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Merrill Vs (Ex-)Merrill: Rosenberg Takes On David Bianco's Unending Bullish Misperception Misconceptions

Tyler Durden's picture




 

The focus of Rosie's morning note has to do with debunking the latest misconception pushed by Barron's, which in all honesty is merely paraphrasing one of Rosie's own successors at Merrill Lynch - David Bianco, whose most recent fluff piece "Harvesting the Truth" (presented below) was an insult to thinking homo sapiens worldwide. The particular item that Rosie has beef with is the Bianco allegation that the consumer is not really 70% of US GDP. Here is Rosie's rebuttal.

The “Streetwise” column in the current edition of Barron’s (It’s Still Too Early to Worry Too Much) runs with a series of assertions otherwise dubbed “common misperceptions” — one of them being that the U.S. consumer is really not 70%+ of the economy because “only a quarter of it is truly discretionary.”

We’ll get back to this in a second, but the fact of the matter is that much of what appears to be non-cyclical is in fact, cyclical (like elective surgery in health care; veal chops in the food category, etc). Second, even if this assertion is correct that ‘only’ 25% of consumer spending is economic-sensitive, it begs the question as to why that is important in anyone’s analysis. Is 25% small? If it is, then what is going to be the driver for the economy going forward; government spending? If 25% is small, then how is it that on average consumer spending manages to generate 300 basis points of growth for the economy coming out of recessions — because they are buying more soap and toothpaste with the other 75%? Maybe that 25% (and that number is not correct but it doesn’t matter in any event) is a huge swing factor in recessions and expansions for overall GDP growth. Once again, this is a classic failure to assess the economic shifts at the margin.

Even if consumer discretionary spending is just 25% of the total expenditure pie (and hence 17.5% of GDP), that would still make it the largest cyclical component of the economy — almost double capital spending and exports, just as an example, and almost eight times larger than housing and commercial construction.

What does resonate with us are the workings of strategists from yesteryear, when deep thinking took center court over data mining, and what we are referring to here is the works of Bob Farrell, the dean of Merrill Lynch research for roughly five decades. Back in August 2001, Bob published a report titled Change May be Secular and opened with this paragraph:

“Change of a long term or secular nature is usually gradual enough that it is obscured by the noise caused by short-term volatility. By the time secular trends are even acknowledged by the majority, they are generally obvious and mature. In the early stages of a new secular paradigm, most are conditioned to hear only the short-term noise they have been conditioned to respond to by the prior existing secular condition. Moreover, in a shift in secular or long-term significance, the markets will be adapting to a new set of rules, while most market participants will still be playing by the old rules.”

NOW HOW BRILLIANT IS THAT?

It seems to us that most strategists and economists are operating under the assumption that we are still in a secular credit expansion that began after WWII and that the recession we just endured was deep but still had a familiar garden-variety feel to it, when in fact, the new secular paradigm is one of credit contraction and thrift. It is extremely difficult to shoehorn the trends of the previous paradigm into the current reality and many mainstream market pundits are resorting to torturing the statistics in order to do exactly that.

To say that discretionary consumer spending is only 25% obscures the point — in much the same way as the legion of economists tried to convince investors not to worry about housing as it fell off the cliff in 2006/2007 because it was “only” 5% of GDP. How did that level of ‘analyses’ benefit anyone?

All that is being said in reference to the consumer discretionary share of spending being 25% (we won’t quibble with that number today but it is not accurate) is that there are segments of consumer spending that have high income elasticities and other segments that have low income elasticities. Okay. That’s nice. However, the bottom line is that real organic personal income has continued to deflate to new cycle lows and this process is exerting ongoing downward pressure on discretionary spending (even in some of the more economic-sensitive “staples” categories) and this is why the government is being compelled to step in with tax rebates, cash-for-clunkers and housing credits. In addition to weak personal income growth, there is also a dramatic decline in credit at the household level that is ongoing, and without the life support from Uncle Sam’s extreme generosity, consumer spending would be under even more severe downward pressure.

For those who feel like liquefying their frontal lobe a little on this Monday morning, as both the Vix and stocks spike in glaring indication of the new schizophrenic normal, here is Bianco's so called research piece, whose sole intent is presumably to get yet more idiots to buy BAC shares.

 

 

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Mon, 12/07/2009 - 11:17 | 155205 Cognitive Dissonance
Cognitive Dissonance's picture

Once again, Rosie takes a poor sap to the wood shed for a well deserved beating. Poor Rosie, he doesn't suffer fools well. What I love about Rosie is how he takes facts and figures that on the surface look reasonable and he eviscerates them.

