It's A Depression


In today’s Breakfast with Dave, David Rosenberg of Gluskin Sheff & Associates makes a very clear case that we’re not in Kansas anymore Dorothy.  Let’s stop calling this a ‘recession’ and label it what it is:  A depression.

This is what a depression is all about — an economy that 33 months after a recession begins, with zero policy rates, a stuffed central bank sheet, and a 10% deficit-to-GDP ratio, is still in need of government help for its sustenance. We had this nutty debate on Friday on Bloomberg Radio (Tom Keene is a class act, by the way) and another economist was on — the architect of the ECRI I think, who was claiming that there was no evidence of any indicator pointing to renewed economic contraction. And yet, that very day, the ECRI leading economic index comes in at a recessionary -10.1% print for last week. Go figure. The market for denial remains a lucrative one we would have to assume.

A depression usually involved a liquidity trap. In other words, expunging the debt excesses of the previous cycle leads to an ongoing contraction of credit where the demand and supply of loan-able funds is basically non-existent. This is why Libor (three-month interbank) rates are down to five-month lows of under 0.3%.

Banks continue to sit with over $1 trillion of cash on their balance sheets and despite survey evidence suggesting a big thaw in once-tight lending guidelines, there is no indication that the Fed’s attempt to restart the credit engines is working. Companies are sitting on tons of cash themselves so they don’t need the money from the banks and households don’t seem ready or willing to take on major credit-sensitive spending commitments. Perhaps with one-quarter of Americans with a sub-650 FICO score, the typical U.S. bank loan officer doesn’t want to get fired for making the same mistake that got us into this mess in the last cycle and is actually requesting some documentation and proof of income (surely you jest).

Finally, you know it’s a depression when, 33 months after the onset of recession…

Wages & salaries are still down 3.7% from the prior peak;

Corporate profits are still down 20% from the peak;

Real GDP is still down 1.3% from the peak;

Industrial production is still down 7.2% from the peak;

Employment is still down 5.5% from the peak;

Retail sales are still down 4.5% from the peak;

Manufacturing orders are still down 22.1% from the peak;

Manufacturing shipments are still down 12.5% from the peak;

Exports are still down 9.2% from the peak;

Housing starts are still down 63.5% from the peak;

New home sales are still down 68.9% from the peak;

Existing home sales are still down 41.2% from the peak;

Non-residential construction is still down 35.7% from the peak.

Folks, in a normal recession-recovery cycle, practically all these indicators are making new highs at this juncture of the business cycle. For anyone to go on Bloomberg Radio and lay claim that this is a normal bounce-back in the economy is unarmed but very dangerous.

What is up, and up dramatically, since the recession began 33 months ago are government transfers to households (in the form of unemployment benefits, food stamps, welfare, social security) — they have ballooned 31% since the end of 2007. A record 30 cents of every dollar in personal income is now derived from some form of government support — now tell me that is not a depression-era statistic. The modern day soup line is a cheque in the mail.

In real terms, private sector wages are down 8.4% since the Great Recession began and are barely more than 1% higher now than they were at the cycle lows. Meanwhile, again in real terms, government-related income payments have surged 17%. Strip out Uncle Sam’s generosity, and real personal income is still 5.5% lower today than it was when the recession began in December 2007.

Maybe now we can get a better appreciation of why it is that the NBER has yet to sound the all-clear siren that the recession actually ever officially ended despite four quarters of positive GDP growth — perhaps not only because this may have merely been an unsustainable policy-induced spasm, but also because in per capita terms, real final sales continued to contract through this alleged statistical recovery.

And, the pressures are certainly deflationary; below are two real life examples to close out the summer. First, have a look at the first sentence of the article on page 5 of the weekend WSJ (Campbell’s Profit Up, but Sales Stew):

“Campbell Soup Co.’s fiscal fourth quarter profit jumped 64%, helped by cost cuts, but the food maker posted weaker sales as its soups battle competition from cheaper meals and lower consumer outlays on groceries.”

This is what happens in depressions. You add a lot more water to the tomato soup. Or you trade down to the no-name brands and hope your kids don’t notice.

On the same page of said WSJ, there was also this article, titled: Walgreen Posts Sales Rise, Swaps Assets with Omnicare. To wit:

“Like other drug retailers, Walgreen’s pharmacy department has faced profit pressure, with consumers cutting back on doctor’s visits, opting for generic drugs and buying medications in bulk.”

This is the new frugality. As we mentioned last week, at the margin, an unprecedented number of Americans are borrowing against their 401(k)s, canceling their life insurance policies (like George Bailey did) or are foregoing their physicals — all in order to scrape by. This is a very grim development, which is why it bothers us so much to hear the bond bear inflationists complain about how their spa fees have gone up so much in the past year. That is not reality for the vast majority of the population.

This is what happens in a deflationary depression — consumer attitudes undergo a radical change and it is secular in the sense that this adjustment to “getting small” is measured in years, not months or quarters. This is the price we all pay for the asymptotic credit bubble of the prior decade and the transition to the next sustainable bull market and economic expansion will require two things: time and shared sacrifice. Good things will end up coming out of this — there is nothing wrong in learning how to live within your means.

The one thing the federal government could do that may help people cope, instead of throwing money down the toilet in useless quick-fixes or turning unemployment insurance into a quasi welfare program, is to defray the costs of an annual visit to a credit counselor for debt-laden and cash-strapped households. Uncle Sam, teach these folks how to fish.

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