"You want to get paid to take on the risk. You don't want to pay to take on the risk. And that's what investors are doing right now." - David Rosenberg [00:23:09]
"Today the stock market drives the economy, not the other way around... everybody knows what their equity portfolio is doing and they're checking it like 10 times a day." - David Rosenberg [00:31:17]
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"The bubble is not in the technology... The bubble is in investor behavior... what is the price you're going to pay for probably what you're going to get" - David Rosenberg [00:17:10]
"93% of the growth in the economy last year came from productivity. That's really unusual. That by the way is very disinflationary." - David Rosenberg [00:49:41]
"If you don't have a plan B, you don't have a plan... their brain of an institutional investor or a wealth manager is just one giant probability curve." - David Rosenberg [00:11:24]
"My assumptions drive your conclusions. So those are my assumptions behind not necessarily a recession call for next year, but for a disappointing year benchmarked against priced in." - David Rosenberg [00:44:22]
Speakers & Credentials
Matt: Host of Excess Returns.
David Rosenberg: Founder and President of Rosenberg Research. Formerly the Chief Economist and Strategist at Gluskin Sheff (2009-2020) and Chief North American Economist at Merrill Lynch. He is renowned for his cycle-navigation expertise and focus on macroeconomic tail risks, having started his career on "Black Monday" in 1987.
1. Executive Summary
David Rosenberg challenges the consensus soft-landing narrative, asserting that current equity valuations represent a historical mania driven by investor behavior rather than pure technological fundamentals.
He highlights a severe "K-shaped" divergence within the US economy, where real consumer spending growth of 2.5% is dangerously decoupled from real disposable income growth of just 1%, heavily subsidized by a plunging personal savings rate.
The labor market presents deep structural weaknesses disguised by top-line metrics; outside of health and education, 83% of the economy has actually shed jobs, representing a loss of 400,000 workers.
Rosenberg dismisses fears of a sustained 1970s-style inflation resurgence, arguing instead that unprecedented productivity growth (accounting for 93% of economic expansion) and a cracking labor market are intensely disinflationary forces.
Strategically, Rosenberg advises extreme capital preservation over FOMO participation, managing a tactical, low-beta (0.4) portfolio heavily allocated toward short-duration bonds, defensive global equities, and hard assets like rare earths and uranium to survive the impending mean reversion.
2. Chronological Table of Contents
[00:00:00] Introduction & The "Perma-Bear" Reputation
[00:08:51] Transition to the Buy-Side & Probabilistic Thinking
[00:16:18] The Sixth Mega-Bubble: Valuations vs. Reality
[00:24:03] The Silent Contraction & The K-Shaped Economy
[00:45:22] Why Inflation is Transitory & Labor Market Cracks
[00:55:04] Portfolio Construction & Tactical Asset Allocation
3. Detailed Thematic Summary
Career Origins and the Shift to Probabilistic Modeling [00:00:00]
The Tail Risk Foundation: Rosenberg's analytical worldview was fundamentally shaped by starting his career on October 19, 1987, a day when the stock market collapsed by 23% [00:02:18]. This ingrained a hypersensitivity to left-tail risks and the importance of capital preservation.
The Wall Street Commodity: Working at major banks like Merrill Lynch revealed that sell-side economists serve primarily as marketing tools to facilitate institutional trading revenues [00:06:26]. In 2007, he was explicitly instructed by management to stop using the term "housing bubble" to avoid alienating clients, forcing him to adapt the phrase to "housing mania" [00:07:05].
The Buy-Side Epiphany & Ego Check: Moving to Gluskin Sheff (co-run by Jerry Sheff and Ira Gluskin) at age 50 forced a structural overhaul in his methodology. Despite coming in with a "Sandy Koufax on the LA Dodgers" star mentality where he thought he had to have all the answers [00:10:58], he was confronted by CIO Ira Gluskin regarding his lack of a "Plan B." He realized institutional allocators operate across a giant probability distribution curve [00:11:24].
