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Four Letters To Rosie

Tyler Durden's picture




 

Some notable correspondences submitted by David Rosenberg's fans to the Gluskin-Sheff strategist. All are worth a read, although inbetween we get this glimpse of what Rosie really thinks: "We will come out of this cycle with tremendous inflation, but the primary trend for the next 3-5 years, the length of time it will minimally take before this global deleveraging cycle fades, is deflation." We knew Rosie was a long-term hyperinflationist.

THE NEW “PAY ME LATER” ECONOMY

The great thing about writing a daily is the insightful responses it elicits. Yes, yes, it seems that everyone has the cash to spend on an iPad — the latest must-have consumer gadget. All you need to do is stop paying your mortgage, as the NYT wrote about yesterday. But if you are waiting for State governments to pay you for services rendered, wait in line. Dave from New York sent the following:

“Hi Dave

At a Memorial Day event in upstate NY today I spoke with a friend who works in a medium sized construction company, about 45 people total.

His firm does a lot of work for New York State, as do most of the construction companies.

New York stopped paying all of them. They have been asked by the State to keep working on their ongoing projects and the state will pay them at some point in the future, they don't know when.

Many of these firms have walked out of the projects, they just can't afford to keep working without being paid. One firm is owed over $8 million on one job alone and has been told that if they quit, the State will sue them for breach of contract, even though the State will not pay them in the near future.

It appears that the State wants all of the construction companies to carry the State through these tough times.
New York State probably won't pass a budget this year at all. The politicians are afraid that the cuts will be so severe that the government workers' unions will make sure they are all defeated in the elections in November.

So now we have a State government that is acting exactly like the ostrich, sticking their heads in the sands when danger is at hand. Who's covering the rear?”

DAVID MEET DAVID

Another response from a reader ... and a meeting of the minds on this ‘income-less’ recovery.

“David,

Consistent with your theme of deep level drawdowns vs. monthly change, you probably noticed the big "mother may I" (two steps forward, 1.8 steps back) in the April income and spending report. It looked like April private wage and salary income was up a healthy $24.4 billion, but, whoops, they revised March down by $28.6 billion. So we are still $4 billion lower than we thought we were last month!

But on government social benefits to persons, "mother may I" worked in the opposite direct[ion]. The April number looked to be down (finally) by $5 billion, but that was only because they revised March up by $8 billion. Transfers are thus still going up!

I prefer to look at "private incomes" as the true organic stuff---private wages and salaries + rental incomes +proprietors incomes + interest and dividends. Due to the Q4 2009 benchmark revisions, this number was reduced by $31 billion from its previously reported anemic level. Consequently, the April "private incomes" number of $8,281 billion is still $477 billion or 5.4 % below its pre-Lehman, Q3 2008 level of $8,757 billion. And of course, these are nominal income numbers---meaning they are totally off the charts compared to any previous post-war cycles where private incomes never declined at all. Since August 2009, "private incomes" have only grown at a $16 billion monthly rate----so it will take another 30 months to even get back to pre-Lehman levels.

On the other hand, "public incomes" (government transfers plus government wages and salaries) are up $417 billion or 14% from Q3 2008. But even Uncle Sam is running out of sovereign steam.

Consequently, if total income growth is now stuck in the mud and the idea of frugality and savings is still operative, it would seem that PCE may have a hard row to hoe.”

THE BULLION-BOND BARBELL

Yet another thoughtful reply on the deflation-inflation debate. It’s all about timing. We will come out of this cycle with tremendous inflation, but the primary trend for the next 3-5 years, the length of time it will minimally take before this global deleveraging cycle fades, is deflation. Take a read of the email below from Scott from New York:

“David,

Great work lately, spot on as usual. A few observations from Upstate NY, a place where the economy is always depressed, since cash for clunkers not many new cars on the road. A new health club opened, very nice, we live in the high rent part of town, (my wife is a health club instructor and they are hiring), but no new sign-up’s or slow sign-up’s. In other words, no recovery here. FYI, both parents are brokers at major wirehouses, I can assure you the income theme is alive and well and one will attest that the gold fever is coming to life, but nowhere near bubble territory. Your deflation theme and charts are right on, prices everywhere except for the grocery store are low. I side with you on deflation, all evidence points towards it.

