Rosenberg’s Take On The Discount Rate Hike (CNBC)

Thursday, February 18th, 2010

David Rosenberg, and several other economists, as well as Steve Liesman, share their first perspectives on the sudden (yet oh so “telegraphed”) discount rate hike.

Source: ZeroHedge.com

Tags: Cnbc, David Rosenberg, Economists, Perspectives, Rate Hike, Steve Liesman
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Deleveraging Through… Deflation? Has Ending QE Been The Ulterior Motive All Along? Andrew Smithers Thinks So

Wednesday, February 17th, 2010

This article is a guest contribution by Tyler Durden, ZeroHedge.com.

Confused by recent proclamations by Hoenig, Plosser, and other unnamed Fed members, who want an end to QE? Even more confused that this could actually happen? Andrew Smithers, former head of SG Warburg asset management before starting Smithers & Co., may have some iconoclastic insight into this development, which at its core is fundamentally deflationary, and a stark refutation to everything the Fed (presumably) stands for. A paradox? Smithers breaks the “Econ 101″ mold in this fascinating interview with Kate Welling. The most provocative perspective: Smithers goes against the grain of every economic textbook which says the only way to inflate debt away (deleverage) is by, well, inflation. Instead, what Smithers suggests is a slow, gradual process of deflation, in which incremental cash flow is converted into equity, and pushes debt out. Indeed, this is precisely what we have been seeing especially in the REIT sector where numerous names, courtesy of BofA, have raised equity on the basis of imaginary valuations, which may just become a self-fulfilling prophecy if enough people buy into them, and by throwing cash at these companies, allow them to lower their debt-to-capitalization ratios. Then again, with another half a trillion in equity needed for the REIT sector to fund itself out of a mid-term funding crisis, that’s purely a pipe dream. However the bigger picture of the Smithers perspective is that this deflationary approach is exactly what the Fed may be engaged in. By distracting the increasingly more vocal inflation hawks, who anticipate that inflation is and always will be the driving motive of the Chairman, Bernanke could very well be pursuing just the opposite: a slow-bleeding deflationary trend.

The clincher from the interview which took place in November 2009:

I think that you will find that several economists over the next few weeks and months will be expressing concern about quantitative easing…Because the most damaging thing that could happen to the world economy would be a third asset bubble collapse…Probably the best way of ensuring that is by making sure that asset prices simply don’t go up much more.  What we need over time is a rebalancing of the economy in which we get deleveraging going on. And there are only two ways to delever: One is by generating cash flow and the other is by replacing debt with equity, either through bankruptcy, via the banking system, or directly, through the corporate sector. Now if you have deleveraging as the main driving force, you can only achieve that goal, really, if you switch the debt from the private sector to the public sector. Otherwise, you get the attempt for everybody to save more and everybody to invest less and you fall clearly into one of those problems that Keynes identified, where the adjustment process, rational on the individual level, just digs the economy, as a whole, deeper into a recession… [For this plan to be effective] we now want a period of slow contained growth, in which we can get a lot of deleveraging going on - without it having to burden the public sector debt by too much. For that, you need time and helpful markets. The sort of ideal market is one that down a bit - that has periodic bounces. So people can take advantage of the bounces to issue a great deal of equity, which also, of course means that the market is more likely to go down thereafter?

Is the entire equity market merely a plaything in one giant Fed-controlled deleveraging ploy? Are equity prices indicative of anything besides what the Fed wants them to be? Some day, when all the Fed’s secrets are revealed, we will know for sure. For now, all we can do, is to continue speculating and pointing out the obvious and ever more increasing irregularities in what was formerly at least passable for an efficient equity market.

Full Smithers interview.

