Gluskin Sheff

David Rosenberg: The Recession Is A Virtual Certainty And Here Is How To Trade It

David Rosenberg released an emergency note today, in addition to his traditional morning piece, in which the sole topic is the upcoming recession, which he says is now a "virtual certainty". He also says what Zero Hedge has been saying for month: that 2011 is an identical replica of 2010, but with the provision of modestly higher inflation, which needs decline before QE3 is launched. Sure enough, a major market tumble will fix all that in a few days, and ironically we can't help but continue to wonder whether the Fed is not actively doing all in its power to actually crash the market to about 20% lower which will send practically flatten the treasury curve and give Bernanke full reign to do as he sees fit. However, as long as the BTFD and mean reversion algos kick in every time the market makes a 2% correction, such efforts are doomed, which in turn makes all such dip buying futile. We give the market a few more weeks before it comprehends this. In the meantime, with each passing day in which "nothing happens", the recession within a depression looms closer, and soon it will be inevitable and not all the money printed by Bernanke will do much if anything (except to terminally wound the dollar). In the meantime, for those who wish to prepare for the double dip onset, here is Rosie's checklist of what to do, and what not.

Meet David Rosenberg: Tea Partier

That David Rosenberg - the skeptic - threw up all over the Q2 (and revised Q1) GDP in his note to clients yesterday is no surprise. Even Joe Lavorgna did it (which makes us quietly wonder if America is not poised to discover cold fusion, perpetual motion, nirvana, a truly edible iPad, and peace on earth). That David Rosenberg - the deflationist - makes light fare ("ceiling will be raised") of the ongoing debt debacle is also no surprise: after all should the US default, the long bond strategy the Gluskin Sheff strategist has long been espousing will go up in a puff of smoke. What, however, is surprising, is the fact that as of yesterday's Breakfast with Rosie we get to put a political face to the financial man, and it very well may be... David Rosenberg - Tea Partier.

Charting David Rosenberg's Thesis: "No Gold Bubble Until $3,000"

Today's "Breakfast with Dave" from David Rosenberg is a veritable chartapalooza, the inspiration for which appears to have been the "reversion to the mean" theme presented in yesterday's IMF chartpack, presented here. There is, however, one section that is unique: that dealing with gold, and more specifically, why in Rosenberg's opinion gold is still quite cheap and why it is trading at about 50% of what the Gluskin Sheff strategist would consider bubble value. As Rosie says: "we have liked gold for a long time and we remain very constructive. It is more than just a hedge against recurring bouts of global financial volatility. The growth rate of gold production is roughly stagnant while the growth rate of fiat currency in most parts of the world continues to accelerate. It's all about relative supply curves - the supply curve for bullion is far more inelastic than is the case for paper money. It really is that simple." Indeed it is: when one strips out all the fancy talk, mumbo jumbo, and syllogistic gibberish out of modern economic theories, be they neoclassical Keynesianism (or, god forbid, just classical), chartalism (sorry, infinite debt-money issuance won't work: in two years we will all see why), or any other attempts to reduce a broken imbalance in supply and demand propped up by the "invisible hand", it is all about supply and demand. Sure enough, one thing we have an infinite supply of is fiat money, and the resulting debt necessary to "back it up." As for demand, well that's another matter. With gold: it is just a little inverted.

Guest Post: Are We Headed For A Second Recession?

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Is a second recession in so short of a time in the offing? It certainly seems that way. The hope for a continued recovery has grown dim as of late as many of the economic indexes are moving towards contractionary territory.  As we posted recently in "EOC Index Shows Economic Weakness" there are several concerns pressing the US economy and, in the words of David Rosenberg, chief economist at Gluskin Sheff, “one small shock” could send us into a second recession.  With the recent release of the Chicago Fed National Activity Index our proprietary economic index is just one small step away from crossing the 35 mark which has always been a pre-cursor to recession. We have discussed many times recently that with the unemployment rate remaining high, housing prices slipping into a secondary decline, consumer and business spending slowing, while gas and food prices remain high eating up more than 20% of consumers wages and salaries.  Add on top of these factors the likelihood of a Greek debt default, a slowdown in the Eurozone, a weaker dollar and Washington locked in debate over the debt ceiling - well, the list of risks far outweigh the positives.  However, that doesn't seem to deter Wall Street economists and main stream media which seem to all be wearing an extremely thick pair of rose colored glasses these days.   However, it doesn't take an economist to figure out that any one of these factors could send us tumbling into a second recession.

"It’s A Cash-Flow Problem": The Ever Broker US Consumer Increasingly Relying On Credit Cards For Daily Staples

Somehow, in all the confusion, the endangered species known as the American "consumer" missed the economic recovery. The reason, as Bloomberg writes, is that consumers are increasingly "using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices." The data comes from credit card transaction processor First Data which reported that the dollar volume of charged purchases rose 10.7% in June (a 6.8% increase in the number of transactions). "The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor. "Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food,” said Tavares, who’s based in Atlanta. “That’s because there’s been no other positive catalyst, like an increase in wages, to offset higher prices. It’s a cash-flow problem." Alas, it gets worse. As Bank of America's Joshua Dennerlein
reports today, the end of the year will see 3.7 million Americans stop
receiving jobless benefits. "This will act as a hit to consumption in
the first quarter of 2012." This number is completely independent of any
possible new legislation to extended jobless benefits for new
unemployed labor pool entrants, as it merely affects those about to hit
the 99 week cliff. Unfortunately even more "growth" over the next 6-9
months will have to come from the Fed and the only thing it knows how to
do: print, print, print.

