Declining Interest Rates as Central Banks Scramble to Prop Up the Stock Market (w/ David Rosenberg)
ED HARRISON: David Rosenberg, we're here in your town, Toronto, talking to you about what's happening, about the calls that you made before. But I want to talk also a little bit about Canada and, looking forward, whether or not it's the same view. Last time we were talking, I think you were talking about defensives on the one side, and you were talking about bonds, long bonds in particular, on the other side. Do you still think that that's a good call? And what are you seeing? DAVID ROSENBERG: Right. Well, I think that the bond market call is intact. It's not going to be a straight line, but the reality is this. We've come a long way in terms of what, say, the 30-year treasury yield has done, going from 3% a year ago down towards 2, the 10-year note down towards 1.5%. But guess what? The recession hasn't even started yet, and there has never been a time historically where yields out the curve fail to go down in the context of an outright recession. ED HARRISON: And by the way, you said yet, whereas last time we were talking, you were talking about the capex recession. Now, you're talking about a real recession, potentially, coming forward. DAVID ROSENBERG: Right. Well, you know, it's-- you have to take a look at GDP as almost an organism. It's like a living thing. And just like the human body, you don't shock one part of it without there being some impact on other parts of it. So this view that somehow we get a capital spending recession and there wouldn't be some knock-on effects, it's called actually, in economic terms, it's called partial coefficients. Every part of GDP is correlated, and it just lags. And it sort of reminds me of the time, you know, back when I was at Merrill, 2007, people were saying, oh, don't worry about housing, it's such a small share of GDP. But people failed to take into account all the powerful multiplier impacts on the rest of the economy. Same thing with capital spending. So the capex recession, companies don't just cut capex without a lag, if they don't see an improvement, cutting other things, like hirings. That's one of the reasons why employment growth is slowing down so dramatically. And in fact, of course, firings aren't that high because there's such a shortage of skilled labor that companies want to hoard their best employees. And you're seeing that in the jobless claim numbers. But remember that non-farm payrolls are a net number. It's hirings minus firings. And hirings, no matter what measure you look at, have peaked for the cycle. So companies are cutting back on hiring plans, and that's why this view that the consumer is going to stay resilient is, I think, a very dubious view as we move into the balance of the year, and then in 2020. ED HARRISON: So when we spoke, we were talking in the sort of mid-June phase, we had sort of a 12 to 18-month topping-- or bottoming, and then, you know, back to square one on the equities front. And we saw 10-year yields for the US at, like, 190, something of that range. DAVID ROSENBERG: Right. ED HARRISON: Right now, equities are pretty much a push, but bonds are doing really well. How does that scenario play out going forward? DAVID ROSENBERG: Well, it's interesting that, you know, the stock market, the glass is half full, as that we're only a few percent away from the all-time highs, if you look at the S&P 500. Now, the S&P 500, by the way, is not the only index out there. I mean, the Russell 2000 is actually back in deep correction phase. You look at the transport stocks, they're in deep correction phase. And in fact, you know, we, in my economics department, construct an in-house equity composite that's purely economic sensitive, just the cyclicals. Deep in correction terrain. So essentially, they have a stock market that's been held up towards the highs because of what sectors? Utilities and staples and health care, the sort of stuff that you want to own in an economic slowdown. ED HARRISON: The defensives. DAVID ROSENBERG: Right. And of course, look, you've had some segments of big tech, you know, taking away some of the political attacks on the sector, but use Microsoft as your bellwether for defensive growth in the technology sector. So my thematic really within the stock market has been classic David Ricardo slash Adam Smith scarcity value. Own what's scarce. So what's scarce? Globally, yield is scarce, as 30% of the global bond market trades with a negative yield. Yield is scarce, so own income equity. Dividend growth, dividend yield, low payout ratios, strong balance sheets, non-cyclical. That's a part of the stock market I actually like. And barbell that with what is the other deficiency, the other scarcity is growth. So you want to own growth. And that's why Microsoft has done so well. You want to own growth stocks, and you want to own income-producing stocks. ED HARRISON: Right. DAVID ROSENBERG: And that's one part of the stock market. The stock market overall, I think, has actually done quite poorly. Even though we're not in a classic bear market, we're in a classic topping formation. And the reality is that, if you're looking over the past year, the bond market returns have been so dramatically superior to the stock market returns. And that's something people would normally talk about. When