Rosenberg's 'Four Horsemen' Of Downside Risk For US Growth

Tyler Durden's picture

Gluskin Sheff's David Rosenberg: The Four Horsemen


We have identified four major downside risks for US growth over the next four quarters:


1. More adverse news out of Europe


Sorry but the situation in the euro area remains highly unstable and the fact that financial markets gyrate so violently with every passing comment from Mario Draghi says something about the manic mindset of today’s algorithm-dominated fast-money backdrop. Never mind that the ESM isn’t even up and running yet, didn’t you know that the scuttlebutt is that it will be granted a banking license, suck off the ECB’s teat, and save the (failed) eurozone experiment. This is actually beyond the ECB’s purview and in the final analysis this will be a political decision. Every German knows what happened in the 1930s and anyone with a keen sense of history knows that Germany is never going to vote for outright debt monetization. What one can reasonably expect at some point is a partial fragmentation of the nonsensical monetary union.


As the FT so aptly put it yesterday:

The reason; however, that the eurozone issue is such a challenge to the markets is because it is ultimately a political issue, whose outcome carries both serious short term risks and profound long-term consequences — none of which plays to professional investors' traditional strengths, or particularly suits their preferred methods of analysis. No wonder everyone is praying that one way or another it will be over soon.

Well, maybe we should pray and prepare for the inevitable — see US. Banks Prepare For Euro Break on page 13 of yesterday's FT and also dig up and have a look at U.S. Banks Haunted By Specter of Eurozone on page 15. But here is the real kiss of death —Rome Has No Flans for Cash Request on page 4. From the sublime to the ridiculous. The article states that:

Italian policy makers have sought to assure financial markets that Italy is in good shape and has no intention of making an early request for intervention by eurozone bailout funds; at least not unless Spain goes first

We're supposed to find encouragement from that, especially those last seven words?


And didn't Spain tell everyone loudly three months ago that it too would not be in any need of external financial intervention?


2. The sharp run-up in food prices


The U.S. Is a massive food producer on a global scale and as such plays a key role in influencing prices in the world market It is going through its worst drought in at least five decades — over half the counties (1,584) across 32 states are considered to be in a condition of agricultural disaster. As we saw with Arab Spring last year rampant food inflation was one of the principal reasons for the tensions. Moreover, in the USA . it was the jump in the deflator that caused the decay in real spending that almost caused the economy to stall out completely in the first quarter —just a few months after the Fed launched its QE2 that supposedly was going to underpin a lift-off for growth.


Many experts are saying corn is likely heading above $10 a bushel based on extremely tight supplies. The big question is whether enough or any rain comes ()Li r way by Labour Day to prevent a similar surge in soybean prices which would then have dire effects on the entire food system, both in the U.S. and abroad (as the Economist points out, a failed soy harvest in the states could prompt Asian countries to impose rice-export bans as they did in 2007-2008).


3.            Negative export shock


Europe's recession is deepening and spreading. Beyond the monetary union too. So far in its reporting season, U.K. corporate profits are down a whopping 16% on a YoY basis and in the past three months. Q3 EPS estimates have been trimmed by 6.3 percentage points. The Mils in core Europe are showing further contraction in industrial activity. This is why one of the big pieces of data last week was the plunge in the ISM export orders index from 47.5 to 46.5 in .July, to stand at its weakest level since the depths of the last global downturn in April 2009.


4.            The proverbial fiscal cliff


The front page of the weekend NYT ran with a front page article (Partisan Impasse Drives Industry to Cut Spending) showing that even the preparation for fiscal retrenchment next year is causing a slowdown in economic activity this year. A CEO of an industrial machinery company based in the Midwest said "we're in economic purgatory. In the nondefense, non-government sectors, that's where the caution is creeping in. Were seeing it when we talk to dealers, distributors and users". A just-completed Morgan Stanley survey concluded that over 40% of companies polled have cited the "fiscal cliff" as "a major reason for their spending restraint",


And as we saw with Friday's payroll data, the household sector is raising its savings rate at a time when rising unemployment is pinching nominal wages. and the run-up in food costs is about to trigger a reversal in real incomes.


