CNBC provided contrarian economist David Rosenberg a five minute opportunity to discuss the economic outlook and his thoughts on the depressionary cycle, which according to Rosenberg, we can expect for years to come.
In his daily newsletter to investors, Rosenberg says that the current economic conditions are “a depression, and not just some garden-variety recession.
The following is excerpted from his CNBC interview. (Video below excerpts and commentary)
No two cycles are the same. I think what we’re starting to see is that this is not a classic, garden variety manufacturing inventory recession caused by inflation or the Fed tightening policy. This is a balance sheet recession – It’s a debt deleveraging. These animals are different in nature.
It doesn’t pay to be delusional or be an ostrich with your head in the sand. See this for what it is. We’ve been destroying bad debt for the past couple years – the excess credit that we created that gave us that artificial recovery for five years. And people think we’re going to expunge this in just a year or two. That’s not how history plays out.
Maybe this isn’t the case where the evil banks are being overly stringent and not lending money. Maybe this is a case where, especially in the household sector, they’ve been so scarred by the trauma that hit their balance sheets from the 30% slide in real estate prices. And of course, look at the debt delinquencies and defaults. The sole experiment and experience we’ve had with excessive leverage at the margin has left misery in its wake. The delinquency rates of consumer loans and on mortgage debt went to levels that you haven’t seen since the 1930’s.
This has a tremendous psychological impact on the desire on the part of consumers, or households, to take on credit. This is actually beyond economics. We’re talking about real psychological trauma here, much like you had in the 1930’s.
If it isn’t obvious to you yet, it will be soon. August 2010 home sales numbers, which are the worst on record, are an important indicator. We’ve been telling our readers since April that the financial mainstream media’s purported housing recovery was nothing but a mirage driven by the $8000 tax credit, which expired at the beginning of the summer. In April, our response to the 27% increase in newly built home sales was as follows:
Once the tax credits disappear, the stimulus ends, and these foreclosed homes start getting marked appropriately on bank books, itâ€™s all coming down – heck, it might come down before that. Expect real estate values to be destroyed. Whatâ€™s really going to hurt the real estate market, is that even though prices might fall 20% or more from here, mortgage rates are going up because of all the money printing and debt being created by Washington. This may make it twice as hard for housing to recover. Back in the early 80â€™s mortgage rates were over 10% – hard to believe, but it can certainly happen again.
We are not even close to being out of the woods. There is a Second Wave of the Housing Collapse, and as we and other forecast in November of 2009, it is now in full effect.
This is going to sound crazy to some, but not to those who have studied housing bubbles of the past, especially Japan: We can expect a further housing decline of 20% to 50% from here over the course of the next decade.
To understand what is happening requires that you begin thinking on time lines of years and decades, not hours or days like the talking heads on CNBC do.
This isn’t about the stock market. This is about our economy coming to a complete standstill. As Rosenberg pointed out, credit lending and the desire to borrow has collapsed, and so long as there is no leverage (credit) in the system, there will be no recovery, until that time, of course, when productive capacity and price stabilization returns to the free market. Unfortunately, this may not happen for a really, really long time and we will have many surprises along the way, one of which may be an eventual hyperinflationary depression if The Federal Reserve and US Treasury continue on their current course.
Our outlook right now?
Regardless of whether or not the The Federal Reserve and US Government move in with more stimulus (pulling forward even more demand like they did with the automobile and housing credit), industry bailouts and quantitative easing, we are likely to go into a severe contraction across the board which will include negative GDP growth, a retest of the 2009 stock market lows, a collapse in housing and more job losses. Of course, we can not underestimate the power of the printing press, thus the Fed may be able to “stabilize” prices as they did over the last 12 months in housing and stocks, but this stabilization will only be in nominal terms. The more they print, the worse the inflationary impact will be down the road.
(This article was updated on 08-25-10 @ 15:30 for further clarification of certain points)
View the CNBC Interview with David Rosenberg: