FYI - David Rosenberg on "future fiat inflation" pg 4-5
Hello!!
Subscribe please! to Dave Rosenberg's Free Newletter
I love this guy!
Another great issue today.
Yes deflation is coming next..... but what's after that? ... in 2011-2012 an onwards?
IF .... as Mr Rosenberg feels (and supports six-ways-to-sunday with data) we're in for a 'correction' ... worldwide... in everything, and employment %'s or numbers don't change much and corporate or tax revenues are in the doldrums, what'll 'central planners/ leaders/ bankers' do?
Cannot cut rates. - already at less than 1.0%
Cannot do much more deficit-spending - budget busted federal/ state/province & municipal.
One thing left.
Fiat Money devaluation
Quote from last para on todays pg 5
Rosenberg June 1/10
Remember this passage from the Bernanke speech back in late 2002:
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” (red emphasis mine)
By increasing the price of "new goods and services" devaluation/inflation DECREASES the forward "price" of existing debt instruments (ie bonds and mortgages) by making the (old/former/redefined) # of dollars necessary to repay the bond/mortgage less expensive.
Now (or soon) it will become evident to all that the only way these "economic managers" can service their stimulus/infrastructure/bailout(+ years of nepotism/pork-barrel wasteful-spending) debt obligations is to devalue the currency.
Given that soon to become evident fact ..... what should you do?
BUY TANGIBLE ASSETS and finance those purchases with long term fixed debt.
As prices go up, more and more city-dwellers will be priced-out of the realty market ... rents will recover and increase .... mortgage rates will rise ....quality Rental Units will be needed.
1) Wait for the dip in demand 2010-2012
2) Then Buy & hold residential income property - small enough to self manage - in just-out-of-prime residential areas.
3) When wait ... as rents rise, your costs stay fixed and your building appreciates.
4) Then refinance it and buy another one.
Robert Ede,
Sales Representative,
Re/Max Hallmark Realty Ltd.,Brokerage
T. 416.494.7653
F.416.494.0016
Direct 416.819.7333
Anticipate Inflation - Buy Tangible Assets
Realty WebSite: www.robertede.com
Political/Economy Commentary: http://robertede.blogspot.com/
There is no shame in turning back, when you discover you're on the wrong path. © 2006
Breakfast with Dave - subscribe at http://www.gluskin.com/
David A. Rosenberg
June 1, 2010
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
IN THIS ISSUE
While you were sleeping: there is renewed carnage from Europe’s escalating debt crisis on global risk assets
• Oh Canada! Q1 real GDP surprised to the upside, surging 6.1% at an annual rate versus the market’s view of a 5.9% increase
• Income theme intact: In April, U.S. bond funds took in $27.2bln on top of the $37.2bln inflow the month before — this is the 16th consecutive month of net inflows
• Corporate margins peak … what does it mean?
• Gold heading to $10,000 an ounce?
• How bad can it get? The risk is that this current financial shock morphs into a negative economic shock and we endure another feedback loop into the markets
Market Musings & Data Deciphering
Breakfast with Dave
WHILE YOU WERE SLEEPING
There is renewed carnage from Europe’s escalating debt crisis on global risk assets. Eurozone equities are down between 2-3% and Asia is in the red as well — the Nikkei is off 0.6% to 9,711, the Hang Seng losing 1.4% to 19,496, the Kospi is off 0.6% and Shanghai down 0.9%. Emerging markets sank 2% today as an exclamation mark on this renewed reversal in risk appetite. We cannot find a regional stock market in positive terrain thus far. The safe-haven bid is intact with Treasuries and bunds rallying — though yields in the Club Med area are backing up as the wheat and the chaff get separated. (CDS spreads suggest that the market is now applying 45% odds of a Greek default within the next five years — and why not? The country has already restructured no fewer than five times in the past two centuries!) Needless to say, there has been a sizeable move in the U.S. dollar as the DXY is up almost a full point in the wee hours of the morning and challenging the highs for the year.
