David Rosenberg On "Shared Sacrifice"

Tyler Durden's picture

From David Rosenberg of Gluskin Sheff

Shared Sacrifice

Our hedge fund desk has always told me that among the most reliable cyclical indicators for the American consumers is the restaurant sector. Traffic is slowing down precipitously and the companies are issuing negative guidance.

I took a look at the monthly details from the latest PCE data and saw that in nominal dollars, consumer spending on eating out sagged 0.4% in October and has contracted now in three of the past four months. The YoY trend peaked at +5.7% in July and has since slowed to +4.4% which is the softest pace in eight months (the three-month trend which a year ago was running at 7.5% at an annual rate is now close to stall-speed of 2%). As a sign that families are becoming more cautious in their spending and eating habits, grocery shopping is up in two of the past three months and at double the trend (at 4%) of the restaurant industry.

The downward trend in "eating out" has broader connotations, by the way.

Now that everyone is focused like a laser beam on Fiscal Armageddon, it may be more appropriate to be looking at what is happening on Main Street rather than Washington. Looking ahead, it is going to be more about the economy, and taking it a step further, at times like these, it is important to understand where the real economic power resides, and that is with the people.

And not just where they shop, but where they eat, in this era of frugality.

In the meantime, it is reasonable to assume that disinflationary pressures will intensify. As the tax base gets broadened and entitlement reform takes hold, an enormous amount of shared sacrifice will be required. Less government will require a move towards tighter budgets and this will contribute to stress in the job market and after-tax personal incomes, at least for a while. Attitudes are changing radically as there is a growing acceptance among public sector unions and civil servants that the way they spend and save is going to undergo some radical changes in the future.

Furloughs, layoffs, and now less-generous pension benefits for current workers and retirees are occurring for the first time ever. Sweeping changes are taking place at the state level as pension trustees and legislatures push for higher monthly contributions to pension plans, a later retirement age and lower annual cost-of-living adjustments for current and retired workers. Unions (those that don't make Twinkles, in any event), are making the concessions because they can see the future absent shared sacrifice — the termination of defined benefit plans in favour of defined contribution plans. Be that as it may, employee contributions are going up — a de facto tax hike. And this will work directly against any upturn in consumer spending when you consider that the state and local government sector employ nearly 20 million people or 15% of the national job pie.

So we will have less government, fewer entitlements and more whisperings that it isn't just the $250,000+ high-income households that are going to experience tax increases and diminished disposable income growth. This is shared sacrifice. To think that the nation could have ever gone to war in Iraq and in Afghanistan under the Bush regime, putting our troops at great risk not to mention the emotional scars on their families, while here at home civilians would be allowed to enjoy tax cuts and a debt-financed consumption binge. This is something worth contemplating as everyone joins in to redress a national balance sheet that has gone parabolic.

At all levels of the social structure, starting with households and followed by unions and governments, the U.S. will be swept up in a sprint to frugality now that the Baby Boom has run out of time to speculate. They will be saving the old fashioned way. Everybody talks about how ultra-low long-term interest rates have nowhere to go but up — well, the same can be said about the U.S. personal savings rate. The problem for bond bears, however, is that the likely increase in the latter will thwart any attempt for a sustained increase in the former given the disinflationary consequences from an aggregate demand viewpoint.

The critically important Baby Boomer population will, out of necessity, be pursuing a strategy of working longer, saving more and liquidating debt in order to secure a comfortable retirement while at the same time the public sector moves in the very same direction towards fiscal probity. In the case of Government, solvency will be restored by reducing non-essential services and severely means-testing entitlements while increasing taxes and user fees. One has to wonder what events could provide positive momentum to GDP growth, push corporate earnings to record highs as the consensus predicts as early as next year, or generate any lasting inflation, for that matter.

It's the people that make these pricing decisions. Businesses can only price up to what consumers are willing to pay. It is households that determine whether or not we have inflation, not some bureaucrat in Washington who believes he has control over some printing press. Surely the Fed's largesse this cycle would have been the proof of the pudding that when a secular credit contraction results in declining monetary velocity, inflation goes down, not up. And when the underlying trend is already below 2%, one can see that disinflation risks are nontrivial even as Wall Street research houses are busy forecasting the return of a rising interest rate cycle.