Recessionary pressures are building, and at a time when the pace of U.S. economic activity has precious little cushion.


Very deflationary situation and in particular tough on retailers. For one example, see the article in the USA Today titled Back to School Promotions Aren't Limited to School Supplies. You'll catch my drift after you read about what's being discounted.

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The Axe's picture

Please Rosey......I grow tired of you....

bank guy in Brussels's picture

David Rosenberg does not understand Europe

After summer vacation Europe will have a medium-term 'fix' good for some months at least ... possibly after a short-term major blow up crisis, but then there will be the big bond-buying and money-printing 'fix' not just talk ... to get through till 2013 when maybe Italy indeed does leave the euro and everything blows up again

Germany will play along because they need to 'save' German banks, insurers and pension funds ... Merkel is already secretly in agreement, while playing 'tough hard money' German for the German public

The 'German hard money' died when German banks levered up 50-to-1 several years ago ... Few people are digesting that

Big time bond-buying like never before

At the moment Ambrose Evans-Pritchard in the UK Telegraph has been providing the best coverage of the euro-game ...

He's always worth reading ... recent articles of Evans-Pritchard on the euro-farce are here

vast-dom's picture

6. it's all a great ponzi

disabledvet's picture

I agree with this 100 percent. "been the game all along"...could they have played it any better?

The Big Ching-aso's picture



#1.  Fuel.     And he's on a Clydesdale.

PhilB's picture

Every time Rosey speaks i hear the Monty Python song "Spam, Spam, Spam...Lovely Spam! Wonderful Spam". You can swap Spam for Bear too, works just as well.

Did anyone forget how Rosey predicted a US recession in 2012 with 99% probability! Its turtles, all the way down for dear David. Come on folks, get some sun on your skin and enjoy a little summer end market rally.

Jason T's picture

the Bernak described deflation in his helicoptor speech: "The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress."


I say bring the deflaiton and drop in prices.  

Landrew's picture

It's not just the falling prices of GOODS, it's the falling prices of ASSETS at a faster rate that destroys everyone. Your wages fall at a faster rate then goods. Your asset values fall at a faster rate then goods/services. The TRAP of DEPRESSION.

WestVillageIdiot's picture

What happens to all of the SAVINGS that can then step in and stabilize things?  That's right, Keynesians don't believe in savings.  They believe it is bad because it hurts the demand side of their equation and that is the magical side of the equation. 

I would hate to see assets end up in the strong hands of those that save for the future.  That truly would be a scenario where the living would envy the dead. 

Winston Churchill's picture


Keynes did believe in saving during good times.

These guys are BANKERS not keyensians.

OneTinSoldier66's picture

I'd rather have a deflationary liquidation of bad debt than a hyper-inflationary robbery of wealth.


We had a deflationary collapse in the 30's. We've been under an inflationary regime ever since. The Dollar has lost around 96% of it's purchasing power since the creation of The Fed. I'm more than ready for a change from inflation.


What I'm really ready and waiting for though, is an End to The Fed.

GolfHatesMe's picture

I care as soon as the Four Horsemen trample the whole PPT team. 

WestVillageIdiot's picture

You don't need the Four Horesemen for that.  You could just find those 4 women at the Golden Corral buffet and they could take care of that. 

Cognitive Dissonance's picture

The problem David Rosenberg has is that he speaks truth to power. The market has always been manipulated to some extent or another. After don't move, they are moved.

But the manipulation has become obscene and obvious and with it any truth speaking (and truth seeing) must be ignored or denounced. Or proven wrong by the manipulation itself. It seems David is pissing in the wind. While he will eventually be proven right for now he needs to change his socks and shoes......and maybe even his pants.

