Mainstream investors, both retail and professional, are fixated on inflation and are likely to be caught off guard making the wrong bet, economist David Rosenberg told attendees at Mauldin Economics’ Strategic Investment Conference.
Conference founder John Mauldin introduced Rosenberg as his “lead-off hitter” for the 13th consecutive year of the event, which was virtual. Rosenberg “has been consistently right, because he isn’t consistent,” Mauldin said. “He is willing to change his tune.”
For his part, Rosenberg said he “unabashedly” finds himself in the same camp with Fed Chair Jay Powell. Prices for goods and services have been driven up by a combination of “fiscal juice and supply conditions associated with reopening,” he said, but that’s a transitory situation, in his view. That’s why he sees growth stocks, Treasurys and other interest-rate-sensitive assets continuing to outperform others.
Investors are likely to be surprised when the conditions for modest deflation reassert themselves by year’s end, Rosenberg argued. Many in the inflation camp fail to spell out in any detail why inflation should persist.
The supply chain disruptions currently being experienced by the global economy simply are likely to be short-lived. They certainly aren’t powerful enough to override “a trend line that has been in place for decades.”
Furthermore, the bearish view on inflation and interest rates “is already priced in” to asset prices, he said. "People will be surprised when supply catches up with demand going into the fourth quarter," he predicted.
One of the economic developments arising from the pandemic that has been overlooked is that the U.S. has seen its highest productivity growth in 10 years. Rosenberg noted that GDP fell 3.5% in 2020, while employment fell 5.5%, revealing that far fewer workers were needed to produce somewhat fewer goods and services.
In 2020, the worst year for the economy since 1946, business spending on software and IT was 6%. "Productivity is more powerful" than the CRB index, he maintained.
In addition, GDP currently stands only 1% below where it was before the recession began in February 2020, Rosenberg said. That was after an 11-year economic expansion.
The productivity boomlet may be good for businesses and investors, but it isn’t helpful to the eight million Americans still unemployed after last year’s sharp downturn. Rosenberg didn’t deny that the economy has grown after lockdown-induced 2020's collapse but he asked, “How could we not have a recovery?”
As for the labor market, the statistic Rosenberg watches most closely is the U-6, which stands at 11%. "Once it gets to 8%, I could change my mind on inflation," he said.