Is the Credit Malaise Really Over?

Tuesday, February 23rd, 2010

Interestingly, the Fed raised the discount rate last week as bank credit for the week contracted by a further $9 billion, According to David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, “this brings the year-to-date decline to $115 billion, or a 14% annual rate, with every component from mortgages, to consumer credit, to business lending shrinking”.

Source: Breakfast with Dave - Gluskin Sheff & Associates, February 22, 2010.

“There is no way the Fed is hiking the Fed funds rate with bank credit in secular decline and all bets are off on the sustainability of any recovery; a sustainable recovery without bank credit growth - that will be a new one. … a true tightening in monetary policy is still likely a 2011 story at this point. Those who were surprised by the early timing of the discount rate hike last Thursday should consider that perhaps the Fed wanted to have the market distinguish the move from an actual policy shift by doing it as far away from an FOMC meeting as possible,” said Rosenberg.

As mentioned before, it is difficult to see a significant economic recovery without the banks coming to the party. And this begs the question: Is this what the policymakers had in mind when bailing out the banks?

Tags: Bets, Business Lending, Chief Economist, Consumer Credit, David Rosenberg, Economic Recovery, February 22, Fed Funds Rate, Fomc Meeting, Gluskin Sheff, Last Thursday, Malaise, Monetary Policy, Policy Shift, Policymakers, Rate Hike, Secular Decline, Strategist, Sustainability, Sustainable Recovery
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Rosenberg: US Bear, Canada Bull - Setting the Record Straight

Friday, December 11th, 2009

In today’s Breakfast with Dave, David Rosenberg (Rosie), Chief Economist, Gluskin Sheff, sets the record straight about being his being bearish the US and bullish Canada.

SETTING THE RECORD STRAIGHT

I get this all the time; how can you be bearish on the U.S. economy and the stock market and also be calling for an elongated period of credit contraction and still be bullish on Canada and commodities?

Well, here goes:

The U.S. credit crunch began in July 2007 (it took the stock market three months to figure it out). The Fed cut the discount rate in August 2007 so it began to be very nervous. And the GDP recession began in December 2007.

When did the Canadian stock market peak? How about June 18, 2008, at 15,073, which is almost a year after the U.S. credit crunch began and six months after the onset of the U.S. recession. At the peak in the Canadian stock market, the S&P 500 had already sagged by almost 15% from its prior highs. The two markets did not hit their peaks at the same time, believe it or not.

And when did the Canadian dollar peak? How about May 21, 2008. Again, 10 months after the credit crunch began. Go figure.

Oil peaked at $145/bbl in July 2008, which is nearly a year after the beginning of the credit collapse and seven months after the U.S. recession began. The CRB also peaked in July - from the time the U.S. recession began to the peak seven months later, commodity prices were up 15%. I would therefore have to assume that there is a very loose connection between the U.S. economy and the performance of resource prices.

In fact, the U.S. was more than a half-year into an economic downturn and a full year into a credit collapse, and copper was still north of $4 a pound; wheat over $10 a bushel; and soybeans above $15 a bushel. At the time these commodities were hitting their highs, not only were U.S. Baa credit spreads in excess of 300bps (from 160bps at the height of the credit bubble) and S&P financials were down more than 40%! Again, go figure.

The reality is that during the first nine months of the U.S. recession, China’s GDP (its imperfections notwithstanding) was still expanding at an average annual rate of 8.9%; India by 6.7%; Brazil by 6.7% too; Russia by 4%; the Philippines by 3.7%; Korea and Thailand by around 2.5%. So the rest of the world did not exactly go to sleep just because the U.S. economy became comatose for a period of nine months. But when Lehman collapsed and global trade finance vanished and it became impossible to secure export credits, well then, it was vertical down everywhere.

So at least we know that it will take to pull the rug from underneath the commodity sector, the Canadian stock market and the Loonie - not just a U.S. recession; and not just a contraction in credit; but a major financial event that infects the entire world economy and trade flows. We certainly are not bullish on the outlook, but nor are we calling for a resumption of the awful destabilizing conditions that prevailed a year ago.

