David Rosenberg: Where to Go For Positive Returns

Monday, July 23rd, 2012

 

 
David Rosenberg discusses how the 3 D’s (Deleveraging, Deflation, and Demographics) are hurting markets, and where investors can go for positive returns, with Wealthtrack’s Consuelo Mack.

Here is the full transcript:

CONSUELO MACK: This week on WealthTrack, the influential economist whose projections have been right on target. Financial Thought Leader David Rosenberg shows how the 3 D’s of deleveraging, deflation and demographics are hurting economies and markets and where investors can go for positive returns, next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. This week, we are sitting down for an in-depth interview with one of the handful of prognosticators who has gotten it right going into and through the rolling global financial crisis we are experiencing to this day. He is Financial Thought Leader David Rosenberg, chief economist and strategist at Toronto-based wealth management firm Gluskin Sheff. Dave returned to his native Canada in 2009 after spending many years as Chief North American Economist at Merrill Lynch, where Institutional Investor magazine placed him on their coveted “All American All Star Team” from 2005-2008.

Rosenberg took on the bullish Wall Street herd as early as 2004, when he started warning about the developing housing and credit bubble which, as he predicted throughout, would wreak havoc on the financial system and many world economies. Well he hit the nail on the head again last year, forecasting the global economy would slow and that treasury bond yields would fall- another homerun. In his influential and widely read daily “Breakfast With Dave” reports, he ranges across the globe covering everything from Europe and how “it is rather incredible that this rolling crisis is now going on 2-1/2 years and policy makers have yet to find a viable solution”; to emerging markets and “why the once mighty BRIC currencies are depreciating of late at their fastest pace since the 1998 Asian crisis”; to the financial markets and “how the “pattern of the past three years is unmistakable as each spring, the equity market corrected as stimulus measures wore off, to only then prompt more incursions by the fall.”

What other patterns are unmistakable to Dave Rosenberg and why did he write in a recent report that “the future is brighter than you think”? I asked him all of the above and more, starting with what he thinks the most important patterns for the economy and markets.

DAVID ROSENBERG: I think the primary trend is still one of deleveraging. It hasn’t really changed much from the last time that the two of us spoke; it’s become much more global in nature. So it started off in the U.S. four or five years ago, in the American mortgage market, the housing market, consumer loans in general, but now we’re seeing how it’s morphed into the survival of the welfare state and all the debt finance to prop up these peripheral countries in Europe, and even now there’s questions about whether China is going to have a hard or soft landing because of a perceived property bubble there.

So we’re still in this deleveraging cycle, still dealing with the impact of too much debt relative to the size of the global economy, and this is what’s creating all this market angst and instability that we’re still living with; notwithstanding the fact that the economy, the U.S. economy is three years in a recovery, we’re still stuck in a very slow growth mode, but recurring financial market instability at the same time.

CONSUELO MACK: So is there any way of knowing whether the second half is going to be worse, better, or the same as the first half? Because, I mean, I’m thinking of my audience out there, and myself included, and saying, “I don’t want to live through another three or four years like this.” So what’s it going to look like, do you think the second half?

DAVID ROSENBERG: Well, I’m going to sound like a classic economist here and say it’s going to be somewhere in between, and this is what I mean. Are we going to get another gut wrenching, you know, 7% decline in GDP, and lose another 8 million jobs? I don’t think we’re going to go through anything close to what we endured in ’08 and ’09.

CONSUELO MACK: And to back-to-back kind of 50% decline in the stock market?

DAVID ROSENBERG: It’s not going to be that bad. But then again, you have to take a look at the contours of the recovery. I actually think the recovery tells you a lot more than the actual gut-wrenching recession did, because normally when you do this with the economy, you do that.

CONSUELO MACK: You get to a V, right?

DAVID ROSENBERG: Well, even in that 1933-’36 period, you got a huge recovery, much bigger than we had this time around, and this time around we had basically a checkmark of left-hand person, that’s what we had. It was not a V-shaped recovery; it was a very meager recovery, especially when you consider everything that the government threw at this thing. Consider the Fed took rates to 0 in December of ’08, they’ve tripled the size of their balance sheet $3 trillion. We’ve had, what, $4 trillion, four years of trillion-dollar deficits, and…

CONSUELO MACK: The fiscal stimulus…

DAVID ROSENBERG: …and more foreclosure moratoria. We’ve tried everything. So we’ve had modest economic growth, but very unacceptable. And now what’s happening is the Fed is left now with all these uncreative tools. Like Ben Bernanke certainly believes that he can do more but, you know, in Economics 101 you learn about the law of diminishing returns, and it’s basically that you end up getting less and less and less incremental impact from the same policies over time. And so that was the same with QE1, QE2, with the LTRO that we had out of Europe. We were getting just a smaller incremental impact on the economy with each individual policy proposal.

CONSUELO MACK: So therefore three years into a quote, unquote “recovery”, so are we on the cusp of another recession?

DAVID ROSENBERG: Cusp or precipice, I don’t know if I’m quite there yet. The economy is extremely fragile. The underlying trend in the economy is barely 2%, it’s barely 2%. So when you have a trade shock that can wipe out 2 percentage points of growth, you’re left with 0. Now, maybe that’s not a recession in the classical sense because we’re not actually going in reverse, but the unemployment rate is going up in a no-growth environment. And then you talk about this so-called fiscal drag, this fiscal cliff that we’re going to see next year- it’s because, you know, we’re probably not in as bad as shape as the Europeans, but here in America, we’ve kicked the can down the road a lot in terms of the Bush tax cuts getting extended, in terms of payroll tax relief, extended unemployment insurance benefits, all these provisions expire December 31st. So just by the government taking back the parking permit from everybody, we have a drag on the economy next year from fiscal restraint, 4 percentage points of GDP, percentage points.

CONSUELO MACK: Which we don’t have. So listening to you, Dave, quite honestly, I do want to kind of bury my head in the sand and I’m thinking to myself, you know, that I want to be in incredibly safe assets, that this is no time to put risk on. And yet, you know, one of the things that you follow, as well, is investor sentiment and the fact that there is a growing despair out there that people are very frightened and worried. And as we know traditionally, that’s in fact, the time when it’s actually best to buy risk.

DAVID ROSENBERG: I mean, there are always opportunities. In a fat-tail world, you’ve got to be very cognizant of the risks. So it’s as much not just focusing on the gross returns, but we have to – and this is what we’re doing every day at my shop at Gluskin Sheff- is we are assessing the risk, identifying it, managing it, and pricing it. And frankly it’s not about, you know, being risk averse. You know, people think that somehow, you know, when you talk about risk all the time you’re risk averse. It’s always important to make sure as an investor that you’re getting paid to take on the risk, that you’re not paying…

CONSUELO MACK: Right, so it’s price is really…

DAVID ROSENBERG: Right. Like, for example, I would say, you know, the high-yield bond market right now is actually, I would argue, priced for a bad economic outcome. You want to buy the assets that you think have already discounted. What’s embedded, what’s the story in this particular asset class, what’s it telling you? So I’m taking a look at the high-yield market right now. I think it’s actually very attractive. We have a core portfolio of high-yield bonds, and the reason I say that is because ultimately when you’re buying corporate bonds, you’re staking a claim in the corporate balance sheet. And the one thing that’s not changed, despite the fact that we’ve got all this angst overseas, the fact that the U.S. economy has hit stall speed, corporate default rates are barely more than 2%, you’ve got corporate balance sheets in great shape whether you look at debt equity ratios, or interest coverage ratios- the fact that treasurers companies both Canada in the U.S. have locked in their maturity schedules, 80% of corporate debt is locked in. In some sense, the corporate sector is in better financial shape than the government sector is. So I like corporate bonds.

