David A. RosenbergMay 12, 2010
Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
DUE TO BUSINESS TRAVEL, THE NEXT RELEASE OF BREAKFAST WITH DAVEWILL BE ON THURSDAY, MAY 20
•
Gold glitters: gold is nolonger trading just as partof the resource sector butis now taking on thecharacteristics of acurrency
•
Good news, bad news.The good news, U.S. smallbusiness sentiment is atits best level sinceSeptember 2008; the badnews, at the current levelit is still below the troughof the previous threerecessions
•
It is still deflation: throwing good moneyafter bad, as the world’sgovernments are busydoing, does not createinflation
•
More labour angst in theU.S. than meets the eye
•
U.S. home prices at risk
IN THIS ISSUE
•
While you were sleeping:little action in globalmarkets overnight; gold ismaking new highs;Canadian dollar going forpar again; weak GDPnumbers out of Germanyand France
•
Bazooka bust: take a readof the article on page 2 of yesterday’s FT —
Blast of Relief as Bazooka Finds itsTarget
WHILE YOU WERE SLEEPING
Little action in global markets overnight: Asian equities were soft — off 0.2% andnow down in seven of the past eight sessions. Emerging markets fell 0.5% — theShanghai index ended the day unchanged (but is 22% below its nearby peak).European equities are broadly higher, however, on the back of improvedearnings results.Gold is making new highs — helped today with a slightly softer tone to thegreenback. The Canadian dollar is staging a rebound and looks set to challengepar again and is firming against a slate of other global currencies (it is back inovervalued terrain, however). U.S. Treasuries are a tad on the defensive sideahead of today’s $24 billion 10-year Treasury note auction. Banking sectorstress is still evident in Libor-OIS spreads (19bps) and the TED spread (27bps).On the data front, the best the German economy could do in Q1 was eke out ameagre 0.2% advance and in France it was +0.1%. Ho hum.
BAZOOKA BUST
It was almost comical to read this headline yesterday on page 2 of the FT —
Blast of Relief as Bazooka Finds its Target
. The word
“bazooka”
, in this context,was coined by former Treasury Secretary Hank Paulson back on July 15, 2008 todescribe his weaponry to safeguard Fannie and Freddie. The stock marketrallied that day by over 1%, to 1,215 on the S&P 500, and the short-covering rally took the index above 1,300 by early August. Little did anyone know that wehad almost 50% to go on the downside before the interim lows were turned in.Beware of bazookas; they don’t always work.Speaking of the GSEs, it really is so encouraging to see that a week after Freddiewent cap-in-hand to the Treasury for a $10.6 billion cash infusion, Fannie had togo begging for $8.4 billion to cover its burgeoning losses. These two wards of the state have now drained $148bln of aid out of taxpayer pocketbooks since the mid-2008 bailout (the size of the entire deficit before the recession began).And what a housing mess it still is — Fannie reported that its delinquency ratestill rose to 5.47% in Q1 from 5.38% the quarter before. What is happening nowis that a growing number of people who can in fact pay their mortgage havestopped making their payments out of “anger” — according to a disturbing article that showed up on page A4 of yesterday’s WSJ (
Emotion Drives Many Defaults
).
Please see important disclosures at the end of this document.
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May 12, 2010
– BREAKFAST WITH DAVE
Why it’s disturbing is that it cites research showing that 12% of mortgagedefaults are now “strategic” and that somehow this is now okay on ourincreasingly hedonistic society. In fact, a law professor is quoted as lamenting why people are
“throwing their money away on a home in which they may never have equity.”
Wow. Look how far we have progressed. We used to be told
“why throw your money away on rent? Why don't you own?”
Now it’s
“why throw your money away on a house?"
Maybe because you signed a contract — now whyshould that matter.
What happened during thisrecent round of intenseEuropean-led volatility andfinancial market weaknesswas that gold rallied even inU.S. dollar termsGold is no longer trading justas part of the resourcesector but is now taking onthe characteristics of acurrency
You really can’t make this stuff up.
