Rosenberg Explains "Why We Should Be Worried"

Tyler Durden's picture

While we politely disagree with David Rosenberg on what is the ultimate flight to safety "security" (in our insolvent day and age perhaps the very word at the heart of capital markets needs to be changed), with him believing in bonds, predicated by a fear of an eventual deflationary crunch, while we ignore any instrument that is used a policy tool by the central planners and instead prefer precious metals, we always are impressed by his ability to synthesize reality in a few succinct bullet points (even if according to Eni's Recchi itself is irrelevant after saying that "Italy’s bond yields don’t reflect reality"). That is most certainly the case today when in his latest Breakfast with Dave letter to clients, Rosie summarizes the 7 reasons why "we should be worried."

From Rosie:

• S&P has come out and said that it may downgrade the U.S. government in July, whether or not there is an impasse in the debt ceiling talks. We've never had the experience of having the world's reserve currency at least not attaining AAA status. It may not lead to anything, but it will be something we have not had to confront before as investors. Don't forget that it is not just $9.7 trillion of Treasury bonds that would be affected, but the $7 trillion of Fannie Mae and Freddie Mac debt, and the other $130 billion of AAA-rated state and local government debt plus bank bonds insured by FDIC — plus countries like Israel that rely on the backing of the U.S. government. And what about the $2.7 trillion repo market tied to U.S. Treasuries? A default could trigger a giant margin call for the banking industry. You see, the effects are quite far-reaching.

Even if the debt can ends up getting kicked down the road in Washington, the reality of fiscal retrenchment is unavoidable. Extended jobless benefits are rolling off and depressing personal income. State and local governments are laying off staff at an unprecedented rate (see No Matter How Debt Debate Ends, Governors See More Cuts for States on page A8 of the Saturday NYT). Chicago Mayor Rahm Emanuel is about to let 625 municipal workers go, as the Investor's Business Daily reported, "after public unions missed a deadline for proposals to help close a $30 mil budget gap".

• Ben Bernanke cleared up his position on Friday that, in fact, the Fed is not contemplating another round of quantitative easing in the near-term and that it will be contingent on deflationary signposts coming back to the front burner.

• The ECB, having raised rates twice to carry out a policy that is only relevant for Germany, has probably started off in another series of policy mis-steps, since its inception 12 years ago. The next mistake is the central bank's continued resistance of stepping in as lender of last resort for Greece if it defaults — and there is really no possible way to see an end-game here that does not involve some restructuring among the creditors, which would thereby doom the entire Greek banking sector.

• The EU leaders were supposed to meet on Friday to come up with a solution to Greece but have delayed it to July 21st (various options are on the table apparently, including bond buybacks at discounted prices or an offer for banks to exchange their existing holdings of Greek bonds for new, long-term Greek debt. But either one of these options involves a writedown on Greek bondholdings and as such is a technical default). We also have a situation where it is no longer just about Greece — where default, in whatever form, seems inevitable. The country can hardly run 7% primary fiscal surpluses for five years in order to meet ridiculously tight budgetary guidelines.

It is now about 40% of the Eurozone economy that is engulfed in the debt crisis, to varying degrees. Italy's problem is not the same as Greece, but it has a huge debt burden of 120% of GDP and now a loss of confidence in both the economy and the political structure, notwithstanding the successful passing of the austerity package in both houses of parliament, as well as a very onerous debt-refinancing calendar ahead (and at a time of sharply higher interest rates).

Spain is far worse, much more like Ireland with weakened banks (five of the nine European banks that could not meet the "joke" stress tests were Spanish), a property market that is primed for a 30% collapse (based on getting to some sort of equilibrium) and an unemployment problem that is far worse. Signs also began to surface last week that even some of the core Eurozone debt markets, such as in France, were starting to feel the fallout. Greece is to the Eurozone what Thailand was to Asia back in 2007 — the canary in the coalmine.

• In addition to the fact that long-term jobless benefits are falling by the wayside, the U.S. government is also sanctioning a form of stealth policy tightening by having Fannie Mae and Freddie Mac begin to cut its insurable limits to $625,500 from the current $729,750, starting in October. This will bite in many ways, including the impact on local government revenues which have now posted back-to-back declines in property tax revenues for two quarters in a row — the first time that has ever happened.

• It is now coming to the fore that al Qaeda has been planning another attack on U.S. soil. The odds of another terrorist strike are hard to handicap and harder to discuss, but if you think it is non-trivial, try selling it to the folks who live in Mumbai. Geopolitical tensions in the Middle East are reviving as well — unrest being reported in Yemen and Jordan. Something else to keep an eye on.