you turn on the television set and you watch, you know, all of the business and market shows, you'd think the stock market is the only asset class in town. ED HARRISON: Right. Definitely. DAVID ROSENBERG: The bond market, meanwhile, in terms of market cap, is infinitely bigger than the stock market. But bond market returns, especially long-duration treasuries, have been a great place to be. You know, it's funny because, a year ago, people would say what idiot, what idiot would buy-- ED HARRISON: Right. DAVID ROSENBERG: --a 3% 30-year treasury? What did-- as if people actually hold onto that to maturity. You know, they're not like a pension fund or insurance company that have to do any asset liability matching. You don't have to own a 30-year bond for 30 years, or a 10-year bond for 10 years. You know, the duration of the stock market, by the way, is 50 years. Do people-- I mean, I hold a stock for the long run, but who holds a stock for 50 years? Not many people. So it's funny that when people say to me, well, who would have bought a long bond at 3% a year ago, what idiot, and my response is, yeah, well, the idiot that wanted to get a 25% total return. That idiot wanted to buy the 30-year bond last year. That's the sort of idiot. So people don't understand that relationship that we talked about earlier, that relationship between yield and price in the bond market, and the power of convexity at these low level of interest rates. ED HARRISON: That's interesting. You know, actually there were two other things I wanted to go off on in that, but when you mentioned convexity, immediately the conversation came to mind-- and I told you about this-- I talked to a German investor, Philipp Vorndran, who's a-- used to be a asset manager for Credit Suisse. And he was basically saying that the last 150 basis points of yield in Europe, from 150 to 0, is-- it was massively convex. And it caused a shortening in duration. People were bidding simply to keep their duration constant. And they were caught out by that. We're really right at that point right now. 150 basis points. You know, that's where the 10-year is as we speak. DAVID ROSENBERG: Yeah. Well, I think that, you know-- I mean, that's a-- you know, let's call it a focus on the curve and focus on the carry and focus on those inflection points from a technical perspective, let's say. From a fundamental perspective, you know, and again, people say, well, who would buy these German bond yields with a negative coupon, well, here's the deal. It comes down to inflation expectations. It's only been in the past couple of months that people have woken up to the-- I wouldn't say prospect, the reality of a German recession. That's a pretty big deal, right? I think globally, when you think about-- we just talk about US and China. We don't talk about-- we talk about Brexit, but Germany, Germany is the largest economy in Europe. It is the engine. And it's only, in quotes, only the fourth largest economy on the planet. And it's going into recession at a time when inflation there is zero. And people do the arithmetic and say, gee, it's interesting that, when Germany goes in a recession historically, guess what, their inflation rate declines by three percentage points. So people will say, well, who would buy, like, a negative 0.5% 10-year bund yield? But actually, if your view is that we're going to recession in Germany and inflation is going to go from zero to negative, your real interest rate is 2.5%. Your real rate. People always say, well, the real rate-- people calculate the real rate on the 12-month trailing trend of inflation or underlying inflation. Why on earth would you ever use the 12-month trailing trend on inflation for your real interest rate? Because by definition, the real rate is based off inflation expectations. Where it's going, not where it's been. So I think that actually there's a lot of people out there buying German bunds because they see a deflationary experience coming ahead of us. And I'll tell you something else that I think is very material from a global perspective, because it's really been a global meltdown in yields this year. It's been a global meltdown in yields. And what's happened is that this was the first time ever that we had a global economic expansion that failed to close the output gap. So this is a 10-year expansion. This is the only time ever where aggregate demand did not surpass aggregate supply. That never happened, we fell short. Then what else do we know? We know that the OECD leading indicator, OK, has declined for 19 consecutive months. Oh, people say, oh, but the declines are getting more marginal, but it's still going down. So what those two numbers are telling you, the OECD leading indicator is still in a downtrend, oh, by the way, only the lowest level since 2009, coupled with the fact that the output gap never closed means that the output gap is going to widen in the next year, the deflationary pressures are going to intensify. And I don't know many times in my career, or looking back before my career, where a deflationary experience failed to prevent long-term interest rates from going down from whatever level they're at right now. So as low as these yields are, they're going to go down. And especially in the US, because the US right now, I mean, he's the smartest kid in summer school. And I think