You are on page 1of 5

David A.

Rosenberg June 5, 2009
Chief Economist & Strategist Economics Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Coffee with Dave
WHERE PERCEPTION DIVERGES FROM REALITY
The headline nonfarm payroll figure came in above expectations at -345,000 in
May — the consensus was looking for something closer to -525,000. The
Nonfarm payrolls
markets are treating this as yet another in the line-up of ‘green shoots’ because
came in above
the decline was less severe than it was in April (-504,000), March (-652,000), expectations, falling
February (-681,000) and January (-741,000). However, let’s not forget that the ‘only’ 345,000 in May
fairy tale Birth-Death model from the Bureau of Labour Statistics (BLS) added (the consensus was
220,000 to the headline — so adjusting for that, we would have actually seen a closer to -525,000) …
565,000 headline job decline. At least initially, this skew to the data is being
readily dismissed.

To Mr. Market, this was not a case of employment declining 345,000, it was a
case of the rate of change improving by 159,000 from April and by 496,000
from the weakest point of the cycle back in January. So, what Mr. Market is
doing is extrapolating this so-called improvement into the future and drawing the
conclusion that employment is going to start to turn positive on a ‘first-
derivative’ basis by August, at which time we will all be bidding au revoir to the
recession.

NOT SO FAST
Changes in the second-derivative only take you so far. As an example, the best
nonfarm payroll report during the expansion was the 380,000 print on … but not so fast, the
November 2005. We never came close to such a tally again, the data began to birth-death model
moderate after that point, and yet the recession didn’t begin for another two added 220,000 to the
years. So this view that we have come off the -741,000 nonfarm payroll result
headline, so the
number could be
in January and sequentially improved from what was a horrific credit-collapse-
closer to -565,000
induced slide, by no means suggests that a cycle of renewed job creation is only
a few months away. Just as it would have been premature to call for the end of
the economic expansion in November 2005 at the peak of the job gains, it is
very likely a mistake in the other direction to be calling for the end to the
downturn just because employment is no longer declining at the same awful
pace it was at the turn of the year. Just as the recession officially began on the
first negative nonfarm payroll reading in December 2007, the recession will
officially end when it turns positive — not just “less negative”. That could be
several quarters away, in our view.

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 highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports, visit www.gluskinsheff.com
June 5, 2009 – Coffee with Dave

LET’S PUT THE PAYROLL DATA INTO PERSPECTIVE
We have to put the data into perspective. Before the Lehman collapse, when
The internals of
equities were in a moderate bear market and bonds in a moderate bull market,
today’s nonfarm
the worst nonfarm payroll result we saw was -175,000. We don’t seem to recall
report, in a word, were
too many pundits rejoicing over employment declines at that time, which were
awful
basically half of what was just posted in May. Moreover, the worst nonfarm
payroll number in the 2001 recession — right after 9-11 — was -325,000; and
before that, at the depths of the 1990-91 recession, the worst report showed a
-306,000 print. So basically, what we saw today was a number consistent with a
deep recession — just not quite as deep as the near-6% at an annual rate
contraction we saw in the first quarter. It is difficult to rejoice over an
employment data that is consistent with real GDP still declining anywhere from a
2% to 4% at an annual rate. Now here we are, close to nine months after the
Lehman collapse, and we are still printing employment numbers that are double
what they were before pre-Lehman. That is the bigger picture.

Moreover, the internals of today’s report, in a word, were awful. Not only are
businesses still cutting jobs but they are also reducing the hours that their
employees are working; the private workweek hit a new record low of 33.1 hours
(from 33.2 hours in April). So, total labour input was much weaker than the
headline payroll suggests and this is vividly illustrated in the aggregate-hours
worked index, which fell 0.7% MoM and something ‘green shoot’ advocates will
not like discuss since this was actually worse than the 0.3% MoM drop in April;
this takes the three-month trend to a -8.6% annual rate. Think about that for a
moment because what goes into GDP is total hours worked and productivity —
so the latter better continue to hang in there or else we are going to be seeing
some nasty output data going forward that may well take Mr. Market by surprise.
Put another way, if companies had held hours worked constant in May instead
of cutting them, to achieve the total labour input they achieved last month would
have required — get this — a 927,000 payroll cut. ‘Green shoot’ indeed.

