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For David Rosenberg The Legacy Of The Bernanke Regime Will Be Stagflation

Tyler Durden's picture


Several months ago we presented a dramatic change in David Rosenberg's outlook when from a die hard deflationist, he uttered the first rumblings of an inflationista. Since then he has further focused his substantial shift in perception culminating with this: "The number of firings, in fact, are more than 10% lower today with a 7.5% unemployment rate than they were in May 2007 when the unemployment rate had hit its cycle trough of 4.4%. Right there that tells you that 7.5% is the "new 4.4%". Yikes. Sounds very 1970s-ish — and recall in that decade, real spending growth was weak but the supply curve was so sclerotic that inflation stayed stubbornly high. At the same time, at a time when firings are at record lows and job openings are rising at a double-digit annual rate, the number of people quitting their current job for greener pastures elsewhere is on a discernible uptrend. All this points to higher wage growth ahead, and frankly, this is a good thing for society." Of course, Rosie is simply picking up on what we discussed over a year ago: namely that courtesy of central planning, Okun's law is now terminally broken.

It also means that higher wages for those workers who are in demand (and perpetual part-time status for those who aren't) will lead to another unpleasant side effect for those forecasting soaring EPS for the S&P: a further drop in corporate margins, which as we keep on showing are now the lowest they have been in over two years: "But the flip side is that as the labour share of the national income pie mean reverts off its all-time lows, we are likely to see profit margins pinched. This is the big risk: margin compression affects the 'E', while inflation, insofar as the tight historical relationship with final prices holds, even if to a smaller degree this time around, affects the P/E."

Some claim to see this in the chart of the Labor Share of income, which to the delight of Marxists everywhere, may have finally broken its long term downtrend and found a support level:

But wrapping it all together, there is one word for what follows: stagflation.

The next major theme is stagflation — this will be the legacy of the Bernanke regime. You cannot keep real short-term rates negative for this long in the face of even modestly positive real economic growth without generating financial excesses today and inflationary pressures in the future. Imagine dusting off the Phillips Curve and getting away with it — it's as if the Fed has changed religions as it now believes there is some trade-off between inflation and unemployment The last time we had negative real policy rates for this long with a central bank wedded to the Phillips Curve was under the Burns-led Fed of the early 1970s. As I have said recently — I am undergoing my own epiphany. I am renowned for being very early — to a fault — in my calls and no doubt am early yet again.

Little by little all the deflationists are starting to fold.

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Mon, 06/03/2013 - 08:24 | 3619835 nasdaq99
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Berdonkey is drinking Gen X's milkshake.  Drinking it all up!

Mon, 06/03/2013 - 08:31 | 3619839 GetZeeGold
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Pretty sure we're into Gen X's grandkids actually.


There was the greatest generation.....we're kinda the opposite of that.

Mon, 06/03/2013 - 09:09 | 3619866 Pinto Currency
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Rosenberg's subtext - "I am brilliant."

What he discusses was visible a decade ago.  This is simply a 1970s redux,

Printing money after a bubble crash cripples the capital structure of an economy by artificially extending the time preference.  It also creates inflation.  Stagflation.

Mon, 06/03/2013 - 12:08 | 3620406 Totentänzerlied
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No, shale oil will not save you, like those miraculous conventional wells did in the 70s.

Mon, 06/03/2013 - 13:00 | 3620602 Jack Napier
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Funny, I thought deflationary pressure was the result of markets seeking equilibrium after being artificially inflated. Yet somehow inflation is on the horizon? Maybe... if the big 5 are willing to let that money into circulation and the Fed is willing to keep firing after the clip is empty.

Mon, 06/03/2013 - 14:15 | 3620833 Pinto Currency
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Prices can also rise when many (like ZHers) lose faith in the c.b.'s omnicience.

Nothing special about their paper.

Mon, 06/03/2013 - 12:10 | 3620414 WhiteNight123129
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Solar is bad thing to bet against, but it might not be enough though.


Mon, 06/03/2013 - 20:47 | 3622077 WhiteNight123129
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Hey Pinto, ok extending the time preference artificially, we all get that, we have a fake long duration trade.

But how specifically does the extension of time preference cripples the capital structure specifically. It is not a rethorical question, I have not figured out why and I am interested in your arguments. 

I say a shifting of long bond duratios it cripples financial assets in teh long run, but how does it cripple the capital structure specifically?. It is a form of death for both equity and bonds, but more for bonds actually. 

