David Rosenberg made his formidable reputation as an early and consistent bear. When he quit Merrill Lynch in 2009 to return to Canada as chief economist at Gluskin Sheff, he raised eyebrows for switching to the buy side, where chronic pessimism can be bad for business.
What's your assessment of the current state of the equity market?
I will refer specifically to the S&P 500, since that is a real market, as opposed to the TSX, which is a resource-financial barbell. I think the bull market remains intact. The only thing that will ultimately bring it to an end will be a return to a tight money policy out of the Federal Reserve, coupled with an economic recession…which is probably years away.
What do you pay closest attention to, in terms of economic signals, market data, central bank pronouncements and the like?
If I were alone on a desert island—and there are a few people who wish I was—and I had just one indicator at my disposal, it would be the yield curve: how short-term interest rates interact with long-term rates. It's a very important, forward-looking economic indicator. And when it flattens and inverts, trouble is usually on the way.
Any thoughts on the theory that a strong housing market can be detrimental to economic growth because it diverts so much bank capital into the sector from, say, commercial lending?
Housing is a very emotional topic. Most people associate high ownership rates with a better society. But there are plenty of European countries that have high rates of rental that are equally stable as those with high rates of home ownership. Building a house has greater GDP multiplier impacts than building an apartment complex. But remember that a house is just a big-ticket consumer durable item. It does not add to the productive capital stock of the economy.
What are the best and worst calls you have made?
The best and bravest call, especially given the institution I was working for [Merrill Lynch], was calling for the recession and credit crisis of 2008-2009. My worst call was connected with that: I stayed bearish too long. In the future, I plan to do a much better job at calling sunnier weather.
Were there times when you lost sleep over market developments?
My first day on Bay Street was Oct. 19, 1987. I'd left my cushy civil service job in Ottawa to become the financial economist of the Bank of Nova Scotia. I've lived through it all. I saw the collapse of New Century Financial and Countrywide. I saw Bear Stearns, Lehman, AIG and my own firm, Merrill Lynch, go down in flames.
And I can tell you, nothing was more frightful than Oct. 19, '87, because the view back then was Armageddon. I spent the entire night pacing in my bedroom, saying: "What the hell did I do?"
Yet you, and the market, recovered.
It was the mother of all corrections, not a bear market. I should have known that, because we didn't have a recession. The market was back to an all-time high within a year. The real bear market didn't start till 1990-91, when the Fed tightened money and inverted the yield curve, and we replayed the movie all over again.
What should we be worrying about this year?
It's a terribly difficult question, because what you would lose sleep over is really the Rumsfeldian "unknown unknowns."
And if these unknowns come calling, where do we hide?
There are two things I've learned: Don't put all your eggs in one basket, and there is no such thing as a sure thing. So long as you are diversified and investing around themes that make sense, and so long as you're disciplined—in other words, know when to cut your losses, know when to take your profits—then everything will be fine.
What's your favourite metric?
Year-over-year trend in the three-month moving average of core durable-goods orders chart.
What's your favourite chart?
Relative strength of the financials both in the corporate bond market and the equity market.