Economy Caught in Depression, Not Recession: Rosenberg

By: Jeff Cox
CNBC.com Staff Writer

Positive gross domestic product readings and other mildly hopeful signs are masking an ugly truth: The US economy is in a 1930s-style Depression, Gluskin Sheff economist David Rosenberg said Tuesday.

Writing in his daily briefing to investors, Rosenberg said the Great Depression also had its high points, with a series of positive GDP reports and sharp stock market gains.

But then as now, those signs of recovery were unsustainable and only provided a false sense of stability, said Rosenberg.

Rosenberg calls current economic conditions "a depression, and not just some garden-variety recession," and notes that any good news both during the initial 1929-33 recession and the one that began in 2008 triggered "euphoric response."

"Such is human nature and nobody can be blamed for trying to be optimistic; however, in the money management business, we have a fiduciary responsibility to be as realistic as possible about the outlook for the economy and the market at all times," he said.

The 1929-33 recession saw six quarterly bounces in GDP with an average gain of 8 percent, sending the stock market to a 50 percent rally in early 1930 as investors thought the worst had passed.

"False premise," Rosenberg said. "And guess what? We may well be reliving history here. If you're keeping score, we have recorded four quarterly advances in real GDP, and the average is only 3%."

Rosenberg's warning comes as a slew of major analysts—Goldman Sachs andJPMorgan among them—have slashed GDP projections for 2010 to the 1.5 to 2 percent range.

Chicago Federal Reserve President Charles Evans said in a speech Tuesday that the risk of a double-dip recession has escalated. He said government programs to help distressed homeowners have been ineffective and aren't helping the pivotal housing sector recover.

The dour outlooks come on the same day that the National Association of Realtors said home sales reached a 15-year low in June, dousing hopes that the industry had reached a bottoming point.

Rosenberg points out that the "overall economic malaise" has come despite aggressive efforts by the Federal Reserve to stimulate the economy through rate cuts. The central bank itself has scaled back its economic projections, has held steady on its balance sheet, and could be announcing another round of quantitative easing measures at its Jackson Hole summit this week.

"How's that for a reality check," Rosenberg said. "It's not too late, by the way, to shift course if you have stayed long this market."

Forbes: The U.S. Financial System Is Effectively Insolvent

Nouriel Roubini
Forbes

For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.

There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:

First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.

For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.

Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.

With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.

Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.

Update from Dave Ramsey on the Economy

I’m tired of hearing all the gloom and doom coming from the media about the economy and unemployment—I bet you are, too! Let’s take a minute to look at the true reality of the situation and what we can do about it.

Yes, many people have lost their jobs and houses. You may be one of them. But guess what? People have lost their jobs and houses even in a bull market. About 93% of people are still employed. That is pretty good! I was alive in the 1970s when unemployment hit double digits, and we’re nowhere near that right now! I’m not making light of the fact that some people are struggling; I’m just putting the situation in the proper perspective.

Even though you may be currently unemployed, that doesn’t mean you have to participate in the recession. People like me who have chosen to not participate acknowledge the reality of a slow economy and suffering people. However, we have decided that we’re not going to form our lives around the negativity coming out of the media and government. We’re intensifying our efforts and going to have the best year of our lives in spite of things slowing down.

Some people who find themselves unemployed will go into new careers or start their own businesses where they have the best year of their lives—professionally, financially and emotionally. Their current job losses are actually blessings in disguise. They believe this and are formulating game plans based on it. I guarantee there are men in their garages right now starting their own mechanic shops. The next Mary Kay Ash is writing up a business plan for new products she’s just created. College students are developing “the next best thing” in their dorm rooms as you are reading this. This is reality!

So think about your skills and interests. How can you leverage those passions into something you enjoy doing every day while earning money for it? If you haven’t lost your job but dread going to work, maybe it’s time to fire your employer and go in a new direction. When you have a game plan for your money and career, you will have a sense of empowerment because you aren’t a slave to the lender (or employer).

When employers start hiring because they believe their businesses will grow, recessions end. Many who have stopped hiring a healthy amount have been paralyzed by fear. They’ve lost hope. People who continue going about their lives in normal ways (without being irresponsible and buying stuff they can't afford) believe in the future. It’s called hope.

You can have fear or hope. It's your choice.

I choose hope.

Seven action steps if you’ve lost your job (or think you might)

Romney: Obama must be 'educator-in-chief'

Former presidential candidate Mitt Romney offers his advice to Barack Obama, and his views on labor unions, federal bailouts, Detroit, protectionism, and America's debts.

