May 22, 2012
While most sell-side analysts are correctly classified as permabulls, Gluskin Sheff’s David Rosenberg has been branded as the opposite – a permabear. He rejects that label. He recently said he’s indeed bullish – on bonds and income – and has been so for quite a while.
Defending that label, Rosenberg asserted that his goal is the “holy grail” of risk-adjusted return. He defined risk in terms of capital preservation. “But when you talk about risk, you are labeled a permabear,” he said.
Rosenberg spoke on May 3 at the Strategic Investment Conference in San Diego, hosted by John Mauldin and Altegris Investments. Rosenberg is chief economist and chief strategist at Gluskin Sheff, a Canadian wealth manager. Rosenberg also spoke at that conference last year, when he offered the same investment advice.
Following his advice then would have been a good decision. During 2011, 30-year Treasury bonds earned 25% returns and the 30-year Treasury strip returned a remarkable 80%. Dow utilities – a sector Rosenberg recommended – calling them “bonds in drag” – were the top-performing stocks in the US market.
Rosenberg’s now forecasts sustained deflation driven by a very weak economy, and he recommended increased allocations to Treasury, corporate and municipal bonds, as well as dividend-paying stocks.
I’ll discuss Rosenberg’s updated investment recommendations, but first let’s look at his economic forecast for 2012 – which is much more bearish than his outlook last year.
Beware of a “big recession” in 2013
At this point following a recession, we are normally at the strongest stage in the business cycle, when the Fed should be raising rates, Rosenberg said. But that is not the case. A year ago, the forecast was for 3% GDP growth, but 2011 ended with a disappointing 1.5%.
Now, the underlying trend is 2% growth, Rosenberg said.
And the economy faces more peril. Rosenberg termed the 42 tax provisions that expire at the end of this year – including the Bush tax cuts – a “fiscal cliff.” That cliff represents a 4% drag on economic growth, which would translate to a 2% contraction in GDP.
“We will be in a big recession next year,” he said. “Whether or not the government will let that happen – I don’t know.”
He said there is “no possible way” that the government could implement a fiscal stimulus that would offset that contraction. Austerity is necessary, he said, “notwithstanding the pain it will cause.” Canada underwent such a program 20 years ago, he said, and its economy emerged much stronger.
Twice before – in 1960 and in 1969 – the US government experienced a fiscal cliff similar to what will happen at the end of this year, Rosenberg said. In both cases, a recession ensued.
“Don’t dismiss those odds,” he said. “The economy went into reverse.”
Rosenberg added that recessions most often happen in the first year of a presidential term, because presidents prefer to “get over with the bad news.”
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