Tag Archives: David Rosenberg

Rosenberg Says US Virtually Certain To Fall Back Into Recession

The US economy is almost certainly headed back into a double dip recession, and economists aren’t seeing it because they’re using “the old rules of thumb” that don’t apply this time, well-known economist David Rosenberg tells CNBC.

“The risks of a double-dip recession—if we ever got out of the first one—are actually a lot higher than people are talking about right now,” he says.

“I think that it’s almost a foregone conclusion, a virtual certainty.”

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Another Day Older And Deeper In Debt

We continue to receive Wall Street research telling us to overweight stocks and underweight bonds. This does not happen at true fundamental bottoms in equity prices and Treasury yields.

I continue to get asked what will turn me more bullish. This doesn’t happen at lows, either. At the true lows, the bears get asked why they’re not even more bearish. At the lows, people threaten to call the police when equity brokers go cold-calling.

What the bulls still refuse to see is that we are in an entirely new paradigm and that the old rules of thumb are rarely, or are ever going to be able to be relied upon, as was the case in the familiar credit-expansion days of yore.

There is simply too much debt overhanging the U.S. household balance sheet — the largest balance sheet on the planet. And, despite the deleveraging efforts to date, the process of balance sheet repair is still in its infancy.

Consider the facts — these are not opinions:

The aggregated household debt-income ratio peaked in Q1 2008 at 136%. Currently, this ratio is at 126%. But the pre-bubble norm was 70% (no wonder 25% of Americans have a sub-600 FICO score). To get down to this normalized ratio again, debt would have to be reduced by around $6 trillion. So far, nearly $600 billion of bad household debt has been destroyed. In other words, we have much further to go in this deleveraging phase. Maybe this is why the McKinsey report concluded that this process can and often takes up to seven years to complete.

Folks, we are in this for the long haul. It’s not too late to enter the acceptance stage.

What about debt in relation to household assets? That debt-to-asset ratio is currently at 20% (the peak was 22.7% set back in Q1 2009) but again, the pre-bubble norm was 12.5%. The implications: classic Bob Farrell mean-reversion would mean a further $7 trillion of debt extinguishment.

We are a long way off this deleveraging phase from running its course. The government, along with the Federal Reserve, have expended tremendous resources to cushion the blow. But now we see first-hand what happens when policy stimulus fades and a mini-inventory cycle peaks out in a credit contraction: stagnation in Q3 followed by renewed economic contraction in Q4.

Play it safe. As in … safe yield.

Here’s a copy of the latest market commentary/analysis from chief economist David Rosenberg at Gluskin Sheff.

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Rosenberg: "Statistical Illusion Of Recovery"

Chief economist David Rosenberg at Gluskin Sheff comments on Friday’s economic numbers. According to Rosenberg they make up an statistical illusion of a recovery. In fact, adjusted for the highest amount of artificial stimulus from the government ever, the U.S. economy is in an ongoing depression.

“If there is a bright spot, it is in the industrial sector.”

David Rosenberg


“The University of Michigan consumer sentiment index, while improving in May, to 73.3 from 72.2 in April, is actually still in recession terrain as in downturns, it averages 73.9; and during expansions it averages 90.9. So, we have the statistical illusion of a recovery, but in reality, organic growth is still hard to find,” Mr. Rosenberg writes in today’s market commentary.

While most analysts and commentators use the latest job report as an explanation for the stock markets drop, Rosenberg barely mention the slower than expected job growth.

Probably because he have already said what is to say about the situation in the American labor market in earlier commentaries.

“The ADP private payroll survey is showing marginal employment growth with none in the small business sector at all. And jobless claims, as we saw yesterday, have basically stopped falling; however, at still around the 440k level, they are not consistent at all with sustainable job creation. After plunging from 600k in June 2009, to 440k, as of January 2010, claims have basically stopped declining. That is a problem.”

Instead, Rosenberg focus on the U.S. consumers and consumer spending.

The Depression Is Ongoing

“The big deal in the April retail sales report was the “core control” segment (excludes autos, gasoline and building materials), which feeds directly into the consumer spending component of the GDP accounts,” he writes.

“The metric fell 0.2% MoM in the first meaningful decline since last July and the largest drop since the depths of despair in March 2009; a huge miss, vis-à-vis the consensus estimate of -0.3%. So this was the big downside surprise beneath the surface.”

“In addition, the University of Michigan consumer sentiment index, while improving in May, to 73.3 from 72.2 in April, is actually still in recession terrain as in downturns, it averages 73.9; and during expansions it averages 90.9.”