November 7, 2008: 9:47 AM ET
Fortune Magazine

NEW YORK (Fortune) -- Mitt Romney, former Massachusetts governor and co-founder of private equity firm Bain Capital, is often mentioned as a GOP contender for 2012. He spoke with Fortune's Jia Lynn Yang.

Any management advice for the next president? How does he rally a depressed nation to meet the challenges we face?

He should forget entirely about reelection and focus solely on helping the nation at a critical time. He should dismiss the people who helped him win the election and bring in people who are above politics and above party. He should surround himself with statesmen and economists, businesspeople and leaders. In some ways it would be beneficial if our presidency consisted of only one term. That way the President would think about his legacy and the future of the country rather than reelection and partisanship.

How likely do you think that's going to happen?

In his second term, President Clinton made an effort to govern more from the center than from the extreme wing of his party, and by doing so, found greater support and greater political success. Perhaps it's a paradox, the less political the agenda, the more political success one enjoys. But now is not the time for partisanship opportunism.

The unions have helped Barack Obama. They will hope to be paid back. I'm particularly concerned that organized labor would call on Barack Obama to pass the card check program. This removes from American workers the right to the secret ballot in deciding whether or not to accept a union. This legislation would do more to harm America's long-term competitiveness than almost anything I can imagine. It would be a partisan payback for organized labor but it would come with devastating consequences for the nation.

Do you have any concerns that the massive government intervention on Wall Street will have unintended consequences?

"The bailout of Wall Street" was a terrible choice of words. No one wants to bail out anything, especially Wall Street. The objective of the legislation, however, had a much broader purpose: to stabilize our financial system, to keep it from complete collapse. Sometimes that broad purpose may require saving individual companies, as with AIG (AIG, Fortune 500). But we just can't have government running around the nation looking to bail out companies in trouble.

Given your Michigan roots and what your father accomplished turning around the American Motors Corporation in the 1950s, what do you think is the future of the auto industry?

Right now, the auto industry is on life support, and its prospects look extremely dim. But they don't need to be. The industry could be turned around. There is no inherent reason why America can't build and sell cars to Americans at least as well as the transplants are doing. Any effort to help the auto industry has to be made as part of a comprehensive strategy. Before the government issues loans to the auto industry, as has been authorized by Congress, it should insist on seeing credible and independent strategies that will return the companies to long-term sustainability. Government should not finance ongoing losses and declining market shares.

What concerns you the most about the economy right now? Any dangers lurking in the global economy that we didn't hear much about during the campaigns?

Far too little attention was paid to America's long-term competitive position during the campaign. I see four major economic strategies at play in the world today: the first is ours. It combines freedom and free enterprise.

The second is China's. It combines free enterprise with authoritarianism.

The third is Russia's. No longer is Russia's plan for dominance based upon industrial capacity but rather upon controlling energy throughout the world. Hence Russia's cozy relationship with Iran and Venezuela as well as its belligerent entry into Georgia. Russia's strategy is based on energy and authoritarianism.

The fourth strategy is represented by radical violent jihad. The intent of the jihadists is to cause the collapse of the other three, such that the "hidden Imam" or the Caliphate remains the last man standing.

The real challenge for America is how to strengthen our competitive position so that our economy outperforms those of the other three. If we're successful, freedom will be preserved for the world. If we're unsuccessful, the results are unthinkable.

When you talk about making America more competitive, what do you have in mind?

First, America must substantially improve our education system. We've fallen behind, particularly in areas of math and science.

Second, we're going to have to remedy our disproportionate health care cost disadvantage. America spends far more than any other nation as a percent of GDP on health care. This effectively is an enormous tax on the economy and on our businesses.

Third, our national debt is excessive and our entitlement obligations pass a massive burden onto the next generation.

Fourth, tax and regulatory policies weigh down our ability to compete. Specifically, our products carry an embedded tax which makes American goods less competitive abroad and at home.

Fifth, America's apparent retrenchment from the concept of open, free and fair trade could put us further behind other nations that are aggressively seeking trade relations around the world.
Sixth, our lack of an effective energy policy drains our economy by approximately half a trillion dollars a year.

And, finally, the blow that Wall Street has taken may make us less competitive in financing entrepreneurship.

There's strong populist sentiment against free trade deals. Given that, how does an American president move forward on this?

I can only hope the President abandons the populist current, which seems to be growing in our country. An effort to block foreign trade will only hurt America. Ultimately products in this country would become uncompetitive. Look what happened to the Soviet Union. Its cars, its watches, its goods became a joke.

The only way to remain the leading economy in the world is to be successful on a level playing field around the world. Some individuals, at the behest of special interests, seek to prevent trade with other nations by imposing America's labor requirements and other peculiarities. That is a disguised form of protectionism.

Do Americans need to save more and adjust to a lower standard of living? In other words, should be buying houses we can actually afford?

