David Rosenberg: "Hope And A Prayer"

Tyler Durden's picture

From David Rosenberg of Gluskin Sheff

Hope And A Prayer For... End The Gridlock!

Survey data indicate the American people are much less polarised than the
broader political class that purports to represent them.

Francis Fukuyama

Senior Fellow. Stanford's Freeman Spogli Institute

Page 9 of the FT. November 6th, 2012

 

So we get a brand new start. Either way... it was always going to be either a new president or the old president but with a fresh term in which to contemplate his legacy — a legacy that could hardly be another four years of subpar economic performance.

When I was at John Mauldin's conference last spring. I thought the extremely provocative lunch-time speech by Paul McCulley contained many hidden truths. If that sermon is available anywhere on video. I'd highly recommend you watch it — preferably over a tall glass of single malt.

The one 'hidden truth that truly resonated was Paul's comment that the toughest thing in the world right now is to be bullish.

Maybe I should try harder to see whatever silver linings there are.

For example, we are entering into a period of stable consumer prices that should last at least for a generation. This will help prevent erosion in real household incomes. There is a strong probability that after years of very solid productivity gains in the industrial sector, that the U.S. will experience a manufacturing renaissance of sorts and re-emerge as a global export leader. This process is already in its infancy stages, by the way, aided and abetted by cheap natural gas costs. The move towards frugality and savings will make us less reliant on foreign borrowings and usher in a period of stronger household balance sheets.

As far as what that means for investments, my primary strategy theme has been S.I.R.P. — Safety and Income at a Reasonable Price — because yield works in a deleveraging deflationary cycle. Not only is there substantial excess capacity in the global economy, primarily in the U.S. where the "output gap" is close to 6%, but the more crucial story is the length of time it will take to absorb the excess capacity. It could easily take five years or longer, depending of course on how far down potential GDP growth goes in the intermediate term given reduced labour mobility, lack of capital deepening and higher future tax rates. This is important because what it means is that disinflationary, even deflationary, pressures will be dominant over the next several years. Moreover, with the median age of the boomer population turning 56 this year, there is very strong demographic demand for income. Within the equity market, this implies a focus on squeezing as much income out of the portfolio as possible so a reliance on reliable dividend yield and dividend growth makes perfect sense.

We are in a period of heightened financial market volatility which is typical of a post-bubble deleveraging period when the forces of debt deflation are countered by massive doses of government reflationary polices. This to-and-fro is the reason why in the span of a decade we have seen two parabolic peaks in the equity market (March 2000 and October 2007) and two depressed bottoms (October 2002 and March 2009). For any investor, return of capital is yet again re-emerging as a very important theme, and so is the need to focus on risk- adjusted returns. This in turn means that a strategy that minimizes both the volatility of the portfolio and the correlation with the equity market is completely appropriate — the best way to play this is with true long-short hedge fund strategies.

Gold is also a hedge against financial instability and when the world is awash with over $200 trillion of household, corporate and government liabilities, deflation works against debt servicing capabilities and calls into question the integrity of the global financial system. This is why gold has so much allure today. It is a reflection of investor concern over the monetary stability, and Ben Bernanke and other central bankers only have to step on the printing presses whereas gold miners have to drill over two miles into the ground (gold production is lower today than it was a decade ago — hardly the same can be said for fiat currency). Moreover, gold makes up a mere 0.05% share of global household net worth, and therefore, small incremental allocations into .bullion or gold-type investments can exert a dramatic impact. Gold cannot be printed by central banks and is a monetary metal that is no government's liability. It is malleable and its supply curve is inelastic over the intermediate term. And central banks, who were selling during the higher interest rate times of the 19805 and 1990s, are now reallocating their FX reserves towards gold, especially in Asia.

On the political side of things, let's hope we see the return of the two-party system, that the fringe elements in both the GOP and Democrat camps see their influence diminish, and that the populist anti-business sentiment in Washington subsidies.

