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opinion

Let me take this opportunity to summarize my five major points to investors at this historic moment in time.

First, I want to emphasize that this crisis only completely fades away with either treatment or a vaccine, and it seems to me a treatment is far more likely to occur first. But even that seems to be many months away. Only then will most people feel comfortable socializing again and we can expect to see more sustainable consumer spending, beyond a brief pent-up demand lift in the third quarter.

Second, from a big-picture standpoint, we’re going to come out of this with a world that is going to be smaller; a world that is more nationalistic and much more protectionist than before – a trend that was already in motion from the trade conflicts that started about a year-and-a-half ago. There will be more regulation and government intervention, and global supply chains becoming more localized, especially in vital areas of national interest, such as medical supplies, food supplies and even semi-conductors. Globalization slows or stalls here, as does the cost-saving strategy of just-in-time inventories, because we have seen, in real time, the importance of having stockpiles on hand. The implications of all this means that for every unit of production, the global corporate cost curve goes up. And since we will still be operating with excess capacity for an extended period of time, this in turn means more compressed profit margins; and this, at a time when share buybacks will be slowed in favour of retention of cash on business balance sheets.

Maybe Fed liquidity will continue to prop up the markets, but the fundamental picture I see is very weak outside of some specific investable themes I’ve mentioned previously. Among them: Home-office technologies (cloud), video streaming for home entertainment, online retailers, health care services, utilities and residential real estate investment trusts, telecommunications and certain other defensive dividend stocks.

Third, it can’t be lost on anyone that what we had was a health crisis morph into an economic crisis and then somehow managed to morph into a financial crisis that was 10 times worse than anything we saw in the financial crisis of 2008-09. This has forced the Fed to probe the outer limits of monetary intervention. It’s now at the point where it has to backstop commercial mortgage-backed securities, investment-grade bonds, the municipal market and high-yield debt. The result is that it has expanded its balance sheet more in two months than it did, cumulatively, from December, 2007, to April, 2013, when the Fed was undergoing the first few rounds of quantitative easing. Once again, we witness the curse of a cycle where leverage was piled on top of leverage. We simply refuse to stop these cycles of redressing debt crises by adding more debt, but something tells me we have really hit the wall this time around.

Fourth, I cannot emphasize enough how the share buy-back trend, funded by the most profound debt-for-equity-swap of all time, alone added 1,000 rally points to the S&P 500 during the bull market. This was the most pronounced source of demand for equities for the past 11 years, and now this movie is going to be running backward for a very long time. The bubbles don’t create the recession, as much as the recession exposes the bubble. And this time, the culprit is the corporate debt bubble. And even in the U.S. household sector, while there was no bubble this time in mortgages, there was clearly a huge one in autos, credit cards and student debt.

This is why the recovery will be long and drawn out, because what comes next is that a secular change in attitudes toward credit and toward savings.

In the United States, households do not have enough cash on hand to tide them over through this crisis. The future will be one of treating “savings” as sacrosanct, especially for the 73 million U.S. boomers staring retirement in the face and with a much lower nest egg than they thought they had. This will prove to be a major secular shift that also ends up holding back the recovery in consumer spending, and again, that is why a V-shaped recovery is out of the question.

Fifth and final point – this is what the future holds: rising savings rates constraining aggregate demand for years to come. The only way we don’t end up with more deflation is because localizing global supply chains, stagnant productivity and a higher government presence in the economy will impinge upon the aggregate supply curve. In fact, if you have a three- to five-year view, a strong case can be made that stagflation is going to emerge as a new secular theme once demand conditions stabilize. Either way, gold comes out a winner, and is my highest conviction call, if for no other reason than supply growth is pretty constant at about 1 per cent a year, whereas the production of the money supply right now is running at 30 per cent. I kid you not, that’s even faster than the 20-per-cent peaks in the 1970s and 80s, when we were watching Happy Days, playing Trivial Pursuit and listening to disco music.

Let me leave it there so I can’t be accused of not being bullish on something.

David Rosenberg is founder of independent research firm Rosenberg Research and Associates Inc.

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