David A. Rosenberg is Chief Economist & Strategist at Gluskin Sheff, with a focus on providing a top-down perspective to the Firm’s investment process. Mr. Rosenberg has earned both Bachelor of Arts and Master of Arts degrees in Economics from the University of Toronto. Prior to joining Gluskin Sheff, David was Chief North American Economist at Bank of America-Merrill Lynch in New York and prior thereto, he was a Senior Economist at BMO Nesbitt Burns and Bank of Nova Scotia. Mr. Rosenberg has ranked first in economics in the Brendan Wood International Survey for Canada for the past seven years and was on the U.S. Institutional Investor All American All Star Team for the last four years.





Try the VIX index at 22 and change. And how about the Investors Intelligence poll at 48.4% bulls as of this past week and just 16.5% in the bear camp. This market remains ripe for a corrective phase. Bonds have been selling off amidst the huge supply backdrop, but make no mistake — the deflationary backdrop is very friendly towards income-generating securities.

As we just saw with the most recent crude oil and copper inventory statistics, at this time there are absolutely no shortages of anything (even in the latest manufacturing ISM report, the only item listed in short supply were ‘electronic components’; and in the non-manufacturing survey, the only thing in short supply were masks for H1N1… this doesn’t exactly sound like an inflationary environment to us).

In fact, we highlight below what the respondents in the latest ISM survey had to say — not exactly on the same page as the mainstream Wall Street economist:

• “Capital markets remain very tight; lenders are not releasing funds for development projects, limiting expansion.”

• “Fourth quarter still looking grim, but potential upturn for Q1 2010.”

• “No one trusts that the recovery is real. Seems everything and everyone is in a holding pattern.”

• “Business is still flat.”

• “U.S. business remains better than 2007 levels, although it’s been through personnel and cost reductions that we are now profitable. Business continues to be about 8 percent below 2008 levels.”


After perusing several Wall Street research documents on what to expect for the coming year, the overwhelming consensus view was:

• Muted recovery but still GROWTH (risk — a relapse or better yet, the current recession never ended)

• Equity markets will be UP (risk — obviously that equities will be down)

• Most popular forecast involves a large-cap multi-national/emerging market barbell for equity allocation (risk — we see health care, staples, and utilities outperform)

• Decided preference for emerging markets as that is where the growth is going to come from (risk — beta trades lag)

• This adds up to expectation of 4% to 5%

• Generally neutral on the U.S. dollar (this can go either way — we see near-term countertrend rally, but still in a secular bear phase)

• Positive on commodities (risk is that they consolidate — we do not foresee a sustained bear market here unless China relapses)

• Negative on long government bonds across the board because of concern over government balance sheets (this is the case every year because bonds are the enemy to the growth bulls… risk clearly is for lower yield activity)

• Overall constructive view on credit product, especially for shorter-term maturities (risk is that spreads widen, which we expect to see near-term, but corporates are priced for a muted recovery so they still have “value’)


The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. We have said repeatedly that this recession is really a depression because the recessions of the post-WWII experience were merely small backward steps in an inventory cycle but in the context of expanding credit. Whereas now, we are in a prolonged period of credit contraction, especially as it relates to households and small businesses highlighted in our small business sentiment write-up yesterday)

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