If we can only end the gridlock finally and begin the necessary process towards fiscal probity that will of course necessitate shared sacrifice but will also remove the clouds of uncertainty, then households and businesses will be able to plan more effectively for the future and perhaps feel more comfortable in releasing their massive cash hoards into the real economy (that may be little more than a hope and prayer, mind you).

All that said, it is not going to be a new government that necessarily ushers in a whole new era of growth, prosperity and confidence. Even under the revered Ronald Reagan, the period of secular growth and bull market activity took two years to unfold — it didn't happen right away. It took the inflationary excesses to be wrung out of the system and concrete signs that the executive and legislative branches could work together to usher in true fiscal reform — and to get blue Democrats on board with reduced top marginal tax rates.

Hope isn't generally a very useful strategy, but there is reason to be hopeful nonetheless. The critical issue is going to be how we get Washington to move back to the middle where it belongs. This requires bipartisanship which in turn requires leadership. Reagan's whole eight-year tenure in the 1980s occurred with the House being in Democrat hands the whole way through. Bill Clinton's second term coincided with both the House and Senate controlled by the Republicans.

It can be done!

The most fascinating article I have read in recent weeks was on page B1 of yesterday's NYT, titled The Election Won't Solve All Puzzles. The title just about says it all, but some heft was added as an economic report jointly published by Stanford and University of Chicago was cited, with this conclusion:

The claim is that businesses and households are uncertain about future taxes, spending levels, regulations, health care reform and interest rates. in turn, this uncertainty leads them to postpone spending on investment and consumption goods and to slow hiring, impeding the recovery", and added that "current levels of economic policy uncertainty are at extremely elevated levels compared to recent history.

With this in mind, the best that can happen is a Reaganesque and Clintonesque return to compromise on the road to fiscal reform.  It will be painful. We all know it will be painful. But all we need is the roadmap to reform so at least we can plan for the future — removing the cloud of policy uncertainty alone will be empowering for the private sector (to this end, I also recommend a read of Business Craves Fresh Certainty on page 3 of yesterday's FT).

In the final analysis, it is up to the business leaders and innovators to step up to the plate. They are the ones that have always been responsible for bringing the economy off the bottom, and taking us over the top. Boy, a new "killer app- or some major innovation that manages to spur sustainable growth in multi-factor productivity would sure be nice to bring me to where I was back in 1987 when I started in this business.

A perma-bull!

Now how good would that be? A sustained decline in oil prices that is induced by new supplies as opposed to demand destruction would act as a he facto tax cut. Structural economic reforms in the world's "surplus saving" countries like China, India and Germany that stimulate their domestic demand, and hence bolster U.S. exports and reduce the global reliance on the U.S. as the consumer of last resort, would be a huge plus. Signs that the debt deleveraging cycle has run its course. Progress in terms of working our way through the domestic balance sheet repair process among households and businesses, though history shows that this is not merely -a two or three year adjustment following a credit bubble and ensuing financial crisis on the scale that we have just endured.

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fonzannoon's picture

It will be painful. We all know it will be painful

Which is why it won't happen.

CrockettAlmanac.com's picture

Why would we want those who have caused our woes to work even more diligently to increase them? Madness.

Hey fonz, you're back. How's it going?

knukles's picture

What woes?
I gots my Obama phone, EBT card, section 8 housing, flat screen and Charlie Rangel representin' me.

Whatz za probem?

I have my strong representation in the Congress to ensure that America is kept free.
I'll build whatever weaponry needed.

What problem?

We built it and they have come, the energy solution has been created in the form of ethanol.
I have my subsidies to keep America Energy Independent.

What problem?

And on and on it goes, ad infinitum, just like the money supply.

malikai's picture

"For example, we are entering into a period of stable consumer prices that should last at least for a generation."

WTF? Is it april fools already?

This is a joke, right?

PLira's picture

Yeah, I stopped reading at that part. Stable if it's Flat Screens or other silly crap you don't need.

 

JLee2027's picture

Thank you. I stopped reading it too after that. I had to look at it several times, thinking I had missed something. It's an idiotic article.

Manthong's picture

What’s the BFD?

All we need to do is cut back a trillion or so a year in expenditures and grow GDP  a few per cent.

