David Rosenberg: "The Business Cycle Is Dead"—The Story Investors Today Believe
Summary
Market Outlook: The guest sees a highly uneven, K-shaped economy driven by AI capex and top-10% wealth effects, with broad weakness beneath the surface. He expects labor market cracks to widen and is skeptical of the consensus no-recession view.
US Treasuries: Bullish on the 10-year and mid-curve, expecting sizable Fed cuts and potential 10% total returns if yields move toward ~3.25-3.5%. He prefers duration in the belly over the long bond due to fiscal/tariff uncertainty premia at the long end.
Valuations & AI Leaders: He argues the equity risk premium is near zero and large-cap tech is a classic price bubble with air coming out. Specific names cited include Nvidia (NVDA), Oracle (ORCL), and Palantir (PLTR) as examples of stretched AI-related valuations.
Sector Positioning: Prefers defensive, cash-flow visible areas like Utilities and Consumer Staples, which are screening well. He also highlights interest in global healthcare, aerospace & defense, and energy infrastructure, while avoiding broad index exposure.
Regional Opportunities: Positive on select non-U.S. markets, notably China given very low valuations that price in severe pessimism. Canada is viewed as a value/ hard-asset torque with improving terms of trade and policy clarity, and he favors Canadian pipelines.
Gold: The stance has shifted from “love” to “like,” with profits taken in miners and bullion after strong gains. Still constructive but less emphatic than before.
Risks & Fed Path: He expects slower growth, rising unemployment, and disinflation, pushing the Fed to cut more than consensus. A steeper curve favors financials, but broad equities face valuation headwinds and narrow leadership concentration.
Transcript
People now have this firm belief the business cycle is dead and the market cycle is dead. Uh there's no such thing as a recession anymore. Uh and there is no such thing as a bare market anymore. You got to buy the dip at every opportunity and the economic cycle has been repealed. I don't remember a time in my life where so many people have shot mother nature in the head. Um but that's what we have in our hands today. Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. >> David, thank you very much for joining us today. How are things in Toronto? >> Things in in one word or less, Jim. Uh freezing. >> Yes, it has been cold the last couple of days. >> That that time of year. Yes. Well, I cannot believe 2025 is coming to an end and I don't know where this year went. It seems just like yesterday that Justin Trudeau was ousted as prime minister of Canada and Donald Trump was sworn in as president. Can you believe how fast this year's gone by? >> Well, you know, the uh the older we get, Jim, the uh uh the faster it gets just uh percentwise uh in terms of uh the hourglass for what's left. So, uh yeah. I know it uh it it sped by uh really quickly and um it was one of these years where once again you're just shaking your head about the way things uh ended up turning out especially for the markets >> and maybe that's why I went by so fast because there is so much going on and one of the things I always like to do as an investor I like to take stock of the past year where I went right where I went wrong and then try to set myself up for 2026 and this is why I want to sit down with you And I always like to take uh or start with a top down approach. And so why don't we just start with the economy? What's your view of the US economy as it stands right now? >> Well, I would say that uh in in two words or less highly uneven. Uh so I think it's it's safe to say that if you're an optimist, uh uh there's still a plus sign next to uh real economic growth. Um but just like the stock market has been uh for the past few years uh the growth has been highly skewed. So it's a case of beauty is in the eye of the beholder uh if you're in the uh AI game uh then it's been a great year uh from a business perspective because uh capital spending in real terms uh is up at almost a 20% annual rate. the rest of the capback scene try negative3. Uh so when we're talking about Kshape, it doesn't just apply to the consumer, it also applies to capital spending because a lot of this AI spending binge is diverting a lot of resources out of what you used to call the the old economy. uh you go to the consumer and uh similar story uh because all the growth in consumer spending this year has really come from uh the equity wealth effect uh because of what the S&P 500 has done and of course that's influenced the top 10%. The top 10% uh is carrying all the load as far as consumer spending is concerned. Uh, and when you take a look actually at the effect of the equity wealth effect on spending, it's accounted for more than 100% of it. Think about that for a second. And I say that because we know that if you're going to measure an economy success based on income. Uh, well, 80% of US national income comes from the labor market. Of course, equity investors pay for the earnings and the income that comes out of profits. uh but for the labor market uh real disposable personal income since April is down uh at about a negative 1% annual rate and yet consumer spending is humming along at over a plus 2% annual rate. So you have a a 3 percentage point gap between underlying real after tax income growth uh and consumer spending. Uh so basically you know if the US consumer was compelled to hold his or her spending in align with real incomes consumer spending would actually be negative. 70% of the economy would be negative but we know that's not the case um because the savings rate has come down a full percentage point since April. Uh that is basically the byproduct of the equity wealth effect on spending. people are comfortable spending more and more of their after tax income especially at the high end because they know that the 401ks are going to look after them. Uh so that's been a big part of that story on the consumer side. Uh I talked about the capital spending side also being lopsided because it's just everything is all about AI. Uh and then you have this situation in the labor market which is also K-shaped. uh where you know if you listen to what Jay Powell said after the last FOMC meeting uh instead of uh creating 40,000 jobs per month since April the US economy has been losing 60,000 uh which of course is what he expects to see once we get all the revisions. So employment is contracting in the US uh yet spending is doing well because of once again the stock market. last time we saw a dynamic like this where the stock market was such a huge important determinant of economic activity. You got to go back to the late 1990s. So there you have it. It's uh it's confusing and it's perplexing. Uh but really the whole year uh you know tariffs, reprieves, uh reciprocal, no reciprocal. Um the tariffs quickly gave way. Uh once it became clear that Donald Trump wasn't going to embark on a the risky adventure of a global trade war, we moved back on to the uh glorious AI trade. uh and both the indirect and direct impacts uh have given the US economy what it's had this year which is moderately positive growth. Um but you strip that out and the emperor is disroed and there's really been no growth at all in the US economy for everything that does not touch generative AI. And so I read an article recently about um or from a professor at Harvard, Jason Fernum, and he wrote an article saying that if you x out all the AI spend, you would have flat growth. And I guess you're saying the same thing. You don't think the economy is growing at 2 and a half or 3%. You think it's flat. >> Well, it's uh you know, it's flat if you account for everything that's not touching AI. It's like the way you you know Bob Frell's 10 marker rules to remember. One of those rules talks about uh a healthy balanced market is a market that is broad. Um and we know for even though you can argue that there's been some broadening out in the past few months, I mean you still have a situation where you know 40% of the S&P 500 market cap is still accounted for by the top 10 stocks. Uh that concentration hasn't gone away and the concentration of the economy is much the same. Uh so basically people will say well you know if you strip everything out of GDP uh then you get you get zero. So but I'm not stripping everything out of GDP. I'm just highlighting uh as Jason Ferman is the the the the very lopsided nature uh to this uh economic expansion. Uh that there is actually a lot of pain and a lot of hurt in wide swaths of the economy. Uh so you can take a look at you know the aggregate and yeah you can say things are just fine and that's because the top 10% is providing all the fuel for consumer spending and 10% of what comprises capital spending which is AI is providing all the impetus for capital spending growth. So um you have to really in a year like this dig beneath the veneer and look at the actual components. If you looked at GDP for example, if you look at the GDP on an equal weighted basis, it's running pretty flat. Uh and because of the concentration uh of growth in the uh in in the tech area, um you get this allure of uh of prosperity, but it's not it's not broadly based. And I guess somebody would say, well, when is it ever perfect or broadly based? But you're really talking about several standard deviations away from the historical norm when you look at the dispersion of the US economy. You look at the breadth, it's it's not nearly as good as what it looks like at the headline level. That's the major point. >> I saw an interview with Scott Bent recently and he did admit that there are pockets of weakness within the US economy. He pointed out or mentioned housing, but he doesn't see the US economy going into a recession in 2026. What are your views? Well, why would anybody be surprised about that? Can you tell me the last Treasury Secretary uh that talked about the US economy being in recession? The closest we came I think was back during the uh Gerald Ford uh era in the mid70s when uh the administration then called it a banana. They wouldn't they were told not to use the word recession. Why would Scott Besson ever use the word recession? He's he's a politician and he works for Donald Trump. So why on earth would you know? So basically uh do I listen too much of what Scott Besson has to say? I guess if he's got some policy initiatives. Uh I'm waiting to see what he's going to unveil on this affordability uh file that the White House is uh supposedly going to tackle. But I don't take my cues on the economic outlook uh from anybody in the White House, including Scott Bessant, because um they're not going to say anything differently. Everything will always be hunky dory. It's interesting that, you know, you talk about Scott Bessant and you know, look at the the 3% growth that he would talk about. He just talk about a lot of threes, right? A lot of threes. Where's the 3% 10ear Treasury note yield that he was supposed to deliver? uh we're only like a 110 basis points away from that and that's part of the problem like you you touched on it that one of the sectors in a whole lot of pain is the housing market. Uh and um that always has been in the past the quintessential leading indicator for the economy and the housing market uh in the United States is uh it's in the basement. um you know we got the NHB index today uh it's 11 points below 50 and 50 is the cuto off for expansion so u yeah the Scott Bessant is entitled to his view as everybody else is but if I was in his shoes and working for Donald Trump I'd be saying the exact same thing not I wouldn't necessarily mean it but I'd say it >> if you're looking for a simple secure way to invest and own physical gold and silver visit our sister company Hardassets Alliance at hardassetsalliance.com that's hardassallalliance.com. So let's you did touch on unemployment and this is one of the issues right now. We because of the government shutdown we haven't seen a lot of data and the last non-farmms we saw were in the month of September we saw a big jump from August 119,000 jobs were added but uh even though we haven't seen any data here in the last few months I believe we have November numbers coming out any day now is that correct? >> Yeah. >> So do you have a sense on where these numbers are going? I I remember you saying in the past, it's not where we're at, it's where we're going. And that unemployment number has been ticking up over the course of this past year, and the last reading we saw was 4.4%. >> Yeah. Well, I guess we sort of redefined what good is when 119,000 is viewed as a terrific number, but uh JPL already let the cat out of the bag after the last meeting when he had said that uh to expect downward revisions uh in in in the data. So that that number is probably not going to stand. And you can see also by, you know, the uh the the ADP data, for example, um they've been very squishy soft. You're seeing relentless job losses out of the small business sector. Uh small businesses, you know, like my own uh or like yours, you know, we're we don't have fancy schmancy uh human resource departments in an ivory tower. Small businesses are at the front lines. They're in the weeds of the economy. uh and they've been laying off workers on mass uh for the past four months. Um so that's one thing that I'm looking at. I'm looking at uh you know the Jolt survey, the job opening labor turnover survey uh that is showing uh continued weakness in hiring rates. It's very interesting that you know the firing rate is very low. uh companies are loathed uh to let people go after the horrible