David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business
It's that time of the year when "sell-side" research departments and financial magazines publish their year-ahead reports (as I once did in the not-too-distant past).
After countless e-mails and phone conversations, I realized that some people expected me to publish one, too. I am not producing a specific set of forecasts, but I am happy to comment on what I see as an emerging consensus and offer my own general view.
For this year-ahead moment, because this cycle has nothing in common with the other recessions of the post-Second-World-War era, I am going to rely on my intuition and experience, and really try to prognosticate from the gut.
Based on my observations, the consensus views for the United States headed into 2010 are:
- A muted recovery for sure - no risk of a double dip.
- Equity markets up.
- Strategies target domestic multinational blue chips and emerging-market equities.
- A neutral U.S. dollar stance, but we did locate more bulls than bears.
- Positive on commodities, for the most part.
- Concern about government balance sheets, and therefore...
- Bearish on long-term U.S. government bonds, and therefore...
- Really comfortable with high yield (for the coupon and the view that default rates will come down).
- Certainty that volatility will not be an impediment.
- The Fed will begin to raise rates in the second half of the year, but this will have no impact since they will still be low.
So we have a glorious opportunity to reintroduce Bob Farrell's Rule 8: "When all forecasts and experts agree, something else is going to happen."
These economists and strategists, many of whom I know, are smart guys and gals, and they are human. To "talk your book" is human; to have the courage to "buck the consensus" is divine.
I, too, am human. I also like to feel that I have the courage of my convictions, and I too have a "book" of sorts - it's called reputation.
Forecasting is a humbling profession in the best of times and I have learned a lot in the past year, especially from my partners here at Gluskin Sheff who realize all too well that:
1. It's what's embedded in asset prices that is of utmost importance.
2. Forecasts must try to minimize portfolio risks at least as much as they attempt to maximize the returns.
3. Every forecast has an error term (more on this in a moment).
I do not view the economic events of the past two years as a classic recession/recovery phase; they only exist in the context of secular credit expansions. Now, even after the credit bubble has burst, we are still in a continuing credit collapse.
Mainstream economists called the downturn in the United States "The Great Recession" - a gentle way of saying "depression."
A depression, by definition, is a credit event, and realizing we've gone through one, of sorts, should lead to the conclusion that a sustainable recovery will not get under way until the ratio of household credit to personal disposable income reverts to the mean. Transition is rarely without pain, but we shall endure.
Perhaps inflation is a consensus forecast, but deflation is the current reality and often lingers for years following a burst bubble of the magnitude we just experienced.
Even China's voracious appetite for basic materials, which will continue to exert upward pressure on commodity prices, does not detract from this view, especially given the widespread excess capacity in the manufacturing sector. Meanwhile, demand pressures here at home will drive profit margins down in many sectors and strain companies linked to consumer goods and services.
Year-ahead reports predict corporate earnings, gross domestic product, interest rates and the relative values of currencies. But keep in mind, the error term is bound to be very wide given the new paradigm of secular credit collapse in which we are operating.
Since 1989, the Japanese stock market has had no fewer than four 50-per-cent-plus rallies and there still has been no period of growth that can be called a sustained expansion.
Today, we have our own special set of conditions, and prematurely committing to the "risk" trade is probably going to be the most lamentable action over the next few years.
I believe that the dominant focus will be on capital preservation and income orientation. Investors need to maintain defensive strategies and minimize volatility and downside risks, as well as focus on where the secular fundamentals are positive, such as in fixed-income and in equity sectors that lever off the commodity sector.
This, in turn, underscores my primary focus of favouring Canadian-dollar-based investments over the United States. At no time in my professional life have the downside risks - economic, fiscal, financial and political - been so low on a relative basis and the upside potential so high as is the case today. The near 2,000-basis-point gap this year between the S&P/TSX composite index and the S&P 500 should be taken in the context of being just past the halfway point of a secular period of outperformance. (A basis point is 1/100th of a percentage point.)
Northern exposure never felt this hot.