That should be a cake walk especially with all of the Obama voters stepping up to do their fair share.

akak's picture

If you thought THAT was funny, he followed up with this doozy:

"This is important because what it means is that disinflationary, even deflationary, pressures will be dominant over the next several years."

Yeah, and inflation is only 1% and the real rate of unemployment is only 7.9%, right?

Tyler, why are you posting such obviously idiotic pro-Establishment bilge?

 

marathonman's picture

Good luck with all that Mr. Rosenberg.

malikai's picture

It's got to be in the top ten of the most twisted and bizarre articles I've ever read.

Normally this guy makes some sense. What the hell happened?

HappyCamper's picture

If we've told you once we've told you a hundred times.  There is no inflation.  You want proof?  This year's IPod is better than last year's IPod, but it doesn't cost more.

See?  Now please excuse me while I go take out a PayDay loan so I can go buy some groceries and booze.

malikai's picture

I think you figured it out. This guy eats iPads.

Everyone show your kids this article and explain to them that this is what happens when you eat an iPad.

HappyCamper's picture

Yum, there's nothing better in the morning than crunching cadmium and lead. 

Offthebeach's picture

Truck stops and rest areas have more, younger women offering at lower prices.( I don't know chicken prices. Memo to call Bwarny Fwanks office. )
Young men are better quality to be used as foder to keep the ME Arab Spring, Fed induced food revolutions controlled.

So young men and women can be had at lower prices, just like IPads.

Urban Redneck's picture

Perhaps someone consumed a bit too much alcohol during last night's drinking games-

northman's picture

I also stopped reading at this point. This is not something i'd expect from Rosy. Perhaps he is forgetting how the exponential function works? It's x squared man! not square root x!

pirea's picture

I do not know why so many listen to this bozzo, and consider him as an advisor. 

L0nG-DoNg-SiLv3R's picture

Do food stamps buy ammo...?

r101958's picture

The problem is that the "the middle where it belongs" has been moving relentlessly leftward, inch by inch, for the last 30 years and so it is now nowhere near the 'middle' of 30 years ago.

CrockettAlmanac.com's picture

The middle we're moving toward looks like Unimatrix One.

fonzannoon's picture

I'm good thanks for asking. Have everything I needed. This was the best learning experience I could have ever had. Especially now that assholeface won. I am convinced the currency is toast. Now I had a dry run as to what happens when things break down. If I am not ready next time it's my fault.

CrockettAlmanac.com's picture

John Williams said hyperinflation by 2014. And he's got the numbers. Glad you're well.

macholatte's picture

On the political side of things, let's hope we see the return of the two-party system, that the fringe elements in both the GOP and Democrat camps see their influence diminish, and that the populist anti-business sentiment in Washington subsidies.

 

Lipstick on a pig.

Gully Foyle's picture

Once again for your edumacation

http://www.counterpunch.org/2012/11/07/victory-of-the-technocrats/

Where does Obama go now? The House remains firmly in the hands of militant right-wingers. The Senate will continue to be paralyzed by the filibuster-happy minority and a spineless Democratic majority. Stalemate? Probably not. Second terms are almost always about polishing a presidential legacy, already being harped upon by the withered likes of Tom Brokaw.  Obama will be desperate for some signature legislative victories.

So what to expect from Obama? An aggressive new plan to combat climate change? A real federal jobs program aimed at full-employment? Liberalization of immigration policies? Decriminalization of marijuana? Deep cuts in the defense budget? Rollback of the Patriot Act? A ban on assassinations by drones? Movement toward single-payer health care? Sure.

No. Clinton will be his template:  the Clinton who pushed for the elimination of the Glass-Steagall Act, the gutting of welfare and the war on Serbia.  Obama will pursue bi-partisanship with a vengeance. Obama has always been a committed neoliberal, a closeted agent of austerity. Now he no longer needs to even play-act for his political base. He can openly betray their interests.

