FMX | Connect – www.fmxconnect.com - (Reported 5/12/2010)
Excerpts from MARKET MUSINGS & DATA DECIPHERING
WHILE YOU WERE SLEEPING
Little action in global markets overnight: Asian equities were soft — off 0.2% and now down in seven of the past eight sessions. Emerging markets fell 0.5% — the Shanghai index ended the day unchanged (but is 22% below its nearby peak). European equities are broadly higher, however, on the back of improved earnings results.
Gold is making new highs — helped today with a slightly softer tone to the greenback. The Canadian dollar is staging a rebound and looks set to challenge par again and is firming against a slate of other global currencies (it is back in overvalued terrain, however). U.S. Treasuries are a tad on the defensive side ahead of today’s $24 billion 10-year Treasury note auction. Banking sector stress is still evident in Libor-OIS spreads (19bps) and the TED spread (27bps).
On the data front, the best the German economy could do in Q1 was eke out a meagre 0.2% advance and in France it was +0.1%. Ho hum.
BAZOOKA BUST
It was almost comical to read this headline yesterday on page 2 of the FT — Blast of Relief as Bazooka Finds its Target. The word “bazooka”, in this context, was coined by former Treasury Secretary Hank Paulson back on July 15, 2008 to describe his weaponry to safeguard Fannie and Freddie. The stock market rallied that day by over 1%, to 1,215 on the S&P 500, and the short-covering rally took the index above 1,300 by early August. Little did anyone know that we had almost 50% to go on the downside before the interim lows were turned in. Beware of bazookas; they don’t always work.
Speaking of the GSEs, it really is so encouraging to see that a week after Freddie went cap-in-hand to the Treasury for a $10.6 billion cash infusion, Fannie had to go begging for $8.4 billion to cover its burgeoning losses. These two wards of the state have now drained $148bln of aid out of taxpayer pocketbooks since the mid-2008 bailout (the size of the entire deficit before the recession began).
And what a housing mess it still is — Fannie reported that its delinquency rate still rose to 5.47% in Q1 from 5.38% the quarter before. What is happening now is that a growing number of people who can in fact pay their mortgage have stopped making their payments out of “anger” — according to a disturbing article that showed up on page A4 of yesterday’s WSJ (Emotion Drives Many Defaults).
Why it’s disturbing is that it cites research showing that 12% of mortgage defaults are now “strategic” and that somehow this is now okay on our increasingly hedonistic society. In fact, a law professor is quoted as lamenting why people are “throwing their money away on a home in which they may never have equity.” Wow. Look how far we have progressed. We used to be told “why throw your money away on rent? Why don't you own?” Now it’s “why throw your money away on a house?" Maybe because you signed a contract — now why should that matter.
You really can’t make this stuff up.
GOLD GLITTERS
In the aftermath of the Lehman collapse, gold faltered as there was a huge margin call everywhere and investors seeking liquidity sold off their winners. The secular bull market for bullion did not end at the time, no long-term trendline was violated, and gold did rise in non-U.S. dollars and far outperformed other currencies. But what happened during this recent round of intense European-led volatility and financial market weakness was that gold rallied even in U.S. dollar terms, which is significant seeing as there were large-scale safe-haven inflows into greenbacks. So this time, gold has managed to hit new highs in all currencies, and gold rallied even with the overall commodity complex slipping noticeably over the past few weeks.
This is a sign. Of what, you may ask? That gold is no longer trading just as part of the resource sector but is now taking on the characteristics of a currency. While the U.S. dollar has gained ground since late last year, there is no doubt that an Administration that has a stated policy of doubling exports in the next five years to “support” two million jobs absolutely craves a depreciating greenback.
Meanwhile, a new socialist government in Japan wants a weaker yen. Sterling has only one way to go in an environment of heightened political uncertainty and a balance sheet that is at least as extended as Greece. And the ECB just gave notice with its agreement to buy sovereign and corporate debt that it is willing to distort the pricing of risk in the bond market for the greater good of helping profligate countries to avoid either defaulting or certainly help them finance their obligations at a subsidized cost. The Bundesbank, this is not.
So gold is no government’s liability and the shape and shift in its supply curve is the shape would seem to be a little easier to make out than fiat currency. We may end up being overly conservative on our peak gold price forecast of $3,000 an ounce.
GOOD NEWS, BAD NEWS
The good news is that we saw a thaw in the National Federation of Independent Business (NFIB) small business diffusion index in April, to 90.6 from 86.8. That is the best level since September 2008. Good stuff.