CONSUELO MACK: One of the things that you’ve told clients is that reliance and deriving a stable income stream while preserving capital is paramount right now. So in these uncertain times, stability of income stream is one of your major investment focuses.

DAVID ROSENBERG: Right. And it comes down to what my overall theme is called: the macro and market outlook in 3D. So I’m talking about the 3Ds. What are the 3Ds? Well, they’re deflation, there’s demographics, and there is deleveraging and we talked about the deleveraging. There’s also this demographic overlay because the first of the Boomers are 55 going on 56, that’s the median age. The first of the Boomers are in their mid-60s, and so they control the wealth. They’re in a different part of their investment life cycle right now, and so accumulating cash flows as opposed to relying on strictly capital appreciation for the Boomer class, the life cycles as far as investments are concerned, that’s altered. And we’re seeing it in our own business in terms of what our clients are telling us, how they would like their money managed.

So you’ve got the demographics talking about the deleveraging, but the deflation. And so people will say to me, “Well, I thought in a deflation, cash is king in a deflation.” And the answer is well, you know, historically that’s true. That’s the ultimate capital preservation- cash is king in deflationary environment except when interest rates are 0. And so then it’s not cash is king, cash flow is king. So it’s imperative. It’s not just about preservation of capital, which of course in the fat-tail world, which is the deleveraging world, capital preservation is key; but you have to overlay that with preservation of cash flows. That’s why MLPs have been so popular.

CONSUELO MACK: Right, Master Limited Partnerships.

DAVID ROSENBERG: That’s why muni funds. That’s right, and that’s why REITs, and that’s why dividend growth, dividend yield have been so popular now. People come back and say to me, “But these things look so expensive.” Well, they look expensive because that’s what’s in demand, you know? And it doesn’t mean because it’s expensive you don’t want to buy it. You know, the perfume I bought is expensive, yeah, but is it good? Yes. Well, okay, that’s why it’s expensive because it’s a good thing to buy. These are good strategies right now, and that’s why their prices have been up as much as they have.

CONSUELO MACK: So as far as this pattern that we’ve seen for the past three years in the stock market, and where it rallies until the spring and then it basically sells off. That has been very disheartening for investors. Are we locked into that for the foreseeable future?

DAVID ROSENBERG: I think what we have is this battle going on, got this battle. We have the secular forces of deflation coming from all this deleveraging and the deleveraging, of course, takes demand out of the global economy, you’ve got the deflation, and then you’ve got these governments fighting it hard. So the secular forces of deflation in the market place, and then the tug-of-war as governments come in and reflate- whether it’s China, or whether it’s the U.S. government, or whether it’s the ECB. And so what this does is creates tremendous volatility, tremendous volatility.

But once again, the question is for an investor, what do I do with this volatility? How can I sleep at night? And that’s why in conjunction with say income equity over here, and corporate bonds over there, there should be a slice in the portfolio in hedge funds that really hedge long-short strategies that can actually be…

CONSUELO MACK: And they exist? There really are hedge funds that really hedge?

DAVID ROSENBERG: Well, you know, hedge funds have been around for 50 years. They got a bad name in the last cycle because they weren’t hedge funds, they were leverage long-only funds. But there are firms out there that are either hedge funds. You know, Gluskin Sheff is not a hedge fund, but 20% of our business is managing these long-short strategies, and it’s actually a very effective way to be nimble in the market place when you get these dislocations.

It’s really just taking sectors and companies that you think are bad businesses, are going to cut their dividends, and you put a short position on them, and you couple that with long position of the companies that you think are going to grow the dividends over time.

CONSUELO MACK: So let’s talk about earnings, because I know that you’ve said that the E in the price earnings ratio, the earnings, they are problematical. So what is your outlook for corporate earnings? And again, what does that mean for the stock market?

DAVID ROSENBERG: Well, corporate earnings right now have hit an inflection point, and it’s not just that they’re slowing, they’re actually starting to contract. Earnings are actually, after a three-year period of steady increases off those lows in 2009, corporate profits are actually now starting to decline outright.

CONSUELO MACK: And you’re talking about the S&P 500?

DAVID ROSENBERG: S&P 500 and even bigger picture. When we got the GDP numbers a couple of weeks ago- the GDP numbers give you corporate earnings for all of America, not just for the large-cap companies- and corporate earnings are coming down. And my sense is that the earnings estimates by the analysts on Wall Street is still far too high. Earnings estimates are important. I’m noticing that fewer companies are giving guidance. Fewer companies are giving guidance. What’s that telling you? That corporate CEOs, very similarly, they have a very clouded crystal ball right now. Fewer companies are giving guidance, and then the ones that are giving guidance, for every one that’s saying something positive about their business, two to three are saying something negative about what the outlook is. And on top of that, the estimates are starting to come down. I don’t think they’ve come down enough.

What does it mean for the stock market? You know, I think that if we were to go into a recession, normally the market corrects 20%. I’m not going to say that we’re going into a recession, but my sense is that the stock market is going to remain at best in the range that it’s been in for the past several months. We have to respect the range, but we’re going to be still in for a lot of volatility, which is why I was saying before that hedge funds, they really hedged, totally appropriate. On top of that, you have to be nimble and as tactical as you possibly can be, but if you’re going to ask me do I think that there’s more downside pressure given the risks out there, and especially to corporate earnings, the answer is yes. I think at this stage, without getting into, you know, what’s your call on where we can get to, I think the balance of risks is at that the market goes down over the near term and then goes up. And if it does, I think it will be a great buying opportunity down the road.

CONSUELO MACK: Let me ask you just about another macro issue, which is what about Europe? And you’ve said, you wrote recently that, you know, you’re two and a half years in, you know, these rolling problems keep coming up in Europe, and there are no viable solutions.

DAVID ROSENBERG: Well, I mean, there are solutions. I don’t know how viable they are. I think it’s a matter of just looking at it realistically. The European Union was working just fine. You know, the whole notion that we were going to try and avoid another World War, another European war at all costs. I don’t think that we needed to have a currency union to achieve that. You can’t have a monetary union and not have the fiscal union, and an integrated banking union. You can’t have it.

CONSUELO MACK: So realistically, I mean, are the 17 countries going to sacrifice their sovereignty?