In a few months, the president will reach out to his old pal Paul Ryan to take a stroll across that tragic terrain known as the common ground in pursuit of those twin obsessions of the elites: deficit reduction and entitlement reform. In the name of political conciliation, Obama will piously move to slash away at Social Security, Medicare, Medicaid and the last frail fabrics of the federal social welfare programs.  These savage cuts will be enthusiastically cheered by the mainstream press, Wall Street and the Washington establishment.

CrockettAlmanac.com's picture

+1 That was an incredibly lucid statement for you. No offense.

fonzannoon's picture

LOL I only read it because you apparently did.

divide_by_zero's picture

Soros will be the more likely template.

FL_Conservative's picture

Please explain to me exactly what PART of fucking "center" we're supposed to move towards.  You mean the "center" part that flushes our Constitution down the toilet?   Please enlighten those with a sub-liberal intellect.

CrockettAlmanac.com's picture

Return to center, address unknown...

dbTX's picture

Have you ever seen a threeson try to tango?

glenlloyd's picture

This reads like a wish list for Christmas...nice, but unaffordable.

I doubt any of the things he's wishing for happens.

Encroaching Darkness's picture

"For example, we are entering into a period of stable consumer prices that should last at least for a generation."

Nurse, bring the long-sleeved white coat and 20 cc of Thorazine, the patient is hallucinating.....

CommunityStandard's picture

I was just going to post something like this.  Seriously, that quote.  I can't even.  I just can't.

odatruf's picture

I am with you both. If you squint, you can almost read that Rosenberg is saying that this is a delusion that is come to by looking very hard for hard to see (nonexistent) silver linings. But honestly I am not sure.

slaughterer's picture

This Rosenberg piece seems like something a person would write after nearly dying through a hard drug overdose and going through 6 independent detox treatments and maybe a long stay in a S. Cal. psych ward.    Has his wife recently divorced him?  Does he need cuddling?

SafelyGraze's picture

great article!

very uplifting!

 and a good source of quotes!

brand new start. 
a fresh term 
the toughest thing in the world right now is to be bullish.
try harder to see whatever silver linings there are.
we are entering into a period of stable consumer prices that should last at least for a generation. 
manufacturing renaissance
cheap natural gas
stronger household balance sheets
reliance on reliable dividend yield and dividend growth makes perfect sense
shared sacrifice
It can be done!

vorward, citizens!

Everybodys All American's picture

Some of these people can't be helped they are Obama zombies.

malikai's picture

Just saw this after posting mine above. It's a joke right?

Orly's picture

And why?  Because the nurse who just got laid off from her $34/hr. job had to take a similar position across the street for $28/hr.  Same with the MRI tech and the Nuclear Medicine Tech...

The pipefitter...

The machinist...

The grocery manager...

and on and on and on.

Stable consumer prices are okay, as long as the "wage market" can keep up.  News Flash: It doesn't!

malikai's picture

I've been trying to put myself in an alternate world where real disposable income declines and it is called 'deflation'. It still doesn't make sense. I can't make sense of it no matter how i try and alter my perspective.

knukles's picture

Only problem is that each side's gonna point at the other and say that it's them's gotta compromise.

The R's have no incentive to make this work, at all.
And the D's are goona take this as a free ticket to endless government created wealth... via higher taxes and more money printing.

Good fucking luck
This is the worst possible outcome imaginable.

After all, in another 4 years the phrase will turn from "Bush's Fault" to "Obama's Fault."

fonzannoon's picture

knukles I had at least 3 people over 50 call me today and gloat and say all exasperated "WELL....We have 4 more years of this guy....and its all your (generation's) fault!!"

To each one I asked why it is my generations fault. The response is the same "You guys all have your heads up your asses and voted him in!" So I asked them if they give any credit to their parents for not raising them to have their heads up their asses? Of course they tried to change the subject.

