David A. Rosenberg
November 23, 2010
Chief Economist & Strategist Economic Commentarydrosenberg@gluskinsheff.com+ 1 416 681 8919
MARKET MUSINGS & DATA DECIPHERING
Breakfast with Dave
WHILE YOU WERE SLEEPING
Lingering concerns over the Irish debt issue (the Bank of Ireland Plc is off 20%today; and the government has collapsed and an election will likely be held inearly 2011) and heightened military tensions between the two Koreas (this wasno missile test — bullets were fired for the first time since the war nearly sixdecades ago) are undercutting the risk-on trade with European bourses downacross the board. There were also some heavy losses across Asia, which weretaking hold even before any shots were fired (for example, the Hang Seng indexwas clocked in overnight trading, down 627 points or a 2.7% slide — thesharpest decline in six months — and the Shanghai index slid 1.9% to a six-weeklow. There is some market chatter about Chinese banks hitting their loan quotasand as such intend to close their credit books). There is also talk that China isgoing to take more aggressive tightening moves to combat inflation pressures.All 10 groups that make up the MSCI World Index are in the red so far today.The U.S. government’s crusade against the hedge fund industry — three are nowunder investigation — is serving as added cloud overhanging the financials. TheU.S. retailing stocks have been behaving quite well (the SPDR Retail ETF is at athree-year high!) and Black Friday will likely prove to be a key inflection point.However, it is fair to ask just how robust the consumer spending outlook is whenWal-Mart comes out and says it will meet any price by its rivals and TJ Maxx, thevery same day, cuts $100 off each iPad?Bonds in the U.S. and core Europe are rallying but not dramatically; sovereignrisks are underscored by the back-up in yields today among the peripheralproblem countries (the Irish 10-year government bond yield has shot up 11bpsto nearly 8%). Today’s NYT appropriately asks for how much longer canpoliticians expect bond holders to not take a haircut on their risky investments(see
In Europe, a Look at Defaults to Stem the Pain
— bailouts are clearly nolonger the answer in the aftermath of what has occurred in Ireland). The euro,as we know it, has a limited lifeline from here. For all the G20 talk about“currency imbalances”, there is no greater imbalance than imposing a ‘goldstandard’ tourniquet on countries facing severe financial strains andrecessionary pressures. To quote the venerable Ken Rogoff in today’s NYT —
“There is no escaping debt restructuring for Greece and Ireland”
. In this light,the greenback, despite U.S. fiscal problems of its own, is quite a bit firmer on aflight-to-liquidity move with the DXY popping back above the 50-day moving average. The Swiss franc, another “defensive” currency, is also firming as I type.
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Setting the record straight… again: the equity marketcertainly did turn in asurprisingly vigorous rallyin the past few months butit would be a mistake torelate this to any realfundamental improvementin the economic backdrop
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Nothing Cavalier in theCleveland Fed’s pricemeasure: its trimmed-mean CPI series, whichremoves the volatility inconsumer prices, is nowjust 77bps YoY fromdipping below zero
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More evidence onhouseholds cutting backon credit
IN THIS ISSUE
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While you were sleeping:lingering concerns over theIrish debt issue andheightened militarytensions between Northand South Korea areundercutting the risk-ontrade today
November 23, 2010
– BREAKFAST WITH DAVE
This renewal of risk aversion has triggered a retreat in the commodity currencycountries — the Aussie is down for a third day in a row. As an aside, theAustralian government said it is contemplating whether to start restricting foreign investment in its rural land and agricultural food production sector —food security is emerging as major strategy theme, not just for governments butfor investors too. The Canadian dollar is gradually moving down towards its fair-value range of 92-93 cents — still about a nickel to go — although fundamentalsupport should be provided by the country’s fiscal rectitude with FinanceMinister Flaherty reiterating his stance that the 2011 budget will focus onspending restraint, deficit reduction and further declines in corporate tax rates.Resource prices are drifting lower from their very lofty levels — oil is downfractionally and copper is heading south for the third day in a row.