Smithers 2009 November -

Source: ZeroHedge.com, February 17,2010

Tags: Andrew Smithers, Asset Management, Bofa, Capitalization, Clincher, Deflation, Economists, Hawks, Incremental Cash Flow, inflation, Pipe Dream, Proclamations, Provocative Perspective, Qe, Refutation, Self Fulfilling Prophecy, Sg Warburg, Trillion, Tyler Durden, Ulterior Motive, Valuations
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Art Cashin: February 8 Insights

Tuesday, February 9th, 2010

The choice selections from today’s Art Cashin comments, via UBS Financial Services:

Greek Rescue Rumor And Chippier Consumer Brings Stocks Back From Brink – For much of Friday’s session, fears about the European Union (particularly Greece) sent folks seeking the safety of the dollar. That, in turn, put pressure on oil; gold and stocks as carry trades were liquidated. The carnage began in earnest as the European markets closed. The dollar began to move steadily higher causing the above-noted damage.

The dollar driven selling was not as vicious as the selling on Thursday, but around 12:45 things started to turn rather ugly. They got even uglier as they headed to the day’s lows at 2:00. Rumors circulated that a trading firm in the crude pits was being forced to liquidate contracts.

But, shortly after 2:00, bids began to pop up in stocks as the dollar eased back. With some investigation, traders learned that there were rumors, or at least speculation, that the ECB and others might be cobbling together a rescue package for Greece over the weekend.

Stocks began to cut their losses as did gold. Crude remained hobbled by those liquidation rumors but cut its losses nonetheless. At 3:00, stocks picked up another tailwind. Consumer Credit fell $1.7 billion not the $10 billion some economists had projected. The hope that the American consumer might be willing to consume again helped the late rally.

That late rally was a bit of a mixed blessing. Had they closed on the lows, the probable course of the market might be a touch clearer. A close at the lows would have suggested an “oversold reflex rally” for Monday extending half-way into Tuesday’s session. The rally would then fail followed by a sharp and severe selloff. The late rally took that specificity off the table. We’ll have to review the napkins for clues to the amended course.

Greece And the Gordian Knot – As noted above, the late rally was sparked by speculation that there would be a rescue package announced over the weekend. When no announcement came forward, there was no follow-through on the rally.

The latest speculation is about the inverted yield curve for Greek bonds. That doesn’t allow any wiggle room or time to ease into austerity. Therefore “instant austerity” runs the risk of public backlash, strikes and maybe even unrest in the streets. To buy some time, some folks speculate, that the ECB or some entity could guarantee short term Greek debt – maybe up to one year. That might buy some time. It will be interesting to see if that’s the road that is taken.

Cocktail Napkin Charting – As noted above, the late Friday reversal rally was primarily the result of rumors of a Greek rescue package. There were also technical contributors to the bounce. The S&P made its intra-day low at 1044. That’s its 200 day exponential moving average. Both Walter Murphy and Stock Market Cycles had listed 1043 as a probable target (darn good call).

Friday’s lows will be a critical testing area on any future pullbacks. If they are violated, things could turn very ugly although some see more support at 1030/1035.

For today, the napkins suggest early support in the S&P may be around 1048/1052 with the backup 1040/1043. Resistance looks like 1070/1074 and then 1080/1085. We need to be careful because the Friday bounce may have released enough of the oversold to allow the bears another shot.

Consensus – Watch the dollar and the headlines and rumors from Euroland. If the dollar rallies smartly, things could get very ugly. Stay very nimble.

Trivia Corner Answer - To heir today - The middle son brought the ailing horse an apple every other day. Today’s Question - Heads up! Each of the following 4 letter words can be made an 8 letter word by adding the same 4  letter word to each one. (Example - If we gave you step, ball, hold, work, path & fall….the answer would be “foot”). What word fits - A) Some; Pick; Bill; Book; Rail. B) Line; Style; Long; Boat; Like; Size. C) Ding; Boy; Man; Vampire. D) Kingdom; Way; Nations, State.

