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The U.S. economic recovery has been weak and the looming fiscal cliff threatens to act as a further drag on the economy. Europe is imploding with the chances of a 'Grexit' increasing, and Spain's economy deteriorating and risking contagion.
2012-06-16
In his latest report "Charts With Dave", bearish Gluskin Sheff economist David Rosenberg looks at the state of the U.S. and global economy and writes that the recovery isn't where it should be.
"Three years into the aftermath of the worst recession since the 1930s, the global economy still cannot manage to expand organically — that is, without the need for ongoing life support from central banks and governments," writes Rosenberg.
NOTE: Thanks to Gluskin Sheff for giving us permission to feature David Rosenberg's charts.
The forecasts of monetary policy makers have higher variability due to incredible levels of uncertainty
A year ago Fed consensus was for 4% GDP growth in 2012, now it looks like the economy will grow about half that pace. GDP growth forecasts are being lowered and this "goes down as the weakest recovery on record"
There is a lack of firepower in this recovery. It's the first time on record that the U.S. economy has gone 11 quarters into a recovery but failed to post 4% GDP growth a quarter.
"…More than three years of 0% policy rates, a Fed balance sheet pregnant with triplets and now going on four years of $1 trillion-plus fiscal deficits — unheard of outside of a wartime economy"
Policymakers face three major headwinds. The first is that we are still in the middle of a consumer deleveraging cycle which is "unprecedented and inherently deflationary". This chart show a notable reversal but there's still a way to go
The second headwind is that the housing the vacancy rate is undergoing a long-term mean-reversion phase in which it could take a while before excess inventory clears out and supports prices
Given the high levels of corporate, household, and government debt across developed countries it appears odd that there's talk of an end to the deleveraging cycle
The looming fiscal cliff could shave 4 percentage points off real GDP growth. Even if half the expected restraint is pushed into the future the economy will likely stagnate next year
Despite calls from intelligentsia saying Europe could avoid a recession and that this would be contained to the periphery. But there are signs that the contraction is moving to the core
"On average, in the third year of recovery, the output gap is fully closed and the Fed is embarking on rate hikes, not contemplating a third round of Quantitative Easing as is now the case"
"The spread pickup over Treasuries is compelling and our research shows that this is one asset class where the potential rewards still more than compensate for the risks involved"
"The market is signaling that secure income is, over time, becoming increasingly scarce. Scarcity value, in other words, is what is in short supply and is what you want to own in the portfolio"
Baby boomers have been choosing to sell during market rallies and rebalance their portfolios into more conservative strategies instead of chasing the market. Hybrid funds - mutual funds that have a mix of stocks and bonds - have become an attractive way to participate in the equity market
Since the housing bubble, baby boomers no longer see real estate as a retirement asset and intense deflation means that the average household is down 15% in net worth from five years ago
But expected returns have been adjusted to a 4 - 5% range and this is what buy and hold investors can expect from the market for public securities for the foreseeable future
The reason no one recognizes this as a "modern-day depression" is because no one can see the soup and bread lines since stamps are now sent electronically or in the mail
Government intervention in the economy and central bank intervention in asset markets in a deflationary environment has caused "intense market volatility"
This massive intervention has taken place across global central banks. It isn't just the Fed, but also the Bank of Japan, Bank of England and the European Central Bank. "Collectively, their balance sheets represent about 25% of GDP"
Mamta Badkar is formerly a reporter at Business Insider. She has a master's degree in journalism from Columbia University and previously reported for Verve magazine in India.