that you're going to see interest rates go down quite a bit more from here. And that's where the total returns are going to be. ED HARRISON: Now, the pushback on that would be that, you know, we spoke to-- I didn't speak to him, but we had Real Vision spoke to Rich Bernstein, your former colleague at Merrill. DAVID ROSENBERG: I love Rich. ED HARRISON: And what he was saying is that actually, if you look at the data, China is leading in terms of bottoming. Europe is following. And then the US, while still bottoming, will follow later. That's the read that I got from what he was saying. DAVID ROSENBERG: Bottoming in terms of economic activity? ED HARRISON: Exactly. DAVID ROSENBERG: I just don't see it. I just don't see it. You know, I think that actually the people that make a living out of following China are actually cutting their numbers to below 6% for the coming year. I'm not seeing that in the leading indicators, but, you know, I follow China because, of course, it's such a key component of the global economy, but I am no China expert. But I'll tell you, I know China experts, and China is not turning around. Where? Europe is turning around. I mean, we just got these horrible ISM numbers. ED HARRISON: Right. DAVID ROSENBERG: Horrible orders. And Germany and the UK and Italy are all either in recession or heading into recession. And now France, which, for whatever reason, had been hanging on by the fingertips, and now France is weakening, especially its service sector. So all I can say is that I don't know what data points Rich is looking at, but they're not data points I'm looking at. ED HARRISON: Right. So what's the policy response there? Especially I'm really interested in Europe more than anything else, because they have their hands tied, in certain ways. I mean, people are talking about fiscal stimulus and things like that, but when you have interest rates at, you know, negative 70 basis points, and you're talking about going even further into the negative, how is that going to help in any possible way? So what can they do to arrest the deflationary impetus that you're talking about? DAVID ROSENBERG: Well, for one thing-- and it's not every single country, but say Europe writ large, the banking sector there is still very weak and undercapitalized. Point number one. And there's no easy solution towards resurrecting a normal functioning banking system. In terms of what could be done, well, there is a negative exogenous shock that everybody is facing-- I mean, even here in Canada-- which is this global trade war. And it's not just anymore-- it's not the US and China, it's now US and the EU, and with the WTO will then give Europe the opportunity to slap tariffs on the US next year. And all this started even before, you know, China, with Mexico and with Canada and with Japan, and tariffs on steel and aluminum, softwood lumber. So look, we had a precedent in the United States that ran on this campaign of trade deficits are evil, they're stealing jobs from the US. And it's created this massive disruption in global supply chains, and also this big withdrawal in global production growth. And the trade-sensitive parts of the world have suffered from it, Canada being one of them. But look at it, Germany is actually a huge exporter. So the bigger your export quotient as an economy, you know, the tougher it's been. So if you're going to tell me we're going to have some massive kumbaya moment, never mind just a US-China trade deal, but all the tariff increases everywhere are going to be rescinded, how's Donald Trump going to do that and save face with his base? ED HARRISON: Right. DAVID ROSENBERG: And this is something-- if you go back to Donald Trump in the 1980s, this is something purely ideological. It's going to be tough to back off from the uncertainty created by the global trade war. And it's not just Europe, but it's actually the global economy that's actually slowing down. Germany happens to be very export sensitive. And I think that the Brexit concerns, you told me they were going to sell Brexit, well, that'll help ease some of the uncertainty, too, over in Europe. But this notion somehow that fiscal policy stimulus or infrastructure, the 13-letter word for motherhood, where are you going to get the workers? Are we going to have-- like, this is what's interesting, right, is that the world is tearing itself apart. Look at society. Look at the xenophobia. Look at the, you know, the hate, the racism, the wide divide politically around the world is happening at a time coming off a 10-year economic expansion. The stock market's coming off the highs, and unemployment at the lows. And this is not something you would expect. You'd expect this, what we're seeing right now, to be happening at the bottom of the cycle, not the top of the cycle. So you shudder to think. But as I digress, the problem here with the infrastructure or fiscal stimulus is, if you're going to-- where are the workers going to come from? Even as bad as things are in Germany, the unemployment rate's at a record low. And the United States is at its lowest level since 1969. I mean, you're going to draw-- what are you going to do, like draw 75-year-olds out of retirement to go build bridges and pave riverbeds and build roads? I mean, so it's nice to talk about infrastructure, but we've sort of run out of skilled