Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. Okay,
Speaker 1: this week on our podcast, we have UM one of
Speaker 1: our first repeat guests. His name is Dave Rosenberg, better
Speaker 1: known as Rosie. I know him from back in the
Speaker 1: days when he was Merrill Lynch's chief economist and a
Speaker 1: raging bear a couple of years early, but ultimately proven
Speaker 1: to be right. UM. One of the things I found
Speaker 1: fascinating about Dave is that in um Or or earlier,
Speaker 1: he flipped to the bullish side after having been somewhat
Speaker 1: cautious coming out of the UH financial crisis, and people
Speaker 1: kicked and screamed, Dave the bear, how can you go bullish?
Speaker 1: And he said, the data proved it, so I have
Speaker 1: to go bullish. So I've always respected that, Hey, this
Speaker 1: position is wrong and I can't stay this way. I'm
Speaker 1: gonna reverse myself. Not a lot of people on Wall
Speaker 1: Street UM do that very comfortably. The other reason I
Speaker 1: wanted to bring Dave back was we both presented at
Speaker 1: a conference this weekend and I saw him on a panel.
Speaker 1: I mean, we hung out and chatted a bit, but
Speaker 1: I saw him on a panel with three other people
Speaker 1: and he hinted at some of his views on the
Speaker 1: FED and the economy and non farm payrolls and inflation
Speaker 1: and and what we're looking at in the markets. And
Speaker 1: it was really just a taste, and I wanted to
Speaker 1: sit down and have the full meal. For those of
Speaker 1: you who are interested in economic data, I don't even
Speaker 1: know how else to describe this. Davi is an idiot
Speaker 1: savant with data in a way that few economists can.
Speaker 1: He has an encyclopedic knowledge of how all these different
Speaker 1: moving parts interact. We didn't really talk about um random dates,
Speaker 1: but we've had dinner in the past where I said,
Speaker 1: you know, February two thousand and three, He's like, oh yeah,
Speaker 1: non farm payroll was a fourteen thousand that month. Not
Speaker 1: a great month. The guy is a walking encyclopedia and
Speaker 1: understands how to put it into context and what it
Speaker 1: means to both the economy and the stock market. If
Speaker 1: you like economics, if you like that sort of data analysis,
Speaker 1: I think you're gonna find this to be a fascinating,
Speaker 1: albeit wonky conversation. Um So, without any further ado, here
Speaker 1: is my chat with David Rosenberg. This is Masters in
Speaker 1: Business with Barry Ridholts on Bloomberg Radio. My guest this
Speaker 1: week David Rosenberg. You might know him from when he
Speaker 1: was chief economist of Merrill Lynch. He's currently chief market
Speaker 1: strategist and chief economist at Gluston Chef out of Toronto,
Speaker 1: New York. Dave, Welcome to Bloomberg. Good to be back, Barry.
Speaker 1: So let me tell you why I'm having Dave on
Speaker 1: for a second time. You are one of the few
Speaker 1: repeat guests. The previous repeat guest was some guy named
Speaker 1: Arthur Levitt who was chairman of the SEC. But other
Speaker 1: than him, you're the first repeat guest. I think I
Speaker 1: think I was your first guest. What you almost two
Speaker 1: years ago? You were one of, if not the very
Speaker 1: first guests that we recorded with. We had done a
Speaker 1: few dry runs and then we brought you in, and
Speaker 1: I think you were the first guest that we actually
Speaker 1: recorded and used the podcast of I think I heard
Speaker 1: you tell somebody, uh, Rosie's my guinea pig. That's right,
Speaker 1: That's exactly right. So um, let me tell you why
Speaker 1: I brought you back, Not to be a guinea pig.
Speaker 1: Dave and I were at a conference this past weekend
Speaker 1: in Miami, Florida. I gave a presentation on risk. Dave
Speaker 1: gave a presentation, as he usually does, on the state
Speaker 1: of the economy, and it's a holistic every data point
Speaker 1: you could think of put into really interesting context. And
Speaker 1: when I sat through a panel that Dave was on
Speaker 1: with four people, my thoughts were, I want to hear
Speaker 1: more of what Dave has to say about where we
Speaker 1: are in the state of the economy. Talk about non
Speaker 1: fund payroll talk about the FED, talk about what this
Speaker 1: means for investors, interest rates, talk about the economic profession.
Speaker 1: And I didn't get enough Dave, So I said, Dave,
Speaker 1: why don't you come on the show this week and
Speaker 1: we'll spend some time. This is really the most fascinating
Speaker 1: time to be an economist. Um following last week's non
Speaker 1: farm payrolls and all the angst, uh storm and drang
Speaker 1: over the FED, so let's let's have at it. Let's
Speaker 1: jump right into this. Last week we saw a huge
Speaker 1: non farm payrolls report, two one new jobs created, unemployment
Speaker 1: rate effectively cut in half from the financial crisis peak.
Speaker 1: What does this mean for global economy? What does this
Speaker 1: mean for the Fed? Let's let's start out simple and
Speaker 1: say What does this new payroll report mean for the
Speaker 1: US economy? Well, I think that it needs a little
Speaker 1: bit of context. Fire away. Well, if you remember, before
Speaker 1: we got the October payroll number, just over a month ago,
Speaker 1: we also got the September number, which at that point
Speaker 1: was putred media age growth, apparently validating the FEDS no
Speaker 1: move in September. And actually I started hearing people talking
Speaker 1: about the prospect of a recession. Now let me let
Speaker 1: me interrupt you right there, because I know I've been
Speaker 1: reading Breakfast with Dave for a million years. That's Dave's
Speaker 1: daily Market and Economic When I was writing it for
Speaker 1: t Rex, you made that's exactly right, the the usual
Speaker 1: inditia of recession that you track. What do you see
Speaker 1: along those lines? Okay, well you know we'll well, we'll
Speaker 1: get to the recession indicators. I mean we can we
Speaker 1: can debate whether the economy slows down or speeds up
Speaker 1: next year. I think a recession is probably as close
Speaker 1: to zero percent odds as anything in this world. Nothing eminent,
Speaker 1: not seeing any sign, No, not not not at all.
Speaker 1: But the point I was making when I said about
Speaker 1: the perspective of the contest next of the October payroll number,
Speaker 1: which was actually one of the best employment numbers of
Speaker 1: the cycle. Was you have to take a look at
Speaker 1: in the context of what we saw in September UH,
Speaker 1: and the truth is usual somewhere in the middle. I
Speaker 1: think that the the let's finish the angst after September
Speaker 1: number was overdone. I think maybe a bit of the
Speaker 1: euphoria after the October number could be a little overdone.
Speaker 1: I think that UM, it just validates the view that
Speaker 1: the U. S economy is doing okay, maybe a little
Speaker 1: bit better than okay. To me, what really stood out
Speaker 1: was this UH the view that this combination of a
Speaker 1: super strong US dollar UH and the weakness that we're
Speaker 1: seeing in various parts of the world, particularly emerging markets,
Speaker 1: was going to come back and push the manufacturing sector
Speaker 1: into a downturn that would then cause a generalized malaise
Speaker 1: in the economy. Well, the reality is that that view
Speaker 1: has so far been proven to have been wrong, because
Speaker 1: we didn't have any manufacturing jobs created last month. And
Speaker 1: yet somehow, and yet, somehow, an economy that is actually
Speaker 1: driven in part by construction, you can say, in part
Speaker 1: by government. Certainly it's a service sector economy outside of manufacturing,
Speaker 1: still generated, as you said, bury two net new jobs.
Speaker 1: Then there's been all the narrative. Well, I would say
Speaker 1: for the past year, UH that the downdraft in oil
Speaker 1: was a net negative for the US economy, that it
Speaker 1: was going to destroy the Montanas, the Dakota's Texas, and
Speaker 1: to spring down the US economy because apparently over a
Speaker 1: five year period all the jobs that were created was
Speaker 1: in shale. Well, once again, we had a month where
Speaker 1: no growth in manufacturing. UH, the resource sector actually had
Speaker 1: a fractually negative job market performance, and the economy, what
Speaker 1: do you know, generated two seventy one thousand net new jobs.
Speaker 1: So I think what's happening is that the fallacy UH,
Speaker 1: that the strong dollar and the weaker mergy markets we're
Speaker 1: going to bring the U s economy to its knees.
Speaker 1: Right now, we're putting the rat in the laboratory. That
Speaker 1: thesis has been proven wrong. I'm quite actually content with that.
Speaker 1: And the view that the shale UH contraction was going
Speaker 1: to create a major domino effect through the economy has
Speaker 1: been proven wrong as well. So in the last thirty
Speaker 1: seconds we have in this segment, you you alluded to
Speaker 1: something earlier, and I want to give you a chance
Speaker 1: to expound on it. Uh, employment data, it's a fairly
Speaker 1: noisy series, isn't it. Well, you know, it's interesting. The
Speaker 1: household survey is certainly volatile. The payroll survey tends to
Speaker 1: be more stable, which is why the markets have already
Speaker 1: paid more attention to it. But it has been a
Speaker 1: little bit more jumpy, which is why always any economists
Speaker 1: will tell you focus on the three months, six month,
Speaker 1: even the twelve month. Friend, the data telling you the
Speaker 1: economy is in decent shape. Full stop. I'm Barry rid Hult.
Speaker 1: You're listening to Master's Business on Bloomberg Radio. My guests
Speaker 1: this week David Rosenberg. He is the chief economist and
Speaker 1: strategist at Gluskin Chef. We were talking earlier about the
Speaker 1: non farm payrolls data and how sometimes that series can
Speaker 1: be a little bit noisy, especially the household survey. What
Speaker 1: does that mean for the Fed? That is quote unquote
Speaker 1: data driven. I think the Fed has already laid down
Speaker 1: its cards and even the doves are running for cover.
Speaker 1: So um, my sense now was that the Fed took
Speaker 1: a pass in September primarily because of the global turmoil.
Speaker 1: And uh, why is a cute market. Why is that?
Speaker 1: Why do we think that emerging market downtown in the
Speaker 1: Shanghai Index? Why should that impact the Fed? No? No, no,
Speaker 1: Well it wasn't just the Shanghai Index at that point.
Speaker 1: I mean you had a situation where credit spreads in
Speaker 1: the US for widening dramatically. Uh. You had a situation
Speaker 1: where over half the stock market was down at least
Speaker 1: from the high. So basically what had happened at that
Speaker 1: point was we had a major tightening in domestic financial conditions,
Speaker 1: and so the FED went to the sidelines. You know, look,
Speaker 1: reality is this. Uh. You know, we tend to get
Speaker 1: a little myopic in the marketplace. I'm a market participant. Uh.
Speaker 1: They do have eight meetings a year. So they took
Speaker 1: a pass um the economy is in fine shape. The
Speaker 1: bottom line here is the desperate desire by the FIT
Speaker 1: to move off of zero. That's what it is all about.
