Merill Lynch's chief North America economist believes we are in a depression

[Esoteric]

You can download David Rosenberg's research note below.

https://www.gpcresearch.ml.wallst.com/common/emaillink/pdf.asp?SSS_20E89F090409B81E37D8B7177FAE1685&

 

[Potential]

In your reference, David mentions "advocating high fixed-income orientation". First a humorous remark and then a serious contrarian remark...

(1) Humorous: does David have the office across the hallway from John Thain's old office which just received $1M in renovations?

(2) Serious Contarian: Do the opposite of what David says to do. Is this case, this could imply buying equities and shorting fixed credit. They could have loaded up on what they are advocating and wanting to dump their position to retail followers, like us. China Wall? HAH!

There is absolutely no credibility on the street.

Economics | United States
26 January 2009
David A. Rosenberg +1 212 449 4937
North American Economist
MLPF&S
david_rosenberg@ml.com


We advocate a high fixed-income orientation

Against this background, we continue to advocate a relatively high fixed-income
orientation in the portfolio – a focus on safety and income at a reasonable price.
That means long-term noncallable government bonds, state and local
government bonds, high-quality corporates (and choose those with strong
balance sheets, high cash reserves and minimal refinancing needs). And in the
equity market, continue to screen for dividend yield and consistent organic
dividend growth in non-cyclical industries.

https://www.gpcresearch.ml.wallst.com/common/emaillink/pdf.asp?SSS_20E89F090409B81E37D8B7177FAE1685&

 

[LowlyPion]

You may not be far from right.

With the massive printing of money, inflation might make fixed income the last place you want to be.

 

[russ_watters]

I love how in the section "How is a Depression Defined", the author declined to even define what he means by the term. But I guess that's fine - I think we've gone past "depression" and now we're in a deep zerbet.

 

[Ivan Seeking]

I love how in the section "How is a Depression Defined", the author declined to even define what he means by the term. But I guess that's fine - I think we've gone past "depression" and now we're in a deep zerbet.

He explained that there is no accepted definition, and it took thirty seconds to see that he goes on to explain what he means.

Depressions can last anywhere from three to seven years
Depressions are basically long recessions – they can last anywhere from three to
seven years, while historically cyclical recessions last 18 months – and tend to
follow years of leveraged prosperity of Gatsby-like proportions. Considering that
in this most recent leveraged cycle from 2002-07, we reached a point where a
record 40% of corporate profits were derived from financial activities, where
household debt relative to income and assets surged to unprecedented levels and
the personal savings rate briefly went negative at the height of the housing
bubble, it is safe to say the down-cycle we are currently experiencing did indeed
follow a classic elongated period of leveraged prosperity. It is now reverting to the
mean.

Depressions marked by balance sheet compression
Recessions are typically characterized by inventory cycles – 80% of the decline in
GDP is typically due to the de-stocking in the manufacturing sector. Traditional
policy stimulus almost always works to absorb the excess by stimulating domestic
demand. Depressions often are marked by balance sheet compression and
deleveraging: debt elimination, asset liquidation and rising savings rates. When
the credit expansion reaches bubble proportions, the distance to the mean is
longer and deeper. Unfortunately, as our former investment strategist Bob
Farrell’s Rule #3 points out, excesses in one direction lead to excesses in the
opposite direction.

Beyond a class recession
Clearly, we have gone beyond a classic recession when the yield on the threemonth
Treasury bill falls to zero. This has happened only in the 1930s and in
Japan in the 1990s, and is emblematic of an economy that has structural, not
merely cyclical, imbalances to work through. It is clear that we are beyond a
garden-variety recession. Even after nearly a year-and-a-half of unprecedented
interest rate relief, multiple liquidity backstops, banking sector capital injections,
loan modifications and record tax rebates, there is still no end in sight for the
contraction in credit, bear market in financial stocks, decline in real economic
activity, peaking unemployment, or any signs of normalcy returning to credit. This
despite a moderate narrowing in spreads from Armageddon-type levels.

 

[mgb_phys]

It's also interesting how there is no definition of a 'bubble' either.

 

[Potential]

Notice the accounting trick in the article below regarding deferred bonuses that could have originated with tax dollars. What? Bonus for losing money?