experience uh postcoid of letting people go and then not finding them again for the next couple of years. Um but we're at a crossing point right now where the hiring rate is so depleted it's like a hot knife through butter that if we get even a modocum of layoffs and the challenger survey data showing that layoff announcements are picking up a lot. they haven't shown up in the data yet, but you're at the precipice right now because the hiring rate is so low that if we get a small pickup in firings, you're going to start to see multi-month declines in non-farm payrolls. And even the people that say, well, you know, the break even level for the unemployment rate is a lot lower than it was in the past because of these tighter immigration rules. what that's done in terms of depleting the supply of labor that you know it used to be that 120 or 150,000 was the cutoff uh for rising unemployment if you didn't get a number above that so now it's 40,000 I'm not going to quibble with that but what I'm going to say is that even if it's 40,000 is the cut off uh for payrolls say in terms of labor market slack we're talking about negatives for the next several months uh so the labor market is is showing cracks once Again, it's only not shown more cracks because the firing rate, the layoffs have been so low. Uh, but the hiring rate is definitely sending you a very worrisome signal. Uh, and if we start to get m multiple months of negative payrolls, because do you remember when we didn't get that recession in 2022 and 2023, the recession that was supposed to happen with the Fed tightening and the inverted yield curve? Well, you know, remember back then, we also had $2 trillion of uh cash stimulus checks that Joe Biden handed out. That was a gift that kept on giving. Um, but on top of that, we didn't have any job losses. We had no job losses. And if you don't get job losses, you're not getting a recession. And that'll be something that will have to be determined. There's a lot of lot of K's out there. Uh this was really the year 2025 was the year of the not so special K. Uh we have a K in the labor market, hirings and firings, a K in the consumer spending market, high-end versus the low and middle end, and then of course I mentioned the K in capital spending, AI or nonAI. So I think that 2025 was the year of the not so special K and then 2026 will be you know what's the next letter but just remember this L follows K. So, um, I have a slightly different view of what the world's going to look like, the economy is going to look like next year, even though there's going to be stimulus at the beginning of the year. You know, the tax refunds that everybody's talking about, you know, what nobody talks about is why is it that the low end and now the pressures have spread to the middle end, the middle end is no longer participating. It's all basically the top 10%. How long can the top 10%, you know, keep the juices flowing for the consumer sector? But what I'll tell you is that everybody talks about the fact that on average, US households are going to be getting $1,000 of refunds uh in the opening months of next year. But when you do the back of the envelope calculations on where that money is going to be spent, you look at the incremental cost increases in healthcare and in auto insurance and in property insurance and in the AI induced electricity boom in utility costs. Um that $1,000 is nice. It'll be necessary because the incremental cost of essentials, I'm not even talking about food. I'm just talking about utilities and health care and insurance is going to drain $1,500 out of the average pocketbook of the US household sector. So, we're still in the hole. People say to me, "Why aren't you more bullish on the US consumer heading into next year?" Well, I would be more bearish if it weren't for the fact that we're getting these tax refunds, but those tax refunds are not going into automobiles. They're not going into furniture appliances. They're not going into a trip to Disney World. uh they're going to be going into essentials uh and so they'll make a situation that's pretty bad especially for low and middle inome household uh it'll make it less worse but it's still not going to be good. >> So if I'm hearing you right it sounds like in the first half of the year you you're expecting some growth maybe moderate growth and in the second half of the year you expect some weakness. >> No but that is what I said what I said was that I'm not I'm not going to try and time it. Uh, I'll just say that um I think that for those that think we're going to get a spending binge in consumer discretionary stocks from this stimulus, you know, the salt deductions, no tax on tips, the social security, so on and so forth. Um, that money is going to be siphoned off into essentials. Now, you'll say, well, that shows up in GDP. Food is food, electricity is electricity. That much is true. What I'm talking about is that for people to think there's going to be cyclical spending going on, keeping in mind at the same time that the incremental cost increases, like think of think of healthcare. Nothing's been done on that score. Uh when you add up that and insurance, I mean I'm not a big inflationist, but there's big inflation in insurance premiums. That's like a tax increase. People don't look at that. Your utility bill is not demand driven. It's a tax increase. your health care bill. It's a tax increase. So, you're getting a tax refund on one hand and it's being drained into other essential spending uh stuff that you spend to live on, not to have fun. Uh and yeah, we already know we already know that next year there's all these pledges uh for more AI related capex. You got the accelerated appreciation allowance. That much is true. Um, so what's going to define next year in that respect is you're probably going to have a decent year for capital spending. Uh, this is not capital spending that's leading to jobs. AI, if you if you actually go to the challenger, gray and Christmas data that come out monthly on pink slip announcements and hiring plans, um, what you see in the past four or five months is a dramatic increase in job layoff announcements due to AI. And uh you know I found it interesting that Jay Powell said after the last FOMC meeting that we're not really seeing a big impact on from AI on the employment market just yet but it's showing up in layoff announcements. It's right there in the challenger data. So we have a kink going on. It's another K another K. we have something going on here which is a fundamental shift in the capital labor ratio and that is very disinflationary. So I would say that yes I think that if we don't have a recession next year uh it's going to be because we're going to have another year of solid capex uh with with relation to the AI uh trade. Uh I don't see a reason why the consumer is going to come bouncing back. they've already ran down their savings rate. Uh their real incomes are going to get pinched by these higher insurance and health care costs and the employment backdrop is deteriorating. Now whether or not it contracts for any extended period of time is a matter of debate, but when you're looking at the unemployment rate, which may be a lagging indicator, but it's useful because it measures the degree of spare capacity that's going on in the labor market. Well, that unemployment rate is on a rising trend. And with a lag, that's puts downward pressure on nominal wage growth. You take that deceleration of nominal wage growth and you bump it against the fact that the cost of essentials for the marginal household is going up. What are you left with? You're left with contracting real incomes, which then leads to a very weak consumer spending picture. And that's 70% of GDP. So, how am I going to come up with a very rosy posy economic scenario for next year? Uh, the capback side probably is going to be fine. That that spending is baked into the cake. Uh, the question is how much of that will offset the weakness that we're going to see lingering weakness in the housing sector. Uh, and I think a consumer sector that has already lost its vitality except that top 10%. Uh, and that will stay intact so long as we have a bull market in equities, the high-end will continue to spend. the high end doesn't spend because of employment or organic income. They spend based on the equity wealth effect. Well, so long as the bull market rages on, that part of society will continue to spend. If it doesn't, then we'll have a consumer recession. Uh and then the question will be how big will the capex be to offset that? It'd be nice if the capex spending that we're seeing is going to lead to employment growth. Um but that's not happening, right? That's not happening. Employment is actually contracting. Uh, and we'll see how long that lasts for. Um, but there's all sorts of challenges ahead. I know that there's nobody out there calling for a recession. Uh, all the people out there that are calling for recession in 2022 and 2023. And I guess you can throw me in there. Everybody's become gunshy. Everybody's become gunshy. And nobody everybody everybody has fear about making that call again. Once burned, twice shy. Uh, so nobody's calling for recession. And it's interesting that in 2022 2023 when we were consumed with recession concern, the recession never came. Uh and now we actually have more conditions for a recession because of what the labor market is doing. And yet nothing is priced for recession and nobody's talking about it. You know, we flipped everything upside down. Uh I talked to so many people out there. People now have this firm belief. It's a cross between complacency and hubris that the business cycle is dead. The business cycle is dead and the market cycle is dead. Uh there's no such thing as a recession anymore. Uh and there is no such thing as a bare market anymore. You got to buy the dip at every opportunity and the economic cycle has been repealed. I don't remember a time in my life where so many people have shot mother nature in the head. Um but that's what we have in our hands today. Yeah, you you raised some very good points there and uh I got shook out of the market back in April during liberation day when the S&P was down 20% and I thought this is it. We're going we're going to be down 30 40%. Right? This is the big pullback and what do we do? We stabilize and we take off and now we're up 15% on the year. So I left a lot of money on the table. But I want to get your views on the Fed now and your good friend Jay Powell. And if there's one person that wants this year to come to an end, it's him. He looks like he's aged 10 years in the past year, but the Fed has cut interest rates three times here in the last few months. Do you What do you What are your thoughts on that? Do you think they're making a policy error by doing so given the strength of the economy? >> Well, I I don't think the economy is that strong. Like I said before, I it's it's an illusion. So, my whole first 10 minutes was talking about dig beneath the veneer and uh there's less strength than meets the eye. You have to dig beneath the the headline level. So the economy is less strong than than than meets the eye. Point number one. Point number two is the Fed is still restrictive. Uh the only reason why you still have hawks on the FOMC is not because of the economy. It's because uh they're still concerned that inflation is above target. Um so uh that's really why you have this wide divide of the Fed. have a lot of members are concerned about the cracks emerging in the labor market and others that uh are still nervous because inflation has been above target for the past four years and they're still concerned about uh the effects that's going to have on their cred credibility as a as a central bank. So you have this wide divide uh at the Fed. Uh I don't expect that's going to get resolved anytime soon. Um but as far as um Fed policy is concerned, you know, they they've cut rates, but they're pushing on a strain because you got this um uncertainty premium at the longer end of the bond curve. Uh uncertainty related to tariffs uh that hasn't gone away. Uh I mean the reality is that we could talk about well you know Trump backed away from reciprocal and he offered delays and reprieves and so on and so forth but uh the net effective tariff rate in the United States has gone from 2% before all this nonsense began in the spring and is now over 16%. It's the highest it's been since 1935. It's been amazing actually amazing that there's not been a big inflationary impulse from it. It's there has been some, but it's been small relative to what everybody was thinking last winter and last spring. The question, of course, the Fed's grappling with is whether there's a lag and whether companies will start to adjust their pricing more next year. Uh, but someone's got to be taking this either on the margins or is it foreign exporters absorbing the blow. Uh, consumers have taken part of it. Um, but it's been amazing that there's not been more. I mean, outside of them, I mean, consumer staples stocks are flat for the year. Uh, so they're not down. Uh, but then again, the market's up 17% or thereabouts. So, uh, they've been they probably been seen their margins uh, hit the most. Um, but other than that, it's been a fabulous year for the stock market as you said. Um, the Fed cutting interest rates, but the question becomes, Jim, that we have to recognize is that what interest rate does the Fed really control? They control the front end of the curve. They control the Fed funds rate. Well, you and I don't borrow at the Fed funds rate. Banks borrow at the Fed