Alas, despite tremendous government stimulus, the current level of 90.6 is still lower than the low we saw at the depths of the 2001, 1990 and 1981/82 recessions. In addition, the current level of the NFIB small business optimism index is still below the average of the recessions going back to 1975; the average during recessions is 92.0. And, at 90.6, it is nowhere near what is deemed as an expansion (average during expansions is 100.2) or even the end of a recession (average at the end of the recession is 96.9).
We welcome any good news and the recent pop in the NFIB index is a move in the right direction. But the NFIB index, based on our simulations, is consistent with real GDP growth of 0%. We reiterate that outside of the lagged impact of the bailout, fiscal and monetary stimulus, together with the arithmetic bounce from the inventory component of the GDP accounts, the U.S. economy is still contracting. The contraction in State and local government spending, commercial construction and even housing three years into its meltdown are all posing significant drags on the pace of overall economic activity.
Consumers only seem to be able to spend on the back of recurring government handouts and subsidies and the export picture has all of a sudden become muddled as the Eurozone economy will soon be contracting again on the back of dramatic fiscal austerity in at least 15% of the region. Capex is really the only bright spot but unfortunately it only comprises 6.5% of GDP.
To be sure, the coincident economic indicators have quite been firm, but the leading indicators have already peaked out and rolled over. A second half growth relapse similar to what we saw in 2002 cannot be ruled out — and the market is as much priced for this prospect today as it was back then.
We’ve said it before and we shall say it again, real final sales since output bottomed in Q2 of last year has averaged a mere 1.38% at an annual rate. It does not get weaker than that in the context of a post-recession recovery. So, remove the inventory contribution and the V-shaped bounce in the economy is nothing more than an illusion.
By maintaining a policy of ensuring that risk assets get mis-priced and that capital gets mis-allocated, it is more likely that deflation pressures will intensify.
IT’S STILL DEFLATION
Throwing good money after bad, as the world’s governments are busy doing (this will cost Ms. Merkel her job) does not create inflation. By maintaining a policy of ensuring that risk assets get mis-priced and that capital gets mis-allocated, it is more likely that deflation pressures will intensify.
If you haven’t noticed, real M2 is down YoY now for the first time in 15 years. A reconstituted real M3 is deflating now YoY for the first time in 50 years.
Wake us up in 2015 when the inflation comes.
MORE LABOUR ANGST THAN MEETS THE EYE
The U.S. ADP survey showed only 32k private sector jobs being created with the key small business sector stagnating. Moreover, the four-week moving average in initial jobless claims have been stuck around 460k now since late February — claims have basically stopped falling and are still nowhere near levels in the past that were consistent with sustained job creation.
The labour force is only going up because benefits are starting to expire after 99 weeks on the dole. The really important, and unnoticed, data-point last Friday was the 255k bulge in the ranks of the unemployed — and there are still 5.6 of them vying for each job opening, a competitive pressure that is forcing the trend in wages down to historic lows. Governments around the world are in clear bailout mode but as we saw in the 1930s, and again in Japan since its credit collapse began in 1990, waging war against deflationary forces is no easy task.
HOME PRICES AT RISK
I had the pleasure of debating Jim Paulsen yesterday at a Club X conference in Montreal. During his presentation, I found a snippet in one of his slides needed to be updated — U.S. home prices are up eight months in a row. Indeed, this is what most investors want to believe, like how they wanted to believe in the tech bubble and how they wanted to believe in the credit bubble. Illusions are one thing, reality is another, and it’s the latter that bites in the end.
Home prices WERE up eight months in a row, until the Case-Shiller 20-city index decided to take a 0.1% MoM (seasonally adjusted) dip in March. And, on a raw basis, prices were down 0.9% on the month and have actually been deflating now each of the past five months (raw as in not seasonally adjusted — and the CS officials have confirmed that the seasonal factors did give an upward skew to the data in prior months).
The LoanPerformance national home price index is also down now for three months running. The FHFA home prices series is also down three months in a row. And, the total unsold housing inventory, when accurately calculated, is running between 16 and 21 months’ supply, and it is this imbalance that is still exerting downward pressure on residential real estate valuation in the U.S. If we end up truly reverting to the mean this cycle, in classic Bob Farrell Rule #1 fashion, then there is 20% downside potential to home prices from here.
We had said that the two biggest risks to Mr. Market’s nirvana view of the world was a reversal in both the unemployment rate and home values … and the latest data do suggest that this is on track.
David A. Rosenberg May 4, 2010
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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