“So, we have the statistical illusion of a recovery, but in reality, organic growth is still hard to find.”

“The headline (inflation) did come in above expected, at +0.4% MoM, but that was due to a spurious 0.5% increase in the automotive segment (even though the U.S. Commerce Department already told us two weeks ago that unit vehicle sales showed a near 5% slide) and a 6.9% bounce in building materials, which may be part and parcel of the flurry of housing activity ahead of the expiry of the federal tax credits,” he adds.

Both industy output and retail sales are classic signs that the recession in the U.S. ended last summer.

David Rosenberg agrees with that, but says the depression is ongoing and the reason is that real personal income, excluding handouts from the government, has barely budged.

“In fact, real organic personal income is nearly $500 billion lower now than it was at the peak 16 months ago and this has never occurred before coming out of any technical recession. It is a depression, as the chart below attests — that is the trend-line for real household incomes, until the government comes in to top them off with handouts, subsidies and extended jobless benefits. The share of U.S. personal income being derived from Uncle Sam’s generosity has risen above 18% for the first time ever.”

“Real consumer spending is up $200 billion over the past 16 months and everyone believes we have a sustainable recovery even though organic income is down almost $500 billion. Think about that for a second because once the stimulus wears off, and with a 10% deficit-to-GDP ratio and concerns surfacing everywhere about sovereign credit risks, there is little out there to support future growth in consumption.”

“Some are clinging to the notion that employment growth will accelerate. From our lens, once you remove all the assumptions the Bureau of Labor Statistics uses in its monthly data, there is little growth in the nonfarm payroll data. And, the Household survey is much too volatile and too small a sample size to rely on.”


Global Deflation

“Spain’s underlying inflation rate just turned negative in April for the first time since at least a quarter century and this is likely the thin edge of the wedge as we have yet to see the full brunt of fiscal austerity hit aggregate demand. Core consumer prices, which exclude energy and food, fell 0.1% from a year earlier from the miniscule +0.2% trend in March. All the deficit-challenged countries in the Eurozone, which technically means all of them since none come close to meeting the Maastricht budgetary targets, could be facing severe deflation pressure in the future based on the amount of slack in their economies,” the Gluskin Sheff chief economist writes.

Adding: “Ireland is already experiencing deflation, with nominal GDP falling faster than real GDP (both are down for two years straight but nominal is falling faster — nominal GDP was down by 11% in 2009, real down 7.5%). Not surprisingly, there is a lot of slack in the economy and the output gap stands at -7.1%, which suggests more deflationary pressures over the medium term. This problem is now widespread: Spain has an output gap of -5.3%, Portugal -3.6%, Italy -5.7% and Greece -4.6%.”

“Even with the recently announced austerity measures for Spain and Portugal, these countries may have trouble improving their fiscal ratios, if deflation sets in and GDP falls (as it has in Ireland). It’s otherwise known as the ‘catch 22’ — and the future of the Eurozone project, as it currently stands, is more in doubt than many are willing to believe at the current time. Either the Euro plunges or several of the EMU members will inevitably opt for their own currency of yesteryear to ease the deflationary pressure on their economies,” he concludes.

The Good News

If there is a bright spot, it is in the industrial sector, Rosenberg points out, and lists the following:

• The just-released U.S. industrial production data was strong, rising 0.8% MoM in April beating analysts’ expectations of a 0.6% increase. On a year-over-year basis, production is running at 5.2%, the strongest pace since mid-1997. Manufacturing is a bright spot with production jumping 1% MoM, matching the gain in March and is also up 6% YoY.

• Steel production is up 74% year-on-year.

• Lumber production has risen 29%.

• Automotive by 67%.

• Truck tonnage has risen 7.5% and container traffic out of Long Beach has surged 19%.

• Railway carloadings are up 14% over the past year. Some of this is related to global growth, some it to the lagged impact of U.S. dollar depreciation, and some of it related to the improved productivity position of U.S. manufacturers, which indeed seem to be enjoying somewhat of a renaissance (something we wrote about three years and should be on archive back at the old shop).

• The latest foreign trade data showed that U.S. exports of goods and services have exploded 20% YoY, as of March.

“So you see, the news is not all bad. The 20% of the economy related to exports and capital spending — the latter will benefit from the fact that capacity actually fell a record amount over the past two years and some of that surely has to be rebuilt and most pronounced in areas like transportation equipment, chemicals, plastics, industrial machinery — are certainly bright spots,” David Rosenberg writes.

