Meet The Latest Gold Bull: David Rosenberg?
We have recently stated that it is our belief that at this point any excess liquidity pumped into the system (see the prior report from Goldman on the debt ceiling, in which the investment bank presents some ideas on how the Treasury (never mind the Fed) can increase liquidity in the market by reducing obligations until such time as (if) the Congress votes to raise the debt cap) will likely go to chase not so much returns in credit or equity markets, but directly to appreciate the price of gold. Reading through Rosie's Breakfast with Dave piece from earlier, leads us to believe that the strategist may have jumped on the dollar bull bandwagon.
Without sharing many thoughts on the topic of Au, Rosenberg throws the cryptic statement "Buy Gold" at the end of page two. The preamble is a discussion on the ongoing deterioration of the dollar:
And portfolios have to be protected against the prospect of a much more pronounced depreciation of the U.S. dollar (and correspondingly, a stronger Canadian dollar) — see the editorial on page 6 of the weekend FT (A Strong U.S. Needs a Weakened Dollar). Also see the commentary on page 9 of Monday’s FT (The Case for a Weaker Dollar).
We do not disagree at all with the assessment that any additional deterioration in the DXY, while beneficial to the stock market on the margin (although several days now a weaker dollar has provided no immediate nitrous boost to the S&P) will see a much more pronounced skew toward gold appreciation than other asset class returns. We hope David will provide more perspectives on his short/mid/long-term view on gold: a topic he has so far not chimed in on extensively.
Other notable points from Rosie's daily recap include the ongoing observations on the market-economy dislocation:
There are some very serious headwinds facing the U.S. economy, and one of them is access to credit for people who are at the lower end of the income spectrum (and who also represent the greatest default risk). A great article on this can be found on the front page of the weekend WSJ (The ‘Democratization of Credit’ Is Over – Now It’s Payback Time). Families at the lower end of the income spectrum spend nearly all of their income, so this is a vital part of the economy and it is going to be very difficult for lower-income families to secure credit going forward. The ratio of credit card debt outstanding to income is 50% higher for the bottom 40% of the income strata than is the case for the upper 40%. The highest default rates are the folks at the bottom of the pay scale. In 2007, fully 35% of poor families had a balance owing on their credit card compared with 21% in 1989. This is the byproduct of government policy inducing lenders to make credit cards available to high-risk, low-income individuals — a reckless policy drive that started in the late 1970s (the policy did help drive homeownership rates up and crime rates down).
Now that lenders have started to respond to their record-high delinquency rates by rationing credit, a mad scramble for cash is occurring to replace the loans — food stamp usage is up 22% year-over-year, pawn shop business is up nearly 40%, and there is a tidal wave of applications for Social Security disability benefits that are not explained alone by workplace mishaps.
In any event, so much effort is being expended by the government to keep the credit cycle going that it isn’t even funny, nor is it useful, anymore. Allowing households to still finance almost 100% of a new house purchase has meant that the FHA default rate for loans made in the last year has surged to 20%; and to 24% for loans made since 2007. Private lenders are now requiring a 20% downpayment, and the credit officers at the FHA only need a 3.5% downpayment. The U.S. taxpayer could be facing up to another $50 billion bailout here. Moreover, the White House plans to induce the banks to modify enough loans to keep 2 million delinquent mortgage borrowers in their homes is proving to be a total flop (see Panel Says Obama Plan Won’t Slow Foreclosures on page B1 of the Saturday NYT) — to the point where Congress is now starting to push the ‘mortgage cramdown’ legislation through — torts, contracts, property rights, we hardly knew ya. Have a look at the article on page 38 of the of the Economist (A New Culture War is Brewing Over Capitalism). Also have a look at Return of the Mortgage Cramdown on page 52 of BusinessWeek.
While the subprime market, first-time home buyers and low-income earners have been and will likely remain the primary targets of government relief efforts, the strains in the housing arena are now most intense at the higher end. According to Zillow, 30% of foreclosures are now concentrated in the top one-third of U.S. home values, nearly double the 16% share when the problems in residential real estate were first coming to the fore three years ago. Prime loans now represent 58% of foreclosure starts, up from 44% a year ago.
Meanwhile, the wave of failed banks continues unabated – we are now up to 98 banks that have failed so far this year. The Sunday NYT ran with an article that half of the $1.8 billion [TD: trillion?]in outstanding commercial real estate loans are sitting on the balance sheets of the small and mid-sized banks. The article cited research by Foresight Analytics who concluded that 581 banks are likely to fail by 2011. As the chart below illustrates, large chunks of the credit market are vanishing. Last week, outstanding bank lending contracted $33 billion, which brings the total decline to nearly $400 billion since the end of May (a 17% plunge at an annual rate). It’s hard to imagine that the economy can gain much traction without recurring government support with the banks calling in their loans at this unprecedented rate. The banks continue to deploy their cash assets into Treasuries/Agencies, having been a net buyer of $30 billion last week and over $50 billion for September as a whole.
Yet this it a topic that has been beaten to death. Going back to our original question, we are curious whether this is i) a fade the gold move, ii) all excess liquidity going to gold, or iii) a precursor ot a currency crisis as the dollar is all but set to plummet to all time lows.