MacroVoices #404 David Rosenberg: The Bond Bullion Barbell

Episode Summary

Executive Summary: David Rosenberg argues the 2023 rally is a cyclical pause in an ongoing bear market, not a new bull market. He sees recession risk, fading pricing power, and decelerating inflation as bearish for equities but highly supportive of long-duration Treasuries and gold. The post-game reinforces a tactical case for hedging equity exposure amid low VIX, rich valuations, and year-end complacency.

Main Topics: Bear market in equities is not over (Priority: 5/5): Rosenberg says the market remains highly concentrated, the equal-weight index has gone nowhere, and the rally is mostly short-covering and seasonality rather than a new bull phase. Inflation is falling, but not bullish for stocks (Priority: 5/5): He argues disinflation reflects fading demand, lower pricing power, and lagged Fed tightening. Lower inflation may help bonds, but it also threatens revenues and profits. Long-duration Treasuries as top conviction trade (Priority: 5/5): Rosenberg’s highest-conviction view is that the bond bear market is ending, with yields likely much lower as recession, disinflation, and mean reversion drive a powerful rally. Gold remains favored amid lower real rates and a weaker dollar (Priority: 4/5): Gold is presented as a monetary hedge benefiting from falling real yields, peak policy rates, and a softer U.S. dollar, while geopolitical risk is treated as secondary. Commodities and oil signal weakening demand (Priority: 4/5): Rosenberg and the post-game both stress that crude’s decline is demand-driven, not merely geopolitical or EV-related, and that this undermines the bullish commodity narrative. Volatility is cheap; hedging is attractive (Priority: 4/5): Eric and Patrick emphasize that VIX and option implied volatility are low, making puts and portfolio insurance relatively inexpensive for investors concerned about 2024 turmoil. Defense and cybersecurity as geopolitical themes (Priority: 3/5): Rosenberg says geopolitics are hard to trade directly, but rising global defense budgets make aerospace/defense and cybersecurity investable secular themes.

Key Arguments: The S&P 500 has not made a new broad-market high, and the equal-weight index has been flat, so the rally is not evidence of a new bull market. The market is pricing a soft landing, but Rosenberg believes the delayed recession is not derailed and earnings expectations are too high. Inflation’s drop from above 9% to just over 3% is historically rare and usually associated with recession, not a sustained equity boom. Lower inflation means lower pricing power and likely lower corporate revenues/profits; consensus 10% profit growth for next year looks unrealistic. The Fed is already very tight relative to neutral, while money supply and bank credit are contracting, which is deflationary and bond-positive. Residential rents have not fully flowed through CPI yet, and falling real-time rents should continue to pull down inflation in 2024. Crude oil is in a bear market and recent weakness appears driven by contracting demand, evidenced by lower gasoline consumption. Long Treasuries offer asymmetric upside because a 100 bp decline in long rates could produce about 25% total return via convexity. Gold benefits from declining real rates and a weaker dollar, making it a core hedge alongside long bonds. The best portfolio framing for 2024 is a 'Bond Bullion Barbell' with exposure to long-duration high-quality bonds and gold. Geopolitical shocks are difficult to trade directly; defense stocks are the cleaner secular play because military budgets are rising globally. Low VIX and extreme bullish sentiment make downside protection unusually cheap, favoring put buying or hedging. Oil’s recent weakness cannot be explained by EV adoption alone given the short timeframe and scale of the move. Commodities are unlikely to be a broad winner in a global recession, despite some technical rebounds in copper and other metals.

Data Points: S&P 500 futures: down 18 bps to 4,559 - Macro Scoreboard at the close of Wednesday, Nov. 29, 2023 U.S. dollar index: down 100 bps to 102.84 - Weekly market snapshot WTI crude oil (Jan.): up 99 bps to 77.86 - Weekly market snapshot Gold (Feb.): up 268 bps to 2,067 - Weekly market snapshot; contango in contract role noted Copper: up 160 bps to 382 - Weekly market snapshot U.S. 10-year Treasury yield: down 15 bps to 4.25% - Weekly market snapshot U.S. CPI: from over 9% to barely over 3% - Rosenberg’s inflation commentary Fed funds rate vs neutral: about 300 bps above neutral - Rosenberg on policy tightness Inflation history: only four other times inflation fell this far, this fast - Rosenberg cites historical precedent Consensus 2024 profit growth: 10% - Rosenberg says this is unlikely Residential rents share of CPI: one-third of CPI; 40% of core - Rosenberg on why rent deflation matters U.S. gasoline consumption: down more than 2% YoY - Rosenberg cites demand weakness despite ~140 million drivers Oil decline: more than 20% below end-September levels - Rosenberg characterizes crude as back in a bear market VIX: below 13 - Rosenberg and post-game describe unusually low volatility/complacency AAII / Investors Intelligence sentiment: more than 2 bulls for every bear - Rosenberg cites extreme bullish sentiment SPX spot price: approximately 4,550 - Post-game options discussion SPX implied move for Dec. 15 OPEX: approximately 90 points - Nick’s options analysis QQQ spot price: approximately 390 - Post-game options discussion QQQ implied move for Dec. 15 OPEX: plus/minus 10 points - Post-game options discussion One-year put premium example: 4.18% of notional - Patrick compares current portfolio insurance cost to Feb. 18, 2020 Comparable put premium in Feb. 2020: 5.82% of notional - Used to show current hedge insurance is ~30% cheaper U.S. crude production: 13.2 million barrels/day - EIA inventory discussion EIA crude inventory build: 1.6 million barrels - Post-game oil analysis Cushing crude inventory build: 1.9 million barrels - Post-game oil analysis Gasoline inventory draw: 1.8 million barrels - Post-game oil analysis Distillates inventory build: 5.2 million barrels - Post-game oil analysis Gold prior all-time high: 2,085 - Technical discussion in post-game Gold measured move target: 2,140 - Post-game chart analysis SPX downside support: 4,500 / 4,460 / 4,450 / 4,400 areas - Technical and options levels discussed QQQ resistance/support: 400 resistance, 380 support - Post-game chart levels Long bond total return estimate: about 25% if yields fall 100 bps - Rosenberg’s convexity argument 10-year Treasury target: 3.0% or lower - Rosenberg’s 12-month outlook 30-year Treasury yield target: 3.5% - Rosenberg’s 12-month outlook Inflation outlook for next year: 0% to 1% - Rosenberg’s forecast based on rents, PPI, and oil S&P 500 level needed to match bond return: above 5,600 or 23x P/E - Rosenberg compares equity upside to bond upside

Pivotal Quotes: "I think that the bear market is still here. We've had intermittent rallies in the context of what is still a bear market." — David Rosenberg: On whether the stock market rally marks the start of a new bull market "My highest conviction trade for the coming year... the long bond gets to three point five, the ten year gets to two point five." — David Rosenberg: On his core fixed-income view and expected Treasury yield decline "The theme for 2024 is going to be the Bond Bullion Barbell." — David Rosenberg: On portfolio positioning favored for the coming year

Implications: Listeners should view the late-2023 equity strength as vulnerable and consider hedges. Rosenberg’s framework favors long Treasuries and gold, while the post-game argues portfolio insurance is unusually cheap and worth buying before volatility returns.