8/14/2019 Zero Hedge_ Parting Thoughts From Rosenberg - Ver 1.0

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http://zerohedge.blogspot.com/2009/05/parting-thoughts-from-rosenberg-ver-10.html

Monday, May 4, 2009Parting Thoughts From Rosenberg - Ver 1.0Posted by Tyler Durden at 6:56 PM

Some of David Rosenberg's last thoughts as he is putting the bubblewrap in his boxes. It is not surprising that his parting gift to his

bank is a moderate shift to a slightly bullish outlook, likely

designed to make life for his "Economic Strategist" replacement a

little easier. However, reading between the lines allows for the real

Rosie to shine through. And is, as always, a breath of fresh air in an

environment where the MSM has become utterly useless.

We are in year 9 of an 18-year secular bear market

The S&P 500 peaked in real terms back in August 2000. Adjusted for the

CPI, it is down 58% since that time. So, we would say that we are in

year 9 of what is likely to be an 18-year secular bear market, becauseif you look at long waves in the past, they tend to last about 18

years with near perfection.

What happened during the last secular bear market

As an example, go back to the last secular bear market, and you will

see that the S&P 500 peaked, again in real terms, in January 1966 and

bottomed in July 1982, 18 years later. But there were plenty of mini-

cycles in between. In fact, there were four recessions and three

expansions during that entire 18-year period and unless you were a

completely passive investor, you definitely wanted to be in the gameduring the three expansions because the S&P 500 rallied an average of

50% during those phases. Again, it is important to note that these

were rallies you

could rent, not own, but they did last an average of 20 months. So,

its not exactly as if they have an extremely short shelf life.

Playing a game of devils advocate

With all this in mind, we went through an exercise over the weekend

and played a game of devils advocate. If Rosie had to face off

against Rosie, what would we say if we were forced to take the other

side of the debate, keeping in mind that in fact, we may be overlybearish at the present time. And believe it or not, we did manage to

come up with some pretty compelling material.

Past the half-way point in the recession

First, our in-house model of predicting where we are in the cycle, for

the first time, gave us a signal late last week that we are past the

half-way point in the recession. Considering that the stock market

bottoms 60% of the way through, this is an encouraging signpost.

Weve worked through the effects of the Lehman collapse

Second, our propriety proxy for private sector interest rates has come

down from 8.11% at the nearby peak to 7.18% now despite the backup in

Treasury yields, to stand at their lowest since last September. The

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TED spread is back to where it was last September, as are most credit

spreads. The VIX has finally broken to 35, back to where it was last

September. 10-year TIPS breakeven levels, which were predicting

deflation at the end of last year, are now forecasting 1.5% average

inflation rates for the next decade. Again, we last saw this in

September of last year. This is interesting because even though the

economy and the markets were clearly in the doldrums back in

September, the fact that so many market barometers are back to where

they were then means that at the very least, we have worked throughthe ill-effects of the post-Lehman collapse.

Stock market has lagged relative to other asset classes

All an equity bull really has to do is point to the fact that the S&P

500 last September was trading around 1200. The only difference is

back then we were looking at it from the perspective of being 20% off

the highs whereas a move back to September levels, which, after all,

would only mimic what many other market indicators have accomplished,

would be viewed as an 80% surge off the lows not to mention another

35% potential upside from where we are today. Even the CRB rawindustrials are now back to where they last October when the S&P 500

was hovering around the 950 level. So again, if we were equity bulls,

and maybe we should be, we would simply point out that of all the

asset classes that have bounced back to life, the stock market has

actually been a laggard.

Three indictors that suggest cyclical bear market is over

Third, we found three indicators that have stood the test of time and

strongly suggest that the cyclical bear market in equities and the

economy have drawn to a close: the ISM, the Conference Boards

coincident-to-lagging indicator and the University of Michiganconsumer sentiment survey. The ISM bottomed in December 2008 at 32.9

and is now 40.1. Going back to 1950, we found that recessions end

within three months of the ISM hitting bottom, and never by more than

six months. The coincident-to-lagging ratio just turned in successive

lows of 89.6. The data go back to 1960 and we found that recessions

ended within two months of this indicator, 100% of the time. And, the

U of M consumer sentiment index bottomed at 55.3 last November. As we

saw on Friday it had rebounded to 65.1 as of the end of April. The

data show recessions end typically within six months of the bottom in

this key leading indicator, and not once was the lag longer than eight

months.

We could be on the precipice of a cyclical upturn

This is not to say that our secular views have changed. However, we

could well be on the precipice of a cyclical upturn, and whether it is

sustainable or not may have to be a story for another day. We dont

see as many green shoots as others do, but then again, we endured more

than a year of jobless recoveries following the market lows of 1990

and 2002.

The most glaring example

The most glaring example of all is the fact that the S&P 500 bottomed

in the summer of 1932 and yet by the end of the 1930s, seven years

after New Deal stimulus, the unemployment rate was still 15%,

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consumer prices were deflating at a 2% annual rate, and lets face it,

the Great Depression did not actually end until 1941. But for

investors, the worst was over in the summer of 1932 in the immediate

aftermath of the acute government intervention at the time. While

there were recurring setbacks along the way, including the severe bear

market of 1937-48, the fundamental lows had already been turned in

long before.

Investors have been able to price out financial tail risks

Fast forward to March 2009, and the same mantra was heard

nationalization, depression and deflation. As was the case with

FDRs early days as President, what the last half of Obamas first

100 days managed to accomplish was to eliminate these words from the

investment lexicon. The degree of intervention from the Treasury and

the Fed has been so intense that investors have been able to price out

financial tail risks that had dominated the market landscape through

much of the first quarter.

The market is gravitating to a new mean

So, the way to look at the situation is that by removing the tail

risks of an outright systemic financial collapse, the market has

gravitated to a new mean (in the sense that at any given point in

time, market prices reflect some expected distribution of possible

outcomes a very bad potential outcome has been taken out of the

probability distribution, at least according to Mr. Market). This is

why if the bulls have a solid argument, it is the prospect that the

S&P 500 can indeed approach those pre-Lehman levels, which back in

September, seemed rather bearish, but is only bullish today

benchmarked against where we are.

Still not sold on the bull case for equities

Despite all these powerful arguments, we are still not totally sold on

the bull case for equities. Valuation is not compelling, in our view.

Sentiment has completely swung towards a bullish consensus (which is a

contrary negative). Home prices and employment are still in freefall,

the former undermining the balance sheet and the latter exerting a

drag on the income statement and suggestions that a mild improvement

in the negative growth rate is something to be excited about seems off

base.

Difficult to ascertain who the marginal buyer will be

It seems hard to believe that after being burned by two bubbles seven

years apart that the baby boomer is going to line up at the trough one

more time. So, its difficult to ascertain who the marginal buyer is

going to be. Disposal of durable goods assets to pay off a record

household debt burden seems like a multi-year deflation story as far

as we are concerned. Since the boomer household is income constrained

and underweight fixed-income securities on its balance sheet, we

believe that demand for high-quality bonds is going to strengthen in

coming years. Government policy will remain highly pro-cyclical but

there is no match for the contractionary effects from a shrinking UShousehold balance sheet.

Deflation will win out over inflation

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We are concerned that deflation will win out over inflation this time

around. While the data cited above are indeed impressive in terms of

their track record, since this is not a manufacturing inventory

recession but rather a downturn deeply rooted in asset deflation and

credit contraction, we may find out that the economic releases that

were tried, tested and true in the other post-war cycles may not be

appropriate today given the overpowering secular trends of consumer

deleveraging and frugality.