Rosenberg: The recession is dead, long live the recession!

Friday, August 21st, 2009

Since joining Gluskin Sheff & Associates from Merrill Lynch a few months ago, the daily research reports from chief economist and strategist David Rosenberg have been a breath of fresh air in the world of the “dismal science”. His notes yesterday on the typical macro-economic environment prevalent once the stock market has rallied by 49%, and how the current landscape stacks up against the historical average, are proof of the useful input that has regularly been forthcoming from Rosenberg. The paragraphs below are excerpts from his report.

We can understand that there is a growing list of economists calling for the end to the recession, and that may or may not be the case actually, judging by the performance of all four ingredients that go into the NBER decision-making wheel. But let’s be charitable and assume that the herd is correct this time around - a 49% rally from the lows and the degree of multiple expansion suggests that the S&P 500 has gone beyond just discounting the end of the downturn but is now embedding a 4.0% real GDP growth rate for the coming year. That is not our view, and even if it is attainable, guess what? It’s priced in. Corporate bonds (and Treasuries too) are discounting around a 2.0% GDP trend, which looks more realistic.

The market has turned in a performance that is double what is ‘normal’ between the lows and the end of the recession, and after such a rally, which is unprecedented actually, the end of the recession isn’t even a debate … at this time, what is ‘normal’ is that we are a full year into the next economic expansion. Did the economy really bottom in August 2008? From our lens, there is always a catalyst or a spark for the next economic expansion and bull market. In 2003, it was leverage and a housing boom. What is it today? Cash for clunkers? Digitized medical technology? Chinese consumption? Government incursion into the economy and capital market? Perhaps we should also recognize that heading into the post-recession environment of 1991, there was a tailwind from sub $20/bbl oil; and heading into the 2003 rebound, we had sub $30/bbl oil; so it may pay to ask the question as to how $70+ oil is going to play in the recovery, unless we are talking about recoveries in Saudi Arabia, Qatar and the UAE?

CHART 1: SHARPEST EQUITY MARKET RALLY EVER IN THE CONTEXT OF PRICING OUT THE RECESSION

United States: S&P 500 Composite (% change from market trough during recession to the official end of the downturn)

It could well be that all the effort the government is making to stave off the decline in the record debt load the U.S. is carrying will just delay the inevitable for another day. The fact that the Fed is extending TALF to buy up distressed commercial real estate debt, not to mention financing RVs and mobile homes. Moreover, the Administration’s move to take over two auto companies and then immediately offer rebates (now that the government is an owner, it can do all it can in its powers to rev up sales) is a signpost that every effort is going to be made to perpetuate discretionary spending even though the boomers are not financially prepared for retirement, and that every effort will be made to resist the need for the household sector to pare their record level of liabilities on their balance sheets. You cannot possibly make this stuff up, but now appliance manufacturers have successfully lobbied for a “cash for clunker” program of its own! See Program to Offer Appliance Rebates on page A3 of the WSJ - a $300 million federal program to incentivize homeowners to replace old refrigerators, air conditioners, washer-dryers and dishwashers with new “high-efficiency” units!

However, the catch-22 is that not until the culture of credit and conspicuous consumption has been replaced by a renewed focus on retirement planning and financial prudence will it be safe to call for the fundamental lows in the market. A 49% flashy bear market rally notwithstanding, we are not at some natural equilibrium point in the economy as the Federal Reserve and the government have moved to cannibalize their own balance sheets as an offset to the necessary deleveraging in the private sector.

Source: David Rosenberg, Gluskin Sheff & Associates, August 20, 2009.

Tags: Breath Of Fresh Air, Chief Economist, Corporate Bonds, David Rosenberg, Digitized, Dismal Science, Downturn, Economic Environment, Economic Expansion, Gdp Growth Rate, Incursion, List Of Economists, Lows, Medical Technology, Merrill Lynch, oil, Real Gdp Growth Rate, Recession, Stock Market, Strategist, Treasuries
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Memo to All My Valued Employees

Monday, December 29th, 2008

Listening to AM640 here in Toronto today, I heard an excellent discussion about the letter from “The Boss,” a truth-be-told debate about the value of tax-cuts, stimulus and taxation. In the current climate of government intervention, and neo-socialism, the letter is a breath of fresh air for those of us who have made the greatest productive contribution. Thanks to Charles Adler for posting the letter at his blog.

To go one step further, it is reminiscent of the world of Ayn Rand’s “Atlas Shrugged,” in which the story’s heroes, the entrepreneurs, the innovators, the captains of industry, the prime-movers, decide the best remedy is to withdraw, to go on strike, as the world is looted by bureaucrats, socialists, pseudo-intellectuals, and mystics.

Memo to All My Valued Employees

Author: The Boss

There have been rumblings around the office about the future of this company and, more specifically, your job. As you know, the economy has changed for the worse and presents many challenges. The good news, however, is this: The economy doesn’t pose a threat to your job. What does threaten your job, however, is the changing political landscape in this country.

First, while it’s easy to spew rhetoric that casts employers against employees, you have to understand that for every business owner there is a back story. This back story is often neglected and overshadowed by what you see and hear. Sure, you see me park my Mercedes outside. You’ve seen my big home at last year’s Christmas party. I’m sure all these flashy icons of luxury conjure up idealized thoughts about my life. But you don’t see the back story.