(h/t ZeroHedge.com)

Tags: Art Cashin, Brink, Carnage, Choice Selections, Consumer Credit, ECB, Economists, European Markets, Gold, Gordian Knot, Lows, Mixed Blessing, Napkins, oil, Pits, Rally, Reflex, Selloff, Specificity, Speculation, Ubs, Ubs Financial Services
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Economy and Bond Market Highlights

Monday, February 1st, 2010

The Economy and Bond Market The 10-year U.S. Treasury note was relatively stable this week, with the yield decreasing by one basis point to end the week at 3.60 percent. As reported this week, real gross domestic product (real GDP) increased at an annual rate of 5.7 percent in the fourth quarter of 2009, besting the consensus estimate of 4.7 percent. This was the best performance since the third quarter of 2003. The figure below shows the annualized quarter-over-quarter percentage changes.

Strengths

• The Reuters/University of Michigan final index of consumer sentiment for January rose to 74.4, exceeding the consensus of 73.0 and the preliminary estimate of 72.8. This was the highest level in two years.
• The Chicago Purchasing Managers Index increased to 61.5 in January, higher than the consensus estimate of 57.2. This was the highest level since November 2005.
• The S&P Case-Shiller 20-city home price index for November rose a seasonally adjusted 0.24 percent from October, the sixth straight monthly gain. The index was down 5.32 percent year-over-year, the smallest year-over-year decline in two years.
• The Conference Board’s index of consumer confidence rose to 55.9 in January from a revised 53.6 in December, besting the 53.5 median estimate of economists.

Weaknesses

• Durable goods orders for December rose 0.3 percent from November, less than the 2 percent advance expected by economists. Orders for durable goods excluding transportation increased by 0.9 percent, more that the 0.5 percent consensus.
• Initial jobless claims for the week ended January 23 were reported at 470,000, more than the 450,000 expected.
• December new home sales declined 7.6 percent month-over-month to 342,000, less than the forecast of 366,000.
• Sales of existing U.S. homes in December fell 16.7 percent from November levels to an annual rate of 5.45 million, worse than the consensus of 5.90 million. November sales had been helped by the government tax credit, which was originally scheduled to expire on November 30.
• The Richmond Fed’s manufacturing index for the central Atlantic region for January came in at -2.00, slightly worse than the consensus estimate of 0.00. It did edge up a bit from December’s index of -4.00. For each of the seven months prior to December, the index had been positive.
• The Mortgage Banker’s Association index of mortgage applications for the week ended January 22 dropped by 10.9 percent after rising for the preceding three weeks.

Opportunities

• The fourth-quarter GDP of 5.7 percent reported this week provides another indication that the global economic recovery appears to be taking hold.

Threats Coordinated global removal of fiscal and monetary stimulus are the biggest threats to the financial markets.

Tags: Basis Point, Best Performance, Bond Market, Consensus Estimate, Durable Goods Orders, Economists, Fourth Quarter, Government Tax, Gross Domestic Product, Home Price Index, Index Of Consumer Confidence, Index Of Consumer Sentiment, Initial Jobless Claims, Median Estimate, Percentage Changes, Purchasing Managers Index, Real Gdp, Reuters, Treasury Note, U S Treasury
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WSJ: Economists cautious in 2010

Monday, January 18th, 2010

WSJ’s Phil Izzo parses the latest findings from The Wall Street Journal’s monthly survey of leading economists, discussing what it says about the recovery and the growth outlook for 2010.

Source: Phil Izzo, Wall Street Journal, January 14, 2010.

Tags: Advertisement, Economists, Growth Outlook, Izzo, Survey, Wall Street, Wall Street Journal, Wsj
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Keep Your Eyes on the Yield Curve

Thursday, December 24th, 2009

Stocks are trading at or close to 2009 highs, being helped along by a record steepening of the yield curve. Put simply, on Tuesday the gap between 10- and 2-year US government bond yields hit its widest spread ever – 286 basis points, beating last week’s 276 basis points and the previous record set in August 2003 of 274 basis points.

From across the pond, David Fuller (Fullermoney) said: “Veteran subscribers will recall a remark often used on this site [Fullermoney]: Bull markets do not die of old age - to which I will add warnings by Roubiniesque economists. Instead, they are assassinated - usually by central banks. So how many rate bullets does it take to fell a bull? You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“Note the still widening spread between US 10-year yields over 2-year yields, otherwise known as the yield curve, on this historical. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the yield curve next inverts by moving below zero. However, the lead was so early last time (early 2006) that some of us became complacent about it.”

