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

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.