David Rosenberg: "It's Time To Start Calling This For What It Is: A Modern Day Depression"

Tyler Durden's picture

By now only the cream of the naive, Kool-Aid intoxicated crop believes that the US is not in either a deep recession, or, realistically, depression. For anyone who may still be on the fence, here is David Rosenberg's latest letter which will seal any doubts for good. It will also make it clear what the fair value of the stock market is assuming QE3 fails, which it will, and the market reverts to trading to fair value as predicated by bond spreads. To wit: "If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $75 in 2011 as opposed to the current consensus view of over $110. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 10x was actually buying the market with a 15x multiple." And since we are in the throes of a deep depression and a 10x multiple is more than generous, applying that to $75 in S&P earnings, means that the fair value of the S&P is... we'll leave that to our readers.

From Breakfast with Rosie, of Gluskin Sheff

We just came off the weakest recovery on record despite the massive amounts of stimulus that the U.S. government has delivered in so many ways. That the yield on the 10-year U.S. Treasury note is down to 2% already speaks volumes because the last time we were at these levels was back in December 2008 when the downturn was already 12 months old. A period like the one we have endured over the past six months when bank shares are down 30% and the 10- year note yield is down 130 basis points has never in the past foreshadowed anything very good coming down the pike. If market rates are at Japanese levels, or at 1930s levels, then it's time to start calling this for what it is: A modern day depression.

Look, that entire period from 1929-1941 saw several quarters of huge bungee-jump style GDP growth and countless tradable rallies in the stock market.

But that misses the point.

The point being that a depression, put simply, is a very long period of economic malaise and when the economy fails to respond in any meaningful or lasting way to government stimulus programs. A series of rolling recessions and modest recoveries over a multi-year period of general economic stagnation as the excesses from the prior asset and credit bubble are completely wrung out of the system. In baseball parlance, we are in the third inning of this current debt deleveraging ball game.

You know you're in a depression when interest rates go to zero and there is no revival in credit-sensitive spending.

The economy is in a depression when the banks are sitting on nearly $2 trillion of cash and yet there is no lending going onto the private sector. It's otherwise known as a 'liquidity trap'.

Depressions usually are caused by a bursting of an asset bubble and a contraction in credit, whereas plain-vanilla recessions are typically caused by inflation and excessive manufacturing inventories. You tell me which fits the bill today.

When almost half of the ranks of the unemployed have been looking for a job fruitlessly for at least six months, you know you are in something much deeper than a garden-variety recession. True, we can't see the soup lines; the soup lines are in the mail — 99 weeks of unemployment cheques for over 10 million jobless Americans. Don't be lulled into the view that we are into anything remotely close to a normal economic cycle.

Basically, in a depression, secular changes take place. Attitudes towards debt, discretionary spending and homeownership are altered for many years, or at least until the scars from the traumatic experience with defaults and delinquencies fade away. That is why we saw existing home sales slide to 15- year lows and new home sales to record lows despite the fact that mortgage rates have tumbled to their lowest levels in modern history. There is no economic model that would tell you that declining mortgage rates should lead to lower home sales.

More fundamentally, in a recession, the economy is revived by government stimulus. In depressions, the economy is sustained by government stimulus. There is a very big difference between these two states.

In a recession, everything would be back to a new high nearly three years after the initial contraction in the economy. This time around, everything from organic personal income to employment to real GDP to home prices to corporate earnings to outstanding bank credit are still all below, to varying degrees, the levels prevailing in December 2007.

Let's be clear: After all the monetary, fiscal and bailout stimulus, the economy should be roaring ahead, as would be the case if the economy were coming out of a normal garden-variety recession. The fact that there has been no sustained response to all these efforts by the government to turn things around is testament to the view that this is not actually a traditional recession at all, but something closely resembling a depression. That, my friends, is exactly what the bond market is signaling, with Treasury yields rapidly approaching Japanese levels. Just because the stock market embarked on a stimulus-led speculative two-year rally, which ended abruptly in April 2011— does not change that fact.

