Rosenberg

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.

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.

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.

Following up to the presentation by Gary Shilling at this year's Strategic Investment Conference, we next move on to an old Zero Hedge favorite: David Rosenberg.

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."

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 indeed...

In advance of tomorrow's Bureau of Labor Statistics fireworks, Goldman's Andrew Tilton explains why GS has a prediction of +125,000 for tomorrow's NFP number (and sees the unemployment rate declining to 9.0%), and provides a short perspective on why the market is still bearish on the employment picture. Probably a more fitting question is why the market is not far more bearish on jobs: 13 weeks of 400K+ claims, offset merely by one 0.1 increase in the service ISM employment component (from 54.0 to 54.1). Ah yes, the ADP number. The same ADP number which "surged" in January leading Barclays to come up with the insane NFP prediction of +580,000 (and a 95% confidence in a 450,000 print) only for the final number to be a gross disappointment. But who cares about headfakes: the market is back in its mania phase when good news are doubly accentuated, and bad news are immediately ignored. So anyway, here is Goldman and David Rosenberg. As to what happens tomorrow, only the Obama administration, Congress, Larry Meyer, and virtually every single NFP bank, know what is coming tomorrow.

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.

David Rosenberg provides the key bulletized market observations that have marked the broad capital markets over the past few months.

• $950 billion of paper equity wealth has been wiped off the map in the past six weeks.
• The Dow is below 12,000 for the first time since March 18th.
• The Transports are down more than 8% from the nearby highs and are down for the year as well
• The Transports/Utilities ratio has broken down to its lowest level since November 9th of last year.
• The Nasdaq is now down for the year (-0.3%)
• The Russell 2000 index is also down for the year (-0.5%).
• The S&P 500 is just 1.1% away from seeing the same fate.
• The S&P 500 has declined in each of the past six weeks, the longest losing streak since June-July 2008.

...And much more

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."

It is no secret that to a deflationist like David Rosenberg bond yields have to go lower... Much lower. With the 10 Year flirting with a 2 handle one would think he would be content. Alas no. In fact, as he suggests in his piece from today, Rosie is convinced that the next iteration of QE will be nothing short of a redux of the 1961 initiative to kill the then gold exodus known as "Operation Twist" (recently dissected by the San Fran Fed). Incidentally it was the same Fed that compared QE2 to Operation Twist. It is only logical that Rosie would then suggest that QE3 would be nothing short of a complete clearing of the 10 Year bond in the market via the Fed in order to anchor expectations that the 10 Year rate would never go up (or reasonably "never") in the biggest gamble of all: that the Fed will attempt to both control its balance sheet and target Long-Term interest rates, a mission doomed to fail...But not like that will prevent the Fed from setting off on such a mission, especially following today's official confirmation of the Housing Double Dip (someone page Jim Cramer). As Rosie says: "Now it is doubtful that the Fed would ever target the long bond. In fact, the Fed may even want it to be higher in yield to ease the pressure on radically underfunded pension funds. While the Fed can either target its balance sheet, which it has been doing with these QE measures, or target interest rates, it cannot do both at the same time. So the next 'QE' will not be called 'QE' but rather something else — maybe Operation Twist 2 (OT2 — you heard it here first). The Fed would buy up all the 10-year notes needed to clear the market at the target "price" (yield). So depending on supply conditions and demand from the private sector, the Fed would basically lose control of its balance sheet, but if in return this policy is the one that blazes the trail for a turnaround in the housing sector and a durable revival in the economy, so be it." And keeping in mind that the true unspoken reason for Operation Twist 1 was to terminate the outflow of gold from the US to foreign bank vaults, we find ourselves agreeing with Rosie that an insane idea such as OT2 is precisely what the Fed would do to avoid a recurrence of the 1961 gold exodus (and attempt to give housing one last failed boost). As many birds would be killed with one stone, the only downside, that of a complete balance sheet implosion following OT2, certainly seems quite acceptable to a central bank now officially run by sociopaths.

...And much more

While the jury is still out on whether David Rosenberg went bullish on equities just as the market topped out (Rosenberg certainly denies it), it is without doubt that in his note today to premium subscribers, in addition to some traditionally cautious and correct observations on the economy, the former Merrill strategist has "just said no" to silver. It remains to be seen if there will be another clarification note following this one should silver (and/or gold) resume the gradual roll higher (especially since with just 90 contracts traded on the HKMerx, the brand spanking new contract may need to lower margins to attract participation). Quote Rosie: "for now I think it is time to step back and adopt a more defensive and cautious posture towards the group...I would not recommend being aggressive in the commodity space until many of the clouds that have recently surfaced begin to part."

It has been a while since the non-paid media saw much from Rosie, who recently decided to go premium. It is ironic then that one of his most controversial pieces came out while he was behind a paywall, namely that he has gone bullish. Today, he takes the time to explain his real position, and share the report that started it all.