Transcription
Do I anticipate that we're going to have a serious correction or a bare market in 2026? Uh, I'm anticipating it. I don't think these multiples are sustainable. And when you look at what happens in a bare market, uh, you know, you don't have to have a horrible recession. You know, uh, when you had the tech wreck back in the early 2000s, GDP barely declined. Uh, we had a technical recession. It was the mildest recession in the post-World War II history. In the stock market was down between 40 and 60% depending on the index that you looked at because it's the multiple. It's the multiple.
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Hey everyone, my name is Anthony Fatis and welcome to another episode of the What the Finance podcast. On this episode, I have the pleasure of welcoming back David Rosenberg. So, David is the founder and president of Rosenberg Research and Associates. So, David, thanks so much for coming back on the podcast.
>> Anthony, it's a pleasure being back on. Thank you. Yeah, look forward to speaking. Uh, we're at the end of 2025. Uh, so I'd be really interested in hearing, you know, how would you describe the economy and the markets that we saw in 2025? And uh, was it what you expected?
>> Yeah, well, it was a, um, it was a roller coaster ride, that's for sure. And uh, it's rather incredible that uh, we're finishing off where we are uh, on the economy and on the stock market when you consider all the angst and anxiety and fear uh, back in April over the reciprocal tariffs and the threat of a global trade war. Uh, and we've come a long way since then. Um, but I, I think that um, you can probably characterize this year at the headline level uh, as uh, being a resilient year, certainly for much of the risk-on trade and for the economy. Uh, from the economic standpoint, you know, you look through uh, the surface and um, you see K-shaped divides pretty well everywhere. Uh, that's what I think has to get resolved in 2026 because uh, you know, the, the K-shape is um, endemic. It's not just in the consumer, but it's in capital spending, and it's in the labor market, and it's in the capital markets too. Uh, so that's my hope is that uh, 2026 is going to be the year uh, of how uh, we change letters from K to something else. Something tells me it could be shifting to the next letter, which is L. Uh, but, um, but we'll see. Um, but there's lots of question marks beneath the veneer of what seems to be a very resilient economy. That much is for sure.
>> And what are the key question marks that you're sort of watching? As you said, sort of this unemploy, this employment issues. I guess there's consumption issues, there's this K-economy.
>> Well, you know, there's just um, still some significant uh, divergences. Uh, like we all know about the K-shaped consumer, and I'll get back into what, you know, the, the high end is the glue that's keeping the consumer together because the low end has been under significant stress. Uh, that's spread into the mid-consumer, as you can see by the uh, retail sales reports that we've been seeing. Uh, I think the question in that respect is going to be, what happens next year? Will the middle consumer and the low-end consumer play catch-up to the high end, or will the high end play catch-down uh, to the rest of the consumer base? And a lot of that is going to be predicated on what the stock market does. Um, because much of the strength we've seen in the consumer in aggregate has come from the high end, which has benefited from the equity wealth effect on spending. Uh, you know, the other K I'd mention was in capital spending. You know, I keep hearing that we have a capital spending boom in our hands, and uh, we do, except it's confined to one sector, which is technology, primarily, you know, generative AI and all the ancillary spending around that. Um, that expenditure from the business sector is up at almost a 20% annual rate this year. So that's a boom. Uh, the problem is that the rest of the capital spending in the economy is actually negative so far this year. Um, so there's another massive uh, anomaly and dichotomy and K-shape. Uh, and we'll see how that gets resolved next year. We know that uh, the spending pledges related to AI are going to continue in the next year. The question is, what's going to happen with the rest of the capital spending pie? Because when you're taking a look at the data, what you see is that it's been a resource allocation shift from the old economy to the new economy. Um, and uh, I don't really look at these divergences as being healthy. Uh, I think it's just basically not showing any broad-based strength. It's really confined uh, to what's happening in this um, inflection point in the innovation curve. Um, other parts of the capital spending picture have lagged well behind. We'll see how that plays out next year. Uh, the K-shape in the labor market. Um, well, that's a pretty easy one. We have a no-hire, no-fire uh, economy on our hands. Uh, and uh, companies are uh, not hiring. You see that the hiring rate is lower now than it was um, you know, before COVID hit. It's like been a hot knife through butter. Labor demand is clearly on the decline. Um, at the same time, uh, there hasn't been much of a firing cycle, as companies continue to hoard their labor and, um, prefer to adjust their hours worked than lay people off. But you see, the, the thing is that the hiring rate in the US economy is so low that if we start to get the layoffs, um, we're really on a precipice where we're going to start to see, uh, monthly declines in non-farm payrolls. According to Jay Powell, uh, that process already started in the spring. It just hasn't shown up yet in the official data, but will when we get future revisions. Um, and then of course, there's the stock market. Uh, it has broadened out, but the bottom line is that we still have the top 10 companies in the S&P 500 accounting for 40% of the market cap. So there's been some broadening out. Um, that's helpful, but uh, the degree of concentration uh, in megacap tech, that is yet to be resolved. Uh, so these are the question marks that I think hopefully will be answered in 2026.