This all then begs the question what it is we are supposed to be bullish about? Especially since 0% policy rates leaves cash as little more than a tactical asset.

The answer is, from an investment stance Safety and Income at a Reasonable Price. High quality bonds with duration. Capital preservation strategies with low correlation to the equity market such as classic long-short hedge fund exposures. And hedges against recurring bouts of global financial, economic and geopolitical instability mean a core holding of precious metals in the portfolio. Strong balance sheets, positive net free cash flow yield, earnings stability, non-cyclical sectors and dividend growth and yield are all the characteristics that should be screened for in any equity market investments. Credit arbitrage strategies make good sense as well given the Fed's ability to mitigate asset price volatility via its balance sheet expansion and sustained strong corporate balance sheet conditions. The demand-supply balance for crude oil is particularly constructive and heightened geopolitical risks will help the basic material sector retain an allure. There are also special situations with regard to the prospect of U.S. energy self-sufficiency, improvements in net household formation and medical technologies. So there are still needles in the haystack for equity investors in a lingering disinflationary environment being accentuated by the looming fiscal austerity and the shared sacrifice this entails at all levels of society.

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Insideher Trading's picture

Plunge off the fiscal cliff.

Don't raise the debt ceiling.

Problems solved.

So there are still needles in the haystack for equity investors in a lingering disinflationary environment being accentuated by the looming fiscal austerity and the shared sacrifice this entails at all levels of society.

There are also still pennies in front of steamrollers. Good luck!

ihedgemyhedges's picture

Quoting Rosie: "The downward trend in "eating out" has broader connotations, by the way."

Being married 18 years, I can tell you from PERSONAL experience that eating out is not encouraged in my house....and going down is not in a downward trend anymore either unless you count zero to zero to zero to zero as a trend.....

goldfish1's picture

Businesses can only price up to what consumers are willing to pay. It is households that determine whether or not we have inflation, not some bureaucrat in Washington who believes he has control over some printing press.


B U L L S H I T. Put 100 loaves of bread on the shelf and bring in 200 people.

derek_vineyard's picture

what fiscal debt crisis?  obama will just invoke an emergency executive order and direct bernanke at his discretion on Jan 1

he'd be in hawaii already, but he has to wait until his opposition folds their hand or losses in a 'call' of their hand

Dan The Man's picture

Not sure I agree with the notion that the ppl make the decision on inflation.  Its really made FOR them.

akak's picture

Rosenberg is here, as he so often is, absolutely full of shit.

Businesses can only price up to what consumers are willing to pay. It is households that determine whether or not we have inflation, not some bureaucrat in Washington who believes he has control over some printing press.

Fuck you Rosenberg, as you obviously have NEVER studied any trace of monetary history, not even that of just the last couple of decades.  In literally hundreds of examples, inflations and hyperinflations have roared ahead DESPITE the inability of the households of those nations to pay for it.  In fact, where has it ever happened otherwise?  That is the very POINT of inflation: to steal from the many for the benefit of the few.  When has "ability to pay" EVER had anything to do with it?  Currency debasement is going to happen regardless of the pain inflicted on the subjects by their overlords --- with the "ability to pay for it" being manifested in a declining standard of living, something which not coincidentally has accompanied EVERY inflationary epoch in every nation, with the only variable being the degree of that decline.

Rosenberg obviously is still under the spell of Keynesian quackpottery, with its misguided belief that 'demand-pull inflation" is the only possible phenomenon that can lead to rising prices.

TheFourthStooge-ing's picture

akak said:

Rosenberg obviously is still under the spell of Keynesian quackpottery, with its misguided belief that 'demand-pull inflation" is the only possible phenomenon that can lead to rising prices.

Rosenberg illustrates that the state of "modern" mainstream economics is comparable to that of medieval mainstream medical practice. The ill are taken to the village barber for a good bloodletting. If a patient dies, it is their own fault for not wanting to recover.