Source: Fullermoney

Tags: Anticipation, Basis Points, Bear Market, Bond Yields, Bull Markets, Bullets, Central Banks, David Fuller, Economists, Fullermoney, Gap, Government Bond, Inverts, Last Time, liquidity, Portfolios, Precise Answer, Quantitative Easing, Sentiment, Yield Curve
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“Bull markets do not die of old age; they are assassinated – usually by central banks”

Thursday, November 12th, 2009

One of the most incisive thinkers in the investment field is David Fuller who runs the Fullermoney service from London and provides daily written and podcast commentary. I have been subscribing to the service for more than 20 years and consider it part of my staple investment diet, particularly also for its truly global approach. I am not an agent for David, but please visit by his site to get a feel for his excellent commentary.

The paragraphs below from Monday’s Fullermoney report are particularly topical at this juncture in stock markets.

Veteran subscribers will recall a remark often used on this site: Bull markets do not die of old age - to which I will add, or warnings by Roubiniesque economists. Instead, they are assassinated - usually by central banks.

“So how many rate bullets does it take to fell a bull?

“You may not be surprised to hear that there is no precise answer, because it depends mainly on sentiment and liquidity. We know when central banks start to reduce liquidity, or at least increase its price, but we do not know precisely when that will affect sentiment adversely.

“We know that a few central banks have commenced an incremental tightening of rates. However, we cannot know how aggressively they will act or when other central banks will follow their lead, because they do not know themselves.

“Recently, some big guns from the investment management and hedge fund industry concluded that stock markets were ripe for a correction. I was of a similar view. However, markets seldom dance to countertrend tunes for long, and with but a few exceptions we have seen little more than slightly larger reactions and more sideways ranging recently.

“The DJIA’s new recovery high today [Monday] is not exactly the stuff of corrections, unless it is instantly and dramatically reversed. Meanwhile, I would back the bull trend. After all, we have seen some mean reversion recently, narrowing overextensions relative to 200-day moving averages. There is also the not insignificant matter of the biggest monetary reflation in human history, and there is no hyperbole in that description.

“Stock market indices would have to break beneath their most recent reaction lows to question further the overall outlook for sideways to higher ranging.

“Meanwhile, note also the still widening spread between US 10-year yields over 2-year yields, otherwise known as the Yield Curve, on this historical chart. It is still rising, indicating to me that quantitative easing continues. The time to start thinking about closing long portfolios in anticipation of the next bear market, I suggest, will be when the Yield Curve next inverts by moving below zero. However the lead was so early last time (early 2006) that some of us became complacent about it.”

Source: Fullermoney.com, November 10, 2009.

Tags: Big Guns, Bull Markets, Bullets, Central Banks, David Fuller, DJIA, Economists, Fullermoney, Global Approach, Hedge Fund, Investment Field, Investment Management, Juncture, liquidity, Mean Reversion, Paragraphs, Precise Answer, Sentiment, Stock Markets, Thinkers
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Joseph Stiglitz Interview on Economic Recovery

Tuesday, October 6th, 2009

Joseph Stiglitz is interviewed by Bloomberg during a visit to Istanbul. Stiglitz believes markets are “irrationally exuberant” about the global recovery.

Bloomberg reports: His comments echo New York University Professor Nouriel Roubini’s view that “markets have gone up too much, too soon, too fast,” and billionaire George Soros, who warned yesterday that America’s economic recovery will be “very slow.”

The U.S. has lost 7.2 million jobs since the recession began in December 2007, and the unemployment rate reached a 26- year high in September, a Labor Department report last week showed. Joblessness is likely to reach 10 percent by the end of the year, according to economists surveyed by Bloomberg News last month.