The "Walter White" Transformation: Host Matt jokingly likened Rosenberg's career pivot at age 50 to Walter White, noting that age 50 "does magical things" for late-career transformations [00:15:48].
The Sixth Mega-Bubble: Valuations and the Equity Risk Premium [00:16:18]
Behavior vs. Technology: Rosenberg clarifies that generative AI is a legitimate technological shift; the bubble resides purely in investor behavior and expected returns against the total addressable market (TAM) [00:17:10].
Egregious Multiples: Utilizing the Shiller CAPE multiple to smooth out business cycles, Rosenberg notes the multiple hit 40 [00:18:31]. This equates to roughly a 2.5% real earnings yield [00:18:40].
Zero Risk Premium: With the real yield on the 30-year bond sitting concurrently at 2.6% to 2.7%, the equity risk premium has effectively compressed to zero [00:22:42]. Investors are pricing equities as a riskless asset class.
Expected Returns: Trading at a 3 to 4 standard deviation event, the historical precedent suggests that nominal total returns for equities over the ensuing 1, 3, 5, and 10-year horizons project to zero or negative [00:21:56].
The Silent Contraction & The K-Shaped Economy [00:24:03]
The Capex Divergence: Real AI-related capital expenditure has surged 15% year-over-year, scaling from a $400 billion budget to $700 billion [00:25:51]. Simultaneously, old economy industrial capex is trapped in a recession, contracting by 1% [00:26:02]. Bank earnings reflect a similar low-quality skew, driven heavily by a 17% bump in trading revenues rather than core economic lending [00:34:00].
The Consumer Mirage: Headline real consumer spending grew by 2.5% YoY [00:26:36], but is structurally unmoored from real disposable income growth, which has stagnated at 1% [00:27:05].
The Savings Rate Collapse: To bridge this gap, the personal savings rate has depleted to 4%, down from 5% a year prior, 6% two years ago, and half of its long-term historical mean of 8% [00:28:56].
The Financialization of Growth: Economic causation has inverted. The stock market now directly drives GDP growth via the wealth effect [00:31:17]. Elevated equity portfolios induce sentiment-driven drawdowns in savings, effectively adding over a full percentage point to baseline real consumer spending in a $30 trillion economy [00:32:16].
The Labor Market Illusion & Disinflationary Pressures [00:45:22]
Hidden Job Losses: While headline payrolls obscure weakness, 83% of the US labor pie has experienced net negative job growth over the past year [00:27:30]. Stripping out the health and education sectors, the broader economy has lost 400,000 jobs [00:27:23].
The Productivity Shock: A staggering 93% of economic growth in the preceding year was derived from productivity gains rather than labor expansion [00:49:41]. This dynamic is severely disinflationary, as it actively suppresses aggregate labor costs.
Why the 1970s Analogy Fails: The previous inflation spike was fueled by $2 trillion in direct pandemic fiscal stimulus colliding with COVID supply shocks [00:43:33], initiating an 18-month wage-price spiral because workers had total bargaining power [00:48:45]. Today, the unionized leverage and automatic COLA clauses of the 1970s do not exist.
Inflation Outlook: Current price shocks will hit the wall of a cracking labor market. Fed Chair Jay Powell admitted at a recent Harvard panel that current tariffs are artificially skewing inflation by 0.5% to 1.0% [00:50:37]. With shelter comprising a third of headline CPI and 40% of core CPI, and real-time rent data turning negative, inflation will surprise heavily to the downside by year-end [00:53:56].
Fiscal Policy, Mean Reversion, and Portfolio Architecture [00:33:01 & 00:55:04]
The Fiscal Crutch & Politics: The US has operated with a deficit-to-GDP ratio exceeding 5% for six consecutive years [00:33:01]. Donald Trump historically fueled the risk-on and crypto trades, but is now going "cap in hand" to request $1.5 Trillion to refund the Pentagon [00:57:05]. Conversely, Xi Jinping and China have quietly positioned themselves a step ahead globally regarding clean energy dominance and oil stockpiling [00:57:37]. Approaching the November elections and eyeing 2028, gridlock or shifting tax policies will likely remove the US fiscal prop, triggering mean reversion [00:36:21].
