The bad news is that the bull market is over. The good news is it's gone to purgatory, not hell.
Former bull David Rosenberg, chief economist and strategist at Gluskin Sheff in Canada, described himself as cautious and agnostic about the unloved U.S. bull market and termed it "pathetic" that equity market players are still looking to Fed Chairman Janet Yellen to ride to the rescue for an injection of liquidity to take it to the next level. This year, equities in America have recovered since mid-February, but they have been led by telecom and utility shares, two of the most defensive sectors.
"That's not a bull market," said Rosenberg, who was chief North American economist at Merrill Lynch for seven years until 2009. Speaking at John Mauldin's Strategic Investment Conference in Dallas this morning, Rosenberg was cautious not to predict that a bear market waits around the corner. However, he was far from optimistic.
The world today is so topsy-turvy that if "you buy bonds, you buy them for capital gains." On the other hand, if "you buy equities, you buy them for income."
Something clearly is wrong with this picture. Rosenberg, who will address Financial Advisor Magazine's Inside Alternatives conference in Denver on September 19, noted that in a world where safe yields are scarce, equities may remain viable as income solutions.
But since the recession ended in 2009, global economies and markets have become absurdly dependent on increasingly impotent monetary easing for sustenance. That game is over.
Yellen and other central bankers face a quandary. Capacity utilization stands at 75 percent, a level once associated with possible looming recessions. Before this cycle, the Fed had never raised interest rates with capacity utilization below 78 percent.
Until the U.S. comes up with a serious fiscal and tax policy to complement monetary policy, Rosenberg thinks any meaningful improvement in the economy and equity prices are unlikely. That will require serious infrastructure spending in America, along with higher taxes on the very wealthy to pass along benefits and possibly through lower taxes to the beaten-up middle class, which isn't spending.
He called President Obama's advice from his chief economic advisor, Larry Summers, to play "small ball" on the 2009 stimulus with infrastructure spending a major error. Summers said in 2011 that the U.S. economy had achieved escape velocity. Two years later, Summers was talking about secular stagnation.
The only nation to enact a true stimulus after the recession was China but they shot themselves in the foot. Why? Their GDP is totally export-dependent and there was no foreign demand from Western nations embracing austerity. The upshot was that China's increased capacity and raised its of production, ultimately making itself less competitive.
For the world economy to rebound, it needs to delever global debt by 25 percent. Aside from tiny Ireland and maybe Greece, it hasn't happened.
Negative interest rates have been a failure and "won't get us there." They represent a tax on bank reserves. "Banks are there to create credit" and taxing them on holding deposits is silly.
Cancellation of some the most egregious debts may gain serious consideration in the public conversation. Pope Francis is at the forefront of the concept.
Moreover, the U.S. has renegotiated Puerto Rico's debts while the European Union has given Greece debt relief.
With the emergence of student-debt-laden millennials as a factor in the global discussion, it could become a popular option. Rosenberg also suspects the top 1 percent of income earners, and particularly the 0.1 percent, will play a big part in redressing structural imbalances. Millennials will have increasingly political clout and they are ones who created the "sharing economy."
Median family net worth is America is near where it was in 1992. Back in those days, gridlock was good when "Bill Gates was running the U.S. economy." Today we are in a very different world.