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David A. RosenbergSeptember 29, 2010
 Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
 
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
DUE TO BUSINESS TRAVEL, BREAKFAST WITH DAVE WILL NOT BEPUBLISHED TOMORROW, BUT RETURNS ON FRIDAY WHILE YOU WERE SLEEPING
The big news is still that asset classes that traditionally move inversely are nowmoving in tandem — stock prices, bond prices, and the gold price. As far as thelatter is concerned, have a look at Martin Wolf’s column today on page 11 of theFT —
Currency Wars in an Era of Chronically Weak Demand
— and also see
Currency Wars: A Fight to be Weaker 
on page C1 of the WSJ. Perhaps all threeare strengthening on the same prospect — the Fed’s strong hint of anotherround of quantitative easing (QE). The Fed, after all, would be buying Treasuriesso it is perfectly understandable why they would rally. More money printing means more U.S. dollar depreciation, which would obliviously be positive for gold(have a look at
Gold Forecast $1,450/oz 
on page 25 of the FT.The equity market seems to be the odd man out but we would surmise that it isrising on hopes that QE2 will be successful yet in stimulating final demandgrowth. From our lens, the jury is out on the efficacies of lower interest rates inan environment of contracting credit, especially considering what little impact the sharp plunge in yields and radical expansion of the central bank balancesheet have already exerted. A record low 0.64% yield on the 10-year TIPSstrongly suggests that the bond market is sniffing out a renewed contraction and the pace of economic activity before too long.We have long been of the view that the trauma that hit the U.S. householdbalance sheet — the largest balance sheet on the planet — has led to a dramaticshift in consumer attitudes towards spending, credit and homeownership. With that in mind, it is somewhat comforting to see society moving from denial toacceptance as it pertains to the secular changes in spending and saving behaviours that is truly underway. For a real life view of the challenges that lieahead have a look at the front page article of the USA Today titled
Recession’sImpact on Us: Lifestyle Changes Deep, Long Term
.
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IN THIS ISSUE
•
 
While you were sleeping: the big news is that of asset classes that traditionally moveinversely are now moving in tandem — stock prices,bond prices, and the goldprice
•
 
Lack of confidence: theConference Board’sconsumer confidenceindex sagged to 48.5 inSeptember from 53.2 inAugust
•
 
It wasn’t just consumerconfidence that’s in afunk, business sentimentslips too in Q3
•
 
House prices dip in theU.S.: the Case-ShillerComposite-20 index fell0.1% MoM in July — firstdecline in four months andis likely the re-emergenceof its primary downward trend
•
 
Richmond, poor man: thelitany of softer regionaleconomic reportscontinues unabated
 
September 29, 2010
– BREAKFAST WITH DAVE
 CHART 1: RECORD IMPLOSION IN HOUSEHOLD NET WORTH
United States: Household Net Worth
(three-year percent change)
1050505050505 6040200-20-40
Shaded region represent periods of U.S. recession. Source: Haver Analytics, Gluskin Sheff 
LACK OF CONFIDENCE
It is now so clear that we never did have an organic recovery on our hands.Growth is vividly slowing down in North America, and deflation, not inflation, is the primary risk. After all, if disinflation was the primary trend for 30 yearsamidst a secular credit expansion, it surely stands to reason that as creditcontracts, and with the underlying inflation below 1% and a huge output gap of 6.5%, deflation is a totally realistic scenario. The bond market is signalling somedeflationary event of great magnitude (could be an unexpected stock marketshock?). Bond yields will follow the 2-year note yield and will completely meltbefore this interest rate cycle is complete.In September, U.S. consumer confidence (according to the Conference Board)sagged to 48.5 from 53.2 in August — the consensus was expecting 52.0. This takes us all the way back to February and the fact that it slipped so badly in amonth that saw the equity market surge must be telling us that something,somewhere else is not going well at all — most likely, in the labour market.Indeed, the spread between the “jobs hard to get” and “jobs are plentiful”series, which gapped up to a six-month high of 42.3 from 41.5 in August. Thisforeshadows a rise in the unemployment rate, to 9.7% from 9.6% currently.
CHART 2: CONFERENCE BOARD EMPLOYMENT INDICATORPOINTING TO AN INCREASE IN THE JOBLESS RATE
United States
Conference Board Employment Indicator
(Jobs Hard to Get minus Jobs Plentiful, percentage points: thick line, left hand s
Unemployment Rate
(percent, thin line, right hand side scale)
1050505050 6040200-20-40-6012108642
Source: Haver Analytics, Gluskin Sheff 
Page 2 of 7
It is now clear that we neverdid have an organic recoveryon our hands in the U.S. — growth is slowing down anddeflation, not inflation, is theprimary risk
 
September 29, 2010
– BREAKFAST WITH DAVE
 
Putting the headline 48.5 reading into perspective, consumer confidenceaverages 72.9 in recessions and 100.2 in expansions. Maybe the NationalBureau of Economic Research jumped the gun. The chart of the “presentsituation” does indeed flag no recovery, down nearly two points in September, to23.1, and in fact, is back to levels prevailing in April 2009 (pre-green shoots!!).
CHART 3: PRESENT SITUATION INDEX DOES NOT FLAG A RECOVERY 
United States: Conference Board Present Situation Index
(1985 = 100)
 
1050505050 20016012080400
Shaded region represent periods of U.S. recessionSource: Haver Analytics, Gluskin Sheff 
Moreover, home-buying plans slipped from 2.1 to 1.9 in September — flirting near all-time lows.
CHART 4: HOME BUYING INTENTIONS FLIRTING WITH ALL-TIME LOWS
United States: Conference Board Consumer Confidence Survey:Plans to Buy a Home Within Six Months
(percent respondents)
1050505050 6.005.254.503.753.002.251.50
Shaded region represent periods of U.S. recessionSource: Haver Analytics, Gluskin Sheff 
Page 3 of 7
Home-buying plans in the U.S.flirting near all-time lows,according to the ConferenceBoard Consumer ConfidenceSurvey
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