David Rosenberg — who has been getting into fights with other pundits left and right — digs in and argues that what we’re really looking at is a depression.
MORE ON THE DEPRESSION
Last week, we received some classic guffaws when we responded to whether
or not the recession has ended with this: “We’re not convinced, but even if it is
statistically over, the depression is ongoing”.
We were reprimanded by former Fed Governor Mishkin for breeding “fear”.
The eyes were rolling among the Squawk Box crew and we were told to tell
that to Mr. Market, who has rallied more than 60% from the March lows
(“artificial” lows, we were told off camera). After all, Mr. Market is so adept at
calling the economy – like the peak in late 2007, literally weeks ahead of what
the polite economics crowd dubs “The Great Recession”; or how adept Mr.
Market was in calling the 2001 tech wreck; or the three failed attempts at
predicting recovery over the past two years. Mr. Market’s ability at calling the
economy, is shall we say, a tad spotty.
In fact, even with the massive amount of stimulus in modern history, all the
economy could do was muster up a 2.8% annualized growth rate in Q3. If that
number stands, it will go down as just about the poorest bounce off a
recessionary environment on record. History, by the way, shows that 80% of
the time, the opening quarter of the recovery ends up being a pretty good
predictor over the extent of the economic pickup we see in the year that
follows. So, that near 5% GDP growth backdrop being projected by Mr. Market
right now looks to be more than just a tad dubious.
Now, as for calling this a ‘depression’, it is an attempt at providing a reality
check to Wall Street research forecasts of a robust recovery. Practically
everyone thought the worst was over in 1930 but all we were in at that time
was the classic phase 2 of the triple-waterfall — the “reflex rally” that comes
on the heels of the “initial sharp down” to only then be followed by the long
and drawn out decline to the fundamental low. The Great Depression didn’t
even receive that label until 1934 and by then we were well over a year past
the lows in both real GDP and the stock market.
But it was a treacherous environment for the rest of the decade and despite
seven years of huge stimulus — and resource-misallocation distortions from
the FDR New Deal — the unemployment rate still finished off the 1930s at
15%; the CPI was still deflating at a 2% annual rate; nominal GDP had still yet
to re-attain its 1929 peak; and the next secular bull market in equities did not
commence for another 15 years. Income strategies worked best even after
the S&P 500 hit bottom; and gold doubled in Sterling terms. Equity rallies
came … and they went. Volatility reigned. What goes around comes around.
Currently, we have a situation that is not consistent with a plain-vanilla recession
but with a depression because depressions are associated with credit contraction
and asset deflation. It is more than just about a mathematical contraction in GDP.
In recessions, social change does not occur. In depressions, they do. Hence the
fact that in Halloween, the reason why sales-related items were so tepid was
because 30% of families made their own costumes.
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