funds rate uh in the overnight market, but you and I don't. Small businesses don't. Homeowners don't. Uh credit cards don't. Most consumer loan rates don't move with the Fed funds rate. They move with the belly of the US yield curve. The most important interest rate for the economy is not the Fed funds rate. It's the 10-year Treasury note. Everything is priced off the 10-year Treasury note. So, monetary policy only works in so far as by cutting the overnight rate, you have an influence over where the 10-year Treasury note yield is going. Well, take a look what's happened, you know, since uh you take a look since the last meeting. Wasn't that long ago, and we're up what, like 10 basis points. You go back to when the Fed first started cutting interest rates in September of 2024, we're down 175 basis points on the Fed funds rate. And yet the 10-year Treasury note yield is up 50 basis points. So really what what when people talk about stimulus, Fed stimulus, well maybe that's great news for the banks, but who's boring at the Fed funds rate? The rate that matters for the economy has gone up. We have we in fact we we have never seen this before. Historically, when you're into the 175th basis point of rate cuts out of the Fed, the 10-year trajeal yield has come down more than 30 basis points. At this stage of the Fed easing cycle, we're up 50. Normally, we'd be down 30. But these are not normal times because you have this tariff premium and you have this uh fiscal uncertainty premium. I mean, you talked before about the economy. I mean, if the if if GDP was a stock on the S&P 500, GDP was a ticker, what multiple would you put on it knowing that this is this economy continues to run on 6% plus deficit GDP ratios year in year out? Imagine what the economy would be doing if it wasn't for the fact that the government extended such a long arm into uh into the economy. But that comes at a price because that's what's happening. Bond investors are nervous. Equity investors are not nervous about anything. Bond investors are nervous about taking on duration in this highly uncertain environment. So you're getting the steeper yield curve. That's that's great for financials. I hope you own bank stocks. That's a steeper yield curve. What could be better than that? But the economy borders off the 10-year part of the curve and it's not been going down. So when you're talking to me about, well, what do I think about Fed policy? Should they be cutting rates? Well, yeah, they they've cut rates and the interest that matters the most for the economy has gone up, not down. So, they haven't really been stimulating when you really think about it. >> So, let's just make the assumption Trump is going to put somebody in there, a new governor who becomes very dovish, more so than they have been. What does that do to the economy? >> Well, for one thing, whatever the Fed does in time A doesn't start to hit the economy until XYZ. the the lags uh the lags are long. Um the Fed's already deliberately restrictive. They don't know how restrictive they are because they don't really know have a handle on on where our star is or the equilibrium rate, but they are moderately restrictive at the very least. So they will be cutting rates. Uh I think that they will get whether it's Hasset uh or whether it's Wars um they they want to cut rates more aggressively. Um the question is will they be able to uh convince the hawks because we're on a knife's edge right now with the Fed. It's a wide divide. Uh the economic data will tell the tale. You know, you have uh the folks that want to cut rates are more forecast dependent. Uh they're operating on their view that we are in a rising trend of the unemployment rate and that's going to have all sorts of other properties related to wage growth that I talked about earlier. And then you have the hawks. The Hawks are strictly looking at the data, but the data are very backwardlooking. So they'll say, well, inflation's close to three, one at two, you know, to which I say, well, you know, you got to borrow a feather out of the hockey helmet of Mark Messier when he talked about playing with Rang Gretzky, you know, back in the 80s that uh yeah, you know, you basically um you know, you don't uh you don't follow the puck, you follow where the puck is going to be. So you have to have a forward-looking view. So my sense is that the data and I know and the Fed has laid it out there. The Fed thinks we're going to have 2% plus growth next year. The unemployment rate is going to peak at uh roughly four and a half and come down from there. I don't have I I don't have the Fed's view. Uh I have something different. I think unemployment rate is going to go a lot higher. I think the economy is going to underperform expectations. I think these hawks will become doves and I think the Fed is going to be cutting interest rates. And um of course you'll say, well, but financial conditions are so easy. Well, if you look at the stock market, that much is true, but that benefits only 10% of the household sector. The other 90% aren't really that much involved or they don't notice it. uh the key for them because they're so heavily indebted uh is what happens to market interest rates. So if the Fed's got to push more in terms of lower short-term rates to get the important interest rates at the mid part of the curve down, I think they'll have a lot more to do. So my view on the Fed is that really no matter who takes over the mantle from Powell in May, uh rates are going to come down. I think rates, and this is again where I'm totally on the other side of the trade versus the consensus. I think rates in the coming year are going to come down and come down a lot. >> So, you're bullish on bonds? >> Well, I'd like to be more bullish on the long bond, but it's sort of like a little or finani out there because um investors are concerned about the fiscal premium and uh it's clear under this administration that's not going to go away. Um, I'd like the 10ear. Uh, yeah, I I think that uh I I you know, in our model portfolio, we don't have long bonds. I I really wish that I could own strips. Um, a little too risky uh for me understanding what's going on. Uh, but I think that um the mid part of the curve uh risk-to-reward looks attractive. I think that I can see a situation, by the way, Jim, where uh by the end of next year, uh the Fed funds rate is uh converging on where the bang in Canada rate is at two and a quarter. Uh most Americans don't even know where the overnight rate is in Canada. Uh they they don't even know really where Canada is except it's a freezing place uh north of the border. But you know there's a 95% historical correlation between the policy rates of Canada and the United States. Uh and the Bank Canada is not going to be raising rates over that horizon. So the question is who's going to converge on who? Uh it is actually when you think about it an intercontinental market. Uh Canada might be the 51st state but if it was it'd be the biggest state. Uh and so I think that um whether you're taking a look at uh at Canada or even the Euro area for example, uh I think I think the funds rate is going to come down uh well over 100 150 basis points. And I'm not even making a an assumption on who's going to take over at the front office at the Federal Reserve. I'm just talking about what the data are going to show. That's my base case. My base case is the economy is going to surprise to the downside. I don't need a recession to know that if we have an economy underperforming, expectations. If we have demand that is underperforming relative to supply, inflation and inflation expectations are going to come down materially. That's my view. So, I am bullish on the say the 10-year note. It's been a little frustrating. We got down to four. We've hit 4%. It seems to be a floor right now. But look, right right now, you don't have a lot of conviction on the economy. If we start to see more conviction on the economy, if things play out the way they think they're going to play out, I think you could finish the year with the 10-year note, you know, somewhere around 3 and a/4%. Uh, and and actually, if you get to that level, when you look at the convexity and the capital gain, you'll get the price appreciation, the total return on the 10-year note will be somewhere close to 10%. Now Jim, when I go and I I I I I tell this narrative to people. I say, you know, you can actually make 10% in the bond market next year. Do you know the response I get back? Do you know what I get back? I get back 10%. That's it. Um, so that's how uh that's how everybody's uh you know brain is turned to like sludge, you know, that basically 10% that's all you're going to make. Um so and boy expectations are running high but let's face it as you said you know up uh 16 17% in a year when we were slitting our wrists in April because of uh reciprocal tariffs people have it in their head that uh the people have it in their head stocks are the place to be and people are actually when you have an equity risk premium of zero let me explain the the cape multiple the sickly adjusted PE the Schiller PE right now is 40. It's 40. It's where it was in the late 1990s. Now, this isn't as big a bubble as it was back then, but this is still a two standard deviation event on its way to three. So, this is actually a classic uh price bubble. But think of what that means. A a 40p multiple is a 2.5% earnings yield. At a time when the 30-year TIPS yield, the real yield, the 30-year TIPS is 2.5%. the equity risk premium longduration asset versus longduration asset. The ERP is zero. So that's the problem that I have. You know, I have more of a problem with the stock market than I have with the bond market. The bond market's got its problems and the fiscal premium is one of them for sure. I don't have a big inflation story for you outside of some areas like I mentioned uh you know utilities and insurance costs but a lot of other things including shelter are going to be coming down in the next year. But when I have a situation when the ERP is zero and this is the the only country in the world where this is happening is in the United States. It's when the stock market is telling you as an investor, the stock market is telling you that equities are no longer a risk asset. When the ERP is zero, when the relative yield between bonds and stocks is zero, it's the stock market's way of signaling to you if you want to believe this or not. I mean, I'm not participating to that extent, but the stock market's telling you that equities are now a riskless asset in your portfolio. And I could just see Marowitz rolling around in his grave just hearing that. We just taken modern portfolio theory and thrown it out the window. So, let's do a deeper dive on valuations right now because uh I'm sure you would agree with me. Everything we've seen this year is just insanity. And I'm going to take uh Nvidia, which is the poster child for all things AI, and its market cap was over 5 trillion just a few short weeks ago. Now, it's closer to 4 trillion. Uh Oracle, we've seen a big pullback in that stock in the last couple of weeks. Palenta much smaller company market caps around 450 million but it's trading at 125 times revs and these are some of the same valuations we saw back during the tech bubble but this pullback that we've seen here in the last couple of weeks in these AI names do you think this is the beginning of something more or is it just maybe a transition going on from tech into maybe growth stocks or sorry value stocks? >> Sure. Well, I mean that's going to work for a while. So, so firstly, I think that this bubble isn't popping, but the air is coming out of the balloon. Uh, the average large cap tech stock um is down on average 20% from the recent peak and the median is down 10%. Uh, so these aren't just little dips. Uh, this is not buying the dip. these the these stocks have uh some have corrected very hard uh as you suggested and now there's we're getting concerns over balance sheet issues and uh the circular uh arrangement issues and accounting issues uh and uh even whether um there's going to be enough power uh to trigger all these um AI data centers uh that have captured everybody's imagination. Yeah. Yeah, the way I see it is that uh today's data centers reminds me a lot of the uh uh the fiber optics uh back in the late 1990s. So bubble isn't bursting. Bubble isn't popping. But if you remember back in March of 2000, uh the bubble didn't pop then either. It took time for that to happen. Um but it started to behave rather poorly once you started getting some information into the market. Uh maybe like god forbid Cisco missing its earnings by a penny or some signs of order cancellations. Now you're getting some concerns coming to the four. Uh this is what happened. You know the the market didn't go vertical down in March 2000. Uh that ended up being a three-year bare market. Um, so I think that uh is there a good chance that this bull market in large cap tech is behind us? I think there's a good chance that it is. There's been a rotation to value and that's not unusual. Uh, and uh the the major averages don't always peak at the same time. They peaked at radically different times back in 2000 as an example. They don't all peak at the same time. Uh you know the reality is that you know 70% of the NASDAQ is tech and telecom and uh in the S&P 500 45% uh is tech and telecom. The Dow even if you look at it not price uh price adjusted but on a cap weight adjusted basis uh tech and telecom is only 20% of the Dow. Uh so Dow being the poster child for the value trade. We can understand why you'd expect uh