Thursday, May 14, 2020

Some Bearish Market Forecasts

I am not an expert in matters financial. I am not a market strategist, market forecaster or even market prognosticator. Many people have opinions on these matters. I know barely enough to follow the discussions.

And yet, I do know who the markets respect and who they ignore. Among the people they respect are Stanley Druckenmiller and David Rosenberg. So, as  public service I am bringing you some of their most recent remarks about the market and the economy.

As you know, the comments by Jerome Powell, Chairman of the Federal Reserve Bank spooked the stock market yesterday and damage the recent rally. The rally off of the bear market lows has been powerful, which does not necessarily mean that the bear market is over and done with. But, whatever Powell was thinking seems to mesh with that of Druckenmiller and Rosenberg.

So, beginning with Druckenmiller:

Investing legend Stan Druckenmiller unleashed a firehose of cold water on market bulls today during an interview with the Economic Club of NY (the same venue that will interview Jerome Powell tomorrow on the topic of negative interest rates), when he said the "The risk-reward for equity is maybe as bad as I've seen it in my career," (although "the wild card here is the Fed can always step up their purchases"), that the government stimulus programs won’t be enough to overcome the economic problems, that it makes no sense for the market to jump so much when optimism emerges around certain drugs like remdesivir ("I don't see why anybody would change their behavior because there's a viral drug out there") and that "there's a good chance that we just cracked the credit bubble that's the result of free money."

Market participants have apparently been lulled into complacency by their belief that the Fed will be at the ready to bail them out. Druckenmiller disagrees:

"The consensus out there seems to be: 'Don’t worry, the Fed has your back'," Druckenmiller said during Tuesday's webcast before adding "there’s only one problem with that: our analysis says it’s not true."

How about the stimulus programs, of which, by my understanding there are both fiscal and monetary programs. Druckenmiller does not believe that they will produce economic growth:

Worse, Drucknemiller said that the Fed's $3 trillion in stimulus programs aren’t likely to spur future economic growth: "It was basically a combination of transfer payments to individuals, basically paying them more not to work than to work. And in addition to that, it was a bunch of payments to zombie companies to keep them alive."

He even takes exception to the Western European and American lockdowns. He notes that Taiwan and Hong Kong did not shut down their economies, though clearly they are both significantly smaller and significantly more homogeneous than Western Europe and America:

Commenting on the coronavrisis response, Druckenmiller said that neither Taiwan or Hong Kong had to lockdown their economies to fight Covid-19, while in the US "this is one of the most bizarre decision making processes I've ever seen" elaborating that the economically cripplling shutdown is a bad idea, and adding that "I can guarantee you poverty kills."

The last line matters. Poverty does kill. We should keep this in mind when we see our political class explaining that they need to choose between life and death, between a shutdown that will save lives and an opening up that will kill people. 

As for Toronto based market strategist Rosenberg, his views align with those of Druckenmiller. He sees America entering a depression. He too puts little faith in the bounceback rally of the past few weeks:

David Rosenberg bluntly told attendees Monday at John Mauldin’s Virtual Strategic Investment Conference 2020 that the stock rallies in recent weeks ignore reality and don’t recognize that the United States is likely entering a depression, facing double-digit unemployment for at least three years, secular changes in consumer spending and saving, and deflation followed by stagflation.

“Right now I would classify the equity market as exhibiting a level of hubris that is as amusing as it is disconcerting,” said the Toronto-based Rosenberg, who in January started his own economic consulting firm, Rosenberg Research & Associates, after working a decade as chief economist and strategist at Gluskin Sheff & Associates.

He continued:

We are in “The Great Repression,” and the downside risks brought on by the COVID-19 pandemic are not being factored in by a lot of people, he said. “Seriously, fully 80% of the stock market rally since the end of March has taken place on the days of the seven-worst readings on initial jobless claims of all time,” Rosenberg noted. “It's surreal that we got that huge rally on Friday following the payroll figure.”

How bad is it? It’s a lot worse than we think:

Real GDP may drop at a 50% annual rate in the second quarter, he told listeners. “Like I said, the hole we have to dig out from is just getting bigger, and the economic math is daunting, because to recoup a 50% plunge in GDP means it has to then surge 100% to make up for that deep loss.”

It’s also possible a “fiscal cliff” will be created when the government ends the income replacement programs currently helping laid-off workers and small businesses, he continued. “Keep in mind that this is no FDR New Deal stimulus, when we built the Golden Gate Bridge, the Hoover Dam, the Lincoln Tunnel, and Route 66. This is not fiscal stimulus with any future multiplier impact or payback; it's simply government-assisted life support.”

