Breakfast With Dave 092910

8/8/2019 Breakfast With Dave 092910

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David A. Rosenberg September 29, 2010Chief Economist & Strategist Economic [email protected]+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Breakfast with DaveDUE TO BUSINESS TRAVEL, BREAKFAST WITH DAVE WILL NOT BE

PUBLISHED TOMORROW, BUT RETURNS ON FRIDAY

WHILE YOU WERE SLEEPING

The big news is still that asset classes that traditionally move inversely are now

moving in tandem stock prices, bond prices, and the gold price. As far as the

latter is concerned, have a look at Martin Wolfs column today on page 11 of the

FT Currency Wars in an Era of Chronically Weak Demand and also see

Currency Wars: A Fight to be Weakeron page C1 of the WSJ. Perhaps all three

are strengthening on the same prospect the Feds strong hint of anotherround of quantitative easing (QE). The Fed, after all, would be buying Treasuries

so it is perfectly understandable why they would rally. More money printing

means more U.S. dollar depreciation, which would obliviously be positive for gold

(have a look at Gold Forecast $1,450/ozon page 25 of the FT.

The equity market seems to be the odd man out but we would surmise that it is

rising on hopes that QE2 will be successful yet in stimulating final demand

growth. From our lens, the jury is out on the efficacies of lower interest rates in

an environment of contracting credit, especially considering what little impact

the sharp plunge in yields and radical expansion of the central bank balance

sheet have already exerted. A record low 0.64% yield on the 10-year TIPS

strongly suggests that the bond market is sniffing out a renewed contraction and

the pace of economic activity before too long.

We have long been of the view that the trauma that hit the U.S. household

balance sheet the largest balance sheet on the planet has led to a dramatic

shift in consumer attitudes towards spending, credit and homeownership. With

that in mind, it is somewhat comforting to see society moving from denial to

acceptance as it pertains to the secular changes in spending and saving

behaviours that is truly underway. For a real life view of the challenges that lie

ahead have a look at the front page article of the USA Today titled Recessions

Impact on Us: Lifestyle Changes Deep, Long Term.

Please see important disclosures at the end of this document.

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IN THIS ISSUE

While you were sleeping:the big news is that ofasset classes that

traditionally moveinversely are now movingin tandem stock prices,bond prices, and the goldprice

Lack of confidence: theConference Boardsconsumer confidenceindex sagged to 48.5 inSeptember from 53.2 inAugust

It wasnt just consumerconfidence thats in afunk, business sentimentslips too in Q3

House prices dip in theU.S.: the Case-ShillerComposite-20 index fell0.1% MoM in July first

decline in four months andis likely the re-emergenceof its primary downward

trend

Richmond, poor man: thelitany of softer regionaleconomic reportscontinues unabated


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September 29, 2010 BREAKFAST WITH DAVE

CHART 1: RECORD IMPLOSION IN HOUSEHOLD NET WORTH

United States: Household Net Worth (three-year percent change)

1050505050505

60

40

20

0

-20

-40

Shaded region represent periods of U.S. recession. Source: Haver Analytics, Gluskin Sheff

LACK OF CONFIDENCE

It is now so clear that we never did have an organic recovery on our hands.

Growth is vividly slowing down in North America, and deflation, not inflation, is

the primary risk. After all, if disinflation was the primary trend for 30 years

amidst a secular credit expansion, it surely stands to reason that as credit

contracts, and with the underlying inflation below 1% and a huge output gap of

6.5%, deflation is a totally realistic scenario. The bond market is signalling some

deflationary event of great magnitude (could be an unexpected stock market

shock?). Bond yields will follow the 2-year note yield and will completely melt

before this interest rate cycle is complete.

In September, U.S. consumer confidence (according to the Conference Board)

sagged to 48.5 from 53.2 in August the consensus was expecting 52.0. This

takes us all the way back to February and the fact that it slipped so badly in a

month that saw the equity market surge must be telling us that something,

somewhere else is not going well at all most likely, in the labour market.

Indeed, the spread between the jobs hard to get and jobs are plentiful

series, which gapped up to a six-month high of 42.3 from 41.5 in August. This

foreshadows a rise in the unemployment rate, to 9.7% from 9.6% currently.

CHART 2: CONFERENCE BOARD EMPLOYMENT INDICATOR

POINTING TO AN INCREASE IN THE JOBLESS RATE

United States

Conference Board Employment Indicator(Jobs Hard to Get minus Jobs Plentiful, percentage points: thick line, left hand s

Unemployment Rate(percent, thin line, right hand side scale)

1050505050

60

40

20

0

-20

-40

-60

12

10

8

6

4

2

Source: Haver Analytics, Gluskin Sheff

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It is now clear that we never

did have an organic recovery

on our hands in the U.S.

growth is slowing down and

deflation, not inflation, is the

primary risk


3/7


Putting the headline 48.5 reading into perspective, consumer confidence

averages 72.9 in recessions and 100.2 in expansions. Maybe the National

Bureau of Economic Research jumped the gun. The chart of the present

situation does indeed flag no recovery, down nearly two points in September, to

23.1, and in fact, is back to levels prevailing in April 2009 (pre-green shoots!!).