However, I also believe inflation is a fat tail event that is not understood fully yet. I believe we will go from deflation to inflation very quickly thanks to QE from the Fed. Bear with me on this one, in The Depression: A Diary, Benjamin Roth feared inflation which never happened, but that debt was never really paid off, we grew our way out of it, basically. But, we did have a bout of higher prices in the 50’s, a small fat tail from the 30’s? When the 60’s hit we spent on Vietnam to the Great Society and that created a shorter fat tail event, i.e. the 70’s stagflation. Is it possible that inflation is the next fat tail as the fat tails are picking up steam and happening at an increasing rate? I say this because sovereign default can be prevented through printing, avoiding technical default, while it is default in my eyes, still you get the point.

Couldn’t we suffer inflation through QE or dollar devaluation because of the monetization of our debt? From my lens this fits into your scenario of deflation and into Bernanke’s need to create inflation. I love your work, you are right and most of us believe, I own treasuries, gold and income securities and am very happy because of your guidance.

Thank you”

THREE D — DEBT, DEFLATION AND ... DENIAL

Below is another response from a reader — this missive really resonates. Mike from Houston (where they indeed have a problem):

“Mr. Rosenberg,

Your daily economic commentary is fantastic as always. I have been reading your commentary since 2002.
I am in total agreement on your view of the economy and am always amazed that the debt problem is everywhere (consumer, state governments, national governments, etc.). My overall opinion is that the country (consumers and government) and the world are addicted to debt and spending. The average person I come in contact with is well aware of the national debt issues, since it is in the press all of the time but the average person seems to be in denial about their own personal debt problems or their neighbor’s debt problem. As you have pointed out numerous times, the consumer has a spending addiction (iPhones, etc.). I find that most people I know are in denial over their spending also. My question is should governments be educating their citizens on responsible personal financial management. I assume the obvious problem with this is that the government would have to educate itself first.

The Wall Street Journal reported last week that the State of Texas will have a large budget deficit (I believe the deficit is approximately $18 billion) over the next two years or approximately 20% of the annual budget. It was also noted that the Texas Governor had spent $600,000 to rent a luxurious mansion over the last two years while the Texas Governor’s mansion is being repaired. I live in Houston, Texas and it appears that Texas is one of the healthier states debt wise. I would hate to live where the sickest are. The State of Texas has been in a state of denial over the budget (i.e., it is a federal problem only). My message to the Texas governor would be “Earth to space cadet!!” or “Austin, Texas we have a problem here”. It is an election year for state officials in Texas so I am sure denial will last until 2011.”

 

 

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Wed, 06/02/2010 - 17:25 | 390421 Mako
Mako's picture

"global deleveraging cycle"

There is no deleveraging in the system.   Individuals can deleverage if the population increases at a huge rate but the leverage of the system does not go away it would just be spread over a larger population.   The deleveraging of the system is called a collapse.

There isn't too much debt, if debt were $45T instead of $52T and you were not producing more credit/debt, you would be collapsing at that level.

You can't pay interest on $45T just the same as $53T(now $52.4T) with negative credit creation.  Humans are playing a game they will never ever win, the appearance of winning can go on for a while though... in this case over 6 decades.

 

Wed, 06/02/2010 - 17:57 | 390483 etrader
etrader's picture

They'll end up having two dollar pegs. T1 for general circulation & T2 for pre existing debt before a set date.

T2 debt will be pegged at say 25 to 50% of general circulation T1.

Would have the same effect of  Roosevelt Gold Confiscation Order.

Wed, 06/02/2010 - 17:53 | 390486 anarkst
anarkst's picture

Mako, you must have had a brutal weekend.  That's some seriously incoherent thinking going on there.