This assumes that Congress will never get its act together to launch an infrastructure building program. One suspects that Democrats will do everything in their power to forestall such an eventuality:

“The problem I have is that it's pure fantasy to think that normalized earnings are not going to be seriously dented by the likely permanent loss of some 10 million workers in the future from what the baseline was prior to the crisis, which means lost labor income of roughly $1 trillion. Since it is an economy where 70% of GDP is derived from consumer spending, I just have a really tough time wrapping my head around the concept that the long-term trend line for corporate profits is miraculously going to be left unscathed,” Rosenberg said.

Seeing the situation through very dark glasses Rosenberg believes that even if the economy is opened, demand will not perk up. People will continue to avoid air travel and restaurants:

An economic recovery is definitely not contingent on reopening the economy, he emphasized, because that won’t guarantee demand. People are still going to be afraid to get on planes and go out to eat. “As it stands, the U.S. Chamber of Commerce said that 25% of small businesses have already shut down and 40% have enough working capital on hand to last another two weeks, and that's it. The AARP reports that 53% of American households have no emergency savings, so I don't think they're heading on a cyclical spending spree anytime soon.”

Rosenberg stressed it will not be business as usual, as the bulls will try to convince people, and the best the U.S. can hope for any time soon is a partial recovery.

“So even as the stock market is telling you that it is all figured out, I can assure you, what we face at this very moment is a highly uncertain economic future, and unfortunately, most of the longer-term risks are to the downside, not the upside. We are in a depression, not a recession. It's a depression. I didn't say the Great Depression; it's a depression,” Rosenberg stressed. “And I think the dynamics of a depression are different than they are in a recession, because depressions invoke a secular change in behavior. Classic business cycle recessions are forgotten about within a year after they end. At a minimum, depressions entail a prolonged period of weak economic growth, widespread excess capacity, deflationary pressure and a wave of bankruptcies.

The stock market thinks that all will be well. Perhaps the reason is that so much of the stimulus spending is going into stocks.

As for where you should put your money, he has some suggestions:

Rosenberg noted some investments that may be good bets, given the profound influences from the COVID-19 pandemic on the way we live and how we conduct ourselves in our personal and commercial lives. “For example, working from home is certainly going to be a more dominant force, with obvious negative implications for commercial real estate, but positive implications for internet infrastructure, hardware and video conferencing,” he said. “There's going to be a sharp reduction in travel to work, travel in general, that means fewer cars on the road, so all the ESG reasons to avoid energy before will now be accentuated. And nothing here is very good news for the auto sector, not to mention office REITs. But they're going to be bullish themes that emerge from this too, as I've outlined. We're going into an era of elevated personal savings rates where people are going to focus on what they need, not what they want.”

Your best bet, he concludes, is to buy gold:

One of Rosenberg’s key investment themes is to invest in physical gold, which he says is a very good hedge against the instability that would be brought on by the extremes of deflation and inflation. “If there is deflation and interest rates remain low or go negative, the opportunity cost of holding gold is nil. Then if there’s inflation, gold will do well as a store of value.”

He argued a strong case can be made over three or five years that stagflation will emerge as a secular theme coming from the pandemic crisis, once demand stabilizes. “Which means dusting off the 1970s playbook might not be a bad thing to thing to at least to start to think about. Either way, physical gold comes out a winner.”


Sam L. said...

"This assumes that Congress will never get its act together to launch an infrastructure building program. One suspects that Democrats will do everything in their power to forestall such an eventuality:..." Nailed it, you have! The Dems hate, Hate, HATE those who are NOT Dems.

David Foster said...


Way isn't just oil, it is also consumed in the form of electricity, and an increasing % of electricity is made from natural gas. Nat gas isn't as easy to transport across oceans as oil is, but LNG ships and converters do make it possible, and emerging economies that need electricity find nat gas attractive...considerably less actual pollution than coal, for one thing.

The relationship between oil & nat gas is complex; a lot of gas comes from wells that also produce when wells are shut because oil prices are low, that acts to restrict supply of nat gas, and guess what that does to the prices?

UbuMaccabee said...

I agree with David. What I want to know if how many forecasters and experts have blind spots about the reality of energy, especially carbon-based energy, because of the blinders that come with their economic and political class. In those circles, renewables are very close to being their theology.

Illuninati said...

Bearish sentiment often precedes a bull market. When everyone else is selling that is usually the time to buy.

Tom in CA said...

Just my two cents but I wouldn't count out commercial real estate. Just because everyone discovered Zoom doesn't make it the all out winner. Personally, I have had just about enough of Zoom meetings. I would short the stock. We were forced into using it but you won't see a lot of Zoom fan clubs in the coming days.

Apple just completed building a $1 Billion dollar complex in Cupertino and they are going to say, hey, let's scuttle it and everyone work in their jammies? Nah.