Now raising intellectual capital

from Rolfe Winkler:

Defining the “extended period”

Another tidbit from Rosenberg, who offers guidance on what the Fed means when it says it will keep rates low for an "extended period"...


The reason — there is a wave of mortgage refinancings coming in the housing market for one, and not only that, but in the commercial space, there are $2.7 trillion of debt coming due through 2011 and another $1.5 trillion of leveraged loans....In other words, the default rate is going to rise even further and the Fed tightening policy would only aggravate that situation. In other words, the Fed is simply immobile for at least the next two years.

I've argued in this space many times that the Fed is trapped. Our monetary system, which is fueled by credit expansion, simply doesn't work in reverse. To avoid deflation, credit must always be expanding in the aggregate. If the private sector won't borrow, the public sector must....and vice versa. If they de-lever in tandem, we get deflation.

We're told to be panicked by the prospect of deflation and yet the solution we've been given -- unprecedented public credit expansion + inflation of new asset bubble -- leaves us worse off than when we started.

from Rolfe Winkler:

Rosenberg: Unemployment headed to 12-13%….

...but that doesn't mean the overall employment picture will get a lot worse.

From today's "Breakfast with Dave" e-mail:

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market.

But in a nutshell, to be calling for a 12.0-13.0% unemployment rate is meaningless except that it is very likely going to be a headline grabber. The most inclusive definition of them all, the U6 measure of the unemployment rate, which includes all forms of unemployed and underemployed, is already at 17.5%. The posted U3 jobless rate that everyone focuses on is at 10.2% (though if it weren’t for the drop in the labour force participation rate, to 65.1% from 66.0% a year ago, the unemployment rate would be testing the post-WWII high of 10.8% right now). The gap between the U6 and the official U3 rate is at a record 7.3 percentage points. Normally this spread is between 3-4 percentage points and ultimately we will see a reversion to the mean, to some unhappy middle where the U6 may be closer to 15.0-16.0% and the posted jobless rate closer to 12%. This will undoubtedly be a major political issue, especially in the context of a mid-term elections and the GOP starting to gain some electoral ground.

from Rolfe Winkler:

Rosenberg: “Welcome to the era of consumer frugality”


Gluskin Sheff's David Rosenberg on last week's consumer credit figures.

U.S. consumer credit outstanding fell $10 billion in June, the fifth decline in a row during which the debt balance has shrunk $60 billion or 5.5% at an annual rate.  Both figures are unprecedented.  As the chart below shows, the YoY trend, at -2.8%, is also running at its steepest contractionary rate in over five decades.  Welcome to the new paradigm of savings, asset liquidation and debt repayment [in] the era of consumer frugality. After 20 years of living beyond their means, American consumers will be spending the next several years living below their means, and no, this will not be the end of the world, but it will put a firm ceiling on overall demand growth for some time to come.

Here's the chart to which he refers (click to enlarge in new window):


The chart depicts the growth of consumer credit.  Not the total level.  Consumer credit isn't actually contracting unless the line goes below 0%.  And this excludes mortgage debt.