"Significant Strain" Ahead For The Economy | David Rosenberg
Summary
Market Dependence: The economy’s resilience is heavily tied to the stock market via the wealth effect; a stall in equities could lift the savings rate and hit consumption.
AI Dynamics: AI-driven capex boosts near-term GDP, but rising concerns include sector-wide correlation, potential overcapacity, and changing ROI expectations.
Fixed Income Stance: Prefers US Treasuries across the curve, extending duration on benign inflation views and attractive real rates.
Defense Allocation: Maintains exposure to Aerospace & Defense given geopolitical risks, while acknowledging it’s a position he’d like to exit if peace prospects improve.
Defensive Equity Tilt: Favors cash-flow, yield-oriented assets like energy infrastructure and pipelines, plus utilities, healthcare, and equal-weight consumer staples; cites valuation caution in some names (e.g., WMT) and relative attractiveness in others (e.g., MSFT).
Gold Positioning: Trimmed silver; keeps a 5–10% allocation to gold and miners, with potential upside sensitivity to Middle East developments.
Regional Valuations: Holds meaningful equity exposure in Europe and Asia for better valuations despite higher geopolitical and energy-price sensitivity.
Oil Outlook: A favorable geopolitical outcome could remove the risk premium, leading to lower oil prices, improved real purchasing power, and a potential rotation out of energy.
Transcript
The big risk for the economy is what happens to the stock market. Because if the high-end stop spending on luxury goods and uh high-end restaurants and cruise lines um and cyclical spending, if that dries up because the stock market doesn't continue to play ball, I think this economy, especially in the second half of the year when a lot of the short-term stimulus falls by the wayside, uh is going to be showing some significant strength. Welcome to thoughtful money. I'm its founder and your host, Adam Tagert. The administration tells us that a new golden age for the American economy is now underway and that we should see substantial material incremental GDP growth this year from the policies that it put in place through acts like the one big beautiful bill, tax relief, deregulation, tariffs, and new trade deals purporting to bring trillions of new dollars of foreign investment into the US. Today's guest, however, is much more skeptical of the promise of these policies as well as the overall prospects for the economy. And now the US is at war with Iran. How will that impact the situation? For guidance, we turn to the highly respected economist and award-winning researcher David Rosenberg, founder and president of Rosenberg Research. David, thanks so much for joining us today. >> Great to see you again, Adam. Thanks for having me on. >> Hey, uh, my pleasure. I'm very excited for this. Um, we got to hang out in person in January, I think it was, at the Vancouver Resource Investment Conference and we were actually on a panel together and I kind of I kind of knew the end of the panel sort of pitched this softball about the administration's policies cuz I kind of figured it was going to be like a big juicy red steak for you and it certainly proved to be that way. We just didn't have a lot of time to talk about it in the remainder of that panel. So, I wanted to bring you back here on the channel to give you as much time uh to uh to elaborate on it as you want. So, why don't why don't we start there, David. Um why are you so skeptical of the administration's um of their purported coming benefits of their economic policies? >> Well, you know, it uh it really depends on your time horizon. You know, if you're going to ask me, are we going to be getting decent growth in the next couple of quarters? The answer is yes. So, I'm not going to totally dismiss the impact of the income tax refunds, uh, which are significant. Uh, the question will be how much of that will find its way into the economy. Uh, but that's really a a temporary boost, right? that that is not something that any investor should be capitalizing. Uh it's not a permanent tax cut. It's just a withholding tables uh allowing for these refunds that'll give us, you know, 2 3 4 months of some better retail sales activity. Um but then that's just going to borrow growth into the present from the future. So I think the second half of the year we're going to have a bit of a vacuum on that side. So this is not like the cash giveaway from Uncle Sam to the proletariat back in 2020 2021 which is a a gift they kept on giving. >> So this will have an immediate but short-term boost to the economy. >> The other aspect which has really nothing to do with the administration. I don't believe that the bonus depreciation allowance is going to lead to a phenomenal incremental increase in capital spending. Our work has shown that the impact you really measure in basis points, not percentage points. But you know, there's a lot of camouflage out there, Adam, because you can point to the economic numbers and say as a politician or a president, well, look at what my policies have done. Um but I don't think that the introduction and advent and proliferation of generative AI uh and chat GPT happening towards the end of 2022 which put an end to the cyclical bare market equities of the time. I don't think you can say, "Oh, well, President Trump is responsible for the AI boom uh any more than, you know, President Clinton could say, well, I created the internet boom because I was around in the mid 1990s." Uh, evolution is evolution, and inflection points on the technology curve uh can happen with anybody in office, Democrat or Republican. That's just the beauty of the uh ingenuity and creativity of the US economy. The bottom line is that if you strip out the AI boom, you actually have a recession in old economy capital spending. Uh I mean we got those fourth quarter GDP numbers. Uh industrial sector capex was actually negative. Um, so what we don't talk about is how this AI boom, as strong as it is, is diverting resources away from other parts of capital spending. So that's the first point I would make is that we do have an AI boom. And I'll tell you right now that a recession is probably off the table uh for the next several quarters uh just from all these spending commitments alone. That has nothing to do with the president's policies. Uh and then on top of that we have up until just the past little while we had an unrelenting bull market in equities. Uh and so even in the face of what you can really acknowledge is a very soggy labor market. I mean in the past year there's been practically no growth in employment. Whether you look at the non-farm payroll survey or you look at the ADP survey there's been almost no growth in employment. Um but yet consumer spending has been chugging along at call at it roughly a 2 and a.5% annual rate and that's with practically no job growth when you smooth out the monthly wiggles and real organic disposable income growth has also been close to zero. So what's happening here that you have this widening gap between incomes and spending which means that the savings rate has been on an epic downtrend and that's been the primary source of support for the economy uh is the fact that um spending has hung in and primarily because of the equity wealth effect for the top 10% but that's the equity market speaking uh that's not about the president um I mean the stock market did just as well under Bill Clinton, if not better, and under Barack Obama than it did under President Trump. That's not about the president. So, we have an epic drop in the savings rate. That's accounted for half the economic growth since last spring. And you have the AI spending boom. H. And so, that's the story of vitality in the US economy. And so, my answer back to you then in Vancouver and today is that none of this has to do with presidential policy. If you're going to talk to me about the success of presidential policy, explain to me how it is that if there's one item, of course, to his personal benefit and his family's benefit, which has been crypto, if Donald Trump has been so successful, uh why to this day is, you know, Bitcoin still roughly 50% below where it was last fall, like >> has that been successful? I don't think so. So, the economy is doing what it's doing. Uh I think actually we get wrapped up in the AI craze uh which is definitely adding to GDP growth but when you do the bean count on the economy and the major contribution has really come from the equity wealth effect on spending at the high end that's been over half the GDP growth over the course of the past year that has been absolutely monumental. Um, so the big risk for the economy is what happens to the stock market because if the high-end stops spending on luxury goods and uh high-end restaurants and uh cruise lines um and cyclical spending, if that dries up because the stock market doesn't continue to play ball, I think this economy, especially in the second half of the year when a lot of the short-term stimulus falls by the wayside, uh is going to be showing some significant constraint. >> Okay. Um uh All right. Sorry, I just want to make sure I caught your last point there. Um I I I heard you saying that the um big risk to the economy is what happens to the stock market. Uh because obviously, uh that sort of has become the tail that's been wagging the dog. Um and if there is weakness in the stock market, I think you expect to see economic weakness. I thought I heard you use the word economic strength. Did you mean that or >> strain? strain. >> Strength. >> S r a i n. >> Okay. >> All right. Great. >> But you you made you made a very uh >> you made a valid point. You know, when I started on the business in the mid 80s, >> the strategist would go to the economist and would say, "Well, what's your GDP forecast so I could plug it into my model and come up with my S&P 500 target?" Mhm. >> Um, but you see today it's the economist that goes to the strategist and says, "Tell me what your S&P is flashing because I need that for my savings rate assumption so I could generate my consumption forecast to generate my GDP call." So, you're right. It's the uh what's the head and what's the tail. Um, there's always been a symbiotic relationship between the stock market, the economy, but now the causation runs in a completely different way than it did when I started on the business 40 years ago. the stock market is the stock market is >> the stock market's driving the economy and if you go back to the that last epic bubble that burst >> um you know back in uh 2000 uh remember the stock market rolled over uh and then the economy rolled over. >> Mhm. >> And so it's not just that the stock market is quotes a leading indicator it's the fact that it's so closely tied to consumer spending today. uh you know again when I started the business you learned about the capital structure you learned about uh what's on the balance sheet of company X is debt and equity and companies would actually issue equity uh to fund productivity enhancing expenditures well nobody's issuing equity today is you debt but you'll get whacked by your investor base if you ever issue equity if anything you get rewarded for buying back your equity >> no what's happened over time is that the stock market's become this speculative vehicle uh for the proletariat to get rich as quickly as possible. So that's why we talk about the wealth effect more than we ever have before. That's why unlike other decades, moves in the stock market like we've seen the past year, couple of years can trigger such a dramatic decline in the savings rate in support of spending. And you know, when I talk to a non-economist about the savings rate, you know, their eyes just glaze over. Like there's the professor economics 101 talking about the savings rate. But I would argue that it's the most um important behavioral aggregate in the national accounts at the margin spread across 140 million households. That decision at the margin, how much am I going to save or spend out of my after tax dollar? You multiply that over the population, it has a massive impact. massive on economic activity not a sustainable run at this trajectory over half the growth over half the growth over half the growth of the economy the past year you can trace back to what the stock market's doing and not what is doing to fund capital investment but to make people feel wealthier and then more comfortable to spend more of their current income that's been that that's the story that's not a presidential story that is a human behavior story. And that's what I say that if the stock market sputters, I'm not even saying going into a bare market. I'm just saying if it stops going up, the savings rate, which by the way today, call it roughly 3 and a half% is less than half where it was the pre-COVID norm. Imagine if we ever embark on a classic Bob Ferrell rule number one, mean reversion on the savings rate. Unless we have a personal income boom, we would have a significant consumer recession. >> Mhm. >> And what I'm trying to say here, not to scare anybody, but just to say that there's more fragility behind these economic aggress on Bloomberg and all you see is the headline. My contention is that there's more fragility behind those headlines than meets the eye. And if the stock market stops going up and the savings rate starts to go up and not down in the face of a labor market that is still showing cracks, it's not imploding. This no higher no fire labor market backdrop means we have just utter stagnation like no growth in employment in the past year. Is that a sustainable economic model? And then no growth in real disposable incomes beyond government handouts. Not a sustainable model to continue to grow the 70% of the economy called the consumer unless that savings rate just continues to go down. So so much of this hinges on what the stock market's going to be doing. >> All right. So obviously I'm going to get in a moment to where you think the stock market might be going, but let me just dig into these these risks of fragility that you're talking about here. So yeah, I was trying to get to a point your word that you just mentioned which was unsustainable which is as long as the stock market is doing well the people who own assets the the top leg of the this K-shaped economy well they can keep spending and it's that that party goes on for as long as the stock