Speaker 1: Move off of zero normalizing. Just as we don't need
Speaker 1: QUI anymore, they ended que and once again, let's attack
Speaker 1: the narrative. The narrative was that as soon as they
Speaker 1: ended QUI, which was October of last year, the economy
Speaker 1: was going to crumble, go down to it sneeze, they
Speaker 1: ended QUWI. No such thing happened round And if you
Speaker 1: go back to and Yellen was telling us what the
Speaker 1: time lag was between the end of QUEI and the
Speaker 1: first rate hike, she inadvertly had mentioned six months. Well,
Speaker 1: my good friend Barry, it's already been more than a year,
Speaker 1: so you know what, it's high time to move off
Speaker 1: of zero. And at the same time, when it comes
Speaker 1: to December sixteenth, and they probably will at this point
Speaker 1: raise rates. It's what they say that's gonna matter, and
Speaker 1: they will continue to reaffirm the view that this is
Speaker 1: not going to be your big brother's, your father's, or
Speaker 1: your grandfather's tiding cycle. It's going to be truncated. They
Speaker 1: could easily signal that not that they're one and done,
Speaker 1: but they're gonna move and then pause an assess so
Speaker 1: that this is not going to be the fed of old.
Speaker 1: When it became an exercise of eating potato chips, you
Speaker 1: just can't stop. At one, two thousand five, two thousand six,
Speaker 1: two thousand seven. We saw once the tightening cycle began,
Speaker 1: it was pretty much straight up right into the teeth
Speaker 1: of a recession. Same thing. This is a very different cycle.
Speaker 1: Low and slow. Is that the big difference, Barry. You
Speaker 1: go back to the uh. You know, you go back
Speaker 1: to look at you did have a big inflation problem
Speaker 1: that had to be circumvented. You go out to the
Speaker 1: late ninety nineties, we had a tech bubble that the
Speaker 1: FED had to get ahead of. Um. You go back
Speaker 1: to that period, You're quite right to look two thousand
Speaker 1: and four, they start to raise rates. They went from
Speaker 1: one percent to five and a quarter in two years.
Speaker 1: And not the most ardent hawk or bond bear saw
Speaker 1: that coming. Um. But the FED had a big bubble
Speaker 1: on its hands. It was the housing incredib bubble. I'm
Speaker 1: looking around trying to find where the bubble is. There
Speaker 1: might be little pockets of bubbles here and there, but
Speaker 1: nothing and certainly no inflation bubble just yet to cause
Speaker 1: the FAT to have to raise rates at every single meeting.
Speaker 1: So my sense is that they raise they reaffirmed this
Speaker 1: notion lore for longer. Uh and um. And we'll take
Speaker 1: it from there. But what I will say is that
Speaker 1: comes back to your question about the recession. Recessions have
Speaker 1: never started after the first rate hike. The recession start
Speaker 1: after the last rate hike. So if you're worried about
Speaker 1: the rate hike December six and sure there'll be more volatility.
Speaker 1: We're gonna stress test liquidity in the bond market, no
Speaker 1: question about that. You might want to have a little
Speaker 1: more cash on hand going in next year for optionality purposes.
Speaker 1: It doesn't mean that it's the end of the cycle.
Speaker 1: The cycle ends every time after the last rate hike
Speaker 1: because it's the last rate hike that ultimately brings the
Speaker 1: economy to its knees. So if that's your view, then
Speaker 1: you have to believe that the first rate hike is
Speaker 1: going to be the last rate hike. And I don't
Speaker 1: believe that for a second. So let's take the other
Speaker 1: side of the trade. What happens if they don't hike
Speaker 1: in December. What sort of a signal does that send?
Speaker 1: What are the implications? Well, if they don't hike, and
Speaker 1: if they don't hike on December sixteenth, I'm nervous, and
Speaker 1: I'll tell you why. And it's not because of what
Speaker 1: happens on December sixteenth. That's that's something happened and the
Speaker 1: lead up to December sixte that caused them not to
Speaker 1: raise rates. So basically, the picture you're painting Barry is
Speaker 1: that U is a repeat of a cosm to go
Speaker 1: on the sidelines in September, which is that we have
Speaker 1: once again a major tightening of financial conditions. So stock
Speaker 1: market correction, widening spreads, or something nefarious is happening because
Speaker 1: they are right now once again setting the table for us.
Speaker 1: If they don't follow through, they suffer a credibility problem. Uh.
Speaker 1: If they don't follow through borrowing a credibility problem, it's
Speaker 1: because something else happened along the way that if your
Speaker 1: long risk is not going to make it too happy,
Speaker 1: it's gonna make people think, what do they know? That?
Speaker 1: What are they seeing? Then I'm not seeing? Well, no,
Speaker 1: I don't well, you know. The thing is that that's
Speaker 1: what people were saying in September. But the reality is
Speaker 1: that it's not what do they see, We don't know.
Speaker 1: We know what we know. What is that half the
Speaker 1: stock market was down and credit spreads are widening inexorably.
Speaker 1: So the fact is the fact is that some people
Speaker 1: thought that the febs just going to look through that
Speaker 1: tightening of financial conditions and still raise rates. But the
Speaker 1: reality is that they didn't look through that tightening of
Speaker 1: financial conditions. They weren't sure if things are going to
Speaker 1: subside or not. Well, they have subsided. Now the prospect
Speaker 1: of the first rate hike in nine years is on
Speaker 1: the table if they don't move at this stage. Look,
Speaker 1: they basically set the bar very low. It's not as
Speaker 1: if things have to get better. They just don't have
Speaker 1: to get worse. And they are going to race rates.
Speaker 1: But if we haven't another going to go, they're going
Speaker 1: to go to fifty. Because so we're really well, let's
Speaker 1: look they people are talking they can go in eighth.
Speaker 1: I mean, we're we're in arrange. Look there's other mechanisms also,
Speaker 1: what do they do with the U uh, with the
Speaker 1: interest rate in excess reserves? Uh, you know, we're we're
Speaker 1: in a whole new realm of healthy operating monetary policy.
Speaker 1: But my sense is that if we're talking about my
Speaker 1: view on what it will mean for basis point impact,
Speaker 1: it's probably going to be twenty five basis points, all right.
Speaker 1: And we didn't really get to talk about earnings yet.
Speaker 1: Since the financial crisis lows, we've seen earnings rise over
Speaker 1: a hundred percent from their bottom and stocks have risen
Speaker 1: over two You mentioned energy before, what are you looking
Speaker 1: at in terms of this so called earnings recession driven
Speaker 1: by energy verry, you have earnings contractions in about half
Speaker 1: the market, earnings positive and half the market. And it's
Speaker 1: been a very usyncratic stock specific um sector selection market
Speaker 1: this year. It's not been a market that you buy
Speaker 1: the index. The bottom line is at stay away from
Speaker 1: the areas UH that have excess valuation, that are hits
Speaker 1: to the foreign economy, that are vulnerable to the US dollar.
Speaker 1: The bottom line is that for all the talk of
Speaker 1: what a bad market it's been this year, in earnings procession,
Speaker 1: the best performing sector is consumer discretionary over ten percent
Speaker 1: capital appreciation this year over ten percent earnings growth. Now
Speaker 1: understand the consumer discretionary might be between ten and of
Speaker 1: the SMP market cap, but it represents seventy GDP. How
Speaker 1: bad can things possibly be when consumer cyclicals are seeing
Speaker 1: ten percent plus earnings growth and ten percent price appreciation
Speaker 1: all the same year. I'm Barry rid Help. You're listening
Speaker 1: to Master's Business on Bloomberg Radio. My guests this week
Speaker 1: David Rosenberg. He is the chief economist and strategist at
Speaker 1: Gluskin Chef in Toronto, Canada, and pretty much around the world.
Speaker 1: And previously we were discussing um, the energy contraction, that
Speaker 1: we've had a huge drop in oil prices. Let's talk
Speaker 1: a little bit about commodities. Copper cut in half, oil
Speaker 1: cut in half, a lot of the industrial metals iron
Speaker 1: zinc doing really poorly now a generation ago. That would
Speaker 1: be a warning from Dr Copper that a recession is coming.
Speaker 1: But you're saying there's no sign of a recession on
Speaker 1: the horizon. What does it mean that the various um
Speaker 1: commodities are getting gobsmacked like this? Well, you know, I
Speaker 1: never would have said that copper price alone would have
Speaker 1: signaled a recession. Every recession has been presaged by one
Speaker 1: thing and one thing only, which is an inversion of
Speaker 1: the yield curve full stop. So I'm not so sure
Speaker 1: that you can look at the price of anything, uh
Speaker 1: and just say it's demand contraction. Every price is determined
Speaker 1: by two lines worthy intersect, which is supply and demand.
Speaker 1: And so it's interesting you talk about oil for example,
Speaker 1: throughout this say sevent collapse in the old price, global
Speaker 1: demand has us gone up? Botolines us We're pretty too
Speaker 1: much oil. The swing producer, that's the saudiast told the
Speaker 1: Americans a year ago, you're the swing producer. Not US
Speaker 1: shale America. You are the swing producer. We've given that up.
Speaker 1: Every single bottom in the old price go back to
Speaker 1: go to, go to two thousand and two to two
Speaker 1: thousand and nine, it was always the Saudies leading, oh pack.
Speaker 1: In fact, you just go back to two thousand and nine,
Speaker 1: who cut output from ten million to three umbrels a
Speaker 1: day with the Saudis. The saudiast told the shale guys
Speaker 1: in the US you are now the swing producer. We're
Speaker 1: out of that business. And then throughout that and despite that,
Speaker 1: going into last summer when oil was hitting, it slows
Speaker 1: and right now we're putting a bottoming process, American producers
Speaker 1: were still producing five thousand barrels a day more in
Speaker 1: the summer than they were last November. So um, okay,
Speaker 1: look and you look at the contango. You look at
Speaker 1: the inventories, and they could explain contango for the lay
Speaker 1: person who doesn't understand backwardization or contanging. Well, just looking
Speaker 1: at you know the fact that the forward curve is
Speaker 1: possibly steep. So it's telling you in terms of the
Speaker 1: nutterm pricing that there's still some supply pressure putting some
Speaker 1: downward impact on the spot price of term you expect
Speaker 1: longer term. Well, I think that. Look when you're taking
Speaker 1: a look at the rig count and the types of
Speaker 1: rigs that are now being shuttered as opposed to the
Speaker 1: type that we're the inefficial ones being shuttered say six
Speaker 1: months ago. The fact that drilling and exploration activity is
Speaker 1: down over the past year in the US by six
Speaker 1: and never well, every time this happened in the past,
Speaker 1: oil is put in the bottom. We're just still going
Speaker 1: to get a v shape recovery. But I think oil
Speaker 1: is putting in a bottoming formation. It's it's not you know,
Speaker 1: the next time you get towards sixty. This fracking revolution,
Speaker 1: the technology is sophisticated that it's not going to take
Speaker 1: much to really trigger the output. So I think we're
Speaker 1: in a broad forty to sixty dollar range. I'm not
Speaker 1: in the view that we're going down to thirty. Barring
Speaker 1: a global collapse in demand or or a recession near
Speaker 1: term prices remain week. I think that within a year,
Speaker 1: I think there will be opportunities. I think there will
Speaker 1: actually be another run towards sixty. It'll be temporary and
Speaker 1: it will be a trade. Energy is a trade. Commodities
Speaker 1: you're a trade, They're not an investment. The twelve year
Speaker 1: supercycle courtesy of China is reeally yesterday's story. If you're
Speaker 1: gonna play the next supercycle into China, you're gonna be
Speaker 1: playing services, okay, because that's where their economy is gravitating
Speaker 1: to their gravitating away from industrialization, away from exports, towards
Speaker 1: consumer spending most services. So that's the new supercycle. Internet services,
Speaker 1: media services, education services, health services, the service sector side
Speaker 1: of the Chinese economy that apparently people are telling me
Speaker 1: it's crashing and burning because people just tend to look
Speaker 1: at commodities and manufacturing diffusion indicries, which gives you a
Speaker 1: very small app shot. For the first time in China's
Speaker 1: modern history, service sector accounts for over half of their GDP.
