Sunday, May 9, 2010

David Rosenberg: Volatility Ahead

Economist David Rosenberg wrote in late March that: "... the current rebound in the economy is a statistical mirage orchestrated by record amounts of money and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years.  From our lens, the rally of the last 12 months smacks of the 1930 snapback, and ... the S&P went on to hit new lows in subsequent years ... Deleveraging cycles take years to play out, even with massive doses of government intervention ... It's remarkable how so many people still refuse to accept what history has taught us about post-bubble credit collapses - they do indeed require ongoing government support, but even then we endure five to seven years of economic stagnation.  And that flat line will involve periods of growth followed by periods of contraction, but the lasting theme is one of volatility (my italics) ... As was the case back then, the investors who end up succeeding are not the ones who are able to play the flashy bear market rallies but the ones who opt for strategies that minimize volatility and optimize risk-adjusted returns.  Income, whether it be from paper assets (bonds, dividends) or hard assets (oil and gas royalties, REITs) is going to emerge as king in an environment where the primary trend is one of deflation, which is indeed the case as private sector credit contracts."