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It’s “pretty clear that the situation will continue to get worse,” Stiglitz said, citing elements of the jobs report such as the number of people who can’t find a full-time job and the pace at which Americans are dropping out of the labor force.

Economic growth this year and next will “fall well short of what we need to stop unemployment from growing,” he said. The likelihood that the U.S. economy will be “out of the woods” before most of the measures in the Obama administration’s stimulus package expire in 2011 is “very small,” he added.

Source: Stiglitz Says Markets ‘Irrationally Exuberant’ About Recovery, Francine Lacqua and Jeremy Torobin, Bloomberg, October 6 2009

Tags: Billionaire, Bloomberg, Bloomberg News, Economic Growth, Economic Recovery, Economists, ETF, Full Time Job, George Soros, Global Recovery, Jeremy Torobin, Joblessness, Joseph Stiglitz, Labor Department, New York University, Nouriel Roubini, Obama, October 6, Recession, Stimulus Package, Unemployment Rate, York University Professor
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Jan Hatzius on US Growth, Rates, and Economists

Monday, September 14th, 2009

This post features a three-part video interview with Jan Hatzius, chief US economist for Goldman Sachs, by Aline van Duyn, FT’s US Markets Editor. Whether you like Goldman or not, Hatzius is worthwhile viewing material.

Part 1: Hatzius on US growth
Hatzius expects “the second half of 2009 … to be quite strong” but “in 2010 we’ll probably see some renewed deceleration in growth”. He sees temporary measures including the inventory cycle and the fiscal stimulus as being responsible for “growth in the second half of 2009, but … by late 2010 that number is going to be somewhere around zero”.

Click here or on the image below to view Part 1 of the video clip.

Part 2: Hatzius on US rates
Hatzius sees “no rate hikes … through the end of 2010″. He points to high unemployment and low core inflation as “a strong statement … from the Fed’s perspective that low interest rates are going to be warranted”.

Click here or on the image below to view Part 2.

Part 3: Hatzius on economists
Hatzuis points to humility and being “realistic in one’s ability to predict the future … as an important part” of his job. He says “the biggest problems have been seen by people who rely on more mechanical models” including “large scale econometric models of the business cycle, because it’s harder to adjust those types of forecasting models for judgment”. “More electric forecasters have had perhaps a somewhat easier time …. Using a judicious mix of estimating models, looking at numbers and relying, at least to some extent, on more anecdotal indicators that are a little harder to… download in a time series form.”

Click here or on the image below to view Part 3.

Source: Financial Times, September 11, 2009.

Tags: Aline, Business Cycle, Core Inflation, Deceleration, Econometric Models, Economist, Economists, Financial Times, Fiscal Stimulus, Forecasters, Gold, Goldman Sachs, Humility, Inventory Cycle, Low Interest Rates, Mechanical Models, Rate Hikes, Source Financial, Time Series, Van Duyn, Video Interview
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The Best Indicator Of Economic Health?

Friday, September 11th, 2009

This article is a guest contribution by Nic Lenoir, ICAP

Traditionally, many people in the industry view the ISM as the best stock market predictor. With a GDP being calculated as the total production of the country I guess it makes sense. But the ISM completely ignores the financial health of the country. That’s why, as some only found out recently, having 4% growth on borrowed money for 4 or 5 years doesn’t do you any good when comes the time to repay your debt. This is one example of how short-sighted economic reporting can be sometimes. Granted, if you start adjusting growth for population growth, inflation, and debt creation, you will not necessarily get much, especially these days. But even if that led to a darker picture, wouldn’t it be a more coherent fundamental assessment of economic progress.