Clearly Mugabe was not at fault for what happened in Zimbabwe. The people there were simply hungering for inflation more than they were for food.

akak's picture

Muchly the truthiness with the words postings made of you glorious wisdom falling down with praise now are turning smiles and mass handclapping celebrationizing up!


TheFourthStooge-ing's picture

Promising pattern of things and true to Keynesian economics is somehow what puts places like Easter Island on the map. As a means, time passes by and obvious facts to deny only grow more obvious.

Bear with it.

tooriskytoinvest's picture

Pastor Lindsey Williams & Robert Litan & Grover Norquist: Obama To Tax Middle Class Into Oblivion! It'll Take $9 Trillion In Cuts To Fix U.S. Debt. IT IS COMING - '$3 TRILLION TAX INCREASE ON MIDDLE CLASS'.


DoChenRollingBearing's picture

EVERYBODY is going to get whacked by higher taxes.

And it will not do anything.  They won`t cut spending

Atomizer's picture

L.I.B. It’s the most cost effective way to get off this taxpayer funded high-speed fiscal express train. If now there is no more money, the subhuman feeders will parish.

Let it burn! 

Sub Humans-Human Error

Errol's picture

In addition to increasing taxes, most folks will experience a lower standard of living as the debtapalooza winds down and the inexorable increase in the real cost of energy consumes a larger slice of the income pie.  Folks may as well downsize on their own terms before they get downsized involuntarily. 

goldfish1's picture

Most folks but not the 1%+++

LawsofPhysics's picture

What a joke. There can never be "shared sacrifice" so long as a select few can print up money or have access to free money. But don't worry Rosy, you dumb fuck, there will be sacrifices.

August's picture

"It is households that determine whether or not we have inflation, not some bureaucrat in Washington who believes he has control over some printing press."

So, if "households" all take their W.I.N. buttons very, very seriously, Ben and his ilk can print to infinity with no worries.  Who knew! 

If the author is seriously maintaining that ordinary consumers are responsible for inflation, not central bankers, then this seems to be a dis-information effort on someone's part.

GottaBKiddn's picture

Exactly! Households don't create inflation, and don't have any control over it. Printing ponzi cash is inflation. And, you can be sure that prices and taxes will soar, and housholders will only be able to scream and cry themselves to sleep, while the "Planners"  toast champagne to their success. Shared my ass.

Quinvarius's picture

Everyone lost their dam minds when they got destroyed shorting with CNBC into QEternity with QE4 coming right around the corner.  So now printing doesn't matter because they were wrong about it not coming?  Everyone is so stupidly bearish, this market can only go up.  Oh yeah, and they are blowing the money supply through the roof. 

Bicycle Repairman's picture

"W.I.N. buttons"

LOL.  I flipped mine over, so it was a N.I.M. button.  No Immediate Miracles.

Lucius Cornelius Sulla's picture

I believe that the point he is trying to make is that the system used to deliver inflation is broken.  Nobody wants more debt and in fact are rejecting it and paing it down.  The only delivery mechanism left for expanding the debt is the public balance sheet which is being used in spades by the political class.  However, total credit (M3) is still stagnant as more debt is being paid down and defaulted on than is being monetized.  Another recession will serve to accelerate the downward trend of M3.

nmewn's picture

Check please! ;-)

Caviar Emptor's picture

Ahem. Let's recap: Costs? Up! Earnings? Down!

As predicted for, ahem, a while here. Just another drop in the biflationary bucket, just another of a million ways that buying power for individuals and business will wither away. 

Atomizer's picture

Many thanks with regard to paying attention to my broken record. At times, ponder whether my posts fall on deaf ears.

GubbermintWorker's picture

This coming era kind of makes me glad that I am in my senior years. I do not envy younger people of today.

wisefool's picture

Right there with you brother. But I am hoping (for them) that we go off the cliff, reboot this thing, so they never have to understand how we got here. Might prevent them from acidentally trying the same things.

Atomizer's picture

Whenever they're running thru the streets and shitting their pants in fear, they’ll know we mean business. For the time being, allow them to establish the romper room NSA nanny state program. Winks.

