Photo: Johnfmauldin via YouTube
Gluskin-Sheff economist David Rosenberg just gave a fantastic and broad presentation on the economy at The Big Picture conference in midtown ManhattanWe have our notes below, but the summary is basically this:
This was no ordinary recession. It’s been defined by the housing and credit bust, and that’s not close to being over. In fact he says that the deleveraging cycle is only about half over, and that even beyond that there are still problems due to the fact that so much household debt has been turned into Federal debt.
He went through a series of charts showing debt-to-assets and debt-to-income charts showing that they have significant ways to go. His favourite chart, which he says defines this situation is this chart, showing the decline in household net worth.
He also talked about medium-term issues, like the fiscal cliff, which he thinks could be causing a recesison already due to businesses witholding investment.
As for investments, he denies that he’s a perma-bear though he still really likes bonds, though he sees how the Fed is forcing investors intoe quities.
— Rosneberg’s presentation is called “Navigating The New Normal.”
— “Everybody has an opinion… the opinion on me is that I’m some kind of radical permabear.”
— Someone recently gave him a pear of actual rose-coloured glasses to get him to change his views.
— Talking about a difference between an economist and a portfolio manager.
— An economist tries to figure out the base case, and the risks around the base case. A strategist then has to figure out what are the appropriate investments around these ideas.
— Talking about worries and threats. Notes that despite all the stimulus, economic recovery is still half the normal pace. The
— What are these headwinds?
- Still experiencing scars of the last cycle. Real estate collapse. Bigger than the housing collapse.
- Household credit contraction.
- Household net worth. Shows first ever 5-year contraction. This is the chart that shows the baby boomer.
Showing charts of continuing drag, include charts of debt-to-assets and debt-to-income levels that are still high above average.
— Household: Debt-to-assets, and debt-to-income. Both are still mean reverting.
–Tries to think about what historians are going to be talking about. We are in the middle of the great recession.
— We are close to halfway through the deleveraging cycle.
— So far we’ve turned the .com-era corporate debt into household debt and now the Federal government debt.
— Still live in a fat-failed world. This is not a time to be taking concentrated bets.
— Talking specifics of the economy. sceptical that the US will “decouple” from the rest of the world. Don’t confuse a lag with a deleveraging.
— More signs of uncertainty. Shows chart of Core Capex Orders and Core Retail Sales. Signs of nervousness ahead of the fiscal cliff.
— Paul McCulley’s favourite chart: Year-over-year change of the 3 month average of core capex orders. It’s gone negative
— sceptical of “housing recovery”
— Now they’re “timestamping” when they’re going to raise interest rates. This is why you have to be bullish on bonds.
— Fed QEing every time the market goes down.
— The market is at a level now, where in the past the Fed might have considered raising rates. Breakevens at cycle high. Dollar breaking down.
— Fed has manufactured a divorce between profits and the market by depressing real rates.
— Best argument for equities. Spread between S&P 500 dividend yields and 5-year t-note yield.
— Today you’re buying Treasuries for capital appreciation, and equities for the dividend.
More to come…