- David Rosenberg — the famed economist and founder of Rosenberg Research — thinks investors are putting too much blind faith in the Federal Reserve’s ability to prop up a “frothy” market.
- In addition to a perceived Fed-backstop, Rosenberg notes weak market fundamentals and lofty valuations as reasons for his concern.
- Rosenberg thinks the market is in the midst of a short-term bounce, not a long-term rally.
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“You’ve got a tremendous amount of speculation.”
That’s what David Rosenberg, the famed economist and founder of Rosenberg Research, said in a recent Cambridge House interview when asked where he was seeing the most nefarious action in the market today.
To Rosenberg, the Federal Reserve is responsible for driving the exuberant behavior. In his mind, the Fed’s actions are signaling to investors that equity purchases may be coming down the pike, thus, creating a backstop for any hiccups or obstacles that may emerge. The Bank of Japan has enacted similar policies by actively buying exchange-traded funds.
“I understand the concept of: The Fed has my back,” he said. “Basically, we have Jay Powell is the blackjack dealer at a casino, and he’s handing out the chips for free. I just don’t find that to be a sustainable model, but that’s really what’s happened.”
For context, here’s a brief guide to what the Fed has been up to since mid-March:
“We know what happens with speculative, liquidity-driven rallies,” he said. “They are castles built on sand.”
Rosenberg’s skepticism over the staying power of a speculative, Fed-driven, liquidity-induced rally is echoed by John Hussman, the outspoken investor and former professor who’s long forecasted a stock collapse, and Stanley Druckenmiller, the legendary investor and former chief strategist for George Soros.
“Investors should be careful to avoid the misconception that easy money always supports the market,” said Hussman. “Despite the fact that the Fed eased the whole way down during the 2000-2002 and 2007-2009 collapses, investors have come to believe that Fed easing always supports stock prices.”
Druckenmiller’s views encompass a similar tone.
“The consensus out there seems to be: ‘Don’t worry, the Fed has your back,'” said Druckenmiller, adding, “There’s only one problem with that: Our analysis says it’s not true.”
In Rosenberg’s assessment, the market is simply in the midst of a short-term rebound after the initial 30-plus percent, coronavirus-induced drawdown. To him, the prices being paid aren’t reflective of fundamentals — they’re being perpetuated by momentum and “excessive” sentiment. And that’s permeating through to valuations.
“It’s a very frothy market,” he said. “It’s still a bounce.”
Despite a 40-plus percent rally since the nadir reached on March 23, Rosenberg thinks the market isn’t out of the woods yet.
“I don’t think this is the onset of a new bull market,” he said. “This is a rally you can rent, but it’s not a bull market you can own.”
In addition to lofty valuations, overwhelmingly positive sentiment, and a perceived Fed backstop, Rosenberg is quick to touch upon a historical precedent that normally coincides with bull markets: a low measure of the VIX. The commonly referenced benchmark gauge of market volatility is now relatively elevated.
“Here the VIX has been close to 30 in the context of a 40% run-up,” he said, adding that the measure is generally closer to 16 or 17 when a new bull is in place. “It is actually, very much, a low-conviction rally in that respect when you look at the volatility measures.”
With all of that under consideration, Rosenberg delivers a stark warning for investors thinking that the coast is clear.
“I don’t even really think we’re past the recession,” he said. “I think you’ve got to really take a look at the forest past the trees.”