Mon, 12/07/2009 - 11:32 | 155217 Trifecta Man
Trifecta Man's picture

If Bianco can reduce the effect of individuals down to 25% of expenditures, then he must be dreaming that business and government becomes 75% of expenditures, commonly associated with a more totalitarian state. TSHHTF!

Mon, 12/07/2009 - 11:38 | 155224 Cognitive Dissonance
Cognitive Dissonance's picture

I think Bianco was saying that of the total expenditures by the consumer (which is now reported to be 75% of GDP) only 25% of the total is discretionary and thus not that meaningful.

As Rosie points out, even if this were true, that still means consumer discretionary spending is 17.5% of GDP (25% of 75% GDP is 17.5% GDP) a huge number by any calculation.

Mon, 12/07/2009 - 11:45 | 155234 Trifecta Man
Trifecta Man's picture

Yes, I misinterpreted.  Thanks.

Mon, 12/07/2009 - 11:48 | 155239 Anonymous
Anonymous's picture

And that consumer discretionary spending is plummeting harder and faster than anyone cares to believe. Ultimately the discretionary spending is what fueled our "economic growth" over the past few years.

Mon, 12/07/2009 - 14:15 | 155489 JR
JR's picture

Exactly! Trifecta Man.

America already has morphed far into totalitarian economic territory.  US discretionary spending has long been less than the bulk of US government spending on empire building and liberal social programs. Coupled with an ever-increasing share of Americans’ wealth transferred to government and government-partnered monopolies, who regularly increase costs and their profits on non-discretionary essentials such as healthcare, gasoline, utilities, shelter, food, insurance, etc., and you get what we’re got—an economy at standstill.

It’s also crazy to say that non-discretionary spending is non-discretionary.  Because it isn’t.  We have to spend so much on “non-discretionaries,” yes, but after we’ve spent all our discretionary money, we’re going to cut down on the “non-discretionaries,” no?

And when we don’t have any money left to save from discretionary income, then we’re going to drop some of the car insurance. Or default on our mortgage. Or shiver in one cold room with the thermostat at 55. That increases the amount of discretionary.  So a lot of what is called non-discretionary is really discretionary.  We can make decisions because of the costs, which makes the non-discretionary number misleading. 

However, when we finally get to the totalitarian point of a being a serf on the big manor where the state provides for all life’s functions—a rabbit warren in which to live, basic rations, and enough heat for survival—there won’t be any need for money for discretionary spending. In Serfdom,  there’s no place to spend it.

And, in Serfdom, when you’re in the way and no longer productive, i.e., a negative on Obama Health Care Adviser Ezekiel Emanuel’s “Reaper Curve,” the state will provide “assisted mortality.” 

When America was young, starting from the 1700s and the pioneers had moved out to Western Pennsylvania and the Ohio Valley, whatever money they had was 100 percent discretionary. Life was hard, but they had the invigorating air of freedom.  With that beginning, the amount of money Americans have that they can call their own has declined every year.  When you’re sitting down paying those bills at the end of the day, all those things you can’t avoid paying just keep adding up.  If the trend continues, in 10 years, Americans will have even less to call their own.

In some ways, all that’s left of “discretionary” spending--that alleged 17.5 percent of GDP--is all that’s left of freedom. This is what recession is all about.  It’s the taking away of discretionary spending.

Mon, 12/07/2009 - 17:53 | 155839 Winisk
Winisk's picture

Life was hard, but they had the invigorating air of freedom.  With that beginning, the amount of money Americans have that they can call their own has declined every year.

My sentiments exactly.  Debt creation got confused with wealth creation.  Consumption doesn't build wealth, it takes it away. 

Tue, 12/08/2009 - 04:32 | 156296 Apocalypse Now
Apocalypse Now's picture

The COGD, or Cost of Government Days, this year was August 12th.  That is the average date that you have to work to pay for all the taxes before you get to keep a portion of the wages you earned.  You know, so Nancy Pelosi can fly around the world and preach about global warming.

There is a website dedicated to it, look up COGD.

Mon, 12/07/2009 - 14:21 | 155500 Thomas
Thomas's picture

All I know is that when I first read the piece, I had an allergic reaction.

Mon, 12/07/2009 - 11:50 | 155242 Hrundi V. Bakshi
Hrundi V. Bakshi's picture

i love Rosie. no nonsense bitch slapping.

