FMX | Connect – www.fmxconnect.com - (Reported 9/08/2010)
Honey Cake with Dave
Excerpt from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
Well, it probably means something when the equity market closes to the lows for the session yesterday and the sharp decline in bond yields, reversing Friday’s ridiculous selloff, took them back to levels prevailing before the nonfarm payroll report was released. And so we begin today’s action in much the same shape: a sea of red overseas with the Nikkei down 2.2% and leading the Asian markets lower (the Hang Seng was down 1.5% and the Kospi index off 0.5%). European bourses are under pressure as well as banking concerns come back onto the front burner.
Bonds are generally bid as investors, in their typical manic mode, revert to their risk aversion ways just two days after euphoria was setting in because the headline private payroll number in the U.S. had a positive sign in front of it. The anti-risk trade is also showing through in the gold price (now at $1,260/oz), which is heading back to its record high and yesterday’s rally, alongside a firmer tone to the greenback — the DXY pierced the 50-day moving average, also supported the view that bullion is increasingly behaving as a currency all its own. Credit Default Swaps (CDS) spreads continue to widen out in Europe as well, and the Swiss franc is hitting new highs against the euro; again, a classic risk-aversion signpost.
Did you know … that the gold price has quietly turned in a 16% price advance so far this year and barring a major reversal, this will be the tenth year in a row that the yellow metal has generated a positive “return” for investors. That compares with nine winning years for Treasuries, seven winning years for the broad commodity complex in general, and coming in last, is six for the equity market. The trend is your friend and it is likely with this relative performance in mind that retail investors have yanked money out of U.S. equity mutual funds now for 17 weeks in a row!
All of a sudden, Germany, the darling economy of the Eurozone, is showing signs of sputtering with industrial production in July eking out a gain of 0.1% versus market expectations of +1.0% -- and barely making a dent in that 0.6% decline posted in June. German exports also slid 1.5% MoM in July, compared to a flat figure penned in by the consensus. It would both seem as though the bloom has come off the rose as far as the mini-miracle in Germany is concerned. What a weakening currency in the spring brought in terms of competitive stimulus in the spring obviously gave way as the euro rebounded in the summer and took that export-production underpinning away. French business confidence, as per the Insee survey, stagnated in August for the third time in as many months.
Why has the Obama fiscal plan fallen flat on its face? Maybe it’s because most folks realize that with companies sitting on a record cash hoard of over $1 trillion, cash is not an impediment towards more capital spending growth. Expanding R&D tax credits is like a motherhood issue and Administrations going back three decades have done this to similar fanfare no fewer than 13 times.
The stepped-up deprecation allowances are nice but will simply borrow from activity in 2012 if it does stimulate any business spending growth at all. And, $50 billion of more infrastructure spending sounds nice but is spread over 10 years and we still haven’t even felt the full impact of that first $800 billion package unveiled last year, which apparently found its way into local union official hands. In fact, there is still $275 billion of that earlier package that still hasn’t been spent! See Obama Plan Not a Big Hit on page B1 of the USA Today as well as Obama’s Proposals More About Politics Than the Economy on the front page of today’s Investor’s Business Daily. Also have a look at Obama Rules Out Any Compromise on Bush Tax Cuts on the front page of today’s NYT. In other words, it’s politics as usual.
Finally, when we see these articles in the morning papers:
•Housing Inventories Keep Rising on the front page of the Investor’s Business Daily (listings up 0.4% in August, the eighth consecutive increase, and up 10.6% YoY);
•Home Builders Sound Retreat on Land Deals on page C8 of the WSJ;
•Employment Trends Index Falls on page A2 of the IBD;
•LCD-Panel Prices Falling on page B7 of the WSJ; and,
•Newspapers Slow Declines in Ads (ad spending down 5.6% YoY) …
….we know our call for a no-inflation/no-growth economy is on track. Focus on long-short funds strategies that minimize the volatility and the correlation with the equity market; hybrid strategies that focus on safe income; bonds, and maximum exposures to precious metals.