tradesmen almost globally. So that's the first thing I'd say. But in answer to your question, the end game is-- and the end game will be massively reflationary, will be the global debt jubilee. The global debt jubilee, when you get actually the monetary and fiscal authorities working together to print money. And that'll come from the G4 central banks-- the Fed, the ECB, the BOE, and the BOJ. And this is just right out of the Ben Bernanke-- what was Ben Bernanke's moniker? Ben Bernanke, before November 2002, was not called Helicopter Ben. ED HARRISON: Right. DAVID ROSENBERG: But he was called Helicopter Ben after November 2002 because the famous What If speech, what if we got caught in this deflationary trap of the zero bond in interest rates. And remember, the Fed went-- and other central banks went as far as they could. Multiple quantitative easings. Who's calling for that back in '07, '08? People thought it was radical enough just take the funds rate towards zero. And look at all of the repeated quantitative easings. But the Fed stopped short of the big bomb. And the big bomb is debt monetization. And so you're asking me what is it that's going to happen. We're going to eliminate, we're going to have a fire, a bond fire, OK, and we're going to eliminate a lot of this debt through the transaction. ED HARRISON: The bond fire, I like that. DAVID ROSENBERG: Yeah, so this is exactly what's going to happen at the end game, is the elimination of the biggest constraint. I mean, there's some things that you can't control. You can't control aging demographics. Or maybe you can, if we have a new baby boom for whatever reason. But that's not going to have any impact on aggregate demand for a couple of decades. What are you going to do with demographics? Not too much. We could do some other things to eliminate uncertainty, given the trade war. But this trade war, China-US, is not just some simple trade war. It's really a complex economic war between an emerging economic power and existing economic power. This is not going away anytime soon. But the biggest constraint globally is the fact we're just choking on too much debt at every level of society, in practically every country. And so that's going to require some sort of sacrifice. One sort as a sacrifice if you don't actually default on it and you don't actually pay it down as individuals. Well, what happens is that the central bank will do the job for you. And that's where debt monetization comes in as the end game. And I see that happening in the next couple of years. ED HARRISON: And so that's like the consolidated balance sheet approach that a lot of people have been talking about, in certain ways. You know, before we get into that, because, I mean, there are multiple vectors that you can go off into on that, there was one thing you said in the middle that I thought was very interesting about not having enough workers, but at the same time people engaging in xenophobia. And the immediate thought that I had was the thing that puts those two together is the pie, if you will. That is, is that if you live in the bottom 50%, you're not getting a huge pie, but you're employed. And so even though we might be in the longest upturn in history of the United States, or even globally, you're not seeing people feel like they're sharing in the upturn substantially. You look at the numbers that just came out today-- we're taping this on Friday-- 2.9%, after 10 years, that's the most you can get year-on-year average wage increase over a year. I mean, don't you expect xenophobia to happen in that situation? The question for me is, is that going to lead to some sort of political problem in a recession before you get to the bonfire? DAVID ROSENBERG: In answer to the question, I think that here's what's happening is you're seeing another political movement take place in the United States. So we had this phenomenon called Donald Trump. And we had the angst, anxiety, in parts of the country over immigration, border issues, so on and so forth, trade, the foreigner is stealing our jobs. By the way, that's not even true. But that sells well in a period of anxiety. I think what's happening right now, Barack Obama, there for eight years. Income inequality just got worse. Wealth inequality just got worse. And it's gotten worse under Donald Trump. And so it's funny, when I write about this, a lot of people write me back saying, well, showing me charts how the top 1% pay most of the taxes. ED HARRISON: Yeah, yeah, of course. DAVID ROSENBERG: And so that's not abnormal. But if you're taking a look at charts of income inequality and wealth inequality, it's beyond an extreme in almost every country in the world, and especially in the United States. And remember that democracy and capitalism, if you look at the history, they're always on a very tenuous dance floor. And so I think that what's happened here is that, I mean, Elizabeth Warren has caught on fire. And she's caught some breaks. I mean, this Ukraine whistleblower fiasco has not just had an impact on Donald Trump but also has had a huge impact on Joe Biden. We have Bernie Sanders' health. That's a big question mark. But Elizabeth Warren is-- her message is resonating. And you're taking a look at the polls, well, the house is going to stay Democrat. I'm reading, whether it's Greg Valliere's work or the Cook