>> Yeah, and it seems like the main thing that's keeping it up is uh, the economy up is employment and the fact that there hasn't been any firings because it seems like everyone's lever, you know, this consumer credit is extremely high, everyone's levered. So when you see that sort of fall over of employment, that's when you'd expect there to be sort of further ramifications around the economy.
>> Right. Well, what's interesting is that uh, you know, according to Jay Powell, and of course, it's the Fed research staff giving him this information uh, is that the real data uh, has shown that non-farm payrolls have declined on average 20,000 per month uh, since April. Uh, and when you've had a string of declines like that, which is still to show up in the official data, uh, his belief is that this, the risk is that this continues into 2026. Uh, so it's not even like we have a jobless economic expansion going on. We have a job contraction economic expansion going on. And maybe, maybe we're just seeing tremendous supply-side productivity growth in the economy. Um, but this would be the first time, if you look at the data on the employment side, employment is so critical because there's no market bigger than the labor market. Not even the equity market is bigger than the labor market. Uh, and that determines um, labor income, which then determines consumer spending. Uh, and here you have the Fed chairman telling you that for the past six months, we've actually been seeing on net employment contraction. And you go back to 1948, for which we have data, that's never happened without there being an outright economic recession, uh, which the consensus is that there is no recession. Um, so that's again, this is a, a huge anomaly. Is that, you know, I was saying before that, you know, the employment situation has to be resolved, no hiring, no firing, but it looks as though on net employment has been going down for the past six months, and yet the economy is hung together. Uh, so something's going on out there. Uh, could it be? I mean, Jay Powell had said that it's too early to really make book on the extent to which AI is generating uh, productivity gains. Although, you know, when you look at the Challenger layoff numbers, what's really featuring large in the past, say, five or six months, that wasn't around a year or two years ago, because they, the Challenger people give you the reasons why we're seeing layoffs, and the, and the layoffs have started to pick up. The layoff announcements, it just hasn't shown up in the claims data just yet. But a rising share of these layoff announcements uh, are coming from AI. Uh, so I think it's actually starting. Jay Powell had said at his presser after the FOMC meeting that the productivity, a lot of it is coming from the automation wave that came uh, from COVID uh, and all the work-from-home technologies and automation that took place um, you know, since the opening months of 2020. Um, and he might, might be right on that. Um, but there is a fundamental shift going on, it seems to me, uh, and that is that the capital labor ratio, as I sound like an economics 101 professor, is going through a significant shift upwards. Maybe that's what the stock market sees, because that's fundamentally positive for productivity growth. The question becomes, what sort of productivity growth are we really seeing? Again, something I hope we get resolved in 2026, because it's one thing to get productivity growth when you get accelerating output growth and you also get positive employment growth. And the productivity comes from the fact that output is rising at a faster rate than employment. But what's happening now is that you're getting the output, but employment's actually going down. Once again, if Jay Powell was right, I mean, you've seen that in the household survey. The household survey has shown that since January, the US economy has lost 250,000 jobs. That's the household survey. That's a survey where the unemployment rate comes from. And you'll be scratching your head, how could this economy be expanding? Uh, well, you know, the uh, the numerator, which is say, non-farm business output, that has still been expanding. Call it 2 to 3% uh, and yet labor input is is stable to lower. Uh, so this is what I'm talking about is that, you know, when people discuss the productivity benefits from generative AI, AI is not making output go up, it's just making us work faster. The productivity is coming from a lower denominator, which is labor input, which then feeds into income in the personal sector, which is far bigger than corporate profits, but of course, that is what equity investors pay for. Um, but the predominant share of national income comes from the labor market. And yet we have the consumer still chugging along. But that's only because of the equity wealth effect on spending for the top 10%. Like the top 10%, they own 90% of the stock market. Uh, and that's why the savings rate's been coming down. We have this unusual, again, a massive dichotomy. Um, like if you were to measure the US economy based on labor income, what if I told you that in real terms, adjusted for inflation, disposable income is down about 1% at an annual rate since April, and yet consumer spending is up more than 2%? We have like this huge divide between what the labor market is delivering as we sit here today in terms of personal income and the consumer spending. I said before, the fallout from that is the fact that people are drawing down their savings rate, and they're doing that because they feel comfortable looking at their 401k plans and they're saying, well, you know, the stock market's going to look after me in retirement, I can spend more my after-tax income. I don't know how sustainable that is. And in fact, Jay Powell, towards the end of his Q&A session, also questioned the extent to which is this sustainable. Like, everything