This renewal of risk aversiontoday has triggered a retreatin the commodity currencycountries
On the data docket, German GDP posted a nice broad-based 0.7% advance inQ3, and remember, this followed the blowout 2.3% surge in Q2. If we weretalking about the old D-mark instead of the euro, we would be talking about theprospect for an impressive currency rally; however, Ireland, Greece and Portugalcontinue to get in the way (even Spanish 10-year yields have gapped up 10bpsso far today and are 220bps above German comparables). For some usefulcommentary on how important it is to recognize the contagion risks from Greeceand Ireland see
Portugal New Focus of Europe Debt Fears
on page A8 of theWSJ. There is more and more discussion of debt restructurings, and frankly, it isabout time. In each case in 2008 and 2009, bondholders got bailed out evenas equity was wiped out or close to getting wiped out. But it was the Lehmanexperience, having bondholders accept a haircut for the risks they took, whichhas policymakers so fearful about not having bondholders be made whole —these days are numbered. Imagine if German and U.S. taxpayers knew the fullextent of just how much these IMF rescue packages are costing them — therewould be an outrage.In any event, also have a look at
Amid Irish Aid, a New Option
on page A11 of the WSJ. Also have a look at the editorial on page A22 —
Europe Takes Out theBazooka
. Ireland alone is using up 13% of the Eurozone stabilization fund andthe fact that Greek bond spreads are wider now than they were in May suggeststhat this “bazooka” is not exactly working out as planned. The saga continuesand likely warrants a more defensive investing posture than many a Wall Streetstrategist is currently recommending.Suffice it to say, with equity PM cash ratios down to 3.5%, the InvestorsIntelligence survey showing the most bullish market sentiment in six months andthe VIX index a smidge above 18, what we have on our hands is: (i) widespreadcomplacency, and (ii) a fully invested market as it became clear in the daysfollowing the mid-term election and Fed meeting in early November that we hada good dose of performance-chasers piling into equities in particular and riskassets in general with a consensus view that the post Jackson Hole gravy trainwas going to remain on the tracks through to year-end.
Page 2 of 11
The saga continues in theperiphery Eurozone, andlikely warrants a moredefensive investing posturethan many a Wall Streetstrategist is currentlyrecommending
November 23, 2010
– BREAKFAST WITH DAVE
To invoke Bob Farrell’s Rule 9:
“When all the experts and forecasts agree,something else is going to happen.”
Below we highlight the still-high levels of mortgage delinquency rates as a vividsign that household financial strains have hardly abated. Both the New Yorkand Cleveland Federal Reserve Banks have just published reports outlining theseverity of the deleveraging cycle that is in full swing — banks have seen theiroutstanding real estate book contract to levels not seen since December 2007.Home prices are taking another leg down as well, though this has received verylittle media attention. And, it is bound to get worse because CoreLogic justupdated its database to show that the complete inventory of unsold homes forsale — including the ‘shadow’ foreclosed stockpile that is not yet listed for sale —has expanded by 200,000 units in the past year to 6.3 million units. Thatmeans that the ‘true’ backlog of unsold inventory overhanging the market isclose to 23 months’ supply compared with 16 months a year ago.We have been on the consumer frugality theme for the last three years andintroduced the deflationary concept of “getting small” as it pertains tohousehold shopping attitudes. Because a flashy QE2-induced rally in equitiesmanaged to provide a lift to select high-end retail activity of late, the reality isthat many not-high-end American consumers are radically changing their buying habits in this secular post-bubble deleveraging phase. For a terrific read on thistheme, look no further than the front page of today’s WSJ —
The Just-in-TimeConsumer
. To wit:
“The Great Depression replaced a spendthrift culture with a generation of frugalsavers. The recent recession, too, has left in its wake a deeply changedshopper: the Just-in-Time Shopper. For over two decades, Americans boughtbig, bought more and stocked up, confident that bulk shopping, often on credit,provided the best value for their money. But the long recession — with its highunemployment, plummeting home values and depleted savings accounts —altered the way many people think about the future. Manufacturers andretailers report that people are buying less more frequently, and are determinedto keep cash on hand.”
American shoppers, at the margin, are frequenting their favourite stores moreoften but buying less per trip. They are doing this to take advantage of lowerprices down the road. So, the bond market has inflation expectations on thebrain, but the consumer is not going to pay the higher price — unwilling andunable. This is very supportive for the fixed-income market (more on this below).
SETTING THE RECORD STRAIGHT … AGAIN
The equity market certainly did turn in a surprisingly vigorous rally in the pastfew months but it would be a mistake to relate this to any real fundamentalimprovement in the economic backdrop. As we will likely see in today’s FOMCminutes, the Fed is yet again going to take a knife to its growth and inflationforecast as it has done with regularity over the past eight months.
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American shoppers, at themargin, are frequenting theirfavourite stores more oftenbut buying less per trip …they are doing so in hopes ofseeing prices in the goodsthey need to buy go down
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