uh the Dow to be outperformers. And of course we're seeing this shift not in the cash but in a value stocks. But the value stocks are very cyclical. Uh so the growth stocks get measured on a very uh longer term horizon basis. Uh that's why they're growth stocks. Um the value stocks are measured valuation wise on a shorter time horizon but are more subject to the vagaries of the economic cycle. Uh so they benefited from this view as you said at the beginning that they they bought into the Scott Besson view that everything's going to be great with the economy. They have a procyclical view. you you know you want to be in the industrials, you want to be in consumer discretionary uh you know you want to be uh in the financials uh and so that's what's working right now. Uh the question becomes what if the economy starts to underperform expectations. So you know the value proposition doesn't have I don't think necessarily the valuation constraints that large cap tech does. Uh however, they're very vulnerable if the economy falls shorts of expectations. Um so yes, I think this rotation into value could continue for a while, but uh I do question its sustainability through all of next year. Uh I have I have a I like to see a realistic view of the economy. I think right now there is just uh too much being priced in uh to the value stocks. So the rotation works for now, but uh I'm pretty skeptical beyond the next few months as to whether it's going to be sustained. >> So you are bullish on bonds, you are concerned about equities. Uh you've been very bullish on gold the last couple of years. You made a great call there. It's up over 50% this year. Do you still like gold in here? >> Uh well, you know, I I've gone from loving gold to liking gold and loving silver to liking silver. So, uh, you know, the love affair is over, but, uh, you know, uh, we're still dancing, just not a not a slow dance. So, we've been taking profits on the miners and on silver and gold. Um, we still, look, we still like bonds. We actually have a position in treasuries and in UK guilts. They're the two highest yielders. Uh, we think there central banks have a lot of catching down to do on on rates that's not fully priced in. And there's parts of the market that uh that we've liked. You know, I like I like utilities uh more for their as much for their growth characteristics really is their earnings visibility uh and their yield and dividend payout ratios. Uh global aerospace defense. Uh you don't that's an area that we think has tremendous uh visibility. Uh we like uh global healthc care uh quite a lot have exposure there. So, it's not as if we we're on zero weighted in equities. We probably have maybe 40 to 50% in the equity market. You'd be surprised to hear that, but it's running on on a very low beta and a high sharp ratio. Um, you know, we're looking very closely right now. I'll tell you that consumer staples is starting to scream very well in our work. Uh, and energy as well. I don't mean I don't mean the classic, you know, um, uh, producers and drillers. uh energy infrastructure uh is starting to look very good to us uh as something investable for next year. So I think look at the bottom line is that bullish bearish uh I think we're getting into a situation look you know the the market gives you a lot of information right uh we just hit uh what's in the was just basically uh you know within the last month say that we hit a new high for the S&P 500 uh but you know only something like 16% of the members of the index actually were at a new high that day uh which is the second lowest percentage participation at a high at a high on record. Um so the despite all this talk about breath improving uh I'm looking at some other signs where uh the participation is not quite as broad as people think. Uh I think we are getting the rotation as you said. I do think that um this is looking a lot like what happened in the late 90s early 2000. It's not 100% the same but then again what is so uh it's a it's a year the coming year is a year to be not be buying the indices to be extremely selective uh to be creative idea generated invest in sectors or subsectors uh that don't have a lot of economic sensitivity uh but have their own unique set of characterist istics that give you a level of comfort over the earnings visibility since after all that's what you're paying for. Uh but the operative word is uh to be creative. Uh focus on details of the market. Do not buy the indices. Do not buy the indices this coming year. It's going to be a year where you have to basically stop throwing darts against the wall. Take out your pencil and paper and do some work. buying the major averages is not going to work this year uh next year like it did this year. Uh so that's uh my major theme and you know uh there's areas outside the United States you know like I said we like like Canadian pipelines were in there uh global aerospace defense were there healthcare were there we have minimal exposure to the US market because it's the only market when you're looking at the Cape multiple there's no market trading at a three standard deviation event like the valuations are insane and then you get these bright lights out there saying Well, valuations only matter when they matter. Yeah. And then when they start to matter, it's like you're getting your head sliced off. The thing about valuations is that they're not aimed to be market timers. Everybody thinks they're going to time the market. Nobody can time the market. Um it's a matter of playing the probabilities. Everything's a shade of gray. There's there's no white and there's no black. And why you want to respect valuations is because at any moment at all the points across the the spectrum it the valuation telling you am I investing with a headwind or a tailwind is the wind in my face or is the wind in my back. You're not going to convince me with a 40 P multiple on the Cape that in the United States as a market you have anything except a wind in your face. In fact, it's the only time when you are north of 35 on the cape multiple. It's the only time when your expected one year, three year, 5 year, and 10 year returns are all negative. So, I will turn bullish again on the US market when we start to gain some semblance of sanity on those valuations as a starting point that will give you a tailwind. There's other markets in the world, uh, Asia, I mean the Chinese market, I mean, China's got all sorts of problems. Okay, we all know that deflation, excessive manufacturing capacity, um, all sorts of problems. They're trading with an 11 multiple. I would say at 11 multiple, it's a multiple that the US had in the summer of 1982. All the bad news is priced and then some. And you'll say to me, like you said at the beginning, Jimmy, like, you know, uh, got Scott Bessons, you know, economyy's doing great. But at a 40 multiple, you have to take a look at what's priced in. Things could be even if you have the belief that the US economy is doing great. Well, I would suggest that at a 40 multiple, it's great isn't good enough. It's got to be stupendous. And when you look at China, you look at some of these multiples in Asia, Hong Kong for example, crazy low multiples. And you'd say, "Well, things aren't so good there." And you'll say, "Well, but they're priced for actually a depression, not even a recession." So the multiples tell you what's priced in and then you have to decide well is that my view or is that not my view. There's other parts of the world uh that actually in the equity universe and it is one global market. People have to get out of their home bias. No matter where you are, it's one global stock market. Uh but there's parts around the world that actually are still priced relatively attractively, you know. So I'm not out there just in bonds and cash. There's parts of the stock market around the world that still look pretty good. Um, but again, like I said, you got to really drill hard and focus more on the story beneath the story and the details rather than the major averages. That's not going to work anymore. >> Some excellent points in there. So, I want to spend the last two minutes. I want to pick your brain about Canada given how you and I both reside here. And I just want to provide a little bit of context for our American friends. The unemployment rate across the country is at 7% right now. In the province of Ontario, where you and I reside, it's at 8%. in the city of Toronto 9% youth unemployment 15%. Shocking number to me. So having said all that, what's your take on the Canadian economy? >> Well, the Canadian economy, I mean, those are all statistics that would tell you that the labor market has been under some serious strain. Uh the Canadian economy itself is really it's barely growing. Uh I mean even if you look at the Bank Canada's forecast and Department of Finance forecasts, you're talking about a barely more than a 1% growth economy. Uh so things here are weak. I mean, you'd be saying to me, well, how's how's the Canadian stock market done better than the US stock market this year? And it's really there's not a big correlation between the Canadian stock market and the Canadian economy. Uh Canada's really a torque on on on the global economy, uh for one thing. And uh look the the financials have been a big part of it and you're seeing a lift to commodity prices and gold and silver and you know Canada is basically um you know a hard asset play. You know Canada is the value trade. If you're talking about the rotation of value well Canada is the poster child uh for value. So I think there's that aspect of it and I'll tell you this much uh you know because we we turned actually for the first time in years we've turned moderately bullish on the Canadian dollar. uh we see it going to 77 cents. We just see it basically closing the undervaluation gap. It may go it may go above that level. It may well um and uh there's a a few things happening. One is that the terms of trade Canada's export price relative to the import price that's improving. I mean commodity prices are starting to improve and that is very beneficial for Canada as it is you could say for you know uh New Zealand and uh and Australia. Uh, but on top of that, you know, I gave Mark Carney's federal budget a B minus. A lot of people said to me that I was uh being too harsh, but it was the best grade I've given any Canadian federal budget since the Harper years. Uh, so I sort of look, I like the supply side dynamics. I'm getting more and more impressed with Mark Carney on the domestic political side. at any event. Um, and I like his, uh, I I like his separating the operating account and the capital account. That made perfect sense. I like the focus on productivity and capital spending, uh, unleashing the natural resources as best he could with all these other, you know, competing elements. But the fact he's even sat down with the Alberta premier, Daniel Smith, I mean, that was never happening under Trudeau. And the fact that Carney is starting to uh move away from his green thumb policies on the environment, that's the environmentalist all up in arms. But you know, if you're a um you know, a capitalist like I am and progrowth and want Canada to promote its uh natural resources, uh I think that uh a lot of the clouds are parting. A lot of the clouds are parting uh for uh for the Canadian economy. Not that we're going to be roaring ahead, but I think a lot of the uncertainty, you know, and also on the tariff side, I think there's a a growing sense that, you know, Trump could have really lowered the boom on us. We came out relatively unscathed, like, you know, over 90% of the goods that he's slapping tariffs on don't apply to Canada uh because of the USMCA. We got off relatively light uh relatively speaking. Uh so maybe there's something to be said. Uh, and when people say to me, what's the biggest difference between Justin Trudeau and Mark Carney? I said, well, look at uh, how many hours do we have? But the most important one, and this matters the most. It matters the most. There's can't deny that it matter. This matters the most. Trump likes Carney. Trump did not like Trudeau. That's all you need to know. >> Yeah, I have to full transparency. I didn't vote for Carney or the Liberals, but I will say he's brought a level of professionalism back to the PMO that we have not seen in years. So, I applaud that. Uh, well, this has been a great discussion, David, and I want to thank you very much for spending time with us today and sharing your thoughts on what you expect in 2026. If somebody would like to follow you online or check out your services, where can they go? Well, you could uh go to uh information rosenbergressearch.com uh and um it'll take you 30 seconds and you can sign on to a free trial for all of my research. Uh or you could email me directly if you have any questions. Um post uh this interview with uh with Jimmy. We've we've done this hundreds of times over the years. But anybody who wants to get out of the color uh or have any questions for me, you can reach me at uh drosenberg roenbergress research.com. All one word, rosenberg at roenbergressearch.com and I'll get back to you ASAP uh because uh I get my morning newsletter out at like uh six o'clock in the morning. So I don't like Dennis Garman, I don't get much sleep. >> And we'll make sure we include all that information in the show notes. David, once again, thank you and all the best in 2026. >> You too, Jim, and to all the viewers as well. To happiness and health. >> Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Thank you all for watching. We'll see you again next time.