Speaker 1: The service sector in China. Service sector is now and
Speaker 1: it's growing um. Consumer spending in China accounted for almost
Speaker 1: six of the overall growth they generated. This is not
Speaker 1: the China people you see. People are just they take
Speaker 1: the latest experience of the extra polading in the future.
Speaker 1: The new supercycle is consumer spending and consumer spending on services.
Speaker 1: If I'm not mistaken. We just printed what was it, like,
Speaker 1: a year of a year retail sales number in China.
Speaker 1: The US hasn't printed the number like that in in
Speaker 1: almost three decades, and on somehow China's crashing and burning. Look,
Speaker 1: China's got they've got they do have leverage problems. Uh,
Speaker 1: you know they're they're they're still liberalizing. Uh. It is
Speaker 1: a it's a it's it's a work in pro in
Speaker 1: in process. But the reality is at as Ali Baba
Speaker 1: showed you a few weeks ago with their blow at
Speaker 1: earnings that if you're playing China in the future, it's
Speaker 1: not the al Coa's and it's not the John and DearS,
Speaker 1: and it's not the caterpillars, it's who are the global
Speaker 1: champions that will penetrate. If I would have said to
Speaker 1: you five years ago, Dave, the Fed's going to take
Speaker 1: rates to zero and keep them there for five years.
Speaker 1: We're gonna do three rounds of quantitative easing, and five
Speaker 1: years from now you're gonna have no inflation and the
Speaker 1: dollar at multi year highs. What what would you say
Speaker 1: to that sort of forecast? Well, I would have said
Speaker 1: that maybe if you wanted to figure that out. You'd
Speaker 1: read the rogue offf Reinhardt classic, or you would read
Speaker 1: the work of this time Mackenzie. Well, this time it's different.
Speaker 1: So the bottom line is that when you go back
Speaker 1: centuries of of recessions that are not classic inventory cycles
Speaker 1: but are process credit and an implosion of asset values,
Speaker 1: this is what happens. If you want to take the
Speaker 1: most uh I think, you know, dramatic example, go back
Speaker 1: to the nineteen thirties. Okay, Now, look, we don't have
Speaker 1: the people living in the land. We didn't have a
Speaker 1: dusk ball. We actually, um, you know, actually have the
Speaker 1: deposit insurance, and we have unemployment insurance, we have a
Speaker 1: social safety net. Um. I'm sure that without all that
Speaker 1: it would have been practically just as bad. We didn't
Speaker 1: let every single bank fail. We didn't have a massive
Speaker 1: run on banks, despite the fact that some institutions were
Speaker 1: allowed to falter. So the bottom line is that when
Speaker 1: you take a look at the history of financial crises
Speaker 1: of this magnitude, Yeah, you drop industrates to zero, you
Speaker 1: keep there for a long time. Uh and um. The
Speaker 1: only reason why the central banks, well let's just take
Speaker 1: the FED as an example, had to do as much
Speaker 1: as it did was because fiscal policy was so ineffective
Speaker 1: or non existent. It is very little compared to what
Speaker 1: I think some people like your buddy wanted to know,
Speaker 1: very very you know, the sad reality is that our
Speaker 1: politicians created so many roadblocks in the US unnecessarily. Look
Speaker 1: on from Canada. You know, we have socialized healthcare there,
Speaker 1: But to really invoke a complicated healthcare plan because you
Speaker 1: couldn't get it done when Hillary was in the White
Speaker 1: House back in the early nineties. And this wasn't even
Speaker 1: about President Obama. This is more Pelosi and read and
Speaker 1: I'm not going to discuss the social fairness of this,
Speaker 1: but to enact legislation that's so complicated that froze the
Speaker 1: small business sector in time, literally two years after the
Speaker 1: capital markets and the housing market detonated, bad timing that
Speaker 1: delayed the recovery. Then we had to basically swing the
Speaker 1: pendulum the other way. We had libertarians running the Fed.
Speaker 1: Uh that we built the wild West and the financial
Speaker 1: markets and the sheriff left town. So then what do
Speaker 1: we do in this cycle swing the pendulum between Basil three,
Speaker 1: the vocal rule dot frank. So we basically now are
Speaker 1: regulating the banks like utilities, and so every step of
Speaker 1: the way, we haven't even been able to pass a budget.
Speaker 1: The government has about operating on continuing resolutions with every
Speaker 1: few years. What do we have the risk of a
Speaker 1: government's out down and debt default that again causes businesses.
Speaker 1: I'd rather just buy back my stock, thank you very much.
Speaker 1: An issue debt to actually commit capital to an economy
Speaker 1: where there's basically no fiscal visibility. So that's been a
Speaker 1: big part of the problem is that you did not
Speaker 1: have the utopia which would have been fiscal policy. Working
Speaker 1: with Monterey policy. We have Larry Summers, who now has
Speaker 1: been saying for a while they were in secretar stagnation.
Speaker 1: He was the one telling President Obama not mistaken to
Speaker 1: go targeted and timely and transitory with the fiscal response,
Speaker 1: the infrastructure spending that ever went anywhere. The President should
Speaker 1: have gone big. He had a big tail wind behind
Speaker 1: his back. He should have gone really big back then
Speaker 1: towards a real new deal to get the economy moving.
Speaker 1: The fiscal response was tepid, and to put all the
Speaker 1: burden of responsibility on Monterrey policy. You're listening to Masters
Speaker 1: in Business on Bloomberg Radio my guest today Gluskin Chef's
Speaker 1: David rosen Burg. He is their chief economist and market strategist,
Speaker 1: operating out of Toronto and worldwide. You know, every time
Speaker 1: I speak to you, Dave, you're in a different part
Speaker 1: of the world. How many countries are you in a year?
Speaker 1: Your travel less than you used to, but you're still
Speaker 1: all over Europe and elsewhere. Well, I'm actually going with
Speaker 1: our investment team to mccow in Hong Kong at the
Speaker 1: end of the month, but mostly like most of our
Speaker 1: businesses in Canada and the States, so I don't do
Speaker 1: the the European and Asian road shows like I used to.
Speaker 1: But you're back in in the in the US. Uh.
Speaker 1: You know, a good chunk of our business, at least
Speaker 1: ten percent, is in the States and used to when
Speaker 1: you're with Merrill Lynch, you used to be around the
Speaker 1: world pretty regularly. You were quite the globetrotter, my friend.
Speaker 1: I think I was either platinum, gold or silver on
Speaker 1: on six different airlines back when we used to have
Speaker 1: six different airlines. That's right, all right, So let's talk
Speaker 1: a little bit about economics, not the economy, but economics
Speaker 1: and the economics profession and one of the questions that
Speaker 1: came up at the friends we were both at were
Speaker 1: forecasting the economy into the forward year. And I want
Speaker 1: to I don't want to ask you what your forecast is.
Speaker 1: I want to ask you a more philosophical question, which
Speaker 1: is why is forecasting so difficult? What makes thinking about
Speaker 1: and projecting the markets and the economy forward a year
Speaker 1: all but impossible? Well, firstly, there's there's always a certain
Speaker 1: level of uncertainty around your forecast. That's like Yogi Bevera
Speaker 1: famously said, Uh, making forecasts uh is very difficult, especially
Speaker 1: when it comes to predicting the future. So there's always
Speaker 1: a certain level of uncertainty. And I'll get into that
Speaker 1: in a second. I think also we live in a
Speaker 1: in a very fast money world and a world where
Speaker 1: uh you have to pay attention to geopolitics more than
Speaker 1: you used to before. Uh, And it's just um, you know,
Speaker 1: the information gets transmitted much more quickly there. You mean,
Speaker 1: it's incredible that sometimes you get moves that in the
Speaker 1: old days, well you'd get in a year, cannot actually
Speaker 1: happen in like a week now. And and look the
Speaker 1: onset of program trading and all the electronics and that
Speaker 1: go along with that. Let me just say this, um
Speaker 1: if I had to present a forecast today like I
Speaker 1: used to when I was on the south side at
Speaker 1: Meryland before that, Bank of Montrail, Bank of Nova Scotia.
Speaker 1: After six years on the bye side of Glaskon Chef,
Speaker 1: sitting down seven with our portfolio managers, I finally figured
Speaker 1: out I used to. I used to think, you know,
Speaker 1: when you're chief economist to Mary Lynch, you you you
Speaker 1: think that you're like the starting pitch of the New
Speaker 1: York Yankees. You have it all figured it out. I
Speaker 1: realized when I got to Glaskon Chef how much I
Speaker 1: didn't know. And it was a revelation I had in
Speaker 1: my first meeting when I gave a particular forecast and
Speaker 1: the portfolio manager I forget what it was exactly, said so,
Speaker 1: how much conviction do you have in that call? And
Speaker 1: I said what, Well, he said, well, certainly you know
Speaker 1: you don't have it's iron clad. What is your conviction level?
Speaker 1: And then what scenario B, C or D if you're
Speaker 1: gonna be wrong where you're gonna be wrong? So you see,
Speaker 1: if you're managing money for a living, if you are
Speaker 1: an investor, portfolio manager. Your whole world is one job,
Speaker 1: probability curve. And the economist job is not to get
Speaker 1: the base case right. It's to help the investor make
Speaker 1: an informed decision, and that comes down to helping tighten
Speaker 1: in the probability bands. So I will go to a
Speaker 1: meeting today, a glaskon chef where basically I will have
Speaker 1: the same base case forecasts, but I'll say, hey, fellas,
Speaker 1: whereas I used to have eight percent conviction, it's down
Speaker 1: to oh, by the way, scenario B is now D
Speaker 1: and D is now C and and everybody in the
Speaker 1: room will be running down like they'll be sweating writing
Speaker 1: down what I'm saying. And I didn't even change my
Speaker 1: base case scenario. It's all about your conviction level, how
Speaker 1: that changes over time. And if you're wrong, we're you're
Speaker 1: gonna be wrong. What is your what scenario B, C
Speaker 1: or D? Because your forecast And this is what gets
Speaker 1: economists into trouble. You know, you read these spreadsheets, you
Speaker 1: read a daily, read a weekly, a monthly out of
Speaker 1: a classic seuth Side Wall Street economics house, and you think, well,
Speaker 1: that GDP growth in the fourth quarter, that's got to
Speaker 1: be there, iron clad. But you don't get to ask
Speaker 1: them how much confidence do you have in that forecast?
Speaker 1: Or if you're wrong, say you're calling for three, will
Speaker 1: it be too or will it be four? Meaning you're
Speaker 1: you're gonna be wrong because it's hotter or wrong because
Speaker 1: it's colder. You've got the whole life of a portfolio manager.