Political Report, it's actually-- for the first time I'm hearing that the Senate is now up for grabs next year. And what if you get a Democratic sweep? Because Elizabeth Warren, her poll numbers show up very well against Donald Trump. And this isn't on-- right now, if you're taking a look at most of the uncertainty polls, and you can get, actually, measures of uncertainty today. You can model them out. It's funny that the Fed actually just did a report last month showing how trade uncertainty is draining 8/10 of a percentage point off of GDP. That's actually a pretty big number. People are going to talk about in the next, say, six months about domestic political uncertainty. And I'm noticing that, actually, in the surveys of domestic political uncertainty and talking about tax uncertainty, those numbers are starting to rise. And so we're already stuck in a capital spending recession. It's spreading out. And I think it's going to continue to deteriorate, because so far it's been mostly related to trade. And of course, related, as well, to overextended corporate balance sheets. But what company, for example, is going to commit capital to the economy not knowing what the ex ante expected rate of return on invested capital is going to be on a major project? Who's going to do that? Because I could tell you right now, this is not just Nixon against McGovern, OK? This is actually-- I'm talking about November 2020, because everybody is focused on other issues right now. They're focused on China-US trade, for example, maybe now US-EU trade. I like to stay ahead of the curve. I like to talk about today, what people will be talking about come January, February. And we're going to be talking about the primaries, talking about the election, talking about Elizabeth Warren, and talking about, wow, what happens if we get wealth taxes, higher tax rates on marginal incomes, dividends, capital gains? Elizabeth Warren, her main goal here is to redistribute wealth and income. And maybe from a society perspective, she's right on the money. But if you are a long only equity fund manager, Elizabeth Warren is not your friend. And the market's going to wake up to this, that we're going to factor in a very uncertain fiscal outlook. And it's not going to get resolved till November of next year. And that is going to be an added layer of uncertainty. And so on top of the trade uncertainty, because that's going to get resolved. And so when you actually model all this uncertainty as an economist, it leads to two things-- a withdrawal in economic activity, because you're more anxious. And that's true at the personal level and the corporate level. And you build up your savings rate as a result. And there's nothing wrong with, say, strengthening your balance sheets, except for the fact that it comes at the expense of something that's near and dear to an economist's heart, which is aggregate demand, otherwise known as GDP. So I think that you're 100% right. I think that this is actually going to be much bigger than 2016. 2016 was really an election over what? Over border control, and over immigration, and over free trade. This is much bigger. This is actually going to be an election battle between a form of socialism and a form of capitalism. So this is actually going to be a really big deal. And here is the other big deal is that this is not on the radar screen yet of the markets. And when it is, I expect you're going to see a rerating of equities and a further shift into the safety of the treasury market. ED HARRISON: Interesting. You know, and before we started talking, you were saying that there was a bombshell that you wanted to talk to me about. You wouldn't tell me what it was about. That almost seems like the bombshell. Is that what you were talking about? DAVID ROSENBERG: Well, that is-- I think that, to me-- we have to always-- look, we have to drive looking through the front window, not the rear view mirror, OK? And not get caught in the moment. So we've got to start talking about, I mean, look, it's October. We got to start talking about next year. Next year-- if we would admit that 2016 was a defining moment for a period of time. And I'm not talking necessarily about Brexit. I'm talking about that outside of Brexit-- and we had at the beginning of 2016, you know, the downdraft in the Yuan and the emerging market angst. But really, we were consumed with the election. And we were amazed how well Donald Trump was doing. And then we woke up after election day thinking, well, it's a clean sweep by the Republicans. That means deregulation. It's going to be a-- the clean sweep means we're going to get corporate tax reform, tax cuts, all the stuff that would cause a massive rerating of the stock market in short order. Like, basically you could have stayed long the stock market all year in 2016. And there were lots of bumps in the road because of Brexit, before that cause of the emerging market period of anxiety that caused a lot of volatility and weakness. But if we just stay the course, come that Tuesday in November of 2016, that made your year because the market just went vertical north because Trump won with a conservative majority in the House and the Senate with the GOP clean sweep. So next year, I was going to tell you, irrespective of everything else, there's so much uncertainty. But we do have one