In this morning’s note David Rosenberg has some good thoughts on the state of the recovery and why he sees H2 headwinds. More interestingly though, he discusses why the recovery has been largely artificial:
“What most economists are missing in their second half recovery prospects is the huge amount of fiscal withdrawal coming out way. And this retrenchment is ongoing at the state and local government levels where the muni bond bears earlier this year totally missed the situtation….
Indeed, this 2009-2011 recovery and cyclical bull market has been as artificial as the 2003-2007 expansion. That last one was fueled by financial engineering in the financial sector. This one is being underpinned by unprecedented government intrusion in the credit markets. As of this quarter, your government has replaced the private sector as the largest source of outstanding mortgage market and consumer related credit. So not only is the USA turning Japanese in many respects, it is also now resembling China where the government also redirects the flow of private sector credit.”
That’s life during a balance sheet recession. With the private sector in saving and debt paying mode government has been forced to step in and bear the burden. Get used to it. This “artificial” economy is far from making an exit. And if austerity comes in the next few quarters as Rosenberg sees then “extended period” might become something closer to resembling “permanent period”. Any economic downturn at this juncture has the potential to prolong the balance sheet recession.