market continues to to rise the bottom half of the K which is sorry the bottom leg of the K it's much more than half it's I'm going to say just for arguments purposes let's say it's around 80%. they don't have the benefits of rising stock prices. So, as their saving rates go goes down, right, as they're basically funding their lifestyle from savings, there is an end date on that. That can't continue forever, right? That's not sustainable. >> Well, um there's actually two items worth noting. The first is 100% correct uh that that top 10 or 20% is carrying the load. They are spending freely uh because of their equity market wealth going up as much as it has. But you know that the bottom and even part of the middle class, they've been hanging on. They've been hanging on. Now they're not going out to restaurants, Beyonce Happy Meals and McDonald's. Uh they're not going on fancy trips. They're not going to the casinos. They're spending everything on necessities. And even there, they are barely hanging on. And what is keeping them sustained is credit. Like if you look at the data, credit card expansion has been incredible. and the buy now pay later, the BNPL, uh that is a huge craze that's been keeping the low and even the middle end intact. And that's something else that we have to consider because if it wasn't for the credit valves for the low end of the income spectrum, they have they'd be forced to cut their spending on the essentials like groceries, like food, uh toothpaste, soap, but they're hanging on. I mean, they are I mean, can you imagine the proliferation of these buy now pay later policies? Can you imagine that that that people you see I keep on hearing about the consumer resilience really like I'm at this stage and this what you're talking about digging beneath the surface that there are people out there and a lot of them that are making installments 40 installments on a pair of shoes think about that >> it's like financial life support right >> well all people talk about are the aggregates did you see GDP growth and they're thinking you know the um I guess the the really bare market is in economic analysis. Nobody wants it. They just want the head. Just give me the headline number. Um there is tremendous stress as I said before. Tremendous stress. I won't say strain. Stress is easier to pronounce. >> Mhm. um beneath the system. The lower end is only surviving right now on credit of all types at a time when you look at the delinquency rates in credit cards and auto loans and in personal loans. Now, by the way, even though it's at a low level, the percentage of residential mortgages in a rears is hooking up. Uh, and that's more for the middle class than the low end because the low end are renters. You go to the New York Fed's monthly survey, the consumer expectation survey, and you'll see the share of low-income households who say they cannot they will not they not expect it to meet their debt payment, their minimal debt payment next three months. That number is at the high end of the historical range. So the question then becomes for them is not the stock market. The question for them becomes at what point do the lenders to risky borrowers seeing delquency rates rise to their highest levels in 15 years >> right >> begin to choke off that credit. So I don't know what the date of any of this is. I don't know the stock market. You know look it's been a great run. I do believe that the market moves in cycles. There's no such thing as a permanent bull market. Mhm. >> Um and then what happens when these lenders start to uh pull back on their credit availability for the for the very low end? Well, don't forget because consumer spending on essentials stills up in GDP. So that's what we have in our hands. We have these two forces of play that have dragged down the savings rate because at the low end, don't forget credit cards and buy now pay later, they give you cash flow, but that cash flow does not count as income. that's not in the denominator >> uh of the savings rate calculation. So I'm thinking that there could be a couple of things that happen and and when I tell people say to me, what is it you're watching? Well, I'm watching this thing that tends to move glacially, but I'm looking for a reversal in this one particularly important aggregate that is very complex called the personal savings rate. And any sort of development, not even a shock, but a development that causes that to normalize, I mean to get back to the normal trend of the past five decades, unless we get the denominator personal incomes really accelerating, the mathematics are going to be a very weak consumer spending backdrop. And and so that's what I'm looking at. And I'll tell you why. because you know you you opened up uh this segment talking about the looming fiscal stimulus and the big beautiful bill. >> Well, the big part of the big beautiful bill was just not falling off the tax the the fiscal cliff by the extension of the tax cuts. But the refunds are all people are talking about. I I cannot believe how shortsighted and myopic our industry has become because that's the only questions I get. Can you give me what the GDP impact is going to be from the looming tax refunds? To which I say, sure. If that's what turns you on, you want me to give you a three month or two month forecast? >> Sure. Um, so I'd like to delve into the things that other people are looking at. Uh, where is the surprise going to be? What will the surprise be after these tax refunds? How much will be saved or spent? But what happens in the aftermath? So, I um have, shall we say, a rather skeptical view as to how the economy is going to play out with or without Donald Trump's policies. >> Okay. Um and tied to that then is obviously what's going to happen with AI capex spending going forward because that's been a big factor over recent years. Um before we get to that, let me just ask you this. Um, it's kind of a pessimistic question, but you know, you're talking here about the lower class and middle class that are really just kind of hanging on by their fingernails right now, right? They're draining down their savings. They're relying on things like buy now pay later, which, you know, I mentioned is sort of like financial life support. Um, does it re in the current economy that we have, does it really matter what happens to the bottom of the the bottom leg of the K? Meaning, you know, from from what I can tell, the the average number of consumer spending has been held up pretty okay, largely because the top end of the K just just spends a lot more above its weight. And as long as they're doing that, does it is it and I hate to say this because it sounds so uh cold-hearted, but is it almost immaterial what the bottom half of the K is doing? As long as this the the asset party is is raging enough that the top half of the K keeps their dominant spending going. >> I'd say that there's a lot of truth to that. Uh I just told you, you know, two narratives about why the savings rates going down. Uh I think that um the equity wealth effect on spending has been has been dominant and um you know the the low end I mean they're spending on necessities. They'll they'll they'd rather not have to share one plate of pasta with a family of four if they don't right >> if they don't need to. But they're you're right. So they'll do what they have to do to survive. They are borrowing to survive right now. uh because their job prospects are meek and wage growth in nominal terms is subsiding at a time when inflation has remained shall we say stubborn. So that's impacted their real incomes. Uh the high-end has been the dominant force. Make no mistake about that. Uh and that again comes down to why why has there been this shift in the curve of high-end consumer spending? It certainly wasn't happening in 2022 during the cyclical bare market, >> but it's been happening and then it's really accelerated just in the past year. Um and so uh the answer is uh yes it's been the equity market the impact it's had on wealth creation but not just the wealth creation but the psychology behind that that it's okay to continue to spend more and more of my after tax income maybe the savings rate gets to zero. Uh nothing says that mathematically it could even go negative, >> right? >> Um depending on as long as >> well so long as you know you you know just borrow your borrow your brains out. >> Um but what I'm trying to get at here is that's that's been the principle. It comes back to the opening question about I guess if you believe that Donald Trump was the principal source of the bull market in equities. Uh I don't really think any president including Ronald Reagan is that powerful uh that they can influence mother nature. The the markets will just move in cycles and the markets are incredibly driven by psychology. In fact, when you go back historically, you'll see that uh you know almost half of a typical bull market is multiple expansion, not earnings growth. >> And then in a bare market, 80% of the bull bare market is the multiple contracting. That's what um John Maynard Kanes famously coined uh animal spirits. Well, the economy isn't really driven by animal spirits um but the markets are and they're markets are more volatile >> and go into far more amplitude in terms of uh the magnitude of the cycle than the economy does. But you see, I would I would say that we've never reached a stage, especially now that 72% of the household financial the household sector financial uh ass uh balance sheet in terms of percent share of financial assets. 72% is an equity today. Um it's never been that high before. It's higher than it was during the com craze. So everybody is all in at the same time and everybody believes because you have a equity risk premium of zero or negative uh that everybody believes that equities have become a riskless asset class. That's going to be I think the big surprise is what happens if the you we talk about mean reversion. What happens if the equity risk premium mean reverted or the price earnings multiple mean reverted? >> Right. >> And so I the answer always is well valuations only matter when they matter. Yeah. and then you have your head sliced off, >> right? Um, so, um, what I'm saying is that this is not, as a, as an economist who is focused on the fundamentals, and maybe that's what gets me into trouble because when you have a situation where real organic, when I say organic, I mean net of government benefits, real organic after tax personal income is running zero year-over-year, But consumer spending is up two and a half to 3%. That is a wide divide. That is not a sustainable economic model. Uh I'd actually rather have it the other way around. I'd rather have incomes accelerating and consumption weakening so that I could say, "Hey, we're going to get catchup. Consumption's got to catch up to incomes." That hasn't happened yet, but that's why I'm bullish on the economy. >> But it's it's flipped. Like basically outside of the wealth effect, what drives consumer spending is real incomes. Real incomes are flat. So you see what I'm saying here is that flat real incomes 2 and a half% spending growth and that 2 and a half percentage point gap Adam is all the stock market >> equity wealth effect on spending. And if that goes away, you know, you'll be at zero in consumer spending growth and there won't be enough AI spending around to make up for that loss because AI is not 70% of GDP, nor will it ever be, but the consumer is. So that's really what's at stake here. What's at stake here? Uh, you know, so all I can say is who knows what the stock market's going to do. I mean, I have my views. There's a wide confidence around those views. But I'm just going to say if you're a macro bull, I wouldn't be pointing to Donald Trump's policies. I'd be praying if you're a macro bull. If you're praying for the Fed to not cut rates, you're praying for higher rates, uh, praying for an ongoing consumer spending binge, you better be hoping that this bull market is going to stay here for a long time because that's what's driving the biggest part of economic growth. >> All right. So, you're taking exactly where I was sort of building up to where the whole system right now seems to be spinning around pretty much just one axis, which is the market. uh and and the the the market's continued upward trajectory. So, you know, David, we're we're coming off of three years of pretty much 20 plus% returns in the markets. So, just statistically a fourth year being that good. Uh the odds are not high just statistically. Um now, you've got some reasons to be skeptical as as you've already mentioned here. Um, obviously if you're praying for this bull market to continue, you've really got to be praying for the kind of AI miracle to continue because so much of what's been driving the market has been the appreciation of the hyperscalers, you know, due to all of the cash flow that they're now directing towards buildouts of data centers and basically investing in one another and all that stuff. Now this year we've seen a little bit of or even we've seen notable capital rotation from growth say into value but now we got a bunch of value stocks that are hard to call value stocks because their pees are pretty stratospheric for those companies. So I guess David how how concerned are you that the bold party will not sustain throughout this year and then bring everything down with it? Well, look, the um you're right that we've had this rotation. Um but you see, the thing is that people think that they're rotating into other sectors of the stock market and and getting out of the tech trade, you know, but but they're all correlated. Uh I mean, now because of the implications for the for the power grid from building all these massive AI data centers, energy is connected now. I mean getting away from the war in Iran, energyy's become connected with uh the AI trade. Utilities become connected with the AI trade. Uh of course consumer discretionary through the equity wealth effect has been connected to the AI trade. Uh in in industrial products uh because of all the construction material uh that's been needed is all tied. So you see the things that very few sectors are not correlated with the AI trade. Uh you could point to REITs, you could point to healthcare, I think you can point to consumer staples. Um I mean that's pretty well it. It's all one giant correlated trade. And so I guess from