In This Issue:

  • My Breakfast with Dave: A Non-Normal Recovery
  • Comings and Goings


My Breakfast With Dave:

David Rosenberg, chief economist for Gluskin Sheffin Toronto, gets up early every morning to decipher the latest economic and market data. The astringent note he published last Wednesday didn’t do much to sweeten my oatmeal.

If you’re an institutional investor who’s looking for a New Normal, you should pay attention.

He says:

Remember, the equity market at any given moment of time is one part reality and three parts perception.

Our friend, Brian Belski at Oppenheimer was on CNBC the other day and claimed that this was turning into a normal economic recovery. And that is what many market participants seem to believe until they don’t believe it any more. Their resolve has been impressive. But if this were a normal cycle, then:

Employment would already be at a new high, not 8.4 million shy of the old peak.

The level of real GDP would already be at a new cycle high, not almost 2% below the old peak.

Consumer confidence would be closer to 100 than 50.

Bank credit would be expanding at a 14% annual rate, not contracting by that pace.

The Fed would certainly not have a $2.3 trillion balance sheet.

And, the government deficit would not be running in excess of 10% of GDP or twice the ration that FDR ever dared to run in the 1930s.

If this were a normal cycle, then there would be a ‘clean’ 5 – 6 months’ supply of homes on the market, not the 21 months overhanging as is the case now when all the shadow inventory is included from the foreclosure pipeline.

If this were a normal cycle, the funds rate would not be near zero and one in six Americans would not be either unemployed or underemployed.

If this were a normal cycle, then mortgage applications for new home purchases would not be down 13.9% year-over-year (just reported for the week of March 12) on top of the already depressing 29.4% detonating trend of a year ago.

But the perception that this is turning out to be a normal sustainable expansion is strong and pervasive, although the reality is that this is just a brief statistical bounce aided and abetted by unprecedented government bailouts and intervention.

While we are inundated with that old refrain about “not fighting the tape”, in our view, this is just a glib excuse to stay long the market because of the herd effect, and to be honest, we heard that same trite rhetoric over and over again back in the spring and summer of 2007.

…This is not the story that a ‘live in the moment’ investor may want to hear today, but even as the market lurches forward, the economic outlook is more uncertain than is commonly perceived and we believe investors are taking on too much risk to be overweight equities at this time. The primary trend towards consumer frugality, liquidity preference and deflation has not vanished just because of the impressive bear market rally in risk assets that has occurred over the course of the past year.

[You can sign up for Mr. Rosenberg’s daily briefing here:]

Looking back, we see that he was similarly skeptical of the market rally last summer. After the S&P rose 15% in the second quarter of 2009, and the Dow hit 9000 in July, he grumped: “Too much growth – and hope – is priced in at this point…Hence our call for a sputtering stock market through year-end.”

In fact, the market didn’t “sputter” through year-end; it rose another 16% to close the year at almost 10,500.

Such are the hazards of prophecy. But was he really wrong? Or was he just right too soon?

It’s not hard to find cheerier views from some credible analysts.

For instance: back in November, David Ranson atH.C. Wainwright Economics said that fourth-quarter GDP would rock, and he was right. Now (per Dow Jones MarketWatch on March 18) he’s looking for near-future growth “even stronger than 5.9%”. He’s impressed by the narrowing of credit spreads and what he sees as the willingness of consumers to take on more risk by butting big-ticket consumer-durables.

But it’s still hard to resist Mr. Rosenberg’s bullet points about the non-normalcy of this cycle, even if stocks continue to levitate in the near-term. As he points out, what’s holding them up isn’t easy to discern. Pointing to historical precedent to adduce a v-shaped recovery isn’t very comforting when you’re in such unprecedented times. The stunningly-high U.S. federal deficits alone – and the higher taxes they portend – should be keeping any long-term investor up at night.

I know, we’re all sophisticated asset-allocators and risk-managers now, and we’re sure that all our correlations won’t go to 1. Even if they recently did. And managers of long-term institutional money, from what I’m seeing, are certainly not over-weight in equities. And they’re probably not the “live in the moment” investors that David Rosenberg is talking about.

Endowments are not going back to the equity-heavy portfolios of yore. They are sticking to the “endowment model,” and doubling down on attractively-priced alternatives, especially private equity. And, increasingly, the big pension funds are trying to get their gigantic ships turned slowly into the same general direction. (We’ll have more to say about this in the next letter.)

But if you know any of those “in the moment” guys you really should sign them up for Dave’s morning letter. Nothing like a little cold reality to start your day.


Comings and Goings:

Chris Conkey is the new CIO – Global Equities atMFC Global Investment Management in Boston (part of Manulife Financial). I’m glad to see Chris back in the game. He left Evergreen Investment Management back in 2007 when it was still part of the now-defunctWachovia Corporation. Mark Schmeer, who previously had the CIO-GE title, stays aboard as CIO – Asset Allocations. MFC Global, with $287 billion AUM, manages both institutional and retail money, and I note that they managed to secure $6 billion in new institutional mandates last year, despite the global turmoil.

When I emailed Chris to wish him good luck the other day he told me he feels that MFC is now positioned to become a much bigger global player.

On the left coast, the University of Southern Californiasaid goodbye to their treasurer and senior investment officer, Ruth Wernig, as she headed north on the Harbor Freeway to her new job as CIO of the $3.2 billion California Endowment. The endowment was gifted with $4 billion extracted from health-insurer BlueCross of California when it converted to for-profit status, and acts as a grant maker to community-based healthcare groups.

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