Merrill Lynch Analyst Says Depression is the New Recession

ML chief economist David Rosenberg has broken the D(epression)-word seal. In his most recent report “Some Inconvenient Truths” he says we are currently in a depression, and uncharacteristically doesn’t mince his words:

Not your father’s recession, but maybe your grandfather’s
In our marketing tour through Europe last week, we brought along our new chart package entitled “Not your father’s recession, but maybe your grandfather’s”. Looking at the youthful demographics that characterize today’s money management industry, we should have probably gone with “great-grandfather’s” instead.

How is a depression defined?
It shouldn’t come as any big surprise that with such a provocative title, we would be saddled with questions as to how an economic depression is even defined. Of course, most portfolio managers still don’t know that a recession is not defined as back-to-back quarters of negative real GDP prints (which we had neither in 2002
nor 2008) but instead the timing of the peaks in real sales activity, employment, industrial production and organic personal income growth.

We are likely enduring a depression today
As for depressions, there is no official definition, except to say that they have existed in the past. There were no fewer than four in the nineteenth century, one in the twentieth century, and we are very likely enduring another one today. Though this current one is muted by the fact that most countries have an elaborate social safety net (deposit insurance, unemployment benefits, welfare, and socialized health care).

Depressions can last anywhere from three to seven years
Depressions are basically long recessions – they can last anywhere from three to seven years, while historically cyclical recessions last 18 months – and tend to follow years of leveraged prosperity of Gatsby-like proportions. Considering that in this most recent leveraged cycle from 2002-07, we reached a point where a record 40% of corporate profits were derived from financial activities, where household debt relative to income and assets surged to unprecedented levels and the personal savings rate briefly went negative at the height of the housing bubble, it is safe to say the down-cycle we are currently experiencing did indeed
follow a classic elongated period of leveraged prosperity. It is now reverting to the mean.

Here are some of the inconvenient truths that David uncovers:

* $6 trillion in private sector debt must be eliminated
* Still in the early states of the credit contraction
* Economy saddled with $1 trillion of excess capacity
* Credit card delinquency rates break to new high
* Housing market index slides to record low despite low interest rates
* Fed’s balance sheet expansion needed to prevent deflation
* Record wealth implosion - 20% hole driven into household balance sheet
* Real unemployment rate at 13.5% (a topic we discussed previously)
* Intentions to raise wages slides to record low
* We have no idea when the credit cycle will hit bottom
* Rising savings rate will be incredibly deflationary
* And scariest of all - The well for the US consumer has run dry for good

Robert Rubin says fair value accounting bad: “I think mark-to-market accounting has led to terrible vicious cycles in asset prices,” http://www.bloomberg.com/apps/news?pid=20601087&sid=abXWPFuHuSSo&refer=home
Although I’m not surprised that someone as unscrupulous as Robert Rubin has proven to be say this (as he is faced with some damaging lawsuits connected to his directorship of Citigroup), I am surprised that his view is given any space anymore in the media. I guess telling the truth to the investing public by using fair value accounting would be tremendously inconsistent with the accepted policy - both by the private sector, the Federal Government and the entities who enforce the legislated rules - of cooking the books in order to maximize the pay of upper management. Rubin’s view would also reflect the fact that our Government has fully adopted an Orwellian stance.

Related Posts:

• The biggest problem affecting economies all over the world is that PRICES OF GOODS AND SERVICES ARE FAR TOO HIGH RELATIVE TO INCOMES.
• An excellent revealing article for economic recovery…
• US Economy Mired in ‘Form of Depression’: Rosenberg
• Which country has the world’s largest negative account balance?
• While you are waiting for US data here some unemployment benefits news from Canada:

Leave a comment