Wikinvest Wire

Rosenberg on the Recession Depression

Tuesday, January 27, 2009

This just in from David Rosenberg at Merrill Lynch (hat tip JN):

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.
The "youthful demographics" in today's money management industry are probably a big part of the reason why they're even having this discussion.

Father, grandfather, great-grandfather?

It has already become quite entertaining to watch how the financial media and the mainstream media tip-toe around the "D" word. Mr. Rosenberg does not feel the need to.
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.
Mean reversion is only fun when you are below the mean.


rich t said...

In conversation I refer to this as the "Greenspan Depression" (picked that up at Fleck's site I think. Man, I hope it catches on. Make it happen Tim!

dmsteidl said...

So will all the money being pumped into the system shorten or prolong this depression or is the government, as my grandfather would say "pissing in the wind"?

Anonymous said...

Bernanke's "helicopter solution" is purely academic theory developed by economists. When was the last time they were right or prescient?

Somehow the country is going
whole hog on something
completely unproven on the
fallacious logical argument
that if "A" did not work
in the great depression then
something that is
"not A" must be the solution.

How about instead -- the government doing
the minimal thing that would
help along the patient to recover. Recall one of the key rules of the medical profession: "do no evil".

dangermike said...

A buddy of mine printed up a bunch of bumper stickers that put it well:

"Welcome to the Not-So-Great Depression"

That Guy said...


The irony of your comment is so rich. Your buddy printed up a bunch of stickers welcoming people to a time where they can't afford anything but the necessities (i.e. not bumper stickers) and they can put them on their cars that are most likely unaffordable or repo'ed. Awesome!
I bet he makes money on it all the same though. I wish I had thought of it.

Anonymous said...


While the government can create money, it cannot create wealth. So when it pumps money into the system, it is actually sucking up wealth from productive sectors and wasting it on unproductive sectors that would/should not survive otherwise. This most definitely prolongs and worsens the depression.

taco-lad said...

Governments cannot magically increase the value of money however, so "making" money just devalues it. Governments don't "create" money to stimulate economic activity. Governments re-distribute money. Taxes levied on citizens, foreign deficit and bonds are all income streams/credit lines that the government can draw on to stimulate various sectors of the economy. A viable option for instance would be to reduce the number of armoured fighting vehicles the US army maintains. Having never fought a vehicular war on home soil, what is the justification for maintaining 100s of thousands of war machines that are glorified joy rides? Why not spend some of that money on improving schooling (more teachers), infrastructure (better roads and municipal services) or other areas that generate further potential capital investment? This shortens and lessens a depression.

The government isn't about being "efficient". It is there to maintain the services that do not have a tangible or short term gain, as well as maintain services that benefit all citizens, regardless of economic status. E.g. armed forces, legal system, Health system(ideally), education system (ideally) and infrastructure.

Before critisising the spending practices of a government, it pays to be aware of the issues surrounding governmental economics, as well as economic models other than pure capitalism.
The free market is often touted as the best method for exchange of goods and services, but people often forget that the theoretical operation of a free market relies on perfect information for both buyer and seller. As soon as one party knows more than the other about a good or service, it becomes an unbalanced transaction and someone loses. In this case, sub-standard equity was re-badged as stable credit. A government should ensure that both sides of a free market transaction have the same information available. Hence regulation and standards.

Anonymous said...

"The government isn't about being "efficient". It is there to maintain the services that do not have a tangible or short term gain, as well as maintain services that benefit all citizens, regardless of economic status. E.g. armed forces, legal system, Health system(ideally), education system (ideally) and infrastructure."

i.e. socialism and we know how that turned out already. That a national government not provide these does not preclude private citizens or much smaller local governments from organizing to do so as needed. Let's not argue over whether national health and education can even work. What I want is to have my tax money back if I choose not to opt out.

Anonymous said...


I agree spending on infrastructure and social programs would be a vast improvement. But you are making one very big assumption that governments can administer these programs competently. It is a nice idea but the record proves otherwise. Ask yourself how did we get to where we are now? What do you think is the ultimate destiny of SS and Medicare? I would rather have my taxes back to figure out health and education on my own.

  © Blogger template Newspaper by 2008

Back to TOP