HedgeOn's picture

CD - I have a great deal of respect for your insights but in this case I have to disagree with you.  It seems that Rosie has been calling for lower yields on treasuries and higher gold prices for years.  He's not giving high frequency trading advice, he's saying that those who take the defensive route will be rewarded in the end.  He might have to change his pants, socks, and shoes occasionally but in the end he'll still have them.

Cognitive Dissonance's picture


For the most part I actually agree with Rosie. But I am saying that when the herd is running in one direction and you are contrary, even when you are "right" you are still "wrong" in the eyes of the herding market. Investing/trading methods and strategies that have worked for decades no longer work because the Fed butcher has his thumb on the scale. Nothing else matters except that thumb.

What the market should be doing and what it is doing are often divergent. I think that divergence has gone thermonuclear. In the case of the recent past (measured over the last few years) the (stock market) herd has been feasting at the Fed trough and getting fat. That will change, and when it does it will be sudden. Until then nothing else matters except the elephant in the room.

As Todd Harrison of likes to say "Trade the market you have, not the market that should be."

HedgeOn's picture

CD, what kind of market do we have?  I don't think anyone that posts here has the money or technology to play ball with the bastards that cand and do move this market.  What I'm saying is unless you have 1) a HFT machine at your disposal and 2) the ability to colocate your server so that you can participate in the shenanigans that take place millisecond by millisecond, or 3) have enough money to take the market 10% higher on no news over a 2 week long period, you are unimaginably disadvantaged.  

Rosie would have to say after each piece of analysis, "that said, do the exact opposite of what you should do because skynet is active, knows what you're thinking, and wants to fuck your stupid ass over."  Look at an old timer like A. Gary Shilling: he'll look like he doesn't know what he's talking about for a whole year and when fundamentals return he gloats because his boring contrary long bond strategy is still king.  

I think Rosie analyzes the fundamentals and knows that the market is rigged but what's he going to write?:  "It doesn't matter what I say because it's all a sham?"  In the end, all I have is my brain and what I know should happen, however, you as well as anyone should know what a joke this market has become.   I am glad there is someone out there who is willing to write about what he believes should be happening based on fundamental analysis instead of this goldilocks-decoupling bullshit. It allows me to realize that I haven't actually become irrevocably stupid or completely insane.  Rosie's not giving HFT trading advice, he's giving fundamental economic analysis and intermediate to long term trading advice.  With all due respect, I think anyone that reads his stuff and actually follows it knows they are going to get sprayed because of, well...cognitive dissonance.

Hohum's picture

Rosenberg's other problem is that he uses the word "growth" and does not explain why GDP is a good measure of it.

Hohum's picture

Rosenberg's other problem is that he uses the word "growth" and does not explain why GDP is a good measure of it.

XitSam's picture

4. The proverbial fiscal cliff

There's a proverb about a fiscal cliff?

Wynn's picture

Proverbs 3:13, 14
Joyful is the person who finds wisdom, the one who gains understanding. For wisdom is more profitable than silver, and her wages are better than gold.

scatterbrains's picture

5.) gasoline bout to buss out...  bitchezz!!

HaroldWang's picture

Downside risk does not equal a falling market. Actual quite the inverse. The market will continue higher, the worse the risk to the economy, as Rosie points out. Worse economic news just brings all the world banks in and the market continues it's meteoric rise.

OldE_Ant's picture

I think this is a perfect time to bring the people together in a boycott campaign to close our discretionary pocketbooks until the wrongs in the economic system are corrected.  (What those wrongs are can be debated and then posted/listed).

The bonus to such a move is all the people who reduce/eliminate their discretionary spending will have more money to cover the increasing non-discretionary costs.

If the consequences to illegal financial actions are zero, then my discretionary spending is going to zero and staying there until the illegal actions by the FED, TBTF, etc. too good to go to jail persons/entities are successfully prosecuted.

