David Rosenberg warned of a financial crisis few others saw coming. So why, amid ongoing global turmoil, is Bay Street’s most noted pessimist ready to change his tune?
When David Rosenberg, Bay Street’s best known pessimist, talks about the events leading up to the 2008 financial crisis, which he does frequently, he likes to cite a famous aphorism by Herbert Stein, one of the great pragmatists of 20th century economics. “If something cannot go on forever,” said Stein, a former presidential adviser, “it will stop.”
This line certainly has more gravitas than “I told you so.” But for Rosenberg – the chief economist and strategist at the boutique wealth management firm Gluskin Sheff and Associates – they amount to the same thing. In early 2005, as chief economist for Merrill Lynch on Wall Street, Rosenberg was one of a few lonely voices who warned that a housing bubble in the U.S. fueled by an abundance of easy credit was going to pop. Scanning the precipitous rise in home values, Rosenberg reasoned that a reversal was coming due.
As he told Barron’s in March of that year, the seemingly unstoppable surge in residential real estate prices had “not been due to income generation, per se, but rather due to loose financial-market conditions and an increasing level of exuberance.” The fact that the bubble hasn’t yet burst doesn’t mean it doesn’t exist, he said, channelling Stein.
“Bubbles and baths usually go together.”
The U.S. economy was roaring, though, so few listened. For Rosenberg, who was working in a prominent position at an investment bank that was earning billions of dollars by selling securities based on dodgy mortgages, it was an especially courageous call. (In the wake of the collapse of those securities, Merrill Lynch’s CEO left in disgrace and the firm paid hundreds of millions to settle shareholder lawsuits over its role in the financial crisis.) “As long as you had a pulse, you were deemed creditworthy,” Rosenberg recalls. “I lived this whole crazy bubble. I was a Canadian and Canadians don’t live this way for the most part. But in America, if I went around talking to clients circa 2005 and 2006 and mentioned the words ‘housing bubble,’ I might as well have looked them in the face and called their kid ugly, because that’s the response that I got. It was all about the democratization of housing and the democratization of credit. I used to take around this chart [showing the ratio] of debt to disposable income. It looked absolutely crazy, like an Internet stock [in the late 1990s].”
For all its analytical rigour, economic forecasting is still about trying to predict the future. Those who make the right call at the right moment attain a sage-like status, and subsequently command a great deal of attention. In the wake of 2008, Rosenberg, who has a master’s degree in economics from U of T, has become one of North America’s most sought-after forecasters. His “Breakfast with Dave” economic briefing notes – emailed daily to Gluskin Sheff’s clients – and ubiquitous media commentaries are now a staple of the raging economic debates about the continuing fallout from a financial collapse that may yet rival the Great Depression in depth and tenacity.
“I don’t think there is any [Canadian] economist who is followed as much as David,” observes Financial Post economics reporter David Pett. “The name resonates outside CEO circles and the investing world. I couldn’t say that about any other economist in Canada.” Bill Robson, the president of the C.D. Howe Institute, agrees: “His opinions are news in their own right. That’s how influential he is.”
Indeed, Rosenberg belongs to a new generation of globally prominent economic seers – Nouriel Roubini, a New York University economist renowned for his pessimism, foremost among them, but also such figures as Jeff Rubin, CIBC World Markets’ former chief economist; Niall Ferguson, the Harvard economic historian; and Joseph Stiglitz, winner of the Nobel Memorial Prize in Economic Sciences. This group has turned its attention to epic problems that eclipse the day-today fluctuations of the business cycle: sustainability, income inequality and the long-term implications of globalization. Most of these tea-leaf readers argue that the cup is half-empty.
For Rosenberg, the big theme is the staggering and unprecedented amount of “deleveraging” that is required of many Western governments in the wake of a Gilded Age-like period that will long be remembered for its addiction to cheap credit. As Robson says, “He’s concerned about the right things and the important things.”
Although he may lack Roubini’s brooding mien, which at times borders on shtick, Rosenberg understands a thing or two about showmanship. In a Gluskin Sheff meeting room with a stunning view of Toronto, Rosenberg offers a telescoped version of his CV – raised in Ottawa, economics at U of T, two short public sector stints – that culminates in a punch line with, well, punch. “My career really started on October 19, 1987,” he says, noting that his first day in Scotiabank’s economics shop coincided with Black Monday. “People ask me why I have this dark cloud wherever I go. Well, you start your career on Bay Street on the day of a 25 per cent collapse in the stock market and see how that affects the rest of your life.”