ABC consumer confidence has been lagging any sort of recovery we are currently having. All economists are unanimous though, the business cycle is in full effect and we are headed for 3% to 4% Q4 growth. Numbers don’t lie, activity has picked up. However there is a slight problem, consumer credit is shrinking, wages are certainly not higher, and confidence is low. Last time we fueled growth using credit, consumer confidence picked up but modestly only, and we are now seeing lows not seen since the recession in 1991. A look at the attached chart of consumer comfort against ISM and GDP makes it very clear, and we also see that ISM is usually a leading indicator, maybe explaining why consumer comfort is currently trailing green shoots. Interestingly it seems the cycles in consumer satisfaction correspond with 8-year presidential cycles. I am only observing, as I don’t have enough data to go more than two preseidents (Clinton and Bush II) on the chart, so this is in no way an expression of my political opinion. But will the pick up in ISM this time again lead to a pick up in consumer comfort and prosperity? It’s difficult to assess. My inclination is that we have many secular problems to deal with and credit infused prosperity at the individual level is not really a possibility.

To go around the difficulty of the consumer’s balance sheet, already rotten with debt, the government has made it its mission to restart the economy using sovereign debt. In essence whether it’s the Fed or the government, this is what always happens anyways, and that is precisely why production always leads consumer confidence. But this time we have a real problem, because we are trying to restart an economy with a level of debt never encountered before. What I find trully fascinating is that we are already claiming victory. This recession is over, and even though growth will be subpar, we are led to believe all is well. The stock market certainly says so. Is the stock market a good indicator of economic prosperity? I don’t know but it’s not the point. The point of all this is to show that economic activity always front-runs consumer prosperity because governments somehow spur activity, whether it’s through the private sector or themselves, everytime the economy is in decline. So in a sense, the government uses the ISM or the stock market (both move in sync historically anyways) to assess its performance, and that is where it is dangerous, because as we discussed earlier ISM is only one component of economic prosperity. It is certainly necessary to have a strong production to have an economy that functions well, but at what cost?

By no means is government intervention an American problem. My original inclination was to blame democracy, as elected representatives will do anything for a short-term boost in outlook to scure their re-election or legacy. But it is very interesting to see that every government around the world is doing the exact same, whether that government is elected or not. The US government bails its banks and its economy using taxpayer money, just like European governments or even the Chinese government. What’s completely absurd is that by nature of ideology, capitalist countries should let failed institution sink and care for the fiscal health of the country, socialist countries should prop the economy using public money but let stocks go bust and takeover failed institutions or businesses to punish failure of capitalist enterprise, and China… well a communist country with a stock market and a currency that one can’t trade is absurd in the first place. It’s not banks that are too big to fail, it’s our economy that can’t tolerate shrinking for a few quarters. One thing is for sure propping the economy up because we can’t tolerate volatility, whether it’s in the GDP numbers or the stck market, is a very bad idea in the long term, and we have been doing it for a very long time. If it works this time it will be worst the next. By trying to fight volatility we are guarantying explosions of volatility far more painful than what would occure otherwise.

The best indicator of health would be a GDP declining to reflect we have moved our manufacturing overseas, we have too much debt, and unfunded pensions are a ticking time bomb that makes the housing market a pleasure to deal with.

Courtesy of Tyler Durden, ZeroHedge.com

Tags: Abc Consumer Confidence, Business Cycle, Consumer Credit, Consumer Satisfaction, Economic Health, Economic Progress, Economists, Financial Health, Full Effect, GDP, Growth Numbers, Inclination, Ism, Leading Indicator, Lows, Numbers Don, Population Growth, Q4, Recession, Stock Market
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David Rosenberg: Equities on a roll, but still overvalued

Monday, August 31st, 2009

David Rosenberg, formerly the Chief North American Economist at Merrill Lynch in New York, returned to his native Canada to settle at Toronto-based Gluskin Sheff, following the Bank of America acquisition. He is highly respected and one of the most candid and lucid macro-economists and his grasp of the market related economics is refreshing. Rosenberg says there is no point in making economic forecasts that are not backed up by actionable investment calls. His Breakfast, Lunch, Coffee and Tea With Dave newsletters are worth reading.

Last week, Rosenberg shared his thoughts on the question, “Is the financial crisis over?” (08/25)

Not if you’re not too big to fail. We are now up to 77 failed U.S. banks so far in 2009. This already matches, in just eight months, the number of lenders who failed in the previous 16 years combined.

