The Big Interview with David Rosenberg
Below is a very good and nearly unfiltered 30-minute session with David Rosenberg of Gluskin Sheff. He speaks with the Wall Street Journal’s Kelly Evans in the weekly "Big Interview" feature, a format I really like. I have featured Stephen Roach and Sheila Bair at CW from previous big interviews.
Rosenberg has been one of the more prescient economists regarding the contours of the particular business cycle and their causes. His overarching theme expressed in the interview is that we are at or near the end of a super credit cycle that makes this downturn unique in post-World War II history. This means we are in the throes of a secular private sector deleveraging which will crimp growth for some time to come.
In Rosenberg’s view (and mine), the pace of this particular cyclical upturn has been unsustainable from the beginning because all of it has been predicated on the inventory cycle and stimulus. I first pointed to this in May of 2009. See Economic recovery and the perverse math of GDP reporting. Late in 2009, I noted a Paul Krugman piece which demonstrated that the way the stimulus is being applied necessarily meant lower GDP growth in the second half of this year. See Double dip recession and the perverse math of GDP reporting. And I think fiscal stimulus is dead for the reasons I first gave in January 2009 – one reason the focus now seems increasingly on the Federal Reserve. Can this recovery be sustained without more stimulus? Given the jobs picture, it is doubtful. Rosenberg believes Q4 could see a decline in GDP.
For me, the real question now is about bank balance sheets. The fake recovery is coming to an end. My hope has been that banks would have the wherewithal to deal with this. The steep yield curve has helped but it is flattening. Since bank losses are paper accounting adjustments which have no impact on cash flows, the only thing we should be concerned about is banks’ future liquidity. In any banking crisis liquidity is the proximate problem which may or may not reflect insolvency. This is how I put it in March of last year when recommending a Swedish-style instead of a Japanese-style banking crisis response:
Identification of insolvent institutions. This is the tricky bit for a number of reasons. First, I should note that Warren Buffett has said Wells Fargo has a pre-tax earnings power of $40 billion. That is enormous. While one should be suspicious whether Buffett is talking his own book, it points out the fact that any bank can ‘earn its way out of insolvency’ if given enough time. Nationalization is but one option. (John Hempton has noted that the Japanese banks actually did not have the benefit of time as their spread margin was so small due to the infamous zero-interest rate policy – you need a steep yield curve). But, ultimately, it is liquidity that is at issue for many bankrupt financial institutions – a loss of depositor or creditor faith. Their credit lines are pulled (Bear Stearns) or bank customers flee (Northern Rock). So, when we ask whether an institution is insolvent or bankrupt, it is a trick question because many failed financial institutions suffer a lack of liquidity — a circumstance which presages insolvency (see my take on this issue here). Identifying whether an institution is fundamentally insolvent depends crucially on the true value of its asset base as well as future loan losses and credit writedowns.
Going forward, if we do double dip, preventing another liquidity crisis in the banking sector as asset prices fall will be critical to containing the damage. And note, Rosenberg thinks its far from clear that a ‘double dip’ would be considered two separate downturns or one continuous recession.
Here’s Rosenberg. (P.S. he calls 9,000 on the Dow, 2% on the 10-year and 11% unemployment in a year’s time.)