Truth is, he didn’t take quickly to “the dismal science.” In high school, he enrolled in a Grade 11 economics course. “I dropped it very quickly when I came home one day and told my dad, ‘Today, we assumed no government.’ I don’t think he stopped laughing for a week. I questioned the entire relevance of taking economics.”
Starting at U of T in 1979, he planned to do a commerce degree, but balancing the books didn’t come naturally. Rosenberg picked up a macroeconomics night course taught by a former public sector economist. Instead of the usual complement of undergrads, the classroom was filled with entrepreneurs and business people, and he found those grounded discussions intensely stimulating because they encompassed history, sociology and human behaviour. Rosenberg fell in love with the discipline “even though we were still assuming no government,” as he jokes.
James Pesando, a U of T economics professor who taught Rosenberg, recalls him as a lively, engaged student always eager to parry ideas about economics. “What I do remember about David was that he had a very extroverted personality,” says Pesando. “You had the impression that he wanted to learn. His success is driven by an extraordinary work ethic.”
Rosenberg spent 13 years at Scotiabank and BMO Nesbitt Burns, finally landing at Merrill Lynch Canada as chief economist and strategist in 2000. Two years later, the New York head office of the legendary investment bank came calling, and so Rosenberg began a seven-year stint on Wall Street that would catapult him into the public eye.
Rosenberg came back to Canada in 2009, having been lured to join Gluskin Sheff, whose principals cannily realized they could put their celebrity economist out in the store window as a way of attracting clients. “Many economists take themselves very seriously and speak in a very eloquent language,” says Ira Gluskin. “David is able to speak to all of our clients regardless of their ability to understand high-tone economic comments. He is definitely not a snob.” Neither is Gluskin. When Rosenberg arrived, the firm gleefully promoted their new economist’s “crystal balls.”
Rosenberg says the switch – from the “sell side” to the “buy side” – has been a revelation. At Merrill, he dealt mainly with internal sales people flogging the investment bank’s securities. At Gluskin, he has a desk right out on the trading floor with the portfolio managers, who, Rosenberg notes, spend their days assessing the probable risks and rewards of the investment choices they make on behalf of investors. “This is something a lot of economists on the sell side don’t see.”
In practical terms, Rosenberg’s forecasts have produced a tidy windfall for the firm’s clients: “Many people think that David is very negative all of the time,” says Gluskin. “He would argue, and I would agree with him, that this is not true. He has been very positive on bonds from the day that he came here and this has proven to be a brilliant decision.” Still, Rosenberg’s hard-headed philosophy can be a tough sell, even internally. “David is controversial because some of our marketing people would argue that it is difficult to get people to be enthusiastic when he sounds so negative,” Gluskin continues. “I would argue that they should listen more closely to his message.”
At a higher analytical level, Rosenberg has pushed Gluskin’s portfolio managers to start thinking about global markets in a somewhat radical way. In his view, what’s happening now bears little resemblance to the standard sine wave business cycle – inflation, rising interest rates, flagging demand, excess inventories, falling prices, and so on – that all economics students learn about in first year.
“We’ve had about 10 of these in the post-World War Two period and that’s what we got taught in school,” he says. “What’s different is that this recession was not driven by any of those things.” Rosenberg believes he has spotted something new on the economic horizon – a kind of meta cycle that was trending up for decades and is now tumbling messily downwards.
“What we’re living through is a contraction cycle and deleveraging period of historical proportions because the movie is running backwards,” he says. “And along with that, is an unprecedented destruction of wealth in the world’s largest economy. The impacts this will have on savings, on spending growth and on inflation are going to linger for a long period of time. We’ve papered over a lot of these problems with fiscal policy and now we’ve reached the end of the road.” With huge deficits and central bank rates set almost to zero, governments have run out of ways to stimulate their economies.
While Canada, with its relatively clean balance sheet and a heavily regulated banking sector, ducked the mayhem that continues to afflict U.S. and European lenders, Rosenberg warns that the country’s economy is still exposed to what he calls “the cross-currents of global investor sentiment.”