my perspective, uh the complexion started changing a few months ago. uh and a lot of that is has been all these massive multi-billion dollar capital commitments which yes will provide a boost to GDP for this year. We'll see what happens next year. The question is now how much over capacity are we seeing? If you notice that companies that are now announcing these mega billion dollar capex plans a year ago, two years ago their stocks would fly. Their stocks are now going down. Their stocks are now starting to go down. the whole complexion has changed because now investors are starting to guess how much dilution is there going to be what is actually my what's my ROI going to be now >> uh from all this investment spending so now there's concerns about over capacity as you'd mentioned there's now new concerns about how this is affecting the disruption uh with other sectors uh across a wide gamut I think you are starting to see it by the way in many many segments of the labor market people are saying it's not AI is not in the labor market numbers. I I I don't know I don't know what data they're looking at. We haven't seen the peak yet, but it is starting to show up at least on the numbers that I'm looking at. Um but this has been a concern too that this is no longer you see what's happened is that AI is no longer a tide that lifts all the boats. >> All boats. Yeah. >> And so and so it's becoming uh you know much more selective and you know who are going to be the winners? uh who who's gonna who's going to you know I mean you can mention some large cap names in that space that will probably end up being a dominant player. Um, look, you can argue even that Nvidia's chips are special chips. They do have that monopolistic power. Um, you know, you mentioned before, yeah, uh, consumer staples. I've been a big fan of Walmart for years, but the multiple right now scares the be Jesus out of me when, you know, and and yet, you know, I mean, there's another defensive growth company trading, I think, at a very attractive multiple called Microsoft. uh and so look there's there's areas that you can point to but uh the whole complexion of that AI trade has changed and it'll be interesting to see if all these estimates of what the TAM is going to be you know the total addressable market what that size is going to be there's been so much money poured into this as usual this is what happens with every bubble and this is you always over >> I don't mean a bubble in a pjorative term this is actually this is uh about you know the exuberance the bubble is really more in investor behavior than it is in the actual technology. Um but then it does tend to lead to overcapacity and that's what ultimately triggers more of the deflation that people talk about productivity. you know, Kevin Morris talking about with the productivity, uh, that'll come down the road, the productivity, and they're thinking, well, what about the overcapacity, >> right? >> Because ultimately what what brought on the deflation after the tech wreck was the over capacity, uh, wasn't the productivity. That was a two-bit player, >> right? >> So, yeah. So, you know, you're taking a look, you've seen the churn of the market, and when you're looking at it, you know, I said before, the stock market just has to stop going up and really it stopped going up, you can say three or four months ago. I mean, heading into this uh conflict in the Middle East, the stock market really was hovering near the highs, but it wasn't making new highs anymore. >> I think right now, David, I think it's the same price it was at Halloween of last year. It's pretty much been flat. Yeah. >> Yeah. So, so this is where expectations come into it. Uh I I think that if you if you pulled most people, if you actually look at the survey data, uh most people still believe we're in a bull market, notwithstanding the fact that we both know that we've just flatlined. It's just been a gut-wrenching >> volatility and that was happening even before the war with Iran. >> So, it has to happen because when I talk about the savings rate, I say it's a behavioral aggregate. A lot of it comes down to expectations. So, it's not just what the stock market has been doing. It's when is there a realization that we've reached some sort of change in the not the regime. I don't mean the regime in Iran, but regime when you when the when when the when the general investing public starts to realize the bull market is over and that's a you and I agree on that and actually it looks like it's or maybe or maybe it's a resting spot. You see, most people believe we're just in a resting spot and heading to the next leg in the bull market. So that expectation that the bull market is still intact is what's still driving the savings rate lower even though as we said the stock market hasn't moved much in the past four months. Mhm. >> These deeply ingrained expectations and you see it in the markets still, right? Like even intraday during this the past few days of this conflict in the Middle East, >> you open up with the markets deep in the red and then it improves in the afternoon because the buy the dippers that mentality has become incredibly ingrained. Uh and it's when all the psychology begins to shift. The psychology is what drives the market multiple. People don't I hear about the earnings fundamentals. Yeah, I get it. But it's the the multiple dominates. The multiple dominates in bare markets and bull markets. And the multiple is just pure psychology. The savings rate is pure psychology. A lot we're talking about is pure psychology. But, you know, we hit extremes when you get to a 40 cape multiple. Um, the second highest on record. Um, a 2 and a half% real earnings yield on the S&P. When you get a 2.6% 6% real yield in the long bond. That's when I said before the the ERP is actually negative. Okay, that's very interesting. That's when you get so emboldened as an equity investor. They actually believe that equities have become a riskless asset class. You see, that's what the stock market investors believe and that's what they're telling you. And they think that they'll never be and and I'll tell you that there's this belief that mother nature doesn't ex exist anymore, that cycles don't exist anymore. recessions don't exist anymore. All those are relics of the past in this so-called new economy. It does remind me a lot of the rhetoric, by the way, in the late 1990s. >> Sure. >> So, I I can't I can't time it. I just like to sort of invest I I like to invest with the tailwind at my back instead of the headwind in my face. >> Uh I think that there are headwinds. >> Uh and that has nothing to do with the economy. Um but it has to do with valuations and it has to do with when is sentiment going to turn because sentiment is as off the charts as much as valuations are everything is you know everything is uh two we're not even talking about one standard deviation events they're two to three whether you're looking at sentiment or valuations or the concentration of equities and household balance sheets all these things have me very nervous because I do believe Bob Ferrell's mean reversion and Then my bigger concern is what this does to the economy. Cuz if it does hit the economy, everything we're talking about the stock market either going into a correction phase, bare market or stop going up cause the savings rate to go up that reduces consumer spending growth. That cuts into earnings. Then all of a sudden what is a multiple compression, say weakness in the stock market becomes an earnings driven weakness in the stock market. And then you get this self-reinforcing spiral which is a nobody's forecast. Nobody believes that could ever happen again. But um you know that's the risk when Humpty Dumpty falls off the wall. That that is the risk. That's the tail risk nobody's looking at. I'm not even talking about geopolitical tail risks. I'm not talking about that. I'm telling you probably in four weeks I'll turn extremely bullish on what's going to happen with the world. That's my own personal belief. But there's so many imbalances beneath the headlines. It bothers me actually that so many people just want the economists just give me the headline and then go away without trying to understand what it is that's driving those headlines. And I think that there is fragility. I said that before. Fragility and major imbalances in the economy. boom and AI capex, recession and nonAI capex. You still have lingering malaise in the housing market and commercial construction. Uh global trade is still in disarray that's been taken off the front pages because of what's happening in Iran. But global trade instability is still fully intact. Uh and then we have the consumer which is only alive because of the stock market. So all I'm saying is that things might continue to chug along. I'm just going to say that there are serious risks that it won't and I think that investors have to pay attention to the balance of risk around their forecast. I would feel a lot better. I said before, if this was an income driven, income driven consumer cycle, an employment-driven consumer cycle, I'd be feeling a lot better. But when I hear the Fed feeding the line about consumer resilience, which was like basically the opening line from Jay Powell at the podium after the last meeting, consumer resilience because the headline drives you to that conclusion without talking about how bizarre it is. is we have this resilience when we have a crappy labor market on our hands, no job growth in the past year, and no real organic income growth. Well, what's so resilient about that? I want the tables to be turned. By the way, when the tables do turn, which they normally do in an economic downturn, maybe this will be next year's story, and we get the gap the other way where consumption growth is lagging well behind income growth, I'll say, "Hey, look out. we're going to be in for a nice upcycled in the consumer, but that might be a 2027 story or 2028 story, >> right? >> Right now, I think people have to really comprehend that we are not in a stable equilibrium where incomes are rising, where consumer spending is rising with incomes. This is a rare period of economic history we have in our hands and principally because of what the stock market's doing. I don't know. That doesn't make me feel uh it keeps that keeps me on edge and it keeps me from being bullish on the economic outlook, those risks in particular. >> Okay. All right. I'm looking at the time, David. I've got three important questions to get through with you in the next 15 minutes or so. So, let's let's crunch on through. Given the importance of psychology in here, right, to keeping this thing going as you've been talking about, what are the indicators that you're looking at to try to determine when the sentiment shifts from, hey, this is just consolidation and and even better new highs are ahead to, oh god, this looks like a topping process and and we need to start thinking about all sorts of um outcomes that we haven't been thinking about yet. Well, you know, I I look I I I consume the survey data like it's nobody's business. So, there's the American Association of Individual Investors, the AI survey, and that's telling me about the general public, how they're feeling about about the market. Uh professional investors, I look at market vein. Uh I look at uh um the uh investors intelligence poll to tell me if and and that's what I mean. The even even when the market wobbles, these things don't change. tells me that we have really well-ingrained perception that a wobble is just a wobble. Uh that we're not at a reverse point in the market people. So I look at that as a sign of um tremendous resolve by professional investors, individual investors. So I I look primarily at the survey data um to look for whether or not people are building in an assumption that the bull market is over. And so that these survey data points are very important to me from a psychological standpoint. Those are the three AI, I market vein, and intelligence. That's all you need. And it's telling me that notwithstanding all the whatever angst, anxiety we get, um that psychology that the bull market's still intact, that hasn't gone away just yet. >> Okay. All right. Well, thank you. And it's it's great to give people these indicators that they can look at themselves as well. Okay. So, Iran, um how, if at all, is that changing your expectations for uh the rest of 2026? Well, you know, I I understand that there's a lot of air underneath the economic data. >> Mhm. >> Okay. Um I I don't trust an economy where there's no job growth. Um are we relying therefore all on productivity growth? You know, let me give you an example. the 1960s, you know, you got the uh microprocessing chips and when you look at the data, productivity is going 2 3%, employment growth is going 2 3%. You go to the 1970s, you know, with the mainframe and productivity 2 to three, employment growth 2 to 3%. You go to the 80s, you know, Microsoft Microsoft goes public in 1986. You get the software boom. Productivity is running 2%. Employment growth is running 2%. If you go to the internet, if you go to the peak of the tech boom in the first quarter of 2000, both productivity, employment growth is running 2%. >> Right now, we have 0% in employment and we have over 2% growth productivity. All the growth is coming from productivity. um giving another example of the imbalances in the economy. Um so this year could be great like you know we know we got the income tax refunds, we got the capital commitments and the hundreds of billions of dollars uh from AI. Uh I think the economy this year on average there I'm using averages um I think we should be okay. The second half of the year I'm a little concerned. 