WHAT ABOUT THE HOUSEHOLD SURVEY
Not much was made of the Household Survey, which showed a 437,000 job
decline in May (-661,000 for those under the ripe old age of 55) and a further The unemployment
rise in the unemployment rate, to 9.4% in May from 8.9% in April and 7.2% at rate is now at its
the turn of the year. The unemployment rate is now at its highest level since highest level since
August 1983, and there now seems to be little doubt that it will take out the August 1993
post-WWII peak of 10.8% posted in late 1982. Recall that in these painful post-
bubble cycles, the jobless rate continues to rise in the ensuing jobless
recoveries —the recession ended in March 1991 but the unemployment rate did
not peak until June 1992; and while the last recession may have ended in
November 2001, the jobless rate peaked in June 2003. It has become
fashionable to call the unemployment rate a ‘lagging indicator’, which is true in a
classic garden-variety inventory-induced recession, but in a credit cycle it is
actually much closer to a coincident indicator since it is highly correlated to
consumer delinquency rates.

Page 2 of 5
June 5, 2009 – Coffee with Dave

In any event, even the 9.4% unemployment rate, as bad as that number is,
sugar-coats the situation. The number of full-time jobs shrank 407,000 last Like any other market,
month, dominating the decline in the Household Survey, and there were the labour market
174,000 people who got pushed into part-time work because of the weak responds to the
economy (not by choice) and that represented a whopping 26% increase at an vagaries of supply and
annual rate. So, when you consider what the workweek did, and the relentless demand
shift towards part-time employment, as well as other measures of labour market
slack, the underlying jobless rate (the U-6 measure) rose to an all-time high of
16.4% from 15.8% in April and 9.8% a year ago.

Like any other market, the labour market responds to the vagaries of supply and
demand. When I went to university in the early 1980s, we learned that there
could never be a deflation because of wage rigidities in the labour market. Well,
it may be time to rip those chapters out of the Econ 101 textbooks. The really
critical number in today’s report was the 0.2% decline in average weekly
earnings — the proxy for wage-based personal income — which was the second
decline in the last three months. Since December, the YoY trend has been
sliced in half, to a mere 1.2% rate. This is certainly going to anchor a soft set of
income and sales data through the month of June, and these are two
ingredients that go into the National Bureau of Economic Research’s (NBER)
recession-determination call.

Another ingredient is production and considering that factory payrolls sank
156,000 and that the manufacturing workweek slipped from 39.5 hours to 39.3
hours in May, it looks as though output fell as much as 1.0% in May (and this is
with a bounce-back in the automotive area). This in turn suggests that the
manufacturing capacity utilization rate will have made a new record low for the
fifth month in a row — to just above 65% from 65.7% in April.

In a nutshell, what the data today told us was that the degree of slack or excess
capacity in both the labour and product markets widened even further in May.
Recession pressures may well be subsiding next to the sharp contraction earlier
this year; however, deflation risks are not only lingering but in fact are
intensifying. We still believe that the V-shape recovery hopes that have
underpinned the equity market while undermining the bond market in recent
months will inevitably prove to be under water.

Page 3 of 5
June 5, 2009 – Coffee with Dave

ABOUT US

Gluskin Sheff at a Glance
Our mission is to be the pre-eminent wealth management firm in
Canada serving high net worth investors

PRIVATE CLIENT FOCUS PERFORMANCE
Gluskin Sheff is an independent wealth Gluskin Sheff has a 24-year track record
management firm focused primarily on of solid investment performance. Clients
high net worth private clients, including investing in our GS+A Value Portfolio
entrepreneurs, professionals, family from inception (January 1, 1991) have
trusts, private charitable foundations and achieved a total net return of 688.6% to
estates. We also benefit from business April 30, 2009, outperforming the
relationships with a number of 329.8% return of the S&P/TSX Total
institutional investors. Return Index over the same period. Our
other longer-term investment models
OUR PEOPLE also have impressive performance
At Gluskin Sheff, having the best people records.
allows us to deliver strong investment
performance and the highest level of CLIENT SERVICE
client service. Our professionals possess At Gluskin Sheff, our clients are our most
the experience, dedication and talent to important asset. Serving them is a core
meet the individual needs of our clients. value maintained throughout the
Company. Clients receive individual
RISK MANAGEMENT attention and investment advice
Our unique dual risk management customized to their specific investment
approach focuses on meeting the needs objectives and risk profile.
of our clients by preserving their capital,
managing risk and delivering strong long- INVESTMENT PHILOSOPHY
term investment returns through various Our investment decisions are based on
economic and market cycles. “bottom-up” research that looks for
companies with a history of long-term
growth and stability, a proven track
record, shareholder-minded management
and a share price below our estimate of
intrinsic value.