Meanwhile, despite the fact that the U.S. consumer cannot seem to revive without ongoing government life support; despite the fact that 130 U.S. banks have failed so far this year; despite the fact that consumers have had to liquidate their debt for each of the past nine months; despite the fact that 1 in 7 Americans with a mortgage are either in arrears or in the foreclosure process; and despite the fact that the U.S. has shed four million jobs through the first 10 months, commodity prices are up more than 30%, the Canadian stock market is up 27%, and the Canadian dollar is up 14%. Go figure.

Tags: 10 Months, Bbl, Bear Canada, Bushel, Canada, Canadian Dollar, Canadian Stock Market, Chief Economist, China, Commodities, Commodity Prices, Contraction, Crb, Credit Bubble, Credit Crunch, David Rosenberg, Economic Downturn, Emerging Markets, Half Year, India, Loose Connection, Market Peak, oil, Recession, Resource Prices, Rosie, Seven Months, Soybeans
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Paul Kasriel: Waking Up In Recovery

Thursday, December 10th, 2009

“What happens after the stimulus spending wears off?,” asks Paul Kasriel, chief economist of Northern Trust. In this video clip, he shares his prognosis on inflation, the US dollar and the year ahead.

Click here or on the image below to view the video clip.

Click here for the first part of “Waking up in recovery”.

Source: Northern Trust, December 2009.

Tags: Advertisement, Chief Economist, inflation, Northern Trust, Paul Kasriel, Prognosis, Shares, Stimulus, US Dollar, Video Clip
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Goldberg, not Rosenberg

Wednesday, December 2nd, 2009

The stock market assessment below comes from highly regarded David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates.

Gold just capped off its best month in a year - ±14% in November and 34% year-to-date. It’s not just the middle-class in China that is starting to buy gold, but the central bank, which has very deep pockets, is going to do likewise. We just came across a Bloomberg News article quoting an official from the state-owned Assets Supervision and Administration Commission (Ji Xiaonan, the Chief) as saying “we recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.” China’s reserves, after a 76% buildup since 2003, currently stand at 1,054 tons, so we are talking here about the prospect of some pretty heaving buying in coming years.

If China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.

Make no mistake, we are gold bulls. Central banks have deep pockets and production of gold is stagnant so the demand-supply backdrop for bullion is bullish. At the same time, we have to pay respect for market positioning over the near-term. The market for precious metals is overextended right now after the parabolic move of the past two months. The net speculative long position has swelled to a record 273,552 contracts (100 ounces each) on the COMEX. Open interest has never been higher, at 693,661 contracts. So this is one crowded trade - as is the short-trade on the USD against all the major currencies, especially the commodity-based units.

So, we could get a meaningful gold correction at any time, and we are talking about a correction in what is still a secular bull market - the 200-day moving average is $970/oz, which means we could get as much as a 20% pullback and no fundamental trendline would be violated. We remain long-term gold bulls, and our commentary remains fundamentally bullish, but anything that could spark a countertrend rally in the U.S. dollar, which is our principal near-term concern, would put gold at a much better price point for investors than the peak we are at today.

Source: David Rosenberg, Gluskin Sheff & Associates - Breakfast with Dave, December 1, 2009.

Tags: Administration Commission, Ball Park, Bloomberg News, Bullion, Central Banks, Chief Economist, China, China Moves, Comex, Commodities, David Rosenberg, Deep Pockets, Emerging Markets, Global Production, Gluskin Sheff, Gold, Gold Bulls, Gold Price, Gold Reserves, Market Assessment, Market Positioning, Metric Tons, Open Interest, precious metals
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Recession is Over - But has the Recovery Begun?

Friday, November 27th, 2009

On the topic of the magnitude of the economic recovery, David Rosenberg, Chief Economist and Strategist of Gluskin Sheff & Associates, provided the following interesting snippet:

“The recession in the US may be over, but what sort of recovery lies ahead remains in question. All we can say is that when looking at what is normal in the context of a post-recession rebound during the post-WWII era, the first quarter of growth is closer to 7.3% at an annual rate, not 2.8% as we just saw in the latest real GDP estimate - the median was 6.3%. To think that with the massive amount of stimulus - without it, growth would have flirted with 0% - this first quarter of positive growth was basically one-third of what is typical really says something.”

