Value can often be determined by how much an entity is desired, and by how much of that entity is available. When the demand outpaces the supply, the price goes up, of course. It is simple economics. I touched on that scarcity cred in a recent MoneySense post. Today we’ll look at a different spin on scarcity in the stock markets, and with respect to the future of stock markets. Many feel that growth will be scarce. That is the opinion of David Rosenberg at Rosenberg Research. Growth will be scarce in the future. You will want to own that scarce entity.
Here’s a wonderful ‘podcastversation’ with David Rosenberg – insulating your portfolio from market volatility. It’s on the Globe website, and yes it is paywall, but I had a listen on your behalf and I will offer up the most interesting and useful bits.
If you are a Globe subscriber I suggest that you invest the 45 minutes.
The US stocks markets are expensive.
Mr. Rosenberg puts full weight in the CAPE (cyclically adjusted price to earnings ratio) as a way to gauge markets and valuations. They are expensive. No doubt.
He offers that CAPE has taken out every other period (in overvaluation) except the dot-com crash, and today it approaches the level that preceded the dot-com crash and led to the lost decade for US stocks.
But of course it is not all US stocks that are expensive, it is pockets of the US stock market. We recently looked at valuations and the US Dividend Aristocrats that performed very well in the early 2000’s dot-com crash.
Mr. R also suggests that you don’t have to own the stocks when they are incredibly expensive. And of course he also admits that market timing is impossible. But there is a lot of money to be made in the middle.
JP Morgan – getting rich in the middle.
This quote or sentiment from JP Morgan was offered up.
“I never bought at the lows and I didn’t get wealthy selling at the highs. I played in the middle 60%. Participating in the market in the middle 60%.”JP Morgan
Nobody ever got hurt taking a profit. Protect the portfolio, protect your wealth, David offers.
JP Morgan made a fortune getting out too soon.
How did the Goldilocks fairytale end?
Jamie Dimon, had recently suggested that coming out of the pandemic and with growth prospects, we are in a Goldilocks moment in time. Mr. Dimon runs JP Morgan Chase, ironically.
“The U.S. economy will likely boom.” A combination of excess savings, deficit spending, vaccinations and “euphoria around the end of the pandemic,” Mr. Dimon wrote, may create a boom that “could easily run into 2023.” That could justify high stock valuations.Jamie Dimon, JP Morgan Chase
With great wit, Mr. Rosenberg reminds us, how did the Goldilocks story end?
The bears show up.David Rosenberg
Mr. Rosenberg offers that there is certainly enough good news to go around, but that good news is already priced in to the markets.
I covered the very good news and early trends for the US earnings season in this week’s MoneySense post. There is a fabulous link in that post from Liz Sonders of Charles Schwab.
Inflation threats? There will be no real inflation.
On the subject of inflation, Mr. Rosenberg is in the ‘transitory crowd’. Inflation is temporary as the fiscal stimulus is temporary. He suggests that the US will face a relapse in July or August after the stimulus ends. The fourth quarter could turn negative.
He points to the recent GDP decline. US real GDP in the fourth quarter of 2020 contracted 2.8% annualized as stimulus cheques ran out.
Without borrowed money there is no stock stimulus.
We will have a second quarter boom, with the retail opening, and robust pick up in restaurants and entertainment, and hospitality, but it’s only 4% of GDP.
Rosey thinks we’ll soon enough go back to the old ways. Low growth, low interest rates with low inflation.
As an armchair economist, I am also in that camp.
One of the biggest restraints on growth is indebtedness. Deflationary pressures might increase. On the massive debt burden, we witnessed that effect after the Great Financial Crisis (2008-2010) that triggered an extended period of weak growth. It was the weakest economic recovery in history.
That may play out again, but at greater debt levels and with greater debt forces.
Debt gives you a sugar high and then you have to pay the piper.
What does Mr. Rosenberg like?
He is long oil. Energy stocks are not priced for the higher oil prices. And for the environment, he likes banks and Canadian banks in particular. Banks and oily stocks. Two themes that have been repeated in this space quite often over the last several months.
A lower risk recovery play is the banks, compared to buying airline stocks or other ‘recovery plays’. He’s not really buying the value trade, because it’s a trade.
Where’s the growth?
Go east young man and young woman. David really likes Japan and India, add in Korea and Taiwan. He likes Asia as many do. That’s where they keep the favourable demographics (Japan excluded) and hence the favourable long term growth prospects. Demographics is destiny.
David suggests that the US will use India to curb China’s ambitions. India will get US infrastructure, productivity growth, and that may offer a lot of long term value.
I had suggested Emerging Markets in add in a growth kicker or three in May of 2019. The returns from the assets suggested in that post have been very generous. Big tech was also a growth kicker suggestion.
And yes he loves big tech. That is expensive big US tech. Big tech has morphed and now offers utility-like characteristics. We certainly saw those essential needs covered by technology at play in the pandemic, and that is why those stocks are even more expensive in 2021.
Go east, go tech for growth.
Canada vs US?
The value investment is Canada, with commodities and financials. We are benefiting from inflation and reflation talk. He does see more short term potential for Canada. But again he thinks the reflation story is a short story.
Canada might have a few more legs short term, but he likes US for growth for the longer term.
The boring 20’s.
If we get that roaring 20’s sequel, Canada is well positioned. That said he feels we will not have the roaring 20’s, we’ll have the boring 20’s. Ha 🙂
See the above bits on debt and short term stimulus.
Bonds are still a great portfolio asset.
David (me too) is an outlier perhaps. He still really likes bonds. He likes US Treasuries. They are a wonderful portfolio diversifier. That has not changed just because rates are low.
Bonds will pay, with inflation risk, but governments will not default, he suggests.
On interest rates?
There could be more near term pressure. Data will look crazy good short term for growth and inflationary trends. But again that is transitory. We already have 2.5% inflation that is priced in.
Bitcoin is a trade.
On bitcoin, he gets bitcoin as a currency. He doesn’t get the store of value thing. He does not share my opinion on bitcoin. David feels that bitcoin might be fun to trade, but it is not a portfolio asset. Maybe a very small position is reasonable, he offers.
In closing Mr. Rosenberg suggests that you believe in diversification. Buy what’s out of favour.
The portfolio moves?
If you own a one ticket ETF such as the iShares asset allocation ETF, the TD One Click Portfolios or BMO one ticket ETF or tax-efficient Horizons asset allocation ETF your moves are taken care of by way of the rebalancing mechanisms. As US stocks were beating everything else by a wide margin over the last year and more, your ETF portfolio would have been moving profits from the US to other geographies and bonds if you have a balanced portfolio.
To cover off more scarcity and to protect against economic shifts you might fill some portfolio holes with the real assets ETF from Purpose.
You’ll find individual commodities ETFs at Horizons.
The same event would be at play if you have a managed portfolio with a Canadian Robo Advisor. Asset allocation portfolios won’t get the shifts ‘perfect’ but they will manage the risks, somewhat, of overvaluation.
If you are in retirement and manage your own stock and ETF portfolio, you might take David’s advice and take profits from your high flyers that are likely very expensive.
If you are in the accumulation stage with more than a decade or more to go before retirement you might shade to the value of Canada and the reopening reflation burst, even if it is going to be ‘short term’. For US stocks you might seek more value and current earnings compared to expensive tech. But keep an eye on that tech for opportunities. Any meaningful correction(s) will be a wonderful long term opportunity.
Canadians are notoriously underweight Asia and developing markets. You might take David up on that offer.
Thanks to David Rosenberg and the Globe and Mail for a great podcast.
I listen to bulls. I listen to bears.
Have a read of the new balanced portfolio.
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