FMX | Connect – www.fmxconnect.com - (Reported 8/11/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
NOT IN KANSAS ANY MORE
Well, it took some patience but it looks like the economic environment I was depicting this time last year just shortly after I joined GS+A is starting to play out. Deflation risks are prevailing and a growing acknowledgment over the lack of sustainability regarding the nascent economic recovery. Extreme fragility and volatility is what one should expect in a post-bubble credit collapse and asset inflation that we endured back in 2008 and part of 2009.
OUR TAKE ON THE FOMC PRESS RELEASE
For the second time in six weeks, the Fed has cut its growth forecast. Deflation concerns are very apparent (excluding Hoenig). As was advertised, the Fed is going to redeploy maturing MBS on its balance sheet by renewing its buying program in Treasuries, and this will reinforce a bull flattening in the bond market. Long-term rates are going much, much lower.
The Fed is not really engaged in more QE, its simply not going to sanction a shrinkage of its balance sheet with the economy increasingly fragile. This is a mixed bag for equities — lower market rates theoretically raises fair-value P/E, but if the Fed is correct on its economic assessment, expect to see downbeat guidance for Q3 — especially in the consumer cyclical space. As a stand alone event, the tone of the press statement will further undercut the dollar and put a bid into precious metals.
WHAT CAUSED BERNANKE TO SHIFT HIS VIEW?
It was just over a week ago that Ben Bernanke told us that “rising demand from households and businesses should help sustain growth ... growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions.”
Meanwhile, yesterday’s FOMC press statement read like a retraction: “Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit......the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” What changed Bernanke’s view?
FREDDIE RETURNS
It speaks volumes about the lingering problems in the housing market that Freddie Mac had to go cap-in-hand again for $1.8 billion of additional taxpayer funding. This brings the entire bailout of Freddie and Fannie to a cumulative $148 billion (and this will likely double before all is said and done) — which amazingly is the size of the entire budget deficit in 2007!
WHY THE NBER HASN’T DECLARED “IT” TO BE OVER
“It”, of course, is the recession that began in December 2007.
We were just sent a piece of Wall Street research (or what passes as research these days) laying claim that the expansion in real GDP from the lows of mid-2009 exceeded what we saw in the recoveries of 2002 and again in 1991-92. We just don’t know where to start when it comes to attacking this thought process. Not that the facts are wrong. But the context is way off base.
The economy nosedived in the 2008 downturn and the newly revised peak-to-trough decline in GDP is now estimated at 4.1% — the steepest contraction since the 1930s. Given the extent of the decline, we should have seen a much greater “rubber-ball bounce” but we didn’t — and the amount of policy stimulus a decade ago and two decades ago pales next to the massive doses of fiscal and monetary relief dished out this time around. By now, if this was a normal recession followed by a normal recovery, as opposed to a debt-deleveraging-depression, real GDP would already be back at a new high. But here we are, 31 months after the recession began, and the level of real GDP is still -1.1% below its prior high.
There are two other critical factors preventing NBER from declaring the all-clear signal. First, despite the dramatic rebound in the equity market in 2009, personal income fell in 49 of the 52 U.S. cities of a million population or more. The three cities that saw an increase were closely tied to the federal government (like Washington D.C.). Indeed, government pay managed to rise 2.6% last year while all the suckers that work in the private sector posted a 6% wage decline. How this doesn’t breed dissent is a legitimate question.
Second, and there was a great op-ed piece on this yesterday, which we discussed last Friday — namely, the rapid decline in the employment-to-population ratio. This is a far more informative measure regarding labour market performance than the traditional unemployment rate, especially at a time when discouraged workers are withdrawing from the labour force at such an alarming clip.
The employment rate has declined now for three months in a row, back to where it was at the start of the year, and smartalecks who see this recovery as anything but disturbing don’t realize that this employment rate, at 58.4%, is down from 64.0% at the 2007 high. This was the largest drop in the post-war era and what it means is that the economy is 12 million jobs shy of being at full employment.
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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