Earnings Reality Check: Analysts have aggressively baked in 19% earnings growth for 2026, assuming profit margins shatter existing record highs in an economy where nominal GDP will struggle to surpass 4-5% [00:40:37].
The Rosenberg Model Portfolio: Designed for extreme capital preservation with a 1.4 to 1.5 Sharpe Ratio, the portfolio boasts a beta of just 0.4 and has generated >60% returns since early 2023, matching the S&P 500 but with drastically lower risk [00:55:40] [00:56:16]. It serves 2,300 clients globally [00:55:40].
Tactical Allocation: The strategy features ~40% equities, 50% fixed income, and 10% hard assets (gold, rare earths, uranium) operating on a classic 3-to-5 year family office timeline [00:56:24] [01:00:48]. US equities comprise only 15% of the equity sleeve, favoring X-Japan Asian indices [00:57:58].
The Bond Trade: 35% of the portfolio is tactically parked in US and Canadian 2-year notes, positioned to capture a highly probable 6-7% total return as central banks inevitably cut rates in response to the silent contraction [00:58:55].
The Probabilistic Distribution Curve: [00:11:24] Moving away from deterministic "right or wrong" forecasting, this model treats economic outcomes as a fluid distribution curve. The analyst maintains a base case (Plan A) but actively scales conviction levels (e.g., 85% down to 65%) while tracking shifting probabilities for Scenarios B, C, D, and E to manage institutional capital risk.
Bob Farrell's Mean Reversion: [00:20:16] The framework asserting that "there are no new eras" and excesses are never permanent. Rosenberg uses this to model the inevitable collapse of extreme equity multiples and the unsustainability of running 5% deficit-to-GDP ratios outside of a recession.
The Inverted Wealth Effect (Financialization of GDP): [00:31:17] Traditionally, macroeconomic growth dictated equity prices. This model dictates that causation has reversed: sky-high equity valuations create a psychological wealth effect that artificially suppresses the savings rate, directly manufacturing over 1% of baseline US GDP growth.
The K-Shaped Economy: [00:25:51] A framework to identify extreme economic bifurcation. Rather than relying on aggregate "blended" data, Rosenberg breaks the economy into diverging tranches, specifically highlighting the boom in AI CapEx vs. the recession in industrial CapEx, and the boom in healthcare employment vs. the contraction in the remaining 83% of the workforce.
The Labor-Productivity Disinflation Mechanism: [00:49:41] A structural framework defining why current inflation is "transitory." With 93% of growth driven by productivity, labor has lost its bargaining power. Price shocks cannot transfer into a self-sustaining wage-price spiral without labor leverage.
The "Take This Job and Shove It" Index (Voluntary Quit Rate): [00:51:51] A specific behavioral metric Rosenberg tracks to gauge worker bargaining power. When the quit rate plunges, it confirms that workers lack the leverage necessary to demand higher wages, ensuring inflation remains transitory.
6. Anecdotes
Black Monday Initiation: [00:02:18] Rosenberg started his career as a financial economist at the Bank of Nova Scotia on October 19, 1987. Experiencing a 23% market collapse on his very first day permanently anchored his analytical focus on identifying hidden tail risks rather than chasing consensus upside.
The Merrill Lynch "Housing Mania" Censorship: [00:06:55] In 2007, as the real estate market began cracking, Rosenberg was formally instructed by his superiors to stop using the phrase "housing bubble" because it was angering internal dealmakers. After switching his phrasing to "housing mania," he was sharply reminded that his true employer was the bank's revenue engine, not the clients.
