David Rosenberg’s Outlook for 2023: 5 Highlights for the Year of the Rabbit

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Economist David Rosenberg took Breakfast with Dave on the road Jan. 19 with a live event in Toronto hosted by Rosenberg Research in partnership with the Financial Post. Year of the Rabbit: Jump the Hole! took an in-depth look at global financial markets and the economic outlook for 2023.

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Here are some of the highlights:

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“The Inflationary Dragon Has Been Slain”

David Rosenberg thinks inflation the story is over, even if many of his clients and other market watchers refuse to believe it.

“The inflationary dragon has been slain,” said the head of Rosenberg Research.

He said that it is not surprising that efforts to stimulate demand by the company Bank of Canada and the federal government caused a burst of inflation amid supply chain shocks, but he argued that even after 18 months, the episode was economically temporary.

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In the past year, when Google was looking for inflation “over the moon,” he said companies took advantage of that and concentrated four years’ worth of price increases into a single year. However, this price hike has its limits and consumers are now starting to fight back.

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Rosenberg cited the popular maxim, “If something can’t go on forever, it stops,” which comes from economist Herb Stein (father of Ben Stein of Ferris Bueller’s Day Off fame).

“I have to say it over and over and over again,” Rosenberg said. “My strongest belief is that the inflation story is dead. And I actually can’t believe the push.”

From bear perma to bull perma

Rosenberg has a reputation as a “perma bear” on stocks (a label he believes is undeserved), but he expects to see a bullish turn later this year.

Everyone is talking about inflation and rising rates, but he said central banks will have to pause at some point and then move to an “aggressive” rate-cutting cycle to steepen the yield curve.

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“You need the bond market to hold you first, you need bond yields to come down to re-establish a more reasonable equity risk premium,” he said.

If that happens and the equity risk premium moves back up — which he sees happening in the fourth quarter of 2023 — then he’ll be one step ahead of calling the next bull market.

“The perma bear is turning into the perma bull — you heard it here first,” he said.

“Stocks don’t grow before bonds grow”

Rosenberg’s belief that inflation will moderate means he was bullish on bonds, a move that didn’t pan out last year.

“The bond market caught my eye last year,” he said. “This is not the first time this has happened.

But now things are “starting to come our way,” he said. “I have to say to everyone in the room that when you do an asset mix, there’s no growth in stocks ahead of growth in bonds, so it’s encouraging to see bond yields come down.”

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If last year was a year of many contractions in the stock markets, then this will be the year we see interest rates fall and earnings hit, setting the stage for another bull market.

“I’d say we’re probably halfway through this bear market in stocks, but we’re not there yet.”

Recession is cathartic—and inevitable

Despite wishful thinking in some respects, Rosenberg was adamant that a soft landing was not in the cards. He said a yield curve model shows a 90 percent chance of a recession, while data from the University of Michigan Consumer Sentiment Survey will serve up a recession on a “silver platter.” As a result, 2023 will be a rough year.

The Bank of Canada is likely to loosen policy to protect against a complete collapse of the housing market, he said, but that won’t protect the country from a serious downturn.

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“I think the recession in Canada is going to be a little worse (than in the United States),” he said.

But recessions, he pointed out, are a fact of economic life: the economy is in recession 15 percent of the time, and that’s not all bad.

“They’re cleaning,” Rosenberg said. “If you always remember, my grandmother always said: Forewarned is forewarned. As long as you know to carry an umbrella, you’ll be fine.”

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Interest rates will fall

After months of rising interest rates, Rosenberg said rates are coming down quite a bit.

He said the average drop in the U.S. Federal Reserve funds rate is 450 basis points during a recession.

“They’re going to cut rates a lot,” he said.

Still, he noted that some Fed officials “couldn’t have been more hawkish” and appeared to want to raise interest rates by as much as 5.5 percent even as inflation begins to falter. Rosenberg speculated that something more than inflation might be driving their desire for a raise.

“Maybe it’s also because they want to get rid of all the financial froth they created during their crazy policies in 2020 and 2021,” he said.

• By e-mail: dpaglinawan@postmedia.com | Twitter: denisegplnwn