If even 1:10 people reduce their discretionary expenditures by 1/2 this could be up to 5% non-discretionary revenue being lost to 'the economy'.

I think closing our pocketbooks is the only way to send a message to these mf'rs running amok.

Call it NO JUSTICE NO MONEY signed J.Q.Public

End of Line

AcidRastaHead's picture

Revelations indeed.

nodoctor's picture

Only four? Bullish.

Hype Alert's picture

Meanwhile, the Baltic Dry Index has dropped to below the June 1 levels.  Party on.

Ignorance is bliss's picture

I think there are more then 4 horsemen running about. There are a pack of demons at the door. So...let's all watch "Dancing with the Stars"  and hope they go away.

1. Oil and Gas prices: Shocks are here to stay

2. War drums pounding

3. 1 out of 6 Americans on food stamps

4. Unemployment and underemployment

5. Obamanation:Need I say more?

6. The only bills passing congress and the Senate are the ones to limiting American constitutional rights.

7. Taxes: They hurt now and they'll hurt more next year

8. Fraud: It starts from the top and finishes strong at the bottom.

9. Healthcare. The system is broken and has become a vampire sucking the wealth from the unfortunate that require healthcare.

10. Crime: There are gangs in America the size of Armies

11. Police conduct: Their all graduates from the police academy in New Orleans

12. media in America: They should be renamed Psyops of AmeriKa

13. The Presidential election: Farce.. Your two choices are more or more of the same

14. China and the BRICS...They are all about dethroning the reserve currency

15. The lack of justice in the land unless your name happens to be Joe Sixpack

16. Militarization of the police and Homeland Security. Didn't I read about this in history? Oh yeah pre 1939 Germany.

17. Regime change...Why do we feel the need to bomb so many innocent people all over the world? This is bad Karma.

18. False Flags

19. Tsunami of Debt and obligations at all levels Government

20. The baby boomers and their non-existent retirement. Hope you like cat food...or should I say cats.

Anyway the article is somewhat limited in my view. The 4 horsemen brought some nasty ass friends.


lizzy36's picture

No worries. Right after Geithner and Obama finish their daily begging calls to EZ leaders and the ECB, they will get right on domestic economic issues. 

disabledvet's picture

That plane ticket's already paid for...just say the word.

island's picture

He  might be correct about growth, but not the stock market.  He is just a tad naive about the central planners and politicians' aim to do whatever it takes to ensure the rich get richer and the poor get poorer, and big business gets bigger (and more monopolistic) and small business gets smaller.  So even if he is correct about growth - the implications are meaningless, as TPTB just don't give a crap. 

disabledvet's picture


MFLTucson's picture

He forgot the biggest one of all.  More of Obama!

William Finn's picture

It seems to me the world changed in the 1990’s and we are paying the price today.

Market Structure:


Arthur Levitt sided with High Frequency Traders, then called SOES bandits, punishing those that risked capital in favor of those that consumed it.  (Ask any regional market maker, or for that matter, LaBranche). This created the highly transparent, (damn near invisible) markets we have today.


Levitt further damaged market liquidity by inflicting the Manning Rule.  In this particular government actions the rule put all the risk on market makers and left them naked to be gamed by their clients.  Once this was enacted, market makers refused to provide liquidity because they were not getting paid for it.  What Levitt missed was that Microsoft could trade itself.  A small cap company could not. 


This has contributed to a market structure issue in which small cap companies have trouble raising capital on the exchanges (this year notwithstanding, possibly, but the aftermarket has been a disaster in those issues) and from banks.



Sandy Weil knowingly killed Glass-Steagall by purchasing Travelers hopelessly blurring the line between commercial and investment banks.  Combining the two entities into one function did three things:


Allowed large investment banks to go public wherein they were risking public money, not their own.  In a risky market, a public company cannot go to the sidelines.  Ask Chuck Prince who appears to have stopped dancing.


Forced regional banks who aspired for more to buy up the regional broker dealers, thus changing their missions and clearing the decks of that valuable capital source.


