David Rosenberg is one of the, literally, handful of observers who has understood this crisis since its origins in the dot-com collapse (two others I strongly suggest reading, especially their works from 2003-2006, are John Succo and Kevin Depew). As such I consider him to be at the apogee of understanding with respect to the macro environment. From his daily missive (free), from Friday, emphasis added:
"At the 2006 bubble peaks, households were engaging in mortgage equity cashouts to the tune of over $80 billion per quarter. That provided the thrust for the spending binge even as the jobs cycle lagged behind, similar to what we had seen in the past as the economy continued to adjust the vagaries of the post-dotcom bubble bust. Today, cash-out refinancing activity is running at one-tenth that good ol' pace of five years ago. Indeed, attitudes towards “being in debt” have shifted so radically that nearly 1 in 4 households are now “cashing in” and paying down their mortgage debt. Nearly 1 in 3 upon refinancing are doing the most unAmerican thing of all; choosing to accelerate their paydown by reducing their amortization terms! This means maintaining or increasing the same monthly payments in a lower rate environment, which in turn helps explain why spending intentions on other things are going down. What can Dr. Bernanke do when the shift in attitudes is so profoundly psychological?"
Remember, all of this is happening at record-low mortgage rates. People are accelerating their retirement of outstanding credit during record low rates. This is in part the remnant of the juxtaposition of credit quality and credit demand: those who qualify don’t want it and those who want it don’t qualify. This is deflation.
Another illustration of deflation: 10-yr Treasury yields at sub 2.5% and a near-record pace of cash accumulation for the SP500. A fundamental understanding of project-finance is the role of the 10-yr yield or any other chosen proxy for “risk-free” return; it’s the foundation of any hurdle rate. I ask this to those I interact with all the time: you mean to tell me this economy cannot generate substantial investment at a 2.5% hurdle foundation? That’s deflation. Note not a single mention of CPI, PPI, or Price Deflator. Those are symptoms, not the cause. Spiking time preferences would be the cause, which said another way is lack of investment demand. Which is spun by lack of confidence. Keep the money close to the chest. Get small.
The sun likes to rise and set. The moon likes to wax and wane. The seasons like to arrive and depart. And businesses like to buy for $1 and sell for $2.
Nature abhors vacuums. Nature abhors excess. Businesses abhor uncertainty.
Until the American Business Spirit is once again allowed to collect the natural rewards for wise intrepidness, this economy will fail to grow at its potential rate. Until the American Business Spirit is no longer a key recipient of a populist-fueled Washington angst, the first guy to take the first investment step won’t arrive.
Hey Washington, want to go some way towards fixing the economy? Stop acting like a bunch of morons, debate reasonable legislation that will allow the small-business man to fund your fat-cat Student Council, and project at least a modicum of capability. Make no mistake, you all, in all parties, are the largest collection of dunderheads since the advent of the wheel.
Succeeding in the above miracle, we can then shift the debate towards what needs to be done: the recognition of accumulated loan losses that funded the extra-ordinary increase in aggregate demand since essentially 1982. In effect, GDP grew unnaturally high due to the remarkable expansions of consumption credit (the most toxic stuff on earth) beginning nearly 30 years ago. The US Consumer, one of the largest engines of the global economy over the past couple of decades, has spent-forward X years of his income. Consequence must roll to the decision maker, whether the consequence is desired or most certainly not. The piper has to be paid. His harlequin hat should not fool us into believing we can modify the unwind of our exposure to him. Any and all policies that fail to address this central problem simply kick the can down the road and lead to a more expensive outcome. The patient piper is not leaving. He will be paid.
Often times you’ll find a man, call him 60 or so years old. If you sufficiently gain his trust he is likely to at least on one occasion joke to you that “had I killed her, I’d be out of prison by now.” Well, if we had thrown Paul Krugman and every other member of the Flat-Earth Society (often better known as The Keynesian School) portside, we’d be half-way through this by now. And yes, things would be (and will be) a lot cheaper.
Read David Rosenberg. Every day.
Disclosure: No Positions in Stocks Tagged