CHART 3: PRESENT SITUATION INDEX DOES NOT FLAG A RECOVERY

United States: Conference Board Present Situation Index

(1985 = 100)

1050505050

200

160

120

80

40

0

Shaded region represent periods of U.S. recession


Moreover, home-buying plans slipped from 2.1 to 1.9 in September flirting

near all-time lows.

CHART 4: HOME BUYING INTENTIONS FLIRTING WITH ALL-TIME LOWS

United States: Conference Board Consumer Confidence Survey:

Plans to Buy a Home Within Six Months (percent respondents)

1050505050

6.00

5.25

4.50

3.75

3.00

2.25

1.50



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Home-buying plans in the U.S.

flirting near all-time lows,

according to the Conference

Board Consumer Confidence

Survey


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Auto buying plans have stagnated at a putrid 4.7 level now for three months

running. So, if taking rates from 5.5% to zero could not revive credit-sensitive

spending, and if tripling the size of the Feds balance sheet could not revive

credit-sensitive spending, then why is it that we should believe that QE2 will be

any different?

Finally, what sort of recovery is this when 46.1% of consumers see business

conditions as bad while a mere 8.1% see them as good?

BUSINESS SENTIMENT SLIPS TOO

It wasnt just the consumer in a deep funk, the Conference Business

Roundtable CEO poll plunged for the first time in a year down eight points to

86 in Q3. In case anyone is wondering why the labour market indicators were

so weak in the consumer confidence index, well, hiring intentions in the CEO

business survey took a dive. Only 31% of respondents plan to hire in the next

six months, well below the 39% print the last time the poll was taken in June.

HOUSE PRICES DIP

Well, we didnt really need the Case-Shiller (CS) home price index to know that

residential real estate prices are dipping again we already got that from the

recent FHFA, resale and new home sale reports. The CS Composite 20 series

dipped 0.1% MoM in July the first decline in four months and quite likely the

re-emergence of the primary trendline which is down.

RICHMOND, POOR MAN

The litany of softer regional economic reports continues unabated. The

Richmond Fed index, if taken at face value, is pointing to a renewed contraction

in industrial activity. The index slid from +11 in August to -2 in September, theweakest reading since the beginning of this year. Shipments slipped to -4 from

+11 and order volumes fell off the proverbial cliff: +41 in April, to +36 in May, to

+25 in June, to +13 in July, to +10 in August, to a big fat ZERO in September.

In economics land, we would typically call that a trend. Capiche!

If you think thats bad, backlogs went from zero to -11 it was +16 in May.

Again, it is abundantly clear that labour market conditions deteriorated in

September down to -3, a seven-month low, from +12 in August and +15 in

July. The average workweek also shrunk from +14 to zero.

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The Richmond Fed

manufacturing index, if taken

at face value, is pointing to arenewed contraction in

industrial activity

Wondering why the labour

market indicators were so

weak in the consumer

confidence index? Well, hiring

intentions in the CEO business

survey took a dive in Q3


5/7


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CHART 5: LABOUR MARKET CONDITIONS IN THE MANUFACTURING

SECTOR DETERIORATED IN SEPTEMBER

United States: Federal Reserve Bank of Richmond Manufacturing Survey:

Number of Employees Diffusion Index (percent)

10505

20

0

-20

-40

-60



The inflation metrics were superb if you are a bond bull, that is. Wages fell to

a five-month low of 8 from 13. Prices-paid receded to 1.31 from 2.19 in August,

and prices-received slid to 1.06 the lowest in seven months from 1.45 in

both July and August.

The service sector didnt fare much better according to the Richmond Fed,

revenues in the service sector came in at -5 in September from -10 in August.

This was the first back-to-back decline since the start of this year.

Yet again, the employment index was a notable blemish, and again, take a look at

the pattern: +10 in May, to +2 in June, to -6 in July, -8 in August and -12 in

September. A pattern to be sure. And again, disinflation pressure was

underscored by the ultra-low reading of 0.34, with respect to the pricing subindex.

CHART 6: DITTO FOR THE SERVICE SECTOR

United States: Federal Reserve Bank of Richmond Service Sector Survey:

Number of Employees (percentage increasing)

10505

20

10

0

-10

-20

-30

-40




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Breakfast With Dave 092910