David Rosenberg: "The Business Cycle Is Dead"—The Story Investors Today Believe
Summary
Transcript
People now have this firm belief the business cycle is dead and the market cycle is dead. Uh there's no such thing as a recession anymore. Uh and there is no such thing as a bare market anymore. You got to buy the dip at every opportunity and the economic cycle has been repealed. I don't remember a time in my life where so many people have shot mother nature in the head. Um but that's what we have in our hands today. Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. >> David, thank you very much for joining us today. How are things in Toronto? >> Things in in one word or less, Jim. Uh freezing. >> Yes, it has been cold the last couple of days. >> That that time of year. Yes. Well, I cannot believe 2025 is coming to an end and I don't know where this year went. It seems just like yesterday that Justin Trudeau was ousted as prime minister of Canada and Donald Trump was sworn in as president. Can you believe how fast this year's gone by? >> Well, you know, the uh the older we get, Jim, the uh uh the faster it gets just uh percentwise uh in terms of uh the hourglass for what's left. So, uh yeah. I know it uh it it sped by uh really quickly and um it was one of these years where once again you're just shaking your head about the way things uh ended up turning out especially for the markets >> and maybe that's why I went by so fast because there is so much going on and one of the things I always like to do as an investor I like to take stock of the past year where I went right where I went wrong and then try to set myself up for 2026 and this is why I want to sit down with you And I always like to take uh or start with a top down approach. And so why don't we just start with the economy? What's your view of the US economy as it stands right now? >> Well, I would say that uh in in two words or less highly uneven. Uh so I think it's it's safe to say that if you're an optimist, uh uh there's still a plus sign next to uh real economic growth. Um but just like the stock market has been uh for the past few years uh the growth has been highly skewed. So it's a case of beauty is in the eye of the beholder uh if you're in the uh AI game uh then it's been a great year uh from a business perspective because uh capital spending in real terms uh is up at almost a 20% annual rate. the rest of the capback scene try negative3. Uh so when we're talking about Kshape, it doesn't just apply to the consumer, it also applies to capital spending because a lot of this AI spending binge is diverting a lot of resources out of what you used to call the the old economy. uh you go to the consumer and uh similar story uh because all the growth in consumer spending this year has really come from uh the equity wealth effect uh because of what the S&P 500 has done and of course that's influenced the top 10%. The top 10% uh is carrying all the load as far as consumer spending is concerned. Uh, and when you take a look actually at the effect of the equity wealth effect on spending, it's accounted for more than 100% of it. Think about that for a second. And I say that because we know that if you're going to measure an economy success based on income. Uh, well, 80% of US national income comes from the labor market. Of course, equity investors pay for the earnings and the income that comes out of profits. uh but for the labor market uh real disposable personal income since April is down uh at about a negative 1% annual rate and yet consumer spending is humming along at over a plus 2% annual rate. So you have a a 3 percentage point gap between underlying real after tax income growth uh and consumer spending. Uh so basically you know if the US consumer was compelled to hold his or her spending in align with real incomes consumer spending would actually be negative. 70% of the economy would be negative but we know that's not the case um because the savings rate has come down a full percentage point since April. Uh that is basically the byproduct of the equity wealth effect on spending. people are comfortable spending more and more of their after tax income especially at the high end because they know that the 401ks are going to look after them. Uh so that's been a big part of that story on the consumer side. Uh I talked about the capital spending side also being lopsided because it's just everything is all about AI. Uh and then you have this situation in the labor market which is also K-shaped. uh where you know if you listen to what Jay Powell said after the last FOMC meeting uh instead of uh creating 40,000 jobs per month since April the US economy has been losing 60,000 uh which of course is what he expects to see once we get all the revisions. So employment is contracting in the US uh yet spending is doing well because of once again the stock market. last time we saw a dynamic like this where the stock market was such a huge important determinant of economic activity. You got to go back to the late 1990s. So there you have it. It's uh it's confusing and it's perplexing. Uh but really the whole year uh you know tariffs, reprieves, uh reciprocal, no reciprocal. Um the tariffs quickly gave way. Uh once it became clear that Donald Trump wasn't going to embark on a the risky adventure of a global trade war, we moved back on to the uh glorious AI trade. uh and both the indirect and direct impacts uh have given the US economy what it's had this year which is moderately positive growth. Um but you strip that out and the emperor is disroed and there's really been no growth at all in the US economy for everything that does not touch generative AI. And so I read an article recently about um or from a professor at Harvard, Jason Fernum, and he wrote an article saying that if you x out all the AI spend, you would have flat growth. And I guess you're saying the same thing. You don't think the economy is growing at 2 and a half or 3%. You think it's flat. >> Well, it's uh you know, it's flat if you account for everything that's not touching AI. It's like the way you you know Bob Frell's 10 marker rules to remember. One of those rules talks about uh a healthy balanced market is a market that is broad. Um and we know for even though you can argue that there's been some broadening out in the past few months, I mean you still have a situation where you know 40% of the S&P 500 market cap is still accounted for by the top 10 stocks. Uh that concentration hasn't gone away and the concentration of the economy is much the same. Uh so basically people will say well you know if you strip everything out of GDP uh then you get you get zero. So but I'm not stripping everything out of GDP. I'm just highlighting uh as Jason Ferman is the the the the very lopsided nature uh to this uh economic expansion. Uh that there is actually a lot of pain and a lot of hurt in wide swaths of the economy. Uh so you can take a look at you know the aggregate and yeah you can say things are just fine and that's because the top 10% is providing all the fuel for consumer spending and 10% of what comprises capital spending which is AI is providing all the impetus for capital spending growth. So um you have to really in a year like this dig beneath the veneer and look at the actual components. If you looked at GDP for example, if you look at the GDP on an equal weighted basis, it's running pretty flat. Uh and because of the concentration uh of growth in the uh in in the tech area, um you get this allure of uh of prosperity, but it's not it's not broadly based. And I guess somebody would say, well, when is it ever perfect or broadly based? But you're really talking about several standard deviations away from the historical norm when you look at the dispersion of the US economy. You look at the breadth, it's it's not nearly as good as what it looks like at the headline level. That's the major point. >> I saw an interview with Scott Bent recently and he did admit that there are pockets of weakness within the US economy. He pointed out or mentioned housing, but he doesn't see the US economy going into a recession in 2026. What are your views? Well, why would anybody be surprised about that? Can you tell me the last Treasury Secretary uh that talked about the US economy being in recession? The closest we came I think was back during the uh Gerald Ford uh era in the mid70s when uh the administration then called it a banana. They wouldn't they were told not to use the word recession. Why would Scott Besson ever use the word recession? He's he's a politician and he works for Donald Trump. So why on earth would you know? So basically uh do I listen too much of what Scott Besson has to say? I guess if he's got some policy initiatives. Uh I'm waiting to see what he's going to unveil on this affordability uh file that the White House is uh supposedly going to tackle. But I don't take my cues on the economic outlook uh from anybody in the White House, including Scott Bessant, because um they're not going to say anything differently. Everything will always be hunky dory. It's interesting that, you know, you talk about Scott Bessant and you know, look at the the 3% growth that he would talk about. He just talk about a lot of threes, right? A lot of threes. Where's the 3% 10ear Treasury note yield that he was supposed to deliver? uh we're only like a 110 basis points away from that and that's part of the problem like you you touched on it that one of the sectors in a whole lot of pain is the housing market. Uh and um that always has been in the past the quintessential leading indicator for the economy and the housing market uh in the United States is uh it's in the basement. um you know we got the NHB index today uh it's 11 points below 50 and 50 is the cuto off for expansion so u yeah the Scott Bessant is entitled to his view as everybody else is but if I was in his shoes and working for Donald Trump I'd be saying the exact same thing not I wouldn't necessarily mean it but I'd say it >> if you're looking for a simple secure way to invest and own physical gold and silver visit our sister company Hardassets Alliance at hardassetsalliance.com that's hardassallalliance.com. So let's you did touch on unemployment and this is one of the issues right now. We because of the government shutdown we haven't seen a lot of data and the last non-farmms we saw were in the month of September we saw a big jump from August 119,000 jobs were added but uh even though we haven't seen any data here in the last few months I believe we have November numbers coming out any day now is that correct? >> Yeah. >> So do you have a sense on where these numbers are going? I I remember you saying in the past, it's not where we're at, it's where we're going. And that unemployment number has been ticking up over the course of this past year, and the last reading we saw was 4.4%. >> Yeah. Well, I guess we sort of redefined what good is when 119,000 is viewed as a terrific number, but uh JPL already let the cat out of the bag after the last meeting when he had said that uh to expect downward revisions uh in in in the data. So that that number is probably not going to stand. And you can see also by, you know, the uh the the ADP data, for example, um they've been very squishy soft. You're seeing relentless job losses out of the small business sector. Uh small businesses, you know, like my own uh or like yours, you know, we're we don't have fancy schmancy uh human resource departments in an ivory tower. Small businesses are at the front lines. They're in the weeds of the economy. uh and they've been laying off workers on mass uh for the past four months. Um so that's one thing that I'm looking at. I'm looking at uh you know the Jolt survey, the job opening labor turnover survey uh that is showing uh continued weakness in hiring rates. It's very interesting that you know the firing rate is very low. uh companies are loathed uh to let people go after the horrible experience uh postcoid of letting people go and then not finding them again for the next couple of years. Um but we're at a crossing point right now where the hiring rate is so depleted it's like a hot knife through butter that if we get even a modocum of layoffs and the challenger survey data showing that layoff announcements are picking up a lot. they haven't shown up in the data yet, but you're at the precipice right now because the hiring rate is so low that if we get a small pickup in firings, you're going to start to see multi-month declines in non-farm payrolls. And even the people that say, well, you know, the break even level for the unemployment rate is a lot lower than it was in the past because of these tighter immigration rules. what that's done in terms of depleting the supply of labor that you know it used to be that 120 or 150,000 was the cutoff uh for rising unemployment if you didn't get a number above that so now it's 40,000 I'm not going to quibble with that but what I'm going to say is that even if it's 40,000 is the cut off uh for payrolls say in terms of labor market slack we're talking about negatives for the next several months uh so the labor market is is showing cracks once Again, it's only not shown more cracks because the firing rate, the layoffs have been so low. Uh, but