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Rosenberg: "Obama's 'Deja Vu' Over-Consumption, Over-Borrowing And Over Building Policy Is Doomed To Failure"
Some wise words from one of the few contrarians not swept into the vortex of a massive melt up.
On the impact of Obama's stimulus, and its transformation into Fiscal Stimulus 2:
The Economic Cycle Research Institute (ECRI), under the auspices of Lakshman Achuthan, publishes a leading economic indicator for the U.S. — when it was surging in the spring when the ‘green shoots’ were sprouting, this fellow was on bubble-vision practically daily with the good news. Well, this allegedly foolproof leading index dropped 1.4 points last week and now stands at an eight-week low. We’ll see if he gets invited back on TV in the next little while.
As an aside, S&P 500 operating earnings are coming in north for $15 for Q3, a quarter in which GDP growth came in at a 3.5% annual rate. Few believe we will sustain that growth rate but think about it for a second, the best we could do with 3.5% growth was an annualized earnings figure of $60 for operating EPS. So where does this thought process come from that we are going to be seeing anything close to $80 of earnings for 2010 — what the equity market has de facto priced in — with a consensus view that we will only see 2.5% GDP growth for next year?
As part of the extension of Fiscal Stimulus 1, the U.S. Administration is using taxpayer money to subsidize the homebuilders
In the latest fiscal foray, the Administration is using taxpayer money to subsidize the homebuilders — no other sector in the economy receives so much favorable treatment and yet the industry adds so little to productivity growth.
As part of the extension of Fiscal Stimulus 1 (they don’t dare call this Fiscal Stimulus 2 for fear of losing all the independent voters):
- Jobless benefits have been extended a further 20 weeks;
- The first-time home buyer tax credit has not only been extended to April but expanded to include repeat trade-up buyers;
- And, believe it or not, the homebuilders, the folks who helped get us into the mess we are in today through their irresponsible overproduction strategies, are going to receive a massive stimulus from the federal government in the form of carry forward provisions allowing the companies to offset losses incurred in 2008 and 2009 against profits booked as far back as — get this — 2004! This is despite the fact that, as Ivy Zelman points out, the homebuilders are sitting on a ton of cash.
This is truly a fiscal policy that is trying far too hard to pursue the old ways of over-consumption, over-borrowing and over-building and it is a policy that is doomed to failure.
The OECD already estimates that U.S. federal government stimulus has been so large that it is equivalent to 5.6% of GDP, so if the economy isn’t growing, even artificially, then there is clearly something very wrong.
Meanwhile, all the stimulus was supposed to cap the jobless rate at 8.5% and that clearly hasn’t happened, and now the White House is claiming that its actions helped save 640,000 jobs from being destroyed. How exactly are we supposed to get excited about that when we‘ve lost 1.8 million household jobs in just the three months alone, not to mention what drop in the bucket that number is in the context of over 10 million full-time positions being eliminated from the economy since the recession began two-years ago.
In fact, the measures to reinvigorate an industry in secular decline like housing has ended up exerting its own distortions because the Federal Housing Administration (FHA) is now facing a 8.24% default rate as it carries out government orders to lend aggressively and with only 3.5% down-payment requirement — the default rate was 6.1% a year ago. We are at the point where capital reserves (0.53%) have fallen below mandated thresholds (2.0%) and there can be little doubt that the agency is going to be the next target for a federal bailout.
Some more thoughts from Rosenberg on the neverending debate of whether QE and Stimulus 1 through infinity will be inflationary, when so many more signs point to an ongoing deflationary collapse:
It does appear to me that the biggest difference between our view and the rest of the economic community is that we believe that recovery won’t occur to nearly the extent as the consensus because household credit is in freefall and still has a long way to go, say, down to 60-70% debt/disposable income versus 140% at the peak in 2007. Any talk of economic recovery must assume that credit ratios at least go sideways from here and probably start expanding. The consensus crowd thinks that current debt levels are okay, even if household debt-to-disposable income ratios were in the 35% range back in the 1950s. You have to be a maniac to think debt goes down that far, right?
