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State and Local Govt. Austerity Turns David Rosenberg (Almost) Bullish

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In the last few years, few economists and strategists have been as vocally bearish as Gluskin Sheff's chief economist and strategist David Rosenberg.

But there is a trend sweeping America that has caused Rosenberg to ease up on his negative outlook and lean a bit more bullish.

"I do see a light at the end of the dark tunnel," he wrote in a recent research note. "The future is brighter than you think."

Rosenberg joined The Daily Ticker's Aaron Task and Henry Blodget to explain himself. While far from optimistic today, "I am starting to see a flicker of light at the end of the tunnel," he says, citing the trend toward fiscal conservatism at the U.S. state and local level as a primary reason.

While Wisconsin Governor Scott Walker's victory in the recall vote grabbed the headlines, "the really big development took place in California where San Diego, by a two-thirds majority vote, approved a plan that puts new city workers on a private sector-type retirement fund and a six-year wage freeze for current employees," he writes. "San Jose also saw a 70% majority pass of a reform bill that offers civil servants two choices: contribute more to fund their pensions or be willing to accept a cut in benefits."

According the Spring 2012 report by the National Conference of State Legislatures on state budgets, Rosenberg's observation about local austerity is spot on. "State fiscal conditions continue to improve at a slow and steady pace," the report states. "For the first time since before the Great Recession, a number of states are projecting to end the fiscal year with small unobligated balances."

While many economists, most notably The New York Times columnist Paul Krumgan, believe austerity is horrible policy at a time of economic distress, Rosenberg does not agree.

"Austerity is not a dirty nine-letter word," he says. "Austerity means living within your means."

On the flip side, predictions by many -- most notably Meredith Whitney -- about a crippling bust at the state and local level and a rash of muni bond defaults have also failed to come to fruition.

The pundits have underestimated the political resolve to get balance sheets in order, Rosenberg says. This trend could be a leading indicator for the November election, the outcome of which holds the key to whether Rosenberg fully commits to this recent flirtation with optimism.

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