Rosenberg Outtakes

• [W]hen they say that the bond market leads the stock market, it is 100% true. Just like clockwork, the S&P 500 hit its nearby high on April 200 at 1,419, just two weeks after High-Yield spreads hit their near-term trough at 585 basis points. If you go back to all the interim peaks and valleys during this three-year cyclical bull-run from the March 2009 lows, the peaking-out or bottoming-out in the stock market occurs, on average, exactly two weeks after HY spreads either hit their bottom or peak. It was no different this time around. Moreover, because spreads are so tightly linked to the P/ E multiple, as well as the fact that they tend to lead, it would stand to reason that the credit market is worth watching for any signpost of whether it is prudent to start chipping away at the equity market again. For now, stick with the tortoise — stay defensive and income- oriented.
• [I]nflation is what is on the minds of the bond-bubble enthusiasts, perhaps because practically everyone has spent his or her professional lives living with it. The double-digit inflation days of the 1970s and 1980s are still not that far removed from everyone's psyche. Outside of wars, deflation is the norm, not the exception. The exception has been the experience of the post-World War II era.
• [Re the (Treasury) "Bond Bubble"] How can a security whose price is constantly projected to decline by the economics community be in a bubble? How can any asset class be in a bubble where the capital is guaranteed and which pays out a coupon twice a year?
• The prospects for the American consumer to lead the recovery look even less promising given the hangover from the housing crash, lingering debt issues and mounting job worries. Even if we don't get another recession any time soon, economic growth will probably be so sluggish that the massive amount of global excess capacity will not be absorbed very quickly. What that means is that the unemployment rate will remain stubbornly high as far as the eye can see — and many at the Fed know it. This in turn means that inflation and interest rates will remain low for a sustained period of time.
• [At] all levels of society, and across most countries in the industrialized world, there is still far too much debt and debt-servicing relative to income-generating capacity. Extinguishing this debt will be deflationary even as central banks are forced into further dramatic actions to cushion the blow — though the bar for the ECB is likely going to be much higher than is the case for the Fed.
• The situation now is one of debt destruction, not debt expansion, and it is only a matter of time before we see prices in aggregate start to deflate. We are not talking about 10 or 20 percent price declines — more like 2 to 3 percent. But enough to jeopardize the lofty earnings estimates embedded in equity market valuations, enough to thwart the progress needed to resolve the U.S. intractable deficit and debt problems, and enough to take bond yields back to their cycle lows.