I started this company 12 years ago. At that time, I lived in a 300 square foot studio apartment for three years. My entire apartment was converted into an office so I could put forth 100% effort into building a company, which, by the way, would eventually employ you. My diet consisted of noodles because every dollar I spent went back into this company. I drove a rusty Toyota Corolla with a defective transmission. I didn’t have time to date. Often times, I stayed home on weekends, while my friends went out drinking and partying. In fact, I was married to my business — hard work, discipline, and sacrifice.

Meanwhile, my friends got jobs. They worked 40 hours a week and made a modest $50K a year and spent every dime they earned. They drove flashy cars and lived in expensive homes and wore fancy designer clothes. Instead of hitting Nordstrom for the latest fashion item, I trolled through the Goodwill store extracting any clothing item that didn’t look like it was birthed in the ’70s. My friends refinanced their mortgages and lived lives of luxury. I did not. I put my time, my money, and my life into a business with a vision that, some day, I too, would be able to afford the luxuries my friends had.

So, while you physically arrive at the office at 9 a.m., mentally check in at about noon, and then leave at 5 p..m., I don’t. There is no “off” button for me. When you leave the office, you are done and you have a weekend all to yourself. I, unfortunately, do not have that freedom. I eat and breathe this company every minute of the day. There is no rest. There is no weekend. There is no happy hour. Every day this business is attached to my hip like a one-year-old special-needs child. You, of course, only see the fruits of my labor — the nice house, the Mercedes, the vacations. You never realize the back story and the sacrifices I’ve made.

Now the economy is falling apart and the guy who made all the right decisions and saved his money have to bail out all the people who didn’t. The people who overspent their paychecks suddenly feel entitled to the same luxuries that I earned and sacrificed a decade of my life for. Yes, business ownership has its benefits, but the price I’ve paid is steep.

Unfortunately, the cost of running this business and employing you is starting to eclipse the marginal benefit. Let me tell you why:

I am being taxed to death and the government thinks I don’t pay enough. I have state taxes. Federal taxes. Property taxes. Sales and use taxes. Payroll taxes. Workers’ compensation taxes. Unemployment taxes. Taxes on taxes. I have to hire a tax man to manage all these taxes and then, guess what? I have to pay taxes for employing him.

Most of my time is now occupied with government mandates and regulations and all the accounting that goes with them. On October 15th, I wrote a check to the US Treasury for $288,000 for quarterly taxes. You know what my “stimulus” check was? Zero. Nada. Zilch.

The question I have is this: Who’s stimulating the economy? Me, the guy who has provided 14 people good-paying jobs and serves more than 2,200,000 people per year with a flourishing business? Or the single mother sitting at home pregnant with her fourth child waiting for her next welfare check? Obviously, government feels the latter is the economic stimulus of this country.

The fact is, if I deducted (read: stole) 50% of your paycheck, you’d quit and you wouldn’t work here. Why should you? That’s nuts. Who wants to get rewarded for only 50% of their hard work? Well, I agree, which is why your job is in jeopardy.

Here is what many of you don’t understand: to stimulate the economy you need to stimulate what runs the economy. Had suddenly government mandated to me that I didn’t need to pay taxes, guess what? Instead of depositing that $288,000 into the Government black-hole, I would have spent it, hired more employees, and generated substantial economic growth. My employees would have enjoyed the wealth of that tax cut in the form of promotions and better salaries. But you can forget it now.

When you have a comatose man on the verge of death, you don’t defibrillate by shocking his thumb to bring him back to life, do you? No. You defibrillate his heart. Business is at the heart of our economy and always has been. To restart it, you must stimulate it, not kill it. Suddenly, the power brokers believe the mud of economy is the essential driver of the economic engine. Nothing could be further from the truth.

So where am I going with all this? It’s quite simple. If any new taxes are levied on me, or my company, my reaction will be swift and simple. I’ll fire you. I’ll fire your co-workers. You can then plead with the government to pay for your mortgage, your SUV, and your child’s future. Frankly, it isn’t my problem anymore.

Then, I will close this company down, move to another country, and retire. You see, I’m done. I’m done with a country that penalizes the productive and gives to the unproductive. My motivation to work and to provide jobs will be destroyed and, with it, will be my citizenship.

While tax cuts to 95% of the people sounds great on paper, don’t forget the back story: If there is no job, there is no income to tax. A tax cut on zero dollars is zero. Who understands the economics of business ownership and who doesn’t? Whose policies will endanger your job?

Answer those questions and you should know who might be the one capable of saving your job. While the media wants to tell you “It’s the economy, stupid,” I’m telling you it isn’t. If you lose your job, it won’t be at the hands of the economy; it will be at the hands of a political hurricane that swept through this country, steamrolled the Constitution, and changed the landscape forever. If that happens, you can find me in South Caribbean sitting on a beach, retired, and with no employees to worry about.

Signed,

Your Boss

Who is John Galt?

Tags: Ayn Rand, Breath Of Fresh Air, Bureaucrats, Business Owner, Canada, Captains Of Industry, Charles Adler, Christmas Party, Flashy Icons, Government Intervention, Innovators, Intellectuals, Mystics, Noodles, Political Landscape, Prime Movers, Productive Contribution, Socialists, Square Foot Studio, Stimulus, Studio Apartment, There Have Been Rumblings
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