For all the chatter about whether the recession that started in December 2007 ended in mid-2009, here is what you should know about the historical record. The 1930s depression was not marked by declining quarterly GDP data every single quarter. In fact, the technical recessionary aspect to the initial period following the asset and credit shock goes from the third quarter of 1929 to the first quarter of 1933.

I can understand how emotional the debate can get over whether or not we have actually just stumbled along some post-recession recovery path or whether or not this is actually a depression in the sense of a downward trend in economic activity merely punctuated with noise that is influenced by recurring rounds of government intervention. The reality is that the Fed cut the funds rate to zero, as was the case in Japan, to little avail. Then the Fed tripled the size of its balance sheet— again with little sustained impetus to a broken financial system. Government deficits of nearly 10% relative to GDP, or double what FDR ever ran during the 1930s, have obviously fallen flat in terms of providing any lasting impact to the economy.

This is going to sound like a broken record but it took a decade of parabolic credit growth to get the U.S. economy into this deleveraging mess and there is clearly no painless "quick fix" towards bringing household debt into historical realignment with the level of assets and income to support the prevailing level of liabilities. We are talking about $5 trillion of excess debt that has to be extinguished either by paying it down or by walking away from it (or having it socialized). Look, we can understand the need to be optimistic, but it is essential that we recognize the type of market and economic backdrop we are in.

The markets are telling us something valuable when (after a period of unprecedented government bailouts, incursions and stimulus programs) the yield on the 5-year note is south of 1% and the 10-year is down to 2%. Instead of contemplating over how attractively priced equities must be in this environment, market strategists and commentators would bring a lot more to the table if they tried to decipher what the macro message is from this price action in the Treasury market. Conducting stock market valuation analysis based on unrealistic consensus earnings assumptions does nobody any good, especially when these estimates are in the process of being cut, and at a time when the Treasury market is telling us we are the precipice of another recession.

If the Treasury market is correct in its implicit assumption of a renewed contraction in the economy, then we could well be talking about corporate earnings being closer to $75 in 2011 as opposed to the current consensus view of over $110. In other words, we may wake up to find out a year from now that whoever was buying the market today under an illusion of a forward multiple of 10x was actually buying the market with a 15x multiple.

How's that for a reality check?

This augers for capital preservation, defensive orientation in the equity market and a focus on income-yielding securities; something we've been advocating for some time.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
GeneMarchbanks's picture

Rosy, The question isn't about what you call it but what to do about it. Here's a suggestion: BLOW UP THE ZOMBIES aka THE LIVING DEAD aka TBTF aka THE STATUS QUO.

MillionDollarBonus_'s picture

US treasuries are a SAFE-HAVEN, and you better get used to it. America is in a win-win situation - either the world economy improves and our tax revenues increase, which makes our debt more attractive, or the world economy detteriorates and investors pile into our debt becasue of its hard-earned safe-haven status. And don't forget that China is TOTALLY dependent on our consumption of their exports, so they really have no choice but to keep buying US treasuries. If China stopped buying US treasuries, we can simply threaten to no longer consume their exports.

GeneMarchbanks's picture

Knock yourself out. USt's are all yours. I'll gladly go elsewhere for my safe- haven.

MillionDollarBonus_'s picture

There is nowhere else to go. You better get your Treasuries while you can cos soon that yield is gonna be sub 0.1%. This will be the biggest wealth transfer in history, and its sad that you don't want to be part of it.

Long-John-Silver's picture

There is nowhere else to go.


There called Gold and Silver Bitch.

Comay Mierda's picture

but but phd economists told me that this is a growth recession

Pontificating Buffoon's picture

...and guns & bullets. Plenty of options out there.

BooMushroom's picture

...and any other durable goods that you were going to consume anyway.  If fhe currency inflates (most likely, has been happening plenty) then your money has appreciated by the rate of inflation.  If there's a depression, then the goods you stockpile may not be available at any price, and then what you have is worth even more.

fonestar's picture

US Treasuries are a Bulbuous Relic.  Gold and Silver are the only two true safe-havens.

