Four Letters To Rosie

Some notable correspondences submitted by David Rosenberg's fans to the Gluskin-Sheff strategist. All are worth a read, although inbetween we get this glimpse of what Rosie really thinks: "We will come out of this cycle with tremendous inflation, but the primary trend for the next 3-5 years, the length of time it will minimally take before this global deleveraging cycle fades, is deflation." We knew Rosie was a long-term hyperinflationist.


The great thing about writing a daily is the insightful responses it elicits. Yes, yes, it seems that everyone has the cash to spend on an iPad — the latest must-have consumer gadget. All you need to do is stop paying your mortgage, as the NYT wrote about yesterday. But if you are waiting for State governments to pay you for services rendered, wait in line. Dave from New York sent the following:

“Hi Dave

At a Memorial Day event in upstate NY today I spoke with a friend who works in a medium sized construction company, about 45 people total.

His firm does a lot of work for New York State, as do most of the construction companies.

New York stopped paying all of them. They have been asked by the State to keep working on their ongoing projects and the state will pay them at some point in the future, they don't know when.

Many of these firms have walked out of the projects, they just can't afford to keep working without being paid. One firm is owed over $8 million on one job alone and has been told that if they quit, the State will sue them for breach of contract, even though the State will not pay them in the near future.

It appears that the State wants all of the construction companies to carry the State through these tough times.
New York State probably won't pass a budget this year at all. The politicians are afraid that the cuts will be so severe that the government workers' unions will make sure they are all defeated in the elections in November.

So now we have a State government that is acting exactly like the ostrich, sticking their heads in the sands when danger is at hand. Who's covering the rear?”


Another response from a reader ... and a meeting of the minds on this ‘income-less’ recovery.


Consistent with your theme of deep level drawdowns vs. monthly change, you probably noticed the big "mother may I" (two steps forward, 1.8 steps back) in the April income and spending report. It looked like April private wage and salary income was up a healthy $24.4 billion, but, whoops, they revised March down by $28.6 billion. So we are still $4 billion lower than we thought we were last month!

But on government social benefits to persons, "mother may I" worked in the opposite direct[ion]. The April number looked to be down (finally) by $5 billion, but that was only because they revised March up by $8 billion. Transfers are thus still going up!

I prefer to look at "private incomes" as the true organic stuff---private wages and salaries + rental incomes +proprietors incomes + interest and dividends. Due to the Q4 2009 benchmark revisions, this number was reduced by $31 billion from its previously reported anemic level. Consequently, the April "private incomes" number of $8,281 billion is still $477 billion or 5.4 % below its pre-Lehman, Q3 2008 level of $8,757 billion. And of course, these are nominal income numbers---meaning they are totally off the charts compared to any previous post-war cycles where private incomes never declined at all. Since August 2009, "private incomes" have only grown at a $16 billion monthly rate----so it will take another 30 months to even get back to pre-Lehman levels.

On the other hand, "public incomes" (government transfers plus government wages and salaries) are up $417 billion or 14% from Q3 2008. But even Uncle Sam is running out of sovereign steam.

Consequently, if total income growth is now stuck in the mud and the idea of frugality and savings is still operative, it would seem that PCE may have a hard row to hoe.”


Yet another thoughtful reply on the deflation-inflation debate. It’s all about timing. We will come out of this cycle with tremendous inflation, but the primary trend for the next 3-5 years, the length of time it will minimally take before this global deleveraging cycle fades, is deflation. Take a read of the email below from Scott from New York:


Great work lately, spot on as usual. A few observations from Upstate NY, a place where the economy is always depressed, since cash for clunkers not many new cars on the road. A new health club opened, very nice, we live in the high rent part of town, (my wife is a health club instructor and they are hiring), but no new sign-up’s or slow sign-up’s. In other words, no recovery here. FYI, both parents are brokers at major wirehouses, I can assure you the income theme is alive and well and one will attest that the gold fever is coming to life, but nowhere near bubble territory. Your deflation theme and charts are right on, prices everywhere except for the grocery store are low. I side with you on deflation, all evidence points towards it.

However, I also believe inflation is a fat tail event that is not understood fully yet. I believe we will go from deflation to inflation very quickly thanks to QE from the Fed. Bear with me on this one, in The Depression: A Diary, Benjamin Roth feared inflation which never happened, but that debt was never really paid off, we grew our way out of it, basically. But, we did have a bout of higher prices in the 50’s, a small fat tail from the 30’s? When the 60’s hit we spent on Vietnam to the Great Society and that created a shorter fat tail event, i.e. the 70’s stagflation. Is it possible that inflation is the next fat tail as the fat tails are picking up steam and happening at an increasing rate? I say this because sovereign default can be prevented through printing, avoiding technical default, while it is default in my eyes, still you get the point.

Couldn’t we suffer inflation through QE or dollar devaluation because of the monetization of our debt? From my lens this fits into your scenario of deflation and into Bernanke’s need to create inflation. I love your work, you are right and most of us believe, I own treasuries, gold and income securities and am very happy because of your guidance.

Thank you”


Below is another response from a reader — this missive really resonates. Mike from Houston (where they indeed have a problem):

“Mr. Rosenberg,

Your daily economic commentary is fantastic as always. I have been reading your commentary since 2002.
I am in total agreement on your view of the economy and am always amazed that the debt problem is everywhere (consumer, state governments, national governments, etc.). My overall opinion is that the country (consumers and government) and the world are addicted to debt and spending. The average person I come in contact with is well aware of the national debt issues, since it is in the press all of the time but the average person seems to be in denial about their own personal debt problems or their neighbor’s debt problem. As you have pointed out numerous times, the consumer has a spending addiction (iPhones, etc.). I find that most people I know are in denial over their spending also. My question is should governments be educating their citizens on responsible personal financial management. I assume the obvious problem with this is that the government would have to educate itself first.

The Wall Street Journal reported last week that the State of Texas will have a large budget deficit (I believe the deficit is approximately $18 billion) over the next two years or approximately 20% of the annual budget. It was also noted that the Texas Governor had spent $600,000 to rent a luxurious mansion over the last two years while the Texas Governor’s mansion is being repaired. I live in Houston, Texas and it appears that Texas is one of the healthier states debt wise. I would hate to live where the sickest are. The State of Texas has been in a state of denial over the budget (i.e., it is a federal problem only). My message to the Texas governor would be “Earth to space cadet!!” or “Austin, Texas we have a problem here”. It is an election year for state officials in Texas so I am sure denial will last until 2011.”



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