Funding pressures are escalating again in the global banking sector as contagion risks intensify. What a wonderful environment for the Bank of Canada to be in as it contemplates its well telegraphed interest rate move — the Bank typically goes 175bps over a 16-month span and while Mr. Carney has no track record in a tightening cycle, let’s just say that the institution he presides over has never done anything less than 125bps. We shall see how market expectations are navigated in the press statement if the Bank does pull the trigger. The Reserve Bank of Australia left rates unchanged today (after having spent the last year “normalizing” them) and the Aussie dollar is coming under a renewed bout of downward pressure, as the resource-based currencies are in general. The Canadian dollar has actually acted quite admirably through this maelstrom — especially in comparison to the global strains of late 2008 and early 2009.
The global data overnight confirmed the view that we are past the peak of the worldwide inventory cycle with the Chinese PMI slipping to 53.9 in May from 55.7 in April (the consensus was 54.5, hence a disappointing print). This overshadowed the good news out of Germany where unemployment there fell twice as much as expected (-45k) last month as well as April’s 1% rebound in retail sales (though not enough to recoup the 1.6% slide in March).
Commodity prices are softer today after a solid start to the week — oil prices have swung back to $72 a barrel. The base metals complex is trading lower in tandem with crude. Interestingly, gold is hanging in (and up in dollar terms now for seven straight sessions — since mid-January, every interim low has been higher than its predecessor and ditto for every intermittent high. The chart looks great and hardly parabolic).
BREAKFAST WITH DAVE page 2
There were a couple of FT articles worth noting. First, the PBOC is much more concerned about a property bubble in China than is commonly perceived over here. We are hearing more market chatter of a hard landing in China than we did in 2008, frankly. Second, the ECB says that the Eurozone faces “hazardous contagion” and sees €195 billion of bank write-downs through the end of 2011.
It’s also fascinating to read the “Ahead of the Tape” column in the WSJ today and to read about the fabulous earnings performance of U.S. companies — a revival built on a weak U.S. dollar, accelerating global growth, fiscal stimulus and a steep yield curve. Meanwhile, the consensus has just now gone ahead and projected peak earnings for 2011 just as each of these main crutches are reversing course.
OH CANADA
Ahead of the highly watched and anticipated BoC rate decision today, first-quarter GDP surprised to the upside yesterday coming in at 6.1% QoQ, better than the 5.9% pencilled in by analysts and the Bank’s own 5.8% estimate. The Q1 result follows the 4.9% jump in Q4, which was revised down slightly. March GDP was also better than expected, rising 0.6% MoM, which means the momentum heading into Q2 is a respectable 2.0% annualized (and we noticed that most Canadian sell-side economists stand ready to upgrade their Q2 forecasts).
Final domestic demand was very respectable coming in at 4.7%, slightly lighter than the 5.0% Q4 tally. Most details were solid but one surprise was the increase from inventories, which accounted for 2.4ppts or 40% of the gain in total GDP — most economists have been saying that the boost from inventories would come later in the year. What caught our eye was the 23.6% jump in residential investment QoQ, which followed the 26.3% rise in Q4. Housing-related spending was also strong, with the 4.4% jump in total PCE getting a major boost from the 10% QoQ increase in furniture and furnishings category — together with residential construction, we calculate that this accounted for 30% of the increase in GDP. In fact, to add a bit of perspective, housing and related spending plus inventories accounted for 70% of total GDP growth in Q1. (bold in original)
While the momentum heading into Q2 is indeed strong, we believe that we will see a major slowdown in activity in the second half of the year. We have seen signs already that housing activity is slowing especially in the face of higher mortgage rates in Q2 and this will continue into H2. We could see some more business inventory building in this quarter but it’s highly unlikely that we will see inventories provide such a boost as it did in Q1 beyond Q2. Without housing and inventories to pack such a powerful punch, we expect GDP to grow at much more modest pace for the remainder of the year.