If I were the Chief North American ML economist and didn't receive my normal $1-3M bonus, heck, I would think we were in a depressioin also if I had to make a $100K mortgage payment every month (just speculating).

AP
BofA CEO Lewis receives support from board
Wednesday January 28, 7:17 pm ET
By Ieva M. Augstums, AP Business Writer
Bank of America CEO Ken Lewis has board's support; company adds 3 former Merrill directors



CHARLOTTE, North Carolina (AP) -- Bank of America Corp. Chief Executive Ken Lewis has gotten a vote of confidence from his board.
.
.
.
Since the acquisition closed at the beginning of the month, both Merrill Lynch and Bank of America reported multibillion fourth-quarter losses. Bank of America lost $2.39 billion during the quarter, its first quarterly loss in 17 years. Merrill Lynch lost more than $15 billion during the quarter.

Amid concern about absorbing Merrill Lynch's losses, Bank of America received $20 billion in additional funds from the government and guarantees to protect the bank from the majority of losses on a $118 billion pool of risky assets. That came on top of $25 billion Bank of America had already received last fall as part of the government's program to stabilize the banking sector.

Lewis separately on Wednesday announced plans to release quarterly reports on lending activities, and provide greater transparency about its activities. The initiative was presented to the board, the company said.

The announcement was a step toward answering growing questions about what banks in general are doing with bailout money that they have received from the government. A number of lawmakers are concerned that banks are not lending enough; the bailout program was creating to help unfreeze credit markets and get lending back to more normal levels.

"This is a step in the right direction in creating greater transparency of where taxpayer dollars are going," Plath said. "Now he needs to speak up about what happened with those bonuses."

Last week, it was learned that Merrill Lynch, with Bank of America's knowledge, had moved up yearend bonuses for executives so they could be awarded before the acquisition was formalized Jan. 1. The bonuses were given as Bank of America was approaching the government for more money.

Former Merrill Lynch CEO John Thain, who had taken over as head of the combined company's wealth management business, resigned last week after news of the bonuses broke.

Thain and Bank of America's chief administrative officer, J. Steele Alphin, have been subpoenaed by New York Attorney General Andrew Cuomo amid an investigation into the timing of the Merrill Lynch bonuses.

The Financial Times also reported Wednesday that Bank of America would defer 2008 bonuses for its capital markets and investment banking staff. Employees that were to receive bonuses of more than $50,000 will not get a year-end bonus for 2008. Instead, those employees will receive the deferred payments in one-third increments in 2010, 2011 and 2012, according to the Financial Times report that cited unnamed executives familiar with the situation.

http://biz.yahoo.com/ap/090128/na_us_bank_of_america_board.html?.v=2

 

[mgb_phys]

If I were the Chief North American ML economist and didn't receive my normal $1-3M bonus, heck, I would think we were in a depressioin

Maybe that's the new definition
It's a recession if the CEO bonus go up by less than 100%/year
It's a depression if the CEO bonus is less than last year
It's Armageddon if the CEO get made redundant

 

[russ_watters]

He explained that there is no accepted definition, and it took thirty seconds to see that he goes on to explain what he means.

"Depressions are basically long recessions" is exceedingly vague, to the point of being useless. It also doesn't fit with more conventional definitions, which require it to not only be long, but deep. For example, a 10% drop in GDP is one typical definition.

 

[Esoteric]

Sprott Says U.S. Depression Will Boost Gold Price (Update1)

And we have mainstream depression call number 2:

Sprott Says U.S. Depression Will Boost Gold Price (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=acQ4RaOnhRK4&refer=home

Feb. 3 (Bloomberg) -- Eric Sprott, the Canadian money manager who last year predicted banking stocks would collapse, said the U.S. is at the beginning of an economic depression that will help gold prices more than double.

Bullion may top $2,000 an ounce in coming years amid a series of financial catastrophes, the chairman and founder of Toronto-based Sprott Asset Management Inc. said yesterday in an interview. Banks will battle to replenish capital, Treasury auctions stand the risk of failing and the moribund economy will create a dire operating outlook for many companies, he said.

“The trend is down, and there’s not one signpost that says it’s changing yet,” Sprott said yesterday from Toronto. “We’ll stand by to wait to see those, and until it does, you have to assume it gets worse.”

