Facing criticism, Rosenberg defends cozying up to the bulls

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David Rosenberg has been dipping his toes into the bull camp in recent months. But it hasn't been entirely welcomed by some of his most ardent followers, who for years found common ground in his decidedly bearish take on markets and the economy.

In August, the chief economist with Gluskin Sheff made it official by issuing a special report arguing that the time has arrived to protect portfolios against inflation, rather than continue to focus on the deflationary risks that he had earlier warned could bring the economic recovery to a screaming halt. He has turned bearish on bonds and over the past year has been warming up to certain segments of equity markets.

As one loyal reader wrote to him this week: "I do think it could be hazardous to your reputational health to turn bullish at this time given the better than 100 per cent runup in the U.S. markets and 'my belief' that the consumer will be unable to carry the ball as the markets and the U.S. consumer have become interdependent and a fall in the markets will be followed by a fall in the consumer..."

Mr. Rosenberg, in his Breakfast With Dave newsletter today, defended his shift into looking at the bright side of life:

"To set the record straight, I am the chief economist and strategist for a wealth management firm. We earn our stripes by generating risk-adjusted returns for our clients over the business cycle. The mantra has been and remains to preserve capital, focus on strong balance sheets and strong management teams, put a premium on value investing and patience, and be diversified across the capital structure. For all the talk of 'more bullish' and 'cheerleader,' as a firm, we are barely more than 50 per cent in terms of equity exposure in our recommended asset mix for a balanced mandate. We have about a quarter of our exposure in equity alternative strategies and at the portfolio manager level, can swing net short at a moment's notice.

"All I have done in recent months is reverse course on my long-standing deflation and bullish bond theme, and at the margin trim recession probabilities and acknowledge that in the face of the third most acute fiscal retrenchment in modern history, the U.S. economy has actually not performed that badly at all. ... I readily admit that much of the equity rally this year was P/E multiple expansion related to central bank-induced liquidity and that if the market had only risen with earnings, the S&P 500 would be trading close to 1,450 than 1,680. And I also acknowledge that if I was a bull with udders, I'd be a cow. The reality is that equity valuation at any moment in time is the product of two numbers which are earnings and the multiple that investors are willing to slap onto those earnings and therefore is code for 'animal spirits.' The reason why strategists are wrong much of the time is because earnings are not altogether that difficult to forecast, but the multiple is generally that inherently unobservable 'wild card.'

"I have to admit that I am struck by so many folks that blindly choose to live in an old paradigm and fight the last war. There is more than just a minority view out there that clings to the view that everything going on in the USA is all bad and that deflation pressures are prevalent across the globe. I had that view at one point, but as Herb Stein famously said, 'anything that cannot last forever, will not!' There is no cause for overstaying a stale forecast."