Speaker 1: Their brain is one giant distribution curve of outcomes, and
Speaker 1: the economist role is not to focus just on the
Speaker 1: base case. It's to focus on the whole range of outcomes.
Speaker 1: Is it a fat tail curve, it is a thin
Speaker 1: tail curve. And actually sometimes just shifting your second your
Speaker 1: well what what what? The next two possibilities are huge
Speaker 1: in terms of what that could mean for portolio management.
Speaker 1: We're discussing fun with Gaussian distribution curves with Dave Rosenberg.
Speaker 1: I love this new or not so new philosophical way
Speaker 1: of looking at the world from a probabilistic perspective. Often wrong,
Speaker 1: seldom in doubt is the expression that comes to mind
Speaker 1: about the people on the sell side who are full
Speaker 1: of conviction, but there is no plan B, there is
Speaker 1: no distribution. Here's my forecast right or wrong? Well, that's
Speaker 1: um and that's what gets economists in the hot water.
Speaker 1: And that's uh, and that's the bad rap in the profession.
Speaker 1: That's why if I had to go back to that, UM,
Speaker 1: I guess profession of publishing forecast us, which thankfully I
Speaker 1: don't have to do anymore, I would do it completely differently.
Speaker 1: I think the one way, how would you how would
Speaker 1: you do it different? Well, as as I said I would,
Speaker 1: I would UM. I would provide scenarios. I'd attached probabilities
Speaker 1: and attached scenarios. What's important once again you talked about
Speaker 1: this Spajan economics. It's actually it should be so elementary
Speaker 1: for economists that actually go through and take statistics, econometrics.
Speaker 1: We all did this in university. Is it's all about
Speaker 1: expected values. It's about across the continuum of possibilities, across
Speaker 1: the distribution curve. What is the reward of being right
Speaker 1: benchmarked against the cost of being wrong spread across that
Speaker 1: um Ultimately, if you're a street economist, and whether it's
Speaker 1: Wall Street, Bay Street, Montgomery Street, House Street, UH, your
Speaker 1: job is basically as the economist to help portfolio managers
Speaker 1: make effective decision making. What I like to say at
Speaker 1: Gluskin Chef is that our portfolio managers are the goalies,
Speaker 1: and I'm the goalie coach. I can't I can't stop
Speaker 1: the puck for them. They actually are the ones that
Speaker 1: wear the goals against average. It's their portfolio. Our job
Speaker 1: as economists, as street economists, UH, in the realm of
Speaker 1: providing cogent and coherent and cohesive investment advice, is to
Speaker 1: help portfolio managers stay out of trouble and to make
Speaker 1: effect of decision making. So if I had a new
Speaker 1: role where I provided forecast UM, they would look like
Speaker 1: probability curves and you wouldn't be wed to one particular view,
Speaker 1: although you would have a base case with a probability
Speaker 1: attached to it. There's something else that's very important to
Speaker 1: my profession, which is this UM. It's admitting when you're wrong.
Speaker 1: I love that I have that as a question. How
Speaker 1: do you, as an economist admit error but you're saying
Speaker 1: you're building that in Speaking of errors, here's an economist
Speaker 1: who's frequently wrong, Richard Yamaron rich pull up a seat
Speaker 1: and join us for a conversation about why most economists
Speaker 1: are so terrible at forecasting UH the markets. They've just
Speaker 1: explained what you do wrong as a professional economist. Well,
Speaker 1: I was actually gonna say, Richie am ron Is is
Speaker 1: about my best friend in the world, and so I
Speaker 1: can't possibly it's a good thing he's here, because I
Speaker 1: would never take a shot at rich behind his back,
Speaker 1: I know, but I was doing it on your behalf.
Speaker 1: I know what you were implying about Rich. I only
Speaker 1: came in because I heard there were free donuts or
Speaker 1: something in that. That's that's exactly, very very ate them all.
Speaker 1: So so we were so we were just discussing looking
Speaker 1: at economics as a probabilistic distribution as a proposed to
Speaker 1: being all right or all wrong, and much of the
Speaker 1: Wall Street universe doesn't take that approach. Um, is this
Speaker 1: a failure of traditional economics or is it just marketing?
Speaker 1: It's marketing, and it's you know, I guess this human
Speaker 1: nature of having to be force fed numbers as opposed
Speaker 1: to a thought process. But here's what's important. Uh As
Speaker 1: I found out working on this on the by side.
Speaker 1: And you know, every cell side firm has an economist.
Speaker 1: Uh not every by side firm has an economist. I'm
Speaker 1: pretty sure that in Canada, Glaskon Chef is probably one
Speaker 1: of the few. It's about scenario building, uh and uh
Speaker 1: and and what happens I think with a lot of
Speaker 1: economists is a certain level of arrogance in your forecast,
Speaker 1: that that is basically the base case, and that's the
Speaker 1: way it's gonna be here. I'll just say this much.
Speaker 1: You cannot marry your forecast, Mary, your partner, don't marry
Speaker 1: your forecast. It will often not love you back. And
Speaker 1: have a plan B. Have an escape clause in case
Speaker 1: you're wrong, and have the discipline to admit that you're wrong.
Speaker 1: And when you admit that you're wrong, because we're human
Speaker 1: beings and we will be wrong. Have the insurance policy
Speaker 1: in place for the portfolio manager. What's that scenario be
Speaker 1: that they can flip into when you are going to
Speaker 1: be wrong. We've been speaking to David Rosenberg. He's the
Speaker 1: chief economist and market strategist for Gluskin Chef. If you
Speaker 1: want to find, by the way, more of his writings,
Speaker 1: you can go to Gluskin chef dot com. Is that right?
Speaker 1: That's the website dot com dot com. It's uh. Go
Speaker 1: to just google Gluskin Chef and you can find the
Speaker 1: website or google Breakfast with Dave which is the daily
Speaker 1: commentary that Dave Rosenberg puts out my staple. If you
Speaker 1: enjoy this conversation, be sure and stick around for the
Speaker 1: podcast extras, where we let our hair down and keep
Speaker 1: the tape rolling. Check out my daily column on Bloomberg
Speaker 1: View dot com or follow me on Twitter at rid Halts.
Speaker 1: I'm Barry Rid Halts. You've been listening to Masters in
Speaker 1: Business on Bloomberg Radio. Okay, welcome back to the podcast.
Speaker 1: My guest today Dave Rosenberg. We have a special special guest,
Speaker 1: rich Yamarone. He's the chief economist at Bloomberg. What's your
Speaker 1: title best looking economists? Best looking economists. That's a low bar.
Speaker 1: That's like smartest bush, low bar. I say that just
Speaker 1: to torture Dave. I know he's a huge gem. It's
Speaker 1: all right, let's do this over again because I'm gonna
Speaker 1: get everybody in trouble with that. Welcome back to the podcast. Uh,
Speaker 1: I'm speaking with Dave Rosenberg. Is my special guest this week.
Speaker 1: My extra special guest just dropping in. One of the
Speaker 1: economists here we keep down in the basement, rich yamar
Speaker 1: And say hello to the people, Yamaron, Hello people, fantastic
Speaker 1: Yammy and Dave are old buddies. They went to uh
Speaker 1: economics grammar school together in um parts unknown, Toronto, Toronto,
Speaker 1: usually usually someplace where wine is pouring. Um. So, the
Speaker 1: funny thing about the conversation about traveling. When you and
Speaker 1: I first met a hundred years ago, you were on
Speaker 1: the road. I want to say two weeks a month,
Speaker 1: maybe three weeks a month, something crazy like that. I'd
Speaker 1: say half the time, a hundred thousand miles a year.
Speaker 1: Uh that's uh that you know that could be the
Speaker 1: under Really yeah, it was a look at that job
Speaker 1: between equities, fixed income, derivatives, commodities, middle markets, Uh, the
Speaker 1: the private client. There were so many constituents to serve. Uh,
Speaker 1: that was crazy. Plus, don't forget very my my wife
Speaker 1: and kids were back in Toronto, so I was I
Speaker 1: was freely available to market seven So and with that, look,
Speaker 1: it was a global firm travel You travel like the globe. Well,
Speaker 1: look it was um you know, uh, no guts, no glory.
Speaker 1: So let me ask you a question similar to what
Speaker 1: I asked our friend Michelle Meyer, who's now a senior
Speaker 1: economist at Merrill Lynch and she's phenomenal, rising star, phenomenal,
Speaker 1: not not rising star. She's a star. So what is
Speaker 1: a day in the lie if of a chief economist
Speaker 1: at a place like Merrill Lynch with fifteen or twenty
Speaker 1: thousand advisors and a trillion dollars in assets under management?
Speaker 1: What time did your day start? Back then? Well, my
Speaker 1: day probably um is as an outlier, because because I
Speaker 1: did the daily which back then was called Morning Market Memo,
Speaker 1: although internally it was called Rosie's Tidbits. Uh, my day started, um,
Speaker 1: I got up at four in the morning. Four in
Speaker 1: the morning, morning, four in the morning. Yeah, well, any
Speaker 1: time you getting up today, if it depends what I
Speaker 1: was doing the night before. But now you're up. I
Speaker 1: think you're up about three because I get breakfast with
Speaker 1: Dave and it looks like it's a couple of hours
Speaker 1: of work. And I get that at you know, before noon. Well,
Speaker 1: I get up at h I get up at four thirty.
Speaker 1: But I've always been well, firstly, I'm not a very
Speaker 1: good sleeper. Uh am, I as I get maybe that's
Speaker 1: t M I uh and uh, well, as only you
Speaker 1: would know. And uh and and I've always been I've
Speaker 1: always been I've always been worried that way. As as
Speaker 1: a as a morning person. Same here, use a long clock,
Speaker 1: you just wake up. You know. It's a you know,
Speaker 1: I have a real passion for this business. And look,
Speaker 1: you asked before about what's all the best change, But
Speaker 1: it's really the markets don't sleep, and so therefore I
Speaker 1: have trouble sleeping, so I get up early. And um,
Speaker 1: I've got a lot of stamina and on a lot
Speaker 1: of engines. So the reality is that, um, you know,
Speaker 1: it's not just about look your your work ethic, uh
Speaker 1: has to be there. I guess you have to have
Speaker 1: a reasonable level of intelligence. You have to read a
Speaker 1: lot because it's important to be informed. Some people think
Speaker 1: that you're smart when all you really do is you
Speaker 1: read eight newspapers and you know what's going on around
Speaker 1: the world. Being informed, though, is important part um of
Speaker 1: what I do. And then it's a uh, I'm matter
Speaker 1: of um of serving all your constituents. Look at Glasgow Chef,
Speaker 1: my most important client, or our portfolio managers. I sit
Speaker 1: right out there with them. I don't have to travel
Speaker 1: around the world to see portfolio managers. I sit next
Speaker 1: to ours, and I say the most important client because
Speaker 1: they're the ones that drive the performance of the firm.
Speaker 1: And then of course I see the clients of our firm,
Speaker 1: which are are wealthy families in North America at Merrill Lynch,
Speaker 1: I mean a million different constitutions all over the world.
Speaker 1: Oh yeah, it was just look, the most important time,
Speaker 1: the most important, the most important challenge for me. You know, Look,
Speaker 1: you had to manage up. You have to manage down.
