David Rosenberg

Marc Faber Blasts "A Corrupt System That Rewards Stupidity"

For the greater part of human history, leaders who were in a position to exercise power were accountable for their actions. The problem we are faced with today is that our political and (frequently) business leaders are not being held responsible for their actions. Thomas Sowell sums it up well: "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." Fortunately, there is an institution that exercises control over the academics at the Fed; it is called the 'real' market economy... and it has badly humbled the professors at the Fed.

Bill Gross' Monthly Thoughts: Expect The "Beautiful Deleveraging" To Conclude... Some Time In 2035

A week ago, we first reported that Bridgewater's Ray Dalio had finally thrown in the towel on his latest iteration of hope in the "Beautiful deleveraging", and realizing that a 3% yield is enough to grind the US economy to a halt, moved from the pro-inflation camp (someone tell David Rosenberg) back to buying bonds (i.e., deflation). This was music to Bill Gross' ears who in his latest letter, in which he notes in addition to everything else that while the Fed has to taper eventually, it doesn't actually ever have to raise rates, and writes: "The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time." How long one may ask? "the last time the U.S. economy was this highly levered (early 1940s) it took over 25 years of 10-year Treasury rates averaging 3% less than nominal GDP to accomplish a “beautiful deleveraging.” That would place the 10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!" In the early 1940s there was also a world war, but the bottom line is clear: lots and lots of central planning for a long time.

Frontrunning: July 17

  • Bernanke Seeks to Divorce QE Tapering From Interest Rates (BBG)
  • China launches crackdown on pharmaceutical sector (Reuters)
  • Barclays, Traders Fined $487.9 Million by U.S. Regulator (BBG) - or a few days profit
  • Barclays to fight $453 million power fine in U.S. court (Reuters)
  • When an IPO fails, raise money privately: Ally Said to Weigh Raising $1 Billion to Pass Fed Stress Tests (BBG)
  • Bank of England signals retreat from quantitative easing (FT) ... Let's refresh on this headline in 6 months, shall we.
  • Russia's Putin puts U.S. ties above Snowden (Reuters)
  • Smartphone Upgrades Slow as 'Wow' Factor Fades (WSJ)
  • Snowden could leave Moscow airport in next few days (FT)
  • New Egypt government may promote welfare, not economic reform (Reuters)

Charles Gave: So Here We Are...

  • China, the single biggest contributor to global growth over the past decade, slowing markedly.
  • World trade now flirting with recession.
  • OECD industrial production in negative territory YoY.
  • Southern Europe showing renewed signs of political tensions as unemployment continues its relentless march higher and tax receipts continue to collapse.
  • Short-term interest rates almost everywhere around the world that are unable to go any lower, even as real rates start to creep higher.
  • Valuations on most equity markets that are nowhere near distressed (except perhaps for the BRICS?).
  • A World MSCI that has now just dipped below its six month moving average.
  • A diffusion index of global equity markets that is flashing dark amber.
  • Margins in the US at record highs and likely to come under pressure, if only because of the rising dollar.

The Diminishing Effects Of QE Programs

There has been much angst over Bernanke's recent comments regarding an "improving economic environment" and the need to begin reducing ("taper") the current monetary interventions in the future.  What is interesting, however, is the mainstream analysis which continues to focus on one data point, to the next, to determine if the Fed is going to continue its interventions.   Why is this so important?  Because, as we have addressed in the past, the sole driver for the markets, and the majority of economic growth, has been derived solely from the Federal Reserve's programs.   The reality is that such analysis is completely useless when considering the volatility that exists in the monthly data already but then compounding that issue with rather subjective "seasonal adjustments." The question, however, is whether such "QE" programs have actually sparked any type of substantive, organic, growth or simply inflated asset prices, and pulled forward future consumption, for a short term positive effect with negative long term consequences? The recent increases in interest rates, combined with still very weak wage growth, higher costs of living and still elevated unemployment is likely to keep the Fed engaged for the foreseeable future as any attempt to remove its "invisible hand" is likely to result in unexpected instability in the financial markets and economy.

10 Nagging Concerns

Gluskin Sheff's David Rosenberg has ten nagging concerns...

David Rosenberg: "From What I Hear..."

If what Rosie is "hearing" is accurate, then the bulls better pray that David Tepper's view of the taper as being bullish is correct, or else Bernanke may go ahead and shock the market as soon as next week's FOMC press conference (the last until September) with a very disturbing gravitational reality check.

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

From Rosie: "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."

David Rosenberg: "When They Say Unemployment Rate, They Mean The S&P 500"

Last week's plunge in wholesale sales (and "completely involuntary" surge in inventories) has Gluskin Sheff's David Rosenberg greatly concerned that current quarter real GDP will be very close to stall speed. However, as he notes, "either Mr. Market has yet to figure this out or simply doesn't care any more because of the well ingrained belief that the 'Fed has my back'." When even the Fed is pimping stocks as cheap, he explains, you know what is dominating the thought process of the central bank's targeting - "they say unemployment rate, but they really mean the S&P 500." The 'wealth effect', however, only benefits a chosen few and as Rosie illustrates, an historically low 52% of American households have any money invested in the stock market (based on a recent Gallup poll) - which merely spurs the 'bulls' to argue that the Fed has to be more aggressive...

The Price Of Copper And 11 Other Recession Indicators That Are Flashing Red

There are a dozen significant economic indicators that are warning that the U.S. economy is heading into a recession.  The Dow may have soared past the 15,000 mark, but the economic fundamentals are telling an entirely different story.  If historical patterns hold up, the economy is heading for a very rocky stretch. But most average Americans are not that concerned with the performance of the stock market.  They just want to be able to go to work, pay the bills and provide for their families.  During the last recession, millions of Americans lost their jobs and millions of Americans lost their homes.  If we have another major recession, that will happen again.  Sadly, it appears that another major recession is quickly approaching. The following are 12 recession indicators that are flashing red...

Lacy Hunt: Cyclical Hurdles For A Highly Over-Leveraged Economy

The financial and other markets do not seem to reflect the reality of subdued growth is how Hoisington Investment's Lacy Hunt describes the current environment. Stock prices are high, or at least back to levels reached more than a decade ago, and bond yields contain a significant inflationary expectations premium. Stock and commodity prices have risen in concert with the announcement of QE1, QE2 and QE3. Theoretically, as well as from a long-term historical perspective, a mechanical link between an expansion of the Fed's balance sheet and these markets is lacking. It is possible to conclude, therefore, that psychology typical of irrational market behavior is at play. As Lance Roberts notes, Hunt suggests that when expectations shift from inflation to deflation, irrational behavior might adjust risk asset prices significantly. Such signs that a shift is beginning can be viewed in the commodity markets. "Debt is future consumption denied," and regardless of the current debate - Reinhart and Rogoff were right. Simply put, "the problems have not been solved, they have merely been contained."

David Rosenberg - The Potemkin Rally

Gluskin Sheff's David Rosenberg exclaims we are currently are witnessing the Potemkin rally (the phrase Potemkin villages was originally used to describe a fake village, built only to impress). The term, however, is now used, typically in politics and economics, to describe any construction (literal or figurative) built solely to deceive others into thinking that some situation is better than it really is. Ben Bernanke, recently proclaimed “The Hero” by Atlantic Magazine, is the “Wizard of Potemkin.” Since 2009 Bernanke has engage in massive monetary experiments. These experiments lead to future dislocations. There is no doubt that the Fed wants inflation. The problem is they may get more than they ask for. We are currently witnessing the slowest economic recovery of any post-WWII period. However, It is important to challenge your thought process. Read material that challenges your views. Here are David's rules...