DAVID ROSENBERG: Hardly likely. I had breakfast recently with a CEO of a major Canadian bank, and he told me that they have a Eurozone breakup committee. And he said this is happening around the world. Any major multinational corporation, any business that is doing business in Europe has one of these Eurozone breakup committees, not unlike the pre-Y2K committees that you had in the late 1990s. So you can bet your bottom Euro that if that’s what they’re doing, the Eurocrats in Brussels are trying to come up with some sort of… you talk about viable, what’s a viable exit strategy? Unless the ECB steps up en masse and rapidly expands its balance sheet, and starts buying the bonds of Italy and Spain en masse at auction, you know, that’s pretty radical. I don’t know what the quick fix is. So I think that the end game will ultimately be that the Eurozone breaks up.

CONSUELO MACK: One of your investment themes that we’ve talked about basically has been capital preservation and income orientation, as well, and one of the themes that you and I have talked about in the past is what you call “SIRP”, which is Safety and Income at a Reasonable Price. Are you looking for SIRP investments? Is that still a major strategy theme?

DAVID ROSENBERG: I would say that SIRP has its thumbprints across all the portfolios we’re running at Gluskin Sheff. In fact, what’s interesting is that we, for years, since 2001 we’re running this one particular strategy that’s called “premium income”, which it’s a hybrid, it’s got dividends, and it could have REITs, it could have preferred, convertible bonds; it’s really a portfolio aimed at distribution, a portfolio aimed at generating monthly cash flows for our clients.

CONSUELO MACK: And that’s Safety and Income at a Reasonable Price.

DAVID ROSENBERG: Right. Well, when we say… for example, when I talked about corporate bonds, and we’re talking about “safety” in quotes; I mean, safety, it’s relative. When talking about corporate bonds, it’s because of the quality of the balance sheets are very strong. Because that’s inherently when you’re buying corporate bonds, it’s mostly about default risk. You want to minimize that strong balance sheets. When I talk about on the equity side, we’re talking about running portfolios that have a low beta, which means low correlations with the overall market direction.

CONSUELO MACK: Right. The overall stock market direction.

DAVID ROSENBERG: The overall stock market direction, so we’re talking about, so it’s not just about, you know, does this company have a consistent history of paying off dividends, and we like the business. It’s also how does it move relative to the overall market? So in a period like this where it’s very tumultuous, and where the market is more prone to go down than up, you want to run your portfolios with very low betas. And so that’s the safety part, that’s the “S” part of the SIRP.

CONSUELO MACK: And the low correlations of the markets, in a highly correlated market, which is what we’ve been in for the last several years, so what are the areas that aren’t correlated that have low betas?

DAVID ROSENBERG: Well, for example, one of the themes that we liked has been the consumer frugality theme. So it means consignment stores, it means private label, it means do-it-yourselfers. I mean, for example, you could actually say, wow, because a Home Depot, does it fall under that category as an example. I’m not going to go sell my home, I’m not going to move, I’m underwater in my mortgage, but you know what? I still want to have a fun life, so instead of buying a new home, I’ll spruce up my existing home. And so home repair, a do-it-yourselfer, and so you can find…

CONSUELO MACK: So can you match a name or two to, you know, the frugality theme? So, for instance, frugality, what’s a–

DAVID ROSENBERG: Well, I’ll tell you one area where we have been long, and it’s worked out well has been the dollar stores. And they’ve been phenomenal investments, and by the way, it’s not just because low income households shop there, you’d find… and what the studies are showing is that a greater share of middle income households are actually going to dollar stores. And that’s an area where we have focused on in terms of our consumer exposure.

CONSUELO MACK: Let me run down a couple of the other investment themes, noncyclical. So give me, you know, what’s the theory behind the noncyclical emphasis? And give me an idea.

DAVID ROSENBERG: Well, it’s all about generating stable cash flows. In an uncertain environment, what do you want in an uncertain environment? You want stability. What about utilities, regulated utilities? Regulated utilities. They have regulated pricing power. What about telecom? And it might not just be the stock, you might want to buy the bonds of these companies. Once again, if you have a single A telecom company that’s giving you a triple B yield, you know, I will be happy to take that all day long in terms of looking at the risk and reward. So telecom, utilities, consumer staples, these are the areas that will tend to outperform in the environment that I’m describing right now.

CONSUELO MACK: And one other category that you had was hard assets. So what are we talking about when you’re emphasizing hard assets?

DAVID ROSENBERG: Resources are not a bad place to be. They’re already corrected quite a bit, so resources, whether it’s raw food, or whether it’s, I would say energy, which is corrected quite a bit. ]If you’re a long-term investor, these are complements. They’re not going to generate a yield for you, but they are what you want to own, things you can see, touch and feel in a very uncertain world, and these things have cheapened up quite a bit, as a hedge against the income part of the portfolio.

CONSUELO MACK: So one question is One Investment for long-term to diversify portfolio, what is it that you would recommend that we all own some of?

DAVID ROSENBERG: Well, I’m still a big advocate of corporate bonds. As I said, I think balance sheets are in great shape, default rates are low, there is too much default risk priced in, and so I would say I would focus on, let’s try and generate equity-like returns without taking on the equity risk. And there is a part of the capital structure that can accomplish that, and it’s called “corporate credit”. That is still to me a happy medium between 0 percent treasury bills and going out in the riskiest part of the equity structure. So corporate bonds to me are a solid investment.

CONSUELO MACK: And Dave Rosenberg, you know, you have a reputation of being a permabear, which is not fair, because you were also known as a permabull in the ‘80s and the ‘90s, and in a recent report you said” the future is brighter than you think.” Why when others are despairing are you getting enthusiastic about the future?

DAVID ROSENBERG: Well, I’m not going to say I’m getting enthusiastic about the future. What I am willing to do is put out some checkmarks as to what can cause me to turn more optimistic. And so I see a flicker of light, and it’s realization that politics will lead the financial markets, which will lead the economy, and what leads the politics is the grassroots level, and so what happened last month, for example, I think in Wisconsin with the recall in San Jose, San Diego, and there seems to be this growing realization at the grassroots level that we have to get our public sector balance sheets in better shape; that these underfunded liabilities have to come under control. So we’re starting to see more of a groundswell of support.

What I’m thinking about is how things will change politically on November the 6th, understanding, coming from Canada; Canada went through what Europe is going through right now. Canada is going through what the U.S. was going through back in the early 1990s. You could never have predicted that Canada ten years later would be the poster child for fiscal integrity globally. But it took tremendous political courage.

CONSUELO MACK: We’ll see what happens, and that’s what you’re going to be watching, Dave Rosenberg.

DAVID ROSENBERG: I’m more than willing to reclaim my status of a permabull that I had in the ‘80s and ‘90s if I see those clouds part come November.

CONSUELO MACK: All right, Dave Rosenberg, so great to have you here from Canada, Gluskin Sheff. It always a pleasure to have you on WealthTrack.

DAVID ROSENBERG: Thank you.

CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s reiterates one we just talked about- Dave Rosenberg’s long-time income generating strategies which is S.I.R.P.: safety and income at a reasonable price. So this week’s Action Point is: seek safety and income at a reasonable price, or S.I.R.P.!

