David Rosenberg is often called a perma-bear, which isn’t fair.

Yes, the founder of Rosenberg Research & Associates is often less than enthusiastic about economic prospects and negative on stocks, but he’s sometimes generally bullish and usually has long recommendations for various asset classes.

Right now, Rosenberg is having a moment because, while he was early, his call that the economy and stocks would retreat from their lofty levels from last year is proving to be correct.

He doesn’t believe in this recent stock market rally and details five reasons the major stock market indices have yet to hit bottom.


David Rosenberg, founder, Rosenberg Research & Associates Inc.

What a fascinating day for the financial markets on Aug. 10.

A clear miss to the downside on the headline and core consumer price index (CPI) in the United States and it was the equity market that loved it the most.

The market that is most sensitive to inflation, which is the long end of the Treasury curve, gave up the entire early session rally.

Even the front end gave back a big chunk of its post-report yield slide.

But the stock market soared and the dollar sank on the belief that the peaking out and rolling over in inflation will somehow push the U.S. Federal Reserve to the sidelines and lead to a soft economic landing.

First, despite the comment from the last Federal Open Market Committee (FOMC) meeting that the central bank is “data dependent,” this is now evidently not the case.

In the wake of the tame CPI release, we had the biggest dove on the Fed, Neel Kashkari from Minneapolis, come out and say that his vote right now is for the funds rate to close the year at 3.9 per cent and head to 4.4 per cent in 2023.


His Chicago Fed counterpart, Charles Evans, added that “we must be increasing rates the rest of this year and into next year.”

So this move up in stocks and down move on the dollar is nonsensical.

What happened to “don’t fight the Fed”?

I guess it works in one direction for an Alfred E. Neuman equity market.

Second, the yield curve is still inverted by more than -40 basis points for 2s/10s.

And the Fed remains committed to tightening policy into this and in the aftermath of back-to-back quarters of negative gross domestic product (GDP) prints (GDP is now being maligned as much as the yield curve).

And then there is quantitative tightening to consider, which layers on the equivalent of another 100 basis points of de facto Fed tightening this year.

We know that the S&P 500 has a 90-per-cent-plus direct correlation to the direction of the central bank’s balance sheet.

Third, the drop in inflation is nothing for equities to cheer about since it’s not being met with any shift in the Fed’s tone.

There is an added element here of demand destruction in this newly found disinflation that works against, not for, corporate profitability.

Look at it this way: every recession brings on lower inflation.


And there’s never been a recession without a bear market in equities, and more often than not, that means down 30 per cent to 50 per cent from the peak.

Fourth, the U.S. dollar slide did help the risk-on trade on Wednesday, as the U.S. dollar index sagged 116 pips to 105.2 and broke below the 50-day moving average by the most since early February.

But back then, as has been the case for a long time, the 100-day trend line held firm and that source of support resides at 103.5.

Fifth, the stock market is either trading on technicals (likely the case) or, if it is about fundamentals, then the “soft landing” view is gaining supporters.

That second point is a dangerous proposition.

Fed tightening cycles have led to recession 85 per cent of the time in the past, but more than that, the shape of the yield curve right now points to a 100-per-cent chance and the string of negative productivity performances we have seen, and the implications this will have on the labour market and forced corporate cost-cutting, also has a 100-per-cent track record as well.

The current combination of monetary and fiscal restraint, which has yet to be fully reflected on the demand side of the economy, is without precedent back to 1960.

The growth in M1 and M2 money supplies is collapsing, the monetary base is contracting and all I continue to hear is how non-farm payrolls soared 528,000 in July.

Never mind the starker and darker message from back-to-back declines in full-time jobs evident in the rival household survey.

Or the stress signpost from a simultaneous jump in credit-card balances at a 15-per-cent-plus interest rate and multiple job holders.

Conveniently ignored, but not by me.

Back to the Fed.

That two former doves can sound so hawkish so quickly after such a benign inflation report is a clear sign that the monetary authority is actually focused on a different strategy than just bringing down inflation, which is going to happen further in coming months.

That is a ruse.

The Fed is aimed more at taking the punch bowl away. This is about correcting inflated asset values at this point.

As such, the answer is “no, we’re not there yet”, if the question is whether the S&P 500, Nasdaq, Russell 2000, Dow or NYSE has hit bottom.

As was the case in 2000-2002 and 2007-09, we are in the early chapters of this book.

Bear markets only end in the mature stage of the recession when investors see the whites of the eyes of the recovery, only after the Fed has dramatically sliced rates, and not until the yield curve is steeply sloped (+140 bps for the 2s/10s gap).

Playing the long game means not going long until these features appear.


This story first appeared in The Financial Post.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc.

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