comes down to the stock market, I guess. You know, when I think about this whole, what's happening with the economy, you know, when I started on the business in the mid-1980s, it was the economy that drove the stock market. And today, it's the stock market that drives the economy. It's like the, what part of the, is the dog and what part is the tail? Um, today, it's the stock market driving the economy. And the last time we saw something like this was back in the late 1990s, when people looked at their dramatic technology equity wealth going up, and the savings rate got drawn down significantly. The most dangerous thing to have done, however, was to extrapolate what happened in 1999 into what ended up happening in 2001, 2002. So that again is one of these huge K-shaped dichotomies and anomalies that I hope is going to get resolved next year. Um, what happens with the stock market is not just going to be important for your portfolio. What happens to the stock market is going to determine what happens with the economy next year. I know people are looking at what's the Fed going to do or not do. A lot of hope that there's going to be a new chairman who's going to be very dovish and cut rates aggressively. Um, we have the tax refund increases in the opening months of the year. Uh, depreciation allowance, what that does with the cap-back cycle, but everything's going to boil down to the econ, for the economy, it's all going to come down to what the stock market does next year.
>> Yeah, really interesting. So that dichotomy is really interesting as you're saying, sort of higher productivity, lower employment. How does that work from a Fed perspective? Because obviously, if you assume there's higher productivity, there could be higher inflation, higher growth, etc. But then also, the, you know, employment is going down. So basically, they're pulling away. The two different, two different focuses are being pulled in opposite directions.
>> Well, you know, I, I heard Austin Goldsby speak, and it was uh, interesting to listen to him because he dissented, as you know, at the recent meeting. He didn't want to cut rates, but only because uh, he feels that we're in a data vacuum right now. He wanted to wait and see the barrage of data we're going to be seeing in the next uh, couple of months. Uh, and he thinks that policymakers are in too much of a bog of uncertainty. So his decision had nothing to do with any particular shift in view of the economy or of inflation. It's just that we don't have enough information. That was his view. Um, but productivity uh, is a, uh, is an inflation killer. Uh, and so there, you can, if, if this generative AI is going to work, there's, you're not going to get inflation out of it. Um, people saying that this is like the internet on steroids. Generative AI making us work quicker, we're faster, more speed. That's all productivity. Uh, productivity reduces uh, the business cost curve. How do you get inflation out of that? Not that there's not pockets of inflation out there, like we do see it, you know, insurance costs, uh, healthcare, um, the tariff impact is going to subside in the opening months of next year. According to most models, if you pay attention to models, uh, the tariffs were never going to be an elongated period of inflationary pressure. Uh, and even as it stands, the tariff impact has been pretty mild compared to what the forecasts were just six months ago. So, the way I see it, um, if you got better productivity growth, and you're getting that productivity growth into a, [clears throat] labor market that's building spare capacity, which puts downward pressure on nominal wage growth, where's the inflation going to come from? Um, and if you're going to come back to me, you're going to say, "Well, there's going to be more tariff pass-through, and there's going to be all these insurance costs, health insurance, and property and casualty insurance." Uh, okay. If you have a loosening labor market, then these cost increases just hit the wall in the labor market. It either shows up in declining real wages, which then shows up in declining real consumer demand, or it gets absorbed in profit margins. Um, so I don't think that there is an inflation story. I think I'm on the other side of the debate, according to most economists. Um, there's a lot of people at the Fed uh, that are still nervous about inflation. Uh, they're nervous about the fact that inflation's been above target for the past several years. I get that. But you can't carry out monetary policy by looking through the rearview mirror. Uh, and when I listen to Jay Powell, and unfortunately, he'll be gone in May, we'll see who takes his spot, but I thought that he was bang on the money. He said, basically, that when you adjust for tariffs, which he said are going to subside, the impact's going to subside in the opening months of next year, you exclude the impact of tariffs, and core inflation is running in the low twos, which means the Fed is close to target. And then he went on to say that there's going to be, even with the insurance costs, because we haven't seen the full brunt of the deflation we've seen in real time in rents, and that's a dominant feature in the CPI and the core CPI, that that's not fully filtered through into the CPI data yet, or even the PC deflator. So, I think people are going to be surprised, including the hawks at the Fed, that by the second quarter of next year, uh, we could well be at target uh, on headline and core inflation. Uh, so I'm one of the few people out there that is not hawkish on rates. Uh, and I'm still bullish on the bond market. Uh, I think that the bond market's bought into the view that we're going to have above-trend growth and that we're going to have inflationary pressures next year, and that the Fed is done. Uh, I'm not in that camp. I'm on the other side of that trade.