The news from last week about the “lease for deed” swap being initiated by Fannie Mae is just the tip of the iceberg for “mortgage (principal) modification” going forward. At the margin, the supply of bank-owned homes should mushroom. Fannie Mae’s new policy rests on the fact that lenders made a bad bet in recent years and they have to pay the price. Keep in mind that bad loans were made for purchases and refinancings, as well as home equity loans.
A record share of mortgage borrowers are already “under water" and the numbers will grow until the house price collapse runs its course.
There are many ways households can reduce their debt burden, for example, budgeting
Lenders are better off keeping the foreclosed occupant as a tenant for obvious reasons. First, the lender has an asset that generates some revenue. Second, the lawn gets mowed and the plumbing stays. Upside down homeowners gain mobility and are relieved of all that debt, taxes and maintenance expense. The prevailing rental expense is likely to be a fraction of the cost of ownership. Many homeowners are highly motivated to downsize, both for demographic reasons and because the “new era” beliefs on house appreciation that prevailed at the recent bubble peak caused massive over consumption for investment reasons.
You can’t pursue frugality with a couple of extra bedrooms in inventory. Once again, at the margin, those households who are over-housed and under water are much more likely to be willing to hand over the keys. Put simply, the lenders are going to have to deal. I can imagine that lenders all up and down the home price spectrum will find themselves offering significant principal reduction to households based on the loan-to-value equation rather than just the ability on the part of the household to service the debt. Most home purchase loans are non-recourse and the IRS has waived the tax liability that used to apply when homeowners defaulted on mortgage debt.
In a typical manufacturing downturn, the jobless rate lags the business cycle by 2-3 months…
What other mechanisms can dramatically reduce the household debt-to-disposable income ratio? One primary method is debt liquidation — assets are sold and the proceeds are used to extinguish debt. Obviously, the house can be sold to pay off the mortgage. That leaves the problem of where to live, but once again, if you want to be frugal, rent a nice two-bedroom town house. It’s bound to be much, much cheaper than keeping the four bedrooms on 3/4 of an acre house.
Debt can also be liquidated by selling investment assets or drawing down cash balances and paying off debt. This is sounding very deflationary. Another method of reducing household debt is through budgeting. Budgeting to reduce debt takes two forms:
- Forgoing purchases that involve credit, and;
- Reducing consumption so that more of the household income can be spent on paying off existing debt.
And lastly, one more convenient comparison between the current environment and the last time we had a real bull market, not on the back of massive credit expansion: August 1982.
- P/E Multiples were 8x, not 26x.
- Dividend yields were 6%, not sub-2%.
- The stock market was trading at a discount to book, not a 2x premium.
- Monetary policy was aimed at reducing money growth and inflation rates, not creating both as is the case now.
- Fiscal policy was aimed at reducing nondefense spending, not accelerating it.
- Deficits were peaking and coming down, not surging to 10%+ relative to GDP.
- Global trade barriers were being torn down; not erected.
- Deregulation back then was in; today it is all about re-regulation and government ownership.
- Union membership was on the way down; today it is back on the rise.
- The dollar was entering a Plaza Accord bull market, not a mercantilist bear market.
- Credit, household balance sheets and participation rates were expanding, not contracting.
- Tax rates, income, capital gains and dividends, were declining then; rising now.
In 1982, Ronald Reagan was President (two consecutive terms as Governor of California), Don Regan was Treasury Secretary (35 years of financial sector experience), Martin Feldstein as the Chief Economic Advisor to President Reagan (the dean of business cycle determination), and Paul Volcker was Fed Chairman (9 years of prior financial sector experience). Compare and contrast to Barrack Obama (junior senator from Illinois for 3 years); Timothy Geithner (21 years experience in government, three years as a lobbyist); Larry Summers (no private sector experience; 27 years of academia and government) and Ben Bernanke (no private sector experience; 30 years of academia and government).