Everything we know about the financial markets right now points to ongoing volatility and headwinds for stock price appreciation. Among the areas Rosenberg recommends where you can find reliable dividend growth and dividend yields are: Canadian and U.S. preferred stock shares, which are senior to common stocks; energy infrastructure investments, such as natural gas pipelines; and utilities. All S.I.R.P. vehicles.

And that concludes this edition of WealthTrack. I hope you can join us next week. We are going to sit down with an investment professional who combines two disciplines: overall investment strategy and actual fund management. BlackRock consultant Bob Doll will join us to discuss macro trends and micro strategies. Until then, to see this program again, or others and read my Action Points and our guests’ One Investment recommendations, please visit our website, wealthtrack.com Have a great weekend and make the week ahead a productive one.

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David Rosenberg On Austerity, Politics, And The Light At The End Of The Tunnel

Monday, June 11th, 2012

by David Rosenberg, Chief Investment Strategist, Gluskin Sheff

“PARTING OF THE CLOUDS?”

Austerity is not some dirty nine-letter word as the socialists in Europe would have you believe. It is all about living within your means and living up to your commitments.

There is some good news in the United States with respect to this topic.

Wisconsin and the controversial Governor Scott Walker and his electoral victory grabbed the headlines last week. But the really big development took place in California where San Diego, by a two-thirds majority vote, approved a plan that puts new city workers on a private sector-type retirement fund and a six-year wage freeze for current employees. San Jose also saw a 70% majority pass of a reform bill that offers civil servants two choices: contribute more to fund their pensions or be willing to accept a cut in benefits.

As last Thursday’s Investor’s Business Daily aptly put it in its lead editorial piece:

San Diego, and San Jose are emblematic of the tidal wave of pension liabilities faced by cities across California — and, indeed, the U.S. It’s unsustainable…if liberal California recognizes the depths of its public-sector union problems, no doubt others will too.

Amen to that.

I’ve been saying for a while that if Canada could pull back from the brink of fiscal insanity in the early 1990s, then certainly America can do it today. Don’t wait for a crisis to shock you into it as we did — it makes the transition to budgetary integrity much tougher. There are more than 80 million millennials out there — kids between the ages of new-born to twenty. This cohort (our future) is even bigger than the boomers. It is imperative that we don’t saddle them with a debt noose around their necks and no job prospects to speak of. As it stands, the average college student has an average debt load of $30,000 and the male unemployment rate for those between 20 and 24 years old is 14%. That, my friends, is the statistic that keeps me up most at night because the longer it stays that high, the more one should be concerned over social stability.

Mitt Romney seems to have taken over in the polls and is the candidate who is taking the high road so far in this campaign. He managed to raise more money in May than the President — an impressive feat (nearly $77 million dollars versus $60 million for President Obama). To be sure, it is difficult to unseat a sitting president but when it has happened, it was because of a deteriorating economic backdrop. This economy was already growing slowly and is about to slow down even more as the European recession and Asian softening hit our exports and production data in coming months.

The uncertainty over the extent of next year’s tax bite is also likely to cause households and businesses to pull spending back and raise cash, at the margin. All this means the economy won’t turn around in time for Mr. Obama — by the time the election rolls around, we could be talking about a 9% unemployment rate, especially with those on emergency jobless benefits getting termed out and as such will be compelled to come into the workforce to engage in a job search (either that or move into your brother-in-law’s basement — if he’ll let you).

In any event, it’s all about resolve, courage, discipline … and the right political moment to strike. Canada has the benefit of granting governments on occasion the benefit of running the country with a majority. The advantage of a parliamentary system — so long as the party in power doesn’t blow it. Canada is blessed with that today — a Conservative majority with a pro-business agenda — as it was in the 1990s with the Liberals under the leadership of Jean Chretien and Paul Martin. Stalwarts who were willing to part from their populist election campaign in 1993 and embark on the road towards fiscal austerity.

It wasn’t easy— cuts to health and education. Privatization. Various revenue- raising initiatives. Keeping the national sales tax that was imposed by the prior Mulroney government (which deserves a lot of credit for blazing the trail). Means-testing Old Age Security and the Guaranteed Income Supplement. Cutbacks to the civil service and wage freezes. Raising the retirement age too in order to curtail bloated actuarial pension liabilities. And a move towards privately delivered medical care. All in formerly Socialist Canada — what Lord Black once labeled a ‘Banana Republic’ (not exactly the right climate to grow the fruit, mind you).

The United States can do the same. But having one party in power at both the executive and legislative levels would be necessary since the divide between the GOP and the Democrats is far too wide to get anything done. A lot can be accomplished, even in a two-year span. The Republicans look set to take the Senate and reclaim the House, so it would stand to reason that those who believe this is a time for courageous action to replace gridlock, would be opting for Mr. Romney.

No candidate is perfect, but let’s just say, from a purely economics standpoint, that Mitt, based on his background as a businessman, understands the time-worn link between profits and jobs. And the U.S., to be sure, has a jobs crisis. Solve that, and you’ll be surprised at how the other ills from social divisiveness to health care funding to government revenues will be resolved.

This will thus require a re-write of the tax code, a highly inefficient tax code that promotes consumption at the expense of savings and investment — investment that is at the root of future productivity growth and in turn the critical driver of our standard-of-living. This means “no” to higher top marginal tax rates — it is imperative to keep the incentive system for success fully intact. You can’t mess with that. Better to build public support for and enact a national sales tax like Canada did over two decades ago. Was it controversial? Yes. Did the retailer lobby picket the parliament buildings and make a whole lot of noise? Absolutely. But in the end, it allowed for lower marginal rates and over time, a declining path for the unemployment rate — which is now far below the level prevailing in the U.S. Tax consumption and this will also fall on foreign producers and help narrow the bloated trade deficit. Encourage the development of natural gas and finally wean us off of oil import dependency and the United States could again emerge as a nation with a trade surplus, deserving of being the world’s reserve currency. Reducing tax breaks and loopholes is necessary — especially those that favour housing. Having a system that encourages a shift in the nation’s resources to basically an unproductive asset is plain wrong — who else has both mortgage interest deductible and tax-free capital gains on the sale of the principal residence? Not just wrong but wasteful.

In a world of finite financial resources, it is important to not have policies that encourage resource mis-allocation. Studies from decades past indicating that homeowners are better citizens than renters have already been proven to be out-dated. So the National Retail Federation would undoubtedly throw a fit over a VAT and the National Association of Homebuilders would rattle the cage over the phasing-out of the tax goodies that promote overconsumption of an unproductive asset — simply put, a house is a large consumer durable good, it’s a place we live and that’s about it — but if replaced by a system that encourages growth in the private sector capital stock, the job creation that will follow should quiet down these lobby groups.

At the same time, there is little doubt that “entitlements” are going to have to be amended — one first step would be to get rid of that word. The only “entitlement” that really is or should be in America is a fair shot at the yellow brick road — not a cheque from Uncle Sam.

Resolve. Courage. Discipline. Shared sacrifice. I can sense it coming down the pike. As was the case with Ronald Reagan, just having a clear and coherent fiscal plan will part the clouds of uncertainty and encourage capital to be put at risk rather than sit as idle unproductive cash on corporate balance sheets.