• The global economy is very clearly cooling off. There are few Asian countries as "cyclical" as South Korea is and on Friday, the region's fourth largest country trimmed its GDP forecast to 4.3% for this year from 4.5% — a fairly decent-sized haircut from the 6.2% expansion in 2010.

As to how the market is reacting...

•    Italian and Spanish bond yields rose above 6% last week.
•    German bund yields touched 2.7%, down 13bps on the week.
•    The Swiss franc rose to record highs against the euro and the U.S. dollar.
•    The FX markets are so risk-averse that the Japanese yen rose 3% against the euro and hit is best level against the U.S. dollar since the round of coordinated intervention to weaken the yen this March.
•    U.S. CDS spreads widened to post-Lehman crisis highs.
•    Gold reached a record $1,600/oz.
•    The VIX index neared the 20 mark.
•    The S&P 500 was off 2.06 % for the week; the Nasdaq lost 2.04%; and the Dow slid 1.4%.
•    All 10 major equity sectors were down, with Energy the top performer (just a 0.4% loss).
•    Bank stocks fell to end the week despite better-than-expected headline results from JPMorgan and Citi.

Source: Gluskin Sheff

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Caveman93's picture

I have no job, no home equity, no prospects for a job that pays well, but my FICO is 780. All is well. Sorry I cannot play.

I am Jobe's picture

Well USA is the right place to be in. Bail out Nation USSA.

TBT or not TBT's picture

Well we do get most of "our" oil from this hemisphere, and do have a helluva military and very weak neighbors, push come to shove about the security of supply to run what's left of our economy and AGRICULTURE production. As to who else you'd rather be, well, NOT in Europe is a good starting answer(no oil and no military), and NOT in any country dependent on food imports and both militarily weak and oil poor(e.g. Egypt...).

Bonesetter Brown's picture

Absolutely.  Real politik.

And all good arguments for a Germany/Russia tie-up if and when we a split in the Euro group.

HITMAN56's picture

"Do you have any conceivable reason for getting up in the morning"                              

 "I like to get the Daily News"

RafterManFMJ's picture

Sure you can play!

1. Get a credit card,

2. get cash advance,

3. go to coin store.


5. profit!

Infinite QE's picture

6. File BK and have free gold/silver!

Buck Johnson's picture

Well you are one of the few, not to many can say they have a FICO score of 780.  But minus that, you are in the same boat as alot of other people.  But if you look anything like your avatar, you won't have to much trouble finding help.

djsmps's picture

Can everyone just quit saying "kicked down the road", "kicking the can down the road" or any other version. This is now the single most uttered phrase in the media.

hedgeless_horseman's picture

It is the preferred euphemism for, "fuck our children and grandchildren," which for obvious reasons didn't poll well with the focus groups.

LeBalance's picture

oh, it won't be nearly that long.

Cleanclog's picture

"Repudiation" is the most succinct word - if only MSM would use it.

Debt repudiation will be happening on a very large scale:

Countries ala Greece and many more.

State and Local governments also on a very large scale even if Meredith's call hasn't panned out. 

Banks and other financial institutions (drop the dividends again) despite CNBCs continual drone that they are trading under book value but don't bother to "report" (ha ha ha like they ever really do any real reporting beyond PR promulgation) that book value is phonier than boloney (and just think about how boloney is concocted) with very few of their underwater assets are accurately market marked or accounted for with fair true value. 

Households as they remain in the houses they can't afford but banks don't foreclose on.

Pissed off police, firefighters, teachers, medical providers growing.  Repudiation of duties will be rolling out soon there too.  Look around.  Start making friends with farmers or start growing your own.


Milestones's picture



To the point; succinct!-and on target.       Milestones

Sofa King's picture

I think a more proper phrase for what is going on is "Hiding the Pickle".

carbonmutant's picture

Procrastination Bitchez...

WoodMizer's picture

you mean,



Porn is the only industry still hiring.

downrodeo's picture

...uhh, excellent... I've been looking to change careers.


Where do I sign??

Dirtt's picture

Okay.  I'll be your Huckleberry.

"Kick it up the 710 Freeway until you reach South Pasadena." And you can quote me on that.

Rosenberg will ALWAYS have a special place in my heart. Q4 2007 was HUGE in my life.

DonnieD's picture

"Hope and Change" is dead and buried.

chunkylover42's picture

how about kicking the grenade down the road, since that's a far more accurate description of what we're doing...

duncecap rack's picture

Somebody suggested "rolling the turd down the road" a while ago. I like that one.

TexasAggie's picture

Has this replaced "Unexpected" by the LSM?

