David Rosenberg Chimes In

I love reading anything by David Rosenberg, Chief Economist & Strategist at Gluskin Sheff in Canada.  He's one of the few that publicly warned about imminent danger back in 2007 while Chief Economist at Merrill Lynch.  He's not seeing much that enthuses him now, either.

Here are a few choice tidbits from his latest commentary:

That global market sentiment rests with more rounds of Chinese policy easing is truly a statement on how fragile things really are.

The Greek equity market, according to Bloomberg, is now trading at levels not seen since 1995 — just as the country was seeking entry into the EMU. Another sign of how markets are repricing the country’s asset markets back to drachma-era levels.

(The S&P 500 was roughly 500 then)

High-yield spreads have widened out nearly 70 basis points in less than a month to 660bps, a level they tested last August when the S&P 500 was hovering near 1,200, not 1,300, so a word for the wise: either corporate bonds are too cheap or equities are mispriced on the other side of that equation. 

(I have price targets and multiple Fib levels in the 1254-1259 area -- credit markets usually have it right)

For the first time on record, we have gone 11 quarters into a recovery but not managed once to post a GDP quarter at 4% at an annual rate or better.

It goes without saying how unusual it is to be experiencing the softest recovery ever recorded (even the 1933-36 bounce was bigger than this) in the face of massive government stimulus from more than three years of 0% policy rates, a Fed balance sheet pregnant with triplets and now going on four years of $1trillion-plus fiscal deficits — unheard of outside of a wartime economy.

Our analysis suggests that if this had been a plain-vanilla recovery (fueled by traditional rate cuts) following a garden-variety recession (the ones we became accustomed to — caused by overheating, inflation pressures, yield curve inversion and excess manufacturing inventories), the growth rate in the economy would be 8% by now.

It seems curious that we could be talking about a deleveraging cycle when the median OECD country is carrying at all levels of society (corporate, household and government) a total debt/GDP ratio of 450%.

This time the culprit is not U.S. banks or mortgages. It has become an even larger problem pertaining to public sector finance.

(Elliott Wave International notes that student loans issued by the U.S. government quadrupled from a little over $100 billion in loans in 2008 to a record high of $460.2 billion as of March 2012.)

The mid-40s readings in the French and German PMIs in May strongly hint at economic contraction at the core of Europe now. The fate of the euro may be debated, but the fate of the region is not up for debate at all. Leading indicators are pointing to ongoing economic duress for several quarters to come.

(No quick fixes, especially if Germany contracts)

There is no “containment” in an increasingly intertwined global economy —only lags. The U.S. economy has nearly a 90% correlation with Europe.

(No containment is the New Reality)

U.S. output gap (potential GDP minus actual GDP) has never been this wide at this stage of the cycle.

The first of the baby boomers — the 78 million ‘pig in a python’ that own most of the wealth and have driven everything in the past six decades from politics to economics — have reached their mid-60s. They are no longer in their capital appreciation/aggressive growth part of the life cycle as they were in the 1980s and 1990s.

After being burnt twice less than a decade apart by two massive bubble-busts, the baby boom investor is voting with his/her feet. They have been net redeemers of equity mutual funds 70% of the time since the market lows of March 2009 — choosing to sell into the rallies and rebalance their portfolios into more conservative strategies than chase the market higher. What the retail investor has discovered are bond funds (of all types) and the importance of the income component within the equity market — which is why hybrid funds have emerged as an attractive vehicle to participate in the equity market in a low-risk fashion and at the same time collect a rent in the form of dividend yield and rising payout ratios. This is all about S.I.R.P. — Safety and Income at a Reasonable Price. The operative theme being one of preservation of capital and preservation of cash flows. 

(And THAT is where all the "volume went")

Share of personal income from Uncle Sam is near an all-time high.  The numbers of disabled workers and food stamps participants are at all-time highs.

("Money for nothing and your checks for free." ~ Mark Knopfler)

The reason why nobody considers this to be a modern-day depression is because nobody can see the soup and bread lines that were so visible during the 1930s. That’s only because these days, you receive your bread and soup from Uncle Sam either electronically or in the mail.