Gluskin Sheff economist David Rosenberg kicked off the Altegris Strategic Investment conference on Wednesday with a largely upbeat view of the economy, saying the odds of a recession in the coming year are close to zero.
Indeed, Rosenberg, whose Breakfast with Dave daily research report is popular in the investment community, told an audience of more than 600 investment professionals meeting in San Diego that “we’re probably only in the fourth inning” of the current business cycle.
What’s more, headwinds that were stalling U.S. economic progress are rapidly dissipating. A slowdown in housing should not be cause for concern, he said, as housing is an “early cycle indicator” whose slowing is typically followed by a handing off of “the baton to the consumer.”
Nor should fears of rising household debt worry us, since it is not debt but “the capacity to service debt that is fundamental,” he said.
That capacity has grown, as has bank lending to consumers, which should translate into improved aggregate demand.
For perspective, he noted that the ratio of debt to GDP was 10% five years ago and proving intractable, but is now almost down to 2.5% — well past the 4% threshold that signals economic healing.
Rosenberg, a former chief North American economist of Bank of America Merrill Lynch, expressed deep concern about employment conditions, yet the socioeconomic woes he describes are not likely to move markets — only “change at the margin” does that, and there the trend is mildly positive, he says.
The disturbing trend is the number of people leaving the labor force — more than 90 million Americans are out of the work force and more are leaving, he says, adding that the oft-commented upon phenomenon of discouraged workers accounts for just one-quarter of the trend.
“Something else is going on here as it relates to the pool of available labor in the U.S.
“Part of it is when you create an environment in which you pay people not to work — that’s what we’ve done in this cycle — the number of people collecting a benefit is up 40% in 5 years,” Rosenberg says.
He cited statistics from a University of Chicago researcher indicating that large numbers of Americans can make more money sitting on the couch collecting benefits than as an administrative assistant or teacher.
Another factor — the most significant factor — affecting today’s low labor market participation rate is the wave of 78 million aging boomers who began reaching age 65 in 2011.
“Of course the labor market participation rate is going down — it’s just mathematical. Three-fourths of the reason is demographic. So get used to… ever-declining rates of unemployment.”
The Gluskin Sheff economist decried work force imbalances, with U.S. colleges producing more psychologists than engineers.
“A large part of the labor force is having trouble finding work — they don’t have the skills,” he says, or their skills are declining.
But the larger problem — that the pool of available labor is declining (it is currently at a 5-year low, he says) — requires immediate legislative attention. At the current rate of decline, “we’re not going to have anyone to employ by 2021,” he quipped, calling for immigration incentives.
In the meantime, Rosenberg’s studies indicate that labor’s share of the economic spoils is now 56% and rising. Whether through market forces or politics, he says, wage increases will accelerate over the coming years.
Addressing monetary policy, Rosenberg cited statements by Federal Reserve Chairwoman Janet Yellen to the effect that the path of the economy is “uncertain,” on which he commented:
“What does an uncertain central banker do? Nothing!”
Therefore, the Fed will be keeping rates low indefinitely, the resulting yield curve suggests to Rosenberg that “the odds of a recession in the next year are close to zero.”
What’s more, “we’ll get corrections along the way, but not a bear market.”
The Gluskin Sheff economist also cautioned investors to stay away from bonds, citing newspaper headlines that “Some fear the economy needs more inflation.”
“Who’s the ‘some’?” he asked.
“The Fed!” he answered, quoting former Fed Chairman Ben Bernanke’s last official speech, in which he said: “we’re committed to making sure that inflation doesn’t stay too low.”
“They think inflation is too low — why would you bet against that? said bond bear Rosenberg, who wants to see 10-year bond rates in the 4% range before he gets comfortable with them again.
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