the hiring rate is definitely sending you a very worrisome signal. Uh, and if we start to get m multiple months of negative payrolls, because do you remember when we didn't get that recession in 2022 and 2023, the recession that was supposed to happen with the Fed tightening and the inverted yield curve? Well, you know, remember back then, we also had $2 trillion of uh cash stimulus checks that Joe Biden handed out. That was a gift that kept on giving. Um, but on top of that, we didn't have any job losses. We had no job losses. And if you don't get job losses, you're not getting a recession. And that'll be something that will have to be determined. There's a lot of lot of K's out there. Uh this was really the year 2025 was the year of the not so special K. Uh we have a K in the labor market, hirings and firings, a K in the consumer spending market, high-end versus the low and middle end, and then of course I mentioned the K in capital spending, AI or nonAI. So I think that 2025 was the year of the not so special K and then 2026 will be you know what's the next letter but just remember this L follows K. So, um, I have a slightly different view of what the world's going to look like, the economy is going to look like next year, even though there's going to be stimulus at the beginning of the year. You know, the tax refunds that everybody's talking about, you know, what nobody talks about is why is it that the low end and now the pressures have spread to the middle end, the middle end is no longer participating. It's all basically the top 10%. How long can the top 10%, you know, keep the juices flowing for the consumer sector? But what I'll tell you is that everybody talks about the fact that on average, US households are going to be getting $1,000 of refunds uh in the opening months of next year. But when you do the back of the envelope calculations on where that money is going to be spent, you look at the incremental cost increases in healthcare and in auto insurance and in property insurance and in the AI induced electricity boom in utility costs. Um that $1,000 is nice. It'll be necessary because the incremental cost of essentials, I'm not even talking about food. I'm just talking about utilities and health care and insurance is going to drain $1,500 out of the average pocketbook of the US household sector. So, we're still in the hole. People say to me, "Why aren't you more bullish on the US consumer heading into next year?" Well, I would be more bearish if it weren't for the fact that we're getting these tax refunds, but those tax refunds are not going into automobiles. They're not going into furniture appliances. They're not going into a trip to Disney World. uh they're going to be going into essentials uh and so they'll make a situation that's pretty bad especially for low and middle inome household uh it'll make it less worse but it's still not going to be good. >> So if I'm hearing you right it sounds like in the first half of the year you you're expecting some growth maybe moderate growth and in the second half of the year you expect some weakness. >> No but that is what I said what I said was that I'm not I'm not going to try and time it. Uh, I'll just say that um I think that for those that think we're going to get a spending binge in consumer discretionary stocks from this stimulus, you know, the salt deductions, no tax on tips, the social security, so on and so forth. Um, that money is going to be siphoned off into essentials. Now, you'll say, well, that shows up in GDP. Food is food, electricity is electricity. That much is true. What I'm talking about is that for people to think there's going to be cyclical spending going on, keeping in mind at the same time that the incremental cost increases, like think of think of healthcare. Nothing's been done on that score. Uh when you add up that and insurance, I mean I'm not a big inflationist, but there's big inflation in insurance premiums. That's like a tax increase. People don't look at that. Your utility bill is not demand driven. It's a tax increase. your health care bill. It's a tax increase. So, you're getting a tax refund on one hand and it's being drained into other essential spending uh stuff that you spend to live on, not to have fun. Uh and yeah, we already know we already know that next year there's all these pledges uh for more AI related capex. You got the accelerated appreciation allowance. That much is true. Um, so what's going to define next year in that respect is you're probably going to have a decent year for capital spending. Uh, this is not capital spending that's leading to jobs. AI, if you if you actually go to the challenger, gray and Christmas data that come out monthly on pink slip announcements and hiring plans, um, what you see in the past four or five months is a dramatic increase in job layoff announcements due to AI. And uh you know I found it interesting that Jay Powell said after the last FOMC meeting that we're not really seeing a big impact on from AI on the employment market just yet but it's showing up in layoff announcements. It's right there in the challenger data. So we have a kink going on. It's another K another K. we have something going on here which is a fundamental shift in the capital labor ratio and that is very disinflationary. So I would say that yes I think that if we don't have a recession next year uh it's going to be because we're going to have another year of solid capex uh with with relation to the AI uh trade. Uh I don't see a reason why the consumer is going to come bouncing back. they've already ran down their savings rate. Uh their real incomes are going to get pinched by these higher insurance and health care costs and the employment backdrop is deteriorating. Now whether or not it contracts for any extended period of time is a matter of debate, but when you're looking at the unemployment rate, which may be a lagging indicator, but it's useful because it measures the degree of spare capacity that's going on in the labor market. Well, that unemployment rate is on a rising trend. And with a lag, that's puts downward pressure on nominal wage growth. You take that deceleration of nominal wage growth and you bump it against the fact that the cost of essentials for the marginal household is going up. What are you left with? You're left with contracting real incomes, which then leads to a very weak consumer spending picture. And that's 70% of GDP. So, how am I going to come up with a very rosy posy economic scenario for next year? Uh, the capback side probably is going to be fine. That that spending is baked into the cake. Uh, the question is how much of that will offset the weakness that we're going to see lingering weakness in the housing sector. Uh, and I think a consumer sector that has already lost its vitality except that top 10%. Uh, and that will stay intact so long as we have a bull market in equities, the high-end will continue to spend. the high end doesn't spend because of employment or organic income. They spend based on the equity wealth effect. Well, so long as the bull market rages on, that part of society will continue to spend. If it doesn't, then we'll have a consumer recession. Uh and then the question will be how big will the capex be to offset that? It'd be nice if the capex spending that we're seeing is going to lead to employment growth. Um but that's not happening, right? That's not happening. Employment is actually contracting. Uh, and we'll see how long that lasts for. Um, but there's all sorts of challenges ahead. I know that there's nobody out there calling for a recession. Uh, all the people out there that are calling for recession in 2022 and 2023. And I guess you can throw me in there. Everybody's become gunshy. Everybody's become gunshy. And nobody everybody everybody has fear about making that call again. Once burned, twice shy. Uh, so nobody's calling for recession. And it's interesting that in 2022 2023 when we were consumed with recession concern, the recession never came. Uh and now we actually have more conditions for a recession because of what the labor market is doing. And yet nothing is priced for recession and nobody's talking about it. You know, we flipped everything upside down. Uh I talked to so many people out there. People now have this firm belief. It's a cross between complacency and hubris that the business cycle is dead. The business cycle is dead and the market cycle is dead. Uh there's no such thing as a recession anymore. Uh and there is no such thing as a bare market anymore. You got to buy the dip at every opportunity and the economic cycle has been repealed. I don't remember a time in my life where so many people have shot mother nature in the head. Um but that's what we have in our hands today. Yeah, you you raised some very good points there and uh I got shook out of the market back in April during liberation day when the S&P was down 20% and I thought this is it. We're going we're going to be down 30 40%. Right? This is the big pullback and what do we do? We stabilize and we take off and now we're up 15% on the year. So I left a lot of money on the table. But I want to get your views on the Fed now and your good friend Jay Powell. And if there's one person that wants this year to come to an end, it's him. He looks like he's aged 10 years in the past year, but the Fed has cut interest rates three times here in the last few months. Do you What do you What are your thoughts on that? Do you think they're making a policy error by doing so given the strength of the economy? >> Well, I I don't think the economy is that strong. Like I said before, I it's it's an illusion. So, my whole first 10 minutes was talking about dig beneath the veneer and uh there's less strength than meets the eye. You have to dig beneath the the headline level. So the economy is less strong than than than meets the eye. Point number one. Point number two is the Fed is still restrictive. Uh the only reason why you still have hawks on the FOMC is not because of the economy. It's because uh they're still concerned that inflation is above target. Um so uh that's really why you have this wide divide of the Fed. have a lot of members are concerned about the cracks emerging in the labor market and others that uh are still nervous because inflation has been above target for the past four years and they're still concerned about uh the effects that's going to have on their cred credibility as a as a central bank. So you have this wide divide uh at the Fed. Uh I don't expect that's going to get resolved anytime soon. Um but as far as um Fed policy is concerned, you know, they they've cut rates, but they're pushing on a strain because you got this um uncertainty premium at the longer end of the bond curve. Uh uncertainty related to tariffs uh that hasn't gone away. Uh I mean the reality is that we could talk about well you know Trump backed away from reciprocal and he offered delays and reprieves and so on and so forth but uh the net effective tariff rate in the United States has gone from 2% before all this nonsense began in the spring and is now over 16%. It's the highest it's been since 1935. It's been amazing actually amazing that there's not been a big inflationary impulse from it. It's there has been some, but it's been small relative to what everybody was thinking last winter and last spring. The question, of course, the Fed's grappling with is whether there's a lag and whether companies will start to adjust their pricing more next year. Uh, but someone's got to be taking this either on the margins or is it foreign exporters absorbing the blow. Uh, consumers have taken part of it. Um, but it's been amazing that there's not been more. I mean, outside of them, I mean, consumer staples stocks are flat for the year. Uh, so they're not down. Uh, but then again, the market's up 17% or thereabouts. So, uh, they've been they probably been seen their margins uh, hit the most. Um, but other than that, it's been a fabulous year for the stock market as you said. Um, the Fed cutting interest rates, but the question becomes, Jim, that we have to recognize is that what interest rate does the Fed really control? They control the front end of the curve. They control the Fed funds rate. Well, you and I don't borrow at the Fed funds rate. Banks borrow at the Fed funds rate uh in the overnight market, but you and I don't. Small businesses don't. Homeowners don't. Uh credit cards don't. Most consumer loan rates don't move with the Fed funds rate. They move with the belly of the US yield curve. The most important interest rate for the economy is not the Fed funds rate. It's the 10-year Treasury note. Everything is priced off the 10-year Treasury note. So, monetary policy only works in so far as by cutting the overnight rate, you have an influence over where the 10-year Treasury note yield is going. Well, take a look what's happened, you know, since uh you take a look since the last meeting. Wasn't that long ago, and we're up what, like 10 basis points. You go back to when the Fed first started cutting interest rates in September of 2024, we're down 175 basis points on the Fed funds rate. And yet the 10-year Treasury note yield is up 50 basis points. So really what what when people talk