I think a President has to be an educator- in-chief as well as a commander-in-chief. The American people need to understand the challenges we face. And the American people need to understand that they, like the nation, need to live within their means. Both have been spending more than they have been taking in. It puts the nation at risk. And it puts families at risk.

There's a period of adjustment that's occurring right now as American families deleverage and employers deleverage. It's time for the government to finally address our severe debt burden, before it leads to even more severe consequences. I'm referring not only to our annual deficit and national debt but also to our obligations under entitlement programs like Social Security.

Sadly, History made Sept 30 as National Debt hits $10 Trillion

History was made on Tuesday Sept. 30, 2008, the last day of Fiscal Year 2008 for U.S. Government accounting purposes, as the National Debt crept up over $10 Trillion for the first time ever. There was no fanfare, no balloons, no real mention of it in the newspapers. This was an important milestone in American history and it went by as an average day.

On Sept. 30th, the total debt amounted to $10,024,724,896,912.49

When the economy revives, how will we know?

The following appeared on page 7D in the Sunday May, 25, 2008 issue of the St. Paul Pioneer Press.

By Jeannine Aversa
Associated Press

WASHINGTON - With any luck, the second half of this year will be better than the so-far rocky first half. The Federal Reserve chief hopes that is the case. So does President Bush.

For the rest of us mere mortals, it feels like the pain is getting worse.

When the economy begins to snap out of its funk, how will we know?

Like calling a recession, pin-pointing the turnaround can be as much art as science. Economists agree there could be some strong signals to look for, however: A calmer stock market, an end to falling home prices and more jobs being created.

We're not there yet.

The economy by all accounts is suffering through difficult times, although some economists have backed off the recession talk. Economic growth has slowed sharply and employers have cut jobs for four months in a row as problems in housing, credit and financial markets forced skittish people and businesses alike to hunker down.

Even though a Labor Department report last week showed the number of newly laid off workers filing for unemployment benefits dropped to the lowest level in a month, claims remain high enough to indiate the labor makret is sluggish.

Still, there's hope that the economy's growth will begin picking up later this year.

Experts will be looking at a variety of barometers to mark the arrival of a rebound, but it's by no means definitive or foolproof.

One important indicator is the stock market. The turbulence taht has engulfed Wall Street since last summer and hit a crisis point with the near collapse of investment firm Bear Stearns, has calmed somewhat, but the situation is still "far from normal," Fed Chairman Ben Bernanke recently observed.

The Dow Jones industrial average, for instance, has clawed its way out of a recent bottom - 11,740.15 - hit in March. However, the index is still under 13,000, well below its peak of 14,087.55 set in early October of last year. Financial markets remain fragile.

Investors are looking ahead - at the economy's prospects and individual businesses - when they make investment decisions and are buying or selling stocks.

"The canary in the coal mine is really financial markets," said Sung Won Sohn, an economics professor at California State University. "The stock market recovery almost always precedes the economic recovery by about six months or so. The exception was in the 2001 recession. Because of the dot-com crisis, the stock market was so badly battered it took a while for it to get back to full speed," Sohn said. By his count, after the 2001 recession, the stock market lagged the economic recovery by one year.

In the current bout of economic troubles, though, fallout from the 2-year-old housing collapse and subsequent credit and financial problems has driven the pullback by consumers, businesses and Wall Street.

That's why economists - this time around - will be looking for signs of stabilization in the housing market. Specifically, house prices will have to stop falling or at least decline at a slower pace in many parts of the country. As many Americans have watched their single-biggest asset - their home - shrink in value, they have become much more cautious in the spending, contributing to the economy's slowdown.

On Thursday, the Office of Federal Housing Enterprise Oversight said U.S. home prices fell 3.1 percent year-over-year in the first quarter, the largest drop in the 17-year history of tracking the data.

House-price improvements also are important to a return to stability because house prices figure into the value of a host of securities, such as mortgage securities and derivatives.

And, improving house prices also would ripple through credit markets, making lenders more willing to make loans to people and businesses. That, in turn, would help bolster confidence in financial markets, economists said.

"Until the housing and credit markets improve, businesses and consumers will be doubting Thomases - there is not question," said Brian Bethune, economist at Global Insight.

Forecasters at the National Association for Business Economics believe the worst of the housing slump and the credit crunch might end this year. The forecasters are hopeful that home sales will hit bottom this year. House prices, though, are still expected to drop this year and next. Some predict house prices won't turn up until the spring selling season of 2010.

