Rosenberg Opens Pandora's 'Global Economic Shock' Box
In a detailed discussion with Bloomberg TV's Tom Keene, Gluskin Sheff's David Rosenberg addresses everything from Europe's "inability to grow its way out of the problem" amid its 'existential moment', Asian 'trade shock' and commodity contagion, and US housing, saving, and fiscal uncertainty. He believes we are far from a bottom in housing, despite all the rapacious calls for it from everyone, as the over-supply overhang remains far too high. "The last six quarters of US GDP growth are running below two percent" he notes that given the past sixty years of experience this is stall speed, and inevitably you slip into recession". He is back to his new normal of 'frugality' and bearishness on the possibilities of any solution for Europe but, most disconcertingly he advises Keene that "when you model fiscal uncertainty into any sort of economic scenario in the U.S., what it means is that businesses raise their liquidity ratios and households build up their savings rates. This comes out of spending growth. And that's the problem - you've got the fiscal uncertainty coupled with a US export 'trade shock'."
On US GDP growth and Recession odds:
You take a look at five of the past six quarters. U.S. GDP growth is running below two percent. You take a look at the past sixty years when you've had that decay in terms of suboptimal growth below two percent, which is stall speed, inevitably you slip in a recession. And I think those odds are actually growing right now barring some sort of massive exogenous positive shock.
On Commodities and the Asian Contagion:
[Keene shows a chart of the CRB Index rolling over significantly] Well technically anything more than a 20 percent decline is a bear market. This has nothing to do really with the U.S. economy. This has to do with the leakage from the spreading recession in Europe, in Asia. Asia is the marginal buyer of commodities. So this is less a U.S. story, more of the spring slowdown we're seeing in Europe hitting Asia and then commodities.
On What To Worry About For The US?
Well I think there are two different shocks simultaneously. The first is that we're seeing the impact of Europe hit Asia and then the U.S. trade channels on top of that. There's the fiscal cliff. Bernanke has talked about the fiscal cliff, but it hasn't happened yet, but what is happening is that households and businesses have no clue what their tax rate is going to look like next year. So when you model fiscal uncertainty into any sort of economic scenario in the U.S. what it means is that businesses raise their liquidity ratios, and households build up their savings rates. This comes out of spending growth. And that's the problem you've got - the fiscal uncertainty coupled with the trade shock.
On Europe's Summit success chances:
Well I think that's ultimately either it's going to be a united Europe or the ECB is going to have to come with a rescue and buy these peripheral government bonds en masse and do quantitative easing unsterilized. Those are the two end games because ultimately you've monetary union or a political union. You need both.
"It's quite possible that the EU Summit will produce something tangible, but we aren't holding our breath." I'll say. Two years of priming the pump did not save Greece.
On The Need For A Market Shock to force Dramatic Action:
Well ultimately if you're going to have some dramatic action you have to be shocked into it, like the United States finally had TARP, but if I'm mistaken the first problems in the housing market started in the first months of 2007. By the spring of 2009 we get some finality.
So you have to be shocked into it. Sitting up into Canada, Tom, in 1994-95 Canada got shocked into dramatic reform. So the question is, "is this the epiphany that we're going to see Europe finally shocked into doing something rather than not."
On Europe's Existential Moment:
You would think this is the existential moment for Europe, it's not about Greece anymore. It's not about Portugal, not about Ireland. You're starting to hit really the large countries on the periphery and Spain. And then you're talking about Italy.
And both these countries, both Spain and Italy cannot fund themselves right now basically at appropriate interest levels that will bring the debt-to- GDP ratio. So that's what you're talking about right now is that it's hitting the real large countries that are too big to fail, too big to rescue simultaneously. That's why this is the existential moment.
We're past the point of no return in the sense that these countries cannot grow their way out of the crisis. They can't grow their way out of the crisis. And even if they come with some sort of pro-growth plan it's structural forms that will take five or ten years.
Supply side economics doesn't happen overnight. So they can't grow their way out of it. Ultimately they've got to take this debt. There's too much debt. And it has to be restructured.