Jack Burton's picture

Sacrifice? That will become real when we start to fund the empire with tax revenues instead of borrowed money. A 1 trillion a year military bill. Up to now this has been borrowed and put on the deficit. Iraq and Afghanistan were both credit card wars, they were not funded at all, they were put on the deficit. Iran and Syria must now be conquered, as of now the only way to do it is to borrow the cash and then send in the bombers. This is no joke, we actually do fight our wars that way. We went into Iraq and paid Zero % of the cost, we were invited to go shopping instead, and leave the bill for the grandkids. If only I was joking, who would argue that I am wrong? We got to this massive deficit by borrowing to fund the war machine and to bail out the failed business model of the banks. Not to mention all the hand outs that special interests get via buying politicians with free money.

We deserve what we have gotten, because we refuse NOT to vote out the ass clowns who run congress. Sure we replace a republican with a democrat or replace a democrat with a republican from time to time. We call THAT change?

Either vote evry useless prick out of office when you get a chance or nothing will ever change. No American should ever vote for a democrat, no American should ever vote for a republican. They are members of the same criminal class, one party one police state criminal enterprise that we call Modern America.

wisefool's picture

Two cooroborating points.

1. Bloomberg was running canned "cliff"  segments today showing small businesses that support the norfolk ship yards. Norman rockwell stuff. The town elder saying "We have to pay our taxes, our medical costs, for obamacare and other programs" Showed the 20ish man in carharts working hard outside in some rural town. "These government contracts support our businesses."

if you use google maps,  there is a pretty good chance you can see the USS George Bush in port.

2. Timmay was on the MSM sunday shows this sunday.  ALL OF THEM. he said we have 900B per year of war savings. That will pay for the social programs, but we still need the tax  increases to  balance the budget.   Of  course, the republicans called this absurd. But technically timmay is right.

I contend that the young man in bib overalls will  probably be doing the exact same things he was doing in that rural town outside of Norfolk ... whether the USS George Bush is there, the USS Timmay Geithener is parked there, or the USS Minnow is parked there.

The only people who will loose out are the DBags like gingrich who get $100,000 to make 4 or 5 speaking engagements in MIC boardrooms. Teaching the noble history of the arms industry to billionaire executives. Thats why it is so hard to vote these useless pricks out of office ... as you mentioned.

goldfish1's picture

Senate report faults San Diego 'zombie' exercises


"A staged zombie attack on Mission Bay is among questionable expenses of $7 billion in Homeland Security money called out Wednesday in a report from Sen. Tom Coburn, R-Okla.

San Diego received $134 million under the program, and expenses here were highlighted repeatedly in the report.

The zombie attack was justified as a simulation of a stressful combat-type event for first responders to experience. It took place this year on Halloween, with 40 hired actors at Paradise Point Resort & Spa."

Shared sacrifice indeed.

Quinvarius's picture

This guy has gone full retard.

It is not the public that decides on inflation.  It is the printing press.

Velocity gets cut in half right off the bat every time you double the money supply.  That is just how the math works.  Using it as an example just illustrates your ignorance.

Only an idiot bottom fishes in a distressed asset, like bonds in a debt crisis, before they actually drop in price.

We don't have a deflation problem.  We never did.  Our problem is inflation, and has been for the last 100 years.  Debt default in a debt based fiat currency causes hyperinflation.  Pick a South American country and check the case studies.

Central Bankster's picture

The problem with deflationists is that they always measure deflation by the value of financial assets like stocks or real estate (rents), or by the yields on bonds as proof of deflation.  Japan is a great exmaple of the deflation boogeyman that doesn't exist, Japan has had rampant inflation in food, energy, gold etc. but deflation in financial assets.  Its hilarious that they don't understand that inflation hits different assets at different times and at different intensities.

tooriskytoinvest's picture

BREAKING: Income tax will exceed 50% in California, Hawaii, and New York City

Jim B's picture

Personally, I don't see any government austerity; they will spend until they collapse the system.  They will hope to be out of office when the piper needs to be paid.  