IQ 145's picture

 My favorite quote on Bonds is from Franz Pick (sp.?), "Bonds are instruments of guaranteed confistication". The person, entity, on the other side of the contract, is also the person who gets to decide how much the monetary units are worth when you cash it in. It's a fools game in an inflationary world. Silver is telling us what the world thinks about the near term future.

YesWeKahn's picture

Just look at AAPL, AMZN, and all the other junks, there is NOTHING to worry about.

plocequ1's picture

I just ordered a another Macbook pro to take the place of my PC. Life is still chugging along. Barclays was right there to offer me 0% financing for 12 months. God bless AAPL and Barclays . I hope i am still alive to accept delivery.

YesWeKahn's picture

Do they take your life insurance as collegial? lol

jus_lite_reading's picture

I cant help myself... my daily read besides zerohedge has another great article that scares the bajezzus out of me today!!! ANOTHER WHORE HOUSE IDIOT says we need MORE STIMULUS then we have the WHOLE EU BURNING WHILE THE sheeple GET ALL EXCITED ABOUT JUSTIN BIEBERS CRASHING A FUCKING WEDDING WHO GIVES a flying rats shit about that when the whole SHIT STORM is about to BLOW!!!!

and for BIEBER


SheepDog-One's picture

The world teeters on the edge of the brink while most people have no idea and are only concerned about Justin Biebers latest antic and some white trash chick who killed her kid and got away with it. Bread and circuses, just more modern over an Iphone Tweet.

jus_lite_reading's picture

I find peace here at zerohedge because I find people like you who undertand WTF is going on and that gioves me hope in the future!!! I must have referred zerohedge to over 1000 friends and colleagues to wake them the fuck up now before it is too late! The peoblem I find is that they find the news too depressing to even think about and they rather NOT KNOW because they KNOW something bad is coming.... but I know when the shit hits the big fan they will be running to people like us for help.... i will help them but after i rub it in their face!!!!

SheepDog-One's picture

Rosie just come out once and for all and admit the REAL safety is in personal protection gear- M40 gas masks and CBR suits, guns ammo and PM's!

Silver Dreamer's picture

This thing is definitely getting ready to go nuclear.

jus_lite_reading's picture

YUP!! I think silver hits 80 by ocotber...

Zero Govt's picture

so let me boil this down: we should be uber-worried because politicians, the public sector, Govt, the EU/EC, the Judiciary and Police, Regulators, Central Bankers and over-leveraged retail banks, all the propped-up corporate crones and vested interests could/will implode under the debt mountain

Er, forgive me i can't see a problem here, i see the solution

Answers on a Postcard to: Feet Up with Popcorn, Chill-Out Lounge Dept., Grim Reeper Street, Capitalism Rules. Postcode: GOVT RIP

Careless Whisper's picture

Well things over in China seem ok. SINA Weibo which is twitter x 3 now has advertisers contacting celebrities for product placement, for a nice fee of course, about 100,000 renbibies.



IQ 145's picture

 "Italy's bond yields don't reflect reality"---No bond yield reflects reality> "reality,?; you couldn't handle reality". A Bond yield that reflected "reality" would be very interesting; but there aren't any; yet.

GoinFawr's picture

Is it just me or is that article essentially a doublethink saying 'borrow more of what you don't have or we'll downgrade your credit rating'?

A Lunatic's picture

I'm not sure how eliminating the debt ceiling would curb uncertainty over whether or not the U.S. can meet it's debt obligations. They just don't want their laundry aired in public any longer. Some solution.

ebworthen's picture

Strange, isn't it?

Kind of like your individual "credit rating"; the more you borrow the better your credit.


Or, any state or federal funds in a yearly budget that aren't spent means that you get that much less funding the next year; so if you waste money you get more.

What kind of madness is this, exactly?

carbonmutant's picture

Deflation is being hidden behind the declining lack of product choices and empty shelves.

Remember the days?

Disappearing distribution channels...

tbone654's picture

Disappearing "profit motive"...

bank guy in Brussels's picture

David Rosenberg writes:

« ... It is now coming to the fore that al Qaeda has been planning another attack on U.S. soil ... »

Always sad to see somewhat smart people falling for the Al - CIA - da, the American government-sponsored 'false flag' terra-rism.

Here's some people who see it - in a classic, hilarious tune, with a great video, the Mos Def - Immortal Technique - Eminem rap classic, about 11 September 2001:

« Bin Laden didn't blow up the projects ... Bush knocked down the Towers ... »

Reptil's picture


we want a new scam

all those trillions in funding and this is what they come up with?

Vergeltung's picture

nothing smells worse that a 9-11 truther retard.