On The Housing Recovery (and the foreclosure cycle):
We've heard this three times in the past three times in the past three years - that housing is about to recover. There is still far too much inventory when you count in all the shadow inventory, but home prices if you look at the data seem to be covering on the bottom at the same time equity prices are going down. So you're seeing a negative wealth effect from the equity market at a time when housing market is stabilized.
I estimate that there's between two and three million excess housing units on the market for sale when you count it on the shadow inventory. So you're talking about at least another two or three years to clear up the inventory and put a definitive floor under home prices.
There's no question that the decline in home prices is decelerating. Some people are claiming victory that we've actually got a floor under home prices permanently. I'm not so sure about that, but I still think it's at least another two or three years to get housing demand and absorb this supply, put a firm floor under home prices another two or three years in my opinion.
I think we're going to get more foreclosed homes now. And it's going to add to the inventory situation. And my sense is that when you take a look at where the value of these homes are being priced in the marketplace it's going to put overall downward pressure on home prices over the course of the next several quarters.
On Job Growth:
When all is said and done it comes down to the labor market.
And employment growth is slowing. The pace of job creation is coming down and with that income growth. And that's what people spend most out of this is income growth. And that's the big problem right now is the employment situation.
On Sluggish Recovery And The Fiscal Cliff:
Reality is that almost every indicator, not just confidence, but things that are going to GDP like income and like employment and production, none of them have gone back to the old highs, including confidence as we feel right here. So this goes down, Tom, as the most sluggish recovery in history.
Can there be a policy solution? Absolutely, but what households and business need is policy clarity. And that's why the election November 6th is so important because nobody knows, Tom, at a minimum there are things that we can control.
We can't control Europe. We can control our own fiscal policy. And it's not so much about controlling deficits. It's about supply side economics and it's about what our health care costs are going to look like in the future, what is the tax rate for the personal and business sector. And what was that going to do?
So that way we can actually plan and put capital to work. That's one of the big problems is on general fiscal policy uncertainty. That much we can control. Hopefully after the election we'll get some clarity on that score.
On ZIRP, QE, and The Fed:
Well we've only had fewer choices since they brought rates down to zero in late 2008, but we also know that Bernanke is willing to be extremely creative in terms of the Fed's own balance sheet. Right now they're uncertain. The Fed is basically uncertain as to whether or not this current slowdown is just a payback from the abnormally warm winter we had in the first few months of the year. Or is this a really true slowdown?
Bernanke tried to have it both ways where they extended Operation Twist. At the same time he held open the olive branch for more quantitative easing. So he hasn't ruled it out.
If you look at my forecast more QE is coming.
On QE's Effectiveness:
The answer, well it depends on your definition of effectiveness. Is effective I'm going to create a three or four-month rally in risk assets? Well maybe it will be a three, four-week rally, but the reality is that they've already done when you think about it three big rounds of non- interest rate easing, QE1, QE2, Operation Twist.
And this still goes down as the weakest recovery on record. So but there are some central bankers who will say well it would have been worse if they didn't do anything, but in terms of generating escape velocity in the economy, generating self-sustaining growth, this is not a monetary policy issue.
It's a fiscal policy issue.
What Do Most Optimists Get Wrong?
Most economists were looking at this through the prism of a classic business cycle, a plain vanilla recession recovery. They didn't look at it through the prism of a wealth destruction credit contraction, asset deflation cycle which generates completely different results in the recovery phase.
Well right now you've got this big overhang in terms of regulatory policy. So that's an impediment, but as I said before when you take a look at the surveys from the Fed credit availability is certainly not a problem for the U.S. economy. This is not about credit availability. That was the case three years ago.
The story right now is that we have a spreading trade shock on the U.S. export sector. We have an uncertain fiscal policy outlook. That to me it's not about monetary policy really and it's not about availability of credit. It's about this fiscal bog that we're in right now. And nobody knows, Tom, what their tax rate is going to be next year, or the year after that, the year after that. That's the big problem.