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On the international front, all the press headlines are about Obama’s trip to
Russia and India’s budget, which is going to push the fiscal deficit to a 15-year
high of 6.8% relative to GDP (and pulled the Bombay stock index down 5.8% in
the aftermath of the news). The country is also doubling its import taxes on gold
and silver, which is very likely going to bite even further into bullion demand
(where imports are already down 55% YoY and the prime reason why gold has
been unable to make a new high).
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July 6, 2009 – BREAKFAST WITH DAVE
It’s fairly light on the U.S. data calendar until we get the PPI and retail sales
reports on July 14. One of the pieces of data that is coming out that could The entire rally in the
garner some attention, however, is today’s non-manufacturing ISM index for U.S. equity markets
June — consensus is hopeful that it will edge up to 46 from 44 in May. Usually, from March to May
this data point comes out in time to help out the predictions for nonfarm payrolls was driven by multiple
but this time, it is the jobs data that should help provide some clues over this expansions
diffusion index. All we know is that the 244k plunge in service-sector payrolls
was the eighth largest slide in the past 70 years, so it will be interesting to see
how this lines up with a consensus-style two point gain in the non-manufacturing
ISM index today. As an aside, we found a nearly 70% historical correlation
between service sector employment growth and the diffusion index.
Even looking at reported earnings, which often tend to get a bigger bounce
coming off the trough as write-downs subside, the consensus is discounting an
earnings backdrop that occurs less than 10% of the time. Page 25 of Barron’s
runs with an article on the earnings backdrop and cites a separate survey from
Capital IQ that shows a lower forward consensus estimate than Thomson at
$68.45, which would represent a more traditional 17% recovery.
As for the data, the 467k slide in U.S. payrolls in June more or less kyboshed the
notion that the green shoots we saw in early spring were anything more than
noise on what is still a fundamental downtrend. The decline was so large that it
surpassed the worst months of the last four recessions, not to mention lining up
in the top ten largest slides going back to 1950.
• Baa spreads have widened 15bps from their recent lows. Junk bond spreads
have continued to widen but probably not for much longer.
• The CRB has corrected 8% from the mid-June highs.
• Bond yields have rallied 50bps from their recent peaks.
• The S&P 500 is coming off three weeks of decline and has corrected more
than 5% from the June 12 peak and the index is actually lower now than it
was on May 4. Everyone seems to believe we are in some sort of new bull
market because of a 40% dead-cat bounce off the most oversold condition
since the 1930s.
• The U.S. dollar has stabilized and despite rumours of its demise, has not
made a low since June 2.
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July 6, 2009 – BREAKFAST WITH DAVE
“….after the turn of the year, there were signs of improvement in those
indicators of economic activity [ed note: (refers to personal income, industrial
production etc]. No doubt partly cause and partly effect of the
contemporaneous minor improvement in the monetary area. Industrial
production rose from January to April. Factory and employment, seasonally
adjusted, which had fallen uninterruptedly since August 1929, continued to fall
but at a much reduced rate … Other indicators of physical activity tell a similar
story. Personal income rose sharply, by 6 per cent from February to April 1931,
but this is a misleading index since the rise was produced largely by government
distributions to veterans. All in all, the figures for the first four or five months of
1931, if examined without reference to what actually followed, have many of the
earmarks of the bottom of a cycle and the beginning of revival.”
The similarities this time around are rather striking, especially the “rate of
change” in economic data that were influenced by government intervention,
which ultimately did not prove to be self-sustaining.
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July 6, 2009 – BREAKFAST WITH DAVE
Then again, the White House forecast has been even worse than the Fed’s. Then again, the U.S.
Back in January, we were told by the Administration that with the passage of the Administration’s
fiscal stimulus bill, the unemployment rate would peak at 8% (a full percentage forecast is even worst
point lower than if the stimulus had not gone through). You have to go back to than the Fed’s
February to find the last time the jobless rate was anywhere near 8%.
