Americans need radical surgery to revive country's economy
Consumers have to cut back debt to survive, Wall Street economist tells James Quinn
(US is in recession, says Rosenberg)
The US economy is in recession. Period. And it has been in a recession since January. This is the mantra of David Rosenberg, the first Wall Street economist to predict America's current economic woes, back in January, and perhaps one of the most bearish in the economic fraternity.
Although the traditional definition of a recession is two consecutive quarters of negative gross domestic product (GDP) - something that has yet to occur - Rosenberg, in his role as Merrill Lynch's chief North American economist, is unphased.
"People who focus strictly on GDP would have missed a very big story in Japan," he points out from his rather chaotic corner office in one of Merrill's two towers in downtown Manhattan. Rosenberg, who jokes at one stage that he is not simply an economist but also a part-time historian, cites the stagnation that plagued the Japanese economy in the 1990s as the perfect example of why the financial firmament tends to measure downturns in the wrong way.
Much like the US, Japan had a credit crisis and a residential real estate crash early on, yet the first back-to-back negative quarters of gross GDP didn't happen until the second half of 1993," argues Rosenberg, adding that, by then, it was clear that the Asian nation was in a recession."Waiting for GDP to go down is sometimes like Waiting for Godot - a lot of action happens on the way," he quips, referencing the Beckett play in which the title character never actually shows up.
Of course Rosenberg, not one to go with the flow, is more than aware that data out last week showed that the US GDP grew by 1.9pc in the second quarter of the year.
Maybe so, he says, but wait for the downward revisions to such numbers that are likely to come out later in the year. "These numbers are going to be revised six ways to Sunday," he smiles, pointing out that strong growth originally seen in the fourth quarter of 2007, according to GDP, soon dissipated based on the most recent revisions.
One of his problems with GDP is that 20pc of it relates to government spending, and so it is not an accurate measure of the real economy.
Even the National Bureau of Economics Research - the final arbiter of an American recession in its role of measuring and tracking business cycles - is not solely focused on GDP.
No, Rosenberg argues, the NBER uses employment, industrial production, real personal income and real sales in manufacturing, retail and wholesale to make up its mind.
"When I take a look at these four, they all peaked and rolled over at different times from last October to February of this year.
"So when I do my homework, I can see that the recession started, I think, in January."
From his perspective, then, the current market, be it in shares, debt or housing, is now as far away from touching the bottom - as some bears predicted when the Dow rose 331 points on Tuesday - as it ever was.
"Look, we are coming off three major shocks," says Rosenberg. "An oil shock, a housing shock and a credit shock.
"Housing is the quintessential leading indicator. Housing peaked in 1988 and then we had a credit crunch in 1989 and then the onset of a consumer recession in 1990. We're just replaying an old movie."
This most recent movie was a Federal Reserve production, he argues, with chairmans Alan Greenspan and then Ben Bernanke attempting to "reflate the housing stock as an antidote to deflation in the tech markets in the early 2000s".
"This was like Mary Shelley's Frankenstein. They built the monster, and then they had to tear it down."
Rosenberg largely dismisses recent signs of apparent green shoots in the housing market as mere foreclosure sales, saying that such sales are part of an "important chapter towards recovery", and instead seizes on mortgage applications, which have fallen six months in a row.
"The path to financial ruin is littered with calls of a bottom, and I don't think you want to confuse intermediate bottoms with fundamental bottoms; I think that is quite a dangerous game to play," he warns.
"I think what separates my call, say from the consensus, is that I don't necessarily think this is going to be a mild flash in the pan. I think this is going to be a long recession."
For Rosenberg, who recites random statistics from two decades ago as if they happened yesterday, the current downturn should not be dismissed as a simple economic phenomenon.
"This is an epic event; we're talking about the end of a 20-year secular credit expansion that went absolutely parabolic from 2001-2007."