Speaker 1: I had a big team. I had a team in
Speaker 1: Toronto and a team in New York. Um, how do
Speaker 1: you manage up? But the well, how do you manage up?
Speaker 1: Is you have to make I I had multiple bosses
Speaker 1: at the well, I don't know do we do we
Speaker 1: have all night? Because well, the donuts are gone. So
Speaker 1: so let's let's let's about who you have who Look
Speaker 1: they were they were they were. Look, you had to
Speaker 1: make the head of research happy and they had a
Speaker 1: research also had their constituents, which uh, you know, they
Speaker 1: had equity analysts reporting into them. You had had a
Speaker 1: fixed income head of equities, you know, So you had
Speaker 1: the head of research and then you had all the producers.
Speaker 1: So look, you had to balance a lot of things.
Speaker 1: You also had the CEO of Merrill Lynch back when
Speaker 1: they were a standalone entity. I recall the days when
Speaker 1: you would get called into. Um, I'm trying to think
Speaker 1: of which Ceo O'Neill you would get called into, Dave,
Speaker 1: what's this nonsense about this or that? What were those days? Look,
Speaker 1: I'll tell you this much okay, Um, Look, I was
Speaker 1: not a threat to Stan O'Neill, uh you know, And
Speaker 1: it's all been written about. But Stan O'Neill and the
Speaker 1: time I was there at the time was that he
Speaker 1: was there treated me with the utmost of respect. And
Speaker 1: I'll tell you that I was probably in his office
Speaker 1: once a month, and uh we got along famously. Well. Um,
Speaker 1: you know, so we're going into a realm that you know,
Speaker 1: where there's the narrative and there's the reality. Uh Stan
Speaker 1: and I got along very well, you know, after he
Speaker 1: left a short period with John Thane, and we got
Speaker 1: along well. But I look, I knew Stan O'Neill very well.
Speaker 1: And look when he was making money for the firm,
Speaker 1: and of course he was taking a lot of risk,
Speaker 1: but people would kiss the ring in his finger everybody
Speaker 1: loves and so well that's what I mean. And then
Speaker 1: and then, uh, I've seen it all. But I'll tell
Speaker 1: you this, uh Stan um brilliant man. Uh and uh
Speaker 1: you can say in quotes, well why did he not
Speaker 1: listen to Rosie? And uh, look it's all behind us now.
Speaker 1: But the reality is that when you want to at
Speaker 1: Merrill Lynch, uh start to compete with the Goldman Sachs
Speaker 1: on R O e s and r oays and half
Speaker 1: your business as a thunderbring herd which is a stable
Speaker 1: uh you know o pe business. Um, you got to
Speaker 1: dial up a lot of risk. But I'll tell you
Speaker 1: this much, and I'll say it for the record. My
Speaker 1: relationship with Stan O'Neill was phenomenal, uh. And he treated
Speaker 1: me with respect. Whether he agreed with me, and purely
Speaker 1: he disagreed with my view, we were in position for
Speaker 1: my view. That's a different matter because people could also
Speaker 1: say that I was wrong and I was way early
Speaker 1: on the call, but stand every step of the way
Speaker 1: treated me without most respect. Coming up next week, we
Speaker 1: interviewed Stan O'Neill and find the real story about the
Speaker 1: relationship with Dave and stand on Masters in Business. Actually,
Speaker 1: I would love to get Stan O'Neill in here. That
Speaker 1: would be a fascinating conversation because he was really talk
Speaker 1: about the middle of the vortex when everything was hitting.
Speaker 1: That would be quite insane. No, Dave, I'm kidding, but
Speaker 1: that would be just unbelievable. To get him in here.
Speaker 1: I tried to get in touch with him. Actually, don't
Speaker 1: you know who I would love to speak to one
Speaker 1: of your men tours in one of my favorite old Bob.
Speaker 1: I was gonna say Richard Dmaron. But since you brought
Speaker 1: up Bob Farrell, let's talk about one of our favorite analysts.
Speaker 1: One of the mentors that you had at Meryl, a
Speaker 1: gentleman named Bob Farrell who put out first time everyone
Speaker 1: writing you actually put it wrote it up, Bob Farrell's
Speaker 1: ten Rules for the Market. I thought that was one
Speaker 1: of the most insightful pieces of here's how to be
Speaker 1: a better trader, manager, investor I've ever seen. What was
Speaker 1: it like working with Farrell? Well, you know, we had
Speaker 1: a just a short stint working together because he was
Speaker 1: in the limelight of his career when I started at
Speaker 1: Meryll Canada back in the late nineties. He used to
Speaker 1: write this report Bob did called Theme and Profile Investing,
Speaker 1: which was um like, truly am like, I would say, apparticly,
Speaker 1: a bible, heartbreaking work of Stack. But but he he
Speaker 1: years ago at decades Go, had written about Bob Farrell's
Speaker 1: ten market rules to remember, which are the ten commandments.
Speaker 1: I've had to stay at a trouble uh. And that's
Speaker 1: what's important in the investing business, is that sometimes most
Speaker 1: of the time, Bury, it's what you don't own in
Speaker 1: the portfolio as much as what you do own in
Speaker 1: the portfolio. Bob Farrell, I would there were three mentors
Speaker 1: that I had in my thirty year career. One of
Speaker 1: them was Warren Justin At, the chief economist at the
Speaker 1: bank in Nova Scotia. He's about to retire in February.
Speaker 1: He brought me on base freedom in n Don Cox,
Speaker 1: who was the chief strategist at at Harris Investment Management,
Speaker 1: which was part of the Bank of Montreal family firms
Speaker 1: out of Chicago. He runs his own consulting firm now
Speaker 1: and is keyed up to be a future guest on
Speaker 1: the show. And um and and and and I would
Speaker 1: say that there's he he might be, But the only
Speaker 1: genius I truly do well. I say Don is a genius.
Speaker 1: What about Yamaron? Yamaron is um a genius divided by
Speaker 1: ten uh and um and and Bob. Bob Ferrell had
Speaker 1: a profound influence in my career. We actually twice a year,
Speaker 1: UH we co host an investor lunch here in New York.
Speaker 1: One's coming up in mid December. He's still a going
Speaker 1: concern um and UH and putting out research and then
Speaker 1: doing work and UH a sound of mind. The last
Speaker 1: time I spoke to him, as he's been at any
Speaker 1: time since I've known him. Uh. He is a true legend. UH.
Speaker 1: The operative word is discipline. He is a disciplined UH strategist.
Speaker 1: And UH doesn't get him passioned. Um. He basically UH
Speaker 1: lets the markets and the charts and the patterns, UM
Speaker 1: do the dictating. He's a he's a rare breed. And UM,
Speaker 1: I've learned a great deal from him. I would love
Speaker 1: love love travel. I would love love love Dave. Cute
Speaker 1: girl goes by that's got your name on it. I
Speaker 1: can't believe you're gonna make a face with that. I
Speaker 1: would love love love to get Bob farrellon here. He's
Speaker 1: one of these guys that doesn't do media, doesn't speak
Speaker 1: to the press, just cranks out with a relentless standing.
Speaker 1: This over half a century intelligent, common sense market wisdom,
Speaker 1: and there are so few people like that. Well, I
Speaker 1: think what makes them even more special is the fact
Speaker 1: that he does not make himself available to the to
Speaker 1: the press. So maybe that adds a little to the mystery. Uh,
Speaker 1: but um, it also makes his um, his material that
Speaker 1: much more exclusive and therefore that much more important. He's
Speaker 1: a fascinating guy. And I know in December during lunch
Speaker 1: you'll you'll put in a good word for us. I'll
Speaker 1: bring good doggy back. So we've discussed your early mentors.
Speaker 1: We've discussed um, the three people who are who are
Speaker 1: most influence unchil, and we've talked a bit um about
Speaker 1: a day in the life of of a economist at Meryl,
Speaker 1: managing up, managing down. Um, how do you like the
Speaker 1: transition to the by side? And for lay people who
Speaker 1: may not know the difference, the sales side is a
Speaker 1: tendency to be transactional, commission driven. You're selling something to
Speaker 1: a willing buyer, as opposed to the by side, where
Speaker 1: people give you assets to manage and you go out
Speaker 1: and buy on their behalf. So mutual funds, hedge funds,
Speaker 1: r A s are by side, broker dealers, transactional business
Speaker 1: are our sales sides. How did you find that transition?
Speaker 1: What was that like? Well, I've been in the financial
Speaker 1: business now for twenty eight years. I've been a Gluscon
Speaker 1: chef for six. I would say that I've learned more
Speaker 1: in the past six years of Glusk and chef as
Speaker 1: as you said a bye side strategist and economist. I've
Speaker 1: learned more in the past six years in the previous
Speaker 1: twenty two combined, because I figured out how to produce
Speaker 1: and communicate a forecast that's meaningful for somebody who manages
Speaker 1: money for a living. And I want to let me
Speaker 1: stop you right there. I want to reiterate what Dave
Speaker 1: said before about this because A it was so refreshing
Speaker 1: and be it was so important when you're and correct
Speaker 1: me if I if I sum this up incorrectly, you're
Speaker 1: doing beautifully so far. When you're an economist on the
Speaker 1: sales side, you make a forecast. Your forecast is out there.
Speaker 1: It's right or wrong, and if you get it wrong,
Speaker 1: so what. If you get it right, so what? It
Speaker 1: doesn't matter when you're advising people on the buy side.
Speaker 1: It's not a black and white win or lose forecast.
Speaker 1: It's a probability matrix with all sorts of shades of gray.
Speaker 1: Here's my highest probability forecast, along with my this degree
Speaker 1: of conviction. If I'm wrong, here's how I'm likely to
Speaker 1: be wrong. And here's here's the next most likely scenario.
Speaker 1: Here's plans C. Here's Plan D that's very different than
Speaker 1: g d. P is gonna be three point two and
Speaker 1: the Dow is going to be at eighteen two. You're
Speaker 1: either dead right or dead wrong, and it's meaningless to
Speaker 1: to an investor. Is that a fair summation? Okay? Um, yeah,
Speaker 1: you you you're like the guy co guy over my shoulders.
Speaker 1: So um you said that. Well, let me just add
Speaker 1: this that in my previous you know, incarnation, I went
Speaker 1: around the world talking to other portfolio managers at other firms,
Speaker 1: and uh and invariably, because you're a human being, you're
Speaker 1: going to be wrong. And I've had my share of
Speaker 1: bad calls. When you work at a small firm and
Speaker 1: we manage eight and a half billion dollars, we're not
Speaker 1: Mery Lynch, Mary Lynch. You see you've got a call wrong. Um,
Speaker 1: it really just hurt your pride when you get a
Speaker 1: call wrong at a small firm where your clients are families. Uh,
Speaker 1: and those are relationships that become personal. I developed some
Speaker 1: close relationships when I was at Meryl with other portfolio managers.
Speaker 1: Of course, they're managing money for other people, so you're
Speaker 1: like two or three or four, you're just you're really
Speaker 1: separated when you're actually firstly, UH, Commandment Number one O
Speaker 1: Glaskin chef is that we own the same funds that
Speaker 1: our clients owned, so we eat what we kill. We're
Speaker 1: invested alongside our clients. So when I make a bad call,
Speaker 1: I feel it on my own portfolio, but not just that.
