‘Follow the bubble’: Famed investor David Rosenberg breaks down the unique way he thinks the next US recession will unfold

Screenshot via Bloomberg TV

David Rosenberg, chief economist and strategist at Gluskin Sheff, sounds the alarm on a Federal Reserve-induced bubble he sees expanding within the US economy.
He points to inflated corporate balance sheets and looming debt servicing payments in order to bolster the case for a recession.
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It’s hard to find a word in the English language that conjures a more visceral reaction from investors than "bubble."

This market phenomenon has been associated with every boom-and-bust cycle throughout history, and has consistently preyed on the overzealous, get-rich-quick participants. After all, envy has an uncanny way of upending sound logic.

But not all are fooled by the market’s irrational exuberance — and one prominent economist thinks the latest bubble is right before our eyes.

"I always say after a Fed easing cycle: follow the bubble," said David Rosenberg — chief economist and strategist at Gluskin Sheff — on Behind the Markets, an investing podcast hosted by Jeremy D. Schwartz. "The bubble this time around was on corporate balance sheets."

Considering that corporate debt hasn’t been the direct culprit in any of the most recent recessions, this is a relatively unique take. And while it’s an argument that’s been espoused by other experts, it’s anyone’s guess how the collapse will play out when it inevitably does.

Rosenberg’s logic behind his thesis works like this: Federal Reserve rate cuts bolster and incentivize capital spending. In turn, corporations pile on debt, taking advantage of ultra-cheap capital while they have the opportunity, and deploying it as they see fit.

But when companies borrow too much, debt servicing becomes an issue. And, currently, corporate debt levels are at all time highs.

Rosenberg thinks this notion will hinder corporate spending going forward, as debt servicing becomes an increasing priority amidst an economic slowdown.

"My thesis all along has been that this will be a capital spending-led recession," he stated. "We’re going to be finding a lot of the cash flows being diverted to debt service — even under this low interest rate environment — and away from capital spending."

Corporations need to invest in new projects, employees, and technology. But when precious capital is diverted to debt servicing, they find themselves hamstrung and unable to invest in the areas that will conjure growth. And a vicious cycle ensues.

To further his point, Rosenberg also notes geopolitical uncertainty — both political and economic — for additional reasons why companies will have a hard time splurging on expenditures. And, with trade war escalations, Brexit, and upcoming election uncertainty looming, it’s no wonder why he’s sounding the alarm.

Although this isn’t the rosiest of outlooks, Rosenberg says one asset has performed well as the going has gotten tougher: gold.

"Gold has been rallying in every single currency term," he stated. "When gold is firming up against all the currencies, that is the hallmark of a full-fledged bull market."

For those interested in obtaining long exposure to gold, the SPDR Gold Trust is the most popular vehicle. Having absorbed a net $38 billion of assets over time, it’s one of the easiest and most liquid ways to transact the resource.

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Source: Business Insider – ccompetiello@businessinsider.com (Christopher Competiello)