Rosenberg also observed the 2009-2019 recovery was one of the weakest in modern history. “We only got to 3.7% unemployment” because of the big falloff in the labor force participation rate, he said.
That’s why deflation remains a more serious threat than inflation in his view. Fiscal policy and debt levels aren’t “good inflation indicators,” he said. “Look at Europe and Japan.”
Fully one-third of industrial capacity is sitting idle. Closing the output gap—the difference between actual and potential GDP—will take until 2025, if not 2030, Rosenberg predicted.
Aging demographics are another factor restraining inflation, because older folks tend to spend less. If inflation does eventually materialize, it will come “because the supply curve becomes sclerotic,” he said, not as a result of a surge in aggregate demand.
When it comes to investing, both Gundlach and Rosenberg agreed that capital preservation was likely to become increasingly important after a decade of spectacular returns for both stocks and bonds. Both viewed cash, earning nothing, as an asset. Gundlach said U.S. stocks had so “grossly outperformed” the rest of the world that they could be set up for a multi-year period of negative returns.
Rosenberg still maintained that long-dated U.S. Treasurys could still remain a viable hedge against future deflation. He particularly likes zero-coupon long-term bonds where investors know exactly what they’ll receive when the instruments mature.