Speaker 1: It actually hurts more when you see the impact I
Speaker 1: could have on your client's portfolio, because invariably it becomes
Speaker 1: a personal relationship. Um, most of our clients are UM
Speaker 1: high net worth. When I was at Meryl or before
Speaker 1: that at the Bank of Montreal, I would spend most
Speaker 1: of my time with institutional portfolio managers, and if I
Speaker 1: ever saw high net worth clients or what they call
Speaker 1: private clients retail clients, it would be a thousand of
Speaker 1: them herded into a ballroom of a hotel and I
Speaker 1: would go up and do my dog and pony show. Today,
Speaker 1: you actually sit right across from them, face to face,
Speaker 1: and these relationships have become personal. So when you're asking
Speaker 1: about what the primary differences at a personal level, it's
Speaker 1: exactly that. It's that when I get a call wrong,
Speaker 1: I feel a little lot more. Uh. Look, when you
Speaker 1: get these big institutions losing a client, it's rounding herror.
Speaker 1: When we actually lose a client, you'd be amazed at
Speaker 1: m at the uh, at the analysis that goes on afterwards,
Speaker 1: assessing where is it that we went wrong and how
Speaker 1: will we make the effort to not make that mistake again.
Speaker 1: So the bottom line is that today when I make
Speaker 1: an error, I take it more personally and I feel
Speaker 1: it more than I did when I was a sell
Speaker 1: side economist. That's really fascinating. You know. We had an
Speaker 1: interesting conversation in the office today in my office today
Speaker 1: about something very similar to what you're talking about, which
Speaker 1: is the ministers without portfolio The people who are not
Speaker 1: managing assets are directly working with portfolio managers, and they're
Speaker 1: free to say as whatever outrageous thing they want to say.
Speaker 1: I won't mention him by name on the air, but
Speaker 1: there he's in my slide deck and someone keeps forecasting
Speaker 1: a seven like crash. He's forecasted every year for the
Speaker 1: past five years. Last year he felt felt the need
Speaker 1: to step it up a notch and he said, even
Speaker 1: worse than a seven like crash. And you could say that,
Speaker 1: you could say that when you're not managing money, you
Speaker 1: could be out of the market for five years when
Speaker 1: you're not managing money, But when you're actually dealing with
Speaker 1: families and pms or managing the money yourself, you can't
Speaker 1: be in cash for five years. You can't be stone
Speaker 1: throwers like that. You have to be a participant. And
Speaker 1: if I'm hearing what you're saying correctly, being that close
Speaker 1: to the ultimate person whose money is at risk changes
Speaker 1: the way you view the world, changes the way you operate. Well,
Speaker 1: you know, just uh, you know, maybe round out the discussion.
Speaker 1: What's different that Gluskin chef for me regarding our clients
Speaker 1: is that, um, it's more personal than it used to be.
Speaker 1: And what does that do to impact your thought process,
Speaker 1: impact how you look at, uh, the economy in the market. Well, look,
Speaker 1: I always I always like to believe that that I
Speaker 1: was on my game, but at this level, at a
Speaker 1: personal level, when the clients actually are either family members
Speaker 1: or friends, or they become friends who developed these personal relationships. Um,
Speaker 1: it means that I have to sharpen my focus that
Speaker 1: much more, all right, So let's sharpen your focus a
Speaker 1: little bit and talk about some specific things. We didn't
Speaker 1: get to in the broadcast portion. So we didn't get
Speaker 1: to talk about the housing market, which is a key
Speaker 1: part of what's going on. What do you see in
Speaker 1: the housing market in the US and North America and globally? Okay, US,
Speaker 1: North America, globally, well, you know, I guess that, um talk.
Speaker 1: I'm not gonna talk about the Mexican housing market because frankly,
Speaker 1: it has no bearing on how we invest. A Gluskin chef,
Speaker 1: the US housing market looks very interesting to me, and
Speaker 1: notw withstanding the fact that mortgage rates are backing up
Speaker 1: courtesy of the Bontom market adjusting to the FED beginning
Speaker 1: it's tightening phase, it's still very historically low, right, very
Speaker 1: historically cheap. Well, you know that's uh. I love the narrative,
Speaker 1: but you know, markets and the economy operate at the margins,
Speaker 1: So it's the change that matters, not the level, and
Speaker 1: not compared to some historical average But what's interesting is
Speaker 1: that employment in the key UH first time home buying
Speaker 1: cohort is running about thirty faster than is the rest
Speaker 1: of population. So these boomerangs that have been sitting in
Speaker 1: the basement at mon pause watching repeats of breaking bad
Speaker 1: are now going out and um and getting into the
Speaker 1: housing market. The interesting situation we have right now is
Speaker 1: that the trend in household formation that also information is
Speaker 1: running towards one and a half million units. Housing starts
Speaker 1: are running at one point two UM. You have housing
Speaker 1: inventories roughly five months supply, very well balanced market. So
Speaker 1: I don't think that the home builders which have of
Speaker 1: course we've got those great numbers from Poulty and d R.
Speaker 1: Horden in the past forty eight hours. But the homebuilders
Speaker 1: are corrected fairly hard in the past several weeks. My
Speaker 1: senses that are they're not priced for the prospect the
Speaker 1: next two years of seeing residential construction rise as much
Speaker 1: as story in cana is a little different. Um. You know,
Speaker 1: housing is a share of us GDP is at a
Speaker 1: low level from historical proportion in Canada. You cannot possibly
Speaker 1: be more over housed than you are today. The story
Speaker 1: in the United States is one of domestic demand, consumer spending,
Speaker 1: capital spending, commercial construction, which by the way, is in
Speaker 1: an uptrend, and housing. In Canada, it's going to be
Speaker 1: less about housing and it's going to be more about
Speaker 1: the strength in US domestic demand. Don't forget Canada ships
Speaker 1: its GDP at the US and a competitively supercharged currency
Speaker 1: helping out the beleaguered manufacturing sector and exports. That would
Speaker 1: be the story. In Canada, You're still getting a huge
Speaker 1: influx of overseas buyers of real estate. I'm using Vancouver
Speaker 1: as an example. But is that is that Canadian my friend,
Speaker 1: my friend, my friend, Canadian dollar is at a discount
Speaker 1: of the US Canada. Canada has this giant for sale
Speaker 1: sign right in front of it. But Canadian, you know
Speaker 1: the from our perspective, Canada never had the same housing
Speaker 1: crash that the US had. It it kept going and going.
Speaker 1: Canadian home prices are fairly yet you says yeah, around,
Speaker 1: Canadian home prices are are fairly aggressively priced, especially in
Speaker 1: the in the really attractive cities. You asked about US investors,
Speaker 1: so you're talking about what they look like in US dollars,
Speaker 1: not Canadian dollars. No, No, What I'm asking is our
Speaker 1: overseas buyers snapping up, still snapping up all of these
Speaker 1: Most of the most of the buying in Vancouver is
Speaker 1: coming out of China. Yes, and yes, you are getting
Speaker 1: US buying into Canada. Canada. Is c h E A
Speaker 1: P for a US based investor. Very interesting, Yameron, you
Speaker 1: were jumping out of your chair. You disagree with Dave's
Speaker 1: Taklan housing. I've disagreed with Dave, and I've been wrong
Speaker 1: on that part for a good number of of those arguments,
Speaker 1: um for for well over a decade. But you know,
Speaker 1: I see the house is a little different. You know
Speaker 1: all those right now? Multi unit around a panel again, Dave,
Speaker 1: and multi units are are are soaring because people cannot
Speaker 1: afford to buy a home. Rentals way up. So the
Speaker 1: Boomerang kids leaving their parents basement. Are they first time
Speaker 1: homebuyers or are they renters? They're renting and rental rental
Speaker 1: units of five or more construction of new construction of
Speaker 1: five or more unity family are the highest since nineteen
Speaker 1: eighties six compared to something that if you break, if
Speaker 1: you pull out of that housing start number you pull
Speaker 1: out the single family units very different I won't even
Speaker 1: ask him about copper oil coast. Will all want to
Speaker 1: commit suicide after it? Well, like I'll say this much
Speaker 1: the the you know, we talked. A world doesn't revolve around.
Speaker 1: We talked around, We talked. We talked about Bob Ferrell
Speaker 1: Rule number one was everything reverts to the mean at
Speaker 1: least ratios, and usually that means that you break through
Speaker 1: the mean in both directions. When we got up to
Speaker 1: almost a home ownership rate back at the peaks, that
Speaker 1: was one extreme. Now we've gotten to the other extreme.
Speaker 1: We're pretty well at historic lows in the home ownership rate.
Speaker 1: And I'm not Yes, i am really not in the business.
Speaker 1: I've never made it a business to take the most
Speaker 1: recent experience and superimposed it into the future. My sense
Speaker 1: is that quite right. UM, rental construction has been very strong.
Speaker 1: It's been the rental demand that's been the big story.
Speaker 1: But UM, we have very tight apartment vacancy rates. Rents.
Speaker 1: One of the reasons why core service inflation is as
Speaker 1: strong as it's been is because of rents. So the
Speaker 1: rent home price ratio is altered in a certain respect.
Speaker 1: We are starting to get income growth, and I'm making
Speaker 1: this point that the key first time home buyer category,
Speaker 1: twenty five to thirty four year olds. Their growth of
Speaker 1: employment in the past year is running thirty, not thirteen,
Speaker 1: faster than it is for the rest of the population. Now,
Speaker 1: there are lags involved, but with a lag they will
Speaker 1: for themselves into homeowner household units and I think that
Speaker 1: is going to be the next leg of the housing market. Now.
Speaker 1: I want to give you props about that, because not
Speaker 1: this summer, the previous summer, you, in a presentation at
Speaker 1: Camp Coo Talk up in Maine, talked about the building
Speaker 1: demand for for employees and the future wage push which
Speaker 1: was a couple of quarters away and year of a
Speaker 1: year we see up two point five percent in US wages.
Speaker 1: You talked about that before anybody else was speaking about it,
Speaker 1: and you got it right. You said, it's inevitable that
Speaker 1: we're going to start to see wage pressures. You can
Speaker 1: have this sort of GDP activity and this title labor
Speaker 1: market without seeing that sort of shift that plays into
Speaker 1: that first time home buyers. What does that going forward
Speaker 1: for the economy. Well, look, it's a uh, it's a
Speaker 1: bit of a double let sword because for the equity
Speaker 1: market will have to get used to living with with
Speaker 1: with probably lower profit margins, doesn't mean that the market's
Speaker 1: going down, but that will be like straint um because
Speaker 1: there's only two sources of income in the economy. The
Speaker 1: government doesn't create income taxes it, but there's corporate income
Speaker 1: and then there's labor income. Labor income is picking up
Speaker 1: across almost every measure. This is actually a debate. If
Speaker 1: you remember a camp Co talk with me and Philippa Donne,
Speaker 1: who absolutely love and I think she is the resident
Speaker 1: labor that's right, you know. And um, what I'll say
Speaker 1: is what I was focusing on back then was this
Speaker 1: one are Keen statistic called a quit rate that we
Speaker 1: know that only green Span I've looked at repeatedly, like
Speaker 1: twenty three years ago, which is the percentage of the
Speaker 1: unemployed that are quitting their jobs voluntarily in search of
Speaker 1: greener pastures elsewhere. It's basically what I call the take
Speaker 1: this job in shove it index, and it's a reflection
Speaker 1: to some extent of worker uh insecurity or alternatively worker confidence.