Here’s a copy of today’s commentary: “Lunch With Dave”

Related by the Econotwist:

Dow Drops On Disappointing Job Report

Hey, America! Wall Street Got A Message For You

Why Optimists Are Wrong About The Euro Zone

Goodbye Keynes – Hello Ricardo!

U.S. Stock Market: Worst Week Since 1940

Merkel, Obama, Sarkozy Have Investors Shitting Their Pants

Welcome Back to Earth, Mr. Market

Albert Edwards: Europe On The Edge Of A Deflationary Precipice

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David Rosenberg: "The Weirdest 20 Minutes Of My Life"

Chief Economist David Rosenberg comments on yesterday’s market plunge, today’s job figures and this week’s European sovereign debt chaos. Oh, in case you don’t have anything to worry about, Mr. Rosenberg has a list…

“The big story yesterday was not some possible computer glitch (though that was the weirdest 20 minutes in front of the Bloomberg in my professional life), but the fact that the contagion risks are turning into reality in the euro zone periphery.”

David Rosenberg

Thursday’s massive sell-off in the U.S. stock market was not caused by some computer blunder, Friday’s labor market report is not as positive as some make it out to be and the problems with sovereign debt in Europe is just getting started. That’s pretty much the summary of today’s edition of “Lunch With Dave”.

The chief economist at Gluskin Sheff also share his list of 10 things to worry about (just in case you don’t have any worries of your own, I guess).

But let’s start with The Big Bang of May 6th:

Mr. Rosenberg writes:

“As far as the dramatic break in the equity market yesterday, it seems appropriate to emphasize that the bear market rally that began in March 2009 is over (with a bullet!). As Walter Murphy pointed out this morning in his blog, we have impulsively broken support like a hot knife through butter. Bob Farrell points out that in panics such as this, bargain hunting is better left to a later period of testing. Considering that the bear market rally, especially in the later stages, was dominated by traders, it is important to keep in mind the liquidity risks.”

“The most popular analogy for “panic” is what happens when someone yells “fire” in a crowded theatre. The challenge in applying this to the stock market is that when you pick the back row on the aisle, you still have to find someone to take your seat before you leave the theater.”

“The big story yesterday was not some possible computer glitch (though that was the weirdest 20 minutes in front of the Bloomberg in my professional life), but the fact that the contagion risks are turning into reality in the euro zone periphery. Before the mid-afternoon meltdown, the Dow was down around 350 points, and that is where it finished the day. The roller-coaster ride is just another reason for the general public to maintain the defensive investment stance it has adopted during this bear market rally. We all know that the locals who drove the market up through most of this cycle (we are talking about the hedge funds and prop desks at the major banks) are the same ones who are dispassionately heading for the exits.”

A Highly Deflationary Brew

“While safe havens benefited, such as Treasuries and German bunds, we saw huge bond sell-offs in Portugal (+33bps), Spain (+24bps) and Italy (+22bps). Greek bond yields surged more than 100bps. The world is awash with excess capacity — in the U.S., there are simply too many vacant houses, empty apartment and office buildings, idle manufacturing plants and unemployed people. Credit is contracting. Money velocity and the money multiplier are anemic. This is a highly deflationary brew.”

“The situation in Europe is dire because there is little, if any, chance that Greece will ever accept a 3-4% annual contraction in its economy in return for the EU-IMF loan deal. Debt restructuring is the only way out, and currency devaluation to grease the skids during the fiscal adjustment is necessary. And, it is not just Greece but the entire Club Med region sharing the same problem — too much debt relative to the size of the economy and onerous debt-servicing burdens.”

“The ECB took a pass at even hinting at quantitative easing — buying government bonds outright as the Fed has done — but surely this is going to have to be part of the plan to averting another financial crisis. The banks, especially in core Europe, cannot withstand another Lehman-type collapse, and when you consider how far the debt restructuring among the PIIGS will go, it is not hard to come up with a $700-800 billion tab.”

The Banks Are Not Nearly Strong Enough

“The banks are not nearly in strong enough shape to withstand losses of that magnitude and European policymakers are well advised to come up with a contingency plan without delay because as we saw in the summer of 2008, a crisis of confidence can quickly spin out of control. In this environment, a bond-bullion barbell is going to work out just fine — as it did yesterday. To have gold rally amidst a flight-to-quality into greenback is quite a statement — and the chart of the gold price in Euro terms is just about as bullish a picture than anyone could ever draw.”

“We went into this latest leg of the credit collapse with equity market bullish sentiment at levels not seen since late 2007, portfolio manager cash ratios also at levels last seen in late 2007, the VIX index at a mere 15x, and valuation implying a return to peak earnings as early as next year!”

