosie urges a reevaluation of the soft landing narrative, emphasizing the importance of historical context and the lessons learned from past cycles. He argues that investors and policymakers must be more cautious and proactive, acknowledging the potential for economic turbulence even when short-term data appears favorable. He believes a more balanced and realistic economic outlook can be achieved by focusing on the broader picture and the systemic risks highlighted by leading indicators.
In the next Section, I will tell you what Rosie thinks of inflation and immigration. Then, in Section IX, what I think, and in Section X, why should you care and, more importantly, what more can you do about it? However, I have hit a new paid subscriber threshold, so you must now be a paid subscriber to view the last three sections. The X Project’s articles always have ten sections. Soon, after a few more articles, the paywall will move up again within the article so that only paid subscribers will see the last four sections, or rather, free subscribers will only see the first six sections. I will be moving the paywall up every few weeks, so ultimately, free subscribers will only see the first four or five sections of each article. Please consider a paid subscription.
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