Speaker 1: You see, everybody focuses, everybody focuses on the on the
Speaker 1: unemployment rate, the classic measures of tightness in the labor market.
Speaker 1: Everybody's always saying, well, the unemployment rate has gone from
Speaker 1: ten percent to five percent. No matter what measure you
Speaker 1: want to use, they've all come down rather significantly, even
Speaker 1: the broader measures. And yet up until recently, there hasn't
Speaker 1: been a big wage response because what these classic measures
Speaker 1: of resource um uh, utilization capacity and labor market they
Speaker 1: don't show is how comfortable you are going to your
Speaker 1: boss asking for a race. It doesn't measure insecurity. What's
Speaker 1: happening is at this quit rate, and it went up
Speaker 1: again in the last month, which correct me if I'm wrong.
Speaker 1: I think it's almost a ten percent, the quit rates rising.
Speaker 1: And when I was having that debate a year ago,
Speaker 1: I was saying, the quit raids rising, that actually is
Speaker 1: the best leading indicator for wages. But you see the question, well,
Speaker 1: the question, like everything else, is always the lags, and
Speaker 1: how long does it take for the information that the
Speaker 1: working class has um better prospects uh than they actually think.
Speaker 1: You see that the labor market is not like commodities,
Speaker 1: and it's not like stocks or bonds. You're talking about people,
Speaker 1: and so at what point do people start to realize that, hey,
Speaker 1: my market for labor is actually tighter. I actually have
Speaker 1: the confidence now to go to my boss and ask
Speaker 1: for a raise. So the quit rate is actually a
Speaker 1: great When you plot the quit rate against wage growth,
Speaker 1: you might aso plot income and consumption, but the legs
Speaker 1: were longer this time around, so we are actually now
Speaker 1: starting to see more discernible science. Look bottom line, look
Speaker 1: at the n f I B index that just came out,
Speaker 1: the Small Business Index, and you've got that the net
Speaker 1: share of companies saying they're going to raise compensation in
Speaker 1: the next six months at its highest level for the cycle.
Speaker 1: So one of the metrics that I used to track
Speaker 1: UM was the Jolts Index. It's the job opening, labor
Speaker 1: turnover whatever of A and UM. How how parallel is
Speaker 1: that to UM? You take this job in shoving in
Speaker 1: depth in terms of what we're seeing, uh, employee confidence,
Speaker 1: availability of better jobs, wage wage pressures. Well, how do
Speaker 1: you contentionalize that looks? So for example, you said before
Speaker 1: that we quotes created a net two and seventy one jobs,
Speaker 1: uh say, in the month of October. What's missing in
Speaker 1: that comment is that we destroyed millions of jobs and
Speaker 1: we created millions of jobs, and then that number was
Speaker 1: to seventy one so what you're missing is the churning
Speaker 1: that goes below the surface of that headline number. So
Speaker 1: the Jolts number is valuable because it tells you what
Speaker 1: that churning. Well, it looks like how many people are
Speaker 1: actually quitting their jobs, how many people are getting fired
Speaker 1: from their jobs, how many people are getting hired. So
Speaker 1: it gives you, UM, you know that the churning. So
Speaker 1: we know, for example, that through the Jolts numbers that
Speaker 1: most of the improvement in labor market this cycle did
Speaker 1: not come from new hires as much as it came
Speaker 1: from a lack of firing. Uh. Companies have begun to
Speaker 1: hoard labor. The firing rate is extremely low, by the way,
Speaker 1: corroborted by what we're seeing in the job is claimed numbers. UH.
Speaker 1: What I always like to look at UM was always
Speaker 1: the UH the the the the number of of people
Speaker 1: that UM that are unemployed, UH normalized by the number
Speaker 1: of new hires. And I was telling me, actually that
Speaker 1: taking out all the other noise and adjusting for the
Speaker 1: labor force, that the labor market was tightening significantly. The
Speaker 1: question all along was which nobody, I mean people? And actually,
Speaker 1: if you take a look at the title of my
Speaker 1: of my employment report last week was, uh, you know,
Speaker 1: the Phillips curve comes back from the grave, maybe appropos
Speaker 1: because of Halloween that people were throwing out the Phillips
Speaker 1: curve as a as a as something you can hang
Speaker 1: your hat on. All that separated the tightening of labor,
Speaker 1: more conditions to the wage rate or the lags, and
Speaker 1: and basically, uh, the level of worker in security that
Speaker 1: existed through most of the cycle. We seem to be shedding, Uh,
Speaker 1: those fears. The proletariat seems to be a little more
Speaker 1: emboldened right now, and so wages are now with a
Speaker 1: longer legs, starting to respond. So you alluded to, but
Speaker 1: we didn't talk about the change in the labor force
Speaker 1: participation rate. Is that a secular factor that we've been
Speaker 1: losing people for demographic and global trade reasons or is
Speaker 1: there something more significant thing now? There's Look, there's two things.
Speaker 1: There's the first of the boomers turn sixty two thousand eleven,
Speaker 1: and that's going to be reality for decades, and so
Speaker 1: the the demographic element to it. Second, early we've created,
Speaker 1: through municipal, state, federal benefits, um a whole myriad of
Speaker 1: incentives for people to leave the labor force um where
Speaker 1: you get paid very well not to work? How well
Speaker 1: do you get paid not to work? I mean, it
Speaker 1: is some money there, but it's not like earning a
Speaker 1: real living. Can you really live comfortably on on disability?
Speaker 1: And if you add up, if you add up everything,
Speaker 1: I think that the Cato Institute did a report. All right,
Speaker 1: so that's strike one, but keep going. But but there's
Speaker 1: be another, uh scholarly research showing that the incentive systems,
Speaker 1: whether it's not just disability, but Medicare benefits and childcare
Speaker 1: benefits and look, you go back to work these days, Barry,
Speaker 1: and you give up a lot of benefits and some
Speaker 1: of the numbers I've seen or as high as forty dollars,
Speaker 1: like you've really got a bit up the wages to
Speaker 1: get people to come back in the labor market. And
Speaker 1: that's why it doesn't happen. Now, maybe you'll start to
Speaker 1: get maybe if the wage rate starts to come back,
Speaker 1: which it looks like it's happening, the participation rates starts
Speaker 1: to be a comeback, and the unemployermate stops going down.
Speaker 1: I think that's a reasonable premise um. But there's no
Speaker 1: question and whether you agree with the kido in student
Speaker 1: or not. They did show that. I think in thirty
Speaker 1: eight states you make more by tapping all the benefits
Speaker 1: at all levels of government then you do as a
Speaker 1: starting salary as an admit assistant thirty eight states. So look,
Speaker 1: you can say the kid and stut they have a
Speaker 1: certain extra grind um. But you know, unless you did
Speaker 1: I certainly implied it. You implied it. But unless you've
Speaker 1: done your own research, you know it's But but there's
Speaker 1: been other um, there's been other analysis done that's come
Speaker 1: to similar conclusions that you could really cry if you're
Speaker 1: on full disability, you can really crank up. Don't forget,
Speaker 1: don't forget. In two thousands and thirteen we had a
Speaker 1: fairly certificly increase in tax rates on income. The reality
Speaker 1: is a space economics. The more you at tax, the
Speaker 1: less supply you'll get your tax work, you'll get less work.
Speaker 1: So there's a marginal jersey is you know you're telling
Speaker 1: me someone's not going to take a starting job because
Speaker 1: they're they're Capital gains tax went up to from fifteen.
Speaker 1: That's a calf gains tax. The marginal increase just like
Speaker 1: the marginal decrease. Is someone going to say, well, you know,
Speaker 1: I used to be taxed at thirty six, but now
Speaker 1: it's thirty eight. I'm not going to start a new job.
Speaker 1: I've always thought that behavioral aspect of it was wildly overstated. So, Barry,
Speaker 1: you asked the question and you answered it yourself. So
Speaker 1: what what's your just Well, I'm trying to give you
Speaker 1: an answer, but you're answering it yourself. The answer is
Speaker 1: that it's mostly structural, largely demographic, largely related to uh,
Speaker 1: you know, look at if you don't like my answer,
Speaker 1: get Larry lindsay On here. We gave a presentation at
Speaker 1: this I saw his presentation two years ago. Get Peter
Speaker 1: book for On here and get Larry lindsay So again
Speaker 1: him to show you the press. Peter, well, yeah, I
Speaker 1: mean you were making faces, So well, hold on. You
Speaker 1: can't conduct an interview by cutting the person you're asking. Okay,
Speaker 1: I think that's where you're wrong. Said okay, well you
Speaker 1: as well. At first you asked a question, then you
Speaker 1: answered to yourself. So it's a good thing. It's a
Speaker 1: good thing we're friends. The answer is that it's mostly structural.
Speaker 1: They're mostly mostly changes and if you actually take a
Speaker 1: look at at the and actually the beauty of the
Speaker 1: household survey is it does show you the discouraged workers,
Speaker 1: and they've been going down. So it's not the number
Speaker 1: of discouraged workers has been going down. Didn't I just
Speaker 1: say that. I'm repeating it for people who didn't understand.
Speaker 1: So let's let's talk about you six, because we haven't
Speaker 1: gotten there. Last report under ten percent for the first
Speaker 1: time in who knows how long, how long? Oh? Nine,
Speaker 1: that's a huge drop because people have been screaming about, well,
Speaker 1: you know, there's still a lot of people who want
Speaker 1: to work, but they're discouraged under ten percent nine points something.
Speaker 1: Look look look at the at the at the narrower measures,
Speaker 1: like the U one and you two is down to
Speaker 1: two and a berry. We can slice this and dice this.
Speaker 1: I'm billion ways. The labor market is tight and it's tightening.
Speaker 1: And the only thing that's separated the tightening to wage
Speaker 1: growth was the level of worker insecurity, which is measured
Speaker 1: by the quit right, which is going up. So workers
Speaker 1: are starting to feel emboldened. If you go to the
Speaker 1: Conference Board Consumer Confidence Survey and you see the percentage
Speaker 1: of people expecting their income to go up in the
Speaker 1: next year. That ratio is going up. If you go
Speaker 1: to the National Federation have been a business to their
Speaker 1: survey showing companies willingness to start to pay people more money,
Speaker 1: that ratio is going up. So the stars are aligning
Speaker 1: that in the coming year, wage growth is going to
Speaker 1: be accelerating. The question really is going to be by
Speaker 1: how much? So what does that mean for future inflation?