Food for thought indeed.

Source: David Rosenberg, Gluskin, Sheff & Associates - Breakfast with Dave, November 26, 2009.

Tags: Advertisement, Ahead, Amp, Chief Economist, David Rosenberg, Economic Recovery, Era, First Quarter, Food For Thought, GDP, Gluskin Sheff, Magnitude, Median, Real Gdp, Rebound, Recession, Snippet, Stimulus, Strategist, Wwii
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Paul Kasriel: Waking up in Recovery

Tuesday, November 24th, 2009

We’ve made it to recovery, but it won’t be quick or easy, opines Paul Kasriel, award-winning chief economist of Northern Trust. In this video, he takes a fresh look at the economy, the headwinds we face, and future engines for global growth.

Click here or on the image below to view the video clip. (A link to the transcript is provided at the bottom of the post.)

Click her for the transcript of the interview.

Source: Northern Trust, November 2009.

Tags: Award Winning, Chief Economist, Economy, Fresh Look, Global Growth, Headwinds, Interview Source, Northern Trust, Opines, Paul Kasriel, Video Clip
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John Ryding on the US economy, inflation and unemployment

Monday, November 16th, 2009

John Riding, chief economist of RDQ Economics in New York, sits down with Michael Mackenzie, US markets correspondent of the Financial Times, to discuss Fed policy, inflation versus deflation and the US employment outlook.

Part 1: On Fed policy
Riding says the Federal Reserve will not raise interest rates until 2011 at the earliest. He says an extended period of easy monetary policy is laying the ground for the next bubble and that the Fed itself is engaged in the biggest carry trade out there through its policy of quantitative easing.

Click here or on the image below to view Part 1 of the interview.

Part 2: On the inflation versus deflation debate
Riding says the debate between inflation and disinflation or potentially even deflation will be settled on the side of inflation, though it may take two or three years to come through.

Click here to view Part 2 of the interview.

Part 3: On the US employment outlook
Riding says should current labor trends continue, the US economy is about 20 weeks away from starting to see the emergence of job creation. The actual rate of unemployment is 17.5%, not the official rate of 10.2%.

Click here to view Part 3 of the interview.

Source: Michael Mackenzie, Financial Times (here, here and here), November 13, 2009.

Tags: Carry Trade, Chief Economist, Correspondent, Deflation, Disinflation, Economics, Economy Inflation, Emergence, Employment Outlook, Fed Policy, Federal Reserve, Financial Times, Inflation And Unemployment, interest rates, Interview Source, Job Creation, Labor Trends, Mackenzie Financial, Michael Mackenzie, Monetary Policy, Quantitative Easing
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Richard Koo: Lessons Learned from Japan’s Lost Decade

Monday, November 9th, 2009

Richard Koo, the world-renowned chief economist of Nomura Research Institute, discussed the lessons learned from Japan’s “lost decade” during a presentation at Center for Strategic and International Studies (CSIS). During his discussion, Koo suggested that government stimulus can play a key role in alleviating the problems of a balance sheet recession. Koo’s recent book, “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession”, discusses these issues in greater detail.

Source: CSIS, October 29, 2009.

Tags: Advertisement, Balance Sheet, Center For Strategic And International Studies, Chief Economist, Decade, Holy Grail, Japan, Key Role, Lost World, Nomura Research Institute, Presentation, Recession, Richard Koo, Stimulus
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David Rosenberg: Stocks Overvalued by at Least 20%

Thursday, October 29th, 2009

The stock market has become overheated since exploding off its March lows and could be in for a strong correction, economist David Rosenberg told CNBC.

“It is overvalued by at least 20%,” Rosenberg, formerly chief economist at Merrill Lynch and now with Gluskin Sheff & Associates, said in an interview. “But it comes down to what your view in corporate earnings (is) going to be. By the time you’re up 60% from any egregiously oversold low, you’ve already got the earnings recovery.”

Source: CNBC, October 27, 2009.