Mon, 12/07/2009 - 11:56 | 155247 deadhead
deadhead's picture

The Bianco team, already "overweight" on the financial sector, upgraded today the following: AXP, DFS, and, my personal favorite, COF.

 

 

Mon, 12/07/2009 - 12:35 | 155299 Cognitive Dissonance
Cognitive Dissonance's picture

Whenever I see the letters "COF" I think of what the doctor tells me to do as he places his hand "down there" checking for a hernia.

Cough please!

Or is it where he puts his finger when he's checking my prostate. I get the two mixed up sometimes. :>)

Moon river!

Mon, 12/07/2009 - 12:55 | 155336 Bam_Man
Bam_Man's picture

That clearly takes them from "overweight" to "morbidly obese".

Mon, 12/07/2009 - 18:57 | 155912 Apocalypse Now
Apocalypse Now's picture

Nice

Mon, 12/07/2009 - 12:01 | 155256 Anonymous
Anonymous's picture

"harvesting the truth", is this like "harvesting people's savings"?.

Mon, 12/07/2009 - 12:08 | 155263 Cursive
Cursive's picture

Come to think of it, it did have a "Soylent Green" ring to it.

Mon, 12/07/2009 - 12:03 | 155259 orca
orca's picture

Thank G-d for the internet, really. 15 years ago we wouldn't have had a chance to see or participate in debunking BS. Today's harvest alone on this site, by Reggie and Rosie, is priceless.

Mon, 12/07/2009 - 12:15 | 155267 JuicyTheAnimal
JuicyTheAnimal's picture

You mean thank God for Al Gore, who invented the internet.  And while we're thanking good ol' God let's thank him for Bernake too, who saved the world and ended the recession earlier this year.  And one more shot out for Lloyd who God has doing his good work for him. 

Mon, 12/07/2009 - 13:13 | 155376 Ned Zeppelin
Ned Zeppelin's picture

Amen to that, brother.  Shout out for the Lloyd!

Mon, 12/07/2009 - 14:58 | 155573 greased up deaf guy
greased up deaf guy's picture

praise the lloyd!  lol

Mon, 12/07/2009 - 12:07 | 155262 Cursive
Cursive's picture

Credit contraction and thrift are the new normal.  It will be obvious 2 years hence.

Mon, 12/07/2009 - 12:20 | 155278 Dr Horace Manure
Dr Horace Manure's picture

Can people trained to be consumers from birth really change their ways?  Is the current contraction enought to teach anyone a lesson?  Or will it be back to "normal" within two years?

I believe the first collapse will not do the trick.  Now the second collapse which is fast approaching, that will finally get everyones attention.

Mon, 12/07/2009 - 12:59 | 155344 Bam_Man
Bam_Man's picture

Can people trained to be consumers from birth really change their ways?

Take away their access to unlimited, perpetual credit and they might have to.

They will still be consumers of air, food and water. All other stuff, not so much.

Mon, 12/07/2009 - 15:00 | 155578 greased up deaf guy
greased up deaf guy's picture

agreed.  people might actually have to start... living within their means.  shudder at the thought!  :-p

Mon, 12/07/2009 - 12:32 | 155294 Lux Fiat
Lux Fiat's picture

Most generations alive today in the US have never seen an economy hit a debt wall.  I think we are in that process, but agree that it will take a few more wake up calls before most realize it.  Let's just hope that the air bags work. 

Add to it that little itty bitty demographic shift, where people in their maximum consuming years likely peaked a year or two back.  We are at the top of the demographic hill looking at a fairly long trip to bottom.  Again, folks alive today have mostly lived in a world of expanding populations in the developed world.  The demographic shift will likely be underappreciated for a while, until it's effects are to pronounced to ignore.

Mon, 12/07/2009 - 12:23 | 155274 heatbarrier
heatbarrier's picture

Consumers are "trading down" across the board, this goes beyond discretionary spending. Furthermore, as Japan showed, it's not GDP contraction that kills in a balance sheet recession is asset deflation, destruction of wealth that has a long-lasting impact. Asset stock is 12-15x GDP.

Mon, 12/07/2009 - 12:20 | 155279 Lux Fiat
Lux Fiat's picture

I have enjoyed many of the articles by Rosenberg that ZH has posted.  While the article needed his excerpts that essentially castrated Bianco's logic, it would have been nice have the entire document as an attachment.  I would rather read the entirety of Rosie's response that that of Bianco's.  Perhaps Gluskin doesn't want what their clients pay for going free to the hoi polloi to often? 