Wed, 06/02/2010 - 19:17 | 390677 Spitzer
Spitzer's picture

So with Ron Paul as president after Clinton, with Volcker at the Fed and Schiff as treasury sec, you claim that the system would still collapse in the next 5 years ?

Keynes that fag fucked it all up, the system is not self defeating.

Under sound money, the supply of capital is finite the price of capital, the interest rate, must rise as the supply dwindles making it harder for businesses to borrow.  This checks credit expansion at a level where the growth in the economy generates enough wealth to at least service said debt.  We can then deduce that any further lending of capital beyond this point results in a loss as the growth rate will at some point become smaller than the interest rate.

Wed, 06/02/2010 - 21:05 | 390860 jdrose1985
jdrose1985's picture

Read chapter 5 of the grapes of wrath.

What don't you understand about human nature?  It corrupts "sound money" the same as credit money. The system we choose time and again consumes us without fail.

 

 

 

 

Wed, 06/02/2010 - 17:33 | 390440 monmick
monmick's picture

So now we have a State government that is acting exactly like the ostrich...

Is that what they mean by the Ostrich-ian School of Economics?

PS -- Sounds better in French: l'école Autruchienne. I believe Ben Bernanke is from that School...

 

Wed, 06/02/2010 - 17:50 | 390480 Paladin en passant
Paladin en passant's picture

Interestingly, Austria is referred to as "Österreich" in German.

Wed, 06/02/2010 - 17:31 | 390443 seventree
seventree's picture

New York State probably won't pass a budget this year at all. The politicians are afraid that the cuts will be so severe that the government workers' unions will make sure they are all defeated in the elections in November.

Once the November elections are over, a lot of desperately hidden bad news will come to light. The winners can enjoy a moment of triumph before reality comes down on their heads. (For a preview, see Greece.)

Wed, 06/02/2010 - 20:15 | 390779 Snidley Whipsnae
Snidley Whipsnae's picture

Florida has done a remarkable job of keeping their financial skeletons in the closet. Once Gov Christ is gone a lot of new about Fl will be coming out...None of it good.

Wed, 06/02/2010 - 20:44 | 390829 Muir
Muir's picture

"will be coming out"

 

The biggest "unsecret" about Charlie.

Wed, 06/02/2010 - 17:34 | 390449 Mitchman
Mitchman's picture

If the underlying theme over the next 3-5 years is deflation, then is the run-up in gold delayed for that period of time also?

Wed, 06/02/2010 - 17:57 | 390495 breezer1
breezer1's picture

the run-up in gold will only be delayed by the price suppression scheme. gold and silver are political and must be suppressed to keep support for the paper stuff, and there will be a whole lot more paper real soon.

Wed, 06/02/2010 - 17:35 | 390455 Remington IV
Remington IV's picture

NY state of mind

Wed, 06/02/2010 - 17:52 | 390464 Leo Kolivakis
Leo Kolivakis's picture

Hmm, Rosie forgot the 4 Ds:

Demographics, Deficits (especially pension deficits), Debt Deflation.

Hyperinflation? Yeah, maybe by 2030!!!

Wed, 06/02/2010 - 17:57 | 390496 GlassHammer
GlassHammer's picture

Oh good someone finally mentioned demographics.

Does anyone notice an increase in upside down American families?

(Where you have 4 Grand Parents but only one or two grand children).

 

Thu, 06/03/2010 - 00:09 | 391132 TBT or not TBT
TBT or not TBT's picture

More so in blue states than red states.   No kidding.    The DNC knows this, whither the high interest taken by the Obama White House in making the results of the 2010 census favorable.  Conservatives breed slightly faster than lefties do, and the numbers in red states get bucked up by the influx of blue state residents who got tired (or fired) of high taxes, heavy regulation, and assholes.

Wed, 06/02/2010 - 17:48 | 390472 Crab Cake
Crab Cake's picture

"...and the state will pay them at some point in the future, they don't know when."