The current downturn, he predicts, will continue until the middle of 2009, pointing out that historically the end of a recession usually comes within a month of the NBER declaring one.
"Whether or not I'm right on the recession call ending, there's going to be an extended period of economic weakness once it does, as post-bubble deleveragings are a multi-year adjustment process."
In his view, that deleveraging has already begun - as seen in banks, such as Merrill itself, beginning to reduce balance sheets by selling off unwanted assets, while companies have begun to reduce stock levels based on the most recent data.
But more importantly, Rosenberg argues, is what must take place in the household sector - a sector already ravaged by rising fuel prices, a stagnant housing market and rising levels of unemployment.
In spite of all those problems, Americans are beginning to reduce their debt exposure - as seen in the savings rate, which rose from 0.3pc to 2.6pc in the last three months, the third steepest quarterly increase since the Second World War.
"I think that's pretty big news," he smiles. "This is going to be a painful but necessary surgery so that we can get out of the hospital and embark on the next bull market of economic expansion."
But before the US economy can truly begin to expand again, Rosenberg believes the savings rate must rise to pre-bubble levels of 8pc, that the US housing stocks must fall to below eight months' supply, and that the household interest coverage ratio must fall from 14pc to 10.5pc.
"It's important to note what sort of surgery that is going to require. We will probably have to eliminate $2 trillion of household debt to get there," he predicts, saying this will happen either through debt being written off, as major financial institutions continue to do, or for consumers themselves to shrink their own "balance sheets".
"American households own more than $4 trillion of consumer durable goods. So something tells me that is going to be a venue for shrinking the household side of the balance sheet.
"We're talking about the silverware, the old antique couch in the basement, unwanted or expensive art," he goes on. "This is the future, the future is frugality."
To back up his vision of a frugal future, he runs through a list of those businesses that already appear to be hurting, based on the second-quarter GDP numbers, those that are becoming somewhat surplus to requirement when times are tough.
"People's expectations have changed and so their behaviour is going to change. Dry cleaning was down, upholstering was down, beauty salons were flat. It's about getting out the old tool kit and doing it yourself."
Ironically for someone whose nickname is "Rosey", he can be amazingly bleak.
"I'm not going so far as to say we're going to live in a cave, but life is going to change. There are going to be some very hard decisions made over the household budget as to what to allocate to consumer discretionary spending."
Such deleveraging measures will be vital, he argues, if the US economy is to get back on track, something that he promises to monitor and flag early, just as he has done with the current downturn.
The other measure that will be vital for the resuscitation of the economy is for reflation to occur, for the Fed to "move from reallocating items on its balance sheet to aggressively expanding its balance sheet".
Rosenberg gives the Fed some credit for its actions over the past 11 months since it began reducing interest rates. However, he still thinks it could have done more.
"Half its balance sheet is in toxic waste," he says, with reference to its continuing bail-outs of the embattled financial sector.
"Usually 95pc of its balance sheet is in treasuries, now it's down to 50pc. I think the Fed's approach is going to have to change."
That change, along with the changes at a household level, should help eventually to kick-start the US economy - until the next time, when Rosenberg, no doubt, will be on hand to foretell the next recession.
FACT FILE
Name David Rosenberg
Nickname Rosey
Job Chief North American economist, Merrill Lynch
First job Economist, Bank of Canada
Claim to fame First Wall Street economist to signal 2008 US recession
Nationality Canadian
πηγή:
The Future Is Frugality
Παρόμοια και εδώ: COLUMN-Long road from here to normality for stocks: James Saft
David Rosenberg, the U.S. economist at Merrill Lynch in New York, has three conditions he is looking for before he becomes more bullish on U.S. stocks:
-a rise in the savings rate to about 8 percent,
-a fall in the number of houses on the market to about 8 months of supply and
-a big drop in the amount debt payments sap from American household budgets.
The good news: all three happening would only represent a return to historic norms.
The bad news: we are a long way away from historic norms.
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