Tags: Amp, Chief Economist, Cnbc, Corporate Earnings, David Rosenberg, Gluskin Sheff, Lows, Merrill Lynch, October 27, Stock Market, Stocks
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David Rosenberg: “Market has overshot the fundamentals”

Tuesday, October 20th, 2009

David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, discusses the outlook for the stock market in the video below.

“My view is that we are still in a secular bear market … My big concern is that the market has gotten ahead of the economy. The S&P is pricing in $85 dollars of operating earnings which would be a doubling from where we are right now, and it usually takes four to five years to double earnings off a recession low … The market has clearly overshot the fundamentals,” said Rosenberg.

Source: CNBC, October 19, 2009.

Tags: Ahead, Amp, Chief Economist, Cnbc, David Rosenberg, Earnings, Economy, Gluskin Sheff, October 19, Outlook, Recession, Secular Bear Market, Stock Market, Stock Video, Strategist
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Chart of the Day: Any bets on the savings rate?

Friday, October 2nd, 2009

I published a post yesterday quoting Richard Koo, chief economist of Nomura Research Institute and author of Balance Sheet Recession, as saying American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The chart below, courtesy of Clusterstock, leaves scant hope that individuals will stop saving and start spending again anytime soon.

“For one thing, we’re way below the personal savings rate we saw in the early 70s, let alone the savings rate in the pre-Greenspan era. With the recent wealth shock and the aging population, there are a lot of folks eager to hold on to every last dollar they’ve got,” said Clusterstock.

Source: Joe Weisenthal and Kamelia Angelova, Clusterstock - The Business Insider, September 30, 2009.

Tags: Aging Population, American Consumers, Balance Sheet, Bets, Business Insider, Chief Economist, Consumption, Era, Greenspan, Last Dollar, Leaves, Lot, Nomura Research Institute, Personal Finances, Personal Savings Rate, Recession, Richard Koo, Shock, Weisenthal
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Koo: Government fulfilling necessary function

Thursday, October 1st, 2009

Richard Koo, chief economist of Nomura Research Institute, rose to prominence early last year with the publication of his fascinating book, Balance Sheet Recession. He has just been interviewed by the brilliant Kate Welling at Welling@Weeden. Although I have not yet set eyes on the interview, I am sure it is top class. However, Richard Russell (Dow Theory Letters) last week provided a taste of the discussion in his newsletter, some of which has been worked into this post.

Koo defines a balance sheet recession as one that emerges “after the bursting of a nationwide asset price bubble that leaves a large number of private-sector balance sheets with more liabilities than assets. In this type of recession, the economy will not enter self-sustaining growth until private-sector balance sheets are repaired”.

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage.

Koo says it’s up to the government to make up for the private sector’s problems by spending and continuing to run deficits. Thus we would be “buying time” through government spending while the private sector has time to repair its balance sheets. He claims it is absolutely necessary for the government to spend and run deficits. If the government cuts back on its spending and stimulus, the US economy will swoon and more money will be lost than was lost during 2008-2009.

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest - to speculate on these things.’

“But a second collapse affects everyone, not just the bubble speculators, and it also suggests to the public that all the efforts to fight the downturn up to that point - all the monetary easing, the low interest rates, quantitative easing - have failed and even fiscal policy has failed. Once that kind of mindset sets in, it becomes ten times more difficult to get the economy going again. So the fact that Larry Summers was talking about ‘temporary’ fiscal stimulus had me very, very worried. That whole Larry Summers idea that one big injection of fiscal stimulus will get the US out of the recession, and everything will be fine thereafter, probably led to President Obama’s saying he’s going to cut his budget deficit in half in four years.”

In summary, Koo’s message is that we will have an all-out recession if government spending and the budget deficits are cut back before consumers’ balance sheets have been restored and they start buying again. Does anybody still expect the economy to be coaxed back to recovery without pain?

Tags: American Consumers, Asset Price Bubble, Balance Sheet, Balance Sheets, Bear Market, Buying Time, Chief Economist, Dow Theory Letters, Fiscal Stimulus, Franklin Roosevelt, government spending, Necessary Function, Nomura Research Institute, Personal Finances, Prominence, Recession, Richard Koo, Richard Russell Dow Theory, Swoon, Weeden
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