I think I'm about tell the same thing to my mortgage company and the IRS.  If anybody has any problem with it, maybe I'll just go out like Butch and Sundance. 

It's a free for all, fuck'em all.

"One firm is owed over $8 million on one job alone and has been told that if they quit, the State will sue them for breach of contract, even though the State will not pay them in the near future."

Welcome to the police state bitches.

Wed, 06/02/2010 - 17:56 | 390492 anony
anony's picture

From my experience with contractors who have donated handsomely to both partys to get these cushy state contracts, I'd say they have been living off welfare for as long as they have been involved with the state.

Police state my fanny.  They laid down with dogs and now they wonder why they have fleas?  Please.

Wed, 06/02/2010 - 18:15 | 390535 terrible
terrible's picture

+1

Wed, 06/02/2010 - 17:47 | 390473 Blues Traveler
Blues Traveler's picture

The beatings will continue until moral improves

Wed, 06/02/2010 - 17:48 | 390477 Kimo
Kimo's picture

Yes, bubble gum may cost more, but real estate, equities, wages....they're all going down.  Still, many are screaming, "INFLATION!"

Wed, 06/02/2010 - 19:22 | 390697 Spitzer
Spitzer's picture

Everything is going down way faster when priced in gold. That is  inflation.

Wed, 06/02/2010 - 17:54 | 390488 Crab Cake
Crab Cake's picture

This country ain't got 3-5 years before TSHTF, and people start getting strung up, beat to death, and shot.  I mean quality people now, not the bottom 90%.  It's really that simple.  You guys want to rev up your calculators and run the numbers on the economy, the finances, and monetary policy; well you ain't look'n out your god damned window.  People are desperate, and they are a powder keg that could go off any month now.  Years, that's funny.

Wed, 06/02/2010 - 18:02 | 390506 GlassHammer
GlassHammer's picture

To quote Gerald Celente "People who lose everything, lose it!"

Wed, 06/02/2010 - 22:48 | 390999 SWRichmond
SWRichmond's picture

With you; 3-5 years, no way.

Wed, 06/02/2010 - 18:14 | 390531 mynhair
mynhair's picture

All is well.  Just take the unspecified job I offered you! - OSquirrel.

Wed, 06/02/2010 - 18:26 | 390557 glenlloyd
glenlloyd's picture

One of the reasons I subscribe to the past "doomsday" post where the author suggested selling any / everything (junk assets) you can before the end of the year. If prices continue to fall it will setup an expectation that they might fall further. If you don't need it then get rid of it. Excess cars, antiques, junk etc. Turn it in to cash, what do you need that storage locker for anyway?

If anyone ever needed a sign that America has a consuption problem look no further than the storage facility. These have sprung up as big business everywhere, and for what? So people can store the stuff they no longer use but don't want to get rid of. Maxed out credit cards on junk stuffed into a u-store it.

Wed, 06/02/2010 - 22:57 | 391005 Temporalist
Temporalist's picture

People have been caught living in storage units.  They will become the new "public housing."

 

New York State of Mind

"This past year saw the highest level of homelessness since the city began recording such numbers in its history."

http://www.gothamgazette.com/article/socialservices/20100602/15/3284/

Wed, 06/02/2010 - 18:37 | 390576 Belrev
Belrev's picture

So we should all run out and buy as much real estate on leverage as we can. It will be the best protection in hyperinflation. Right?

Wed, 06/02/2010 - 18:59 | 390622 rapier
rapier's picture

On the 3rd letter and " in The Depression: A Diary, Benjamin Roth feared inflation which never happened, but that debt was never really paid off, we grew our way out of it, basically."

No the debt was defaulted on, liquidated, we didn't grow our way out of it.

This flation stuff will drive you nuts.  Whatever happens the new boss will be the same as the old boss.  In any case the future will be much more authoritarian, so libertarians can be free.