As if a 13% fiscal deficit to GDP ratio isn’t big enough, the most interventionist
Administration on record — these deficits are twice as big as FDR’s — seems to
be planning more fiscal stimulus. See the front page of the WSJ — Calls for More
Stimulus Grows (though a strong argument against yet another fiscal
blockbuster can be found in the op-ed section (page 7) of today’s FT — We Do
Not Need a Second Stimulus Plan.
Meanwhile, the government is going ahead this week with a minimum wage hike
(to $7.25/hour from $6.55) that is going to force companies, especially in the
retail sector, to economize even more on their labour input at a time when the
unemployment rate is at a 25-year high of 9.5% (affecting nearly 3 million
workers who earn the minimum wage).
In sum, bank wide credit extended to the private sector was down $9.4 billion in
the June 24th week and by over $90 billion during the last four weeks, which is
epic. How anyone can believe we are going to see any kind of recovery as the
commercial banks focus on reducing their non-liquid assets remains one of life’s
mysteries. In the meantime, what the banks did build up on their balance sheet
during the week was CASH, which rose $57.3 billion to $937 billion or about
four times what could be considered a normal amount.
At the same time, it looks as though the Fed is now in the process of snugging
monetary policy. We don’t hear from the inflation-ists that the central bank has
actually been allowing its bloated balance sheet to lose some weight in recent
weeks and that the growth rate in the once-red-hot monetary aggregates is
shrinking and the monetary base is also shrinking. Over the last 13-weeks, the
monetary base has contracted at a 23% annual rate (!), M2 growth has softened
to a 1.4% annual rate and MZM has slowed to a mere 4.6% annual rate.
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July 6, 2009 – BREAKFAST WITH DAVE
The charts below vividly illustrate the growing shift towards liquidity preference
at all levels of the economy. Banks, non-financial corporations and households,
in a complete show of caution, are building up cash and cash equivalents on
their balance sheet at a frenetic pace. The ultimate question is where all this
cash is going to be deployed, and we believe will ultimately be diverted towards
debt repayment.
0.10
0.08
0.06
0.04
0.02
90 95 00 05
Shaded area represent periods of U.S. recession
Source: Haver Analytics, Gluskin Sheff
0.050
0.045
0.040
0.035
0.030
0.025
0.020
80 85 90 95 00 05
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July 6, 2009 – BREAKFAST WITH DAVE
0.18
0.16
0.14
0.12
0.10
0.08
75 80 85 90 95 00 05
Households are so strapped for cash that they are challenging their property tax
bills in droves — see the front page of the Sunday NYT (Tax Bill Appeals Take
Rising Toll on Governments). This, in turn, is wreaking further havoc on state
and local government finances because for the first time, on record property tax
revenues are declining due to the wave of reassessments. So how are the state
and municipal governments dealing with the situation? By taxing tourists —
hotel taxes, car rental fees and other such charges (great news for the
hospitality sector); see Tourists Pay Price as Taxes Climb on the front page of the
USA Today.
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July 6, 2009 – BREAKFAST WITH DAVE
New York City is now being particularly hard hit — the vacancy rate in Manhattan
just hit a 15-year high of 15.0%, versus 13.5% in 1Q and 7.2% a year ago (for
class A space). Asking rents plunged 11% QoQ and for those clinging to the
inflation view, many sectors are actually deflating; median apartment prices in
the city dropped between 13% and 19% as well last quarter. See the details on
page A6 of the IBD.
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July 6, 2009 – BREAKFAST WITH DAVE
• The Federal government has approved just $1 billion for the program. That is
equivalent to 250,000 autos or basically a week’s worth of current sales
levels.
• The program will run from August to November, so it is very short-term in
nature.
• The government will cut cheques of between $3,500 and $4,000 to dealers
so they can buy old cars that get 18 miles per gallon or less and then sell the
owner a more fuel-efficient replacement. But the problem is that most cars
on the road already get more than 18 mpg, so they won’t qualify. In addition,
while there are a lot of old cars that will qualify, the question is whether, even
with a $4,500 discount, the owners will want to take new car payments at a
time of rising unemployment rates and declining wage rates.
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July 6, 2009 – BREAKFAST WITH DAVE
ABOUT US
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July 6, 2009 – BREAKFAST WITH DAVE
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