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