“Turning Bullish”??? NO
David Rosenberg (Chief US Economist)
A tribute to my good friend Rosie who will leave BAS/ML in the comming weeks.
As an April Fool's joke, Rosenberg titled his latest economic report as 'Turning Bullish' yet reiterated his stance that “there is simply no sustainable recovery in the economy, the stock market or the financial backdrop until we get some clarity on the outlook for residential real estate prices.”
Warmer Weather Misleading: Despite last week’s “bullish” data on pending home sales, Rosenberg reminds us that the Case-Schiller index had its largest drop on record (2.8%) in December 2008 and has now seen 30 consecutive monthly declines. Rosenberg has also warned that February data may be skewed to the upside due to warmer than average temperatures that tend to aid the real estate market. There are still far more sellers than buyers and demand is virtually dead for homes. We will not see a stabilization until unsold inventory moves from 11.5 months of supply to 8 months.
How did we get here? It was the deflation in home prices in summer '06 that led the mortgage market crunch, which led the credit collapse in summer '07, that led the onset of the bear market in autumn '07, which subsequently led the recession at the end of that year, that finally triggered the severe (and ongoing) consumer recession. Housing must stabilize before calling a definitive bottom.
Where we go from here? The housing mess, ongoing labor market distress, plunging household income and an increased savings rate will ultimately take the S&P to new lows in this bear market. Might we see the S&P 500 gravitate in the 475 to 650 range for an extended period of time?
What the Market is Missing - Jobs & Manufacturing: This prevalent view that the recession is about to bottom out has somehow bypassed the most important part of the economy which is jobs and income - wages and salaries shrank at a 4% annual rate in Q1 which is a $265.0bb contraction at an annual rate. The Income hole that was created this past quarter is Triple the size of the Fiscal Stimulus. Employment conditions are likely to remain weak enough that organic wage and salary income is probably going to shrink at a $245.0bn annual rate in Q2. Implications for the manufacturing segments of the data suggest that the capacity utilization rate in March will have fallen to a fresh record low of 65%! There is so much slack in the manufacturing economy that over on third of capacity is sitting idle. This is not bullish.
Sill Too Early: The S&P 500 typically hits its trough when the declines in employment are closer to 150K, not the 663K lost in March and formally announced last week. The market typically bottoms when payrolls are still negative, but not anywhere near the magnitude that we are currently seeing. At the end of the day, there is little chance that a two-decade secular credit expansion that turned parabolic from 2002 to 2007 is going to be corrected over a 16-month span. The destruction of 7 million full-time jobs, $20 trillion of wealth and a record $230 billion of organic personal income is going to weigh over economic activity and corporate earnings for years to come. Since November, real personal income has been declining at a 3.2% annual rate. Most importantly, recessions don't end until the first derivative improves. As April approaches, we are going to see minus signs in front of critical data points: Personal Income & Industrial Production. What happens if declines in next months payroll data is around - 750,000?; and the market thought - 663,000 (Friday's print) was bad. As said, the four most important economic variables are personal income (excluding government transfers), retail sales, industrial production, and employment. The first derivate of income, production and employment are all negative. Bottom line, the market is going much lower.
Recommended Recession/ Depression Readings:The Forgotten Man -- Amity Shlaes
America's Great Depression -- Murray Rothbard
Manias, Panics, Crashes -- Kindleberger
The Fourth Turning -- Strauss
The Holy Grail of Macroeconomics -- Koo