Analysts also will be looking for zooming gasoline and other energy prices to settle down. Gasoline is approaching $4 a gallon on average nationally and oil has blown past $130 a barrel, from $100 at the beginning of the year. An easing of high food and other commodity prices also would be welcomed. High prices, especially for energy, are taking a bit out of paychecks, undermining consumer purchasing power, and putting a squeeze on businesses' profits.

Unlike the recessions in 2001 and 1990-1991, people, more so than businesses, are bearing the brunt of the economy's current woes.

"It is almost unprecedented in the post World War II perioud to have a recession be driven by a pullback in consumer spending, versus a pullback in business spending," said Mark Zandi, chief economist at Moody's Economy.com "This one is unique in that sense. Businesses are pulling back but they are more reacting to consumers." He's among those in the recession camp.

U.S. households are more in debt and under greater pressure to restrain spending. Zandi said the share of households' after-tax income that goes to serving their financial obligations was 19.3 percent in 2007. That was up from 17.9 percent in 2000 and 17.2 percent in 1989 - the years preceding the last two recessions.

In contrast, a debt-burden measure for nonfinancial businesses shows that 10 percent of their cash flow is going to interest payments on debt, Zandi said. That's down from around 25 percent in 2001 and 30 percent in the 1990-1991 recession, he said.

Against that backdrop, another barometer for economic revival would be a turn-around in sagging consumer confidence. The hope: if people cast off their gloomy mind-set, they'll be more likely to boost spending, which would energize the national economy.

The Fed has been hoping to turn consumer psychology and thus heal the economy through its most aggressive rate-cutting campaign in decades. The Bush administration is counting on those powerful rate reductions along with billions of dollars worth of rebate checks to lift the U.S. out of its slump in the second half of this year.

Fed officials viewed economic activity as "likely to be particularly weak in the first half of 2008; some rebound was anticipated in the second half of the year," according to Fed documents released Wednesday. Still, economic growth for the yar as a whole is likely to be feeble.

Even if that second-half rebound happens, businesses are likely to remain cautious in hiring, waiting for signs that any recovery has real staying power. The unemployment rate, now at 5 percent, could rise to 6 percent or higher next year, some economists said.

So the job market needs to get back to full throttle before the economy is truly back on firm footing. After the last two recessions, the country was still losing jobs as the economy struggled to recover.

Some believe the country will experience a "W" shaped recovery. That's wehre the economy picks up with the help of the stimulus, loses steam as that boost fades and then picks up again in the second half of 2009.

It's hard to say with certainty how it will turn out. Each period of economic stress "has its own kind of biography," Bethune said.

Dave Ramsey's Thoughts on Gas Prices

Thoughts on Gas Prices
By Dave Ramsey
www.daveramsey.com

Gasoline has gone up 26% since this time last year. SHOCKER! Since most of us are used to daily commutes, running the kids here and there for their various activities, and visiting friends and family, this price increase is affecting us. The Consumer Price Index figures say this is the number one thing that's gone up in our household budgets this year — and it's only May!

"But there's nothing I can do," some say. I say, "Oh, yes there is!"

It's time to revisit the budget.

When I tell people this, some tell me they've crunched their budgets as much as they can. Then I ask, "How much is your car payment? ... How much is your monthly cable or satellite bill? ... Is the Starbucks drive-thru a regular stop on your morning commute?"

I hate to break it to you, but new cars, cable, and Starbucks are luxuries, NOT necessities! You can easily survive with a used (and paid-for!) car, no cable reality shows, and coffee made at home. Just think of all that money you could use to pay off debt and put toward your gasoline money for the month if you did just those 3 things!

Earlier this month, an algebra teacher in Michigan sent me a great email that I read on the radio show. She wrote:

Dave, I often give my math students this calculation to figure out. A typical latte costs $3.59 for 16 oz. That's 22 cents per ounce or $28.72 a gallon! Ask your listeners if they've drank a gallon of latte lately! Read the blog

HOLY COW! If that doesn't put things into perspective, I don't know what will!

First Things First
You must remember there IS a difference between needs and wants in life. The first things at the top of your budget should be your needs: shelter, food, transportation, clothing, and utilities. If you currently go to the movie theatre every weekend or have a Hawaiian vacation at the top of your list when you struggle to pay the electric bill, your priorities are out of wack. Don't sacrifice your needs to finance your wants. If you do, it will catch up with you and you'll regret it.

Plan Ahead
You can also strategically plan ahead when running errands and commuting to work. If you go to the grocery store twice a week, reorganize your list so you only have to go once a week. If you have a lot of errands to run, plan your route ahead of time so you're not retracing your steps around town. You could also organize a carpool with some of your coworkers who live near you.
June will be here before you know it, so go have a Budget Committee Meeting right now to see where you can free up some more money — because every little bit adds up when gas is $4 a gallon!