What i would agree with is that a negative duration environment makes people refuse to plan for the future but favor present goods over a promise of future cash flows. It is not good, because it discourages those who project themselves in teh future.


Mon, 06/03/2013 - 08:57 | 3619902 SamAdams
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The greatest generation sure didn't have the greatest knowledge about money creation. 

Anyhow, why so pessimistic about our children's future?  The Chinese will be sending all their mfg over here, and jobs will abound, housing be provided, and bouncy nets placed along all roof-tops.  They are already exchanging all of those rapidly inflating dollars for safer US property and real assets.  Good thing FED sold its gold to their banks, we want the Yuan to be the new reserve if we are ever to see manufacturing and agricultural labor (other than ethanol) return to the states.  Of course, we still have to eliminate this US middle class; a very successful agenda as of late.  It is also impressive how so many kids come back from war disabled by some means or another.  Have to get that government dependency to greater than 50%, and we are almost there!  Will be quite the celebration when taxes must be raised and the midddle class further decimated.  Our Fascist-Communist Amerika is almost a reality!!!   

Mon, 06/03/2013 - 12:14 | 3620433 Totentänzerlied
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It's actually the Greatest Fool Generation, as it spent its whole existence laying the foundation for the destruction of America... And then demanded praise for its dubious acheivement. Mission fuckin accomplished. I love to harp on the useless egomaniacal Quisling generation, the Baby Boomers, but I never said they started this shit.

Mon, 06/03/2013 - 23:48 | 3622610 Diogenes
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At least the Boomers had some political balls. They were marching in the streets and scaring the shit out of Nixon and he didn't pull half the shit Bush and Obama did. Where are today's protesters? Can you see those lame ass Tea Party and Occupy goofs scaring anybody?

Mon, 06/03/2013 - 09:09 | 3619921 krispkritter
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Went straight into 'Gen Why?'  And now 'Gen Zzzzzz...'

Personally I'd like us to be 'Gen F U' and starting breaking TPTB's shit down...Looks like the party is in Turkey though: http://roarmag.org/2013/06/the-day-the-people-of-turkey-rose-up-in-pictures/

Mon, 06/03/2013 - 08:25 | 3619836 Debugas
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who said there will be "positive real economic growth" anytime soon ? Ain't gonna happen

Mon, 06/03/2013 - 08:48 | 3619884 WestVillageIdiot
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I just want to see what happens if the Yen breaks decisively below 100.  That should be some fun. 

Mon, 06/03/2013 - 08:59 | 3619909 SamAdams
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Mon, 06/03/2013 - 08:27 | 3619837 Yen Cross
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  Silver is ripping higher. Me likey

Mon, 06/03/2013 - 08:43 | 3619865 WestVillageIdiot
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Did somebody in Greenwich over sleep today?  They are supposed to clobber AG promptly at 8:30.  That guy better get his butt to work or he is fired. 

Mon, 06/03/2013 - 08:52 | 3619891 Yen Cross
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 lol.  I needed some light hearted humor.

Mon, 06/03/2013 - 09:30 | 3619966 sleepyguy007
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he must have hit snooze a few times,  looks liek 9am did it.

Mon, 06/03/2013 - 08:30 | 3619841 fonzannoon
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inflation is coming and it has nothing to do with greener fucking pastures.

it's just a tapdance on the grave of the middle class.

Mon, 06/03/2013 - 08:50 | 3619888 fuckitall
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Inflation is here now, 10% - 13% / yr.  Some say 15%.

Mon, 06/03/2013 - 08:52 | 3619892 fonzannoon
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agreed, even I get suckered into the "It's coming" meme sometimes. Thanks for the reminder.

Mon, 06/03/2013 - 10:09 | 3620050 BeerBrewer09
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FOUR (4) fucking duracell or energizer 9 volt batteries at Lowe's = $11.79. This is one product where I don't believe they can decrease quality/packaging size to fudge the rapid increase in price. I'd love to see how much those same batteries were 5 or 10 years ago.

Mon, 06/03/2013 - 11:29 | 3620290 HardAssets
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Yeah, I bought three greeting cards for h.s. grads last week. Ran over $15 . . .

A relative is reading a paperback book she checked out from the library that has the price printed on the cover. I looked up the current price and it has doubled since 2005.  Do this comparison with many items youve bought iin the past and you can see how bad inflation really is.  Of course the further back you go the worse it gets. Over 80% of the value of your money has been iinflated away (stolen) since 1971. And that's using government liar stats.