About bear markets and valuation:

One should always keep an open mind. Practically all bear markets have a 50% retracement and this cycle has been no different. However, what we have witnessed is unprecedented because at no time in the past has the stock market rallied more than 50% ahead of the supposed end of a recession. Normally, the
move off the lows to the official end of the economic downturn is 20%. And, the trailing P/E multiple on operating earnings is now north of 25, a record eight point expansion in a short time frame (the P/E on reported earnings is nearly 130x!).

Go back to the March lows, and the market was down around 60% from the peak,but then again, earnings plunged the same amount. At the lows, valuation levels
suggested that equities were pricing in $50 of operating earnings and -2.5% real GDP growth for 2009. And guess what? That’s exactly what we are likely to get.

What’s priced in five months and 50% later? Call it $70 on operating EPS for the coming year and +4.0% real economic growth. In other words - the stock market is fully priced and then some. But for the time being, the technicals and sentiment - the high level of enthusiasm - and the risk of a “buying panic” by lagging portfolio managers are very likely going to make folks, like Walter Murphy, look prescient.

About last week’s so called good news (08/26):

1. Bernanke reappointed

We really fail to see how it could possibly be that the same central bank official, who, over a span of a decade, presided over two massive bubbles and their busts, can be viewed as being a positive force for the markets. Perhaps there is some solace in knowing that the same person who created this awesome and complex $2 trillion Fed balance sheet will be around to dismantle the largesse since he’s probably the only one that knows how.

2. The first monthly increase in the Case-Shiller home price index

As for the second point, there is a difference between a trendline and the noise around that trendline. Home prices are down a massive 31% from their peak and have been in a vertical-down pattern for nearly three years. Perhaps a respite is in order, but with the true underlying unsold inventory near 12 months’ supply, which is double what would typify a balanced housing market, it would seem like wishful thinking that we have suddenly achieved a fundamental low in residential real estate values (especially at the high end).

3. The seven-point jump in consumer confidence in August

With regard to point number three, we welcome any rise in consumer confidence but an honest appraisal of the data would show that 54.1 is still a very depressed level. In fact, the average index level during recessions is 73.0 - August’s reading was nearly 20 points below that. So, if the recession is indeed over and done, somebody forgot to tell this 70% chunk of GDP otherwise known as the consumer.
Now, what about Mr. Market, who is still in a most joyful mood. Well, the normal level of consumer confidence in the month in which the S&P 500 is up 55% from an oversold bear market low is 100. So, the stock market is behaving as if consumer confidence is twice the level it really is.

What is the enemy of this bear market rally?

The real enemy for the equity market is Mr. Bond - that pesky Treasury market that just won’t sell off and validate the great reflation trade. Indeed, if we were seeing a real asset allocation move on the part of investors, as opposed to massive and ongoing short covering, then the 10-year Treasury note yield would be trading close to 5.0% - especially with these freshly minted Obama debt forecasts. But instead, the 10-year note is now getting perilously close to the July 10 low of 3.32%. Keep in mind that July 10 was the day when Meredith Whitney gave the green light to Goldman, and Roubini declared the recession to be ending, and what a spark that provided to this last leg of the bear market rally. Now what if Doug Kass’ declaration yesterday that the major averages have hit their highs for the year proves as prescient in the other direction? Come on, not only is the market trading at a nutty 130x multiple, but September-October is right around the corner (as is H1N1).

Equities are on a roll… but still overvalued (08/28):

We continue to hear how undervalued the stock market got to this cycle, but it was really the corporate market that was priced for Armageddon. The equity market, at the lows, was discounting -2.5% real GDP, but if it was pricing in the same outlook as corporates, Baa spreads pierced the 600 basis point threshold, then the S&P 500 would have bottomed near 315, not 666. (Hey, that still would have been a triple-bagger from the 1982 lows!)