A.W.E.S.O.M.-O 4000's picture

But Gold and Silver don't pay interest!


Nah, I'm just fucking with you.

Sudden Debt's picture



Nowhere else to go? :)


PM's, land, rare earths,.... plenty to invest in and to make some serious money. unless you trade your paper bonds for other paper crap.

Anything you can't touch is worthless.


Clorox Cowboy's picture

Ultimately you will be proven correct, but I think you're jumping the gun slightly (by years or perhaps only months?).  When Europe falls, Treasuries will catch a bid in a monstrous way.  The closer yields are pushed toward zero though, the more violent the eventual snap-back will be.


End-game: US is past it's peak and will never recover.  We're not quite there just yet, but getting closer all the time.

Sudden Debt's picture

Sure, I give it 3 to 5 years before the US realizes it's over. But if Europe goes down first, the US will follow a bit faster.

My money is in PM's. That means I don't care about the short run, protection of wealth so to speak but it's also a investment as our economies have no way out.

But I'd never put my money in bonds because you lock it down and once they go down it will go down pretty fast.


Clorox Cowboy's picture

Agreed, I have a significant % in PMs also.  No argument from me about the ultimate end for this farce.

Whalley World's picture

3 to 5 years!  By that time the USA will be broken into a series of regional pricipalities.  That's if the Mayan Calendar does'nt hit first.

This Empire is going down in Hyperspeed.

Strider52's picture

I want to get me ahold of some Dark Matter. It's completely intangible, but it holds the galaxies together. That's gotta be worth something.

theMAXILOPEZpsycho's picture

you're awsome! I'm going to use some of your material at dinner parties...the only problem is I think most people will actually take you seriously and take the advise!

GeneMarchbanks's picture

You, sir, have Stockholm Syndrome. Seek help.

bugfixx's picture

As Jim Grant said recently, US Treasurys offer "return-free risk."

SilverRhino's picture

No other safe haven?  You're a fucking moron.  Enjoy your flammable safe haven. 

Rule #1: "Safe havens" are not flammable

Ruffcut's picture

MillionDollarButtFart, being an attention whore is so important for you that you relish in embarassment.

Pity the fool.

Spirit Of Truth's picture

I know this is tongue-n-cheek million$, but what's amazing is that there are executives in fancy, well-insulated offices on Wall Street who seriously do think like this.  One might note how Dick Fuld had an elevator direct to his office and could come in in the morning and bypass everyone who worked at Lehman before it blew up.

bid the soldiers shoot's picture

"Nowhere else to go?"

What about room 101? The biggest transfer of flesh in your life. 

AldousHuxley's picture

TOTALLY = <30%

Rank Country/region Volume % change over 2009 1 United States 283.3 28.3 2 Hong Kong 218.3 31.3 3 Japan 121.1 23.7 4 South Korea 68.8 28.1 5 Germany 68.0 36.3 6 The Netherlands 49.7 35.5 7 India 40.9 38.0 8 United Kingdom 38.8 24.0 9 Singapore 32.3 7.6 10 Italy 31.1 53.8
Clorox Cowboy's picture

Yes, Treasuries are a safe haven...UNTIL the world figures out how to move AWAY from the dollar as its reserve currency.  Do you think China enjoys lending us money that it knows will likely never be fully repayed?  They're biding their time, attempting to build their own middle class consumers.  China is stumbling right now, but I believe they will prevail and the US will fade from this point forward...first slowly, then very very rapidly.

Abitdodgie's picture

China does not lend us money it lends us paper ,they know fiat money is meaningless, the only people who think it is worth somthing are the slaves

A.W.E.S.O.M.-O 4000's picture

Hello! We're right here and can here you talking!

