David Rosenberg Characterizes the Current Malaise a Depression

By on November 17, 2011

David Rosenberg - Gluskin Sheff EconomistConsuelo Mack interviewed David Rosenberg, Gluskin Sheff’s chief economist and strategist, recently. Back in February 2009, Rosenberg predicted the S&P 500 could fall to 666 (link), which it did. However, he remained much too bearish on the stock market, which eventually doubled from its nadir in a mere 2 1/2 years.

In Mack’s interview, Rosenberg mentioned the “D” word stating we were seeing a secular contraction of credit. He made his case stating there has been no employment growth in 10 years. In addition, the stock market, as measured by the S&P 500, is no higher than it was 12 years ago.

Rosenberg questioned what it means when money market rates are close to zero. He thinks it means the economic outlook is fragile.

When Mack asked how long the economic weakness could last, Rosenberg said academic pieces of work suggest a deleveraging cycle can last 7 to 10 years. Mack said we’re 4 years into the cycle and Ben Bernanke has said there are signs of life or “green shoots” in the economy. Rosenberg countered by saying normally growth at this stage of a recovery would be 5 percent and not 2 1/2 and most economics were forecasting 4 percent growth for this year.

Mack pointed out that corporate profits were strong and asked Rosenberg what was wrong with the theory that suggests the stock market should be doing better than it is. Rosenberg conceded that corporate balance sheets are in great shape. He noted that earnings have been good, but current corporate guidance on earnings has been more mixed than at any other time in the past 2 years of the recovery phase. He added that much of the earnings progress has been of a non-recurring nature, or accounting related.

Rosenberg forecasts another difficult year for job growth. He said the Wall Street economy leads the real economy by 3 to 9 months. He said the economy could contract a bit in the first few months of 2012. Rosenberg said we may look back 6-9 months from now and ask if MF Global wasn’t the Bear Stearns of 2011. He added we’ve learned there is, “usually not one cockroach in a messy kitchen, there’s usually a few of them.”

Rosenberg stated what’s happening in Europe has global ramifications and is significant. Rosenberg pointed out several monetary unions in the past that didn’t last (East African and Scandinavian). He said the only monetary union that works is the United States. Rosenberg stated the European Central Bank (ECB) is going to have to play a much larger role with regards to money printing. He added that this is a great opportunity for Germany to re-shape and have more influence in the Euro zone. He wouldn’t be surprised if the Euro zone comes out of this crisis smaller.

Rosenberg continued the discussion with Mack regarding his opinion that the bond market gets things right more often than the stock market. He compared the situation of the U. S. to that of Japan and discussed the “output gap,” which implies $1 trillion excess slack in the economy.

Rosenberg discussed the virtues of corporate bonds given their favorable balance sheet ratios. He stated corporate balance sheets are as good as they’ve been in 50 years.

Rosenberg doesn’t necessarily believe dividend stocks are a crowded trade since dividends may be the only return investors get in the foreseeable future.

Rosenberg concluded the interview on an optimistic note indicating political factors could lead to changing dynamics post-2012.

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