When Ignorance Is Bliss, The Recession Is Truly A Depression

With the market still drunk with hopium and grotesque stupidity from last week, after surging triple digits on an NFP number which was exactly as expected (returning strikers added 10,000 workers and the Birth-Death model, when accurately measured, contributed a net 17,000 jobs, so strip out these two effects and we actually end up with +40,000, which was bang on the consensus estimate) here is another reality check from David Rosenberg for all those who may be confused and believe that buying the "dips" or the market is in any way a prudent decision, when all it does is begs for someone to pull the rug from under the feet of speculators who believe that momentum and an implied correlation of 1 is indicative of improving fundamentals. Additionally, as nobody else seems to enjoy touching the topic, here is another observation on why we continue to live in a depression.

From David Rosenberg, calling it how it is as usual.


That doesn’t mean that investors are not going to treat the data as good news —it just doesn’t mean they are going to be right any more than they were in the autumn of 2007 when they took the stock market to new highs and then maintained a “buy the dips” view in early 2008, especially when President Bush unleashed the powerful tax rebates (that had an impact all right, but was measured in weeks).

  • Ignored in the employment report were the declines in full-time employment, the stagnant workweek and slide in the diffusion indices.
  • Ignored in the manufacturing ISM report were the declines in the leading components, such as new orders, backlogs and vendor performance.
  • Ignored in the pending home sales were the non-seasonally data showing month-over-month declines in all regions (-16.9% in the Northeast; -12.3% in the Northwest; -5.1% in the Midwest; and -0.7% in the West) as well as on a YoY basis (-22.5% in the Northeast; -17% in the Northwest; -15.2% in the Midwest; and -21.0% in the West).
  • Ignored was the fact that construction spending in July contracted 1% (consensus was -0.5%) and this is likely to lead to an even weaker print for Q2 real GDP (to 1.5% from 1.6%).
  • Ignored was the fact that outside of the sales tax holidays and retroactive jobless insurance cheques, chain store sales would have been +1% YoY and not +3% as reported in August. And, as last Friday’s NYT puts it (page B1 — Discounts Help Lift Back-to-School Sales), “all of the discounting was a troubling sign for the fall and holiday seasons” — equity investors ostensibly thought otherwise). The Investor’s Business Daily reported that the discounting in August was “among the deepest ever”(!).
  • Ignored was the fact that within the Conference Board consumer confidence index, the ‘facts-on-the-ground’ present situation component fell to 24.9 in August from 26.4 in July.
  • Ignored was the fact that the ECRI weekly leading index has been around -10.0% now for seven weeks in a row and nobody, even the architect of the indicator, seems too fussed about it (shades of 2007).
  • Ignored was the non-manufacturing ISM index, which came in well below expectations, at 51.5 from 54.3 in July — the weakest since January. Amazingly, the employment component dropped to contraction terrain of 48.2 in August from 50.9 in July and provided a total non-ratification of the payroll report where all the job gains were reportedly in the service sector! Again, like its manufacturing counterpart, all of the leading indicators in the non-manufacturing ISM fell in August (52.4 from 56.7 for new orders; 50.5 from 52.0 for order backlogs; and 51.0 from 52.0 for vender performance).
  • Ignored was the fact that the blended manufacturing and service sector ISM fell to a seven-month low of 52.1 in August from 54.4 in July, not to mention far off the nearby high of 56.0 reached in April (right when the stock market peaked; just as it bottomed at 40.6 when the S&P 500 hit its trough — market timers take note!).

Within the non-manufacturing ISM survey, a mere seven industries reported “growth”, down from 13 in July, 14 in June, and 16 in May, which was the nearby peak (in November 2007, the month before the recession started, 10 industries reported growth). This means that in August, only 39% of non-manufacturing industries said they had posted an increase in activity, compared with 72% in July, 78% in June and 89% in May. In other words, our call for a continued slowing in the pace of economic activity does not look far off the mark, and when that slowing is occurring after a 1.5% growth rate on GDP, there is precious little margin before contraction takes over. It still amazes us as to how few — us and perhaps Albert Edwards — see these economic risks as non-trivial.

Strip away the abovementioned ignorance, and yes, it is a depression.


This is what a depression is all about — an economy that 33 months after a recession begins, with zero policy rates, a stuffed central bank sheet, and a 10% deficit-to-GDP ratio, is still in need of government help for its sustenance. We had this nutty debate on Friday on Bloomberg Radio (Tom Keene is a class act, by the way) and another economist was on — the architect of the ECRI I think, who was claiming that there was no evidence of any indicator pointing to renewed economic contraction. And yet, that very day, the ECRI leading economic index comes in at a recessionary -10.1% print for last week. Go figure. The market for denial remains a lucrative one we would have to assume.