EMPLOYMENT CONDITIONS STILL SLUGGISH
The question must still be asked as to why the White House wants to boost capital spending when it is the labour market that is in need of the most help right now. How do the latest proposals deal with the fact that we have a youth unemployment problem in the United States of historical proportions? Only 47.6% of people between the age of 16 and 24 were employed last month, a new low since the data began in 1948. Consider that a decade ago, at the height of the tech boom, that ratio stood at 62.8% for that cohort.
As we said on Friday, the August jobs report did not pass the sniff test with full-time jobs sliding, the aggregate hours work index flat and the diffusion index declining sharply. And, we just learned that the Manpower Hiring Intentions Survey for the coming quarter slipped to +5 from +6 — at the depths of the recession back in the first quarter of 2009 it was +9, just for some perspective.
The component of the survey measuring the share of companies who intend to hire, slipped to 15% from 18% in Q3, while the share of those intending to cut their staff requirements jumped from 8% to 11%. Hardly an encouraging signpost.
STATISTICS, DAMNED STATISTICS AND LIES
As our friend at the Bank Credit Analyst, Chen Zhao, is fond of saying, “you can have your own opinion, but you can’t have your own facts.”
More and more, we are seeing economists coming out of the woodwork laying claim that the slowdown we are now seeing in the U.S. economy is completely normal. The beloved “soft patch” — the one all rose-colored economists were telling us to expect to see in 2008. At least that was the sixth year after the last recession ended so at least there was a shot — a very long one, as it turned out.
We just completed the fourth quarter of the statistical recovery from the 2009 lows in real GDP. Normally, that particular quarter is running at over 6% at an annual rate. This time around, it was 1.6% and likely to get marked fractionally lower again. Normal indeed. The notion that it is normal to have a growth pause this early in the cycle, assuming we are early in the business cycle as opposed to slipping along a downward trendline, is nutso.
What is normal heading into the second year of a recovery is that the economy is accelerating and firing on all cylinders. The fabled “soft patch” comes in years 4 and 5, and in lagged response to the tightening in monetary policy as the Fed leans against classic mid- and late-cycle inflation risks. The soft patch does not occur in year 2. This is a completely abnormal economic condition — all the more so in the context of the massive and ongoing fiscal and monetary stimulus.
In recessions, the economy is stimulated by the government sector. In depressions, the economy is sustained by the government sector. You choose which of today’s backdrop this economy more closely resembles, especially as President Obama announces yet another fiscal package — obviously politically motivated — with a new set of infrastructure spending at a time when there are still leftovers from the $800 billion gorilla unveiled 18 months ago.
Let’s not forget that real final sales — real GDP excluding inventories — have only risen at a 0.9% annual rate since the economy hit rock bottom. This is actually a contraction in per capita terms so it may well be that the recession never did end. Again, what is normal is for final sales to expand at a 4% annual rate in the crucial first year of recovery. Put that in your pipe and smoke it!
We were told at a Fox News interview yesterday that a pundit was laying claim that the economy was in far better shape — across all indicators — than it was two-years ago. Admittedly, two-years ago Lehman wasn’t collapsing and Merrill wasn’t being swallowed up. The government has since guaranteed the survival of any bank deemed “too big to fail”. But two-years ago, just prior to the collapse, the debate was alive and well over whether we were in a soft landing or a recession and whether the stock market was in a corrective phase or recession. Then we endured two quarters of horrible declines in GDP and employment — it was like falling off a cliff.
Is the economy “better” if that time period is your yardstick? The answer is yes. But why not go back three-years ago and see what the answer really is. You can always pick your base period if you want to get to the answer that fits your bias. However, the reality is that we know so much more now. We know that even with a pregnant Fed balance sheet, de facto zero policy rates and a 10% deficit-to-GDP ratio that would have made FDR blush, the economy remains extremely fragile. And, when every economic variable is lower now that it was when the recession began 33 months ago, how can anyone come to the conclusion that the economy is doing just fine and that we are somehow on a normal path.
Look at Chart 2, what is normal, 33 months after the recession begins, is that all the stimulus and lags have worked their way through the system and generated new peaks in all the economic data. On average, employment is up 5.5%, GDP is up 12%, housing starts are up 27% and retail sales are up 25%. This time around, and in the face of pronounced policy stimulus, employment is down 6%, GDP is down over 1%, starts down 47% and retail sales are down 4%.
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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