Sprott, who manages $4.5 billion, said in March that the world was in a “systemic financial meltdown,” a call that presaged the collapse of financial institutions including Bear Stearns & Co. and Lehman Brothers Holdings Inc. Since then, the U.S. has entered the worst economic slowdown since the Great Depression, credit markets have tightened and asset prices have dropped as companies and funds sell portfolios to raise cash.

The 81-company Standard & Poor’s 500 Financials Index has dropped 62 percent since Sprott said on March 6 he was buying bullion and gold-producers’ shares, while shorting financial- sector stocks. Gold slipped 6.3 percent during the same period.

So-called short-selling allows speculators to profit from a stock’s decline by borrowing shares, selling them to raise cash and buying them later when the price drops to repay the debt.

 

[Esoteric]

IMF Says Advanced Economies Already in Depression

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6aaWZ8ab8yU&refer=home

By Angus Whitley and Shamim Adam

Feb. 7 (Bloomberg) -- Advanced economies are already in a "depression" and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said.

“The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”

Ten days ago, the IMF cut its world-growth estimate for this year to 0.5 percent, the weakest pace since World War II. Stimulus packages alone won’t succeed in dragging the global economy out of recession unless confidence is restored in the banking system, Strauss-Kahn said today.

“All this will work if, and only if, the different countries are likely to do what they have to do in terms of restructuring the banking sector,” he said. “And today it’s not done.”

The U.S. economy has lost 3.57 million jobs since a recession started in December 2007, its biggest employment slump of any economic contraction in the postwar period as companies from Macy’s Inc. to Caterpillar Inc. cut costs. The U.K. economy will shrink this year by the most since 1946, the IMF forecasts.

“There is hope that the fiscal and monetary stimulus measures being implemented around the world can help turn things around,” said David Cohen, Singapore-based director of Asian economic forecasting at Action Economics. “But there is still the risk it can be short-circuited by further financial turmoil.”

$780 Billion Package

The U.S. Senate is due to vote early next week on an economic stimulus package totaling at least $780 billion that President Barack Obama said is needed to prevent the economy from sinking into a deeper recession. Asian nations from China to Singapore and India have pledged more than $685 billion on their own spending programs.

The Obama administration is considering subjecting banks to a new test to determine whether they require fresh capital injections as part of a rescue plan to be unveiled by Treasury Secretary Timothy Geithner next week, people familiar with the matter said.

Governments should be ready for “full-fledged” intervention, acting quickly to sell or wind-up insolvent lenders, Strauss-Kahn said. While the European Central Bank, which left interest rates unchanged this week, may have more room to cut borrowing costs, such a policy may not be as important as restructuring the region’s banks, he said.

Borrowing Costs

“We’re probably not very far from the point where the question of interest rates is not the most important question,” Strauss-Kahn said. “Providing direct liquidity to the market, restructuring the banking sector, may have more influence on demand than interest rates.”

In Asia, “there’s still room for bigger stimulus packages,” the IMF official said. Malaysia, for example, may introduce a second stimulus package larger than November’s 7 billion-ringgit ($1.9 billion) plan, he said.

Developing Asia will probably expand 5.5 percent this year, the slowest pace since 1998, the IMF said in last month’s update of its World Economic Outlook report. The region may expand 6.9 percent next year, the fund forecasts.

Asian nations will need a recovery in the global economy before the region can exit a slowdown, the IMF said this month. Strauss-Kahn said today the fund’s forecast for a recovery to start in 2010 is “very uncertain.”

Demand for Loans

Demand for IMF loans is rising in nations suffering from weaker export sales, banking industry turmoil and deteriorating investor confidence. The organization has so far agreed to lend $47.9 billion to countries affected by the crisis, including Belarus, Hungary, Iceland, Latvia, Pakistan, Ukraine and Serbia.

Strauss-Kahn said he agreed with Poland that the eastern European nation isn’t in need of assistance from the fund now, but may require financial aid in the future.

The fund may collaborate with some countries to restore confidence, without necessarily providing immediate loans, the official said.

“Some need for precautionary arrangements may appear,” he said, without naming specific countries.

Critics of the fund say it’s failed to keep up with the pace of change as the worldwide recession deepens.