We’ve seen this before, by the way. The rewrite of the tax code during the Reagan era wasn’t legislated until 1986 and this was the reform that took sky- high top marginal rates on a declining path. But the bottom of the economy and the market was in 1982 as households and businesses responded ahead of the fact to a new level of certainty and confidence as it pertained to the outlook for fiscal policy. There is no shortage of books on behavioral economics that deal with how “expectations” play a crucial role in spending patterns today.

I may be cautious on the outlook for risk assets and cyclical securities over the near- and intermediate term. But change is always at the margin. And it usually starts in the political sphere. Within that realm, it is the local levels that tend to lead reforms at the national level. And that we could see the pension reforms take hold in California of all states — hey, isn’t that our “Greece”? — is a real bellwether. The temptation to stay bearish at the peak level of desperation in 1982 must have been strong, but superimposing the experience of the prior 16 years of cost-push inflation, excessive regulation, extreme labour power, the costs of the Vietnam War (at every level), economic sclerosis and labour immobility to the next 16 years would have been a colossal error, because as it turned out, the 1980s and 90s belonged to America. Fancy that. But you couldn’t have sold that story in 1982, that much is for sure.

The future is brighter than you think. This does not mean we will not have another recession, by the way — we had a doozy within the first two years of the fabled Reagan presidency, but we endured nonetheless and came out stronger on the other side once the inflationary excesses of the day were purged (today, it is a case of curing a deflationary debt deleveraging). The structural tax reforms, a new approach for dealing with the Soviet Union, and the air traffic comptroller lockout (which forever changed management-union relations) ultimately ushered in a prolonged period of prosperity that would have seemed like a dream in the 1970s when families had to line up on different days of the week to fill their cars up with gas. What Reagan managed to do was instill confidence with a coherent, credible and cogent strategy that gave people — who make up the economy — a higher degree of certainty over the future. I cannot stress how important it is for any government to ensure at all times that households and businesses have as much clarity over the policy outlook as possible. That makes it easier to plan ahead. And in turn, it leads to better economic results.

I’m noticing a certain degree of despair these days, just as I am getting enthusiastic about the future. Much depends on what happens on November 6th and between now and then we still have the European mess, China hard landing risks and the U.S. debt ceiling issue to confront. Be that as it may, those with some dry powder on hand will have their clients in a solid position to take advantage of whatever forced “panic” selling takes place.

For the record, I do see a light at the end of the dark tunnel. Don’t be surprised if I end up turning bullish ahead of the pack — though it may not be until the like of my good friend, Jim Paulsen, is hiding under his desk screaming “uncle”! But the Rosenberg shift to perma-bull status — I was there in the 80s and 90s, but obscurity got in the way — could come as early as Thanksgiving.

I’m so excited I just can’t hide it. But for now, I’m keeping the powder dry.

Tags: Austerity, Chief Economist, Chief Investment Strategist, Civil Servants, Controversial Governor, David Rosenberg, Debt Load, Editorial Piece, Electoral Victory, Letter Word, Light At The End Of The Tunnel, Living Within Your Means, Millennials, No Doubt, Public Sector Union, Retirement Fund, Scott Walker, Sector Type, Thirds Majority Vote, Two Choices, Unemployment Rate, Wage Freeze
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Jeff Rubin: The End of Growth

Thursday, May 31st, 2012

 

 
Jeff Rubin, author of The End of Growth (his second best-selling instalment), discusses the effect and ramifications of expensive-to-produce oil, in the context of the developed world’s over-indebtness, with Pierre Daillie. He says our growth expectations, including those of Canada need to be adjusted downward, as low interest rates will not be sufficient to re-ignite growth, and the catch-22 of (high) oil prices will snooker (global economic) growth in the foreseeable future.

Rubin, former Chief Economist, CIBC World Markets, shares his current investment outlook as well.

At the heart of Rubin’s thesis is his well-informed premise that we’ve burned all the ‘cheap’ oil, and unless we learn to use less oil, growing global consumption of the black stuff can only come at growth’s expense.

Bottom line: We are destined to relinquish economic growth in return for the increasing global appetite for energy.

The End of Growth, by Jeff Rubin, is an eye-opener, an interesting and controversial perspective on the future of trending issues affecting global economic progress.

Discussion:
The End of Growth – Do You agree or disagree?

Tags: Appetite, Bottom Line, Canadian Market, Catch 22, Cheap Oil, Chief Economist, Economic Progress, Eye Opener, Foreseeable Future, Global Consumption, Global Economic Growth, Growth Expectations, Indebtness, Instalment, Investment Outlook, Jeff Rubin, Low Interest Rates, Nbsp, Oil Prices, Perspective, Premise, Ramifications, Snooker, Thesis, World Markets
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David Rosenberg (Strategic Investment Conference)

Monday, May 7th, 2012

Submitted by Lance Roberts of Streettalk Advisors

Guest Post: Strategic Investment Conference: David Rosenberg

STRATEGIC INVESTMENT CONFERENCE – DAY 1

If you haven’t read the notes from the first two speakers, Niall Ferguson and Dr. Woody Brock, I encourage you to do so. The next speaker at the conference is a friend of mine and one of the most widely regarded economists today. David Rosenberg was previously the Chief Economist at Merrill Lynch and is now the Chief Economist and Investment Strategist at Gluskin-Sheff.   Here are his thoughts.

The 3-D’s Deflation, Deleveraging and Demographics

“People continually label me a “perma-bear” which is very inaccurate. I have been a perma-bull on fixed income for a very long time. The reason that Gluskin-Sheff hired me is that my job is to take the economic data points and put them together in a structure from which investments can be made.”

“A Forecast is nothing more than the midpoint of a distribution curve.”

When you talk about risk often enough you get classified as a “perma-bear”. The corner stone of asset management is not capital “appreciation” but capital “preservation”.

In the second year of this economic recovery (2011) the economy was growing at 1.6%. This is important to understand because in a “normal” recovery the economy should be growing at 5-6% at this same point.

Bob Farrell’s 10 Market Rules: The 10 Commandments To Remember

1. Markets tend to return to the mean over time
2. Excesses in one direction will lead to an opposite excess in the other direction
3. There are no new eras — excesses are never permanent
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
5. The public buys the most at the top and the least at the bottom
6. Fear and greed are stronger than long-term resolve
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree — something else is going to happen
10. Bull markets are more fun than bear markets.

These are the ten commandments of investing. Not understanding this is what leads to individuals losing large amounts of money over time.

Rules #1 and #9 are the most important to conversation today.

The markets tend to return to the mean over time. Understand this. Just this year there have been two very important covers from Barron’s.

February 2012 – Barron’s Dow 15000
April 2012 – Barron’s – Outlook Mostly Sunny.

Barron’s has an absolutely horrible track record of putting on their covers bullish sentiment at just about the peak of the market. (He showed many examples of Barron’s covers going back over the past decade.)

At the point of peak bullishness by investors and money managers is when the “reversion” effect will occur. In other words, whatever Barron’s puts on their cover you are wise to do the opposite.

