This article is a guest contribution from David Rosenberg, Chief Market Economist, Gluskin Sheff.
In terms of what is driving market sentiment right now, it boils down to three things. First, there is a consensus view that the stress tests in Europe were a game changer and that the crisis has been dealt with. Second, there is a lot of hope that the Chinese government has managed to curb the property and credit bubble and did so by engineering a soft-landing and not a hard-landing and that no further policy restraint is going to be needed. Third, almost everyone is dismissing double-dip risks in the U.S.A., and a whole army of Wall Street research departments are expending considerable resources into dissecting the ECRI and concluding that it is not foreshadowing another recession.
The latest was a report that said that the ECRI was only -1.5 (not -10.5) once the effects of mortgage applications were removed. How about that? Remove housing, and it’s “only” -1.5 (as if that is any good in any event).
This takes us back to 2007 and 2008 when all the research houses (except for the one I toiled at) came to the conclusion that once you strip out the effects of housing, the U.S. economy was just in fine shape, didn’t you know? Housing doesn’t matter, right?
Right.
But all is not right!
At least not with jobs and housing.
First, even though the BLS told us that the U.S. jobless rate fell to 9.5% in June from 9.7%, we know that the rate would be 10.2% if not for the plunge in the labour force over the past two months. Second, we just received the detailed regional data and they showed that the unemployment rate climbed last month in 291 of the 374 areas monitored; fell in 55 and was flat in 28.
Now how does that grab you? Of the 12 metro areas with a depression-like 15% unemployment rate, 10 were situated in California – the largest state ostensibly is not yet out of recession (just as Janet Yellen moves back to Washington from San Fran). And when you consider that the state government in California just reinstated a fresh round of furloughs, you know that the extent of underemployment along with unemployment is extremely deep (see “New Furloughs in California” on page A13 of the NYT).
Second, the housing backdrop is still very weak. The high-end homeowner is now buckling as foreclosures among those with jumbo prime mortgage loans (mortgages of over $729,750) have soared 600% in the past 2-½ years. Foreclosures among borrowers with prime conforming loans have risen 425%.
According to RealtyTrac, we still have a situation today, despite all the taxpayer money that has been thrown at the situation, where 154 of 206 cities (with populations of 200,000 or more) have posted increases in foreclosure filings on a YoY basis. Meanwhile, sellers of properties are starting to see the light and are cutting their prices (not yet evident in the Case-Shiller but will be soon).
Thirty percent of homes sold last month were properties in which the owner had to cut his/her asking price (Zillow). As well, it is now taking 8-9 weeks to sell a house upon listing, down from 10-11 weeks a year – in another sign that sellers are becoming more realistic and coming closer to match the existing depressed bids there are out there. Remember – this remains a full-fledged buyers market out there with a near-record 19 million vacant housing units nationwide to choose from.
GOLD CORRECTION A BUYING OPPORTUNITY
There is no question that gold’s allure as a safe-haven has taken a bit of a beating with the more confident tone coming out of European markets, but be assured that in a global post-bubble credit collapse, skeletons come out of the closet when you least expect it. The surprises are not over; not by a long shot. And the gold price will ebb and flow, but it is in a secular bull market and will retain its natural hedge against recurring concerns surrounding the integrity of the global financial system. Watering down financial regulation bills in the U.S.A., kicking the can down the road via less-than-onerous Eurozone stress tests and reduced capital stringency as per Basel III does not alter the deleveraging game that much and the rounds of market instability that will come our way.
The investment demand for gold remains quite solid at a time when production growth is still anaemic – the World Gold Council just released data showing that investors bought 273.8 metric tons of gold via ETF’s in Q2, the second highest tally on record (and brings net investment in these finds to over 2,000 tons value at just under $82 billion).
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