INCOME THEME INTACT
U.S. bond funds took in a decent $27.2 billion of fresh inflows in April on top of the $37.2billion the month before — making it 16 straight months of net inflows despite all the cries from Wall Street research houses to shun bonds. Page 2 of 7The People’s Bank of China is much more concerned about a property bubble than is commonly perceivedIn Canada, while the momentum heading in Q2 is strong, we believe that we will see a major slowdown in the second half of the year
BREAKFAST WITH DAVE page 3
For the year-to-date tally, net new inflows into fixed-income funds came to $118.7 billion versus $81.9 billion in the same time last year. Hybrids attracted $4.1 billion in April, building on the March inflow of $4.6 billion — bringing the cumulative new inflow to $14.7 billion from $6.5 billion at this stage of 2009.
To be sure, retail investors did put something into equity funds — $13.9 billion in April after an $11.5 billion net investment made in March. What is interesting is that even in the context of an 80% rally in the equity market, the private investor was still more focused on income than capital appreciation strategies in April — even as the S&P 500 was hitting new post-credit-collapse highs!
Already, many of these private clients have come to regret even tiptoeing back into the stock market because in the aftermath of all the recent turbulence as the European debt crisis spreads globally. TrimTabs’ weekly database shows that there have been net redemptions of over $37 billion in May — the most since October 2008 and the fifth heaviest outflow on record. It’s back to the old strategy of ‘return of capital’ as opposed to ‘return on capital’.
MARGINS PEAK … WHAT DOES IT MEAN?
The two charts below show the profits/GDP ratio (Chart 1) and the ratio of unit selling prices to labour costs for nonfinancial corporations (Chart 2). Both are proxies for margins and what they show is that the V-shaped recovery in margins has caused them to head back very quickly to near-record highs. What you want to do as an investor is to go long the market at the trough, not the peak, in the profit/GDP ratio. Not that we all of a sudden go into a bear market at the peak, but that price gains in the S&P 500 average 6½% in the ensuing year whereas in the year after the margin trough the index surges 18%. In other words, the hard lifting has already been done.
CHART 1: CORPORATE PROFIT MARGIN I
United States: Before Tax Corporate Profits as a share of GDP (percent)
didn't copy see.www.gluskinsheff.com
05009590858075706560555017.515.012.510.07.55.0Shaded region represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff
Even in the context of an 80% rally in the equity market in the U.S., the private investor was still more focused on income than capital appreciation strategies in April
BREAKFAST WITH DAVE Page 4
CHART 2: CORPORATE MARGINS IIUnited States: Nonfinancial Corporate Unit Selling Prices relative to Unit Labour Costs (ratio)
- didn't copy go to www.gluskinsheff.com
0500959085807570656055501.681.641.601.561.521.481.44Shaded region represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff
GOLD SAVES LIVES!
The letter below comes Matthew, a subscriber to our research, pertaining to our biblical bullion comment yesterday. I thought his email was worth a reprint:
“David, Interesting gold citation from the Bible. In 1904, my grandfather was conscripted by the czar to fight for Russia in its war with Japan. He escaped from the Ukraine and made his way to a port where the captain of a freighter to NY refused to accept the small amount of fiat currency he was offered. But he let my grandfather board in exchange for a few gold coins — although the few coins would sell for much less than the asking price for passage in local fiat. That captain knew all one needs to know about commodity currency.Warm regards, Matthew"
GOLD HEADING TO $10,000 AN OUNCE?
Peter Schiff thinks that is a real possibility — see page 45 of the current BusinessWeek. There is no doubt that when benchmarked against the CPI, money supply and GDP, gold can easily double from here. Demand is always difficult to forecast, especially for jewellery, but we do know that central banks have very deep pockets and bought more gold last year (425 tons) than at any other time since 1964.
The supply backdrop is also highly conducive to a sustained bull market. Mined production is no higher now than it was a decade ago and has fallen outright in 5 of the past 8 years. And, we know what the marginal cost curve is doing because there is so little cheap supply left in the ground that gold companies now have to drill as much as 2.3 miles to get to the yellow metal in South Africa (and all Bernanke has to do is press a button).