The “Fiscal Cliff”

Under status quo at the end of 2012 roughly 42 tax benefits will expire at the end of 2012. At that point there will be record drag (roughly 4%) on GDP from reduction of those tax benefits to spending. Since the economy is currently barely growing at 2% do the math – a negative 2% economic growth rate is a very large recession.

Ben Bernanke – the Fed has NO ability to offset the impact of the “fiscal cliff.” By the way – recessions tend to happen in the first year of the Presidential cycle.

The last two times, 1960 and 1969, that there was a fiscal retrenchment of the same magnitude both ended in recessions. If there is any one thing to worry about it will be this particular event more than just about anything else.

What about government spending? US government spending runs at approximately $1.50 for every $1.00 brought in. This level of spending is unheard of outside of WWII and is very unsustainable. Furthermore, the longer that this excessive level of debt based spending occurs the more that it becomes a structural problem. Interest payments are at a record share of total revenue as well as the debt as a share of GDP. The high level of debt to GDP, and the subsequent servicing of that debt via interest payments, reduces economic growth. This leads to the real problem facing the U.S. today…Deflation.

Outside of commodity based inflation there is deflation running in everything else from incomes to real estate. This deflation impacts the base of the consumer and the economy. Take a look at the current output gap which is still at some of the largest levels on record. The current economic growth rate is too weak to offset the current slack in the economy.

This is why QE3 is coming and is just a matter of timing.

The deflation in housing is going to continue. Housing is only about 40% through its reversion process. In fact, along with housing, the entire household debt deleveraging process is still in progress and still has a tremendous way to go. This deleveraging cycle will remain a dead-weight drag on the economy for quite a long time.

It is important to understand that the debt bubble didn’t happen in 3 years and it won’t be cured in three years either.

According to the recent McKinsey study the debt deleveraging cycles, in normal historical recessionary cycles, lasted on average six to seven years, with total debt as a percentage of GDP declining by roughly 25 percent. More importantly, while GDP contracted in the initial years of the deleveraging cycle it rebounded in the later years.

A further pressure on the economy remains excess unemployment. There are roughly 20 million still unemployed versus the long term average of about 13 million. The excess capacity of labor suppresses wages and economic growth. In other words, excess employment leads to deflationary economic pressures.

In regards to employment the only real report to watch is the U-6 report, versus U-3, because it is the most inclusive measure of unemployment. If two full time employees are converted to part time they are not included in the U-3 report but will show up in the U-6 report. The U-6 level of unemployment is still at a higher level than at any other recessionary period.

As I stated, high levels of unemployment, or excess slack in the labor market, leads to deflation in wages. Deflation is wages is very problematic and has a lot do with deflationary prices in the economy.

So, deflationary pressures are why I am still bullish on bonds versus stocks.

Here is an interesting side note. What correlates with bond yields?

88% Fed Policy
75% Core CPI
64% CPI inflation

With the Fed keeping yields at zero through 2014 there is NO rate risk in owning bonds. When bond yields jump up for any reason it is a buying opportunity UNTIL the Fed starts taking the punch bowl away.

Historically, the average yield curve spread between the short and long dated maturities is about 160 basis points. Currently, that spread is about 330 basis points. That spread will revert to the average over time which means that the long bond yield is going to 2%. Buy Bonds and you will get a better return than owning stocks with dramatically less risk.

What type of bonds? I like corporate bonds. Corporate balance sheets are great and have been cleaned up tremendously since the recession. The current corporate default rate is 2% and companies that are BB or BBB rated that have an A rated balance sheet make a lot of sense. There is no debate between stocks and bonds. Bonds are a contractual agreement to pay interest and repay principal over a specified period of time.

Stocks are currently priced for a 10% growth rate which makes bonds a safer investment in the current environment which cannot deliver 10% rates of returns. We are no longer in the era of capital appreciation and growth. The “baby boomers” are driving the demand for income which will keep pressure on finding yield which in turn reduces buying pressure on stocks. This is why even with the current stock market rally since the 2009 lows – equity funds have seen continual outflows. The “Capital Preservation” crowd will continue to grow relative to the “Capital Appreciation” crowd.

Investment Stategy – Safety and Income at a Reasonable Price

1. Focus on Safe Yield – Corporate bonds
2. Equities – Dividend growth and yield, preferred shares
3. Focus on companies with low debt/equity ratios and high liquid asset ratios. The balance sheet is more important than usual.
4. Hard assets that provide an income stream – oil and gas royalties, REITS.
5. Focus on sectors or companies with low fixed costs, high variable cost, high barriers to entry, high level of demand inelasticity.
6. Alternative assets – that are not reliant on rising equity markets and where volatility can be used to advantage.
7. Precious Metals – hedge against reflationary policies aimed at defusing deflationary risks.

Copyright © Streettalk Advisors

Tags: Bob Farrell, Capital Appreciation, Capital Preservation, Chief Economist, Chip Names, David Rosenberg, Deflation, Distribution Curve, Economic Data, Economic Recovery, Eras, Excesses, Fixed Income, Gluskin Sheff, Investment Conference, Investment Strategist, Lance Roberts, Merrill Lynch, Midpoint, Point Bob, Streettalk
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Weakness Overseas on Chinese and European PMIs

Monday, April 23rd, 2012

I had a sense in the latter part of last week that each time we kept bouncing off S&P 1370, that this market was going to do the thing that frustrates the most number of people – that is (if we were headed lower) to gap down through that key level – where no one could position for it intraday.  [Apr 20, 2012: 1370 - Resistance Becomes Support.... for Now]  Tongue in cheek I said I could envision Joe Kernen of CNBC blaming any Monday morning weakness of the winning of “a socialist” in the first round of French elections – because that’s what Joe blames everything on.  ;)

News stories this morning are in part blaming the “uncertainty” of French elections, along with the more likely reasons, continued weakness in PMI figures in China and Europe overnight.

• “The risk was always that the European crisis and associated weak economic activity would encourage more extreme politics. This is slowly happening and is something we need to watch going forward,” said Jim Reid, strategist at Deutsche Bank, in a note.

Germany is of particular concern as the wheelhouse of European manufacturing.

• Business activity across the 17-nation euro zone contracted at a faster-than-expected pace in April, according to the preliminary purchasing managers’ index, or PMI, readings released Monday by data firm Markit.
• Manufacturing PMI fell to 46.0, the lowest in 34 months, from 47.7 in March, defying economists’ expectations for a rise to 48.1. A reading of less than 50 indicates a contraction in activity.
• Services PMI fell to a five-month low at 47.9 from 49.2 in March versus forecasts for a reading of 49.3.
• The composite PMI also fell to a five-month low at 47.4 from 49.1 in March. Economists had forecast a rise to 49.3. “The flash PMI signaled a faster rate of economic contraction in the euro zone during April, extending what appears to be a double-dip recession into a third consecutive quarter,” said Chris Williamson, chief economist at Markit.
• Preliminary German PMI Manufacturing decreased to 46.3 points in April, from 48.4 points in March.

