In his daily note, Gluskin-Sheff economist David Rosenberg makes an important observation about the frequency of recessions.
Namely: The gap between them is getting shorter and shorter.
Nobody would ever dispute that the U.S. economy has managed to see its
government spend its way into some sort of statistical recovery — though it is
more evident in the output and sales data than in the income data. Look at the
largesse — a 0% policy rate, a $2.3 trillion Fed balance sheet loaded up with
mortgages, a $1.4 trillion fiscal deficit loaded with bailouts and freebies and
accounting changes that have allowed the banks to mark-to-model their way
back towards earnings heaven. If the economy was not recovering without
Uncle Sam’s generosity, then that would truly be a big story.
But Mr. Market at some point will have to confront the future. The time gap
between recessions is shortening now — we went 10 years from 1990 to 2000,
then 5 years from 2002 to 2007 and the next recession, following this pattern,
is likely going to occur within the next 2-3 years. And, unlike the start of the last
recession when the government had so many arrows in its quiver, there are
none today to help lift the economy again.
Going into the 2007 downturn, the budget deficit was $160 billion. There was
ample room for fiscal stimulus. The funds rate was 5.5% and could be cut
550bps — now it is at 0%. The Fed’s balance sheet could be allowed to triple
without reviving inflation expectations — good luck the next time around.
He seems to be throwing in the towel on this recession, and its potential to be “the big one.”
Perhaps the downturn that really shakes the foundation (the equity culture, the
view that we can spend more than we make to perpetuity, etc) is the next one
because the policy response, by definition, will just not be there to turn things
around. Not something to worry about today, but the day of reckoning is coming.
What we see in the crystal ball is not only the limited response the government
will have on hand to deal with the next downturn, but that it will likely start with
the economy never getting back to full employment. Recall that for the first time
ever, the U.S. economy in 2007 slipped into recession without having first swung
into excess demand terrain (when inflation pressures are burgeoning), which is
why it didn’t take long for deflation risks to come to the forefront. Imagine how
intense the deflation pressures will be in the next go-around as the recession
begins with a much higher unemployment rate, a much lower capacity utilization
rate, and a more constrained government response.
We can understand that this is far beyond a market mindset that is fixated on
next month’s nonfarm payroll release and the coming quarter’s earnings reports
— but the primary trend, which is deflationary, is hardly going to be broken by
current reflationary policies than was the case from 2002 to 2007 when credit
growth and asset prices surged. It was a great five years for the beta trade, but
it ended in tears. So will this whippy rally, even if not currently recognised by the
majority of market pundits who will get you into safety as quickly heading into
the next turndown as they so successfully did in late 2007.
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