>> Okay. So you can, you see the Fed continuing to cut rates into next year, you know, and what, down back down to 2%?
>> I, I, I think they'll, you know, people laugh at me, I don't care. I think the Fed will be cutting a lot next year. And uh, whether it's Kevin Hassett or Worsh or anybody else, it's not going to be because of Donald Trump putting his imprint on the Fed. The data will dictate. The data will dictate. You know, so many people are looking at the Fed dot plots that are really calling for one more cut next year. I don't care about the dot plots. The dot plots are a useless guide. But yet everybody just, you know, focuses on the dot plots and they focus on the Fed's forecast. This is the median forecast of 19 people. And you know, if you have a consensus, well, the Wall Street Journal prints out the consensus of 19 economists, do you really look at the median or do you pick and choose who are the best forecasters here because I'm going to pay attention to them? But when you look at the median numbers out of the Fed, you, you don't know who they are. And not all Fed officials, in terms of their forecasting ability, are born equal. So it's not much of a help. You know, I hear, oh, after the FOMC meeting, oh, it's a growthy Fed. It's a growthy Fed. Look at what they did with their GDP forecast. Look what they did with their unemployment forecast. Look at their dots. They're basically done. Um, there's, uh, there's a lot of people at the Fed uh, that think that the funds rate is going to have to go, you know, two or through 3%. I happen to be, I happen to be one of them. Um, so I don't think that they're done, even though the median numbers, which are meaningless, are suggesting otherwise. So, yeah, I think next year, if the Fed is truly data-dependent, they should be forecast-dependent. And I would say that if Powell is anywhere in the ballpark on his view right now, rates are going to be coming down more than what's priced in.
>> Yeah. Okay. Makes a lot of sense. So, we sort of been piecing it all together and we've sort of talked about a few things, but what do you actually see in 2026? What's the overall thesis?
>> Well, like I said, it's um, you can't, you can no longer forecast the US economy without knowing what the stock market's going to do. That's just the reality. There's like a, today, there's like a 95% correlation, but it's the stock market driving the economy through the wealth effect on spending for the top 10% of the consumer base, which accounts for 50% of total consumer spending. That's the glue. Like I said before, even with the AI spending boom, if the consumer, AI, I know AI is big, it's on the front pages of every newspaper every single day. It's a big spending bench going on. But what has not changed is that consumer spending is 70% of GDP. AI spending is not 70% of GDP. And the only reason that we're not in a classic recession because the income numbers are telling you that we actually have an income recession. Personal income, disposable income in real terms is negative over the past six months. But consumer spending is positive because the equity market is making people feel richer. So they're spending beyond their means. If the household sector, and that includes the high end, were compelled to spend their money in line with their real incomes, consumer spending would be running negative since April. So it all comes down to the stock market. And uh, I could say, your guess is as good as mine. I think that we are in a classic price bubble. I'm not alone in thinking that. A lot of people will push back on that. I know the market's broadened out. There's hardly, outside of maybe consumer staples and and and and REITs, and energy. Uh, most segments of the stock market are well trading well above their historical valuations. It's not just what's happening in technology. This is a, uh, 23 forward multiple on the S&P 500. You know, I take a look at uh, the CAPE multiple, which is my favorite, the Schiller cyclically adjusted PE because it's rich in history. It's a real variable. It goes back uh, 100 years plus. And that multiple is at 40. That's the smoothed cyclically adjusted PE multiple, 40. We're at 40. That's a 2 and a half% real yield on the stock market at a time when the real yield on the long bond is 2 and a half%. So, we're operating in a world right now where there's a zero equity risk premium. And you got to compare, a lot of people like to use the 10-year, but you got to compare a long duration animal to a long duration animal. Uh, based on the 30-year real yield, you, you're not getting compensated to take on equity risk. Besides the fact that, you know, Jeremy Grantham famously said that you measure anything is in a bubble when you cross above a two standard