China stabilized (bounced a tad), albeit at contractionary levels:

• China’s manufacturing activity contracted further in April, although the sector improved from levels seen in March, a preliminary reading from HSBC showed Monday. HSBC’s so-called “flash” Purchasing Managers’ Index rose to 49.1 in April, compared with a final reading of 48.3 in March.  The flash PMI is based on responses from 85% to 90% of those surveyed in a given month.

If this break of S&P 1370 holds going into 9:30 AM EST, last week’s lows of 1365 and then lows of the previous week of 1357 are key levels that traders will eye.  A close and hold below 1370 will have intermediate term levels of 1340 (March lows) on the radar.  If you are playing at home the “bear flag” I keep mentioning seems to be fulfilling.  Keep in mind Apple is at the 50 day moving average and perhaps buyers (and gamblers who love to pile in ahead of earnings) will help keep it up, which would help NASDAQ – and thus lend a hand to the market as a whole.  We’ll see.

Tags: Business Activity, Chief Economist, Cnbc, Consecutive Quarter, Deutsche Bank, Double Dip Recession, Economic Activity, Economic Contraction, Euro Zone, Extreme Politics, French Elections, Gap, Joe Kernen, Manufacturing Business, Monday Morning, Pmis, Purchasing Managers Index, Strategist, Tongue In Cheek, Wheelhouse
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BRIC Country PMI, New Business, Employment, Exports, Mfg Import Purchases

Friday, April 20th, 2012

by Richard Shaw, QVM Group

HSBC Emerging Markets PMI Index rises to 53.4 from 52.4 for 2012 Q1

Stephen King, HSBC’s Chief Economist, said:

“The latest HSBC EMI underlines the relative immunity of emerging nations to the economic permafrost of the developed world. Emerging nations still have many years of economic “catch-up” ahead of them, suggesting that their growth rates – driven by continuous urbanisation alongside productivity gains linked to improved access to global capital – should remain significantly higher than in the west. They also have considerably more policy ammunition to deploy, including rate and reserve ratio cuts and, if necessary, fiscal stimulus.

Despite two successive quarters of strength, EMI remains at a relatively low level, thanks largely to further deterioration in Chinese export orders but also domestic demand as a result of attempts to tame inflationary pressures through quantitative tightening. Emerging market inflation has generally eased outside India, despite the return of higher oil prices, and policymakers are returning their focus to promoting growth over limiting inflation.

Emerging nations still have to balance the risks of too little growth against the threat – if not yet the reality – of commodities-driven inflation. But the outlook remains encouraging with China, India, Brazil and Mexico all set to be top ten global economies by 2050.”

click images to enlarge

source: HSBC Emerging Markets Index 2012 Q1

Tags: Business Employment, Chief Economist, Chinese Export, Emerging Market, Emerging Markets, Export Orders, Fiscal Stimulus, Global Capital, Global Economies, Inflationary Pressures, Level Thanks, Markets Index, Oil Prices, Permafrost, Productivity Gains, Qvm, Relative Immunity, Reserve Ratio, Richard Shaw, Urbanisation
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The Outlook for Earnings (Brown)

Tuesday, April 10th, 2012

by Dr. Scott Brown, Ph. D, Chief Economist, Raymond James

April 9 – April 13, 2012

The stock market has risen nicely this year, partly on improving economic data, but are such gains justified by the earnings outlook? The level of the S&P 500 Index does not appear to be out of line with earnings expectations, but there may be some pressure on profits over the longer term. As the election approaches, we may hear more about class warfare.

In the late 1990s, share prices rose more than was justified by the earnings outlook. In hindsight, the market was clearly in a bubble. In the last decade, the market rose roughly in line with earnings. However, the Great Recession sent earnings sharply lower, and the stock market followed. Since the recession has ended, earnings have more than recovered. Bottom-up earnings estimates for more than a year out, compiled from analysts’ forecasts of individual companies, still look a bit giddy, but that’s typical. Top-down estimates, provided by economists and strategists, are more moderate – and consistent with some slowing in corporate earnings relative to the last few years. That’s to be expected. Much of the rebound in earnings has reflected the bounce-back from the recession. Firms have a tendency to cut too many jobs and overly curtail capital expenditures near the end of the downturn and there’s some catch-up as conditions begin to improve.

Click here to enlarge

Part of the strength in corporate profits in the recovery has been due to the restraint in labor costs. Given the large amount of slack in the labor market, wage pressures are relatively subdued. Moreover, since the labor market slack is expected to remain elevated for some time, corporate profits are likely to stay relatively strong. As a percentage of national income, corporate profits are very high and labor compensation is relatively low. The share of national income going to profits and the share going to labor cycles back and forth over time and at some point the pendulum seems likely to swing back in the other direction, but probably not anytime soon.

Click here to enlarge

It’s hard to have an intelligent discussion about the distribution of income. One side sites “corporate greed,” the other sites “class envy.” For the most part, economists have generally shied away from income distribution issues. This is mostly a question of politics. It’s difficult to say what an “appropriate” distribution of income should be and what steps should be taken to achieve it.

However, there’s no doubting that the distribution of income has widened significantly over the last thirty years. Real wages have stagnated. A lot of that is due to the decline of union membership. In the early 1970s, 25% of private-sector jobs were union jobs. Now unions account for less than less than 7% (note that 37% of public-sector jobs are union, but many of these are teachers and the dynamics are a lot different). In the late 1960s and early 1970s, we typically had more than 300 work stoppages per year, involving millions of workers. We had 19 last year, involving 113,000 workers.

It’s unclear what role the distribution of income will take in this year’s election, but investors should pay attention.

Tags: Capital Expenditures, Chief Economist, Class Warfare, Corporate Earnings, Corporate Profits, Downturn, Dr Scott, Earnings Estimates, Economic Data, Hindsight, Individual Companies, Labor Compensation, Last Decade, Raymond James, Recession, Share Prices, Slack, Stock Market, Strategists, Wage Pressures
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Paul Kasriel’s Parting Thoughts – Mary Matlin’s Economics

Friday, March 30th, 2012

Kasriel’s Parting Thoughts – Mary Matlin’s Economics

As many of you know, I will be retiring from The Northern Trust Company on April 30. In the few remaining days of my tenure, I will be sharing with you some of my parting thoughts with regard to economics as time permits and the spirit moves me. By the way, after April 30, my Northern Trust email address will disappear into the ether, but I hope I will not follow it there. If you feel the need to contact me after April 30, and I cannot imagine why you would, I have established a personal email address, which has gone live: econtrarian@gmail.com.

