From notes of conference call hosted by David Rosenberg, Merill’s North America Economist:
Not yet past the half way point of the recession, credit losses, or house price deflation.
Recession probably started back in January, and won’t end before mid-2009.
If you’re waiting for GDP to actually turn negative, you’re going to miss a lot of action along the way. Japan had a real estate bublle that turne dbust and they had their own credit contraction in the early 90s. But didn’t see first back to back contraction of real GDP until the second half of 93. By that time, Nikkei was down 50%.
With all the leverage in the system, profits as a share of GDP went into this recession at 14%, which was unprecedented. It’s now at 12. At a recession trough, it typically goes to 7. YIKES!
First Call consensus for operating earnings for 09 is $105. At 7%, it could be more like 50. Merrill is at 63. Still means we could easily retest 2002 lows.
We’re in a secular bear market that started in 00, comparable to 1929, 55, 66, 82. On Rich Bernstein’s performance asset mix table, the only class to have a negative inflation-adjusted return over the past 10 years is the S&P.
Chapter 1 was the end of the residential construction bubble. Demographic demand for housing is 1.45mm units annually. From 2003 to 2007, builders added average of 2.0mm units, with peak being 2.3. Think Global Crossing.
Chapter 2 was the end of the home price bubble. Home prices rose 20% per yhear for 6 years. Housing prices in real terms are still 30% higher today than they were when the bubble began to inflate in 2001.
Chapter 3 was the end of the credit cycle, which had expanded for 20 years, but went parabolic in the last 6.
Chapter 4 was the end of the employment cycle
Chapter 5 is the first consumer recession since 90-91. He thinks this consumer recession is just getting started, and will be similar to the 6-quarter recession in 73-5.
The “4 Horsemen” (deflation of both housing and equities, credit contraction, and food/energy price increases) will add up to a household sector cash flow drain of $800 billion. That’s 12% of discretionary spending, which is the exact peak to trough decline in real consumer cyclical spending in 73-5. In that scenario, the S&P goes down 40% peak to trough.
Three things will make him turn bullish:
1. Personal savings goes to 8%, where it was pre bubble, which is where it was in the late 80s. Frugality becomes the new vogue, which will be very, very disinflationary.
2. Vacant housing supply cuts in more than in half, from 17 months to 8 months.
3. Household interest coverage (interest/income) ration goes from 14.5% which is near historic high to 10.5%, where it bottomed in 82 and 92.
Disinflationary influence hard to overstate. Businesses responded to the biggest tax stimulus of all time by cutting inventories by $62 billion. Continued de-leveraging in financial sector. *And* consumer savings going from 0.3% in the first quarter to 2.6% in the second, which is the third steepest increase in any given quarter in the past 55 years.
[...] “plnfw” (please, lord, nfw). But then I thought of David Rosenberg’s thoughts I posted a couple of months [...]