Please note this was transcribed to best of the ability of the transcriber and may have minor errors. Please refer to the podcast itself to clarify anything.
Download the full transcript: pdf 2017-01-26 - Transcript of the Podcast Interview between Erik Townsend and David Rosenberg (532 KB)
Erik: Joining me next is Gluskin Sheff Chief Economist David Rosenberg and of course Dave is the author of “Breakfast with Dave” probably one of the best and well known newsletter that's produced every single day in the industry. So, Dave thanks so much for joining us. I wanna start with your outlook on equities and frankly I'm not sure if I need to talk to an economist or a psychiatrist to get my head around this equity market but you know let's go back 3 to 6 months, we had the smartest guys in the room, Ray Dalio, Stan Drunkenmiller, Carl Icahn, they were all saying, I thought for very good reason's this market's overdone, it's over bought, you know it's gone too far. And now Donald Trump gets elected, this guy's gonna have more headwinds in terms of political opposition than any president in recent history, yet it seems that everybody has just decided that it's trade up and away from here. Overnight last night S&P futures touched 2999.50 so if the cash index had been trading, it would have broken 2300. Is it just me? I mean everybody's talking about the analogy to Trump is the new Ronald Reagan and I can't help but think wait a minute, first 2 years of Reagan's presidency was a massive bear market and recession. Am I missing something here Dave?
Dave: Well, you know the other thing, I don't think you're missing anything, no. I mean the Reagan presidency is well you know, and it goes to show in those first 2 years after the honeymoon period when the market is down 25%, that really basis-point-for-basis-point, what matters you know for the market is the shift in the market multiple as oppose to earnings growth and the Fed certainly showed its hands. Volcker raised and we had the recession starting 6 months after Reagan got elected. People looked benevolently of course and the entire Reagan regime entire 8 years and a lot of that wasn't just his pro-business stance but also the fact that the FED continued to cut interest rates that reinforced the expansion of the market multiple. But I remember that the starting point in 1982 for the bull market was a multiple that was 8, you know, not the 17 on forward and almost 20 on trailing and that point the onset of the bull market occurred in 1982 after a huge recession. This time around, not only are valuations at 15-year highs but we're entering it into the eighth year of the expansion of the bull market. You have to respect where were you are in the market cycle in the business expansion and we're much more mature now than we were in that early stage of Reagan or you can argue the early stage of Bill Clinton or Barrack Obama. I mean the benefit of being elected at the bottom of the cycle, then you can just ride it up and just take credit for it. I think that the challenge for Donald Trump with all deference to the animal spirit rally they were seeing right now is that the multiples are really stretched and that maybe if were not even in the ninth inning of the game here, we're certainly somewhere in or around the seventh inning stretch. So, the answer is no. It's not like Ronald Reagan at all in that regard.
Erik: And in terms of where we are and what comes next obviously as much as you and I see a lot of reason for concern here, you can't fight the tape and clearly the trend has been upward. So, are we gonna see several months do you think of exuberance over this election before reality sets in? And it seems to me like a lot of people seem to think we're in a new inflationary boom. You wrote an excellent piece back in December saying wait a minute, there's a lot of good reasons to think that Trump would bring back the disinflation trade. So, do you still see it that way and give us a little bit of background on where that viewpoint comes from?
Dave: Well, I mean the second question is a lot easier, the inflationary boom. So basically, I'm supposed to take it at face value because the markets are telling me that this is their view today, and their view today might not be the market's view 3, 6, 12 months from now or 5 years from now. But the market's telling me that one man, President Trump is gonna be able to, with fiscal policy, will be able to do what Bernanke and Yellen and Draghi and Trichet and Koroda and Carney, who actually run the printing presses, what they couldn't do in the past 8 years a president's gonna be willing to do, or be able to do, on inflation. And the answer is no. That's just not gonna happen. There's just too many powerful secular forces a play whether it's demographics, intense global competitive pressure that aren't going away and of course with the fact that you've got tremendous excess supply of retail space net and states and Amazon creating tremendous margin pressure and price discounting in the rest of the consumer goods and services area. So, no and I'm not a buyer of the view and especially with the US dollar likely to still be a strong currency even though it's a very crowded trade, it's probably the right trade. I don't see the big inflation out there.
You know people wanna compare to Ronald Reagan, fine. I mean there's differences, there's some similarities but what did the inflation do during the Reagan era? What did inflation do during this supply side Reagan era? Went from 12 percent to down below 5 percent over his 8-year term? Why anybody thinks that Trump's policies themselves are gonna create inflation, I imagine that the wall with Mexico will create demand for cement and concrete and the likes and you'll see some commodity inflation perhaps coming out of there, infrastructure probably much the same, but that's a very small sliver of the overall inflation pie and ultimately what will matter for the markets is the extent towards any inflation at the backend of the economy comes to the frontend of the economy. And looking at the Trump's policies deregulation should reduce business costs. What is inflation doing about that? Yes, the infrastructure works. The only way it's gonna work is if it ultimately improves productivity like the good old fashioned Eisenhower structure of the interstate highway in the 1950s really showed true in the 1960s in terms of increased productivity growth, well productivity growth in that itself is anti-inflationary because it brings down unit labour cost. So, what if Donald Trump reduces tax rates along with congress corporate tax rates? Well what's inflationary about lower corporate tax rates? It actually means that wages can rise without crimping margins and forcing companies to have to pass it on to consumers. So outside of cement, concrete, some base metals, the things that might go initially into the stuff that's needed to build the wall of Mexico or needed to see upgrade airports and pave bridges and roads, I don't see where the big inflationary impulse is gonna come from. If anything, if Trump is successful, it means that the potential GDP growth rate, the non-inflationary GDP growth rate of the United States is gonna be rising overtime. I can't build an inflation view out of that.