Which team do you think deserved the higher multiple — the one with actual experience in the real world or the one immersed in academia and government?
To this end, we could only read with amusement the admonishing that the President took on his trip to Asia over U.S. policies which seem to be aimed at breeding more asset bubbles and blazing a trail for anti-competitive trade frictions — see China’s Blunt Talk for Obama. You can’t make this stuff up.
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Irrelevant, unfortunately. New highs.
Which really means new lows for my 'folio. I'm thinking of changing my username to "Death to Smoochy"
I Ben Franklined going long this morning. My list in favor of going long was one item:
1. Geithner's strong dollar policy (yuck, yuck)
My list for not going long was too long to mention.
Rosie may be on the wrong side of the trade at the moment, then again, he may be sitting on the bench next to me. One thing he's not is irrelevant. I'm not going long for the simple reason that Obama, Geithner, Bernanke, Dimon and Blankfein all want me to go long. The view from the bench is just fine. When the trade turns, and it will, then I'll play with real money.
I've been fooled before. Won't get fooled again.
Simple to analogize...stand facing a gale-force wind and start pissing. Outcome does not change if you just piss harder.
It ain't taxpayer money anyhow...nobody is ever repaying this. We're on a heroin addict financial trajectory here. You get behind to the loan shark, either you die or he does and the debt is extinguished.
We easily have a free pass for another 100 years. Just keep the innovations coming.
(And silence blogs like Zero) Fucking Internet!
Reap the whirlwind.
??good night sweet heart weeeelllll it's time to go-O doh doh doh doh doh??
it would not surprise us to see the S&P 500 gravitate in a 475-650 range for an extended period of time
Rosenberg on April 2, 2009
http://www.businessinsider.com/henry-blodget-merrills-rosenberg-a-new-bu...
Game ain't over yet. I still think that's where were going because at some point the world is not going to let the dollar fall any further and when it does, the carry trade's a-gonna unwind. It's gonna be fun. Real fun.
Rosenberg's only fault in that projection was that he was assuming the market was still being valued on fundamentals.
With the exception of Volker the Ronnie team looks just as weak.
rt
Was Volker appointed by Carter?
rt
Yes
5 Things America can Learn from China
http://www.fundmymutualfund.com/2009/11/time-5-things-america-can-learn-...
1 Thing China Can Learn from USA: money printing
China already sterilizes their reserves; that's how they keep the peg going
Achuthan is currently ranked #1 on the list of charlatans I intend to harass (with witty remarks of course) when the market crumbles. In case you were wondering, Altucher is #2.
Manufacture of content versus the motley fool
Reagan was a two-bit actor who didnt do anything for California (much like Ahhnold) except increase property taxes and close down mental institutions, creating our homeless peeps. Under his Presidency, interest rates skyrocketed to 21%, precious metals, inflation, unemployment, trade imbalances, imported goods soared along with Japan Inc. Reagan was merely a tool---much like Bush...simpletons who were puppets of the elite ruling classes who accomplished nothing beyond enabling obscene gaps between the have/have nots, bloated Govt., labor oppression, de-regulation that proved disasterous, record budget deficits etc. Their legacy is leaving ruin in their wake, for Democrats like Clinton and Obama to deal with. A crummy "actor" and a draft-dodging, cocaine addled n'er do well---who created our dire straits, so dire indeed that they required drastic and dramatic attempts to recitify the damage. The jury is still out on Obama and Co.---only time will tell. BTW...The "Terminator" has managed to get Cali into it's 2nd consequtive $30 Billion budget deficit this year. He's finished here.
Hear, hear!
