The economy is going to have to stand on its own two feet this year, according to David Rosenberg.
The stimulus we experienced in 2009 is unlikely to be repeated in 2010 for a number of practical and political reasons. Scott Brown’s recent victory in the Senate was a message for government to go easy on the public purse, among other things (ie, health care). Based on official projections, the U.S. government debt-to-GDP ratio will soar above 100% within the next two years — levels in the past that only occurred in periods of war. The general public is hardly likely going to accept a further deterioration in the nation’s balance sheet, which means that the era of fiscal quick fixes to periodically stimulate GDP growth is behind us.
Moreover, it also looks as though Bernanke & Company are going to try and craftily withdraw from its unprecedented incursion into the mortgage market. If 2009 was the year of the policy reflation, then 2010 is likely to be the year renewed deflation. Below we highlight how investors should be braced for such an outcome — it is the opposite of what worked in the 2009 flashy bear market rally that so many pundits are mistaking for a new secular or even sustained cyclical uptrend. Extrapolating what happened from the March lows into the future could well be the most critical mistake an investor can make this year. We intend on not making a mistake that would risk the fundamental goal of capital preservation and growing wealth over time. What happened last year was a policy-driven deviation from the primary trend that is characteristic of a deleveraging cycle and a secular credit contraction, which is towards debt deflation.