2027, I think there'll be an incredible vacuum because we'll be p we'll be past the peak of the AI spending boom. We will not know at that point how much overcapacity there there's going to be past the peak of fiscal stimulus. We'll probably have a change in the midterm. So, they're going to have split government, which means fiscal gridlock. And then it comes down to what's the stock market going to do? I have a view on the stock market. uh it's not particularly bullish but then again other people have a different view. Um, as I said before, you tell me your prediction on the stock market. I'll tell you where the savings rate's going and I'll tell you what happens to the consumer. But I'll just tell you this much that we should be very concerned about the Kshape to everything, especially the consumer from a social stability standpoint. We should be very concerned about an economy that's running on all the things we're talking about. uh I mean fiscal stimulus and uh AI spending with no with no job creation with no job creation. So, um, tough for me, you know, and believe me, I'm I'm I'm not in the recession camp any longer. I haven't been for a long time, but that doesn't reduce my concern that benchmarked against expectations, I think the economy second half of the year is going to seriously disappoint. You have so much priced in. The consensus is so wildly optimistic that you don't have to have a recession call. But if you get GDP growth the second half of the year running 1 to 2% and with that higher unemployment, that's going to be a big surprise to the markets and a big surprise to the Fed. And that's really really where I'm at right now. >> All right. Um, thank you again. The specificity is super helpful. Um, so uh you're you're not looking too good at least about the economy in the second half of this year. Um, all right. Rubber meets the roll road. um what type of investing strategy do you think is appropriate for the moment in time that we're in? You know, and are there particular assets that you particularly favor or would particularly stay away from given these conditions? >> Well, look, um one of my recent moves was to extend bond duration uh out to the 30-year because I like where real rates are. I like where real rates are and uh I have a very benign inflation outlook. Uh, I'm not nearly as nervous as a lot of the Fed hawks. So, uh, I like real rates and I like how bonds are valued against the stock market and I think inflation inflation expectations are going to drop measurably between now and the end of the year. So, >> I I like the Treasury market. I like all aspects of it. The front end I like as well because there's not enough Fed rate cuts priced in. The Fed has talked everybody out of it. Uh I'm on the other side of the trade as the FOMC Seahawks and I want and I like the long end. Um >> so so this is a gentleman prefer bonds. Uh >> yeah, exactly. Yeah, you you remember my uh my my title to the one actually I put I put that report out the day that the tenure touched 5% in October 2023. Um there's parts of the stock market uh that I like. Obviously, aerospace defense to to us has been a no-brainer and one of the few sectors to be going up through this conflict with Iran. Um, you know, we've been long utilities, healthcare, uh, energy, infrastructure, uh, in Canada, we've been favoring, uh, the pipelines. Um, but most of our equity concentration and and people should know that in the Rosie model portfolio, I'm not 0% in stocks. In fact, we're 50% equities. It's just that 15% of that has really been in the US. we have 35% in in Europe and Asia. Um and um notwithstanding the fact that Europe and Asia are more susceptible to the disruptions we've had because of the war and energy prices um we still like that diversification in those other markets because they command just superior valuations. So >> uh >> we like those um particular regions Europe and Asia. Uh we like US bonds. We bought recently we think there's too much inflation and RBA tightening so we bought Australian bonds and in the equity market you know we're very sector specific so like I said um the hard assets that spin off a revenue stream uh we're very cash flow sensitive so like I said the pipelines the utilities energy infrastructure uh we do like healthcare we've been there yeah equal weight again one of our recent moves was into the equal weight consumer staple sector we like consumer staples we just don't want to we don't want to own like two names Costco and Walmart. So we did and the equal weight uh consumer staples. So it's a very shall we say defensively structured yield oriented capital preservation type of uh asset mix that we have right now. >> Okay. Do you have any gold in there? Obviously I forgot to mention but doesn't have a yield. >> Good point. Well, I I didn't want Now you're going to get me carried away. We're going to spend another hour talking about gold. In fact, we were at the gold we were at the gold conference. We have trimmed our exposure. Uh we when silver started looking like a dot stock >> just around the time of the conference and we blew out our silver and silver miners, but we're still uh we're still somewhere between uh 5 and 10% on gold and the gold miners. Uh it used to be higher. Um but here's you know this as well as I do that you don't make money till you book a profit, >> right? >> Uh so uh we've done that in in gold. We're still, we like gold. We're just not uh we don't we don't adore it as much as we used to. >> Okay. >> But I'll just tell you this much. I'll tell you this much. Okay? Depending what happens in the Middle East, this could be a game changer for me. Okay? You might want to have me on in a month or two. Uh cuz um there's a risk depending on how this goes that I become a permable. >> Okay. And and obviously I'm assuming if if things go really well, you become a permable. >> Uh well, I'm putting out a report where I'm saying we don't have to win the gold medal. The silver medal will be just fine. If we can uh you know, if you if you if you're at the safari and you confront the tiger, but the tiger has no teeth and no claws, you don't have to run away just because just because it roars at you. >> Mhm. Um, so the silver medal is basically that Iran does not the Iranian regime. Um, because this it might not go away. Uh, and I'm not really don't know anything about regime change. That's that's difficult to do from the air. >> Yeah. >> But defanging the root of evil on the planet and then the next thing that happens is the Abraham Accords. When you think about bringing Iran into the global order, uh 90 million people, young, vibrant, educated population, bringing them into I I mean, this is um this is this could be really big stuff. Bringing Iran into the world economic order and not just that, but then paving the way for at least say economic relationships between Israel and the Gulf countries, other Arab countries. Well, I could tell you we could be talking in a month time that I'm redoing my whole asset mix based on what happens out of this because I I won't have any desire. I I I have no satisfaction owning global aerospace defense. In fact, I hate owning it, but I do it because we want to make money. I I would love to have an excuse to take that position off. So, there you have an incentive to get me back on sooner than six months. Okay. >> All right. Uh, and we'll we'll call that the turning these swords into plowshares Rosenberg investment strategy. Um, so David, absolutely. So, first off, I I absolutely that's a deal. I hope we are able to have you back on in a month, meaning I hope things go as well as you're hoping for. And if I can, I'd like to expand that discussion to not just include Iran potentially starting to normalize relations with the wealth with the West um and you know uh better trade inside the Gulf and stuff like that. But let's also add the impact. We'll just dream for a moment. Let's also assume the board of peace uh has uh its desired outcome and that the aggressive hostilities between Israel and Gaza largely get tamped down and let's assume that things go well with Venezuela and let's assume as is being talked now that uh Cuba maybe has a friendly change in regime. What does that world look like and what investment themes come out of all that? So if that's of interest to you, I'd really love to have that conversation. >> Absolutely. Look, it's all it's all peace is a good thing. And um the one thing I'll say with reference that I didn't mention before is what what what what could come out of this? Imagine if the geopolitical risk premium in the oil price comes out permanently. >> Mhm. >> Uh and um all this will lead all everything that I'm thinking about right now is going to lead to lower oil prices. Donald Trump. But the question is, will it come a time for the midterms for Donald Trump? >> Well, but then but then, but then you'll have me back on and I'll say, okay, I'm going to go back and say, yes, there was one presidential policy that >> indirectly led to much lower oil prices without having to drill, baby drill. Mhm. >> And that's a successful resolution out of this war with Iran because we take out the geopolitical uh risk premode of oil. We end up getting more production more production and then Iranian production uh in the world supply and then uh it's you know I'll probably do another shift out of my uh oil out of my energy exposure. >> Uh there's some things I wouldn't mind. I'd like to do a a shift, a real meaningful shift, but that will breathe life into real purchasing power. Uh that might get me bullish on the low-end consumer. Uh I mean, mind you, they don't drive. So, uh but lower oil prices are good for consumers everywhere. Even in the energy producing countries like Canada, consumers love lower energy prices. >> Well, it reduces cost of living, but it also boosts economic growth. job process get better and keep up what you earn. >> Like like I said, you um you had me on in the opening days of uh of this conflict. >> Um but things could change. So, and I would love to come back cuz you know what? I tell you the truth. I love talking with you. Always have. >> Right back at you, my friend. Um and you know what we didn't even put on our list there, and this could be very oil friendly, too, is a negotiated piece to the war in Ukraine. And if Russia starts normalizing its relationships with the rest of the world and its oil stops getting embargoed, that just adds even more tailwinds there. So, so let's all hope for that, my friend. And and I hope I have you back on in a week to in a month to discuss all this. Um, last question, but the most important for folks that would like to follow you and your work, David, in between now and your next appearance here, where should they go? Well, uh, you could either email me directly at drosenbergosenberressearch.com or just go to the website, Google Rosenberg research. Uh, you could go to information roenbergressearch.com if you want to sign on for a free trial. Uh, we'd love you to kick our tires. Uh, but if you have any questions or comments for me personally coming out of this, uh, I'd love to hear your feedback. Uh, D. Rosenberg of rosen roenbergress research.com and uh and I'll get back to you. >> Uh you are a very generous and very courageous man to share your email address uh publicly. >> I but I won't I won't share my phone number because uh that's getting that might get a little too personal. >> That's that's very wise I think. Um well David look when I edit this as normal I will put up the links to all that folks. The links will also be in the description below this video. All right. Well, folks, look, please join me in thanking David for giving us so much of his time and expertise today. Uh, so much specificity around which assets he thinks are a good fit for this market environment. Uh, to show that appreciation, please join me in just hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it. Um, I also uh two things. one, if you uh would like to get some help from a professional financial adviser in perhaps putting into practice some of the things that David has mentioned here, uh if you don't already have a good professional adviser who's uh already advising you, um then recommend that you consider scheduling a free consultation with one of the ones that Thoughtful Money endorses. These are the firms you see with me on this channel every week. Uh to set up one of those free consultations, just fill out the very short form at thoughtfulmoney.com. only takes you a couple seconds to fill out the form. As a reminder, these consultations are totally free. There's no commitments involved. It's just a service these firms offer to help as many people as possible. Also, I just want to let you know that um there's only a couple days left after this video airs uh to lock in your tickets to the upcoming Thoughtful Money Spring Conference at the lowest early bird price discount that we're offering. So, if you haven't already bought your ticket, run now. Don't walk to thoughtfulmoney.com/conference and buy your ticket now at that lowest early bird price. Um, if you are a premium subscriber to our Substack, you'll also receive an additional $50 off of that price by entering the discount code that I've emailed you. So, check your email inbox for that. As a reminder, the conference itself is taking place on Saturday, March 21st. Don't worry if you can't watch the event live that day. Everybody who buys a ticket is going to be sent replay videos of the entire event, all the presentations, all the live Q&A uh within hours of the event's conclusion. And uh as I've said many times already, this is the absolute best faculty we've ever had and it probably may be the most timely conference we we've ever done. Um especially given the recent events that are going on with Iran. Um the faculty includes the great Lacy Hunt who will be kicking it off with his traditional keynote. He'll be walking through uh a whole new set of slides offering his typical graduate level walkthrough of what's happening in the macro economy. Uh he'll be joined by first- timerrs Ed Dow, Michael Oliver, and journalist Matt Taibbe. Um, we'll also be joined by Luke Groman and Brent Johnson, by uh Stephanie Palmboy and Grant Williams, by Michael How the liquidity expert and Darius Dale, uh, by Judy Shelton and Danielle Timino Booth, um, by Rick Rule, by Andy Sheckchman, by uh, David Haye, by Melody Wright, I think there's one or two others, Lyn Alden, uh, and still one or two others whose names I think I'm forgetting, but as you can see, it is just an absolutely fantastic powerp packed faculty. Really hope you can join us that day. So again, make sure that you if you haven't bought yet, go right now after this video ends to thoughtfulmoney.com/conference. David, I can't thank you enough. Um it's always such a pleasure to talk to you, my friend. Um like I said, let's hope we see you in in a month for all those good reasons. >> Good. I hope so, too. Okay. All the best, Adam. Good seeing you, buddy. >> You, too. Everybody else, thanks so much for watching.