deviation event in any particular asset class. Credit spreads are certainly there. But so is the stock market in terms of the multiple. The multiple is always the heartbeat of animal spirits, what investors are willing to pay up for for the future expected earnings stream. So this is the sixth bubble uh, that we've had in the past century. Not as big as it was in 1999. Um, but this is a bubble, and bubbles can last for a year and a half. This bubble started in the summer of 2024. So it's been about a year and a half. And normally the market rises 25% in the bubble phase. So you can always make money in a bubble, but you have to know that when you're in the bubble, you're really in extra innings in the baseball game. And um, the first, the first uh, the first game, which is the bull market, lasted nine innings. And the nine innings ended a year and a half ago. And on average, using baseball analogy, extra innings go to the 13th, 14th inning historically before the ghost runner rule was introduced in 2020. And I think that's where we are right now. Um, so it's hard to know what exactly the precipitating force is going to be that causes the rollover in the stock market. Do I anticipate that we're going to have a serious correction or a bare market in 2026? I'm anticipating it. I don't think these multiples are sustainable. And when you look at what happens in a bare market, uh, you know, you don't have to have a horrible recession. You know, uh, when you had the tech wreck back in the early 2000s, GDP barely declined. Uh, and then we had a technical recession. It was the mildest recession in the post-World War II history. And the stock market was down between 40 and 60% depending on the index that you looked at because it's the multiple. It's the multiple. You know, what, what people don't realize is that, for example, this year, from the April lows, from the reciprocal tariff lows, this year, and you look at the median sector of the S&P 500, 75% of this run-up has been the expansion of the market multiple, and only 25% has been due to earnings growth. That's the power of the multiple. Basis point for basis point, the multiple, the animal spirits in the stock market is a far more powerful determinant of where the market goes than earnings. All I ever hear about is what's a fundamentally different market. Well, I'm not going to say the fundamentals have been lousy, but what I'm saying is that there's a big delta between the fundamentals and where the market's actually trading. And that's the, that's the multiple expansion we're talking about. In a bare market, uh, the contraction of the multiple, that mean reversion process historically accounts for 80% of the draw down on the stock market. It's not that earnings necessarily collapse. It's that what investors are willing to pay for the earnings stream uh, tends to mean revert. And so that will be interesting to see how that process plays out, if it plays out at all. Well, I mean, that's my base case forecast, but you know, there's no such thing in this business of forecasting is a sure thing. But let me just say that what is a sure thing is that if the stock market does roll over, the economic repercussions are going to be far higher than they've been in the past. And that might be where you get multiple contraction causing the stock market to go through an initial leg down, and then the impact that has on consumer spending, especially in the high end that's kept the glue together. Then you get the additional headwind on earnings. So you get the multiple contraction bumping against an outright earnings decline. And this is an, nobody's got this forecast. Nobody. Do you know that I, I got some numbers and it showed that less than 1% of Wall Street analysts, equity analysts, less than 1% have a sell recommendation on their stock. Did you know that? And there's not one top-down strategist that's calling for a down market next year. Everybody is up because of course, this is the business of extrapolation. But it's not much different than we had back in 2000, heading into 2000, every strategist was bullish, and every analyst had a buy or hold recommendation on their stocks. Are really, you know, people like to say, well, it's not like the dot-coms, and there's differences, similarities, but certainly in terms of market positioning and sentiment, and the narratives, there are a lot of similarities.
>> Yeah, do, does the multiple expansion make sense when you take into account, I guess, the basement trade of, you know, there's so much more government debt, there's so much more credit in the system, there's so much more liquidity, so then does it just make sense that it's basically there's more credit, liquidity, etc. in the system, hence spending multiples?