IMO much of what the fascist big govt/big banks partnership does is to hide this fundamental theft of the earnings and wealth of the people. (And notice how there is Never a really indepth examination of the history and nature of banking & the Fed Reserve on the mainstream media ?)   How much better off would Americans have been if they and family's wealth over generations hadn't been taken from them ?  Do you think you might just have had a little more resources to take care of your own retirement, your own health care, and your kids educations ?

The cost isnt just in money. It impacts every aspect of our lives. Many young mothers would like to be with their children the first few years. But they must work because one paycheck earner can't support most families. And many good middle class jobs have been outsourced in the name of 'free trade' gobalism. Many young men end up fighting wars overseas because they have few prospects back at home.  It is a truly evil system.

Mon, 06/03/2013 - 12:52 | 3620587 Go Tribe
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Yeah, I bought three greeting cards for h.s. grads last week. Ran over $15 . . .


You could've gotten them into a house with a zero-down VA loan for less than that!

(I read that 96% of their loans are now zero down)

Mon, 06/03/2013 - 12:17 | 3620449 Totentänzerlied
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10% per year for 10 years is not PSYCHOLOGICALLY equivalent to 100% in 1 year. You are therefore correct to say it's coming, as the last 100 years, 30s excluded, were just a slow prelude.

Mon, 06/03/2013 - 09:49 | 3619998 yogibear
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No worry, Bernanke, Evans, Dudley and Yellen will just deny inflation and point to the cooked CPI.

Wed, 06/05/2013 - 09:43 | 3626030 e-recep
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i monitor meat prices, i mean good quality meat, not Orly's chicken. the inflation seems to me 12.5% at the moment.

Mon, 06/03/2013 - 08:30 | 3619842 dow2000
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Rosie has gotten it right since 2006

Mon, 06/03/2013 - 08:31 | 3619844 Jason T
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Inflation: Making Sure "It" Doesn't Happen Here

You can't stop nature bitchez

Mon, 06/03/2013 - 08:31 | 3619845 imapopulistnow
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A legacy of stagflation may not be so bad if the alternative was servere deflation coupled with a second great depression.

Mon, 06/03/2013 - 08:35 | 3619854 imapopulistnow
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Wage-driven inflation as opposed to low-wage driven deflation is the better of the two alternatives.

Mon, 06/03/2013 - 08:43 | 3619863 imapopulistnow
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And 7.5% may very well  be the new 4%.  The Governor of Pennsylvania was spot on when he said that many of the unemployed are drug addicts who can not hold a job.  Thank you Purdue Pharma et al.  You contributions to the legacy of stagflation likely is far greater than Bernanke's.

Mon, 06/03/2013 - 09:22 | 3619951 Pinto Currency
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The 'being shot is good when the alternative is to be electrocuted' analysis doesn't work.

Central banking doesn't work.


Mon, 06/03/2013 - 10:56 | 3620199 Creepy Lurker
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I logged in specifically to give you a green arrow for that statement. Its time to stop making excuses and rationalizations for these bastards. They are destroying us.

Mon, 06/03/2013 - 11:33 | 3620333 HardAssets
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"Central banking doesn't work."

On the contrary, is works Very Well for the small group of criminals that benefit off it.

Mon, 06/03/2013 - 08:38 | 3619858 NoDebt
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If you are young you will live to regret saying that.

This economy is now a Windows laptop with no "restart" function.  Things breaking down and mysteriously not working any more.  Icons disappear from the screen, the internet connection getting slower, but no way to turn it off and on again for a refresh.

They are printing now for only one reason- to pay for government spending, which is currently 25% of our economy and will become 35-40% of our economy in a generation.  We are becoming Europe.

Mon, 06/03/2013 - 10:13 | 3620055 Non Passaran
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WfW 3.11

Mon, 06/03/2013 - 08:32 | 3619846 blindman
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it wasn't the ....
was the low spark of high heeled boys.

Mon, 06/03/2013 - 10:59 | 3620215 Creepy Lurker
Mon, 06/03/2013 - 08:33 | 3619852 Zen Bernanke
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Since greenspans time about 18 years ago, the fed has caused at least 7 bubbles in 4 different markets, 5 of which popped to disasterous consequences.  With this legacy of being responsible for what is likely the worst price stability in recorded history, it is a testimony to the strength of business to have succeeded at all given this backdrop. 

