David Rosenberg, chief economist and strategist at Rosenberg Research & Associates, has spent a lifetime analyzing trends and identifying future shifts in the global economy and financial markets.
But even the celebrated economist is a little confounded by the scale and nature of the current global economic crisis and acknowledges it’s hard for many investors to chart a clear path forward.
“In a world where Greek bonds trade at a discount to treasuries, in a world when central banks are buying junk bonds, I don’t even know how you can even talk about an appropriate asset mix,” he said during an hour-long conversation with Anthony Vaccaro, group publisher of The Northern Miner, at the Global Mining Symposium.
One thing is certain, however. In a world where the supply of global fiat money is growing at a 20-25% annual rate and the production of gold globally is going up at a 1% annual rate, he said, the precious metal is going into a secular bull market and investors must own it.
“Gold is a ballast in the portfolio. It’s a source of stability and it’s an insurance policy against things going wrong, because when things go wrong, central banks tend to print more money, and your gold is tangible, your gold is real.”
According to Rosenberg, “we’re in a world where central banks have taken over,” and whether it’s U.S. Federal Reserve Chairman Jay Powell or Christine Lagarde, president of the European Central Bank, or any other central banker for that matter, they are “operating a casino,” he said. They are like “the black jack dealers handing out the chips for free.”
Rosenberg shakes his head in disbelief. “The two-year Greek bond yield is negative six basis points, negative six! And their ten-year yield is trading fifteen basis points below where 10-year treasuries are. … That’s a junk bond. So we live in a world of capital markets where a junk bond credit trades at a discount to the most liquid and safest security on the planet, which are U.S. treasuries.”
“Greece is just an extreme example,” he continued. “It’s a bond trading with a negative yield. But we have over US$17 trillion in funds globally, that’s with a ‘T’. You’re talking like about a third of the global bond market trades with a negative yield, so how do you do your valuations when you’re doing your dividend discount model or you’re doing your cap rate model for real estate? You’re trying to discount flows. Well in a negative rate world they just go to infinity.”
“What I try and do is bring common sense and fundamentals to the analysis. But I think that the central banks in some ways have really destroyed any semblance of risk versus reward in an organic sense.”
During the last financial crisis of 2008-2009, the central bank bought Triple A treasuries and Triple A mortgages, he pointed out, but look at what it has done this time. “Powell bought CMBS. They bought corporate bonds, investment grade, but the big kicker was high yield.”
“Obviously when you’re coming in and buying high yield bonds to generate risk appetite in the hope that that’s going to resuscitate the economy … you’re pretty desperate.”
Five percent is high yield today, he went on. “High yield has become an oxymoron.”
“Portfolio managers are buying 5% bonds. There’s not a snowball’s chance in hell that that compensates you for default risk today or default risk down the road.”
The economist also noted that he had been worried for quite a while about the next recession – well before the coronavirus pandemic whipped around the globe – because he felt the Fed and other central banks were out of conventional policy bullets.
Rosenberg also noted that the snapback in the third quarter was essentially all fiscal policy.
“That was all the government basically giving you money to stay alive or to spend … the gargantuan rebound in the third quarter was basically government transfers. That wasn’t monetary policy. What monetary policy gave you was a huge bull market in everything except maybe cash.”
Even after a vaccine is available and the world manages to “get to the other side of the mountain,” Rosenberg argued, the central banks “are going to remain super accommodative for a long period of time” because “there will still be a lot of permanent damage to the economy that will have to be restored.”
That premise, he said, tells him another thing, which is that real interest rates are going to stay negative for some time to come, which will be an ongoing source of support for gold, because gold “has an almost perfectly inverse correlation with negative interest rates.”
Despite that, he said, people continue to ask him whether they should sell their gold with the risk-on-trade coming back and news of a potential vaccine. “I said what? No, I actually think you should be buying in at a better entry point.”
“It’s very interesting that when it comes to the equity market, every single dip is to be bought. Every dip. In fact, when it was down 30% you had people saying … ‘you gotta buy’. God forbid gold falls 3% and I have people saying to me, should I get out of my gold position?”
Rosenberg also noted that whether there’s inflation or deflation, both scenarios are good for gold.
“Look, if we get inflation, gold is going to rip because of its classic store of value characteristics,” he said. But it will also do well in a setting of deflation, which the economist expects to continue for some time.
“Everybody talks about gold as a hedge against inflation but it’s equally a hedge against deflation, because deflation in a period of these massive public and private debts globally increases the real cost of servicing that debt and creates fiscal instability and it forces central banks to become even more aggressive. People don’t see that gold is a hedge against deflation. It is, and so are bonds.”
In his view, deflation is going to last for at least several more years and possibly as many as five. “If I’m wrong on inflation, it’s not because we’re going to have a demand boom,” he continued. “I’m worried about supply constraints.”
Looking ahead to a future after Covid-19 and what the ‘new normal’ will look like, Rosenberg sees investors gravitating towards companies catering to healthcare needs; consumer staples; internet and telecom service providers; internet infrastructure and cloud computing – anything that is digital or has an online presence – like Amazon and even Netflix, to some extent. “These tech companies have been re-rated as utilities,” he explains, and cater to the new normal of working and spending more time at home. What comes back the latest and the least is going to be office real estate, he predicted. “I think that’s going to be an overhang for a very long time.”
Rosenberg also believes that the trend is going to be focused on the parts of the economy and the market that cater to higher savings rates.
“When I talk about a fundamental shift in behaviour, we went into the pandemic with over half of households not having enough savings, or liquidity or cash on hand to get through three months of idled economic activity,” he said. “So how people approach saving and spending is going to change.”