Submitted by Taps Coogan on the 16th of February 2020 to The Sounding Line.
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David Rosenberg of Rosenberg Research recently spoke with the Financial Post about what he views as a historic disconnect between the US economy and the stock market.
Some excerpts from David Rosenberg:
“Well, I think all the (Coronavirus) risks are to the downside. So, if it changes anything, it is going to be the timing of the next (interest rate move) and the next move was always going to be an interest rate cut… The Fed has made it very clear that they are frustrated that they can’t wave the magic wand and get inflation above their 2% target. So (the Coronavirus) is a deflationary shock… all it effects though is really the timing of the Fed’s eventual move…”
“You could argue that the stock market totally ignored what happened last year. Last year we had a four quarter earnings recession. Earnings went down in Q1, Q2, Q3, and Q4 and the stock market still went up 30%. So, if you are not going to respond as an equity investor to an epic decline in corporate earnings, what risk are you ever going to price in? And that’s the point I have been making along… The statistical relationship between them has never been as low as it is today. The correlation is down to 7%. You go into any other cycle in the post WWII experience and that correlation is as high as 70% and as low as 30%. We’re down to 7%. So, if you want to talk about the stock market and you want to talk about risks, you are better off talking to your electrician or your plumber… than talking to an economist.”
“What it all comes down to is the most powerful source of demand for equities has been, in two words: share-buybacks. We have driven the share count of the S&P 500 down to its lowest level in 20 years. What the companies did with the tax cuts in 2018, what they’ve done with the massive amount of debt that they have taken on their balance sheets, is they bought back their own stock, given us this allure, this bull market in earnings per share…”
“I think it’s when the buybacks stop, for whatever reason, and it will come down to mathematics – the relationship between earnings yield and corporate bond yeilds, …that this bull market stops. So any other risk? That just falls by the wayside…”
“The only reason that we didn’t have an outright recession last year was because of the US consumer, what I call ‘Consumerica,’ the 70% of GDP… but the business sector is in recession. Capital spending (growth) was actually negative in the last three quarters of the year. So if you are taking a look at the US economy, excluding the consumer, the other 30%…, it actually had a mini-recession last year and the stock market went up 30%… So people can say ‘That’s very interest Mr. Rosenberg that the NY Fed recession model went to 70%… but for the stock market who cares.’ It’s not about the economy. This is the weakest economic cycle of all time. We haven’t had… one year were GDP growth was 3.0% or better… Even in the 1930s we had five years were GDP was at least better than 3.0%. Weakest economic expansion by far and one the most powerful bull markets for equities… It’s really all just about buying back shares.”
“The stock market today really looks more the a commodity. It’s really like having some copper mine shut down in Chile or Peru,’I’m going to go buy some copper’ because the supply side has been taken down so much… It has nothing to do with the economy. I would venture to say that for the first time, those recession odds that are at 70% go to 90% or 100% and as long as companies just buy back their own stock, this train continues.”
While I am not quite as sure that inflation is headed lower, on the broader points, I couldn’t agree more.
There is more to the interview, so enjoy it above.
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