“Canada, in some respects, is the prettiest girl in the ugly contest. But that doesn’t mean we’re not vulnerable to these external events, as [Bank of Canada governor] Mark Carney has made abundantly clear.”
Early this summer, Rosenberg made a somewhat daring prediction about his own predictions, hinting (to the surprise of his many fans) that he may soon feel upbeat about our neighbour to the south.
Don’t be surprised, he told The Financial Post, if his signature bearishness turns into something a bit more optimistic by “Thanksgiving,” by which he meant the culmination of the American presidential race and the possibility of a Mitt Romney victory. “The future is brighter than you think,” opined Rosenberg. “I’m so excited I just can’t hide it. But for now I’m keeping the powder dry.”
Just weeks later, however, Rosenberg’s unexpectedly sunny disposition had given way to a more familiar sense of foreboding. In one of his well-read “Breakfast with Dave” notes, he itemized no fewer than 11 reasons for Americans (and therefore everyone else) to feel queasy about the U.S. labour market. Dismissing the “alleged” post-2009 recovery, Rosenberg parsed the June jobs numbers and concluded pointedly that food stamp use had risen by a third since the recession ended.
Nouriel Roubini, meanwhile, has declared that the looming tempest of 2013 – featuring a catastrophic implosion of the euro zone and a double-dip recession – will make the financial crisis seem like a light rain shower. When I asked Rosenberg whether he was still feeling moderately bullish about the prospects for the U.S., he replied that he doesn’t let “blips” – Roubini’s “perfect storm” forecasts among them – influence his long-term views. And, he added, “I never said I was bullish. I said there are certainly events that could push me in that direction. That’s more than a subtle difference.”
While Rosenberg insists that, as an economist, he isn’t in the business of forecasting politics, the subject is never far from his mind, and never more so than with this fall’s U.S. election. Like many observers, he believes the United States, with its uncontrolled deficits and increasingly stagnant economy, has arrived at a day of reckoning, not unlike 1980, when Ronald Reagan was elected president.
He doesn’t have to reach too far back into history to find examples of other countries or regions that have reversed their fortunes when confronted by the ugly prospect of economic chaos. Not surprisingly, Canada in the early 1990s is at the top of his list. Recalling the early years of Jean Chrétien’s three-term Liberal majority, Rosenberg says the Grits and finance minster Paul Martin ignored the party’s pricey 1993 election promises and eradicated a federal deficit that was running, by that point, at well over $40 billion a year. Chrétien and Martin repeated their trick a few years later with drastic pension reforms that boosted payroll deductions but put the country’s retirement savings pool on a far more financially stable foundation.
His other example: Southeast Asia in the wake of the calamitous currency devaluations of the late 1990s. Unable to borrow their way out of the crisis, countries such as Thailand and South Korea radically restructured their political and economic systems, allowed major banks to fail, and endured a wrenching contraction. “The phoenix rose from the ashes,” he says. “In 2001, no one would have believed that the next decade would belong to Asia.”
For the U.S., Rosenberg believes strongly that only Republican “one party rule” – a Mitt Romney victory, combined with majorities in both the House and the Senate – would produce the political consensus necessary for sweeping reforms to both the country’s costly entitlement programs (such as Social Security) as well as a tax code that produces an over-supply of housing but not nearly enough business investment in manufacturing and research and development. “I think this is actually a tremendous opportunity,” he says, brightly. “In a period where you have a crisis, you need effective leadership and it’s tough to do when you’re constantly compromising.”
He declares himself encouraged by the contentious, though successful, campaigns by some U.S. state governors and mayors to wrestle down costly public sector wage and benefits settlements. Rosenberg also points out that the housing sector is showing signs of a pulse, while the country’s unexpectedly productive oil and gas sectors suggest the U.S. could actually become an energy exporter.
“Maybe austerity is a dirty word in Europe,” he muses. “But maybe it just means, ‘live within your means.’ It doesn’t mean stop spending.” It means stop excessive borrowing beyond what you can reasonably afford. This is advice he was selling on Wall Street in the heady days of the housing bubble, and the principles still apply.
In the (not entirely negative) world according to David Rosenberg, America won’t become a fiscal basket case. After all, even bad times cannot go on forever.
Journalist and author John Lorinc (BSc 1987) writes about politics and business for the Globe and Mail and Spacing magazine.