GubbermintWorker's picture

But man, they sure are adept at kicking the can down the road!

knukles's picture

This is what happens i a deleveraging hangover post money bubble.
Everybody gets hurt.
Well, almost everybody.... the oligarchy continues to make out like the bandits they are, the sociopaths they are. caring not for the pain and misery shared by the peasantry, the treasure extracted at the point of a spear.

Thanks, fellas....

Atomizer's picture

Just be patient knukles. Leading the herd is easier than figuring out if they see a mirage or an oasis.

pslater's picture

"As the tax base gets broadened and entitlement reform takes hold,....."

Where?  In Zimbabwe?  The unions just won the election for Obummer and it's payback time now.

Obummer WANTS to off the fiscal cliff.  When the first items on your agenda upon becoming President are the destruction of:

1. The country's industrial base (see, GM, Chrysler, etc.)

2. The finacial sector (TBTF banks)

3. The Health care sector (see the 'Afforadable care Act')


4. The energy industry (see gas prices doubling, cutting drilling permits, and generally villifying the entire industry)

You only have one agenda:  The destruction of the American way of life leading to the ultimate radical dream - one world goverment.

Ps.  Why does Obummer want to go off the fiscal cliff?  $500 billion in cuts to the military.  The fiscal cliff was Obummer's idea and he could never get these cuts through Congress.  He could care less about cuts to discretionary spending.  How better to weaken America than by gutting its military?

hairball48's picture

"... In the case of Government, solvency will be restored by reducing non-essential services and severely means-testing entitlements while increasing taxes and user fees..."

Good fucking luck with that plan. Who exactly will be voting for that agenda? And when?

Things that go bump's picture

I don't think we get to vote on this.

JustACitizen's picture

Personally, if the American people turned over a new leaf - learned to filter or ignore advertising, lived within their means and enjoyed their relations with family/friends instead of "things" - I would rejoice. If we rediscovered the virtues of honesty, tolerance and hard work - I would be inspired - and I like to think others would too.

Imagine:  Politicians who create their own "facts" nay "universe" held up for ridicule and derision. CEO's forced to demonstrate their personal contributions to company success - and not some consultant flunky's recommendation to a "Board" of fellow ass-clowns in order to justify their payplan. Imagine a marketplace where track records mattered - books were based on facts/cash - and integrity could not be "bought".

I do not know if we have hit rock-bottom in our degredation - but - I sure hope to see a rebirth in the importance of character in my lifetime. I feel like a frickin' joke with all of my antiquated notions...

Good luck to all. 

nmewn's picture

You are not alone.

Somewhere down the line integrity will make a come back...as will shame and dishonor. As will character and honesty. I'll let it be known now, apologies and contrition will mean next to nothing to me in weighing the deeds done.

Just because someone begs for forgiveness or mercy does not mean its automatically granted...not by the old schoolers.

Tirpitz's picture

"Somewhere down the line integrity will make a come back"

Won't be easy to beat the allure of a quick billion or two in rigged profits of the Goldman type...

Monkeyfister's picture

It'll only come back when the Banksters are in REAL prison, facing long terms of incarceration, and crippling fines. That's the only way to keep the rest in line.


Pareto's picture

Agreed.  I think eventually there will be a return to those work ethics you speak of.  Forced austerity has a way of changing habits and expectations and rather quickly.  But not before Maslow's heiarchy of needs, and Kubler-Ross's 5 stages of grief have occurred.  I don't imagine that we are as close to "change" or correction as many think.  I think we can stay in this funk for some time.  Hope has an incedible way of maintaining a sense of denial.  So long as people can see that there is a way out, that there is an opportunity for a do over without any pain, things won't change much, in my opinion.  Consumption patterns will fall, people will do less because they have less, but, they will still believe in the American dream.  And thats a powerful thing since nowhere else in the world does the capitalization of an opportunity mean so much.  At least, that used to be the case.

Joebloinvestor's picture

Wait until they finally disclose that the $250k meant COMBINED, not individual income!


Joebloinvestor's picture

Wait until they finally disclose that the $250k meant COMBINED, not individual income!