"Significant Strain" Ahead For The Economy | David Rosenberg
Summary
Transcript
The big risk for the economy is what happens to the stock market. Because if the high-end stop spending on luxury goods and uh high-end restaurants and cruise lines um and cyclical spending, if that dries up because the stock market doesn't continue to play ball, I think this economy, especially in the second half of the year when a lot of the short-term stimulus falls by the wayside, uh is going to be showing some significant strength. Welcome to thoughtful money. I'm its founder and your host, Adam Tagert. The administration tells us that a new golden age for the American economy is now underway and that we should see substantial material incremental GDP growth this year from the policies that it put in place through acts like the one big beautiful bill, tax relief, deregulation, tariffs, and new trade deals purporting to bring trillions of new dollars of foreign investment into the US. Today's guest, however, is much more skeptical of the promise of these policies as well as the overall prospects for the economy. And now the US is at war with Iran. How will that impact the situation? For guidance, we turn to the highly respected economist and award-winning researcher David Rosenberg, founder and president of Rosenberg Research. David, thanks so much for joining us today. >> Great to see you again, Adam. Thanks for having me on. >> Hey, uh, my pleasure. I'm very excited for this. Um, we got to hang out in person in January, I think it was, at the Vancouver Resource Investment Conference and we were actually on a panel together and I kind of I kind of knew the end of the panel sort of pitched this softball about the administration's policies cuz I kind of figured it was going to be like a big juicy red steak for you and it certainly proved to be that way. We just didn't have a lot of time to talk about it in the remainder of that panel. So, I wanted to bring you back here on the channel to give you as much time uh to uh to elaborate on it as you want. So, why don't why don't we start there, David. Um why are you so skeptical of the administration's um of their purported coming benefits of their economic policies? >> Well, you know, it uh it really depends on your time horizon. You know, if you're going to ask me, are we going to be getting decent growth in the next couple of quarters? The answer is yes. So, I'm not going to totally dismiss the impact of the income tax refunds, uh, which are significant. Uh, the question will be how much of that will find its way into the economy. Uh, but that's really a a temporary boost, right? that that is not something that any investor should be capitalizing. Uh it's not a permanent tax cut. It's just a withholding tables uh allowing for these refunds that'll give us, you know, 2 3 4 months of some better retail sales activity. Um but then that's just going to borrow growth into the present from the future. So I think the second half of the year we're going to have a bit of a vacuum on that side. So this is not like the cash giveaway from Uncle Sam to the proletariat back in 2020 2021 which is a a gift they kept on giving. >> So this will have an immediate but short-term boost to the economy. >> The other aspect which has really nothing to do with the administration. I don't believe that the bonus depreciation allowance is going to lead to a phenomenal incremental increase in capital spending. Our work has shown that the impact you really measure in basis points, not percentage points. But you know, there's a lot of camouflage out there, Adam, because you can point to the economic numbers and say as a politician or a president, well, look at what my policies have done. Um but I don't think that the introduction and advent and proliferation of generative AI uh and chat GPT happening towards the end of 2022 which put an end to the cyclical bare market equities of the time. I don't think you can say, "Oh, well, President Trump is responsible for the AI boom uh any more than, you know, President Clinton could say, well, I created the internet boom because I was around in the mid 1990s." Uh, evolution is evolution, and inflection points on the technology curve uh can happen with anybody in office, Democrat or Republican. That's just the beauty of the uh ingenuity and creativity of the US economy. The bottom line is that if you strip out the AI boom, you actually have a recession in old economy capital spending. Uh I mean we got those fourth quarter GDP numbers. Uh industrial sector capex was actually negative. Um, so what we don't talk about is how this AI boom, as strong as it is, is diverting resources away from other parts of capital spending. So that's the first point I would make is that we do have an AI boom. And I'll tell you right now that a recession is probably off the table uh for the next several quarters uh just from all these spending commitments alone. That has nothing to do with the president's policies. Uh and then on top of that we have up until just the past little while we had an unrelenting bull market in equities. Uh and so even in the face of what you can really acknowledge is a very soggy labor market. I mean in the past year there's been practically no growth in employment. Whether you look at the non-farm payroll survey or you look at the ADP survey there's been almost no growth in employment. Um but yet consumer spending has been chugging along at call at it roughly a 2 and a.5% annual rate and that's with practically no job growth when you smooth out the monthly wiggles and real organic disposable income growth has also been close to zero. So what's happening here that you have this widening gap between incomes and spending which means that the savings rate has been on an epic downtrend and that's been the primary source of support for the economy uh is the fact that um spending has hung in and primarily because of the equity wealth effect for the top 10% but that's the equity market speaking uh that's not about the president um I mean the stock market did just as well under Bill Clinton, if not better, and under Barack Obama than it did under President Trump. That's not about the president. So, we have an epic drop in the savings rate. That's accounted for half the economic growth since last spring. And you have the AI spending boom. H. And so, that's the story of vitality in the US economy. And so, my answer back to you then in Vancouver and today is that none of this has to do with presidential policy. If you're going to talk to me about the success of presidential policy, explain to me how it is that if there's one item, of course, to his personal benefit and his family's benefit, which has been crypto, if Donald Trump has been so successful, uh why to this day is, you know, Bitcoin still roughly 50% below where it was last fall, like >> has that been successful? I don't think so. So, the economy is doing what it's doing. Uh I think actually we get wrapped up in the AI craze uh which is definitely adding to GDP growth but when you do the bean count on the economy and the major contribution has really come from the equity wealth effect on spending at the high end that's been over half the GDP growth over the course of the past year that has been absolutely monumental. Um, so the big risk for the economy is what happens to the stock market because if the high-end stops spending on luxury goods and uh high-end restaurants and uh cruise lines um and cyclical spending, if that dries up because the stock market doesn't continue to play ball, I think this economy, especially in the second half of the year when a lot of the short-term stimulus falls by the wayside, uh is going to be showing some significant constraint. >> Okay. Um uh All right. Sorry, I just want to make sure I caught your last point there. Um I I I heard you saying that the um big risk to the economy is what happens to the stock market. Uh because obviously, uh that sort of has become the tail that's been wagging the dog. Um and if there is weakness in the stock market, I think you expect to see economic weakness. I thought I heard you use the word economic strength. Did you mean that or >> strain? strain. >> Strength. >> S r a i n. >> Okay. >> All right. Great. >> But you you made you made a very uh >> you made a valid point. You know, when I started on the business in the mid 80s, >> the strategist would go to the economist and would say, "Well, what's your GDP forecast so I could plug it into my model and come up with my S&P 500 target?" Mhm. >> Um, but you see today it's the economist that goes to the strategist and says, "Tell me what your S&P is flashing because I need that for my savings rate assumption so I could generate my consumption forecast to generate my GDP call." So, you're right. It's the uh what's the head and what's the tail. Um, there's always been a symbiotic relationship between the stock market, the economy, but now the causation runs in a completely different way than it did when I started on the business 40 years ago. the stock market is the stock market is >> the stock market's driving the economy and if you go back to the that last epic bubble that burst >> um you know back in uh 2000 uh remember the stock market rolled over uh and then the economy rolled over. >> Mhm. >> And so it's not just that the stock market is quotes a leading indicator it's the fact that it's so closely tied to consumer spending today. uh you know again when I started the business you learned about the capital structure you learned about uh what's on the balance sheet of company X is debt and equity and companies would actually issue equity uh to fund productivity enhancing expenditures well nobody's issuing equity today is you debt but you'll get whacked by your investor base if you ever issue equity if anything you get rewarded for buying back your equity >> no what's happened over time is that the stock market's become this speculative vehicle uh for the proletariat to get rich as quickly as possible. So that's why we talk about the wealth effect more than we ever have before. That's why unlike other decades, moves in the stock market like we've seen the past year, couple of years can trigger such a dramatic decline in the savings rate in support of spending. And you know, when I talk to a non-economist about the savings rate, you know, their eyes just glaze over. Like there's the professor economics 101 talking about the savings rate. But I would argue that it's the most um important behavioral aggregate in the national accounts at the margin spread across 140 million households. That decision at the margin, how much am I going to save or spend out of my after tax dollar? You multiply that over the population, it has a massive impact. massive on economic activity not a sustainable run at this trajectory over half the growth over half the growth over half the growth of the economy the past year you can trace back to what the stock market's doing and not what is doing to fund capital investment but to make people feel wealthier and then more comfortable to spend more of their current income that's been that that's the story that's not a presidential story that is a human behavior story. And that's what I say that if the stock market sputters, I'm not even saying going into a bare market. I'm just saying if it stops going up, the savings rate, which by the way today, call it roughly 3 and a half% is less than half where it was the pre-COVID norm. Imagine if we ever embark on a classic Bob Ferrell rule number one, mean reversion on the savings rate. Unless we have a personal income boom, we would have a significant consumer recession. >> Mhm. >> And what I'm trying to say here, not to scare anybody, but just to say that there's more fragility behind these economic aggress on Bloomberg and all you see is the headline. My contention is that there's more fragility behind those headlines than meets the eye. And if the stock market stops going up and the savings rate starts to go up and not down in the face of a labor market that is still showing cracks, it's not imploding. This no higher no fire labor market backdrop means we have just utter stagnation like no growth in employment in the past year. Is that a sustainable economic model? And then no growth in real disposable incomes beyond government handouts. Not a sustainable model to continue to grow the 70% of the economy called the consumer unless that savings rate just continues to go down. So so much of this hinges on what the stock market's going to be doing. >> All right. So obviously I'm going to get in a moment to where you think the stock market might be going, but let me just dig into these these risks of fragility that you're talking about here. So yeah, I was trying to get to a point your word that you just mentioned which was unsustainable which is as long as the stock market is doing well the people who own assets the the top leg of the this K-shaped economy well they can keep spending and it's that that party goes on for as long as the stock market continues to to rise the bottom half of the K which is sorry the bottom leg of the K it's much more than half it's I'm going to say just for arguments purposes let's say it's around 80%. they don't have the benefits of rising stock prices. So, as their saving rates go goes down, right, as they're basically funding their lifestyle from savings, there is an end date on that. That can't continue forever, right? That's not sustainable. >> Well, um there's actually two items worth noting. The first is 100% correct uh that that top 10 or 20% is carrying the load. They are spending freely uh because of their equity market wealth going up as much as it has. But you know that the bottom and even part of the middle class, they've been hanging on. They've been hanging on. Now they're not going out to restaurants, Beyonce Happy Meals and McDonald's. Uh they're not going on fancy trips. They're not going to the casinos. They're spending everything on necessities. And even there, they are barely hanging on. And what is keeping them sustained