(The Slaves)

PivotalTrades's picture

US Treasuries are only the penultimate stop on the way to total fiat distruction.

ove the tounge and cheeck sarcasin.

prains's picture


Defcon 1: Totally Fucked

Defcon 2: Completely Fucked

Defcon 3: Super Fucked

Defcon $: Super Dooper Fucked


I was so much happier at Totally Fucked but the Chinese are playing for keeps,  Defcon $$$$$Alpha . They invented the Trojan Horse back when the Greeks were still wiping their ass with their toga's.

When the day comes for that big red button in the oval office to be pushed, the only thing that will happen is the sound of a coke can hitting the bottom of the machine out in the hallway.

There's a holy shit moment for ya.  

Oh, but  you're right they're SO dependent on nike runner sales. Dude, you have been completely Googed.

kahunabear's picture

we can simply threaten to no longer consume their exports

Well, that seems "simple" enough, ha.

RSloane's picture

The American consumer has been leveraging cheap labor abroad for decades. Its a little late to be screaming "foul".

roblondon's picture

Boom. Just like that, first world nations around the world fail to support the banana republics of the world. Global depression ahead.

TheMerryPrankster's picture

Turns out the 1st world nations were just banana republics with nice paint jobs.

Big Ben's picture

You can keep your treasuries. I'll keep my TREASURE.

By the way, what happens when China decides it wants to "liberate" Taiwan? If they are wise, they will sell their US assets first, rather than have them taken over by the US gov. when war is declared.

TeresaE's picture


Thank you for the largest laugh I've had all day.

China needs us!  Priceless!

UST are a safe haven!  Double Priceless!

At first yes, we may be a "safe haven" but whatcha' goin' do with all that paper promises when China & India (along with Brazil, Venezuela, Korea, Russia, etc) enact their new deals and start buying oil in something other than dollars?

Or do you think they have set up these plans for the hell of it? 

Yeah, that's it.  All those countries are just stupid, don't they realize how "secure" a country is that is so corrupted and broken that most people still think it is in first place?

Again, thanks for the laugh, I really needed it.

I Told YOU So's picture

at  million dollarbaby

you sir are full of shit, china has 6.3 billion people world wide (when you subtract the 300 million us) to sell to, the real fight is when (not if) the worlds financial center moves back to asia, as has happened before in history,

SumSUN's picture

I might feel a little better holding paper IOUs if the people controlling the system weren't idiots.  A bunch of fuckin' lying idiots.

scatterbrains's picture

no way! If you did that Mall properties would get hurt.. I say keep the status quo and one day, sooner or later, everything will get all better.. the bankers know best!  Tow the line bitches.. and don't forget to pay your taxes.


Abitdodgie's picture

People bitch and moan and get upset with the Government ,BUT they always pay there taxes , why? They have no balls to stand up to them

Ruffcut's picture

Don't pay your taxes? Go to jail, lose your house. Sorry you don't own anything worth a shit.

Even if half of ALL WE HAVE, was create thru too much debt and leverage and dogs and cats, living together, I still want to try and keep the other half, at least.

iDealMeat's picture

It's really easy for TBTF and TPTB to BS the sheeple..  The last depression was in black and white, so it looked depressing..  This one is in color so it doesn't look depressing.. Therefore it must not be a depression.


TheMerryPrankster's picture

Plus people have nicer cars to sleep in and plastic food stamp cards that look like credit cards, instead of soup lines.

The first rule of management including politics, is managing perceptions. I'm sure the government has thousands of bloggers and blogger bots, that spam anyone who mentions our current malignant state as a depression.

Economic propaganda is king and the king is economic propaganda.

chunga's picture

Calling all lawyers. This is (supposedly) a nation of laws. Our economy is based on fraud. Sue the bastards and claw every ill-gotten penny from TBTF!

Rhode Island Foreclosure Amicus Brief

High Plains Drifter's picture

when the fed building in washington is surrounded and burning , with many rats inside of it. so we send in rosey to negotiate?

Cognitive Dissonance's picture

Oh Christ. Once again here comes the Rosenberg haters in the comment section. It must be because he's a little chubby and not because he has a sharp mind and big balls.