The IMF and similar institutions are “incapable” of coping with the global financial crisis, because their resources can’t keep up with demand, former World Bank President Paul Wolfowitz said on Feb. 4.

Russian Prime Minister Vladimir Putin has criticized the World Bank, IMF and World Trade Organization as anachronistic organizations that give no voice to emerging economies.

The IMF and the World Bank were set up at the 1944 Bretton Woods conference. The IMF was designed to prevent crises in the international monetary system and to provide financing to distressed countries.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.netAngus Whitley in Kuala Lumpur at awhitley1@bloomberg.net
Last Updated: February 7, 2009 04:38 EST

 

[Proton Soup]

In your reference, David mentions "advocating high fixed-income orientation". First a humorous remark and then a serious contrarian remark...

(1) Humorous: does David have the office across the hallway from John Thain's old office which just received $1M in renovations?

(2) Serious Contarian: Do the opposite of what David says to do. Is this case, this could imply buying equities and shorting fixed credit. They could have loaded up on what they are advocating and wanting to dump their position to retail followers, like us. China Wall? HAH!

There is absolutely no credibility on the street.




https://www.gpcresearch.ml.wallst.com/common/emaillink/pdf.asp?SSS_20E89F090409B81E37D8B7177FAE1685&

i think you're right, it's a con. they want people to come down to the office and pay commissions to move their money around. probably with annuities or something else that will be a complete raping of the consumers. times are bad so play on peoples' fears. sell them a sure thing. when people are scared, all they want is a little security. of course, as soon as the market starts to turn around a bit, play on peoples' fears of missing out and being left behind. forever and ever, amen.

 

[Astronuc]

It's more a funk than a depression.

Puting things in perspective: Why This Recession Seems Worse Than '70s and '80s
http://finance.yahoo.com/news/Why-This-Recession-Seems-cnbc-14354968.html

If you think this recession is the worst since World War II, chances are you weren't born or working during the downturns of the 1970s and '80s, you're listening to President Obama too much or you're a white-collar worker in financial services.

If all three are true, you may even think we're on the verge of another Great Depression.

At this point, the only thing that may be true is your age and employment status.



"The current situation has nothing in common with the Great Depression," says economist Steve Hanke of the Cato Institute and Johns Hopkins University. "The sooner they [in Washington] stop spinning the bad news story and say nothing, the sooner we'll be more confident."

Hanke is not alone in dismissing what appears to be a potent cocktail of misinformation and doom and gloom, wherein the current recession-now in its 13th month-is already considered worse than the 16-month ones of 1973-1975 and 1980-1982.

"We were pretty scared in '82; things looked horrible for awhile," says Bob Stovall of Wood Asset management and a 55-year veteran of the securities business. "I don't think you can say it's worse than then; its different. You have changed the landscape but you did that in the Midwest when you forced a lot of rust-belt companies to the wall."

"This time it's financial firms going out of business, instead of manufacturing ones, and the jobs are going with them," explains Stovall.
. . . .
At this point, the current recession is worse than those of the '70s and '80s by only one statistical yardstick, and that's the unusually quick ascent in the jobless rate-from 4.4 percent in March 2007 to 7.6 percent in January 2008.
. . . .
During the 1973-1975 and 1980-1982 periods the unemployment rate almost doubled (4.6-9.0 percent, 5.6-10.8 percent, respectively), which means a peak of about 8.6-8.8 percent this time around. In further contrast, during a ten-month stretch in 1983-1983, the jobless rate was above 10-percent.
. . . .
Growth

. . . . GDP contraction thus far has been modest. It's down 1.1 percent vs. 3.1 percent in the 1970s period, says Chris Rupkey.

And though the economy shrunk at a 3.8 percent annualized rate in the fourth quarter of 2008 and is expected to decline another 4.0-6.0 percent in the first quarter of 2009, imagine the reaction today to the 7.8 percent plunge in the second quarter of 1980 or consecutive swoons of 4.9 percent and 6.4 percent in 1981-1982.

. . . .

The states need to get their budgets under control.

It seems the federal government and state governments do not understand 'business development'.

 

[nuby]

I like this old quote by Reagan.

"Recession is when a neighbor loses his job. Depression is when you lose yours."