>> Well, um, you know, I, I, I think that it comes down to the fact that, well, this is my opinion anyways, that, you know, we've had uh, you know, starting in the fall of 2022 uh, with uh, ChatGPT and the whole proliferation and expansion of all the spending on this new technology. Um, and so this is nothing that we haven't seen before. I mean, if we can get data, I mean, there used to be a time where, you know, railroads were the new technology, and there was a time when, um, radar and transistors and semiconductors and mainframe computers, and then we had the internet. And so this is just normal behavior. Um, I don't know so much about the liquidity aspect. Liquidity has not been a problem for a long, long time. I said before, just since April alone, look at the expansion of uh, the multiples sector by sector. You drill down to the sector level. It's not just been earnings, it's been the multiple that's been the driving force sector by sector, not just in technology. But this is what happens when you have uh, a, a, a, a shift in the innovation curve. The bubble isn't in the actual technology. The bubble is in animal spirits and investor behavior. How investors respond initially uh, to the new technology. If I data back to Leonardo da Vinci times, when he invented the wheelbarrow, which I imagine back, you know, a thousand years ago, that was that was massive technology. It's the same thing. You know, that's the one thing, Anthony, that hasn't changed. And, and generative AI hasn't changed the fact that we are humans. Human emotion. The reason why in economics they force you to take psychology when you do your economics degree is because there is so much psychology and emotion behind what's happening in the capital markets. So nothing here. It's not, it's not about liquidity. Liquidity, people don't even know how to define liquidity. The liquidity is the bid-ask spread. That's all it is about liquidity. Liquidity is is euphemistic with confidence. That's all it is. It's confidence. You didn't have liquidity back in 2008 because there's no confidence. There's no trust. Now you have tremendous confidence. That's all it is. When you're talking about liquidity, it's just about confidence in the future. And that's reflected in the market multiple. And they move to extremes. And that's the one thing that generative AI, I'm telling you, it, it, it's not made us smarter. It's made us quicker. And it's not going to alter any more than the internet did. It's not going to alter the extreme human emotions of fear and greed. And the person who actually first modeled this out, animal spirits and the impact on equity market behavior, was John Maynard Keynes back in the 1930s. And then who perfected it in strategy work was my hero and mentor, Bob Farrell at Merrill Lynch, who in the 1950s was the first equity strategist to incorporate sentiment into his uh, into his analytical work. So that's what we're talking about here. This, if this was just about earnings alone, the stock market would be a lot lower than it is right now. It's not about what earnings have done. And you could argue earnings have been fine. They have. But there's a massive delta between the fundamentals and where the market is because of the exuberance that's evident in the expansion of the market multiple. Now, if the multiple was 18 or 20, I'd say that's fine. But the forward multiple is 23. You look at price to earnings, you look at price to book, you look at price to sales. Price to sales is actually a three standard deviation event. There's no valuation metric that isn't saying that we're not in a bubble. And you can't time when bubbles are going to burst, except to know that you're playing on borrowed time. And I could be completely wrong. Maybe this is a 2027 story. I think that that would be unusual. I think we're in the late stages, not just of the bull market, but I think we're in the late stages of the bubble. And these don't tend to end well. And it's always very difficult to isolate what is the piece of bad news going to be. Will it be a more hawkish Fed? Uh, will it be something happens? What if the Supreme Court rules against Trump, and then he's forced to go into a whole bunch of other um, uh, measures to get what he wants on tariffs? It'll be complete mayhem. I don't get asked that question. I never get asked that question. I get questions. I get questions. What is the impact on capex going to be from the appreciation allowances? Or what's the impact of consumer spending going to be from the tax refunds? I don't get any questions about what happens at the Supreme Court. It's going to be mayhem, and we don't know how Donald Trump's going to respond to that. On top of that, nobody ever asks me, you know, people seem to think that we're going to get these tax refunds next year, and everybody's going to head out to the shopping malls. What people don't realize is that that tax refund, $1,000 per household, people don't realize when you do the math that all that money and then some, is going to go into the round of cost increases that you can't substitute away from early next year, which nobody again talks about. So, I guess people don't talk about things, so I'll talk about them. Okay. Um, healthcare, uh, insurance costs, uh, property and casualty and auto, and utilities. Those four things are going to come to an incremental $1,500 additional expense of the household sector in the opening months of next year. So people say, "Well, we're going to get this. Thank God we're getting the tax refund, or else it'd be really tough." Even the tax refunds don't compensate for the cost pressures on the household sector that's going to come early next year, which nobody talks about. People think that this money is going to come from Uncle Sam and we're just going to head out to the auto dealerships. I don't think that's going to happen. It's going to be spent on the necessities of life. And that's really where the inflation is. Unfortunately, the inflation that we're seeing is a, is a, is a different form of taxation uh, on things that you can't substitute away from. So people will be very surprised that there is not going to be any cyclical spending thrust from these tax refunds. Um, but the overriding point is that, which I think people on the call have to know, is that never before has the economy been reliant on the stock market like it is today. It is not a stable situation. That if the economy was actually responsive to the labor market and 80% of national income, which is labor income, we'd probably be in a recession right now, but we're not because of the stock market. So let's just see how this plays out. Uh, I wouldn't be as concerned if the CAPE was at 30 instead of 40. Okay, it's just that these valuations are too high, which means it doesn't take much in the way of any adverse news to cause it to roll over. What was the adverse news in the opening months of 2000? Does anybody really remember what was happening? The Fed wasn't raising rates anymore. What was happening? God forbid Cisco misses by a penny and things start to roll over. It will not take much, I don't think, to cause this thing to roll over. And that's my big concern is that that will have a detrimental impact on consumer spending at the high end. Which has been the only bullish component of the household expenditure picture in 2025.