My guess is everyone under X age just gets chucked under the bus. Which is fine by me because I was not planning on any of this shit anyway. But it will rip the social fabric apart along generational lines. 

malikai's picture

If it keeps going this way it's going to blowback and then we'll have a real class war on our hands..

knukles's picture

I'm with you, Fonz.
The divisiveness, blame, anger and celebratory arrogance being displayed is beyond comprehension.
There has been little if any demonstration of maturity, civility or common sense.
The people who've been placed in orifice sincerely believe that through higher taxes and printing money, they can build a wondrous paradise.
Unfortunately, it is bereft of morality, ethics and any sense of reason.

While I didn't expect too much of a change (altho I'd hoped for it) the biggest tell is the group here at ZH.  Most sincerely believe (if they're truthful) that either side (red or blue) of the One Big Leviathan Party are really one and the same, but the emotions shown over the past few days decry that premise, at least in part.

Another 4 years of higher taxes, increased government spending and expansion, further encroachment upon the Naturally Given Rights of Man, increased liberalistic degradation of society's morals and ethical foundations....
We are indeed facing the maw of the atheistic statist liberal monolith, which in the end will likely necessitate greater curtailments to individual freedoms in order to maintain a sens of status quo, as has been happening.
Orwell was prescient.
This, in my mind's eye, is what I would imagine as a path to serfdom.  A complete breakdown in the social fabric of the country.  Unfortunately, these people just don't get the reality:

Math, the New Inconvenient TruthTM

fonzannoon's picture

Damn right. I could not believe how many jumped to one side of the boat or the other as things came down to the wire. I was floored.

Offthebeach's picture

Leno asked the president a viewer’s question about what subjects he struggles with when he helps his daughters with homework. ”Well, the math stuff I was fine with up until about seventh grade,” explained Obama. “But Malia is now a freshman in high school and —I’m pretty lost.”

giddy's picture

What do you expect from a presidential campaign waged on dividing and conquering by interest groups?  The problem with boomers is they raised their kids with the expectation that life was easy... that somehow the accumulation of "stuff" is important or infinite.  The purpose of life isn't "ease" but "struggle".  Without the struggle we devolve into lumps of glob. So cheer up... maybe your grandchildren will be strong and manly.

chubbar's picture

Well Fonzannoon, here's the conflict I see in your position (as I understand it). I basically agree with your general premise. However, aren't you one of the "blame the baby boomer" guys around here? If not, then I apologize and please disregard my following comments.

Here is the discrepancy with your position as I see it. I'm a baby boomer who was 14 when Nixon took us off the gold standard in 71. I got to experience what the austrian economists describe as the inflationary period, where life is pretty good. That is to say that with the exception of the few recessions that were cured by printing, I got to live 30+ years experiencing the constant inflation and opportunities that are presented when money is poured into an economy and malinvestment occurs along side wage gains and lifestyle improvements. During that time, several presidential elections occured, lots of senate elections occured and many debates happened concerning SS, other entitlement programs, military spending, etc. Not many folks were really aware of what the fuck was going on in the big scheme of monetary policy and while the good times were rolling, not many cared. I think that is human nature but I do agree that thinking people should have questioned what was going on.

Now we get to the present time. According to your theory, everyone over 18 should be culpable going forward because they can vote, at least according to the logic of anyone claiming the baby boomers should be held responsible for the past 30+ years of congressional stupidity. The failure of that logic is that you personally now find that you in fact don't have a say in gov't, regardless of your views and the fact that you (and many of those your age) now vote. We didn't have much of a say either at your age and going forward through the years, but that doesnt' seem to occur to you. How does it feel to know that the country is in the hands of the bankers and nothing you say or do will change the tragectory of the nation? We have never had a choice that mattered (presidentially) with the possible exception of Ron Paul, whom the MSM promptly dismissed. The baby boomers only had the timing of their birth, in relation to this monetary cycle, to owe to their widespread comfort (a generalization) not some sort of natural progression or superior ability. We are now in the downcycle, eveyone gets to participate. With the possible exception of the elites. I wouldn't spend too much time blaming anyone other than the folks who constructed this debacle.

The folks calling you are just reminding you that you don't get to call them out for the failings of the last 30+ years without owning the failure of the next several years since you and your peers can now vote. You are now the same age and have the same power as the generation you blame for the mess we are in.

Welcome to the party!