FMX | Connect – www.fmxconnect.com - (Reported 9/07/2010)
Breakfast with Dave: New Tax Breaks a Lackluster Effort
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
The scuttlebutt today is on a new round of tax breaks to be announced by the White House (see more below). The front page of the WSJ runs with Obama to Push Tax Break — the new proposal will allow companies to write off 100% of their new investments in new plant and equipment through 2011 (at an estimated stimulus of $200 billion). This begs the question, aren’t businesses sitting on a record cash hoard right now? In other words, “money” is not an impediment towards business investment growth, say, as much as the regulatory policy backdrop.
This is again one in a long list of quick fixes aimed at boosting domestic spending and is likely to have muted impact, in our view. Even if it does have an impact, it will merely bring forward spending that would have occurred in any event and merely distort the quarterly flow of GDP data much like ‘cash for clunkers’ and the housing tax credits did for the household sector.
The reality is that capex is already in boom mode — up at a 25% annual rate in Q2, 20% in Q1 and 15% in Q4 of last year — we already have business spending running at its fastest rate in three decades without the need for more deficit-financed tax incentives. In other words, how ridiculous is it for the government to be targeting tax relief to the one part of the economy that needs it the least? This passes for a creative solution to the post-bubble credit collapse? And, the President will also announce a $50 billion in infrastructure spending? Please tell us, is this something new or part of the ballyhooed infrastructure spending unveiled in early 2009 that was supposed to have left the economy with a 7% unemployment rate by now?
EMPLOYMENT DATA WERE WEAK
It’s quite amazing to see what the “take” was on last Friday’s U.S. jobs report. The WSJ was fairly typical of the general response — Jobs Data Provide Hope was the front page headline. That is only true in the sense that the nonfarm payroll number came in above expectations, but the report, while hardly horrible, was still quite weak and highly unusual for an economy operating on so many government-applied steroids.
IGNORANCE IS BLISS
That doesn’t mean that investors are not going to treat the data as good news —it just doesn’t mean they are going to be right any more than they were in the autumn of 2007 when they took the stock market to new highs and then maintained a “buy the dips” view in early 2008, especially when President Bush unleashed the powerful tax rebates (that had an impact all right, but was measured in weeks).
IT’S A DEPRESSION
This is what a depression is all about — an economy that 33 months after a recession begins, with zero policy rates, a stuffed central bank sheet, and a 10% deficit-to-GDP ratio, is still in need of government help for its sustenance. We had this nutty debate on Friday on Bloomberg Radio (Tom Keene is a class act, by the way) and another economist was on — the architect of the ECRI I think, who was claiming that there was no evidence of any indicator pointing to renewed economic contraction. And yet, that very day, the ECRI leading economic index comes in at a recessionary -10.1% print for last week. Go figure. The market for denial remains a lucrative one we would have to assume.
STILL GOING FOR GOLD
Gold is up 14% so far this year as the secular bull market continues unabated. Investment demand is playing a critical role here. At the lows over a decade ago, investors represented less than 7% of total demand and according to the World Gold Council, that share has swelled to nearly 40%.
WHAT'S THE BANK OF CANADA TO DO?
The market is split on tomorrow’s Bank of Canada meeting, but most economists like round numbers and feel another hike, to 1%, is in order. We feel, based on how the economy and inflation have been moving vis-à-vis the Bank’s latest forecasts, not to mention the heightened uncertainty south of the border, that there is not enough rationale for another tightening. But monetary policy is as much an art as it is a science and perhaps Mr. Carney will take the opportunity to take out one last insurance hike. Not our recommendation, but certainly plausible. We would expect, however, to see a press release that will leave investors uncertain as to whether the Bank is going to maintain this tightening posture.
Several months ago, we published some analysis showing that the U.S. inventory cycle (now basically behind is) played a minor role in Canada’s economic revival out of recession and that close to 100% of the rebound in GDP came via the direct and indirect effects of the housing boom — a boom that is now over and will likely have profound influences over the Canadian economic outlook, especially since export prospects are clouded by the weakening demand trend south of the border.
Consider that from the nearby peaks, right when the Bank of Canada embarked in its rate-hiking cycle, we have seen...
•Existing home sales decline 36%;
•Single-family housing starts plunge 29% ;
•Residential building permits slide 15% ;
•Home prices drop 5%.
You don’t have to do much more than study what happened to the U.S. economy three years ago to understand that the housing sector... leads.
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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