MacroVoices #372 David Rosenberg: The Bear Market Bottom Is Not In

David Rosenberg presents a bearish outlook for equities and the economy, arguing that markets are currently pricing in a soft landing scenario that he believes is incorrect. He contends that a recession is already starting in Q2 2023, evidenced by negative retail sales volumes, declining industrial production, falling temp agency employment, shrinking work weeks, and rising initial jobless claims. Rosenberg emphasizes that the aggressive Fed tightening cycle since 1981 and inverted yield curve (which began inverting in July 2022) historically lead recessions by 10-12 months, suggesting the timing is now appropriate for economic downturn.

Regarding equity markets, Rosenberg believes the October 2022 lows will not hold if his recession scenario materializes. He calculates that a typical recession would cause a 20% hit to earnings (bringing EPS to around $185) combined with a recession multiple of 16x (versus current 19x), yielding an S&P 500 target of approximately 3,000. He views the current market rally as a significant bear market rally similar to what occurred in early 2008 after the Bear Stearns collapse.

On banking and credit, Rosenberg distinguishes the current situation from 2008-2009, noting that large banks are well-capitalized but regional banks face significant commercial real estate exposure. He expects credit tightening similar to the early 1990s S&L crisis, which could lead to a three-quarter recession followed by a workout period. The combination of higher interest rates and restricted credit access will have layered negative impacts on the economy.

For inflation, Rosenberg maintains his view that the peak is behind us, dismissing secular inflation arguments as premature. He expects rental components (30% of CPI) to eventually reflect current real-time rent deflation, with a massive pipeline of new apartment units coming online while vacancy rates have risen from 4% to 7%. He believes inflation will surprise to the downside over a 12-month horizon.

On gold, despite recent strength to over $2,000, Rosenberg remains bullish due to expected Fed policy pivots and dollar weakness. He anticipates that economic data will force the Fed to halt rate hikes, with markets pricing in more rate cuts for 2024, while other central banks continue tightening, creating divergence favorable for gold.

Regarding China's reopening, Rosenberg sees it as providing only a fractional positive boost to global GDP, primarily benefiting intra-Asian trade and tourism rather than having substantial global production impacts. For commodities, while acknowledging secular bullish factors from energy transition and supply constraints, he expects near-term weakness due to recession-driven demand destruction, followed by longer-term strength once recovery begins.