MacroVoices #512 David Rosenberg: Will The 2025’s K become 2026’s

Economist David Rosenberg presents a contrarian view for 2026, predicting significant disinflation and more aggressive Fed rate cuts than markets expect. He argues that inflation will return to the Fed's 2% target by Q2 2026 as labor market cooling leads to demand destruction, similar to patterns seen in 2008. Rosenberg highlights that the US economy has become heavily bifurcated - a 'K-shaped' recovery where AI-related capital spending is booming at 17% annually while traditional capex is down 3%, and where high-income consumers drive spending through equity wealth effects while lower and middle-income households struggle with negative real income growth. He warns that everything depends on the stock market continuing to rise, as high-end consumer spending financed by equity gains is the primary economic driver. The discussion covers significant risks to the AI boom, including electricity supply constraints and financing challenges, with corporate debt issuance rising as internal cash flows become insufficient. Rosenberg sees the current market as the second-biggest bubble of the past century, with the Shiller CAPE ratio at 40 (a three standard deviation event). He advocates for defensive positioning with low beta exposure, focusing on utilities, healthcare, aerospace defense, and precious metals while maintaining significant cash positions. The conversation also touches on geopolitical risks, commodity markets, and currency dynamics, with Rosenberg particularly bullish on the Japanese yen and bearish on continued dollar strength.