GOLD GLITTERS
In the aftermath of the Lehman collapse, gold faltered as there was a hugemargin call everywhere and investors seeking liquidity sold off their winners.The secular bull market for bullion did not end at the time, no long-term trendline was violated, and gold did rise in non-U.S. dollars and far outperformedother currencies. But what happened during this recent round of intenseEuropean-led volatility and financial market weakness was that gold rallied evenin U.S. dollar terms, which is significant seeing as there were large-scale safe-haven inflows into greenbacks. So this time, gold has managed to hit new highsin all currencies, and gold rallied even with the overall commodity complexslipping noticeably over the past few weeks.This is a sign. Of what, you may ask? That gold is no longer trading just as part of the resource sector but is now taking on the characteristics of a currency. While the U.S. dollar has gained ground since late last year, there is no doubt that anAdministration that has a stated policy of doubling exports in the next five years to“support” two million jobs absolutely craves a depreciating greenback.Meanwhile, a new socialist government in Japan wants a weaker yen. Sterling has only one way to go in an environment of heightened political uncertainty anda balance sheet that is at least as extended as Greece. And the ECB just gavenotice with its agreement to buy sovereign and corporate debt that it is willing todistort the pricing of risk in the bond market for the greater good of helping profligate countries to avoid either defaulting or certainly help them finance theirobligations at a subsidized cost. The Bundesbank, this is not.So gold is no government’s liability and the shape and shift in its supply curve is the shape would seem to be a little easier to make out than fiat currency. Wemay end up being overly conservative on our peak gold price forecast of $3,000an ounce.
GOOD NEWS, BAD NEWS
The good news is that we saw a thaw in the National Federation of IndependentBusiness (NFIB) small business diffusion index in April, to 90.6 from 86.8. Thatis the best level since September 2008. Good stuff.
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May 12, 2010
– BREAKFAST WITH DAVE
CHART 1: TODAY’S LEVEL IN SMALL BUSINESS SENTIMENT IS STILLLOWER THAN THE BOTTOM OF THE THREE PREVIOUS RECESSIONS
United States: National Federation of Independent Business Small BusinessOptimism Index
(percent)
050505
11010510095908580
Shaded region represent periods of U.S. recession.Source: Haver Analytics, Gluskin Sheff
Alas, despite tremendous government stimulus, the current level of 90.6 is stilllower than the low we saw at the depths of the 2001, 1990 and 1981/82recessions. In addition, the current level of the NFIB small business optimismindex is still below the average of the recessions going back to 1975; theaverage during recessions is 92.0. And, at 90.6, it is nowhere near what isdeemed as an expansion (average during expansions is 100.2) or even the endof a recession (average at the end of the recession is 96.9).
We welcome any good newsand the recent pop in theNFIB index is a move in theright direction. But the NFIBindex, based on oursimulations, is consistentwith real GDP growth of 0%
We welcome any good news and the recent pop in the NFIB index is a move in the right direction. But the NFIB index, based on our simulations, is consistentwith real GDP growth of 0%. We reiterate that outside of the lagged impact of the bailout, fiscal and monetary stimulus, together with the arithmetic bouncefrom the inventory component of the GDP accounts, the U.S. economy is stillcontracting. The contraction in State and local government spending,commercial construction and even housing three years into its meltdown are allposing significant drags on the pace of overall economic activity.Consumers only seem to be able to spend on the back of recurring governmenthandouts and subsidies and the export picture has all of a sudden becomemuddled as the Eurozone economy will soon be contracting again on the back of dramatic fiscal austerity in at least 15% of the region. Capex is really the onlybright spot but unfortunately it only comprises 6.5% of GDP.To be sure, the coincident economic indicators have quite been firm, but theleading indicators have already peaked out and rolled over. A second half growth relapse similar to what we saw in 2002 cannot be ruled out — and themarket is as much priced for this prospect today as it was back then.
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