>> So, so what do you say if we do get [snorts] this significant bare market in 2026, how do you position? You've mentioned your quite bullish government bonds. I think you mentioned consumer staples have underperformed. I'm assuming you think they're going to potentially do well in that scenario. What else do you?
>> Look, yeah, I look, consumer staples along with REITs, I think, are the only two sectors that are down here to date. And I'm a contrarian thinker, and I like owning what's unloved and underowned. Consumer staples, by the way, if the Supreme Court rules against the Trump tariffs, and again, it's not a sure thing, but I think there's a high odds that will happen. Consumer staples, which which have been hurt by the tariffs, will rip. You may, you may be able to make your whole year as an equity market participant just by being long what's hurt you the most this year because I think that that will be like a, a coiled spring. So, consumer staples on my radar screen. Uh, energy is on my radar screen. Another beaten-down sector. But I'm impressed that in the face of adverse news, the oil price has started to bottom out, and uh, the E&P stocks are basically priced for oil where it is right now. So, um, getting to warm up to uh, energy. Uh, you know, we, I've been long utilities. I've been long pipelines. I'm a long global aerospace defense. I think that you want to be very thematic. I would not be buying the indices. I'm not a perma-bear. Okay, people. Maybe I'm a teddy bear, not a perma-bear. Um, there's slices of the market I like. I just don't like the whole market. God forbid if you tell people you don't like the whole market. Oh, the guy is so bearish. No, there's parts that I like. Um, you know, uh, I, I think that uh, Asia uh, has been a long position for us uh, and and and remains that way. Now, of course, if the US market goes down, you know, everything is correlated, but you'll, you'll be hurt less in Asia where the multiples are so much better. Let me tell you something, okay? I keep on hearing about the China is uninvestable. China is uninvestable. Well, really, you can't go and buy the Shanghai index. It's uninvestable. It's outperformed the S&P 500 this year. Uh, and the Chinese stock market trades at an 11 forward multiple. Now, you'll come back and say, well, you know, excess capacity and still working through the property uh, mess from the past several years. That's fine. At an 11 multiple, all the bad news, and then all the bad news is priced in. You're at an 11 multiple. You're less than half the S&P 500 multiple in China. Um, you know, uh, that's pretty incredible. I mean, that's basically the multiple you had in the fall of 1982, uh, when it was the biggest buy for the next 20 years. Um, and China is the biggest component of uh, the MSCI Asia Pacific, so, X Japan. So that looks pretty attractive to me. There's places I, I think you just have to be, 2026 will not be a year of buying the indices. It'll be a year of uh, being thematic and creative and drilling down to areas of the market that you like, uh, and leaving behind the things that you don't like, which means that you don't buy the S&P 500 and you don't buy the QQQ's. One of the things that I've been advocating is uh, to embark on long-short strategies that work well after the bubble bursts. Like, for example, go long the equal-weight S&P and barbell that with a short position on the market-cap S&P. You can go long value and short growth, which is working out, especially the past month. Go long the Dow and short the QQQ's. Have this barbell trade. You can go in the currency markets, you know, you, you can go long the Swiss franc or go long the Japanese yen, classic defensive currencies, and short the cycle currencies like the New Zealand or the Australian dollar. So I think there's ways that you can actually um, embark on these long-short strategies within your portfolio. I think probably my my favorite one would just be because as the market will broaden out, and it has broadened out, and as it broadens out, even if the market goes down, it'll be the high-flying growth stocks like we've been seeing already, that will go down the most. To be going long the equal-weight and shorting the cap-weight against that. I think that's a great strategy. And so thinking creatively out of the box, that is what's going to make the difference. And I would say also, make sure you have cash on hand. Look, I think we have to sit back and think about, what Warren Buffett has done. Now, I've never met Warren Buffett, but I know people that know him and know him well. And although the leadership