From David Rosenberg, Gluskin Sheff
What A Joke
The Saturday Globe and Mail (page 811 ran with this special feature:
Ready to Spend: An American Comeback Story
Once again, I have to stress that the true measure of a country's standard of living is national income, not narcissistic spending. And the critical driver of income, beyond working-age population growth, is productivity. Not just labour, but multi-factor productivity. All the talk is about the revival of the consumer, but as we see in this post-Thanksgiving period, retailers are stepping over themselves to lure in shoppers by opening earlier than ever and discounting like they never have before. Call it deflationary growth. But what the article fails to notice is the downtrend in business capital spending. The article doesn't mention that there has been no capital deepening in the USA. in well over a decade.
And what the article does seem to heed is the message that was so clearly delivered by Ben Bernanke last week, which is that the U.S. economy's non-inflationary speed limit is in secular decline. And with that, as I put my market strategist hat on. I would say the fair-value P/E multiple is really only being supported now by the artificial manipulation by the Fed to drive real interest rates into record negative terrain.
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And some other thoughts from Rosie:
Beware of all the talk of how great the post-Thanksgiving sales have been. All the comparisons are with year-ago levels, and a year ago, sales were not being pulled into Thanksgiving day as they were this time around, so these are not apple-to-apples benchmarks (the sort of person that leaves the family dinner on Thursday to head to Best Buy, Toys R Us, Target and Wal mart so as to be the first to line up for the 8 PM door-opening blockbuster deserves some social commentary — I'm not sure that is what the pilgrims had in mind when it came down to giving thanks). We heard the same blow-out Black Friday and Cyber Monday data this time in 2011 and the rest of the shopping season was a bit of a dud (see Early Push for Sales Undercuts Black Friday on page B1 of today's NYT).
Meanwhile, the spending culture is alive and well in America, nonetheless, with ShopperTrak data showing 300 million store visits on Black Friday alone (that's almost the entire population — didn't anyone make it to work?). It's not "Black Friday" any more but it has now become a four-day "Black Weekend" and as such, year-over-year data are very misleading (nobody can accuse the retailing lobby from not being creative — it is trying to make it a five-day weekend now with the extension to Mobile Tuesday I kid you not — see page 32 of the NYT).
There was a pundit on CNBC early this morning stating that the American consumer is "on fire". Yet ShopperTrak also noted that while traffic was UP 3.5% year-on-year on Black Friday, actual dollar sales fell 1.8% (which goes to show how intense the "doorbuster promotions" were in cannibalizing retailer margins). Today's WSJ cites an IBM survey, based on data from 500 retailers, that the average order per customer shrank 4.7% from a year ago. And an analysis by Chase Paymentech (a sub of JPMergan Chase) concluded that in-store sales tumbled 7% YoY on Saturday. The National Retail Federation was predicting, based on its survey, 147 million shoppers hitting the malls, but the actual, 137 million that it tracks fell short.
While Cyber Monday could provide a lift (after all, for the first time, over half of consumers said they shopped on-line over the weekend), this does not detract from the view that what the retailing community has done is condition the consumer to conduct as much of the holiday shopping as possible over one weekend. Again, remember last year's pattern... if you loaded up on the S&P retailing group in mid-November of 2011, you ended up losing money by the end of the year... despite the initial "bullish" holiday spending data.
So the one conclusion to make right is it is too early to tell how the holiday shopping season will unfold, but we came off a Q3 where both the quarterly rate and YoY pace was 2% in real terms which is actually close to half the long-term trend. Retail sales slipped 0.3% in October if memory doesn't escape me. And real personal incomes excluding government handouts peaked and began to roll over in July. Retailers have a declining personal savings rate to thank because the sort of low-paying jobs that are being created are hardly generating anything close to an enthusiastic trend on household incomes. I realize that the latest "bullish" University of Michigan consumer sentiment data captured everyone's attention, but the weekly tracking by Rasmussen is actually showing that the influence from lower gas prices and higher equity/home values may be waning — this index slipped to 89.1 as of November 23rd from 95.2 on November 9th to stand at a six-week low.
Moreover, it will be interesting to see the extent to which the 40% of the five million Americans that received unemployment insurance react ahead of the possible expiry of their emergency benefits (see page A4 of today's WSJ — Deadline Looms for Long-Term Unemployed) The spending impact could be as much as a $60 billion annual rate.
And business sentiment is certainly moribund, underscored not only by the survey data but also by the IPO calendar, which is devoid of any new deals in the pipeline both this week and next (see A Cold December for IPOs on page C3 of today's WSJ).
THE BIG PICTURE
We remain in the throes of a secular era of disinflation. We also are in a long-term period of sub-par economic growth and below-average returns. This has become so well entrenched that U.S. pension plans now have more exposure to bonds than to stocks, as we highlighted two weeks ago. Look, this is not about being bearish, bullish or agnostic. It's about being realistic and understanding that in our role as market economists, it is necessary to provide our clients with information and analysis that will help them to navigate the portfolio through these stressful times. Our crystal ball says to stick with what works in an uncertain financial and economic climate — in other words, maintain a defensive and income-oriented investment strategy.
It is our contention that in this post-bubble, mean-reverting process, the ability for policymakers to re-create the credit cycle, reflate asset values and ignite a consumer-led recovery is going to be thwarted by secular changes in attitudes towards borrowing, saving, discretionary spending and homeownership. In other words, even after enough debt is paid off, the baby boomers' spending years will be focused on putting their money in the coffee can. The first of the boomers are now turning 65 and the median boomer is now 55, going on 56. At the margin, they will now be forced to plan for retirement by setting aside an ever-greater part of their paycheques as opposed to relying on the perceived level of their future net worth, which had become the norm over the past two decades as inflated asset values, first in equities and then in residential real estate, triggered unrealistic expectations of the intrinsic value and capital gains potential of their asset base — an asset base concentrated in inherently unproductive items such as the house.
The missing piece in most analysis regarding the efficacy of government policy in terms of rejuvenating a new cycle of borrowing and spending is the extent of trauma that has taken place on the household balance sheet since the housing bubble popped in 2006 and the equity bull market reversed course in 2007. We estimate that the cumulative loss of household net worth, even with the recovery in recent years. is $4.7 trillion. In other words, a 7% hole has been driven into the household balance sheet over a five year span, which has not happened since the 1930s. Household wealth is no higher today than it was in 2006, and this realization is really only now setting in.
The process of a secular rise in the U.S. personal savings rate and the dampening effect this will have on aggregate demand will be incredibly disinflationary for some time. While fiscal stimulus indeed cushioned the blow, the current reality is one of restraint, at a time when the output gap is closer to 6% — where it normally is in periods of deep recessions, not year-four of an expansion.
From a top-down perspective, what drives inflation is the shape and interaction of two different curves — the economy's aggregate supply curve and the aggregate demand curve. The movements in these curves tell us where the "output gap" is at any moment in time—the "gap" between where the economy is actually operating and the level it would be operating at if it were running flat out at full employment. In other words, the "gap" measures the degree of slack in the labour and product markets, and this "gap" at 6% currently augurs for 'fair-value' or 'equilibrium' policy rates to be -2.4% according to our research, which is why at the zero bound. the Fed has been and will continue to focus on non-conventional measures aimed at lowering the cost of capital.
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