Juggling Dynamite

David Rosenberg of Gluskin Sheff joined Consuelo Mack on Wealth Track this weekend to discuss his outlook for the economy. Rosenberg says we’re just 4 years into a depression that will likely last 7-10 years. He says the economy is likely to begin contracting again in 2012 and that the employment situation is going to deteriorate further. He calls the MF Global bankruptcy the Bear Stearns of 2011. 

And Rosenberg is one of the first to admit there is no ‘decoupling’ of foreign or Canadian economies from one another. This is a global downturn. All risk markets are vulnerable together. Watch the video interview here. (Thanks Christian) 

Warning: the stock picks offered by the host after the interview are likely to lose value too. Remember dividend paying stocks don’t decouple from bear markets either.

Present problems are real and looming.  But longer-term I am actually more optimistic about the prospects for the US economy than for most others.  The US has stronger demographics, birth rates, immigration, and a more mature and predictable political and legal system than most countries in the world, especially when compared with places like China, Japan, Russia and Europe.  For more on some of these strengths and on the power of the 100 million+ Generation Y following the Boomers (many of whom are those kids “Occupying” parks right now.  Boomers better hope those kids get some decent employment prospects, they are going to need them to buy Boomer homes and fund Boomer health care and retirement income into their old age), read Count the people. (Thanks Peter)

The ability to recognize and admit our errors is a crucial step in the path to recovery and healthy progress.  When the credit crash first hit in 2007, banks began bursting.  I remember a few moments of candid admission such as one terrified CEO lamenting, “We are getting to a time when we will all look back and wish we had done things differently.”  That was then and a fleeting flash.  Banks began begging governments to rescue them or face promised Armageddon for all.  Their fears were contagious, their threats successful.  They extorted tax payer funds in the final hour–and bounced.  A few months later the financial elite acted as if none of it had ever happened.  They resumed old ways of levering up and bonusing out. 

Unfortunately for all of us, our governments and policies enabled a dangerous financial sector, allowing them to escape the experience without having to repent or reform.  So the boil was not lanced.  The pain is not yet past, and the world economy is continuing to suffer ad nauseam.  There is no escaping this.  We can either admit, repent and reform, or we will continue to pay and lose until we do.  The choice is ours.

One of the hideous legacies of protecting people from the consequences of their bad behaviour, is that many are now vigorously rewriting history–busily devising scapegoats and fantasy about the what, who and whys of what happened.  We must not leave this unchecked, unconfronted–lies will not serve our recovery.   We must face the facts as painful as it may feel.  Whether it be for acts of commission or omission, in truth, there is some blame in this for all sides.  This article from Barry Ritholtz is a good start: 

Why are people trying to rewrite the history of the crisis? Some are simply trying to save face. Interest groups who advocate for deregulation of the finance sector would prefer that deregulation not receive any blame for the crisis.

Some stand to profit from the status quo: Banks present a systemic risk to the economy, and reducing that risk by lowering their leverage and increasing capital requirements also lowers profitability. Others are hired guns, doing the bidding of bosses on Wall Street.

They all suffer cognitive dissonance — the intellectual crisis that occurs when a failed belief system or philosophy is confronted with proof of its implausibility.

And what about those facts? To be clear, no single issue was the cause. Our economy is a complex and intricate system. What caused the crisis? Look…

Read:  What caused the financial crisis?  The big lie goes viral for the 12 key causes as a template to understand the changes needed now to reform our system.

See also this excellent article from Paul Volcker:  Financial Reform: Unfinished Business.

Good ‘cut to the chase’ article in the Financial Times from Nouriel Roubini on likely outcomes facing the European union staggering under debts far and wide:

“…since half of the European financial stability facility’s resources are already committed to Greece, Ireland, Portugal and to their banks, there is only about €200bn left for Italy and Spain. Attempts have been made to use financial engineering to turn this small sum into €2,000bn. But the leveraged EFSF is a turkey that will not fly, because the original EFSF was already a giant collateralised debt obligation, where a bunch of dodgy, sub-triple-A sovereigns try to achieve, by miracle, a triple-A rating via bilateral guarantees. So a leveraged EFSF is a giant CDO squared that will not work and will not reduce spreads to sustainable levels. The other “turkey” concocted by the EFSF was supposed to be a special purpose vehicle where reserves of central banks become the equity tranche that allows sovereign wealth funds and the Bric countries to inject resources in a triple-A super senior tranche. Does this sound like a giant sub-prime CDO scam? Yes, it does. This is why it was vetoed by the Bundesbank.

So, since the levered EFSF and the EFSF SPV will not fly – and there is not enough International Monetary Fund money to rescue Italy and/or Spain – the spreads for Italian debt have reached a point of no return.

…The eurozone can survive with the debt restructuring and exit of a small country such as Greece or Portugal. But if Italy and/or Spain were to restructure and exit this would effectively be a break-up of the currency union. Unfortunately this slow-motion train wreck is now increasingly likely.

Only if the ECB became an unlimited lender of last resort and cut policy rates to zero, combined with a fall in the value of the euro to parity with the dollar, plus a fiscal stimulus in Germany and the eurozone core while the periphery implements austerity, could we perhaps stop the upcoming disaster.”

Read the whole piece here.