certainty. We have a certainty that there is going to be an election next year. And we know that two months, two months, can make or break your year. And some people in 2016 to manage long only equities that were so beaten up in the last two months of the year. It was like a gift from heaven. And so I'm saying that for next year, we've got to pay attention. I would say that today we've got non-farm payrolls. That's great. We got the two ISM indices this week. That's great. You know, people say to me, so what is the most important number I should be watching right now? I say, you're going to be surprised when I tell you, because it's not an economic number. It's the daily betting track polls on Elizabeth Warren. Not on her own, but against Donald Trump and the presidential election. That's really the only thing that's going to matter, the only number that does matter for the next year is going to be that number, because I can tell you, if she wins and she wins with a clean sweep-- which, by the way, more often than not, a new president actually starts off with a clean sweep. It's not the first time. And you've got to think, we're going to have a massive, massive upheaval in fiscal policy. ED HARRISON: Interesting. Speaking of elections-- and that's one of the things I think is interesting. I don't know how more interesting-- how interesting it is compared to the massive upheaval that we'll have in the United States is Canada's election coming up, which is this month. There's a lot of talk about, there's going to be a change in government. Does it really matter? I mean, where's Canada going in terms of its economy? DAVID ROSENBERG: All right, well first, let's just say that Canadian elections, in a word, are boring. It's like almost everything in Canada, except maybe the Toronto Raptors. It's like, there's nothing that's exciting. We're sort of like-- we're the younger brother. But things here tend to be a lot more toned down. The election here is a lot more toned down. And even though there's differences between the three parties, it's nothing like the wide divide in the United States. So let's just say that in Canada, it's hard to handicap. I don't see either of the two big parties, liberals and conservatives, winning a majority. I think it'll be a minority government. But the problem of a minority government means that the left leaning NDP are going to have the balance of power. So that's going to be question marks because minority governments and candidate typically aren't really that stable. As far as the economy is concerned, I call it the triple C economy. Triple C, C is for condos. C is for crude. And C is for cannabis. So the Triple C economy. What else? When I travel around the world, that's all we want to talk about. Right. And then of course, you know, on the Condo market-- I mean, Canada, you know-- if you think there's more condos being built in Canada than there are single family homes by multiples. ED HARRISON: And as they came in, I mean, the cranes over these condos came in yesterday, were met just everywhere. DAVID ROSENBERG: Build it and they will come. They should actually get Kevin Costner to make that movie hear about the housing market as opposed to baseball. But yeah, you know, Toronto went through a bit of a lull. And now the bubble is back, basically, in residential real estate. Even in Vancouver, things are picking up. Vancouver could be picking up because of all the problems in Hong Kong and capital moving out towards British Columbia. People don't know that outside of Asia Vancouver has got the highest percentage of Asian population in the world. People don't even know. Is that bigger than San Francisco? Yes, it is. So Vancouver is getting a bid again. And the Toronto housing market's on fire. Absolutely right. Now, a lot of it is-- and a lot of the growth in Canada is people look at Canada and say, well, the economy's doing so well here. Well, it's because of population growth. But population growth in Canada is running more than triple what it is in the United States. And it's not because birth rates or fertility rates are any better here than they are south of the border. It's immigration. I mean, when you're pulling in net-- you know, unprecedented 400,000 net international immigration in the country, you know, these people, whether it's through government assistance or not, but they find a job. They need a roof over their head. They've got to buy clothes. They've got to buy food. They create natural growth and aggregate demand. ED HARRISON: And where are they going? DAVID ROSENBERG: Well, 40% of them are coming to the greater Toronto area. That's why you're seeing all the cranes. And so what are the factors of production for an economy? I mean, you have capital and you have labor. And under the labor, you have the labor that originates from natural births, for example. And then you also have immigration. Canada's got an immigration boom going on that is incredible. And so when you take a look at the Canadian economy, it's interesting because we've got the GDP numbers last week. So real GDP in Canada is running year over year at what? It's running 1.4%. Population growth is running what? 1.5%. Oops. Do the arithmetic. Actually, real per capita GDP-- like, if I was actually running for the conservatives, I could just say, hey, did you understand that