is credit. Like if you look at the data, credit card expansion has been incredible. and the buy now pay later, the BNPL, uh that is a huge craze that's been keeping the low and even the middle end intact. And that's something else that we have to consider because if it wasn't for the credit valves for the low end of the income spectrum, they have they'd be forced to cut their spending on the essentials like groceries, like food, uh toothpaste, soap, but they're hanging on. I mean, they are I mean, can you imagine the proliferation of these buy now pay later policies? Can you imagine that that that people you see I keep on hearing about the consumer resilience really like I'm at this stage and this what you're talking about digging beneath the surface that there are people out there and a lot of them that are making installments 40 installments on a pair of shoes think about that >> it's like financial life support right >> well all people talk about are the aggregates did you see GDP growth and they're thinking you know the um I guess the the really bare market is in economic analysis. Nobody wants it. They just want the head. Just give me the headline number. Um there is tremendous stress as I said before. Tremendous stress. I won't say strain. Stress is easier to pronounce. >> Mhm. um beneath the system. The lower end is only surviving right now on credit of all types at a time when you look at the delinquency rates in credit cards and auto loans and in personal loans. Now, by the way, even though it's at a low level, the percentage of residential mortgages in a rears is hooking up. Uh, and that's more for the middle class than the low end because the low end are renters. You go to the New York Fed's monthly survey, the consumer expectation survey, and you'll see the share of low-income households who say they cannot they will not they not expect it to meet their debt payment, their minimal debt payment next three months. That number is at the high end of the historical range. So the question then becomes for them is not the stock market. The question for them becomes at what point do the lenders to risky borrowers seeing delquency rates rise to their highest levels in 15 years >> right >> begin to choke off that credit. So I don't know what the date of any of this is. I don't know the stock market. You know look it's been a great run. I do believe that the market moves in cycles. There's no such thing as a permanent bull market. Mhm. >> Um and then what happens when these lenders start to uh pull back on their credit availability for the for the very low end? Well, don't forget because consumer spending on essentials stills up in GDP. So that's what we have in our hands. We have these two forces of play that have dragged down the savings rate because at the low end, don't forget credit cards and buy now pay later, they give you cash flow, but that cash flow does not count as income. that's not in the denominator >> uh of the savings rate calculation. So I'm thinking that there could be a couple of things that happen and and when I tell people say to me, what is it you're watching? Well, I'm watching this thing that tends to move glacially, but I'm looking for a reversal in this one particularly important aggregate that is very complex called the personal savings rate. And any sort of development, not even a shock, but a development that causes that to normalize, I mean to get back to the normal trend of the past five decades, unless we get the denominator personal incomes really accelerating, the mathematics are going to be a very weak consumer spending backdrop. And and so that's what I'm looking at. And I'll tell you why. because you know you you opened up uh this segment talking about the looming fiscal stimulus and the big beautiful bill. >> Well, the big part of the big beautiful bill was just not falling off the tax the the fiscal cliff by the extension of the tax cuts. But the refunds are all people are talking about. I I cannot believe how shortsighted and myopic our industry has become because that's the only questions I get. Can you give me what the GDP impact is going to be from the looming tax refunds? To which I say, sure. If that's what turns you on, you want me to give you a three month or two month forecast? >> Sure. Um, so I'd like to delve into the things that other people are looking at. Uh, where is the surprise going to be? What will the surprise be after these tax refunds? How much will be saved or spent? But what happens in the aftermath? So, I um have, shall we say, a rather skeptical view as to how the economy is going to play out with or without Donald Trump's policies. >> Okay. Um and tied to that then is obviously what's going to happen with AI capex spending going forward because that's been a big factor over recent years. Um before we get to that, let me just ask you this. Um, it's kind of a pessimistic question, but you know, you're talking here about the lower class and middle class that are really just kind of hanging on by their fingernails right now, right? They're draining down their savings. They're relying on things like buy now pay later, which, you know, I mentioned is sort of like financial life support. Um, does it re in the current economy that we have, does it really matter what happens to the bottom of the the bottom leg of the K? Meaning, you know, from from what I can tell, the the average number of consumer spending has been held up pretty okay, largely because the top end of the K just just spends a lot more above its weight. And as long as they're doing that, does it is it and I hate to say this because it sounds so uh cold-hearted, but is it almost immaterial what the bottom half of the K is doing? As long as this the the asset party is is raging enough that the top half of the K keeps their dominant spending going. >> I'd say that there's a lot of truth to that. Uh I just told you, you know, two narratives about why the savings rates going down. Uh I think that um the equity wealth effect on spending has been has been dominant and um you know the the low end I mean they're spending on necessities. They'll they'll they'd rather not have to share one plate of pasta with a family of four if they don't right >> if they don't need to. But they're you're right. So they'll do what they have to do to survive. They are borrowing to survive right now. uh because their job prospects are meek and wage growth in nominal terms is subsiding at a time when inflation has remained shall we say stubborn. So that's impacted their real incomes. Uh the high-end has been the dominant force. Make no mistake about that. Uh and that again comes down to why why has there been this shift in the curve of high-end consumer spending? It certainly wasn't happening in 2022 during the cyclical bare market, >> but it's been happening and then it's really accelerated just in the past year. Um and so uh the answer is uh yes it's been the equity market the impact it's had on wealth creation but not just the wealth creation but the psychology behind that that it's okay to continue to spend more and more of my after tax income maybe the savings rate gets to zero. Uh nothing says that mathematically it could even go negative, >> right? >> Um depending on as long as >> well so long as you know you you know just borrow your borrow your brains out. >> Um but what I'm trying to get at here is that's that's been the principle. It comes back to the opening question about I guess if you believe that Donald Trump was the principal source of the bull market in equities. Uh I don't really think any president including Ronald Reagan is that powerful uh that they can influence mother nature. The the markets will just move in cycles and the markets are incredibly driven by psychology. In fact, when you go back historically, you'll see that uh you know almost half of a typical bull market is multiple expansion, not earnings growth. >> And then in a bare market, 80% of the bull bare market is the multiple contracting. That's what um John Maynard Kanes famously coined uh animal spirits. Well, the economy isn't really driven by animal spirits um but the markets are and they're markets are more volatile >> and go into far more amplitude in terms of uh the magnitude of the cycle than the economy does. But you see, I would I would say that we've never reached a stage, especially now that 72% of the household financial the household sector financial uh ass uh balance sheet in terms of percent share of financial assets. 72% is an equity today. Um it's never been that high before. It's higher than it was during the com craze. So everybody is all in at the same time and everybody believes because you have a equity risk premium of zero or negative uh that everybody believes that equities have become a riskless asset class. That's going to be I think the big surprise is what happens if the you we talk about mean reversion. What happens if the equity risk premium mean reverted or the price earnings multiple mean reverted? >> Right. >> And so I the answer always is well valuations only matter when they matter. Yeah. and then you have your head sliced off, >> right? Um, so, um, what I'm saying is that this is not, as a, as an economist who is focused on the fundamentals, and maybe that's what gets me into trouble because when you have a situation where real organic, when I say organic, I mean net of government benefits, real organic after tax personal income is running zero year-over-year, But consumer spending is up two and a half to 3%. That is a wide divide. That is not a sustainable economic model. Uh I'd actually rather have it the other way around. I'd rather have incomes accelerating and consumption weakening so that I could say, "Hey, we're going to get catchup. Consumption's got to catch up to incomes." That hasn't happened yet, but that's why I'm bullish on the economy. >> But it's it's flipped. Like basically outside of the wealth effect, what drives consumer spending is real incomes. Real incomes are flat. So you see what I'm saying here is that flat real incomes 2 and a half% spending growth and that 2 and a half percentage point gap Adam is all the stock market >> equity wealth effect on spending. And if that goes away, you know, you'll be at zero in consumer spending growth and there won't be enough AI spending around to make up for that loss because AI is not 70% of GDP, nor will it ever be, but the consumer is. So that's really what's at stake here. What's at stake here? Uh, you know, so all I can say is who knows what the stock market's going to do. I mean, I have my views. There's a wide confidence around those views. But I'm just going to say if you're a macro bull, I wouldn't be pointing to Donald Trump's policies. I'd be praying if you're a macro bull. If you're praying for the Fed to not cut rates, you're praying for higher rates, uh, praying for an ongoing consumer spending binge, you better be hoping that this bull market is going to stay here for a long time because that's what's driving the biggest part of economic growth. >> All right. So, you're taking exactly where I was sort of building up to where the whole system right now seems to be spinning around pretty much just one axis, which is the market. uh and and the the the market's continued upward trajectory. So, you know, David, we're we're coming off of three years of pretty much 20 plus% returns in the markets. So, just statistically a fourth year being that good. Uh the odds are not high just statistically. Um now, you've got some reasons to be skeptical as as you've already mentioned here. Um, obviously if you're praying for this bull market to continue, you've really got to be praying for the kind of AI miracle to continue because so much of what's been driving the market has been the appreciation of the hyperscalers, you know, due to all of the cash flow that they're now directing towards buildouts of data centers and basically investing in one another and all that stuff. Now this year we've seen a little bit of or even we've seen notable capital rotation from growth say into value but now we got a bunch of value stocks that are hard to call value stocks because their pees are pretty stratospheric for those companies. So I guess David how how concerned are you that the bold party will not sustain throughout this year and then bring everything down with it? Well, look, the um you're right that we've had this rotation. Um but you see, the thing is that people think that they're rotating into other sectors of the stock market and and getting out of the tech trade, you know, but but they're all correlated. Uh I mean, now because of the implications for the for the power grid from building all these massive AI data centers, energy is connected now. I mean getting away from the war in Iran, energyy's become connected with uh the AI trade. Utilities become connected with the AI trade. Uh of course consumer discretionary through the equity wealth effect has been connected to the AI trade. Uh in in industrial products uh because of all the construction material uh that's been needed is all tied. So you see the things that very few sectors are not correlated with the AI trade. Uh you could point to REITs, you could point to healthcare, I think you can point to consumer staples. Um I mean that's pretty well it. It's all one giant correlated trade. And so I guess from my perspective, uh the complexion started changing a few months ago. uh and a lot of that is has been all these massive multi-billion dollar capital commitments which yes will provide a boost to GDP for this year. We'll see what happens next year. The question is now how much over capacity are we seeing? If you notice that companies that are now announcing these mega billion dollar capex plans a year ago, two years ago their stocks would fly. Their stocks are now going down. Their stocks are now starting to go down. the whole complexion has changed because now investors are starting to guess how much dilution is there going to be what is actually my what's my ROI going to be now >> uh from all this investment