FMX | Connect – www.fmxconnect.com - (Reported 8/17/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
NOT THE TIME FOR A JUBILEE
My early Monday morning read yesterday almost served as an epiphany of sorts, not because I have seen the light and about to change my views, but rather, that they were solidified.
In a nutshell, we are in the early stages of a secular credit collapse following the biggest credit bubble in human history.
The credit expansion that began with the Diner’s Club card in the 1950s (one card per family!) finally morphed into a full-fledged bubble post the 2001 “ownership society” craze when buy-now, pay-later mortgage loans populated and polluted the financial backdrop. The bubble was the result of a universal, irrational and linear belief in real estate asset appreciation that developed in the 1990s and reached its glorious peak in 2007.
But the problem of not having enough income nationally (globally, in fact) to support the record debt load, especially as asset prices succumbed to their own grotesque degree of overvalued excess, led to the credit collapse and financial crisis. The credit collapse and financial crisis continued through 2008 despite the cry and hue from the economic intelligentsia that all we were in for was a soft-landing during this wonderful period labeled “The Great Moderation.” In turn, what followed were that all the king’s horses and all the king’s men brandishing marvelous new tools attempting, with futility, to put Humpty back together again.
We then got a pause in the collapse and a spectacular bear market rally in the final eight months of 2009 and into early 2010. But as Mick Jagger put it in an oldie but goodie, “it’s all over now.”
Now we are rolling back into pronounced economic weakness, with contraction in GDP likely to soon follow the stagnant economic conditions of the current quarter. The peaking-out and rolling-over in the equity market alongside the virtual meltdown in government bond yields strongly suggest that, at the margin, investors are also belatedly and begrudgingly, coming around to this view.
We are almost five months into this transition — past the interim peaks in the stock market, bond yields and economic indicators such as the ISM index; therefore, it seems to be an appropriate time to deliver a forecast for the next stage in the new paradigm that began with the inflection of the secular credit cycle. The first stage was the “Financial Crisis” with loan defaults and bank failures. The second stage is the “Economic Crisis” with all its attendant deflation and GDP contraction forces.
Looking ahead, the outlook for the U.S. favours saving over conspicuous consumption. An outlook of “getting small” at every level of society — in other words, living within our means. This is a highly deflationary outlook that favours investment strategies that deliver a safe income stream at a reasonable price, even as asset values come under unrelenting pressure. It is not that farfetched, but who among us wants to question the quality of the Emperor’s robe? The most startling possibility is that, even as the vast majority of pundits debate how “gradual” the recovery will be, we have already entered a period that seems destined to mark the most severe contraction since the horrible 1937-38 setback.
We are not saying that we are into something that is entirely like the experience of the 1930s. But at the same time, what we are confronting is nothing at all like the cycles of the post-WW era, when recessions were mild corrections in GDP in the context of a secular credit expansion and when lower interest rates could always be relied up to revive spending on big-ticket durable goods. As we said last week, we’re not in Kansas any more. We are in the process of unwinding the excesses of a parabolic credit cycle of the prior decade. The first of the boomers are now retiring with nobody around to buy their monster homes and the Fed is now fighting a deflation battle that is prompting comparisons to Japan for the past two decades.
What the bulls still refuse to see is that we are in an entirely new paradigm and that the old rules of thumb are rarely, or ever going to be able to be relied upon, as was the case in the familiar credit-expansion days of old.
There is simply too much debt overhanging the U.S. household balance sheet — the largest balance sheet on the planet. And, despite the deleveraging efforts to date, the process of balance sheet repair is still in its infancy.
We are a long way off this deleveraging phase from running its course. The government, along with the Federal Reserve, have expended tremendous resources to cushion the blow. But now we see first-hand what happens when policy stimulus fades and a mini-inventory cycle peaks out in a credit contraction: stagnation in Q3 followed by renewed economic contraction in Q4.
Play it safe. In other words, capital preservation strategies, deploying hedge funds that hedge, and an income emphasis will all rule in the sort of environment we are in today and likely to be in for some time yet.
CANADIAN HOUSING MARKET: A LONG, HARD SUMMER
As foreshadowed by earlier-released large-city data, Canadian resale home sales fell by 6.8% MoM on a seasonally adjusted basis, the sixth decline in seven months (on a YoY basis sales were down 30%). Vancouver and Toronto saw some of the largest declines, as the HST kicked in B.C. and Ontario, dampening sales activity. But even outside of Toronto and Vancouver, other cities saw large YoY sales decline — Calgary (-41%), Halifax (-26%), Edmonton (-39%) and Winnipeg (-13%) for example — so it was more than just the HST-effect driving the declines.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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