Equity market bubble will ‘end in tears,’ Rosenberg warns

Veteran Bay Street economist and strategist David Rosenberg is warning that a return to a more normalized interest rate environment could stop the record-breaking market rally in its tracks.

In a television interview Tuesday, Rosenberg, the chief economist and strategist at Rosenberg Research, said what he views as an asset bubble will burst once rates begin to creep higher.

“We are in a huge financial asset bubble, but you know … bubbles will last longer than you think, but they don’t correct by going sideways. We know they end in tears and so will this one,” he said. “And when it does it’s going to be because, oops, what do you know, as a government we overstimulated, inflation came back and interest rates all of a sudden aren’t at zero anymore.”

Rosenberg said the coordinated effort undertaken by central banks around the world to keep rates lower for longer to combat the COVID-19 crisis has lulled market participants into a false sense of security, with cheap money helping to send risk assets like stocks higher.

“With COVID, the S&P 500 is at 3,700. If we didn’t have COVID this year, the S&P would be 3,200 right now. So in the most bizarre, you’d say almost perverse way, COVID has added 500 points, or 13 per cent to the S&P 500. Why? Because of what the Fed is doing,” he said.

Rosenberg warned that a return of inflation could not only put the brakes on equity market returns, but could also throw a wrench into the Canadian government’s aggressive stimulus plans, given Ottawa’s financial assumptions rely on low borrowing costs.

“The risk is that inflation comes back sooner rather than later, and that might not be a 2021 story, it might be a 2022 story, but that to me is the real principle risk,” he said. “Especially when you look at the fiscal projections in Ottawa, that sustainability hinges on a multi-year period of zero rates, and I think that’s truly pie in the sky.”

Source: BNN Bloomberg