The Sandy Koufax Ego Check: [00:10:58] Transitioning to the buy-side, Rosenberg admits he initially arrived with a superstar "Sandy Koufax on the LA Dodgers" mentality, believing he had to have all the exact answers figured out, before learning that institutional investing is about managing probabilistic scenarios rather than ego-driven certainties.
Ira Gluskin and the "Plan B" Paralysis: [00:09:28] During his first boardroom presentation as Chief Economist at Gluskin Sheff, legendary CIO Ira Gluskin ambushed Rosenberg by bluntly asking, "Rosenberg, what's your Plan B?" Unprepared for this thinking, Rosenberg froze, asked for a month to reformulate, and completely rebuilt his methodology around conviction levels.
The Walter White Late-Career Pivot: [00:15:48] Host Matt compared Rosenberg's total philosophical rebirth at the age of 50 to Walter White from Breaking Bad, highlighting how late-career shifts can do "magical things" for an individual's operational framework.
The Stimulus Check Miscalculation: [00:48:04] Reflecting on his incorrect 2022 recession call, Rosenberg admits he assumed consumers would rationally save at least half of the $2 trillion in pandemic stimulus. Instead, the public spent every penny, temporarily offsetting the Fed's aggressive rate hikes and invalidating his yield curve inversion models.
7. References & Recommendations
People:
Ira Gluskin & Jerry Sheff: Legendary institutional investors who co-ran Gluskin Sheff; Ira hired and mentored Rosenberg on probabilistic forecasting.
Bob Farrell: Wall Street legend whose "10 Market Rules" heavily influence Rosenberg's mean-reversion philosophy.
Harry Markowitz: Nobel Prize-winning economist cited for the foundational logic that investors must be compensated for taking risk.
Robert Shiller: Economist who pioneered the CAPE (Cyclically Adjusted Price Earnings) multiple utilized in Rosenberg's valuation models.
Scott Bessent: Cited as an observer who correctly identifies the current disinflationary nature of a productivity-driven economy.
Donald Trump: Mentioned regarding his positive impact on the risk-on/crypto trades, and his upcoming request for $1.5 Trillion in Pentagon funding.
Xi Jinping: Highlighted for consistently staying a step ahead of the globe in positioning China for clean energy and strategic oil reserves.
Jay Powell: Federal Reserve Chair, cited for his admission during a Harvard panel that tariffs are skewing inflation higher.
Sandy Koufax: LA Dodgers Hall-of-Famer used as a metaphor for leaving superstar egos at the door in institutional finance.
Walter White: Fictional character used playfully by the host to illustrate the power of reinventing oneself at age 50.
Entities / Institutions:
Rosenberg Research (rosenbergresearch.com - listeners offered a free trial using a promo code via 'information at rosenbergresearch.com')
Gluskin Sheff
Merrill Lynch / Bank of America
Bank of Nova Scotia / Bank of Montreal
Concepts & Metrics:
U3 vs. U6 Unemployment: Rosenberg urges looking beyond the 4.3% U3 headline rate to the U6 measure to see true labor market slack building up.
Books / Publications:
How a Bear Survived in the Bull Ring (Upcoming book authored by David Rosenberg, expected Summer 2026).
8. The Bottomline (by AI)
The structural integrity of the macro economy is severely compromised; we are riding a low-quality expansion subsidized by a depleted 4% personal savings rate, an artificially buoyant stock market, and an unsustainable >5% deficit-to-GDP fiscal crutch. As these temporary pillars erode and the election cycle forces fiscal normalization, the extreme equity multiples currently priced for perfection will face violent mean reversion, entirely regardless of a formal recession declaration. Watch the U6 unemployment rate and consumer income decoupling closely, and aggressively rotate capital out of expensive consensus US equities into high-conviction short-duration bonds, global defensive sectors, and hard assets to preserve wealth through the inevitable contraction.
Jul 16, 2026
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-1%
Real terms contraction showing weakness beneath the AI headline boom.