BREAKFAST WITH DAVE page 5
HOW BAD CAN IT GET?Well, as we pointed out yesterday, the risks is that this financial shock morphs into a negative economic shock and we endure another feedback loop into the markets. The ECRI leading indicator is pointing to much softer growth ahead, and that is with the policy rate at 0%. In the past, the Fed cushioned soft-landings in the real economy by cutting rates (1986, 1995, 1998) but it has no such leeway this time around and the voting public’s appetite for more fiscal largesse is fading fast — one reason why the latest fiscal bill to work its way through Congress was trimmed in half.
But let’s be optimistic — let’s assume that growth remains intact. That is still no ‘get-out-of-jail-free’ card when it comes to where market prices can get to during this period of pullback in investor risk appetite. It may be useful, even if you are an economic bull, to go back to that spasm in the summer of 1998 when the Asian crisis came back to bite risk assets in the derriere (taking LTCM along for the ride). The S&P 500 was down 20% back then, not 11% as has been the carnage to date this time around. Credit (Baa) spreads widened 120bps, double the 60bp move-out thus far. Oil prices slid 30% back then; putting the recent 20% dive into some perspective.
The big difference is that back in 1998, the unemployment rate was 4%, not 10%, and jobless claims were 300k, not 460k. Moreover, the median age of the boomer was 42, not 55, and wasn’t in the hole on his/her net worth by an average of $100,000 from two years earlier and sitting on real estate values that had deflated 30% from the peak. But the financial landscape looks equally worrisome — since mid-April, 19 companies have pulled or postponed debt offerings and the ones that did come to market raised just $53 billion in May (from $183 billion in April) — the most tepid activity since December 1999 when Ed Yardeni had everyone convinced that the lights were going to go out everywhere across the planet the very next month (Y2K scare).
As we said, usually the appetite for risk comes back because the Fed cuts rates. This time around, we may have to see more balance sheet expansion and more money printed. We still love the bond market but gold is a very good hedge here just in case we are wrong on the inflation call or if the markets begin to anticipate the massive reflation efforts that are still to come. Remember this passage from the Bernanke speech back in late 2002:
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
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Subscribe please! to Dave Rosenberg's Free Newletter
I love this guy!
Another great issue today.
Yes deflation is coming next..... but what's after that? ... in 2011-2012 an onwards?
IF .... as Mr Rosenberg feels (and supports six-ways-to-sunday with data) we're in for a 'correction' ... worldwide... in everything, and employment %'s or numbers don't change much and corporate or tax revenues are in the doldrums, what'll 'central planners/ leaders/ bankers' do?
Cannot cut rates. - already at less than 1.0%
Cannot do much more deficit-spending - budget busted federal/ state/province & municipal.
One thing left.
Fiat Money devaluation
Quote from last para on todays pg 5
Rosenberg June 1/10
Remember this passage from the Bernanke speech back in late 2002:
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” (red emphasis mine)
By increasing the price of "new goods and services" devaluation/inflation DECREASES the forward "price" of existing debt instruments (ie bonds and mortgages) by making the (old/former/redefined) # of dollars necessary to repay the bond/mortgage less expensive.
Now (or soon) it will become evident to all that the only way these "economic managers" can service their stimulus/infrastructure/bailout(+ years of nepotism/pork-barrel wasteful-spending) debt obligations is to devalue the currency.
Given that soon to become evident fact ..... what should you do?
BUY TANGIBLE ASSETS and finance those purchases with long term fixed debt.
As prices go up, more and more city-dwellers will be priced-out of the realty market ... rents will recover and increase .... mortgage rates will rise ....quality Rental Units will be needed.
1) Wait for the dip in demand 2010-2012
2) Then Buy & hold residential income property - small enough to self manage - in just-out-of-prime residential areas.
3) When wait ... as rents rise, your costs stay fixed and your building appreciates.
4) Then refinance it and buy another one.