"The jury is still out on Obama"??? Really.... I know hope-flavored Kool-aid tastes good but tell me, Hammer 59, what has Obama done to fix the long-term problems of this country? When he came into office in January he could have done anything he wanted. He could have tackled all of the big problems this country faces and could've blamed all the transitional pain on Bush. Instead, Obama spent all of his political capital trying to resurrect and protect the status-quo. My 14 year-old son was asking me today what Obama had accomplished in his first year in office. And I couldn't think of a damn thing.
I agree with much of what you say except that,imo, Clinton was about as destructive as Reagan to the long term health of our financial system.
I remember many whiny people crying about the economy during Clinton's first year in office. The GOP were fighting the Clintons tooth and nail. Why do you think he was rewarded with a second term?
Clinton was smart enough to be a fiscal centrist, and Congress made sure that he stayed so. Don't forget the mandate of the 1994 congressional elections.
1996 election against Dole was a no-brainer. Dole dissed the supply-siders in the GOP, and was set adrift.
Then we come to the dot-com meltdown...on Clinton's watch. He inherited nothing.
Bottom-line...the gene pool for the Oval Office is being dumbed-down, and mediocre appears to be faire du jour. How else could TPTB be running all this.
Amen. That Contract With America Congressional purge in 94 spooked Bubba back to center. A similar purge will occur in 10, but unlike Bubba, I don't think Obama will get out of his liberal handcuffs to go even close to center for the re-election bid. Of course, he's doing a good job so far pissing off his lib base, too...so who knows ??
And just to be fair, CWA was the fertilizer for the mess we're in today.
I agree totally with your analysis of the Oval Office gene pool. And I'd like to add Capitol Hill for good measure.
This post lost me went it started talking about what a great job Reagan did. My ass. I don't like Obama, but give me a fucking break. Reagan paved the way for all of the shit we have today.The guy was about as smart as Sarah fucking Palin.
Furthermore, the idea that the reason we are screwed today is because of rising taxes on capital gains, unions, and potential/actual regulation of Wall St is ridiculous.
+1, actually, +2. Read the bio's of those mentioned. Idiots. Still looking to be trickled on... Why no mention of nancy's star readers, were they from business or education?
Also, WTF, where is any evidence that "experience" leads to better results than academia?
Oh, I know, let's get some experience like that guy, what's his name... what for it... HANK PAULSON! Yea, put his experience with another high flying business leader like Ken "boy" Lay, and this BS would be so back to the glory years of friggin 82. Can't wait. ZH, worse article you have ever given voice!
I sure would hate to see Rosey lose that bet with the dickhead on Fast Money. Peter Shiiff is suppose to be on there tonight. I'm sure they will make fun of him like they did Rosey, and any other bear they allow.
regarding boy wonder barry soetoro el presidente extraordinaire from kenya - can anyone really expect more from a liar? www.oabamacrimes.com
he is a rockefeller sock puppet engaged to rape, plunder, and blunder amerika....the rockefellers, morgans, harrimans et. al fianced the bolshevek revolution....they are at it again...
You left out rosenberg's dig at lakshman in the title of his piece suggesting that laksman was hiding from the press. keep it classy!
Not sure why the Reagan love affair on ZH but he quadrupled the debt. Reagan railed against tax-and-spend but he sure loved to print-and-spend. Instead of having US taxpayers pay upfront he backdoored all the spending via debt issuance, inflation, and dollar drops. Reagan's formula of using the govt's credit card would set the precedent for every future POTUS. Taxes = bad, debt = good. I guess being a 'B' actor helps to fool some of the people some of the time. That govt accounting sleight-of-hand was his greatest legacy, but the other equally impactful thing that inflated this 30 year superbubble: his appointment of good, old 'Easy Al' Greenspan. Kind of says it all.
Reagan and his boys....I miss them. Any truth to the claim that they helped sowed the seeds of our current harvest throught deregulation?? I remember (1983) credit card copmpanies offering free credit cards on campus to unemployed, already indebted college students. In one or two generations our economic genome hasn't had enough time to mutate and Washington continues to interfere with natural selection (economically speaking).