10 Reasons For Doing Drugs

“The complacency was amazing and I could see this so clearly in my last two trips to New York City. Back in December 2008, I recall marketing in midtown and walking along 5th Avenue, I noticed that nobody was carrying any bags or boxes and that everyone looked catatonic, as if they were on Prozac. In the last six weeks, I have been to the city twice, and both times it seemed to me that everyone was walking around looking as though they were on heroin. Smiles everywhere and a general sense that things were good, though nobody really seemed to know why. We shall see whether that bliss turns to bust on my next trip, which is hopefully next month when I get on stage with my buddy and former colleague Rich Bernstein.”

And here it is; David Rosenberg’s list of 10 things to worry about:

1. Greek default and contagion risks to European banks

2. ECB dragging its heels (á la Bernanke in 2007)

3. Hung parliament in the U.K. to add to uncertainty

4. China policy tightening and possible bubble burst in real estate

5. U.S. economy only managing 1.6% annualized real final sales growth in the past three quarters

6. Slide in Chinese stock market and commodity prices signaling an end to the global V-shaped recovery

7. Big fiscal drag will drain as much as two-percentage points off U.S. growth next year; 1.25 percentage points in Canada

8. Higher dividend and capital gains rates in the U.S. will curb investor enthusiasm

9. U.S. dollar surge will eat into U.S. large-cap corporate earnings

10. Every index is now showing a return to U.S. home price deflation

And That’s Not All, Folks!

Here’s Mr. Rosenberg’s view on today’s labor market report, described by analysts and journalists as “positive” and “better than expected”.

“So, ADP rose 32k in April and everyone got so excited over the positive sign beside the digit. Wow. So now we are only 8.2 million private sector jobs short of where we were before the onset of the “Great Recession”. This 32k increase in ADP, of course, comes on the heels of 4%-plus GDP growth in the past six months and we are very likely well past the peak of the cycle on that score.”

“While it is apparent from the ADP data that large-cap manufacturers are now hiring, it remains to be seen how far this goes with the global economic outlook looking murkier and the reversion to a stronger U.S. dollar negatively impacting export competitiveness. And, what is also apparent is that there is no hiring coming out of the small business sector with outright declines ongoing in the goods-producing segment.”

“The latest CEO survey showed company executives more optimistic about the future, but just about 3 out of 4 do not intend on boosting their staffing requirements. So is 32k the best we are going to do? Let’s hope not because, if that is the case, then it will take 22 years to recoup all the job losses incurred since late 2007.”

The Problem of Productivity

“Well, there is such a thing as too much of a good thing. U.S. productivity growth moderated but not nearly as much as expected in Q1 (remember, the pace of economic activity moderated too) — to a 3.6% annual rate (the consensus was expecting 2.6%) versus 6.3% in Q4 and 7.8% in Q3. The message here is that the recovery is being totally dominated by productivity with very little in the way of labour input.”

“Of that 4.4% rise in nonfarm business output in Q1, 80% was accounted for by productivity growth, not far off what we saw in Q4 (in the current cycle productivity is accounting for nearly 100% of output growth, compared to 50% in prior cycles going back to the early 1950s). Real compensation per hour stagnated in Q1, and this followed outright declines the prior two quarters — a whole series of other cash flow boosts from extended jobless benefits, to strategic defaults and tax credits, are helping underpin consumption. Organic income growth is just not there because of all the slack in the jobs market — that is so evident in these data.”

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The Ugly Picture

“The total pool of available labour now stands at a record 21.2 million, which is nearly eight million higher than the pre-bubble norm. So, to put today’s stellar headline figure into proper perspective, it would take another 28 months of gains like this to absorb the excess and reverse the deflationary tide that is now gripping the labour market. More than likely, this process of unwinding the idle capacity in the labour market will take at least twice as long as that. Income strategies work best in a deflationary environment, which is why bonds have begun to overtake equities on the total return ladder on a year-to-date basis. This remains a secular trend, periodic divergences like 2009 notwithstanding.”

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“Our biggest concern looking forward in the employment picture is the ever-present risk of a “double dip”. It is very likely that Q4 2009 reflected the peak for GDP growth and that the bear market rally is potentially over. Risks to confidence in the economic outlook will undoubtedly now rise materially. The resumption of the credit collapse, this time in Europe, suggests that headwinds are picking up in the global economy with negative implications for global trade flows as well as corporate earnings, which, with a lag, will also dampen hiring intentions.”

Here’s a copy of the full commentary by chief economist David Rosenberg at Gluskin Sheff.

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