about stimulus, Fed stimulus, well maybe that's great news for the banks, but who's boring at the Fed funds rate? The rate that matters for the economy has gone up. We have we in fact we we have never seen this before. Historically, when you're into the 175th basis point of rate cuts out of the Fed, the 10-year trajeal yield has come down more than 30 basis points. At this stage of the Fed easing cycle, we're up 50. Normally, we'd be down 30. But these are not normal times because you have this tariff premium and you have this uh fiscal uncertainty premium. I mean, you talked before about the economy. I mean, if the if if GDP was a stock on the S&P 500, GDP was a ticker, what multiple would you put on it knowing that this is this economy continues to run on 6% plus deficit GDP ratios year in year out? Imagine what the economy would be doing if it wasn't for the fact that the government extended such a long arm into uh into the economy. But that comes at a price because that's what's happening. Bond investors are nervous. Equity investors are not nervous about anything. Bond investors are nervous about taking on duration in this highly uncertain environment. So you're getting the steeper yield curve. That's that's great for financials. I hope you own bank stocks. That's a steeper yield curve. What could be better than that? But the economy borders off the 10-year part of the curve and it's not been going down. So when you're talking to me about, well, what do I think about Fed policy? Should they be cutting rates? Well, yeah, they they've cut rates and the interest that matters the most for the economy has gone up, not down. So, they haven't really been stimulating when you really think about it. >> So, let's just make the assumption Trump is going to put somebody in there, a new governor who becomes very dovish, more so than they have been. What does that do to the economy? >> Well, for one thing, whatever the Fed does in time A doesn't start to hit the economy until XYZ. the the lags uh the lags are long. Um the Fed's already deliberately restrictive. They don't know how restrictive they are because they don't really know have a handle on on where our star is or the equilibrium rate, but they are moderately restrictive at the very least. So they will be cutting rates. Uh I think that they will get whether it's Hasset uh or whether it's Wars um they they want to cut rates more aggressively. Um the question is will they be able to uh convince the hawks because we're on a knife's edge right now with the Fed. It's a wide divide. Uh the economic data will tell the tale. You know, you have uh the folks that want to cut rates are more forecast dependent. Uh they're operating on their view that we are in a rising trend of the unemployment rate and that's going to have all sorts of other properties related to wage growth that I talked about earlier. And then you have the hawks. The Hawks are strictly looking at the data, but the data are very backwardlooking. So they'll say, well, inflation's close to three, one at two, you know, to which I say, well, you know, you got to borrow a feather out of the hockey helmet of Mark Messier when he talked about playing with Rang Gretzky, you know, back in the 80s that uh yeah, you know, you basically um you know, you don't uh you don't follow the puck, you follow where the puck is going to be. So you have to have a forward-looking view. So my sense is that the data and I know and the Fed has laid it out there. The Fed thinks we're going to have 2% plus growth next year. The unemployment rate is going to peak at uh roughly four and a half and come down from there. I don't have I I don't have the Fed's view. Uh I have something different. I think unemployment rate is going to go a lot higher. I think the economy is going to underperform expectations. I think these hawks will become doves and I think the Fed is going to be cutting interest rates. And um of course you'll say, well, but financial conditions are so easy. Well, if you look at the stock market, that much is true, but that benefits only 10% of the household sector. The other 90% aren't really that much involved or they don't notice it. uh the key for them because they're so heavily indebted uh is what happens to market interest rates. So if the Fed's got to push more in terms of lower short-term rates to get the important interest rates at the mid part of the curve down, I think they'll have a lot more to do. So my view on the Fed is that really no matter who takes over the mantle from Powell in May, uh rates are going to come down. I think rates, and this is again where I'm totally on the other side of the trade versus the consensus. I think rates in the coming year are going to come down and come down a lot. >> So, you're bullish on bonds? >> Well, I'd like to be more bullish on the long bond, but it's sort of like a little or finani out there because um investors are concerned about the fiscal premium and uh it's clear under this administration that's not going to go away. Um, I'd like the 10ear. Uh, yeah, I I think that uh I I you know, in our model portfolio, we don't have long bonds. I I really wish that I could own strips. Um, a little too risky uh for me understanding what's going on. Uh, but I think that um the mid part of the curve uh risk-to-reward looks attractive. I think that I can see a situation, by the way, Jim, where uh by the end of next year, uh the Fed funds rate is uh converging on where the bang in Canada rate is at two and a quarter. Uh most Americans don't even know where the overnight rate is in Canada. Uh they they don't even know really where Canada is except it's a freezing place uh north of the border. But you know there's a 95% historical correlation between the policy rates of Canada and the United States. Uh and the Bank Canada is not going to be raising rates over that horizon. So the question is who's going to converge on who? Uh it is actually when you think about it an intercontinental market. Uh Canada might be the 51st state but if it was it'd be the biggest state. Uh and so I think that um whether you're taking a look at uh at Canada or even the Euro area for example, uh I think I think the funds rate is going to come down uh well over 100 150 basis points. And I'm not even making a an assumption on who's going to take over at the front office at the Federal Reserve. I'm just talking about what the data are going to show. That's my base case. My base case is the economy is going to surprise to the downside. I don't need a recession to know that if we have an economy underperforming, expectations. If we have demand that is underperforming relative to supply, inflation and inflation expectations are going to come down materially. That's my view. So, I am bullish on the say the 10-year note. It's been a little frustrating. We got down to four. We've hit 4%. It seems to be a floor right now. But look, right right now, you don't have a lot of conviction on the economy. If we start to see more conviction on the economy, if things play out the way they think they're going to play out, I think you could finish the year with the 10-year note, you know, somewhere around 3 and a/4%. Uh, and and actually, if you get to that level, when you look at the convexity and the capital gain, you'll get the price appreciation, the total return on the 10-year note will be somewhere close to 10%. Now Jim, when I go and I I I I I tell this narrative to people. I say, you know, you can actually make 10% in the bond market next year. Do you know the response I get back? Do you know what I get back? I get back 10%. That's it. Um, so that's how uh that's how everybody's uh you know brain is turned to like sludge, you know, that basically 10% that's all you're going to make. Um so and boy expectations are running high but let's face it as you said you know up uh 16 17% in a year when we were slitting our wrists in April because of uh reciprocal tariffs people have it in their head that uh the people have it in their head stocks are the place to be and people are actually when you have an equity risk premium of zero let me explain the the cape multiple the sickly adjusted PE the Schiller PE right now is 40. It's 40. It's where it was in the late 1990s. Now, this isn't as big a bubble as it was back then, but this is still a two standard deviation event on its way to three. So, this is actually a classic uh price bubble. But think of what that means. A a 40p multiple is a 2.5% earnings yield. At a time when the 30-year TIPS yield, the real yield, the 30-year TIPS is 2.5%. the equity risk premium longduration asset versus longduration asset. The ERP is zero. So that's the problem that I have. You know, I have more of a problem with the stock market than I have with the bond market. The bond market's got its problems and the fiscal premium is one of them for sure. I don't have a big inflation story for you outside of some areas like I mentioned uh you know utilities and insurance costs but a lot of other things including shelter are going to be coming down in the next year. But when I have a situation when the ERP is zero and this is the the only country in the world where this is happening is in the United States. It's when the stock market is telling you as an investor, the stock market is telling you that equities are no longer a risk asset. When the ERP is zero, when the relative yield between bonds and stocks is zero, it's the stock market's way of signaling to you if you want to believe this or not. I mean, I'm not participating to that extent, but the stock market's telling you that equities are now a riskless asset in your portfolio. And I could just see Marowitz rolling around in his grave just hearing that. We just taken modern portfolio theory and thrown it out the window. So, let's do a deeper dive on valuations right now because uh I'm sure you would agree with me. Everything we've seen this year is just insanity. And I'm going to take uh Nvidia, which is the poster child for all things AI, and its market cap was over 5 trillion just a few short weeks ago. Now, it's closer to 4 trillion. Uh Oracle, we've seen a big pullback in that stock in the last couple of weeks. Palenta much smaller company market caps around 450 million but it's trading at 125 times revs and these are some of the same valuations we saw back during the tech bubble but this pullback that we've seen here in the last couple of weeks in these AI names do you think this is the beginning of something more or is it just maybe a transition going on from tech into maybe growth stocks or sorry value stocks? >> Sure. Well, I mean that's going to work for a while. So, so firstly, I think that this bubble isn't popping, but the air is coming out of the balloon. Uh, the average large cap tech stock um is down on average 20% from the recent peak and the median is down 10%. Uh, so these aren't just little dips. Uh, this is not buying the dip. these the these stocks have uh some have corrected very hard uh as you suggested and now there's we're getting concerns over balance sheet issues and uh the circular uh arrangement issues and accounting issues uh and uh even whether um there's going to be enough power uh to trigger all these um AI data centers uh that have captured everybody's imagination. Yeah. Yeah, the way I see it is that uh today's data centers reminds me a lot of the uh uh the fiber optics uh back in the late 1990s. So bubble isn't bursting. Bubble isn't popping. But if you remember back in March of 2000, uh the bubble didn't pop then either. It took time for that to happen. Um but it started to behave rather poorly once you started getting some information into the market. Uh maybe like god forbid Cisco missing its earnings by a penny or some signs of order cancellations. Now you're getting some concerns coming to the four. Uh this is what happened. You know the the market didn't go vertical down in March 2000. Uh that ended up being a three-year bare market. Um, so I think that uh is there a good chance that this bull market in large cap tech is behind us? I think there's a good chance that it is. There's been a rotation to value and that's not unusual. Uh, and uh the the major averages don't always peak at the same time. They peaked at radically different times back in 2000 as an example. They don't all peak at the same time. Uh you know the reality is that you know 70% of the NASDAQ is tech and telecom and uh in the S&P 500 45% uh is tech and telecom. The Dow even if you look at it not price uh price adjusted but on a cap weight adjusted basis uh tech and telecom is only 20% of the Dow. Uh so Dow being the poster child for the value trade. We can understand why you'd expect uh uh the Dow to be outperformers. And of course we're seeing this shift not in the cash but in a value stocks. But the value stocks are very cyclical. Uh so the growth stocks get measured on a very uh longer term horizon basis. Uh that's why they're growth stocks. Um the value stocks are measured valuation wise on a shorter time horizon but are more subject to the vagaries of the economic cycle. Uh so they benefited from this view as you said at the beginning that they they bought into the Scott Besson view that everything's going to be great with the economy. They