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Breakfast With Dave 121609

Breakfast With Dave 121609

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Published by: ejlamas on Dec 16, 2009
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David A. RosenbergDecember 16, 2009
 Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
Breakfast with Dave
The U.S. dollar is consolidating but the currency du jour is the Sterling in theaftermath of its November unemployment data, which showed the first declinesince February 2008 (-6,300; consensus was +12,500). The once-hot Aussie hashad a few pegs knocked down from underneath it as Q3 GDP came in at the down-under end of expectations, at +0.2% (consensus was +0.4%) and Reserve Bank of Australia officials are downplaying further rate hikes.Bonds are doing very little and the action in equities is mixed to higher — Europeand U.S. futures in the green; in Asia, we did see Japan, India and Singaporehigher, while China, Hong Kong and Korea lower. Commodities, in general, are bidwith gold bouncing off its 50-day moving average. Bloomberg News runs with astory of how global central bank buying of bullion is a sell signal because monetaryauthorities were selling into bear market through the 1980s and 1990s and thatproved to be a wrong strategy. But the bottom line is that the central banks wereselling for more than 10 years until gold hit its trough, and they only recently began to buy. So from our lens, the fact that central banks are in the early stages of theirdiversification back into bullion is actually a constructive signpost.
The U.S. dollar, left for dead just a few weeks ago, has staged a huge comebackand has popped above both its 50- and 100-day moving averages. Most of thestrength has been against the Euro, which has broken down as the world now sees that the region’s fiscal and banking sector woes are even worse than they are in the United States.Commodities are hanging in even in the face of the U.S. dollar strength, especiallycopper and we see that gold so far is successfully testing its trend lines. Be thatas it may, the renewed decline in the Baltic Dry Index bears watching for thecommodity complex.The Treasury market has also weakened materially on the back of concerns that the Fed may begin to boost the discount rate (its balance sheet has already shrunk17% in the past three weeks but remains bloated nonetheless), a growth scareunder way (to the upside) and more massive government bond supply on its way.We may at some point get some mortgage convexity selling to kick in and sendyields even higher in illiquid markets.
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
While you were sleeping —economic data in the U.K.and Australia came inbelow expected; bondsare doing very little andequities are mixed tohigher this morning Interesting market moves— U.S. dollar has staged ahuge comeback, butcommodities are holding in; U.S. treasury bondshave also weakenedmaterially on concerns that the Fed may begin toboost the discount rateGDP is not everything part2; as we stated yesterday,GDP is not the bestbarometer of economichealth, and we are notalone in this assessmentStill signs of softness —strength in the U.S.industrial production datacame from materials andsupplies and the NAHBhousing index falls to itslowest level in six months• What the man said — evenwhen he is behind closeddoors at the FOMCmeeting, Fed ChairmanBernanke still manages toget the message acrossWill it be payback time in2010? The U.S.government has a record$2.5 trillion in debt rolling over in 2010No surprise in the U.S.housing starts data …fundamental trend is stillvery weak
December 16, 2009
Keep an eye on any break above the nearby high of 3.89% on the 10-year Treasurynote yield. Moreover, it was interesting to see from yesterday’s U.S. TreasuryInternational Capital (TIC) data that the Chinese were conspicuous by their absencefrom the Treasury market in October — in the lead-up to Obama’s visit there.Perhaps this was a subtle way to show who’s really boss. It could well be that theliquidity-driven phase of this bear market rally in equities is now behind us:
Keep an eye on any breakabove the nearby high of3.89% on the 10-yearTreasury note yield
Fed balance sheet contracts; discount rate move could heighten tightening expectations down the road.2.
Stronger dollar – definitely an “anti-liquidity” development.3.
Growth scare – all of a sudden the real economy as opposed to thefinancial economy begins to absorb part of the liquidity growth.
We mentioned two days ago, there is an outside chance that we could see Q4 realGDP approach a 4-5% range at an annual rate, well above current consensusexpectations (currently the Bloomberg consensus is expecting a 3.0% increase inGDP). A good chunk of that is in inventories, not final demand, but so be it. Thepoint we are trying to make is that GDP is not only revised massively in the futurebut it is not the best barometer of economic health, notwithstanding all theattention it receives. Let’s not forget that Japan has had nearly 60-positive GDPquarters since its bubble burst in the early 1990s. Yesterday, a quote from The Becker-Posner Blog (taken from the article titled:
Should We Jettison GDP as an Economic Measure?
) was sent to us by a long timereader, and friend, and it encapsulates what we believe:
“But it is necessary to emphasize that it is just a starting point. I disagreewith economists who say the “recession” ended in the third quarter. Thedepression (as I think we should call it if only because of its enormouspotential political consequences) has caused massive unemploymentwith all the associated anxieties and hardships, has greatly reducedhousehold wealth, has caused private investment to turn negative, hascost the government trillions of dollars in lost tax revenues and recovery expenditures (TARP, the fiscal stimulus, the mortgage-relief programs,the auto bailouts, etc.), has undermined belief in free markets andaltered the line between government and business in favor government,and is threatening a future inflation while deepening our dependence onforeign lenders. To view a change in GDP from negative to positive as signifying the end of a depression (by which criterion the GreatDepression ended in 1933 and again in 1938) is to misunderstand theutility of GDP as a measure of economic activity.”
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December 16, 2009
To little fanfare, the NAHBhousing market index fell inDecember, to 16 from 17 inNovember … the lowestreading in six months
We still have no clue how the last U.S. nonfarm payroll report could show such alarge increase in service sector employment at a time when the ADP and ISMreports flagged discernible declines. And, how it was that a flat raw retail salesresult in November managed to translate into a 1%-plus spike in the governmentdata base is again one of life’s mysteries. All we can say is that while all thecomponents of GDP are pointing now to 4-5% real growth in Q4, this is notnecessarily a sign that the economy is out of sickbay. Japan had nearly 60quarters of positive GDP growth since its credit bubble burst two decades ago, andall they represented were noise around a flat trendline.Let’s also recognize that most of the strength in the industrial production report forNovember was in materials (+1.2% MoM) and supplies (+1.0%). Finishedconsumer goods production was really an average +0.3% — the second weakestprint since June, in fact. So, we would not exactly characterize it is at a broadlybased report.To little fanfare, the National Association of Home Builders (NAHB) housing marketindex fell back to 16 in December (consensus was at 18) from 17 in Novemberand the nearby high of 19 in October. This was the lowest reading in six monthsand leading the decline was a two point slide in the future sales expectations.Considering the massive amount of stimulus out there in support of the residentialreal estate market, the December level is tied for the fifth weakest result in the 25-year history of the survey. It is clear that there are secular changes afoot withrespect to household attitudes towards credit, discretionary spending andhomeownership. There is really no other way to explain a 16-print today in theNAHB index. To put a number like this into proper perspective is still below the troughs of the prior two recessions (20 and 46 respectively). This report is nothing less than shocking.
United States: National Association of Home Builders Housing Market Index
(all good = 100)
050505 806040200
Source: Haver Analytics, Gluskin Sheff 
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