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.