David Rosenberg of Gluskin-Sheff looks back on the year that was, and outlines what he sees as the four horsemen still haunting the economy:
It’s truly hard to believe that it was just over two years ago that we invoked the Four Horsemen as our investment theme regarding the headwinds facing the consumer. The Four Horsemen being:
When you think about it, these constraints are still very much in play. The only supporting factors are government handouts, which now make up over 20% of personal disposable income. For all the talk of how a double-dip was averted, we may look back at a 50 reading on consumer confidence — 20 points below recessionary averages in the past — as a sign that the original downturn never really ended.
There are two basic components to GDP: inventories and everything else called real final sales. The inventory contribution looks to be over after a year in which industrial production turned in a quick V-shaped bounceback. It’s over, and we know the run-rate on real final sales is 0.9%, by far the weakest “post-recession” recovery ever recorded. And, we know with reasonable certainty that we will face a negative fiscal shock in 2011 that will drain at least 1.5 percentage points from the underlying trend in GDP. So arithmetically, there is a strong chance that the economy contracts next year, barring some exogenous positive development that can act as an antidote.
Whatever that catalyst may be is anyone’s guess. But we doubt QE2, which is dressed up to counteract liquidity problems or perhaps support undervalued asset prices, neither of which currently afflict the U.S. economy, is going to provide the solution to widespread structural issues as they pertain to a muddled regulatory backdrop, health care costs, taxation, excessive housing inventories, stretched household balance sheets, dilapidated state and local finances and chronic unemployment. Unless Bernanke can either manage to expand the Fed to include fiscal policy or add foreclosed homes and municipal debt to its balance sheet or perhaps embark on a hiring spree of its own, it is doubtful that the answer to the litany of challenges facing the U.S. economy resides in an additional 25 or 50 basis points of bond yield relief.
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