David Rosenberg Breaks Down “The End Game”

By | July 5, 2021

As always, just as the market is about to set off on yet another dead cat bounce courtesy of vapor volume and the lack of concerted selling (after all the Fed is front and center today which means nothing can possibly go wrong… at least until someone actually does some Mark to Market accounting on the left side of Bank of America’s balance sheet), here comes David Rosenberg with a cup of very cold water, thrown right in the face of the misguided optimists who carry the deluded idea that this story could possibly have a Hollywood ending..

The End Game

Well, all the major averages have sliced through their respective 50- and 200- day moving averages and have radically undercut the June lows. And recall, QE2 started November 10, 2010. All the gains from QE2 are now gone. In fact, as it now stands, 20 months of hard earned capital appreciation in the S&P 500 has been wiped out in just three weeks … bear markets are merciless; malevolent beasts. Global growth prospects are clearly being marked down — the action in the once-hot BRICs say it all as these areas are in full-fledged bear mode:

  • Brazil: -33%
  • Russia: -21.6%
  • India: -20%
  • China: -27%

The bond market also clearly has recession in its sights — none of this namby- pamby “35% odds” stuff out of Wall Street. The 10-year U.S. note yield closed at 2.31% in yesterday’s session, undercutting last October’s QE2-related low; dead air all the way down to 2%, which would be a test of the December 2008 trough.

In terms of the end game, it seems obvious now. If we can agree that the problem is excessive indebtedness at a whole bunch of levels (each country seems to have its own unique situation, for example the nonfinancial private sector credit outstanding relative to GDP in Spain is around 200%!) in many countries then there is really only one answer. This is not really about the EFSF, which helps reduce debt servicing costs but does not help alleviate the problem of overall debt burdens — that is just a swap. I think the ECB and the Fed (watch for some big changes in the press statement today), but especially the ECB, has to buy bonds en masse and reduce the amount of European debt outstanding and sharply boost the money supply. I believe that is the only way out right now. The central banks have to be the ones to absorb the debt and bring debt ratios down to more comfortable levels.

As for the Fed, when Ben Bernanke gave his testimony to Congress back on July 13th, the Dow was sitting at 12,492 (10,809 at yesterday’s close), the 10-year was at 2.92% (2.31%) and oil was at $98/bbl ($81.21). Recall that back then, he did not shut the door on more Fed easing policy if the situation called for it. The only question is whatever it is the Fed decides to do, will it bolster aggregate demand any more than taking rates to 0% and embarking on two rounds of quantitative easing programs. These are the vagaries of a central bank burdened with the task of stimulating an economy saddled with so much debt and so many scars from years of real estate deflation and lingering joblessness.

The gold price seems to understand the end game, since it will involve an explosion in the monetary pace. The bond market is doing what it’s doing— and now equities with a lag— because this asset class doesn’t believe the next reflation wave will really do much to ignite confidence and spending, even if it manages to save the euro and the region’s undercapitalized banks.

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