Embed Doc
Copy Link
Readcast
Collections

CommentGo Back

Download

David A. RosenbergJuly 3, 2009

Chief Economist & Strategist Economics Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Lunch with Dave

THE CROSS OF THE GOLDEN CROSS IS GETTING CROSSED UPIN THIS ISSUE

• The cross of the goldencross is getting crossedup• Strange way for arecession to end• Jobless claims point tofurther big declines in July• Fiscal stimulus orrestraint?• Is ISM the big loser?• The financial crisis is over… Really?The S&P 500 is clearly struggling and on Thursday closed below its 50-daymoving average and is barely hanging on to its 200-day m.a. As we have saidbefore, the bounce in the market was a two-month wonder that looks to havebeen completed in early May and what is ironic is that most of the streetstrategists turned outright bullish after the complete move had already beenmade. But the volume has not been there, the green shoots are fading (withboth auto sales and employment disappointing in June) and it may be importantfrom an “all the good news is priced in” standpoint that since the stress testresults were announced the broad market has done little more than movesideways.The CRB is also struggling now at both the 50-day and 200-day m.a.’s. The U.S.dollar has bounced back despite the weak economic data and the reason for that is because heightened risk aversion, which is what we are seeing now, tends to occur alongside a shift towards liquidity preference, and many investorsmay not like the greenback for a whole host of reasons, but liquid it is.Note that the Baltic Dry Index is coming off a two day 2.2% slip, which could be anear-term caution sign for the commodity complex. The chart of gold shows a triple-top and it too is converging on the 50 and 100-day moving averages – therebound in the U.S. dollar and news that jewellery demand out of India is veryweak (see page 20 of today’s FT). This should help set up a return for theCanadian dollar into a 80-83 cent band (as an aside, the higher end represents the 200-day m.a.).The 10-year T-note yield, after the latest rally, is at a critical juncture of its own at3.5% – hugging the 50-day moving average and a break of that could well set upa retest of 3.08 - 3.15%, which is the range on the 100-day and 200-day moving averages. As an aside, the bubble of the year candidate may well go to theChinese stock market, which has soared 70%. Nothing else comes close.Enough of the technicals, let’s move to the fundamentals.

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc.is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highestlevel of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports

visit www.gluskinsheff.com

July 3, 2009

– LUNCH WITH DAVE

STRANGE WAY FOR A RECESSION TO END

The June U.S.employment reporthad deflationthumbprints all over it

Has a recession ever ended with U.S. payrolls sliding 1.3 million over a three-month span? The answer would be “no”.The June U.S. employment report had deflation thumbprints all over it. Youdon’t have to take my word for it, have a read of San Francisco Fed PresidentJanet Yellen’s speech on June 30 when she dared to utter the “D” word (seebelow). And that was before the release of the payroll data, which containeddisturbing signs of weakness on many fronts.The headline U.S. nonfarm figure came in at -467k compared with -350kconsensus forecast and the back revisions were negligible (+8k). Also keep inmind that the Birth-Death adjustment showed that miraculously, 185,000 jobswere created by new business formation, which was 20,000 more than a yearago – you really cannot make this stuff up. Be that as it may, at no time in the1980, 1982, 1990 or 2001 recessions did we ever come close to seeing such adetonating jobs figure as we did on Friday, not even at the depths of thosedownturns, and yet we have a whole industry of ‘green shoot’ advocates today telling us that the recovery has already arrived.We saw a market commentator on the front page of today’s NYT stating “It looksshockingly bad compared to last month, but it is better than April when theeconomy shed 504,000 jobs. The trend is much better than when we started the year”. We can understand the human need to be optimistic at all times, butin the money management business, it is vital to constantly do reality checks.With the global economy coming out of the abyss at the turn of the year, andwith credit conditions far better than the total freeze-up back then, why shouldwe still be seeing job declines of between 700k and 800k? Is that the newbenchmark for the economy? The reality is that the Lehman collapse was ninemonths ago and the peak of the fallout was five months ago. Think about that, the economy was in recession for over a year by the time the markets reallybegan to fall apart at the turn of this year, and since the peak of the angst, theeconomy has still shed over 2½ million jobs, which is more than what was lost in the entire 2001 tech-wreck-downturn.So while we are no longer experiencing an earthquake, what we are enduring are the aftershocks, not green shoots. There is still up to $5 trillion of consumerand mortgage-related debt that has to come out of the system based on the newand lower level of assets and net worth on the household balance sheet, andcompanies are adjusting their order books, output schedules and staging requirements to this new paradigm of credit contraction. It should not be lost onanyone that this is the first time since the 1930s depression that the privatesector job losses posted in the economic downturn more than wiped out all thegains from the prior expansion.

While we are nolonger experiencingan earthquake, whatwe are enduring arethe aftershocks, notgreen shoots

Page 2 of 12

July 3, 2009

– LUNCH WITH DAVE

This is a totally new experience for analysts, economists and strategists, whichmay be one reason why so many pundits missed calling this cycle for what it is,or perhaps for what it is not, a garden-variety recession, where little rules-of- thumb like the ISM or ECRI can be relied upon to call the turn. This time around, the signpost will come from more esoteric indicators such as home inventories, the savings rate, debt-service ratios, household balance sheet growth, and liquidassets relative to non-liquid assets on commercial bank balance sheets. That is the big picture.

As always, the devilwas in the details inThursday’s nonfarmpayroll report

Back to the smaller picture (the data). As always, the devil was in the details inThursday’s report. In almost every industry, job losses were deeper in June than they were in May. The diffusion index fell to 28.6 from 31.0, which means thatnearly three-quarters of the corporate sector is still in the process of shedding jobs. The Household Survey showed a 374k job decline, and all centered in full- time jobs. In fact, we have lost a record 9 million full-time jobs this cycle, more than triple what is normal in the context of a post-WWII recession, and the over2 million pushed onto part-time work (and the number of people now working part-time because they have no other choice due to the weak economy hasmore than doubled).This in turn has taken the total hours worked in the private sector down to a newrecord low of 33.0 hours in June from 33.1 hours in May. In fact, aggregatehours fell so much in June that the decline was equivalent to over an 800k jobslice! Just to put the entire labor market picture into a certain perspective;aggregate hours worked, which closely tracks real GDP growth, fell 0.8% in June(that is a 9.2% plunge at an annual rate), which was the steepest decline sinceMarch, and not once did a recession ever end with this metric as weak as it waslast month.

Aggregate hours fellso much in June thatthe decline wasequivalent to over an800k job slice

When we say that deflation has gripped the labor market, we are notexaggerating. Average weekly earnings – the proxy for wage-based income – fell0.3% in June and have been flat or down in three of the last four months.During this interval, they have deflated at a 1.6% annual rate – versus a +1.8% trend a year ago and +5.2% two years ago.Moreover, judging by the lingering – indeed, accelerating – weakness in labourdemand, these deflationary pressures in the labour market in general andwages in particular can be expected to persist. In addition, the implications forconsumer spending once the fiscal stimulus subsides in the second half of theyear are clearly negative, with similar implications for corporate profits and theequity market, which are

de facto

priced in a V-shaped earnings recovery. Theaverage duration of unemployment gapped up by two weeks to 24.5 weeks –both the monthly increase and the level reached new record highs. The numberof unemployed people that have been looking for a job with futility for the pastsix months rose 433k to a new all-time high of 4.4 million. Almost one-in-threeof the ranks of the unemployed have been looking for work now for the past sixmonths and still can’t find one. It is remarkable that anyone can be seriousabout ‘green shoots’ in this labour market backdrop.

Page 3 of 12