A depression usually involved a liquidity trap. In other words, expunging the debt excesses of the previous cycle leads to an ongoing contraction of credit where the demand and supply of loan-able funds is basically non-existent. This is why Libor (three-month interbank) rates are down to five-month lows of under 0.3%. [TD: and yet, one solitary bank in Europe still can not access this "perfectly functioning" market, instead paying the ECB 1.20% for 7 days worth of $60 million in dollar funding... some market]

Banks continue to sit with over $1 trillion of cash on their balance sheets and despite survey evidence suggesting a big thaw in once-tight lending guidelines, there is no indication that the Fed’s attempt to restart the credit engines is working. Companies are sitting on tons of cash themselves so they don’t need the money from the banks and households don’t seem ready or willing to take on major credit-sensitive spending commitments. Perhaps with one-quarter of Americans with a sub-650 FICO score, the typical U.S. bank loan officer doesn’t want to get fired for making the same mistake that got us into this mess in the last cycle and is actually requesting some documentation and proof of income (surely you jest).

Finally, you know it’s a depression when, 33 months after the onset of recession...

    * Wages & salaries are still down 3.7% from the prior peak;
    * Corporate profits are still down 20% from the peak;
    * Real GDP is still down 1.3% from the peak;
    * Industrial production is still down 7.2% from the peak;
    * Employment is still down 5.5% from the peak;
    * Retail sales are still down 4.5% from the peak;
    * Manufacturing orders are still down 22.1% from the peak;
    * Manufacturing shipments are still down 12.5% from the peak;
    * Exports are still down 9.2% from the peak;
    * Housing starts are still down 63.5% from the peak;
    * New home sales are still down 68.9% from the peak;
    * Existing home sales are still down 41.2% from the peak;
    * Non-residential construction is still down 35.7% from the peak.

Folks, in a normal recession-recovery cycle, practically all these indicators are making new highs at this juncture of the business cycle. For anyone to go on Bloomberg Radio and lay claim that this is a normal bounce-back in the economy is unarmed but very dangerous.

What is up, and up dramatically, since the recession began 33 months ago are government transfers to households (in the form of unemployment benefits, food stamps, welfare, social security) — they have ballooned 31% since the end of 2007. A record 30 cents of every dollar in personal income is now derived from some form of government support — now tell me that is not a depression-era statistic. The modern day soup line is a cheque in the mail.

In real terms, private sector wages are down 8.4% since the Great Recession began and are barely more than 1% higher now than they were at the cycle lows. Meanwhile, again in real terms, government-related income payments have surged 17%. Strip out Uncle Sam’s generosity, and real personal income is still 5.5% lower today than it was when the recession began in December 2007.

Maybe now we can get a better appreciation of why it is that the NBER has yet to sound the all-clear siren that the recession actually ever officially ended despite four quarters of positive GDP growth — perhaps not only because this may have merely been an unsustainable policy-induced spasm, but also because in per capita terms, real final sales continued to contract through this alleged statistical recovery.

And, the pressures are certainly deflationary; below are two real life examples to close out the summer. First, have a look at the first sentence of the article on page 5 of the weekend WSJ (Campbell’s Profit Up, but Sales Stew):

“Campbell Soup Co.'s fiscal fourth quarter profit jumped 64%, helped by cost cuts, but the food maker posted weaker sales as its soups battle competition from cheaper meals and lower consumer outlays on groceries.”

This is what happens in depressions. You add a lot more water to the tomato soup. Or you trade down to the no-name brands and hope your kids don’t notice.

On the same page of said WSJ, there was also this article, titled: Walgreen Posts Sales Rise, Swaps Assets with Omnicare. To wit:

“Like other drug retailers, Walgreen’s pharmacy department has faced profit pressure, with consumers cutting back on doctor’s visits, opting for generic drugs and buying medications in bulk.”

This is the new frugality. As we mentioned last week, at the margin, an unprecedented number of Americans are borrowing against their 401(k)s, canceling their life insurance policies (like George Bailey did) or are foregoing their physicals — all in order to scrape by. This is a very grim development, which is why it bothers us so much to hear the bond bear inflationists complain about how their spa fees have gone up so much in the past year. That is not reality for the vast majority of the population.
This is what happens in a deflationary depression — consumer attitudes undergo a radical change and it is secular in the sense that this adjustment to “getting small” is measured in years, not months or quarters. This is the price we all pay for the asymptotic credit bubble of the prior decade and the transition to the next sustainable bull market and economic expansion will require two things: time and shared sacrifice. Good things will end up coming out of this — there is nothing wrong in learning how to live within your means.

The one thing the federal government could do that may help people cope, instead of throwing money down the toilet in useless quick-fixes or turning unemployment insurance into a quasi welfare program, is to defray the costs of an annual visit to a credit counselor for debt-laden and cash-strapped households. Uncle Sam, teach these folks how to fish.

Check to you, idiot Princeton professors.