I think Peter Schiff is very good at explaining how political economy should operate. But it seems his market and economic forecasts, in anything but the very long term, tend to be similar one-way bets. Maybe I notice this because often times my bets are opposite his. (I mention him because he’s calling a spectacular buying opportunity in gold, again.)
David Rosenberg is also very good on political economy. He seems to me more pragmatic than Peter Schiff in that he seems more open to change his market calls as evidence mounts.
[Note: Both Peter and David have made some great calls, and I respect their work. This is not intended to be a bash session.]
Mr. Schiff remains on the inflation train, thinking that Fed policy must eventually generate an unmanageable increase in prices; while Mr. Rosenberg has held on to his outlook that deflation is the order of the day under current policy. David has been more correct than Peter since the credit crunch, but now he’s changing his tune ... Thus, it is an important shift of a powerful voice away from the deflation camp [a camp I frequent].
Mr. Rosenberg believes we may soon begin to see some inflation. He doesn’t expect much, but he notes the potential for inflation to exceed the 2% threshold the Fed likes to posit.
The crux of his change of heart seems to rest on the deleveraging of US households. The fact that they may have finished working off their debt suggests consumption can regain a pace to generate rising prices. Rosenberg’s words now:
“My sense is that once this consumer deleveraging cycle is over, and there are signs that it is coming to an end if it hasn't ended already, you're going to see the velocity of money start to rise, against the backdrop of double-digit growth of the monetary base, and that is going to lead to inflation down the road.”
Here is a chart from the BIS showing debt growth as a percentage of GDP in a range of countries. Notice what I circled: it shows that US household debt as a percentage of GDP has shrunk in the five-year period in question.
That is unquestionably a good thing. But is it sufficient to counter other deflationary forces?
Sure, there is plenty of data you can grab to suggest the US economy has finally stabilized and could resume a steady pace of growth. But I feel like we’ve said that at least once a year for the last, I don’t know, three or four years, maybe?
The chart above shows overall global debt, when measured relative to economic growth, actually increased (and by $33 trillion, no less). I may be reading this wrong, but I would say that means many countries are actually worse off when it comes to their flexibility in managing debt and growth.
So if you want to consider the Fed’s much-talked-about tapering, you have to wonder what it will mean for interest rates. And if it means interest rates will continue to climb, you have to wonder what that will mean for countries still struggling with too much debt and dysfunctional credit markets. And you have to wonder what type of contagion that might have on the US. And you have to wonder if the Fed actually can taper any meaningful amount of its purchases without rattling sentiment.
All said I can understand Mr. Rosenberg’s change of heart. He sees the writing on the wall – we’re stuck with a status quo of QE that will in most cases generate further fuel for financial markets. And, as Mr. Rosenberg believes, I suspect any increase in prices will look more like stagflation than inflation.
In the medium-term, Mr. Rosenberg’s decision may begin to look prescient. Rising interest rates may be taken as a sign the market has overcome the central banks’ low interest rate policy. US economic data may continue to improve. The labor market may even continue to show the faintest signs of improvement.
But how long can the US maintain stability if the rest of the world has dropped anchor and the US labor market still faces substantial hurdles?
I do expect the US will continue to outperform. But that’s all relative. It doesn’t necessitate rising prices. And it perhaps overlooks the battle the Fed will continue to fight in trying to keep the rest of the world from weighing down the US.
A major correction, particularly in US equities, could be materializing now (finally). But ultimately, the outlook for the global economy suggests business as usual. In such an environment, stock markets probably remain buoyed and other asset prices will ebb and flow on fluctuating economic expectations.
Unless the Fed surprises everyone, I’ll be looking for a market downturn soon ... and then a buying opportunity.