Since joining Gluskin Sheff & Associates from Merrill Lynch a few months ago, the daily research reports from chief economist and strategist David Rosenberg have been a breath of fresh air in the world of the “dismal science”. His notes yesterday on the typical macro-economic environment prevalent once the stock market has rallied by 49%, and how the current landscape stacks up against the historical average, are proof of the useful input that has regularly been forthcoming from Rosenberg. The paragraphs below are excerpts from his report.

We can understand that there is a growing list of economists calling for the end to the recession, and that may or may not be the case actually, judging by the performance of all four ingredients that go into the NBER decision-making wheel. But let’s be charitable and assume that the herd is correct this time around – a 49% rally from the lows and the degree of multiple expansion suggests that the S&P 500 has gone beyond just discounting the end of the downturn but is now embedding a 4.0% real GDP growth rate for the coming year. That is not our view, and even if it is attainable, guess what? It’s priced in. Corporate bonds (and Treasuries too) are discounting around a 2.0% GDP trend, which looks more realistic.


The market has turned in a performance that is double what is ‘normal’ between the lows and the end of the recession, and after such a rally, which is unprecedented actually, the end of the recession isn’t even a debate … at this time, what is ‘normal’ is that we are a full year into the next economic expansion. Did the economy really bottom in August 2008? From our lens, there is always a catalyst or a spark for the next economic expansion and bull market. In 2003, it was leverage and a housing boom. What is it today? Cash for clunkers? Digitized medical technology? Chinese consumption? Government incursion into the economy and capital market? Perhaps we should also recognize that heading into the post-recession environment of 1991, there was a tailwind from sub $20/bbl oil; and heading into the 2003 rebound, we had sub $30/bbl oil; so it may pay to ask the question as to how $70+ oil is going to play in the recovery, unless we are talking about recoveries in Saudi Arabia, Qatar and the UAE?


United States: S&P 500 Composite (% change from market trough during recession to the official end of the downturn)


It could well be that all the effort the government is making to stave off the decline in the record debt load the U.S. is carrying will just delay the inevitable for another day. The fact that the Fed is extending TALF to buy up distressed commercial real estate debt, not to mention financing RVs and mobile homes. Moreover, the Administration’s move to take over two auto companies and then immediately offer rebates (now that the government is an owner, it can do all it can in its powers to rev up sales) is a signpost that every effort is going to be made to perpetuate discretionary spending even though the boomers are not financially prepared for retirement, and that every effort will be made to resist the need for the household sector to pare their record level of liabilities on their balance sheets. You cannot possibly make this stuff up, but now appliance manufacturers have successfully lobbied for a “cash for clunker” program of its own! See Program to Offer Appliance Rebates on page A3 of the WSJ – a $300 million federal program to incentivize homeowners to replace old refrigerators, air conditioners, washer-dryers and dishwashers with new “high-efficiency” units!

However, the catch-22 is that not until the culture of credit and conspicuous consumption has been replaced by a renewed focus on retirement planning and financial prudence will it be safe to call for the fundamental lows in the market. A 49% flashy bear market rally notwithstanding, we are not at some natural equilibrium point in the economy as the Federal Reserve and the government have moved to cannibalize their own balance sheets as an offset to the necessary deleveraging in the private sector.

Source: David Rosenberg, Gluskin Sheff & Associates, August 20, 2009.

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