Robert Ede,
Sales Representative,
Re/Max Hallmark Realty Ltd.,Brokerage
T. 416.494.7653
F.416.494.0016
Direct 416.819.7333
Anticipate Inflation - Buy Tangible Assets
Realty WebSite: www.robertede.com
Political/Economy Commentary: http://robertede.blogspot.com/
There is no shame in turning back, when you discover you're on the wrong path. © 2006
Breakfast with Dave - subscribe at http://www.gluskin.com/
David A. Rosenberg
June 1, 2010
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
IN THIS ISSUE
While you were sleeping: there is renewed carnage from Europe’s escalating debt crisis on global risk assets
• Oh Canada! Q1 real GDP surprised to the upside, surging 6.1% at an annual rate versus the market’s view of a 5.9% increase
• Income theme intact: In April, U.S. bond funds took in $27.2bln on top of the $37.2bln inflow the month before — this is the 16th consecutive month of net inflows
• Corporate margins peak … what does it mean?
• Gold heading to $10,000 an ounce?
• How bad can it get? The risk is that this current financial shock morphs into a negative economic shock and we endure another feedback loop into the markets
Market Musings & Data Deciphering
Breakfast with Dave
WHILE YOU WERE SLEEPING
There is renewed carnage from Europe’s escalating debt crisis on global risk assets. Eurozone equities are down between 2-3% and Asia is in the red as well — the Nikkei is off 0.6% to 9,711, the Hang Seng losing 1.4% to 19,496, the Kospi is off 0.6% and Shanghai down 0.9%. Emerging markets sank 2% today as an exclamation mark on this renewed reversal in risk appetite. We cannot find a regional stock market in positive terrain thus far. The safe-haven bid is intact with Treasuries and bunds rallying — though yields in the Club Med area are backing up as the wheat and the chaff get separated. (CDS spreads suggest that the market is now applying 45% odds of a Greek default within the next five years — and why not? The country has already restructured no fewer than five times in the past two centuries!) Needless to say, there has been a sizeable move in the U.S. dollar as the DXY is up almost a full point in the wee hours of the morning and challenging the highs for the year.
Funding pressures are escalating again in the global banking sector as contagion risks intensify. What a wonderful environment for the Bank of Canada to be in as it contemplates its well telegraphed interest rate move — the Bank typically goes 175bps over a 16-month span and while Mr. Carney has no track record in a tightening cycle, let’s just say that the institution he presides over has never done anything less than 125bps. We shall see how market expectations are navigated in the press statement if the Bank does pull the trigger. The Reserve Bank of Australia left rates unchanged today (after having spent the last year “normalizing” them) and the Aussie dollar is coming under a renewed bout of downward pressure, as the resource-based currencies are in general. The Canadian dollar has actually acted quite admirably through this maelstrom — especially in comparison to the global strains of late 2008 and early 2009.
The global data overnight confirmed the view that we are past the peak of the worldwide inventory cycle with the Chinese PMI slipping to 53.9 in May from 55.7 in April (the consensus was 54.5, hence a disappointing print). This overshadowed the good news out of Germany where unemployment there fell twice as much as expected (-45k) last month as well as April’s 1% rebound in retail sales (though not enough to recoup the 1.6% slide in March).
Commodity prices are softer today after a solid start to the week — oil prices have swung back to $72 a barrel. The base metals complex is trading lower in tandem with crude. Interestingly, gold is hanging in (and up in dollar terms now for seven straight sessions — since mid-January, every interim low has been higher than its predecessor and ditto for every intermittent high. The chart looks great and hardly parabolic).
BREAKFAST WITH DAVE page 2
There were a couple of FT articles worth noting. First, the PBOC is much more concerned about a property bubble in China than is commonly perceived over here. We are hearing more market chatter of a hard landing in China than we did in 2008, frankly. Second, the ECB says that the Eurozone faces “hazardous contagion” and sees €195 billion of bank write-downs through the end of 2011.
It’s also fascinating to read the “Ahead of the Tape” column in the WSJ today and to read about the fabulous earnings performance of U.S. companies — a revival built on a weak U.S. dollar, accelerating global growth, fiscal stimulus and a steep yield curve. Meanwhile, the consensus has just now gone ahead and projected peak earnings for 2011 just as each of these main crutches are reversing course.