have a procyclical view. you you know you want to be in the industrials, you want to be in consumer discretionary uh you know you want to be uh in the financials uh and so that's what's working right now. Uh the question becomes what if the economy starts to underperform expectations. So you know the value proposition doesn't have I don't think necessarily the valuation constraints that large cap tech does. Uh however, they're very vulnerable if the economy falls shorts of expectations. Um so yes, I think this rotation into value could continue for a while, but uh I do question its sustainability through all of next year. Uh I have I have a I like to see a realistic view of the economy. I think right now there is just uh too much being priced in uh to the value stocks. So the rotation works for now, but uh I'm pretty skeptical beyond the next few months as to whether it's going to be sustained. >> So you are bullish on bonds, you are concerned about equities. Uh you've been very bullish on gold the last couple of years. You made a great call there. It's up over 50% this year. Do you still like gold in here? >> Uh well, you know, I I've gone from loving gold to liking gold and loving silver to liking silver. So, uh, you know, the love affair is over, but, uh, you know, uh, we're still dancing, just not a not a slow dance. So, we've been taking profits on the miners and on silver and gold. Um, we still, look, we still like bonds. We actually have a position in treasuries and in UK guilts. They're the two highest yielders. Uh, we think there central banks have a lot of catching down to do on on rates that's not fully priced in. And there's parts of the market that uh that we've liked. You know, I like I like utilities uh more for their as much for their growth characteristics really is their earnings visibility uh and their yield and dividend payout ratios. Uh global aerospace defense. Uh you don't that's an area that we think has tremendous uh visibility. Uh we like uh global healthc care uh quite a lot have exposure there. So, it's not as if we we're on zero weighted in equities. We probably have maybe 40 to 50% in the equity market. You'd be surprised to hear that, but it's running on on a very low beta and a high sharp ratio. Um, you know, we're looking very closely right now. I'll tell you that consumer staples is starting to scream very well in our work. Uh, and energy as well. I don't mean I don't mean the classic, you know, um, uh, producers and drillers. uh energy infrastructure uh is starting to look very good to us uh as something investable for next year. So I think look at the bottom line is that bullish bearish uh I think we're getting into a situation look you know the the market gives you a lot of information right uh we just hit uh what's in the was just basically uh you know within the last month say that we hit a new high for the S&P 500 uh but you know only something like 16% of the members of the index actually were at a new high that day uh which is the second lowest percentage participation at a high at a high on record. Um so the despite all this talk about breath improving uh I'm looking at some other signs where uh the participation is not quite as broad as people think. Uh I think we are getting the rotation as you said. I do think that um this is looking a lot like what happened in the late 90s early 2000. It's not 100% the same but then again what is so uh it's a it's a year the coming year is a year to be not be buying the indices to be extremely selective uh to be creative idea generated invest in sectors or subsectors uh that don't have a lot of economic sensitivity uh but have their own unique set of characterist istics that give you a level of comfort over the earnings visibility since after all that's what you're paying for. Uh but the operative word is uh to be creative. Uh focus on details of the market. Do not buy the indices. Do not buy the indices this coming year. It's going to be a year where you have to basically stop throwing darts against the wall. Take out your pencil and paper and do some work. buying the major averages is not going to work this year uh next year like it did this year. Uh so that's uh my major theme and you know uh there's areas outside the United States you know like I said we like like Canadian pipelines were in there uh global aerospace defense were there healthcare were there we have minimal exposure to the US market because it's the only market when you're looking at the Cape multiple there's no market trading at a three standard deviation event like the valuations are insane and then you get these bright lights out there saying Well, valuations only matter when they matter. Yeah. And then when they start to matter, it's like you're getting your head sliced off. The thing about valuations is that they're not aimed to be market timers. Everybody thinks they're going to time the market. Nobody can time the market. Um it's a matter of playing the probabilities. Everything's a shade of gray. There's there's no white and there's no black. And why you want to respect valuations is because at any moment at all the points across the the spectrum it the valuation telling you am I investing with a headwind or a tailwind is the wind in my face or is the wind in my back. You're not going to convince me with a 40 P multiple on the Cape that in the United States as a market you have anything except a wind in your face. In fact, it's the only time when you are north of 35 on the cape multiple. It's the only time when your expected one year, three year, 5 year, and 10 year returns are all negative. So, I will turn bullish again on the US market when we start to gain some semblance of sanity on those valuations as a starting point that will give you a tailwind. There's other markets in the world, uh, Asia, I mean the Chinese market, I mean, China's got all sorts of problems. Okay, we all know that deflation, excessive manufacturing capacity, um, all sorts of problems. They're trading with an 11 multiple. I would say at 11 multiple, it's a multiple that the US had in the summer of 1982. All the bad news is priced and then some. And you'll say to me, like you said at the beginning, Jimmy, like, you know, uh, got Scott Bessons, you know, economyy's doing great. But at a 40 multiple, you have to take a look at what's priced in. Things could be even if you have the belief that the US economy is doing great. Well, I would suggest that at a 40 multiple, it's great isn't good enough. It's got to be stupendous. And when you look at China, you look at some of these multiples in Asia, Hong Kong for example, crazy low multiples. And you'd say, "Well, things aren't so good there." And you'll say, "Well, but they're priced for actually a depression, not even a recession." So the multiples tell you what's priced in and then you have to decide well is that my view or is that not my view. There's other parts of the world uh that actually in the equity universe and it is one global market. People have to get out of their home bias. No matter where you are, it's one global stock market. Uh but there's parts around the world that actually are still priced relatively attractively, you know. So I'm not out there just in bonds and cash. There's parts of the stock market around the world that still look pretty good. Um, but again, like I said, you got to really drill hard and focus more on the story beneath the story and the details rather than the major averages. That's not going to work anymore. >> Some excellent points in there. So, I want to spend the last two minutes. I want to pick your brain about Canada given how you and I both reside here. And I just want to provide a little bit of context for our American friends. The unemployment rate across the country is at 7% right now. In the province of Ontario, where you and I reside, it's at 8%. in the city of Toronto 9% youth unemployment 15%. Shocking number to me. So having said all that, what's your take on the Canadian economy? >> Well, the Canadian economy, I mean, those are all statistics that would tell you that the labor market has been under some serious strain. Uh the Canadian economy itself is really it's barely growing. Uh I mean even if you look at the Bank Canada's forecast and Department of Finance forecasts, you're talking about a barely more than a 1% growth economy. Uh so things here are weak. I mean, you'd be saying to me, well, how's how's the Canadian stock market done better than the US stock market this year? And it's really there's not a big correlation between the Canadian stock market and the Canadian economy. Uh Canada's really a torque on on on the global economy, uh for one thing. And uh look the the financials have been a big part of it and you're seeing a lift to commodity prices and gold and silver and you know Canada is basically um you know a hard asset play. You know Canada is the value trade. If you're talking about the rotation of value well Canada is the poster child uh for value. So I think there's that aspect of it and I'll tell you this much uh you know because we we turned actually for the first time in years we've turned moderately bullish on the Canadian dollar. uh we see it going to 77 cents. We just see it basically closing the undervaluation gap. It may go it may go above that level. It may well um and uh there's a a few things happening. One is that the terms of trade Canada's export price relative to the import price that's improving. I mean commodity prices are starting to improve and that is very beneficial for Canada as it is you could say for you know uh New Zealand and uh and Australia. Uh, but on top of that, you know, I gave Mark Carney's federal budget a B minus. A lot of people said to me that I was uh being too harsh, but it was the best grade I've given any Canadian federal budget since the Harper years. Uh, so I sort of look, I like the supply side dynamics. I'm getting more and more impressed with Mark Carney on the domestic political side. at any event. Um, and I like his, uh, I I like his separating the operating account and the capital account. That made perfect sense. I like the focus on productivity and capital spending, uh, unleashing the natural resources as best he could with all these other, you know, competing elements. But the fact he's even sat down with the Alberta premier, Daniel Smith, I mean, that was never happening under Trudeau. And the fact that Carney is starting to uh move away from his green thumb policies on the environment, that's the environmentalist all up in arms. But you know, if you're a um you know, a capitalist like I am and progrowth and want Canada to promote its uh natural resources, uh I think that uh a lot of the clouds are parting. A lot of the clouds are parting uh for uh for the Canadian economy. Not that we're going to be roaring ahead, but I think a lot of the uncertainty, you know, and also on the tariff side, I think there's a a growing sense that, you know, Trump could have really lowered the boom on us. We came out relatively unscathed, like, you know, over 90% of the goods that he's slapping tariffs on don't apply to Canada uh because of the USMCA. We got off relatively light uh relatively speaking. Uh so maybe there's something to be said. Uh, and when people say to me, what's the biggest difference between Justin Trudeau and Mark Carney? I said, well, look at uh, how many hours do we have? But the most important one, and this matters the most. It matters the most. There's can't deny that it matter. This matters the most. Trump likes Carney. Trump did not like Trudeau. That's all you need to know. >> Yeah, I have to full transparency. I didn't vote for Carney or the Liberals, but I will say he's brought a level of professionalism back to the PMO that we have not seen in years. So, I applaud that. Uh, well, this has been a great discussion, David, and I want to thank you very much for spending time with us today and sharing your thoughts on what you expect in 2026. If somebody would like to follow you online or check out your services, where can they go? Well, you could uh go to uh information rosenbergressearch.com uh and um it'll take you 30 seconds and you can sign on to a free trial for all of my research. Uh or you could email me directly if you have any questions. Um post uh this interview with uh with Jimmy. We've we've done this hundreds of times over the years. But anybody who wants to get out of the color uh or have any questions for me, you can reach me at uh drosenberg roenbergress research.com. All one word, rosenberg at roenbergressearch.com and I'll get back to you ASAP uh because uh I get my morning newsletter out at like uh six o'clock in the morning. So I don't like Dennis Garman, I don't get much sleep. >> And we'll make sure we include all that information in the show notes. David, once again, thank you and all the best in 2026. >> You too, Jim, and to all the viewers as well. To happiness and health. >> Don't forget to sign up for a free portfolio review with one of our endorsed investment partners at wealthon.comfree. With markets hitting all-time highs, now is a great time to stress test your strategy and be prepared for what comes next. Thank you all for watching. We'll see you again next time.