Mon, 12/07/2009 - 20:32 | 156008 richfool70
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You ca n read it here: http://tinyurl.com/yhyhelr

Mon, 12/07/2009 - 12:26 | 155285 UKman
UKman's picture

you can subscribe for free & get it daily from the Gluskin site

Mon, 12/07/2009 - 12:41 | 155309 Lux Fiat
Lux Fiat's picture

I had looked at that before, but thanks for sharing as others may find it useful. 

I am just not fond of signing up for things that require my phone number, address, etc.., and not fond of entering bogus information.  Just another approach-avoidance conflict yet to be resolved.

Mon, 12/07/2009 - 12:37 | 155302 Anonymous
Anonymous's picture

Sadly, Bianco perpetuates the reality that wall street analysts are con artist scumbags, and their employers are criminal entities whose principle function is to abuse everyone everywhere by stealing people's money and rendering our system completely disfunctional.

Mon, 12/07/2009 - 12:48 | 155318 Trifecta Man
Trifecta Man's picture

Insider buy to sell ratio hits 82 to 1.  I don't think business owners agree with the idea of a potential consumer credit expansion.  Maybe because so many business executives are cooking their books with more layoffs and funny accounting.

Mon, 12/07/2009 - 12:56 | 155337 Miles Kendig
Miles Kendig's picture

The Rosenberg - Bianco situation is a reminder in motion that one can either command respect or demand it.  This is a defining concept of leadership and most especially of command.  It grows ever more apparent with each passing "note" that those who insist upon sustaining the unsustainable are throwing a temper tantrum because when they say "Follow me" the only things that will are their computer systems that are programed to.

Mon, 12/07/2009 - 13:15 | 155381 Ned Zeppelin
Ned Zeppelin's picture

+1!

Mon, 12/07/2009 - 13:37 | 155419 Anonymous
Anonymous's picture

Consumer (government?) spending.

The deficit is now averaging $120 billion per month.

That is enough to cover ALL monthly sales by WalMart, Target, Home Depot, Lowes, McDonalds PLUS ALL monthly new car sales PLUS all monthly new home sales.

So really ... consumer spending means ??? It's government spending that counts.

Mon, 12/07/2009 - 14:24 | 155508 Grand Supercycle
Grand Supercycle's picture

I just use TA...

And it's bearish for the markets so we know where the economy is headed.

And as expected, the USD index daily chart gets more bullish.

http://www.zerohedge.com/forum/market-outlook-0

Mon, 12/07/2009 - 14:41 | 155543 Anonymous
Anonymous's picture

how pissed must Jim Bianco be that some people confuse him (he's a good guy even though he now works for Pimco) with Daid BS Bianco

Mon, 12/07/2009 - 15:49 | 155649 OutLookingIn
OutLookingIn's picture

I love Rosie and how he can turn a phrase, "liquefying their frontal lobe".

I just love that! Stupidity and fools usually go hand in hand - Rosie can't stand either.

Mon, 12/07/2009 - 15:53 | 155658 OutLookingIn
OutLookingIn's picture

Sorry Tyler. Looks like that is your phrase! Way to go! Sounds like something Rosie would have said though!

Mon, 12/07/2009 - 16:48 | 155755 alexander-delarge
alexander-delarge's picture

Jeff Saut ( Raymond James ) has his weekly piece out this am....no mention of his erroneous reference to Rosie from last week. But he reprints the Barron's piece by Santoli prefaced with "Speaking to other naysayer's points...."

Mon, 12/07/2009 - 18:53 | 155905 Anonymous
Anonymous's picture

Bianco must be having visions of OBama new world order!!!

Mon, 12/07/2009 - 23:19 | 156141 Astute Investor
Astute Investor's picture

David Bianco is simply emulating Henry Blodgett's outrageous $400 price target for Amazon back in '99.  Lo and behold it happened, Blodgett is declared a genuis and he parlays the call into $40 million of compensation.

Bianco is bullish for the sake of being bullish and everyone will think that he is another genius if the SPX hits 1500.  Unfortunately, people forget that even a stopped clock is right twice a day.

I'm embarrased that Bianco is one of my fellow CFA charterholders.  He must have failed the behavioral finance sections - data mining, anchoring, conformation bias, etc.

Mon, 12/07/2009 - 23:19 | 156143 Anonymous
Anonymous's picture

Love the content on the website but the commentary is oh so morbid and scewed toward the position of this is truly the end of the world. History would indicate that the bears are wrong a majority of the time and this period and its problems which seem so insurmountable shall to be overcome

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