Tuesday, September 15, 2009

Expect a Slow Motion Recovery

David Rosenberg of Gluskin Sheff details the need to look beyond the stimulus induced rebound (which has been rather remarkable in its speed) and to focus on the more probable secular environment that we will need to live with:

We are in a post-bubble credit collapse environment. The transition to the next sustainable bull market and economic expansion is likely years away. The most notable “non-confirmation” signpost for this bear market rally in equities is the 3-month Treasury bill yield, which is just 13 basis points away from zero. This could be Japan all over again.

His concern is that all the recent news / market recovery will be taken as a true economic recovery. As such, the fear is the stimulus that has accounted for as much of this growth, will be unwound too soon. Back to David:

The global economy is being held afloat by rampant fiscal stimulus, which is accounting for all of this year's growth rate and 80 pct of next year's. This is very much like the 1930s when the pace of economic activity was in need of major stimulus. The sharp downdraft in the equity market and the steep recession in 1937-38 after the government had the temerity to remove the life support fully eight years after the initial shock is case in point.


  1. Great blog. Keep up the good work.

    However, I have a question. Why do so many bloggers hang on Rosenberg's words? He appears to be pretty much a perma-bear, oblivious to market action and fighting both the tape and the Fed. ML got rid of him at the right time.

  2. I agree - the blog is awesome.

    Nah - Rosenberg isn't a perma-bear. Look at his material prior to 2005.

    That being said, there are a couple of reasons why Rosie is pretty well respected (not just by bloggers);

    1) his commentary is always accompanied by supporting date (not that this makes him always right, but he attempts to use data to support his positions). Very few macro-economist analysts support their work with as much detail a DR does.

    2) he's been right regarding his macro-economic outlook domestically and globally

    this doesn't mean he's correct on his equity outlook and uninformed comments as to "ML got rid of him at the right time" are off hand and little researched and in fact, i would be willing to bet money that you don't even know who replaced DR at Merrill much less read any of his replacement's commentary...if you had, i suspect you wouldn't have made such a stupid comment.

  3. burt- just saw your comment and i believe mogwai's response encompasses my thoughts (though possibly a bit harsher than i would have made it).

    that said, the fact that his views are well thought out, transparent (i.e. free), backed by data, and counter to mainstream media are all reason i (like many bloggers i suppose) like his work.

    as for merrill. he doesn't belong at a firm that is perma-bull (i.e. all investment banks are).

  4. I do have access to David Bianco's work.

    My point about DR is valid. The purpose of this business is to trade successfully. DR has been wrong for a major move. When I'm wrong, I don't keep looking for excuses why I'm smarter than the market - I reevaluate and reconsider. I see none of that from DR.

  5. good point re: trading, but i think david r is more focused on investors.

    that said, if you had been listening do david r all along, i suppose you would have missed most of the sell-off from last fall and been invested in investement grade corp's this year (not as strong as equities, but up 16% YTD).

    enough david r ass kissing for the time being.

    burt- where are you currently invested / how long do you see yourself allocated there?

  6. I have been "trading" for over 30 years, 20 of which as PM for a hedge fund. I put trading in quotes, because I consider all buys/sells as trades, even if they are aimed at long term outlooks, as mine usually are.

    I went 50% net long in converts last Nov. This was in my opinion, the deal of the generation. I put the remaining 50% into stock between March and the golden cross. Note that I tried to buy this 50% numerous times between Nov and March and got stopped out repeatedly.

    My gross is about 120%. I am long high/vol high/levered gas and short the majors. This is an attempt to pick a bottom in gas and to ride the improving financial situation. I am about even on this including being stopped out twice.

    How are you positioned?

  7. Thanks for the info and congrats! Well, played.

    I trade two portfolios for myself, one "investment" portfolio where I pick betas and rebalance and a "trading" portfolio where I tend to be pretty active. My investment portfolio is pretty standard; 20% in five asset classes and rebalance quarterly.

    The more exciting portfolio is my trading portfolio and did much better there last year, but to no surprise underperforming my long-term portfolio this year.

    Trading Portfolio:

    I too was long converts as well in November (reasoning detailed here: http://tinyurl.com/nfrksu
    ) after buying in on close-end muni's a month prior (http://tinyurl.com/nlfl7o ). Still hold both my converts and muni positions, but looking to leg out soon as I am not so sure how much more they can run.

    Dabbled in investment grade and high yield corps in the Spring, but closed out a few months back. Since that time, I've been extremely convervative, allocating some to beat up commodities, REITS, and EM currency in anticipation of a weak dollar / market dislocation, but unfrotuantely hedged some of that by shorting oil (been dead wrong there to date, but not too burned as I used the ETF USO which gets beat up by contango).

    My issue now is that I really don't love much. Positioned for a large leg down in equities with a large allocation to OTM puts, but long closer OTM calls, which have done well, then delta hedging along the way (in total, been short the beta, but long vol).

    With my balance I go long (via options) on the long bond when rates move towards 4.5-4.6% and sell / go the other way when it legs down to 4.2%. I figure this pattern will break down at some point, but it's been a tight trading range for some time...

    My goal is to stay flat until there is another market downturn. I figure if I can break even, then make money off of dislocations I'll be rewarded for my pateience.

  8. One more thing I forgot. I am long Fannie & Freddie preferreds, AIG and Citi. I view these as cheap OTM calls with no expiration date. I recognize that they will probably not be worth much unless the market goes back to 2007 levels. Unlikely, but still a positive prob. I esp. like this trade since it is counter to traditional Graham-Dodd securities analysis.

  9. burt- not sure if you've seen the analysis, but john hempton has an epic 9 parter on freddie preferreds': http://tinyurl.com/paojcl

  10. I've read it. Very impressive. One of his points, that the interest rate carry by these companies is extremely profitable, could have shorter-term significance. It could lead to very high quarterly numbers.