Mon, 06/03/2013 - 08:47 | 3619878 WestVillageIdiot
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But the body can only fight off multiple parasites for so long. 

One of the headlines today is about how Bernanke should stay on as Fed Chair.  The piece (of crap) was written by some clown from Reuters.  He drools on Bernanke's balls, giving him the usual hero treatment.  Just like Greenspan, Beranke will be a hero until he isn't.  Then he will go work for some scoundrels like DB or JPM. 

Give 'em hell, Ben, you bearded little douche bag.

Mon, 06/03/2013 - 08:35 | 3619853 RSloane
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But but....I've been told that our economy is in a state of evolution, from industrial and manufacturing to services. The real question gripping everyone is - should McDonald workers be counted as a part of the manufacturing or services industries?  Bernanke is cleverly inducing stagflation while this evolutionary process is unfolding much like a coma is induced to enhance the recovery of brain-injured patients. Thanks Ben Shalom, where would we be without you.

Mon, 06/03/2013 - 08:38 | 3619855 IamtheREALmario
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As I recall, it took the manufacturing led PC Boom of the early 80s to get us out of stagflation. Yes, capital was required to expand manufacturing capability. However, MORON economists (at least pretend to) forget the link between value adding activity and the increase in capital. Today's Fed "created out of thin air" money goes only one direction OUT OF THE FRIGGIN COUNTRY. It does not support (and that all it ever does in a healthy economy) the value adding activity. My belief is that is by design, since those who run our world have been very poor in the admimistration of their duties and now are running a massive "no child left behind/affirmative action" program with the whole planet and that, like all of these progressive/communist programs, many will have to suffer to prove that the central planners are wrong and incompetent.

The other arugument is that the central planners are not incompetent, simply that our assumptions are incorrect about what exactly they want to accomplish (slave plantation earth) and how that goal got away from them for a while.

Mon, 06/03/2013 - 08:53 | 3619895 ElvisDog
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You're overthinking things. There is no global "affirmative action" program. Everything that has happened over the past 10-20 years (at least) can be explained by the oligarchs who run things in every country trying to stripmine as much wealth as possible from everyone else. They are sociopaths to whom accumulation of wealth trumps everything else.

Mon, 06/03/2013 - 10:42 | 3620145 nofluer
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As I recall, it took the manufacturing led PC Boom of the early 80s to get us out of stagflation.

As *I* recall it took double digit interest rates imposed by Volcker to tame stagflation. As Volcker put it, "Without a healthy currency, you cannot have a healthy economy."

The rest happened as a RESULT of Volcker's stabilization of the currency.


Mon, 06/03/2013 - 08:37 | 3619857 goldenbuddha454
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Roubini talking gold to $1,000.00 or less due to the inability of QE's to create inflation, banks hoarding cash, collapse in the velocity of money.  He may have a point.  Just means I'll be buying a bunch of gold and silver at the next bottom.  Thanks Nouriel!

Mon, 06/03/2013 - 08:50 | 3619886 sleepyguy007
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he has been more or less wrong about everything since 2008 and his dr. doom fame.   the fact he's saying it now might mean its the bottom or near it

Mon, 06/03/2013 - 08:53 | 3619887 IamtheREALmario
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It might be worth looking at the gold chart centering on 1980 and how gold performed against inflation.


It WAS during stagflation that gold rose the most. However, I would argue that since the crash in 2008 we have had an extended period of stagflation in the real economy, much of which has been caused by commodity and equity price manipulation not market forces. This time the Fed decided to keep interest rates low, but not put the money into the economy. IF the money that the Fed created was staying in this country and being put to tangible use (other than buying imports and increasingprices), then the velocity of money would be huge and inflation would be getting away from us. Unfortunately or fortunately all of the money that the Fed is putting into the ecomony is getting trapped in nonproductive eddies, such as imports, equities and bankers' pockets. The banks are simulating demand by raising commodity prices (such as food and oil) and as a result making thigs less afforadable to the working classes. Otherwise, without the money making it to the economy inflation is limited because there is not  a lot of money chasing goods. How could this ever change to create demand driven inflation without re-starting value adding activity here in the U.S. to increase the velocity of money? Price controls (by the banks) are not a healthy substitute for a market driven economy. This time prices are being controlled UP by the banks and not limited by the government, but in either case it distorts things and creates malinvestment.

Mon, 06/03/2013 - 12:55 | 3620599 Go Tribe
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No one will accept your bid in U.S. dollars.

Do NOT follow this link or you will be banned from the site!