Depression-chondriacs

David Rosenberg is today's celebrity economist. Maybe this is deserved: His record in calling the economic crash was quite good.

His record in calling, or even acknowledging, the recovery? Less impressive.

That has led some to think Rosenberg is a permabear clinging firmly to his once-right predictions of doom. Such was the case in a recent musing of his with a subhead that reads, "You know it's a depression when, 33 months after the onset of recession ..." followed by 13 bullet points describing our dismal state of affairs.

Most of Rosenberg's points are accurate, but hardly indicative of a depression. (Reason No. 3: "Real GDP is down 1.3% from the peak" ... oh, heavens! One percent!?) Some are flat false. Others I find off the mark. For example:

Rosenberg's reason for depression No.  10: "Housing starts are still down 63.5% from the peak"
That's because we had a bubble. It was the past numbers that were scary, not the current ones. Builders such as KB Homes (NYSE: KBH  ) and Pulte (NYSE: PHM  ) went on drunken rampages and built way, way more supply than was necessary. The fact that housing starts have collapsed is perhaps the single most optimistic statistic in the housing market today. It means past excess is being soaked up. That's a good thing. Revisiting housing starts' previous highs is a surefire way to dig the market deeper into a hole.

Put another way, Rosenberg seems to think we're in a depression as long as we're not replicating past bubbles.

Rosenberg's reason for depression No. 13: "Non-residential construction is still down 35.7% from the peak"
Again, bubbles. Comparing current levels to bubble highs and concluding that we're in a depression is like assuming you must be freezing to death after coming down off a fever. Take a longer view of non-residential construction, and you'll see that current levels are roughly were they were in 2006. It was 2007-2008's high that was the anomaly. Not today's level.

Rosenberg's reason for depression No.  2: "Corporate profits are still down 20% from the peak"
False, actually:

Using the numerical data from the chart above shows annualized corporate profits in the most recent quarter came in at $1.372 trillion, up from $1.369 trillion in early 2007. That's a new all-time high. Roughly half of the Dow Jones Industrial average, including Merck (NYSE: MRK  ) , AT&T (NYSE: T  ) , and Procter & Gamble (NYSE: PG  ) , earned more in the past 12 months than they did in 2007. I'm not sure I'd call that a depression.

It's bad out there, particularly on the employment front. Rosenberg's reason for depression No. 5: "Employment is still down 5.5% from the peak," is his most credible. Still, there's a crowd of otherwise intelligent people bent on the notion that every economic data point that remains below the bubble-formed peaks is evidence of a depression. I think that's a dangerous mindset. A more sound approach is realizing that the cause of our recession was that those data points were too high to begin with. Until the population is big enough, we don't want construction to return to previous levels. We don't want lending standards to fall to previous levels. We don't want debt to return to previous levels. We don't want the trade deficit to return to previous levels. The fact that all these data points have plunged is not, I don't think, evidence of a depression as much as it is evidence of newfound stability.

Fool contributor Morgan Housel owns shares of Procter & Gamble and AT&T. Procter & Gamble is a Motley Fool Income Investor pick. The Fool owns shares of and has written covered calls on Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 27, 2010, at 5:37 PM, MMTInvestor wrote:

    I read Rosenberg everyday and am a big fan of his, but he's not always on the money, as you point out. Morgan, these are good, fair points. I agree with your needed correction to his excesses, though I submit they are much fewer (and potentially less costly to investors) than those we hear everyday from Wall Street analysts and CNBC cheerleaders.

    Scott

  • Report this Comment On September 27, 2010, at 8:31 PM, bullinnature wrote:

    excelllent article, I enjoyed it. Thanks.

  • Report this Comment On September 28, 2010, at 12:46 PM, TMFAleph1 wrote:

    A strong thesis.

    It is indeed curious that someone who was vociferous in highlighting the excesses of the credit bubble should use data from the height of the bubble as the benchmark for evaluating the health of the current economy.

  • Report this Comment On October 08, 2010, at 6:52 AM, TopAustrianFool wrote:

    I believe you are failing to recognize that you call "real GDP" a GDP measure that does not take into account the real inflation of about 10% of the last couple of years. After a deflation of bout 17% right after the Panic of 2008, the Fed. inflated prices back to 2005 levels. This is indeed a depression, but you need to conduct an economic analysis, grabbing specific statistics will not help you understand that.

    How can you have an economy of over 10 Trillion $$ and still have growing unemployment? Inflation is the answer. If you have no growth in employment, you have no economic growth.