if you're taking a look at a real per capita basis, the economy is actually slightly lower today than it was a year ago. So it gives this illusion that things here are really great. On a per capita basis, though, the economy is flat. It's actually underperforming the US, despite all the problems south of the border. ED HARRISON: And why is that? What's happening there that's causing it to underperform? DAVID ROSENBERG: Well, in one word, productivity. There's just no productivity growth. There's no capital deepening. And for a whole host of reasons, but that's the big reason, is that for all the talk about how Canada is this paragon of virtue when it comes to economic growth and the Bank of Canada doesn't feel like it has to cut interest rates like everybody else, the reality is that productivity growth in Canada is stagnant. That's the problem. ED HARRISON: You know, let's wrap it up with going back to your investment thesis, because when you talk about November 2020, that's a good time frame for us to be thinking about. We're talking about 13 months. 13 months could be a huge decision for people. And then that last two months, what do we do between today and that time period from an investment standpoint? Do we hold the line in terms of defensives versus longer bonds? Or is there some other play that you think warrants thinking about? DAVID ROSENBERG: Well, I think that if my thesis is right that a recession is either starting or about to start, then you want to be very defensive. I mean, you want a liquidity with a capital L. Liquidity is going to be extremely important. You're going to want to have cash on hand, primarily to be able to buy assets at cheaper levels down the road. And you want to have a very defensive posture. I'm not saying that you've got to go out and buy barbed wire and canned beans and spam and sawed off shotguns. But if you basically, within the equity market, as I said before, focus on balance sheet strength. Focus on sectors and companies that don't have a lot of cyclicality. You can find them in consumer staples. You can find them in utilities. You can find them in parts of telecom, even in select REITs. You want to be non-cyclical. You want to be yield-oriented, and not just dividend yield, but dividend growth and low payout ratios. And I said before, those will be fine-- those will be fine areas. And I think that, again, focus on balance sheet strength and focus on companies that don't have much in the way of a refinancing calendar, say, in the coming 12, 24 months when you consider how overextended corporate balance sheets are. I'd say that long term treasuries, you know, you want to own yield. I said in the stock market own yield. In the bond market I want to own quality and I want to own duration. And I'll say that again for a couple of reasons. Firstly, a period of heightened uncertainty and a period where currencies are relatively unstable and there's rolling bear markets. It's interesting-- I look at gold. Gold has broken out not just in US dollar terms, but in every currency terms, which tells you this is a bull-- this is not just, oh, I'm buying gold as a hedge against the prospect that the US dollar goes down as the Fed eases more aggressively. It's rallied this year in every single currency. And if you look at the chart of gold-- and this is what I want to say. It's the old Mark Twain refrain about lies, damn lies, and statistics. The lies I think he's referring to economists. Statistics, it's about this. Charts don't lie. And you do not have to be the world's brightest technical strategist to look at a chart of gold and say, wow. About a year and a half ago a six year basing period came to an end. And we have had a breakout. Gold is in a secular bull market. And actually, that six year basing period looks a lot longer, more elongated, but a similar picture to the basing period that the S&P 500 put in from 1979 to 1982, when Business Week wrote on the front cover, the death of equities. Next thing you know, we're in a 20 year secular bull market in equities. We're going into a secular long term bull market in gold for a whole host reasons. By the way, if I'm right on debt monetization and if that works, that big boom works, we will get the inflation that we haven't seen for a long period of time. And gold will actually go to even further highs in that sort of environment. ED HARRISON: We're going to come back to that in our next edition of this in the new year. So I want to thank you for that. I want to talk to you about triple B's again when we talk again. And again, thank you. It's been a pleasure talking. DAVID ROSENBERG: Same. Enjoy the weekend. ED HARRISON: According to David Rosenberg, the capital investment recession in the US he predicted in our last interview is well advanced. He believes this downshift will likely metastasize from a Capex recession to a global recession, given recession in Europe likely is under way already. In terms of the investment thesis that goes along with this, you're looking at long duration treasury bonds as a conviction play and continued overweight in defensive sectors in equities like utilities, health care, and REITs, and a continued underweight in cyclical sectors like financials, energy, materials, and industrials. Rosenberg also says to buy gold, as he thinks it is now in a secular bull market.