May 3, 2013

Trend Spotter Rosenberg Sees Inflation Around the Corner

Firings are at all-time low, Gluskin Sheff economist says

The widely followed economist David Rosenberg, known for his early warning of the housing market bubble, now foresees a persistent inflationary trend in the making.

Speaking at the Altegris Investment Conference in Carlsbad, Calif., Friday morning, the Gluckin Sheff chief economist and strategist jokingly referred to star bond manager Jeffrey Gundlach’s quip earlier at the conference that “if you’re early you’re wrong.”

David RosenbergSince inflation won’t be happening by Tuesday, Rosenberg (left) said he was wrong. But longer term, he saw little escape from the conclusion that a secular shift in the economy is at hand. And this despite the current buzz about deflation, he said, citing as one example a recent Barron’s article, A Deflationary Wave.

Rosenberg—whose Breakfast With Dave daily research report is popular in the investment community, even with its $1,000 annual subscription price—opened his session with the announcement that he’s getting divorced—from bonds, he said after a long pause. Bonds perform poorly in periods of inflation.

“We’re closer to the end of QE than people believe,” he said.

The Canadian economist’s key insights concerned the labor market.

“Ninety million adults now reside outside the labor force,” he said. “The Department of Labor should do survey: Are they all on food stamps…or is there an underground economy that we’ve got to capture?”

Rosenberg said he paid special attention to the JOLTS survey, a monthly DOL report on job vacancies. The economist perhaps surprised many people in saying that job openings are up but that “companies can’t find qualified applicants for the jobs they want to fill.”

Yet while hiring thus stagnates, firings are at an all-time low.

In fact, the number of people getting fired today with a 7.5% unemployment rate is 10% lower than May 2007,” when unemployment was at a trough of 4.4%. That tells me we may be near full employment.”

In a very wonkish talk, Rosenberg, a former chief North American economist for Bank of America Merrill Lynch, went into detail about the policy failures that have led to today’s tepid economy. “We’ve never had growth this weak this long into an expansion,” he said, adding that the GDP growth rate was in secular decline.

In the main, he blamed Washington for lacking the courage to address structural economic issues, and faulted the Federal Reserve for using the blunt instrument of monetary policy when tax, regulatory and fiscal matters were retarding economic growth.

“We’ve gone five years without a budget being passed,” with the government running on continuing resolutions, he said. That creates uncertainty for business, which translates to genuine austerity—not the governmental kind but rather corporate austerity. Companies like Apple and Microsoft will hire whom they must but otherwise take their funds to the debt markets and pay investors dividends.

Regulation particularly has acted as a drag on the economy, Rosenberg said, saying government regulation now stands at the highest level since 1994.

Citing Obamacare legislation totaling 20,000 pages, he said, “No wonder companies are not making a commitment to the economy.”

Another negative effect of Obama's health care law, Rosenberg expects, is “serious health care inflation next year.” That, together with the labor market picture, where companies will soon need to pay more to the existing employees they want to keep, is likely to see the emergence of “mild stagflation.”

And history shows it is hard to reverse inflation once it takes root, Rosenberg noted.

The Gluskin Sheff chief economist said his inflation forecast should be treated as “coffee table” discussion at this point, adding his own firm has not made any new asset allocation decisions yet.

But he said, generally, that portfolio managers should screen for companies with high capital-to-labor ratios, that have high fixed costs to variable costs; and relatively inelastic demand. Consumer staples are companies whose margins should expand in the coming period of inflation.

“Cash and optionality are good ideas now,” he said, adding, “Anyone who’s naked long corporates or high yield--now that’s a dangerous game.

“I’m not talking about double-digit inflation,” he said, “but the shift is coming.”

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