David Rosenberg Says the Bulls Are in Fantasyland

This article is based on a presentation from John Mauldin’s 2020 Virtual Strategic Investment Conference, which is being held from May 11 to 21. To register for this conference, click here. The Strategic Investment Conference was just approved by CIMA and CFP for 14 hours of continuing education credits.

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.

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.”

The U.S. Labor Department reported Friday, May 8, that 20.5 million nonfarm payroll jobs were lost in April, catapulting unemployment to 14.7%. But Rosenberg maintained the loss was actually 27 million jobs. “When you account for the big drop in the participation rate and the errors that people made in classifying themselves erroneously that they're still employed when they're actually not, the real unemployment rate is currently over 20%, as if the reported 14.7% rate isn't horrific enough. … We're likely going to see another five to 10 million jobs lost in May, and the unemployment rate will probably test 30%, which we last saw in 1933.”

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.”