David, Rosenberg, Merrill Lynch’s chief North American economist, says the US Remains Firmly In Recession.
Merrill Lynch’s David Rosenberg, the first economist from a major bank to declare a US recession was underway back in early January, argues that recent unemployment figures show yet more evidence that the US economy is a deep recession.
My Comment: I could not possibly agree more. I talked about US unemployment recently in Continuing Job Claims and the “L” Shaped Recession and Jobs Decline 7th Consecutive Month.
It is highly improbably for jobs to decline 7 consecutive months and to not be in recession. Now Canada is following suit with a shocking loss of 55,000 jobs in July. Please see Canada, Japan Head For Recession for more on the Canadian jobs story.
Pointing to last week’s news that employment has now declined for six months in a row, Mr Rosenberg, Merrill’s chief North American economist, says that “at no time in the past 50 years has this happened without the economy being in an official recession.”
My Comment: Its seven now, although it was six when the above article was written. Furthermore, December was barely positive so it is now 8 consecutive months of bad jobs data. In December I suggested that every jobs report in 2008 would be extremely weak, and so far that is a perfect scorecard. January kicked off the implosion, as noted in Jobs Contract as 2007 Job Growth Revised Away, and jobs have been negative ever since.
Americans need radical surgery to revive country’s economy
The Telegraph is reporting Americans need radical surgery to revive country’s economy.
The US economy is in recession. Period. And it has been in a recession since January. This is the mantra of David Rosenberg, the first Wall Street economist to predict America’s current economic woes, back in January, and perhaps one of the most bearish in the economic fraternity.
“The path to financial ruin is littered with calls of a bottom, and I don’t think you want to confuse intermediate bottoms with fundamental bottoms; I think that is quite a dangerous game to play,” he warns. “I think what separates my call, say from the consensus, is that I don’t necessarily think this is going to be a mild flash in the pan. I think this is going to be a long recession.”
“This is an epic event; we’re talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007.”
But more importantly, Rosenberg argues, is what must take place in the household sector – a sector already ravaged by rising fuel prices, a stagnant housing market and rising levels of unemployment.
In spite of all those problems, Americans are beginning to reduce their debt exposure – as seen in the savings rate, which rose from 0.3pc to 2.6pc in the last three months, the third steepest quarterly increase since the Second World War.
Before the US economy can truly begin to expand again, Rosenberg believes the savings rate must rise to pre-bubble levels of 8pc, that the US housing stocks must fall to below eight months’ supply, and that the household interest coverage ratio must fall from 14pc to 10.5pc.
“It’s important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt to get there,” he predicts, saying this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own “balance sheets”.
“American households own more than $4 trillion of consumer durable goods. So something tells me that is going to be a venue for shrinking the household side of the balance sheet.
“We’re talking about the silverware, the old antique couch in the basement, unwanted or expensive art,” he goes on. “This is the future, the future is frugality.
“This is the future, the future is frugality“
Indeed it is. And it was Minyanville Professor Kevin Depew who coined the phrase It’s Cool to Be Frugal.
The US has been on a consumption binge of epic proportions all on the misguided belief that real estate prices would keep on rising forever, at a clip of 8% or more a year. No one ever bothered to do the math as to how anyone could possibly afford to pay the projected prices. Real wages were shrinking but somehow everyone could get rich selling houses to each other.
The “Housing Prices Always Go Up” dream has finally crashed on the rocks of reality. However, while the party was still going on, consumers were willing to go deeper and deeper in debt, buying new kitchens, taking expensive vacations, buying boats, buying SUVs “needed” to haul all the junk around they were buying, etc. And as long as home prices kept rising, everyone ignored the debt side of the balance sheet.
Now, the party has ended, and asset prices are crashing but the debt still remains. Consumers are now very concerned (finally), about the debt side of the balance sheet. It is going to take an amazing shift from consumption to savings to pay down that debt. And a secular shift from consumption to saving is now underway. “Cool To Be Frugal” is actually an understatement.
