David Rosenberg's Thoughts

Market Musings

What’s the biggest surprise of the S&P downgrade of the US’s credit rating?
The timing of it. They already had stated their intention, but the timing of it was early.

Why did it come early?
The budget agreement to get the debt ceiling raised is light.

What are the consequences of this?

In a real economic sense, the impact is fairly small. We have to remember it’s a split rating. Moody’s and Fitch have not downgraded the U.S.

What are the global consequences of the US downgrade?
If the U.S. isn’t AAA, it begs the question who is? The real consequences run a lot deeper than the U.S.

What will be more consequential is if France loses their AAA rating. If the U.S. isn’t AAA then I can’t see France having a AAA rating. And if France isn’t AAA you can kiss the European Stability Fund good-bye. Because the ball will then be in Germany’s court and I’m not so sure that the country will be able to bail out the entire euro zone.

So you’re more concerned about the economic situation in Europe than the U.S.?
The crisis of confidence is stemming from the eurozone – not the U.S.

Did bond indices in the U.S. get changed? No. Did banks have to go out and raise capital against bond indices? No. So what is the big deal? It’s a bit of a tempest in a teapot. The U.S. has a split rating. Full stop.

Sounds like the downgrade is not as bad as everyone thinks.
It’s like when Canada got downgraded in 1994. It lit a fire under the seats of the policymakers.

When do you think any sort of meaningful reform will happen?
Any real meaningful structural shift won’t happen until after 2012. 2012 is going to be the most critical election of the past three or four decades in terms of fiscal policy.

We have deflation, a credit collapse, an ongoing decline in assets and real estate prices. Along with a global debt crisis. It’s like musical chairs. The debt keeps getting transferred; not expunged.

So what if we had a 12-24 months rally in the equity markets? The same thing happened in the 1930s, when there was a recovery from 1933 to 1936. This is not Japan all over again. What we are in now is probably a modern day depression. The great recession is a polite way of saying a depression – economists are polite people.

So the markets are saying we’re in a depression?
That’s why you have gold at $1700 an ounce. That’s why 10-year Treasury bond yields are lower now. The bond market is saying we are in for weak growth. Gold is saying the government is going to try to reinflate their way out of it.

What can we expect to further happen while riding out the recession/depression?
Growth rates are going to be much weaker globally. There is going to be a prolonged period of very weak activity. Consumer confidence is lower today than after the 1987 crash and after 9/11.

How do we get back to a sustainable bull market and expansion?
In the end, you print money.


The final line is where I disagree with Rosenberg's generally fine analysis. The solution is not to print money.

It is to default on debt that can not and will not be repaid.

By running huge deficits to feed the war and welfare machine we entered the realm of the mathematically impossible several years ago.

Only when these machines are dismantled can we see sustained recovery. In the meantime, the will to face the music seems lacking - so I will continue to buy gold.