spending so now there's concerns about over capacity as you'd mentioned there's now new concerns about how this is affecting the disruption uh with other sectors uh across a wide gamut I think you are starting to see it by the way in many many segments of the labor market people are saying it's not AI is not in the labor market numbers. I I I don't know I don't know what data they're looking at. We haven't seen the peak yet, but it is starting to show up at least on the numbers that I'm looking at. Um but this has been a concern too that this is no longer you see what's happened is that AI is no longer a tide that lifts all the boats. >> All boats. Yeah. >> And so and so it's becoming uh you know much more selective and you know who are going to be the winners? uh who who's gonna who's going to you know I mean you can mention some large cap names in that space that will probably end up being a dominant player. Um, look, you can argue even that Nvidia's chips are special chips. They do have that monopolistic power. Um, you know, you mentioned before, yeah, uh, consumer staples. I've been a big fan of Walmart for years, but the multiple right now scares the be Jesus out of me when, you know, and and yet, you know, I mean, there's another defensive growth company trading, I think, at a very attractive multiple called Microsoft. uh and so look there's there's areas that you can point to but uh the whole complexion of that AI trade has changed and it'll be interesting to see if all these estimates of what the TAM is going to be you know the total addressable market what that size is going to be there's been so much money poured into this as usual this is what happens with every bubble and this is you always over >> I don't mean a bubble in a pjorative term this is actually this is uh about you know the exuberance the bubble is really more in investor behavior than it is in the actual technology. Um but then it does tend to lead to overcapacity and that's what ultimately triggers more of the deflation that people talk about productivity. you know, Kevin Morris talking about with the productivity, uh, that'll come down the road, the productivity, and they're thinking, well, what about the overcapacity, >> right? >> Because ultimately what what brought on the deflation after the tech wreck was the over capacity, uh, wasn't the productivity. That was a two-bit player, >> right? >> So, yeah. So, you know, you're taking a look, you've seen the churn of the market, and when you're looking at it, you know, I said before, the stock market just has to stop going up and really it stopped going up, you can say three or four months ago. I mean, heading into this uh conflict in the Middle East, the stock market really was hovering near the highs, but it wasn't making new highs anymore. >> I think right now, David, I think it's the same price it was at Halloween of last year. It's pretty much been flat. Yeah. >> Yeah. So, so this is where expectations come into it. Uh I I think that if you if you pulled most people, if you actually look at the survey data, uh most people still believe we're in a bull market, notwithstanding the fact that we both know that we've just flatlined. It's just been a gut-wrenching >> volatility and that was happening even before the war with Iran. >> So, it has to happen because when I talk about the savings rate, I say it's a behavioral aggregate. A lot of it comes down to expectations. So, it's not just what the stock market has been doing. It's when is there a realization that we've reached some sort of change in the not the regime. I don't mean the regime in Iran, but regime when you when the when when the when the general investing public starts to realize the bull market is over and that's a you and I agree on that and actually it looks like it's or maybe or maybe it's a resting spot. You see, most people believe we're just in a resting spot and heading to the next leg in the bull market. So that expectation that the bull market is still intact is what's still driving the savings rate lower even though as we said the stock market hasn't moved much in the past four months. Mhm. >> These deeply ingrained expectations and you see it in the markets still, right? Like even intraday during this the past few days of this conflict in the Middle East, >> you open up with the markets deep in the red and then it improves in the afternoon because the buy the dippers that mentality has become incredibly ingrained. Uh and it's when all the psychology begins to shift. The psychology is what drives the market multiple. People don't I hear about the earnings fundamentals. Yeah, I get it. But it's the the multiple dominates. The multiple dominates in bare markets and bull markets. And the multiple is just pure psychology. The savings rate is pure psychology. A lot we're talking about is pure psychology. But, you know, we hit extremes when you get to a 40 cape multiple. Um, the second highest on record. Um, a 2 and a half% real earnings yield on the S&P. When you get a 2.6% 6% real yield in the long bond. That's when I said before the the ERP is actually negative. Okay, that's very interesting. That's when you get so emboldened as an equity investor. They actually believe that equities have become a riskless asset class. You see, that's what the stock market investors believe and that's what they're telling you. And they think that they'll never be and and I'll tell you that there's this belief that mother nature doesn't ex exist anymore, that cycles don't exist anymore. recessions don't exist anymore. All those are relics of the past in this so-called new economy. It does remind me a lot of the rhetoric, by the way, in the late 1990s. >> Sure. >> So, I I can't I can't time it. I just like to sort of invest I I like to invest with the tailwind at my back instead of the headwind in my face. >> Uh I think that there are headwinds. >> Uh and that has nothing to do with the economy. Um but it has to do with valuations and it has to do with when is sentiment going to turn because sentiment is as off the charts as much as valuations are everything is you know everything is uh two we're not even talking about one standard deviation events they're two to three whether you're looking at sentiment or valuations or the concentration of equities and household balance sheets all these things have me very nervous because I do believe Bob Ferrell's mean reversion and Then my bigger concern is what this does to the economy. Cuz if it does hit the economy, everything we're talking about the stock market either going into a correction phase, bare market or stop going up cause the savings rate to go up that reduces consumer spending growth. That cuts into earnings. Then all of a sudden what is a multiple compression, say weakness in the stock market becomes an earnings driven weakness in the stock market. And then you get this self-reinforcing spiral which is a nobody's forecast. Nobody believes that could ever happen again. But um you know that's the risk when Humpty Dumpty falls off the wall. That that is the risk. That's the tail risk nobody's looking at. I'm not even talking about geopolitical tail risks. I'm not talking about that. I'm telling you probably in four weeks I'll turn extremely bullish on what's going to happen with the world. That's my own personal belief. But there's so many imbalances beneath the headlines. It bothers me actually that so many people just want the economists just give me the headline and then go away without trying to understand what it is that's driving those headlines. And I think that there is fragility. I said that before. Fragility and major imbalances in the economy. boom and AI capex, recession and nonAI capex. You still have lingering malaise in the housing market and commercial construction. Uh global trade is still in disarray that's been taken off the front pages because of what's happening in Iran. But global trade instability is still fully intact. Uh and then we have the consumer which is only alive because of the stock market. So all I'm saying is that things might continue to chug along. I'm just going to say that there are serious risks that it won't and I think that investors have to pay attention to the balance of risk around their forecast. I would feel a lot better. I said before, if this was an income driven, income driven consumer cycle, an employment-driven consumer cycle, I'd be feeling a lot better. But when I hear the Fed feeding the line about consumer resilience, which was like basically the opening line from Jay Powell at the podium after the last meeting, consumer resilience because the headline drives you to that conclusion without talking about how bizarre it is. is we have this resilience when we have a crappy labor market on our hands, no job growth in the past year, and no real organic income growth. Well, what's so resilient about that? I want the tables to be turned. By the way, when the tables do turn, which they normally do in an economic downturn, maybe this will be next year's story, and we get the gap the other way where consumption growth is lagging well behind income growth, I'll say, "Hey, look out. we're going to be in for a nice upcycled in the consumer, but that might be a 2027 story or 2028 story, >> right? >> Right now, I think people have to really comprehend that we are not in a stable equilibrium where incomes are rising, where consumer spending is rising with incomes. This is a rare period of economic history we have in our hands and principally because of what the stock market's doing. I don't know. That doesn't make me feel uh it keeps that keeps me on edge and it keeps me from being bullish on the economic outlook, those risks in particular. >> Okay. All right. I'm looking at the time, David. I've got three important questions to get through with you in the next 15 minutes or so. So, let's let's crunch on through. Given the importance of psychology in here, right, to keeping this thing going as you've been talking about, what are the indicators that you're looking at to try to determine when the sentiment shifts from, hey, this is just consolidation and and even better new highs are ahead to, oh god, this looks like a topping process and and we need to start thinking about all sorts of um outcomes that we haven't been thinking about yet. Well, you know, I I look I I I consume the survey data like it's nobody's business. So, there's the American Association of Individual Investors, the AI survey, and that's telling me about the general public, how they're feeling about about the market. Uh professional investors, I look at market vein. Uh I look at uh um the uh investors intelligence poll to tell me if and and that's what I mean. The even even when the market wobbles, these things don't change. tells me that we have really well-ingrained perception that a wobble is just a wobble. Uh that we're not at a reverse point in the market people. So I look at that as a sign of um tremendous resolve by professional investors, individual investors. So I I look primarily at the survey data um to look for whether or not people are building in an assumption that the bull market is over. And so that these survey data points are very important to me from a psychological standpoint. Those are the three AI, I market vein, and intelligence. That's all you need. And it's telling me that notwithstanding all the whatever angst, anxiety we get, um that psychology that the bull market's still intact, that hasn't gone away just yet. >> Okay. All right. Well, thank you. And it's it's great to give people these indicators that they can look at themselves as well. Okay. So, Iran, um how, if at all, is that changing your expectations for uh the rest of 2026? Well, you know, I I understand that there's a lot of air underneath the economic data. >> Mhm. >> Okay. Um I I don't trust an economy where there's no job growth. Um are we relying therefore all on productivity growth? You know, let me give you an example. the 1960s, you know, you got the uh microprocessing chips and when you look at the data, productivity is going 2 3%, employment growth is going 2 3%. You go to the 1970s, you know, with the mainframe and productivity 2 to three, employment growth 2 to 3%. You go to the 80s, you know, Microsoft Microsoft goes public in 1986. You get the software boom. Productivity is running 2%. Employment growth is running 2%. If you go to the internet, if you go to the peak of the tech boom in the first quarter of 2000, both productivity, employment growth is running 2%. >> Right now, we have 0% in employment and we have over 2% growth productivity. All the growth is coming from productivity. um giving another example of the imbalances in the economy. Um so this year could be great like you know we know we got the income tax refunds, we got the capital commitments and the hundreds of billions of dollars uh from AI. Uh I think the economy this year on average there I'm using averages um I think we should be okay. The second half of the year I'm a little concerned. 