Canada's Housing Bubble

Jan 15 2010 Izabella Kaminska ftalphaville.ft.com

All we may have been doing is buying time

Gluskin Sheff’s David Rosenberg has taken umbrage with the term ‘The Great Recession’ to describe the current global economic malaise.

According to the seasoned economist, it’s quite clear what we experienced last year was not a recession but a depression. That said, it was definitely not another ‘Great Depression’.

Instead he’s termed it the “Not So Great Depression.”

As he explained on Friday in ‘Brunch with Dave’, the differentiating factor rests on the excesses that preceded the bust:

Now what makes a depression different than a recession is that depressions follow a period of wild credit excess, and when the bubble bursts and the wheels begin to move in reverse, we are in a depression. A recession is a correction in real GDP in the context of a secular expansion, which is what all prior nine of them were, back to 1945.
But this was not a mere blip in real GDP — it is a post-bubble credit collapse. This is not a garden-variety recession at all, which an economic downturn triggered by an inflation-fighting Fed and excessive manufacturing inventories. A depression is all about deflating asset values and contracting private sector credit. In a recession, monetary and fiscal policy works, even if the lags can be long. In a depression, they do not work. And this is what we see today.

The markings of a depression, meanwhile, are also in a market that doesn’t react as it should to rate cuts:

The stock market typically rolls over shortly after the last Fed rate hike at any given cycle. That didn’t happen this time. The Fed last hiked rates in the summer of 2006 and yet the stock market didn’t peak until after the first rate CUT … that does not happen in a normal cycle.
Even with a 0% funds rate, the economy could still not turn around, and that is exactly what happened in the 1930s in the U.S. and in the 1990s in Japan. When the central bank takes rates to zero and that does not do the trick in helping the economy or the markets find the bottom, and then has to engage in an array of experimental strategies and radically expand its balance sheet, then you know you are in a depression.

The timing of the stock-market slump to have well passed the Fed’s first rate cut should therefore have been a clue that we were facing no ordinary recession says Rosenberg.

What’s more, money velocity and money multipliers are still in decline a year after the onset of quantitative easing suggesting liquidity is being re-circulated into risk assets rather than the real economy.

This is a situation that can’t go on, says Rosenberg:

This process cannot last indefinitely and already we have a situation where, on a Shiller price-earnings basis, the equity market is as overvalued now as it was in September 1987. And that correction that ensued back then took place with 7% real GDP growth and a 50%+ trend in corporate earnings.
The vagaries of an overvalued market is that good news may no longer be good enough — and viewed as an opportunity to take profits. When this strategy occurs en masse — well, look out. And in extremely overvalued markets, it doesn’t take much. Food for thought — think of the risk involved before chasing the performance of the past year
———
The problem is that all this fiscal largesse, intervention and incursion cannot go on indefinitely because there are limits to what the taxpaying public will support in terms of policy. Trying to get people to buy a home when the homeownership rate is still well above the long run average; trying to spur auto consumption when 20% of the households in the U.S.A. are already a three-car family — these policies aimed at reviving a defunct cycle of over consumption is starting to be viewed as a colossal waste of taxpayer money.

So there you have it, all we may have been doing is buying time.

You have been warned.