is changing at Berkshire Hathaway, he hasn't apparently lost a step. I gave a presentation in Toronto to a group of financial advisors, and this one 30-year-old, when I brought up Warren Buffett's name, totally smacked me around that Warren Buffett doesn't know what he's doing anymore, that he's lost it. To which I'm saying, really? The guy who, the government went to in 2008 to save the system because he had liquidity, that's the guy you're talking about? Because he's, what? Because he's old? You're old means you have, you're wise and you have experience, which Warren Buffett has. I think that we should all ask the question, what does Warren Buffett say that the typical Wall Street strategist, analyst, economist is not saying? Why is Warren Buffett sitting on a hoard of cash of $380 billion? Why is Warren Buffett sitting on over 30% cash asset ratio right now? It's never been that high. It's never been that high. So, what's he saying that nobody else is seeing, except maybe Jamie Dimon? So I would say that you want to, you want to build, you want to build a liquidity buffer because once this bubble bursts, and all bubbles burst, there's no sense trying to time it. Are you really going to at this stage chase nickels in front of the steamroller? I think that's a pretty bad idea. Make sure if you're going to do anything for 2026, for you and for your family and for your friends and for your clients, make sure you have a liquidity buffer. Uh, because you want to be alongside Warren Buffett to pick up those pieces when things roll over, as they always do. I'm telling you, what really, what you talk about 2025. What unnerves me the most is this pervasive belief, ingrained belief, that the market cycle and the business cycle are dead. That recessions are relics of the past, and that we will never see a bare market again. And I'm telling you, that has become an endemic belief because the buying the dips have kept on working. We were supposed to have a recession in 2022. It never came. So people think that things are so much different, that mother nature has died. But mother nature never dies. And everything in life, whether it's your personal life, or whether it is your commercial life, or whether it's just the seasons, everything in life works in a balance, and everything moves in cycles, and the markets move in cycles. And that's where I come out of it. Uh, the problem, if you're asking me about the economy, if I have a bearish view on the stock market next year, which I do, I don't think it's a radical bearish view, but the risk is that that will precipitate a second-round impact because it will mean that not only does the multiple compress, but we also get the earnings recession. Let's see how things shape up 12 months from now. But uh, that's my biggest concern. On top of that, I'm respecting uh, what Warren Buffett is doing. I will basically be happy to place my bets alongside his. And if he's over 30% cash, we should be at least sitting back thinking about what it is that he's seeing that nobody else is. That's my theme for 2026.
>> Yeah, David, really good. So, thank you so much for your time today. Uh, you sort of laid out a lot of wisdom there and a lot of a lot of analysis. Uh, so normally I ask my last question is, what is one message you want to take away? It seems like there's lots of messages there. Is there anything else you want to add?
>> Yeah, I mean, I, I'll just, just reiterate, reiterate that I think you want to be mindful. You, you got to really protect your portfolio this year and the coming year. Be mindful of the beta. Be mindful of the sharp ratio. Be mindful of the degree of cyclicality. And at the margin, I would be de-risking. No matter what your portfolio is, I would be de-risking. First and foremost, and I will reiterate the most important thing for next year. Make sure you have a liquidity buffer. Uh, it's going to matter more than it has in a long period of time, and you'll be happy that you did.
>> Great, David. Thanks so much. If anyone wanted to find out more about your work and what you do, where would the best place for that be?
>> Just email me, drosenberg@rosenbergresearch.com, and I'd be happy to engage with you. Uh, or you can uh, go to information@rosenbergresearch.com and uh, just plug in your name and it's takes like 10 seconds, and you'll be able to get a free trial for my research. So you can, you can kick my tires. And if you want to contact me personally, I gave you my email address. Don't be a stranger.
>> Yeah, great. I'll put all in the description below. But thanks for your time.
>> All the best. Take care.