My friend David (Rosie) Rosenberg and I enjoyed a conversation and debate on his podcast. Here’s the synopsis. Thank you, Rosie. Hope to see you at our August gathering in Maine.
Webcast with Dave
Special Guest, David Kotok
Webcast Date: March 14th, 2022
Synopsis of the Debate Between the Two Daves — Kotok Versus Rosenberg
David Rosenberg: First, my apologies for the technical glitch that cut off the taping of my March 14th webcast (unfortunately, there is no playback or transcripts, but the problem has been resolved).
I have to say that my good friend, David Kotok, was particularly forceful in his explanation of the four fundamental changes at play that will dominate the future economic, political, and financial landscape. These being:
(i) the onset of a shooting war,
(ii) a global payments shock from the freezing of Russian central bank reserves,
(iii) COVID-19 and long-COVID-19, and
(iv) the need for climate change to accelerate and not the other way around.
David Kotok is very cautious near-term, but sees opportunities in aerospace/defense, health care and clean energy stocks. And his call is for 7,000 on the S&P 500 by the end of the decade. And may he live that long (and beyond) to see that forecast come true!
David Kotok’s themes boiled down to four main points:
1. Russia-Ukraine War
- David K. emphasized the world needs to recognize that the war should include Belarus as a critical region for being able to wage this horrible war. It's the staging ground for this crisis. David labelled this a “shooting war,” which in a historical context invariably leads to unintended consequences.
- He does not believe this will lead to World War III but does believe the world has changed, and Russia’s role in the world has changed. There is no going back for a long time. It is against this backdrop he emphasized global defense stocks as an area he is bullish on, with military budgets expanding everywhere on the planet, including Germany and Japan.
- David drew inferences to the bombing of Pearl Harbor nearly eight decades ago, which triggered a bear market and then a huge bull market in U.S. assets as the country gained world economic, military and financial superiority.
- David strongly believes that this “event risk” bear market will potentially be a long-term buying opportunity.
- He went on to discuss how the Fed is known to be a patriotic agency and how Powell has done well navigating the COVID-19 pandemic and hopefully that translates to how the Fed manages the US interaction with the Russia-Ukraine war.
- He called Powell a “gradualist” and expected him to be able to insulate the economy from extreme shocks.
2. Global Sanctions
- David made the connection referencing the Russia-Ukraine incursion as a regional “shooting war” and then drew the link to an outright “Global Financial War,” which could well threaten the dollar as a reserve currency.
- The freezing of central bank reserves by the Federal Reserve has set a new precedent, and monetary authorities can now be expected to diversify away from dollar reserves.
- We are seeing early signs of this already. The rewriting of the interdependence of the global financial market has already begun. New financial structures will be created to address unexpected shocks to the system in the future.
- He has written about and promoted world financial market interdependence for decades but now sees the war and the U.S.’s response impeding its progress.
- David K. expects the global sanctions will persist, and the rewriting of new systems will take quite some time to work their way through into practice.
3. COVID-19 and Long COVID-19
- First and foremost, it’s not over. The BA.2 variant is already spreading around the globe and triggering fresh lockdowns in China and swaths of Europe.
- David monitors wastewater as an indicator of what is to come in this regard, and referenced Montgomery, Pennsylvania, currently showing 50% of the population now has COVID-19; and the infection rate in Orlando, Florida has kicked up to 15% after being close to zero a few weeks ago. The next wave is on its way.
- David K. was adamant that the government has failed us in this battle, as politics held sway over practicality.
- What is completely missed by many is how “Long COVID-19” is going to be exerting tremendous impacts down the road on fiscal policy, the health care system, and the labor market. This is an issue that does not receive enough attention... but it will.
4. Climate Change
- David K. is strongly of the view that the war in Ukraine has merely interrupted global climate initiatives — this is a trend that has been delayed, perhaps, but not derailed.
- He is no fan of fossil fuels. The world will continue to migrate away from crude oil despite the current reliance and the sudden realization that global supplies are thin and the industry underinvested.
- In other words, the exposed global interdependence of oil and the recent volatility will galvanize the need to move away from fossil fuels. It’s an interesting point — most people don't think that way.
There was much interaction between the two Davids on gold — David R. is bullish, but David K. is more bearish — his bearish view on gold is largely linked to how Russia is cornered and must run down its bullion holdings to finance the war/economy.
The amount Russia has will get a considerable haircut; David K. also referenced that Putin will ironically have to pay his mercenaries in gold coins, much like in ancient times, and the sale of that gold will flood the market, too.
Finally, despite all the temptation to be negative, David Kotok referred to himself as an optimist.
David K. is also a big fan of the financials (something David R. does not agree with) as the Fed tightens and potentially inverts the yield curve... and with the Fed in mind, David K. gave Jay Powell a great grade for his 2020 work in preventing a depression, financial calamity, and a run on the banks.
Dave R. responded that all that effort to “save the system” was offset by the reckless expansion of the balance sheet in 2021, long after the recession and crisis had passed, which triggered this endless stream of asset bubbles.
David R. Kotok
Chairman & Chief Investment Officer
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