2027, I think there'll be an incredible vacuum because we'll be p we'll be past the peak of the AI spending boom. We will not know at that point how much overcapacity there there's going to be past the peak of fiscal stimulus. We'll probably have a change in the midterm. So, they're going to have split government, which means fiscal gridlock. And then it comes down to what's the stock market going to do? I have a view on the stock market. uh it's not particularly bullish but then again other people have a different view. Um, as I said before, you tell me your prediction on the stock market. I'll tell you where the savings rate's going and I'll tell you what happens to the consumer. But I'll just tell you this much that we should be very concerned about the Kshape to everything, especially the consumer from a social stability standpoint. We should be very concerned about an economy that's running on all the things we're talking about. uh I mean fiscal stimulus and uh AI spending with no with no job creation with no job creation. So, um, tough for me, you know, and believe me, I'm I'm I'm not in the recession camp any longer. I haven't been for a long time, but that doesn't reduce my concern that benchmarked against expectations, I think the economy second half of the year is going to seriously disappoint. You have so much priced in. The consensus is so wildly optimistic that you don't have to have a recession call. But if you get GDP growth the second half of the year running 1 to 2% and with that higher unemployment, that's going to be a big surprise to the markets and a big surprise to the Fed. And that's really really where I'm at right now. >> All right. Um, thank you again. The specificity is super helpful. Um, so uh you're you're not looking too good at least about the economy in the second half of this year. Um, all right. Rubber meets the roll road. um what type of investing strategy do you think is appropriate for the moment in time that we're in? You know, and are there particular assets that you particularly favor or would particularly stay away from given these conditions? >> Well, look, um one of my recent moves was to extend bond duration uh out to the 30-year because I like where real rates are. I like where real rates are and uh I have a very benign inflation outlook. Uh, I'm not nearly as nervous as a lot of the Fed hawks. So, uh, I like real rates and I like how bonds are valued against the stock market and I think inflation inflation expectations are going to drop measurably between now and the end of the year. So, >> I I like the Treasury market. I like all aspects of it. The front end I like as well because there's not enough Fed rate cuts priced in. The Fed has talked everybody out of it. Uh I'm on the other side of the trade as the FOMC Seahawks and I want and I like the long end. Um >> so so this is a gentleman prefer bonds. Uh >> yeah, exactly. Yeah, you you remember my uh my my title to the one actually I put I put that report out the day that the tenure touched 5% in October 2023. Um there's parts of the stock market uh that I like. Obviously, aerospace defense to to us has been a no-brainer and one of the few sectors to be going up through this conflict with Iran. Um, you know, we've been long utilities, healthcare, uh, energy, infrastructure, uh, in Canada, we've been favoring, uh, the pipelines. Um, but most of our equity concentration and and people should know that in the Rosie model portfolio, I'm not 0% in stocks. In fact, we're 50% equities. It's just that 15% of that has really been in the US. we have 35% in in Europe and Asia. Um and um notwithstanding the fact that Europe and Asia are more susceptible to the disruptions we've had because of the war and energy prices um we still like that diversification in those other markets because they command just superior valuations. So >> uh >> we like those um particular regions Europe and Asia. Uh we like US bonds. We bought recently we think there's too much inflation and RBA tightening so we bought Australian bonds and in the equity market you know we're very sector specific so like I said um the hard assets that spin off a revenue stream uh we're very cash flow sensitive so like I said the pipelines the utilities energy infrastructure uh we do like healthcare we've been there yeah equal weight again one of our recent moves was into the equal weight consumer staple sector we like consumer staples we just don't want to we don't want to own like two names Costco and Walmart. So we did and the equal weight uh consumer staples. So it's a very shall we say defensively structured yield oriented capital preservation type of uh asset mix that we have right now. >> Okay. Do you have any gold in there? Obviously I forgot to mention but doesn't have a yield. >> Good point. Well, I I didn't want Now you're going to get me carried away. We're going to spend another hour talking about gold. In fact, we were at the gold we were at the gold conference. We have trimmed our exposure. Uh we when silver started looking like a dot stock >> just around the time of the conference and we blew out our silver and silver miners, but we're still uh we're still somewhere between uh 5 and 10% on gold and the gold miners. Uh it used to be higher. Um but here's you know this as well as I do that you don't make money till you book a profit, >> right? >> Uh so uh we've done that in in gold. We're still, we like gold. We're just not uh we don't we don't adore it as much as we used to. >> Okay. >> But I'll just tell you this much. I'll tell you this much. Okay? Depending what happens in the Middle East, this could be a game changer for me. Okay? You might want to have me on in a month or two. Uh cuz um there's a risk depending on how this goes that I become a permable. >> Okay. And and obviously I'm assuming if if things go really well, you become a permable. >> Uh well, I'm putting out a report where I'm saying we don't have to win the gold medal. The silver medal will be just fine. If we can uh you know, if you if you if you're at the safari and you confront the tiger, but the tiger has no teeth and no claws, you don't have to run away just because just because it roars at you. >> Mhm. Um, so the silver medal is basically that Iran does not the Iranian regime. Um, because this it might not go away. Uh, and I'm not really don't know anything about regime change. That's that's difficult to do from the air. >> Yeah. >> But defanging the root of evil on the planet and then the next thing that happens is the Abraham Accords. When you think about bringing Iran into the global order, uh 90 million people, young, vibrant, educated population, bringing them into I I mean, this is um this is this could be really big stuff. Bringing Iran into the world economic order and not just that, but then paving the way for at least say economic relationships between Israel and the Gulf countries, other Arab countries. Well, I could tell you we could be talking in a month time that I'm redoing my whole asset mix based on what happens out of this because I I won't have any desire. I I I have no satisfaction owning global aerospace defense. In fact, I hate owning it, but I do it because we want to make money. I I would love to have an excuse to take that position off. So, there you have an incentive to get me back on sooner than six months. Okay. >> All right. Uh, and we'll we'll call that the turning these swords into plowshares Rosenberg investment strategy. Um, so David, absolutely. So, first off, I I absolutely that's a deal. I hope we are able to have you back on in a month, meaning I hope things go as well as you're hoping for. And if I can, I'd like to expand that discussion to not just include Iran potentially starting to normalize relations with the wealth with the West um and you know uh better trade inside the Gulf and stuff like that. But let's also add the impact. We'll just dream for a moment. Let's also assume the board of peace uh has uh its desired outcome and that the aggressive hostilities between Israel and Gaza largely get tamped down and let's assume that things go well with Venezuela and let's assume as is being talked now that uh Cuba maybe has a friendly change in regime. What does that world look like and what investment themes come out of all that? So if that's of interest to you, I'd really love to have that conversation. >> Absolutely. Look, it's all it's all peace is a good thing. And um the one thing I'll say with reference that I didn't mention before is what what what what could come out of this? Imagine if the geopolitical risk premium in the oil price comes out permanently. >> Mhm. >> Uh and um all this will lead all everything that I'm thinking about right now is going to lead to lower oil prices. Donald Trump. But the question is, will it come a time for the midterms for Donald Trump? >> Well, but then but then, but then you'll have me back on and I'll say, okay, I'm going to go back and say, yes, there was one presidential policy that >> indirectly led to much lower oil prices without having to drill, baby drill. Mhm. >> And that's a successful resolution out of this war with Iran because we take out the geopolitical uh risk premode of oil. We end up getting more production more production and then Iranian production uh in the world supply and then uh it's you know I'll probably do another shift out of my uh oil out of my energy exposure. >> Uh there's some things I wouldn't mind. I'd like to do a a shift, a real meaningful shift, but that will breathe life into real purchasing power. Uh that might get me bullish on the low-end consumer. Uh I mean, mind you, they don't drive. So, uh but lower oil prices are good for consumers everywhere. Even in the energy producing countries like Canada, consumers love lower energy prices. >> Well, it reduces cost of living, but it also boosts economic growth. job process get better and keep up what you earn. >> Like like I said, you um you had me on in the opening days of uh of this conflict. >> Um but things could change. So, and I would love to come back cuz you know what? I tell you the truth. I love talking with you. Always have. >> Right back at you, my friend. Um and you know what we didn't even put on our list there, and this could be very oil friendly, too, is a negotiated piece to the war in Ukraine. And if Russia starts normalizing its relationships with the rest of the world and its oil stops getting embargoed, that just adds even more tailwinds there. So, so let's all hope for that, my friend. And and I hope I have you back on in a week to in a month to discuss all this. Um, last question, but the most important for folks that would like to follow you and your work, David, in between now and your next appearance here, where should they go? Well, uh, you could either email me directly at drosenbergosenberressearch.com or just go to the website, Google Rosenberg research. Uh, you could go to information roenbergressearch.com if you want to sign on for a free trial. Uh, we'd love you to kick our tires. Uh, but if you have any questions or comments for me personally coming out of this, uh, I'd love to hear your feedback. Uh, D. Rosenberg of rosen roenbergress research.com and uh and I'll get back to you. >> Uh you are a very generous and very courageous man to share your email address uh publicly. >> I but I won't I won't share my phone number because uh that's getting that might get a little too personal. >> That's that's very wise I think. Um well David look when I edit this as normal I will put up the links to all that folks. The links will also be in the description below this video. All right. Well, folks, look, please join me in thanking David for giving us so much of his time and expertise today. Uh, so much specificity around which assets he thinks are a good fit for this market environment. Uh, to show that appreciation, please join me in just hitting the like button and then clicking on the subscribe button below as well as that little bell icon right next to it. Um, I also uh two things. one, if you uh would like to get some help from a professional financial adviser in perhaps putting into practice some of the things that David has mentioned here, uh if you don't already have a good professional adviser who's uh already advising you, um then recommend that you consider scheduling a free consultation with one of the ones that Thoughtful Money endorses. These are the firms you see with me on this channel every week. Uh to set up one of those free consultations, just fill out the very short form at thoughtfulmoney.com. only takes you a couple seconds to fill out the form. As a reminder, these consultations are totally free. There's no commitments involved. It's just a service these firms offer to help as many people as possible. Also, I just want to let you know that um there's only a couple days left after this video airs uh to lock in your tickets to the upcoming Thoughtful Money Spring Conference at the lowest early bird price discount that we're offering. So, if you haven't already bought your ticket, run now. Don't walk to thoughtfulmoney.com/conference and buy your ticket now at that lowest early bird price. Um, if you are a premium subscriber to our Substack, you'll also receive an additional $50 off of that price by entering the discount code that I've emailed you. So, check your email inbox for that. As a reminder, the conference itself is taking place on Saturday, March 21st. Don't worry if you can't watch the event live that day. Everybody who buys a ticket is going to be sent replay videos of the entire event, all the presentations, all the live Q&A uh within hours of the event's conclusion. And uh as I've said many times already, this is the absolute best faculty we've ever had and it probably may be the most timely conference we we've ever done. Um especially given the recent events that are going on with Iran. Um the faculty includes the great Lacy Hunt who will be kicking it off with his traditional keynote. He'll be walking through uh a whole new set of slides offering his typical graduate level walkthrough of what's happening in the macro economy. Uh he'll be joined by first- timerrs Ed Dow, Michael Oliver, and journalist Matt Taibbe. Um, we'll also be joined by Luke Groman and Brent Johnson, by uh Stephanie Palmboy and Grant Williams, by Michael How the liquidity expert and Darius Dale, uh, by Judy Shelton and Danielle Timino Booth, um, by Rick Rule, by Andy Sheckchman, by uh, David Haye, by Melody Wright, I think there's one or two others, Lyn Alden, uh, and still one or two others whose names I think I'm forgetting, but as you can see, it is just an absolutely fantastic powerp packed faculty. Really hope you can join us that day. So again, make sure that you if you haven't bought yet, go right now after this video ends to thoughtfulmoney.com/conference. David, I can't thank you enough. Um it's always such a pleasure to talk to you, my friend. Um like I said, let's hope we see you in in a month for all those good reasons. >> Good. I hope so, too. Okay. All the best, Adam. Good seeing you, buddy. >> You, too. Everybody else, thanks so much for watching.