Rosenberg Explains "Why We Should Be Worried"

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."

Rosenberg On The Debt Ceiling

When it comes to the debt ceiling, we have heard everyone and the kitchen sink's opinion on this issue at this point. Yet one person who has been silent so far is the original skeptic David Rosenberg. Summarized: "Despite the fear mongering, the U.S. government is not going to default. Any backup in bond yields from a failure to cobble together a deal will drive market rates down because of the deflationary implications from the massive fiscal squeeze that would ensue at a time of a huge 5% output gap. Even if there were to be some sort of "buyer's strike" if the U.S. were to be defaulted, rest assured that the Fed would step in aggressively." Obviously to a mega bond bull like Rosenberg, this is the only possible outcome. After all an alternative would mean the central planners have failed, and the most artificially inflated security in the history of man: US bonds, which are only there because they are the "best of all evils" was enjoying an extended "ignore the emperor's nudity" sabbatical... which alas does not change their evilness, nor is this equilibrium stable once more and more realize it is all about gold at the end of the day. And as yesterday demonstrated when existential fear grips the market, the impossible does happen, and both bonds and stocks can sell off, and in the process lead to all time records for gold. Bookmark July 14: it is a harbinger of what is coming.

How Capitalism Went On A Brief Sabbatical Which Became A Permanent Vacation: Rosenberg Explains "The Artificial Recovery"

Indeed, this 2009-2011 recovery and cyclical bull market has been as artificial as the 2003-07 expansion. That last one was fuelled by financial engineering in the financial sector. This one is being underpinned by unprecedented government intrusion in the credit markets. As of this quarter, your government has replaced the private sector as the largest source of outstanding mortgage market and consumer-related credit (see front page of the Investor's Business Daily). So not only is the U.S.A. turning Japanese in many respects, it is also now resembling China where the government also redirects the flow of private sector credit. When we said capitalism went on a sabbatical three years ago, we didn't expect this to be a permanent vacation.

Zuckerman: "Why the Jobs Situation Is Worse Than It Looks"

The Great Recession has now earned the dubious right of being compared to the Great Depression. In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment. The real job losses are greater than the estimate of 7.5 million. They are closer to 10.5 million, as 3 million people have stopped looking for work. Equally troublesome is the lower labor participation rate; some 5 million jobs have vanished from manufacturing, long America's greatest strength. Just think: Total payrolls today amount to 131 million, but this figure is lower than it was at the beginning of the year 2000, even though our population has grown by nearly 30 million...The inescapable bottom line is an unprecedented slack in the U.S. labor market. Labor's share of national income has fallen to the lowest level in modern history, down to 57.5 percent in the first quarter as compared to 59.8 percent when the so-called recovery began. This reflects not only the 7 million fewer workers but the fact that wages for part-time workers now average $19,000—less than half the median income.

Bill Gross: "College Is Worthless"

A few weeks ago we pointed out what may be the most troubling (and Marxist) observation in America's labor arena, namely that the labor's share of national income has dropped to the lowest in history as a record number of Americans now focus on wealth creation through assets (i.e. owners of capital) instead of labor. In his just released latest letter (below) Bill Gross piggybacks on this observation in what is one of the most scathing notes blasting the traditional of higher education, and in essence claiming that college, as means of perpetuating a broken employment status quo whcih redirect labor to a now-expiring Wall Street labor model, is now worthless: "The past
several decades have witnessed an erosion of our manufacturing base in
exchange for a reliance on wealth creation via financial assets. Now,
as that road approaches a dead-end cul-de-sac via interest rates that
can go no lower, we are left untrained, underinvested and overindebted
relative to our global competitors.
The precipitating
cause of our structural employment break is both internal neglect and
external competition. Blame us. Blame them. There’s plenty of blame to
go around." And why college graduates have only a 6 digit loan to look forward to: "American citizens and its universities have experienced an ivy-laden ivory tower for the past half century. Students, however, can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace." And some very bad news for the communists in the White House and the chimpanzees in the San Francisco Fed who continue to believe that unemployment is anything but structural: "The “golden” days are over, and it’s time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street."

Rosenberg's Takeaways From Bernanke's Speech: "Cause For Pause"

Yesterday we brought you Goldman's quite bearish takeway on Bernanke's speech (excluding the highly irrelevant Jamie Dimon monologue detour: we can't wait to hear what the JPM CEO says once it is announced that Glass-Steagall is being reinstated). Below we present Rosie's key takeaways on Bernanke's remarks. "Bernanke said the 'jobs situation remains far from normal" and as such, this recovery cannot be regarded as being "truly established." That is quite an admission — free money, a tripling of the Fed's balance sheets and 10% deficit/GDP ratios have fallen short of establishing an established recovery. Cause for pause."

Reality Check With Rosenberg

  • The S&P 500 is no higher now than it was on February 7. Yet, so many pundits still believe we are in a flaming bull market.
  • QE2 failed to provide for a sustained acceleration in the pace of economic activity.
  • The housing inventory background is horrible
  • Over half of the NYSE is now trading below its 50-day moving average (thanks to Richard Russell).
  • M3 has fallen at a 1.5% annual rate since QE2 started (thanks to CLSA's Russell Napier); in other words, credit is still not being created.
  • The Nasdaq is the first of the major averages to have broken below both the 100-day and 50-day moving averages. The Dow and S&P 500 have so far just pierced the former, but we all know the Nasdaq is a leading indicator. As an aside, in the last 12 months the Dow has broken below its 50-day moving average three times and from that point to the interim bottom, we saw the Dow plummet 4.5%.
  • ...And much more