  • Report this Comment On December 02, 2010, at 5:52 PM, Glycomix wrote:

    What recovery? 9% unemployment, Balance of trade deficit of $481B, and a deficit spending congress who only care about re-election, not about preventing stagflation.

    Obama's administration is like a virulent form of Jimmy Carter economic flu leading to high unemployment, economic stagnation and hyperinflation. With Carter we dealt with 21% inflation. With Obama and the Dems, the currency's been debased 25% in two years although it's not hit the streets because the Democrats fired everyone in the Federal Reserve that tried to tell us the Truth: Alan Greenspan and William Poole.

    According to the Economist, US imports in April 2010 was $483B. That's more than the next 10 nations combined, and unemployment is still high when you exclude government employment caused by deficit spending.

    The Dems haven't fixed the cause of the crash. Indeed they've made it worse with more deficit spending:

    Inflow: tax revenue of $1T/yr and total gross income of everyone in the US of $8.2T/yr

    Outgo:

    1. Deficit spending of $1.5T on "stimulus"

    2. Medicare debt that increases $2T/yr because 50% of medicare is unfunded.

    Calculation: $37.7T- $29.3T= $8.5T in new debt in 4.25 years. $8.5T/4.25 yrs =$2T/yr

    (In May 2009 Medicare debt was reported to be $37.7T; In Feb 2005 it was $29.3T )

    3. Welfare Loans Debt: from Fannie Mae and Freddie Mac: Debt = $6.2T ? Congress won't give us a straight answer.

    Current US law requires Fannie and Freddie to guarantee loans to minorities and the very poor. http://www.law.cornell.edu/uscode/html/uscode12/usc_sec_12_0..... http://www.huduser.org/portal/datasets/GSE/gse2007.pdf In table 2 note 1,

    4. $2.6T in further Welfare Loan debt that's been written down by US and Foreign banks..

    http://www.reuters.com/article/idCNL554155620091105?rpc=44

    Much of Fannie and Freddie's bad debt been bought by the Federal Reserve and by the FDIC. Unfortunately, this makes our banking system at risk for failure. Switzerland has attempted to make its banks less likely to fail by increasing their capital requirements at 16% instead of the 4-8% Typical in US Banks. The Federal Reserve's place in avoiding the problem has been neutralized by their subsidizing welfare mortgages by

    5. $2T/yr for extra entilements:

    The Democrats passed $10.3 trillion in new welfare programs passed in 2009. According to the congressional budget office, these programs will add another $9T to the debt in 8 years.

    http://www.heritage.org/research/reports/2009/09/obama-to-sp... ; (f) http://www.washingtonpost.com/wp-dyn/content/article/2009/08...

    I don't excuse greed, but the problem is not in the banks or greed, but in deficit spending,

    The more that you and others try to hide the problem, the worse it gets. We need to rip off the bandage, debride the wound, get back on a path to health. We need to find out how bad the welfare loans have made our financial system and find a way to export.

    When a house has a rotten foundation, you have to prop up the house with jacks, rip out the rotten underpinnings (such as welfare mortgages and deficit spending on entitlements) and put in a new foundation:

    MY SUGGESTIONS

    1. Promote exports and change the economic climate so that businesses choose to manufacture in the US instead of going abroad.

    2. Provide tax cuts for business investments. Like Reagan's tax incentive 100% of the first $250K investment can be expensed in the first year.

    3. Eliminate all taxes on exports to prevent inflation.

    4. Allow drilling in Alaska and on the Continental shelf before we run out of gas. The chair of Nobel Energy tells us that we could run out of oil in 10 years if we don't drill new oil wells.

    5. Provide hefty prizes for the scientist or entrepreneur producing the most effective techniques for producing large quantities of ethonol in a cost effective fashion. Our current cars will run on a 95% ethanol fuel.

    6. Provide economic incentives for entrepreneurs to provide an infrastructure for electric cars in urban areas where they're economically feasible as in the NE Washington-Boston corridor and the LA San-Francisco, and Seattle Area.

    7. Provide insurance to allow drilling in the intercontinental-shelf

    8. Go to a flat tax of say 45% to provide incentives for improvements.

    9. Get rid of the restrictions political expression in Churches and religious organizations. That's poisonous and a contravention of the first amendment. The only exception, we allow disagreement, but we don't allow incitement to violence. All "hate-speech" laws are prohibited by a new amendment to the constitution as long as they don't directly incite others to violence with statements like, "Kill the unbelievers", or "kill people in the X sect."

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