Be that as it may, what we have on our hands is a liquidity-induced and technically-strong equity market, and as Bob Farrell has been known to say, these types of rallies quite often “go further than you think” but they do not generally correct by “going sideways”. Even if the recession is over, the market usually is up 20% from the time of the bottom to the end of the downturn. By the time we are up over 50% on the S&P 500, what is “normal” is that we are heading into the second year of recovery (recession being over isn’t even a debate), the economy has shown an ability to expand without the need for government assistance and GDP would have risen nearly 5.0% by now and helped create about 1 million jobs. In other words, after the market has jumped over 50% from the low, we have moved beyond hope and into reality.

You can sign up to receive David Rosenberg’s letters by email here.

Tags: Acquisition, American Economist, Bank America, Bank Of America, Bear Markets, Breakfast Lunch, Canada, Candid, Coffee And Tea, Core Beliefs, David Rosenberg, Economic Downturn, Economic Forecasts, Economics, Economists, Eight Months, Five Months, GDP Growth, Gluskin Sheff, Gold, Grasp, Lows, Merrill Lynch, Native Canada, Real Gdp, Recession, Retracement, Stock Market, Technicals, Valuation Levels
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Nouriel Roubini: The Phantom Economic Recovery

Tuesday, August 18th, 2009

The following article is a guest contribution from RGE Monitor, and Nouriel Roubini’s Project Syndicate, August 16, 2009.*

Where is the US and global economy headed? Last year, there were two sides to the debate. One camp argued that the recession in the US would be V-shaped—short and shallow. It would last only eight months, like the two previous recessions of 1990-1991 and 2001, and the world would decouple from the US contraction.

Others, including me, argued that given the excesses of private sector leverage (in households, financial institutions and corporate firms), this would be a U-shaped recession—long and deep. It would last about 24 months, and the world would not decouple from the US contraction.

Today, 20 months into the US recession—a recession that became global in the summer of 2008 with a massive recoupling—the V-shaped decoupling view is out the window. This is the worst US and global recession in 60 years. If the US recession were—as is most likely—to be over at the end of the year, it will have been three times as long and about fives times as deep—in terms of the cumulative decline in output—as the previous two.

Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth and that there is no risk of a relapse. Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.

Data from the US—rising unemployment, falling household consumption, still declining industrial production and a weak housing market—suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.

Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.

The first reason is likely to create a long-term drag on growth: Households need to deleverage and save more, which will constrain consumption for years.

Second, the financial system— both banks and non-bank institutions—is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.

Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anaemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.

Fourth, the releveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Domestic private demand, especially consumption, is now weak or falling in over-spending countries (the US, UK, Spain, Ireland, Australia and New Zealand, etc.), while not increasing fast enough in over-saving countries (China, other Asian countries, Germany and Japan, etc.) to compensate for the reduction in these countries’ net exports. Thus, there is a global slackening of aggregate demand relative to the glut of supply capacity, which will impede a robust global economic recovery.

There are also now two reasons to fear a double-dip recession. First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don’t. If they take their fiscal deficits (and a potential monetization of these deficits) seriously and raise taxes, reduce spending and mop up excess liquidity, they could undermine the already weak recovery.

But if they maintain large budget deficits and continue to monetize them, at some point—after the current deflationary forces become more subdued—bond markets will revolt. At this point, inflationary expectations will increase, long-term government bond yields will rise and recovery will be crowded out.

A second reason to fear a double-dip recession concerns the fact that oil, energy and food prices may be rising faster than economic fundamentals warrant, and could be driven higher by the wall of liquidity chasing assets, as well as by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created a major income shock for the US, Europe, Japan, China, India and other oil-importing economies. The global economy, barely rising from its knees, could not withstand the contractionary shock if similar speculative forces were to drive oil rapidly towards $100 a barrel.

So, the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anaemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession. The recent market rallies in stocks, commodities and credit may have gotten ahead of the improvement in the real economy. If so, a correction cannot be too far behind.

©2009 / PROJECT SYNDICATE

Nouriel Roubini is chairman of Roubini Global Economics and a professor at the Stern School of Business, New York University.

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