Created the incentive for big banks to grow faster than their natural market.  When this happened, they had to create a new market (read securitization and derivatives) to satiate their growth.


In boom times the big investment banks would work with big companies, creating opportunities for the regionals to get in the game and finance small companies.



In bad times, the big banks would trade down to working with small companies, and the regionals would go dormant.  But at all points in time, someone was willing to raise money for small companies


Now small companies cannot go public because there is no profit for a regional bank to sponsor them, there is no incentive to support them in the aftermarket, and the market has been made so illiquid institutions cannot invest in them.


Monetary Policy



It seems to me that up until Greenspan pulled his surprise rate cut midafternoon in 1998, the Fed was in the business of causing recessions, not starting them. Up until 1998, we would have recessions every four or five years like clockwork: ~ 80-82, 85, 90-91, 94-94.  Up until LTCM, no one bank could bring down the system. 



Further, the Fed was content to let the market sort out its problems.  But because the big banks had to show growth, their derivatives portfolios were so big and interconnected, the FED HAS GONE FROM CAUSING RECESSIONS TO SUPPORTING EXPANSIONS without ever allowing the market to clear



Today there are no “regionals” left to whom small companies can turn. 

There are no market makers left, leaving small company shares to be exceptionally volatile and illiquid,  widening, less transparent, real bid ask spreads.  For instance, try to get a bid on a block of 300k shares these days.  Not possible.

Community banks are saddled by problems created by the bigs in 2003-2006 because they cannot “trade” their way out of it.  Because of this they are capital constrained.  They cannot finance small business unless it comes with enough real estate to secure it.

Because of the problems created by the removal of Glass-Steagall, the Government has come in with all sorts of additional regulations which destroy small companies and help the big ones (Dodd Frank, Sarbanes-Oxley).  These are the single most regressive taxes ever levied on small business).

Because of the removal of Glass Steagall, no matter how much money the Fed pumps into the primary dealer system, the big banks are going to horde the capital because of the $800 Trillion derivative portfolios they have built.  The counterparty risk with Europe is so daunting, the banks are carrying excess reserves for the first time in history and will for the foreseeable future.

Because of the abuses of mass mortgages at the big banks, the FDIC makes it so difficult to get a mortgage, no one can take advantage of the low rates – harming the very people they are allegedly trying to help

Because information is so tightly guarded and disclosure from Companies is so guarded, it is impossible to legally learn anything which will give you an advantage regarding a company.  Because there is no informational edge anymore, ETF’s developed, creating cross ownership among all securities…ie AAPl being in every index there is.  When money comes into the market, it finds AAPl.  God forbid a small company not included in an ETF try to raise interest in its shares.

All of this creates a market in which money is trapped in the banks, correlation between securities is at historic highs, investors are aging and pulling in risk, and the Fed is starving 90% of the people in the world of income and access to credit. Furthermore, the valuations are all being determined by a giant arbitrage between individual shares and their underlying index and/or ETF.  So valuations sit here on a castle in the sand, awaiting the next wave. 

Sad, that….

shovelhead's picture

We won't need a black kamikaze swan.

A generic grey swan will do to topple the mountain of derivatives teetering overhead.

That ain't gonna be pretty at all.

piceridu's picture

Thanks for taking the time and posting...many good points.

Clowns on Acid's picture

We are in the Age of Narcissism (Gov't sponsored) gotta buy, buy, buy......otherwise ...whats left?

Steve in Greensboro's picture

1. More adverse news out of Europe: Cause: government spending by European governments.

2. The sharp run-up in food prices: Cause: ethanol made from corn.  government money printing.

 3. Negative export shock: Cause: see 1 above.

4. The proverbial fiscal cliff: Cause: commies controlling the U.S. Executive branch.

Smaller government, smaller banks, less systemic risk, higher growth rates, higher capital accumulation, wealthier civil society.