Page 4 of 5
June 5, 2009 – Coffee with Dave

IMPORTANT DISCLOSURES
Copyright 2009 Gluskin Sheff + Associates Inc. (“Gluskin Sheff”). All rights and, in some cases, investors may lose their entire principal investment.
reserved. This report is prepared for the use of Gluskin Sheff clients and Past performance is not necessarily a guide to future performance. Levels
subscribers to this report and may not be redistributed, retransmitted or and basis for taxation may change.
disclosed, in whole or in part, or in any form or manner, without the express
written consent of Gluskin Sheff. Gluskin Sheff reports are distributed Foreign currency rates of exchange may adversely affect the value, price or
simultaneously to internal and client websites and other portals by Gluskin income of any security or financial instrument mentioned in this report.
Sheff and are not publicly available materials. Any unauthorized use or Investors in such securities and instruments effectively assume currency
disclosure is prohibited. risk.

Gluskin Sheff may own, buy, or sell, on behalf of its clients, securities of Materials prepared by Gluskin Sheff research personnel are based on public
issuers that may be discussed in or impacted by this report. As a result, information. Facts and views presented in this material have not been
readers should be aware that Gluskin Sheff may have a conflict of interest reviewed by, and may not reflect information known to, professionals in
that could affect the objectivity of this report. This report should not be other business areas of Gluskin Sheff. To the extent this report discusses
regarded by recipients as a substitute for the exercise of their own judgment any legal proceeding or issues, it has not been prepared as nor is it
and readers are encouraged to seek independent, third-party research on intended to express any legal conclusion, opinion or advice. Investors
any companies covered in or impacted by this report. should consult their own legal advisers as to issues of law relating to the
subject matter of this report. Gluskin Sheff research personnel’s knowledge
Individuals identified as economists do not function as research analysts of legal proceedings in which any Gluskin Sheff entity and/or its directors,
under U.S. law and reports prepared by them are not research reports under officers and employees may be plaintiffs, defendants, co-defendants or co-
applicable U.S. rules and regulations. Macroeconomic analysis is plaintiffs with or involving companies mentioned in this report is based on
considered investment research for purposes of distribution in the U.K. public information. Facts and views presented in this material that relate to
under the rules of the Financial Services Authority. any such proceedings have not been reviewed by, discussed with, and may
not reflect information known to, professionals in other business areas of
Neither the information nor any opinion expressed constitutes an offer or an Gluskin Sheff in connection with the legal proceedings or matters relevant
invitation to make an offer, to buy or sell any securities or other financial to such proceedings.
instrument or any derivative related to such securities or instruments (e.g.,
options, futures, warrants, and contracts for differences). This report is not Any information relating to the tax status of financial instruments discussed
intended to provide personal investment advice and it does not take into herein is not intended to provide tax advice or to be used by anyone to
account the specific investment objectives, financial situation and the provide tax advice. Investors are urged to seek tax advice based on their
particular needs of any specific person. Investors should seek financial particular circumstances from an independent tax professional.
advice regarding the appropriateness of investing in financial instruments
and implementing investment strategies discussed or recommended in this The information herein (other than disclosure information relating to Gluskin
report and should understand that statements regarding future prospects Sheff and its affiliates) was obtained from various sources and Gluskin
may not be realized. Any decision to purchase or subscribe for securities in Sheff does not guarantee its accuracy. This report may contain links to
any offering must be based solely on existing public information on such third-party websites. Gluskin Sheff is not responsible for the content of any
security or the information in the prospectus or other offering document third-party website or any linked content contained in a third-party website.
issued in connection with such offering, and not on this report. Content contained on such third-party websites is not part of this report and
is not incorporated by reference into this report. The inclusion of a link in
Securities and other financial instruments discussed in this report, or this report does not imply any endorsement by or any affiliation with Gluskin
recommended by Gluskin Sheff, are not insured by the Federal Deposit Sheff.
Insurance Corporation and are not deposits or other obligations of any
insured depository institution. Investments in general and, derivatives, in All opinions, projections and estimates constitute the judgment of the
particular, involve numerous risks, including, among others, market risk, author as of the date of the report and are subject to change without notice.
counterparty default risk and liquidity risk. No security, financial instrument Prices also are subject to change without notice. Gluskin Sheff is under no
or derivative is suitable for all investors. In some cases, securities and obligation to update this report and readers should therefore assume that
other financial instruments may be difficult to value or sell and reliable Gluskin Sheff will not update any fact, circumstance or opinion contained in
information about the value or risks related to the security or financial this report.
instrument may be difficult to obtain. Investors should note that income
Neither Gluskin Sheff nor any director, officer or employee of Gluskin Sheff
from such securities and other financial instruments, if any, may fluctuate
accepts any liability whatsoever for any direct, indirect or consequential
and that price or value of such securities and instruments may rise or fall
damages or losses arising from any use of this report or its contents.

Page 5 of 5