May 3, 2012

10 Market Rules to Remember: An Economist’s Reminder

Pessimistic outlook from economist David Rosenberg couched in well-known list

Borrowing heavily from his predecessor as chief North American economist at Bank of America-Merrill Lynch, economist David Rosenberg laid out his market outlook by framing it within Bob Farrell’s famous “10 Market Rules to Remember.”

David Rosenberg“Whenever I hear that someone hasn’t heard these rules I always wonder, If you don’t know about these, how have you possibly been managing money?” he said at the beginning of his presentation, titled “The Marco and Market in 3D—Deflation, Deleveraging and Demographics,” at the 2012 Strategic Investment Conference jointly hosted by the alternative investment firm Altegris and Millennium Wave Investments in Carlsbad, Cailf., on Thursday.

But before getting to the rules, Rosenberg, who has since left Merrill Lynch and is now chief economist and strategist with the Toronto-based investment management firm Gluskin Sheff, first defended himself against charges that he is a “perma-bear” in his view of markets and the economy.  

“When you talk about risk, which I always do, people get confused and label you a perma-bear,” he explained. “But it is absolutely [critical] to worry in this environment, as the outlook is fraught with significant risk.”

As an example, he noted that in 2011, the second full year of economic recovery, the economy grew by 1.5%. The second year is typically the strongest year of a recovery, and GDP usually hits somewhere near 5% growth. The fact that we only experienced 1.5% growth means “there is very little cushion in the economy.”

He then ran threw a slew of covers from Barron’s, and compared what was suggested on the covers to what happened soon afterwards. In one slide the cover read, “Can anything stop this economy?” from April 2000.

“Yes, the tech wreck soon did,” he said.

In another, a picture of a rollercoaster was depicted with the caption, “Is this the housing bottom?” The issue was from July 2008.

“Do the opposite of what a Barron’s cover reads and you’ll be okay,” Rosenberg joked.

He then listed the rules, which he said “sound basic” but are important to review:

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras—excesses are never permanent.

4. Rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

5. The public buys the most at the top and the least at the bottom.

6. Fear and greed are stronger than long-term resolve.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.

8. Bear markets have three stages: sharp down, reflexive rebound and a drawn-out fundamental downtrend.

9. When all the experts and forecasts agree, something else is going to happen.

10. Bull markets are more fun than bear markets.

“I’m not only not a perma-bear, but I’m actually a bull on bonds,” he said. “Bernanke has said there is nothing the Fed can really do to prevent the fiscal cliff we’re headed for, and this will be the theme moving forward. Don’t dismiss the odds of a recession. We went through a fiscal 'retrenchment' of this size only twice in the last century, in 1960 and 1969, and both were accompanied by recessions.”

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See complete coverage of the 2012 Strategic Investment Conference on AdvisorOne.

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