Wed, 06/02/2010 - 19:20 | 390667 DormRoom
DormRoom's picture

TD, et al analysises, and selective data are usually biased,  since its clear most of ZH contributers are Austrian school ideologues.  The fundamental assumption in all your analysis is that Keynesian/neo-Keynesian theory is inherently wrong, when empirical data proves otherwise.  So, if Keynesian theory does work, thus implying an expanded role for government in markets, which I'm sure mindfucks your bromance libertarian ideology, causing you a bro-me existential crisis.  I will hand you a bro-tissue.

 

p.s. A  group that comes up with a cultural meme called 'bros icing bros' should never be trusted with other ppl's money, but they are, cuz it doesn't take much creativity to make money by circulating money around a byzantine financial apparatus. 

You guys are no different than circus carnies looking to take nickels from suckers.

Wed, 06/02/2010 - 19:45 | 390732 akak
akak's picture

Could you translate that into Logical please?

I happen to have left my pro-Keynesian-Goobledygook-to-Logical dictionary at home today.

Wed, 06/02/2010 - 21:58 | 390916 taraxias
taraxias's picture

I'd settle simply for an english translation myself.

Wed, 06/02/2010 - 23:31 | 391068 Canucklehead
Canucklehead's picture

You don't get many dates do you...

Thu, 06/03/2010 - 09:37 | 391503 Dread Pirate Roberts
Dread Pirate Roberts's picture

Oh great collegiate abode.  Please explain to us simpletons how Keynesian theory works when a country already has a national debt-to-gdp ratio of 90% and must borrow all the funds to "stimulate" private demand. 

Note, the average increase in a country's debt after a crisis is 86% (credit: "This Time is Different").  After our debt increases by (at least) 86%, how much of the country's gdp will be required just to service our debt?

Please show your work.

Wed, 06/02/2010 - 19:34 | 390722 dryam
dryam's picture

Most of the money supply comes from debt in a fractional reserve banking system.  The system inherently needs to always move in the forward direction.  When the banks are lending a $1000 deposit can expand the money supply 20-30x. When the banks stop lending a $1000 deposit can shrink the money supply 20-30x (negative multiplier effect).  Real estate is the worst asset class for a bubble.  It's typically the biggest purchase in everyone's life.  People buy real estate with a lot of leverage.  Banks are inherently leveraged; it's leverage upon leverage.  The losses have been huge to say the least (no one really knows because the government wants to keep it secret).  It only takes a small % of bad loans to put an over leveraged bank out of business (in the real world).  The banks have not recognized most of their losses.  They are still marking-to-fantasy.  By all accounts the real estate has another 20-30% to drop.  25% of home "owners" are underwater.  We haven't started talking about CRE.  So, this all tells me the overall money has dropped an unthinkable amount.  I'm on the side of people that think that Bernanke has actually underestimated how much money he thinks he needs to print (btw, no matter how much money he prints, you can't push on a string).

Who is borrowing from the banks?  I see the fractional reserve banking system clearly moving backwards.  I own a lot of gold, but I'm also holding a lot of USD's for the deflation that I see coming in the money supply over the shortrun.

I think this why Hugh Hendrey recently said there would probably be deflation before hyperinflation.

Wed, 06/02/2010 - 22:54 | 391006 SWRichmond
SWRichmond's picture

I own a lot of gold, but I'm also holding a lot of USD's for the deflation that I see coming in the money supply over the shortrun.

I think this why Hugh Hendrey recently said there would probably be deflation before hyperinflation.

+1

Wed, 06/02/2010 - 19:42 | 390735 zen0
zen0's picture
by DormRoom
on Wed, 06/02/2010 - 16:20
#390667

 

TD, et al analysises, and selective data are usually biased,  since its clear most of ZH contributers are Austrian school ideologues.  The fundamental assumption in all your analysis is that Keynesian/neo-Keynesian theory is inherently wrong,.....