OH CANADA
Ahead of the highly watched and anticipated BoC rate decision today, first-quarter GDP surprised to the upside yesterday coming in at 6.1% QoQ, better than the 5.9% pencilled in by analysts and the Bank’s own 5.8% estimate. The Q1 result follows the 4.9% jump in Q4, which was revised down slightly. March GDP was also better than expected, rising 0.6% MoM, which means the momentum heading into Q2 is a respectable 2.0% annualized (and we noticed that most Canadian sell-side economists stand ready to upgrade their Q2 forecasts).
Final domestic demand was very respectable coming in at 4.7%, slightly lighter than the 5.0% Q4 tally. Most details were solid but one surprise was the increase from inventories, which accounted for 2.4ppts or 40% of the gain in total GDP — most economists have been saying that the boost from inventories would come later in the year. What caught our eye was the 23.6% jump in residential investment QoQ, which followed the 26.3% rise in Q4. Housing-related spending was also strong, with the 4.4% jump in total PCE getting a major boost from the 10% QoQ increase in furniture and furnishings category — together with residential construction, we calculate that this accounted for 30% of the increase in GDP. In fact, to add a bit of perspective, housing and related spending plus inventories accounted for 70% of total GDP growth in Q1. (bold in original)
While the momentum heading into Q2 is indeed strong, we believe that we will see a major slowdown in activity in the second half of the year. We have seen signs already that housing activity is slowing especially in the face of higher mortgage rates in Q2 and this will continue into H2. We could see some more business inventory building in this quarter but it’s highly unlikely that we will see inventories provide such a boost as it did in Q1 beyond Q2. Without housing and inventories to pack such a powerful punch, we expect GDP to grow at much more modest pace for the remainder of the year.
INCOME THEME INTACT
U.S. bond funds took in a decent $27.2 billion of fresh inflows in April on top of the $37.2billion the month before — making it 16 straight months of net inflows despite all the cries from Wall Street research houses to shun bonds. Page 2 of 7The People’s Bank of China is much more concerned about a property bubble than is commonly perceivedIn Canada, while the momentum heading in Q2 is strong, we believe that we will see a major slowdown in the second half of the year
BREAKFAST WITH DAVE page 3
For the year-to-date tally, net new inflows into fixed-income funds came to $118.7 billion versus $81.9 billion in the same time last year. Hybrids attracted $4.1 billion in April, building on the March inflow of $4.6 billion — bringing the cumulative new inflow to $14.7 billion from $6.5 billion at this stage of 2009.
To be sure, retail investors did put something into equity funds — $13.9 billion in April after an $11.5 billion net investment made in March. What is interesting is that even in the context of an 80% rally in the equity market, the private investor was still more focused on income than capital appreciation strategies in April — even as the S&P 500 was hitting new post-credit-collapse highs!
Already, many of these private clients have come to regret even tiptoeing back into the stock market because in the aftermath of all the recent turbulence as the European debt crisis spreads globally. TrimTabs’ weekly database shows that there have been net redemptions of over $37 billion in May — the most since October 2008 and the fifth heaviest outflow on record. It’s back to the old strategy of ‘return of capital’ as opposed to ‘return on capital’.
MARGINS PEAK … WHAT DOES IT MEAN?
The two charts below show the profits/GDP ratio (Chart 1) and the ratio of unit selling prices to labour costs for nonfinancial corporations (Chart 2). Both are proxies for margins and what they show is that the V-shaped recovery in margins has caused them to head back very quickly to near-record highs. What you want to do as an investor is to go long the market at the trough, not the peak, in the profit/GDP ratio. Not that we all of a sudden go into a bear market at the peak, but that price gains in the S&P 500 average 6½% in the ensuing year whereas in the year after the margin trough the index surges 18%. In other words, the hard lifting has already been done.
