The Economic Forecast; Storm Clouds Forming

Here’s a public service, a special reward for those who regularly read this blog. It concerns the economic forecast, which is obviously coupled to a market forecast. The author is one David Rosenberg, a market strategist from Canada.

When it comes to the markets, where I do not possess any special knowledge or expertise, all I can do is to identify those who do. If you ask who the people on Wall Street take seriously, the name of David Rosenberg will almost surely pop into mind.

This week Rosenberg has posted some comments on Linked In, to the effect that the emerging consensus about future economic growth and the Goldilocks scenario, is almost certainly wrong.

He admits that he is generally early in his prognostications, fault that we can also attribute to famed hedge funder Jim Rogers. But, better to be early than late when the blank hits the fan.

In his view we are seeing two market bubbles, in real estate and stock prices:

Look, nobody is right all the time, and nobody is wrong all the time. And more often than not, it really comes down more to timing, and I am historically early to a fault. But experience goes a long way in this business and so it is important to identify bubbles — we have two now, in residential real estate and equities — and then understand that excesses will always go further than you think (where we are now) but that no bubble ever corrected by going sideways (no sense timing it; just know that it’s out there).

One understands that the media is all-in on the Biden economic boom scenario. They are happily ginning up the optimism, not realizing that the more the consensus insists that nothing can go wrong, the more the likelihood that something serious will go wrong:

To me, it is fanciful to believe that we come out of the first global pandemic in over a century into a world of new-found sustainable inflation. Or that a massive surge in public sector deficits and debts, producing little more than a short-term sugar high, have assured us an economic future replete with the “Roaring Twenties” and a “Goldilocks” economic scenario. The vaccination rollout is impressive, and the re-opening of the U.S. economy is both welcome and impressive. But once this so-called “pent up” demand is filled in the 4% of GDP known as the COVID-19-affected “consumer services” sector, and once these short-term stimulus checks run out, the economic emperor becomes disrobed as was the case in last year’s fourth quarter. While the markets had a 1-2 year time horizon when I started in the business in the mid-1980s, today it is more like 1-2 months. By July-August, the markets, both stocks and bonds, will start to see what I already see around the bend.

So, you have a few months to enjoy the party. Then the economy will revert to the norm and show that all of the prognosticators had taken the wrong side of the trade:

So yes, the consensus on inflation, Treasury yields, equity markets (especially the value trade), “Goldilocks,” “Roaring Twenties,” the Fed not knowing what it’s doing, is so overwhelmingly one-sided, that I don’t find it difficult one bit to place the bet in the other direction. Why? Because “something else is going to happen.” We have until the summer months to find out what the “something else” will be.

When the party ends you do not want to be left holding the bag… so to speak.