Now, on to Mary Matalin. I saw her on one of the cable news shows on Wednesday defending Republican presidential candidate Mitt Romney’s planned car “elevator” in his new La Jolla home in terms of job creation. Ms. Matalin argued that by installing this elevator, Romney would be creating new jobs for the economy. How might Bastiat, the 19th century French political economist, have reacted to Ms. Matalin’s argument? My suspicion is that he would have made a distinction between what Ms. Matalin “sees” and what is “unseen.” Ms. Matalin sees the additional workers manufacturing and installing the elevator. What she apparently does not see are the workers who otherwise would have been hired for some other unrelated project had Mr. Romney forgone the installation of the elevator and rather invested, or saved, these “elevator” funds. Ms. Matalin, a Republican partisan, appears to have bought into the Keynesian fallacy often trumpeted by Democratic (or is it Democrat?) partisans that an increase in saving implies less total spending in the economy and diminished job creation. If Mr. Romney chooses to forgo the installation of a car elevator in favor of, say, purchasing some additional financial assets, in effect, he is transferring some of his purchasing power to another entity – a business, another household or a governmental body – that has a greater urgency to spend currently than does Mr. Romney. So, although Mr. Romney would be hiring fewer workers to manufacture and install a car elevator, the recipient of Mr. Romney’s investment funds would be hiring additional workers to produce whatever they were purchasing. (This concept of transfer credit comes from the Austrian school of economics, whose pupils greatly admire Bastiat.)The only way Mr. Romney’s decision to forgo the installation of a car elevator would not lead to a creation of jobs is if Mr. Romney chose to increase his saving by holding more bank deposits and/or currency, in which case would result in a decline in the velocity of money.

So, boys and girls, like Bastiat, keep your eyes open. Try to see everything when analyzing economic issues. Ms. Matalin was not incorrect to argue that Mr. Romney’s decision to install a car elevator in his new abode would create new jobs. But what she apparently failed to see is that new jobs would have also been created if Mr. Romney had chosen to forgo the purchase of the car elevator and instead invested those funds. Increased saving in general does not result in decreased aggregate spending. Rather, it merely changes the composition of who is engaging in the new spending.

Copyright © Northern Trust

Tags: Cable News, Chief Economist, Elevator, Fallacy, Financial Assets, Job Creation, La Jolla, Mary Matalin, Mary Matlin, Mitt Romney, New Jobs, Northern Trust Company, Parting Thoughts, Partisan, Partisans, Paul Kasriel, Political Economist, Purchasing Power, Republican Presidential Candidate, Republican Presidential Candidate Mitt Romney
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Rosenberg, Lee Debate Outlook for U.S. Stocks

Monday, March 26th, 2012

Thomas Lee, chief U.S. equity strategist of JPMorgan Chase, and David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, talk about the outlook for U.S. stocks and their investment strategies. 

Source: Bloomberg, March 23, 2012

Tags: Chief Economist, David Rosenberg, Debate, Gluskin Sheff, Investment Strategies, Jpmorgan Chase, Outlook, Stocks, Strategist, Thomas Lee
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Gold and China: Where the Bulls and Bears Square Off

Sunday, March 25th, 2012

Gold and China: Where the Bulls and Bears Square Off

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

To paraphrase the great Steve Martin, today’s investors are very passionate people and passionate people tend to overreact at times. An overreaction is exactly what’s happened in gold and global markets in recent weeks. While market bulls have been sniffing out data points to support their case, market bears have continued to take a glass-half-empty approach.

Gold and China are two areas that have been caught in the bear trap this week, but we believe the gold and China bulls still have room to run.

Short-Term Challenges for Gold
Rising bond yields, a stronger U.S. dollar and an improving U.S. economy have squelched expectations for a third round of quantitative easing (QE3) and consequently, spelled trouble for gold. Since late February, gold has declined more than 7 percent.

As confidence improves, UBS says the yellow metal is losing the dual role of safe haven and risk asset: “Gold is moving off center stage, while growth assets are moving to the fore.” Earlier this month, we saw the largest weekly contraction in long gold positions on the Comex since 2004.

As I wrote in my blog this week, the selloff has pushed the price of bullion below its 200-day moving average for only the 30th time over the past 10 years. Over this time period, gold has declined on average 2.1 percent over the 10 days following the cross-below date. This means we’re likely only one-third into the correction in terms of price and duration.

All is not lost for gold. In his latest Gold Monitor, Dundee Wealth Economics Chief Economist Martin Murenbeeld lists 10 positive factors for gold, one of which is monetary reflation. We are currently experiencing one of the greatest global liquidity booms the world has ever seen. Over the past seven months, there have been 122 stimulative policy initiatives from central banks around the world, according to ISI Group.

You can see from Canaccord’s chart below that injecting liquidity into the global monetary system has been a steroid for stronger gold prices over the past decade. The global monetary base has ballooned three times larger, with gold increasing nearly six-fold.

While we are seeing strong signs of improvement in the global economy, it’s important to remember that the recovery has been built upon a mountain of printed money that cannot be hastily unwound. Dr. Murenbeeld explains, “money doesn’t grow on trees; it will have to be borrowed by some government and/or it will have to be printed by some central bank.”

This is why we believe the bull market for gold remains intact.

Overreaction on China
Indication of a Chinese economic slowdown and negative comments from BHP Billiton regarding its outlook for Chinese demand caused anxiety for investors this week.

The March HSBC Flash Manufacturing Purchasing Managers’ Index (PMI) fell 3 points from the previous month due to weakening domestic and external demand.

However, Macquarie says, “it’s not that bad out there.” The firm’s research shows that relatively strong demand from China during the first two months of the year has had a positive impact on global commodity prices. Macquarie says, “while there is undoubtedly a slowdown taking place in Chinese economic growth as a result of domestic policy tightening and weaker export growth, the impact on commodities demand has been negligible.”

As for the BHP comments, Barclays says that they were misconstrued, stating the “BHP executive was by no means bearish on near-term Chinese demand prospects and comments referring to a softening in Chinese steel demand were largely focused on the scenario post 2025 … the notion that iron ore and steel demand growth is unlikely to grow at a double-digit pace forever is not a surprise to the market.”

Bright spots in China’s economy aren’t hard to find. Barclays reports that the backlog of manufacturing orders saw its largest month-over-month increase since 2005 from January to February of this year. Supported by an all-time high in gasoline demand, Chinese oil demand reached a record high in February. Gasoline demand was resilient despite Beijing hiking prices by 4 percent in February due to higher oil prices. The Chinese government followed that up with an additional 7 percent hike earlier this month. Auto sales increased nearly 24 percent year-over-year (13 percent sequentially) in February, the largest increase since November 2010, according to UBS.

While rising fuel costs are a hot-button issue here in the U.S., CLSA’s Andy Rothman says that the higher fuel prices will only modestly impact Chinese consumers because few come in direct contact with unsubsidized gasoline. CLSA estimates that fuel accounts for only 2 percent of China’s Consumer Price Index (CPI) basket, compared to 5.4 percent in the U.S.

We’re also seeing positive developments in an area where Chinese consumers are vulnerable—housing prices. According to CLSA and China’s National Bureau of Statistics, home prices fell in 27 cities on a year-over-year basis during February, three times the volume in December. In addition, none of the 70 cities tracked reported more than a 5 percent increase in new home prices. A gradual reduction in home prices is exactly what the country needs to prevent a major housing crash, but don’t expect the Chinese government to let the bottom fall out.

Remember, the minimum cash down payment for a Chinese home buyer with a mortgage is 30 percent. Investors are required to put 60 percent down in cash. Currently, about one-third of home buyers are paying all cash, according to CLSA. Andy says the government is poised to relax the country’s strict housing policy measures as soon as this summer if the decline accelerates.

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