Speaker 1: Is the Fed behind the curve? Are they endangered twelve
Speaker 1: months from now of not recognizing this? Tell me what
Speaker 1: this wage pressure is gonna mean one year from now. Well,
Speaker 1: I never believed that that wages lead inflation. Um. My
Speaker 1: sense is that there's going to be offsetting forces from
Speaker 1: the lagged impact of the strong dollar. The weakness and
Speaker 1: commodity prices is going to ensure that of the CPI
Speaker 1: that is goods oriented will remain very low or maybe
Speaker 1: in mild deflation. I think we will continue to see
Speaker 1: service sector inflation. My sense is that you know, inflation
Speaker 1: is zero right now. A year from now, I think
Speaker 1: it'll be one and a half to two percent. Is
Speaker 1: that behind that's increase? My friend? We don't have to
Speaker 1: two percent? Is like nirvana. I mean, don't forget there's
Speaker 1: the FED wants it to two, and there's some on
Speaker 1: the left side of the equation that wanted towards three. Well,
Speaker 1: I'm not looking at the level. I'm looking at the
Speaker 1: marginal change. Well, don't forget that. A lot of the
Speaker 1: reason why we're zero is because of commodity prices. Unless
Speaker 1: you think oil's gonna go down another fifty from here,
Speaker 1: we're not gonna get that out of thrust. I think
Speaker 1: oil is gonna be stuck in a arrange between forty
Speaker 1: and six. So then what happens that is that in
Speaker 1: and the dollar impact will dissipate over time. Goods inflation
Speaker 1: will no longer be minus for it will be zero.
Speaker 1: Core server sector inflation probably gets up towards three percent.
Speaker 1: Put in the Martini shaker and it comes out to
Speaker 1: roughly one and a half two percent underlying inflation. And
Speaker 1: uh yeah, I guess if you're long duration bonds, you're
Speaker 1: not gonna like to hear that story. But it actually
Speaker 1: isn't a bad overall story for the economy. You're telling
Speaker 1: a goldilocks scenario of full employment, rising wages, low inflation. Well,
Speaker 1: I don't like Goldilocks because the story also had three bears.
Speaker 1: I'm one of them. That's right, he's still one of
Speaker 1: the bears. Are still in here, all right? We touched
Speaker 1: on housing, we touched on inflation. Um During the panel
Speaker 1: discussion in UH in Miami, you described what you thought
Speaker 1: was going on at the Federal Reserve in great detail,
Speaker 1: but with a very abbreviated answer because there were four
Speaker 1: people on the panel. I want to delve back into that.
Speaker 1: Let's talk a little bit about Janet yelling and what's
Speaker 1: going on at the FED and what's the thought process here.
Speaker 1: I know we briefly touched on it, but you gave
Speaker 1: an answer as to what you see over the next
Speaker 1: twelve months? Is it? Is it every third meeting? Tell
Speaker 1: me what you see happening, uh, over the next twelve months.
Speaker 1: As soon we get a quarter point increase December? What
Speaker 1: does look like from the data dependent FEDS perspective? My
Speaker 1: sense is that, uh, they'll probably skip every other meeting.
Speaker 1: Like in other words, could I see them going a
Speaker 1: hundred basis points next year? Once a quarter? In other words,
Speaker 1: I could see that, and and then I you know,
Speaker 1: and and then little we'll see what happens going forward.
Speaker 1: You what you're asking about being behind the curve, It's
Speaker 1: always answer that question through the rear view mirror, and
Speaker 1: I would say that, um, you know they the tips,
Speaker 1: break even levels will give you some indication. The steepness
Speaker 1: of the yield curve will give you some indication. Commandity
Speaker 1: prices will give you some indication. The dollar will give
Speaker 1: you some indication. A whole range of variables will tell
Speaker 1: you if the FED is behind the curve. Classically, if
Speaker 1: you go through a bare steepen or of the Yelk curve,
Speaker 1: that would be a classic sign of the Feds behind
Speaker 1: the curve and we're not there. What do you think
Speaker 1: is the most hated sector of the market these days? Oh,
Speaker 1: the most hated sector of the market, Well, I would
Speaker 1: say that the part of the world that is most
Speaker 1: out of favor right now is my beloved country, Canada.
Speaker 1: I've never seen the Canadian banks with such a huge
Speaker 1: short position by the US hedge funds. I've never seen.
Speaker 1: I can't pick up a newspaper and not hear about
Speaker 1: how energy will drag Canada into a pernicious and perennial recession,
Speaker 1: how housing is dramatically overvalued and destined for a collapse. Um,
Speaker 1: I would say that the last time I remember the
Speaker 1: view on Canada and I think it's way overdone by
Speaker 1: the way. Um, the last time I had the view
Speaker 1: in Canada was this negative. I think you have to
Speaker 1: go back to the early to mid nineties when Canada
Speaker 1: was truly a fiscal basket case. We almost had a
Speaker 1: failed auction in and of course we had the Quebec refredum,
Speaker 1: so we had the political uncertainty. Um. But Canada right
Speaker 1: now standalone. Um, if you're a value investor looking for
Speaker 1: a turnaround situation, Canada looks very good to me right now.
Speaker 1: You like Canada here and you think that's a it's
Speaker 1: a investment. I say that it is a You know,
Speaker 1: if I love the baritone Homediveland that is Richie Amarone
Speaker 1: on vocals. I think Canada, I think Canada is a
Speaker 1: is going to be by definition an upside surprise. Yes.
Speaker 1: So that that assumes that no major disruption. Oil firms
Speaker 1: continues to uh, you know what the key Once again,
Speaker 1: as I said, before, you know, the Saudis told the
Speaker 1: shale guys in the US, you are the swing producer.
Speaker 1: When I see exploration and drilling activity down six in
Speaker 1: the US your vie and again, well, and there's lags.
Speaker 1: People may be surprised that a year from now we're
Speaker 1: more in a fifty sixty dollar range can and dollar
Speaker 1: will responding kind Uh, there'll be a lagged impact on
Speaker 1: all these concerns on energy credits, regarding the Canadian banks. Um,
Speaker 1: and don't forget that, you know, this new Liberal government. Uh,
Speaker 1: that's question, that's right justin Trudeau, but not about him,
Speaker 1: but what his economics team and the choice of Bill
Speaker 1: Murnau as finance minister, which well, I know it's not
Speaker 1: surprising it very Americans. It's a surprise. Well, you know,
Speaker 1: I don't even know if Americans even knew who he was.
Speaker 1: Most most Americans, most Americans don't even know what the
Speaker 1: auto was. The capital so it's Toronto. So you're you
Speaker 1: because when we first were talking about Trudeau getting elected,
Speaker 1: I know you were not enthralled with that. But this
Speaker 1: seems fairly constructive that uh you like the finance Well, look,
Speaker 1: I'm not going to disclose publicly how I voted it,
Speaker 1: but I will say that out of the three parties,
Speaker 1: out of the three parties, the Liberals did have the
Speaker 1: most pro growth fiscal plan. Really, that's kind of surprising. Well,
Speaker 1: I thought you read my daily. I do read your daily.
Speaker 1: It's a blur after after ten years of it. It's
Speaker 1: kind of a So it takes some of the pressure
Speaker 1: off the bank. Not only do I read your daily,
Speaker 1: but let me remind you that I republished your entire
Speaker 1: analysis of the Canadian election on the Big Picture because
Speaker 1: I thought it was so strong. Do you recall that conversation.
Speaker 1: That's why we're moving this conversation into let's discuss the
Speaker 1: minister appointment. I am forever indebted. I think that he's
Speaker 1: appointed a strong economics team. It's one of these situations
Speaker 1: where I think that you know, look, the Liberals got
Speaker 1: elected in on almost a socialist manifesto which never saw
Speaker 1: the light of day. You couldn't have sold the story
Speaker 1: that Jean Cratchin and Paul Martin would have been the
Speaker 1: fiscal dragon slayers. That would have they would have been
Speaker 1: the duo that made Canada the poster child for fiscal integrity.
Speaker 1: So what I will say is that Canada, the federal
Speaker 1: government has a thirty one debt to GDP ratio the
Speaker 1: media and the media O. E. C. D is eight percent.
Speaker 1: They're really running on a platform of roughly five billion
Speaker 1: dollar deficits annually for the next four years. I actually
Speaker 1: put on my report they should be running twenty five
Speaker 1: billion dollar deficits. And they could do that and not
Speaker 1: even spin the dial on the debt. This is like
Speaker 1: I would saying before. This is what I was saying before.
Speaker 1: We've had a detonation in the energy capital stock. It's
Speaker 1: thrown Alberta into a terrible recession. And this is where
Speaker 1: public sector infrastructure spending is really in a pack of
Speaker 1: powerful punch. They should actually do more. It's what I
Speaker 1: told Barack Obama he should have done. Of course, you
Speaker 1: know back in two thousand nine. Um let me let
Speaker 1: me get that for you. That that actually, um so
Speaker 1: your deep Akinsian when it comes to it, Well, what
Speaker 1: does that mean about being a Kinsian that during a
Speaker 1: recession the government steps into make up the shortfall and
Speaker 1: grow and call it Kansian or you can call it
Speaker 1: this common sense. I don't disagree with you either. Look,
Speaker 1: I am not Look I'll tell you right now, I
Speaker 1: am not a tea party advocate. I am not a libertarian.
Speaker 1: I am a right I'm a conservative. I'm a John
Speaker 1: Cask type of conservative. Uh, you could say liberal and
Speaker 1: social issues and conservative and economic issues. But it's foolhardy
Speaker 1: and actually dangerous policy to think that you're going to
Speaker 1: run the same fiscal stature throughout the business cycle, irrespective
Speaker 1: of the negative shocks that come our way. How can
Speaker 1: you not respond your job? Okay, this is not that
Speaker 1: responded well, it did respond, It didn't respond, It didn't
Speaker 1: respond enough. Look, this is Monday morning quarterbacking, and I
Speaker 1: would say to the federal government Ottawa, don't make the
Speaker 1: same mistake. We have had a huge negative shock to
Speaker 1: the economy from the energy sector, and Canada is look
Speaker 1: when it's not maybe it's uh, not quite right of center,
Speaker 1: it's maybe just a debt center. Under the Harper government,
Speaker 1: it was more right a center that has been historically um.
Speaker 1: But there is a public private partnership in Canada and Canada,
Speaker 1: the Canadian government has tremendous capacity to borrow money at
Speaker 1: historically low interest rates, and not for programs spending or welfare,
Speaker 1: but for productivity enhancing UH, infrastructure spending, which will have
Speaker 1: a long term payback if it's successful in terms of
Speaker 1: boosting the long term growth potential of the country. You
Speaker 1: will get on the right side of the Laugher curve
Speaker 1: and actually end up garnering more revenues down the road.
Speaker 1: All right, we've been speaking with Dave Rosenberg. He is
Speaker 1: the chief economist and market strategist at Gluskin Chef in Toronto, Canada.
Speaker 1: If you enjoy these conversations to be showing, look Up
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Speaker 1: Be sure and check out my daily column on Bloomberg
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Speaker 1: dot com. Follow me on Twitter at Ridholts. Dave, you're
Speaker 1: gonna start tweeting. I know you just occasionally have someone
Speaker 1: in your office. It looks like tweets something out for you.
Speaker 1: But why don't we get you on Twitter? Uh? Well,
Speaker 1: once again, you just have to, uh get on the
Speaker 1: Gluskins Chef website and uh it's all there for the
Speaker 1: viewing there it is. I want to thank my engineer, Reggie,
Speaker 1: my producer, Charlie Vohmer, my head of research, Michael bat Nick.
Speaker 1: I'm Barry Ridhults. You've been listening to masters in Business
Speaker 1: on Bloomberg Rate. Yeah.