 

$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$

 

Economic theories are not essentially wrong or right, but beneficial or not, depending on what one's goals are. If one is of a totalitarian mindset, with government diddling from cradle to grave, Keysianism is for you. Just don't be shy to accept the consequences, or complain that you didn't know....

Wed, 06/02/2010 - 20:47 | 390835 zen0
zen0's picture

I asked my dog about animal spirits and he looked at me like I was insane, then he crawled into his bed and went to sleep.

Not a Keynsian, I'd guess.

Wed, 06/02/2010 - 20:51 | 390843 akak
akak's picture

I suspect that Keynes first got his inspirations about "artificial stimulation" and "pump priming" by watching his dog lick his own balls.

Wed, 06/02/2010 - 21:06 | 390865 zen0
zen0's picture

The problem I have with a hyperinflation talk is this: When does high inflation become hyper inflation? I lived in a time when we got regular 10% wage raises for a few years, got almost 20% in a savings account, and was paying off a 13.5% mortgage!

 

 And we didn't die! (thank you Mr. Volker)

 

 

 

 

Wed, 06/02/2010 - 21:44 | 390895 akak
akak's picture

"The problem I have with a hyperinflation talk is this: When does high inflation become hyper inflation?"

I asked this to somebody who had experienced repeated bouts of Latin American hyperinflation in the their life, and his answer was, when you seriously start worrying about the loss of value in your wages from one paycheck to the next.

Thu, 06/03/2010 - 00:09 | 391133 Alienated Serf
Alienated Serf's picture

yikes

Thu, 06/03/2010 - 02:56 | 391242 Matto
Matto's picture

"when you seriously start worrying about the loss of value in your wages from one paycheck to the next."

 

Hence you stop hoarding and start spending ASAP, driving velocity and hence the broader measures of money supply through the roof!! Welcome to the the hyperdome.

Wed, 06/02/2010 - 22:16 | 390952 Mark_BC
Mark_BC's picture

What I don't understand is why Bernanke can't just print like there's no tomorrow to offset the deflation to maintain the appearance of price stability, until the final debt default crunch comes at which point the currency is the hyperinflated away within a few weeks. Felix Zulauf on KWN talks about this transition with deflation followed by a rapid death inflation at the end.

http://www.kingworldnews.com/kingworldnews/Broadcast/Broadcast.html

 

 

 

Wed, 06/02/2010 - 23:12 | 391037 SWRichmond
SWRichmond's picture

Persistent deflation, as has been pointed out by innumerable deflationists here, raises the buying power (value) of dollars, while crushing bank assets (loans) and accelerating bank closures.  A little too much bank fear = bank runs, so persistent deflation = bank runs.  Where will the money come from to pay off depositors?  It will be clicked into their accounts.  Whether this new money actually shows up in any accounts is debatable once the situation gets that far.  If it does, this could be the last straw for the currency.

There's no physical limit to printing; the limit is practical.  After a certain point, the market says "no mas."  Bernanke was getting away with it until the Chinese started to complain; the Europeans saw through it immediately.

Bernanke will print IMO, but this time around he will wait until he is "forced."

Thu, 06/03/2010 - 08:37 | 391387 RunningMan
RunningMan's picture

We are actually getting both deflation and inflation togther right now. We are seeing the massive amounts of cash dumped into the financial sector spilling out in bank earnings and traders bonuses. Some of that is making its way into the services sector that supports these segments. But at the same time, unemployment is persistently high (alleged, massive census-driven positive job print tomorrow notwithstanding), and people's spending continues to be constrained and erratic. I think the government believes the money continuing to flood into the banks like oil into the Gulf will eventually wash up on the shores of the rest of the economy and stimulate job growth and prevent further price erosion. I tend to think it will just make one big sticky mess.

Thu, 06/03/2010 - 13:47 | 392259 jmc8888
jmc8888's picture

stagflation was the result of switching to floating rate, taking us off the gold/silver standard, and the effects of deficit war spending under that new dynamic.  the concern over the value of what the oil sheiks were getting, among other geo-political events gave us our oil shocks.

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