Mauldin Conference – David Rosenberg

David Rosenberg, Chief Economist and Strategist at the Canadian investment firm, Gluskin Sheff, was the day’s third speaker

He began by talking about his reputation as a perma-bear–at least with repect to equities. Instead, he said his biggest focus is always on risk, as in risk-adjusted returns, thus earning himself the perma-bear moniker. In determining his outlook he looks at the “market’s message.” For example, what does the 3-month Treasury bill’s yield indicate? A market fraught with risk. In contrast, the mid-teens yields of the early ’80s signaled that equity risks were very low. Indeed, he remains very bullish about bonds. He said income is in short supply, and one should own what’s scarce.

He presented a slide showing the factors most correlated with bond yields, and number one on the list was Federal Reserve monetary policy. Thus, with the Fed on hold–with respect to the Federal Funds Rate–he sees a bullish view on bonds as a natural outcome. In response to the argument that bond yields are [too] low, he asks, relative to what? Because relative to the Fed Funds Rate they’re quite high. He expects the long bond to go to 2%, in which case its total return would be 25%. He also likes corporate bonds, where a 5% default rate is priced in instead of the more realistic 2%, which is the current experience.

He isn’t surprised at all that investors continue to favor bonds over stocks, as measured by mutual fund flows. It’s all about demographics, namely the demographics of retiring baby boomers, who need income. They’ve gone from needing capital appreciation to needing capital preservation. With less than 7% of household assets in bonds, he sees room for that to move higher.

In short, his investment motto is safety and income at a reasonable price.


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