CHART 1: CORPORATE PROFIT MARGIN I
United States: Before Tax Corporate Profits as a share of GDP (percent)
didn't copy see.www.gluskinsheff.com
05009590858075706560555017.515.012.510.07.55.0Shaded region represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff
Even in the context of an 80% rally in the equity market in the U.S., the private investor was still more focused on income than capital appreciation strategies in April
BREAKFAST WITH DAVE Page 4
CHART 2: CORPORATE MARGINS IIUnited States: Nonfinancial Corporate Unit Selling Prices relative to Unit Labour Costs (ratio)
- didn't copy go to www.gluskinsheff.com
0500959085807570656055501.681.641.601.561.521.481.44Shaded region represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff
GOLD SAVES LIVES!
The letter below comes Matthew, a subscriber to our research, pertaining to our biblical bullion comment yesterday. I thought his email was worth a reprint:
“David, Interesting gold citation from the Bible. In 1904, my grandfather was conscripted by the czar to fight for Russia in its war with Japan. He escaped from the Ukraine and made his way to a port where the captain of a freighter to NY refused to accept the small amount of fiat currency he was offered. But he let my grandfather board in exchange for a few gold coins — although the few coins would sell for much less than the asking price for passage in local fiat. That captain knew all one needs to know about commodity currency.Warm regards, Matthew"
GOLD HEADING TO $10,000 AN OUNCE?
Peter Schiff thinks that is a real possibility — see page 45 of the current BusinessWeek. There is no doubt that when benchmarked against the CPI, money supply and GDP, gold can easily double from here. Demand is always difficult to forecast, especially for jewellery, but we do know that central banks have very deep pockets and bought more gold last year (425 tons) than at any other time since 1964.
The supply backdrop is also highly conducive to a sustained bull market. Mined production is no higher now than it was a decade ago and has fallen outright in 5 of the past 8 years. And, we know what the marginal cost curve is doing because there is so little cheap supply left in the ground that gold companies now have to drill as much as 2.3 miles to get to the yellow metal in South Africa (and all Bernanke has to do is press a button).
BREAKFAST WITH DAVE page 5
HOW BAD CAN IT GET?Well, as we pointed out yesterday, the risks is that this financial shock morphs into a negative economic shock and we endure another feedback loop into the markets. The ECRI leading indicator is pointing to much softer growth ahead, and that is with the policy rate at 0%. In the past, the Fed cushioned soft-landings in the real economy by cutting rates (1986, 1995, 1998) but it has no such leeway this time around and the voting public’s appetite for more fiscal largesse is fading fast — one reason why the latest fiscal bill to work its way through Congress was trimmed in half.
But let’s be optimistic — let’s assume that growth remains intact. That is still no ‘get-out-of-jail-free’ card when it comes to where market prices can get to during this period of pullback in investor risk appetite. It may be useful, even if you are an economic bull, to go back to that spasm in the summer of 1998 when the Asian crisis came back to bite risk assets in the derriere (taking LTCM along for the ride). The S&P 500 was down 20% back then, not 11% as has been the carnage to date this time around. Credit (Baa) spreads widened 120bps, double the 60bp move-out thus far. Oil prices slid 30% back then; putting the recent 20% dive into some perspective.
The big difference is that back in 1998, the unemployment rate was 4%, not 10%, and jobless claims were 300k, not 460k. Moreover, the median age of the boomer was 42, not 55, and wasn’t in the hole on his/her net worth by an average of $100,000 from two years earlier and sitting on real estate values that had deflated 30% from the peak. But the financial landscape looks equally worrisome — since mid-April, 19 companies have pulled or postponed debt offerings and the ones that did come to market raised just $53 billion in May (from $183 billion in April) — the most tepid activity since December 1999 when Ed Yardeni had everyone convinced that the lights were going to go out everywhere across the planet the very next month (Y2K scare).
As we said, usually the appetite for risk comes back because the Fed cuts rates. This time around, we may have to see more balance sheet expansion and more money printed. We still love the bond market but gold is a very good hedge here just in case we are wrong on the inflation call or if the markets begin to anticipate the massive reflation efforts that are still to come. Remember this passage from the Bernanke speech back in late 2002:
“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”
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