Forward earnings estimates in the stock market have not remotely factored a secular shift from consumption to savings in. The implication on the stock market should be obvious. Furthermore, many who are out of a job, will not be able to pay down their debt. And what cannot be paid back, will be defaulted on.
Others will default on purpose, simply choosing to walk away. I have written about “walking Away” on many occasions. most recently in Walking Away: The Next Mortgage Crisis.
And that was some massive change in attitude. Three short years ago people were camping out overnight for the chance to buy a Florida condo. Now there are virtually no bids on some condos, and many are walking away from single family homes.
Attitude Changes Are The Key
Attitudes about walking away, frugality, housing as an investment vs. a place to live, and saving are all in a major secular shift. And attitudes, like super-tankers do not reverse easily.
The fed is attempting to fight this of course, but instead of having the wind of consumption pushing the economy along as Greenspan had, a gale forced wind of forced frugality is blowing stiffly in the face of Bernanke. And that is why Bernanke’s misguided academic models will fail.
We are in deflation now, but few see it because they do not understand what deflation is: a net contraction in money supply and credit.
Just a few day ago, I received a message from someone who posts under the name Oil Shock: “Deflation is always coming, but it never gets here and it never will.”
Sorry Oil Shock, you lose.
Deflation is Not Coming, Deflation is Here.
- Credit is contracting by any reasonable measure. It would be contracting at a stunning rate if marked to market. And from a practical standpoint marked to market is how it must be considered, even if there is no direct measure (which I might add is on purpose). Instead it is still hidden in marked to fantasy level 3 assets and in SIVs and other off balance sheet vehicles. See Not Practical To Tell The Truth for this line of reasoning. M3 is simply not a reasonable measure of credit, nor is MZM. Inquiring minds will want read Bank Credit Is Contracting for more details.
- Trillions of dollars of housing wealth has been wiped out, yet laughably some still talk of hyperinflation. There has never been a hyperinflation in history where land prices have fallen like they are now. In fact, there has never been hyperinflation where land prices have declined at all, barring some obscure war zone perhaps.
- Bank writeoffs have hit $500 billion and $2 Trillion is coming. “Yes, That’s $2 Trillion of Debt-Related Losses”, says Nouriel Roubini.
The only question now is how long deflation lasts, not whether it gets here. For more on deflation, please see Deflation In A Fiat Regime?
Even those focused on “inflation” through the myopic eyes of prices may have their eyes opened. Looking ahead, year over year comparisons of gasoline prices, food prices, etc, may never be easier. So be prepared to start seeing the word “deflation” more often, even if the context is wrong.
Currently, the word “deflation”, if found at all, is buried on page 15 of the Wall Street Journal. The word is headed for page 1.
The Printing Presses Are Gearing Up. Will It Matter?
Yes, Congress will spend. Yes, the Fed will print. Yes, the Fed and the SEC, and the Treasury will act to intervene in the credit markets and God only knows what else. And those who look at things from a purely monetary standpoint (as opposed to a price standpoint), will be the next ones to scream about inflation.
However, at this point I find it doubtful that Congress or the Fed is going to be acting faster than the expected $2 trillion in writeoffs that are coming. In addition, with the secular shift from consumption to savings, consumers paying down debt is in and of itself a deflationary force.
Finally, there is the strong likelihood that any jobs programs coming out of Congress will be to rebuild infrastructure. Indeed, our bridges, roads, and energy grids, are all in horrendous shape. Inquiring minds may wish to consider Rebuilding America’s Decaying Infrastructure. The cost could be enormous.
Yet unlike the misguided bombing of Iraq that was all expense and zero benefit, at least the asset side of the balance sheet will increase in the spending boom that is likely coming. Add it all up, and that is how the deflation we are in can continue, even if and when Bernanke puts his pedal to the metal on the printing presses.
Mike “Mish” Shedlock
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