Tuesday, August 17, 2010

Sustainable Recovery or Recession Part 2

Perma-bear, David Rosenberg, faces a stiff challenge from two main street challengers in this video clip recorded Friday, Aug. 13. Rosenberg re-emphasizes that the stock market and economic recovery we are enjoying is mostly a bounce from a very low level, stimulated by corporate inventory replacement and cash as stimulus that is now drying up. He points out that comparisons of recent recessions and their recoveries is a comparison of unlike situations. What distinguishes the current economic period is the need for credit to be reduced substantially before real intrinsic growth can resume on a sustainable basis. He says that US consumers represent the biggest balance sheet in the world and are carrying debt equal to 20% of their assets. The long-term average level is 12.5%.

The two challengers both agree with each other. Their positions are summarized as the recovery we are in is sustainable due to the excellent cash position of most corporations. They agree that the economy is still mired in debt deleveraging that will last for several years. But the general improvement in the health of corporations will create enough economic expansion to maintain a very low rate of growth, maybe not enough to change unemployment from current levels but enough to prevent another recession.

In his current letter, titled A Fragile Economic Outlook Continues, John Hussman briefly references the corporate debt condition. "While corporate cash levels may very well reduce liquidity risk for companies that would otherwise need to raise funds in a tight credit market, investors should not ignore that the overall debt burden of U.S. corporations is higher than it has ever been." The amount of corporate debt is tracked in the Federal Reserves Flow of Funds data report, Z.1. The facts are that corporate debt is at an all time high.

Skip the first two minutes of this clip and not miss a thing.