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Random Market Musings From David Rosenberg

Tyler Durden's picture


Some big picture observations on the market from David Rosenberg:

In the past seven trading sessions, we have seen the VIX index jump as much as 15% on any given day and slide as much as 10%. We are still in a period of heightened volatility.

The markets have very recently begun to shrug off the turbulence in the Middle East and North Africa. An eerie calm has certainly managed to settle in regarding the civil war in Libya, but investors would be premature to dismiss out of hand the prospect for the turmoil to spread to places like Bahrain, Oman, and Saudi Arabia. Young populations, extremely high youth unemployment rates, and a lack of political and economic freedoms are as much a powder keg here as they were in Tunisia and Egypt. Events overseas are still a pervasive source of global market and economic instability.

While there is an estimated $15 per barrel geopolitical risk premium in the oil price, it still pays to take note that before the crisis erupted in the Middle East and North Africa, Brent crude was trading around $100/bbl. This reflects the reality of burgeoning demand from the fast-growing emerging market world (as well as relative energy inefficiencies in this region) coupled with a relatively inelastic supply curve. The same holds true for the food complex, where prices globally have just hit a new record. In the absence of a slowing in demand, the end-result is going to be ongoing increases in headline inflation rates. And if central banks in the emerging market world, who have allowed their economies to overheat as it is, continue to drag their feet in terms of policy tightening, the need for more draconian measures down the road will be even more intense and could well lead to a bad outcome for growth in this part of the world.

Inflation in the emerging market world is typically problematic, especially since food comprises such a larger part of the consumer spending basket, but if the supply is inelastic over the intermediate term, then tactics that delay an adjustment to curb demand for other goods and services will likely prove to be the greater of two evils. The tough choices these governments face are generally unappreciated by the investment community.

There is a great debate both in the markets and among Fed officials about whether QE3 will be necessary. Atlanta’s Lockhart was the latest to voice his view that such will be unwarranted, and he seems to find support from the likes of Richard Fisher from Dallas and Charles Plosser from Philadelphia. But there are others like Janet Yellen and Bill Dudley who appear to desire even more doses of stimulus. Bernanke is keeping his cards close to his vest. All we can say is that by the time the decision will be made, the headline U.S. inflation rate is very likely going to be at or above 3%, so the Fed is going to have a real job on its hands to convince everyone that “core” is the measure to watch (though even here we can expect to see fuel kick into airlines and cotton seep into apparel).

Not only that, but with European Central Bank’s (ECB) Trichet saying that a euroland rate hike is “possible” next month to combat  rising inflation and mentioning those two sabre-rattling words “strong vigilance” after last week’s policy meeting, it would seem that if the Fed were to ease monetary policy at a time when the ECB is snugging liquidity would seem to be a prescription for a disastrous result for the U.S. dollar.

The euro is indeed receiving relative interest rate support, but discord is beginning to grow among the politicians as Germany’s Merkel does not apparently want to ease rescue-package debt-reduction targets for the problem peripheral countries in need of assistance — the new Irish coalition will be put to the test. And with Portuguese 10-year bond yields piercing 7.5% recently, it is clear that investors continue to place a premium against eventual default; and at these interest rate levels, it seems difficult to believe that countries like this can fund themselves without significant backing. The eurozone debt situation still seems to be as much a powder keg as the Middle East political situation is, but for now, investors seem to have taken on a more benign attitude.

In part, this is because of the pervasive belief that the U.S. economy is doing much better. No doubt employment conditions have improved but employment is a lagging indicator because the decisions that human resource departments make, in terms of staffing, begins months in advance. It’s little different than the existing home sales data — there is a classic three-month lag between the initial decision to sign and then to close the deal. The downtrend in jobless claims is encouraging, but let’s face an important fact: The U.S. economy shed 8.8 million jobs in the recession and in an expansion that is nearly two-years old now, it has only made up 1.3 million or 15% of that loss. That is an absolutely horrible recovery, by any standard, and especially when one considers how many fiscal and monetary policy bullets were used to generate the expansion.

The primary reason why so many investors believe that the economy is improving is because the surveys have been so strong — the ISMs, consumer confidence and regional Fed polls of manufacturing sentiment. The auto, claims, and the chain store sales data were also decent. But there is an array of other data reports like industrial production, single-family starts, real consumer spending, core capex orders and shipments, construction spending and new home sales that were all negative. So no, it is not apparent that we are seeing a uniformly strong U.S. economy at all, but then again, perceptions are often difficult to break.

All in, we see an uncertain economic climate. That augurs for an equity strategy that focuses on low-cyclicality and high earnings visibility. Dividend growth and dividend yield barbell with exposure to hard assets such as raw materials. Longshort “relative value” strategies make perfect sense in the current and prospective period of above-normal volatility. And, of course, a core holding in
precious metals, as a hedge against ongoing U.S. dollar weakness, is an appropriate strategy. We should add here that China’s decision to expand its military budget by 13% this year, including an ambitious submarine program, will only serve to question the long-term outlook for the U.S. dollar as a global reserve currency since historically it has always been the case that this status was bestowed upon the world’s military leader. As it stands, German 2-year note yields already command a 100 basis point premium over comparable Treasuries, certainly enough to keep the greenback on the defensive (even if a classic countertrend rally was to occur).

Exploration and production companies in the energy space and oil/gas services are hugely profitable in our view even if there was a $10-$25 pullback in the price of crude, for whatever reason. And the exemplary behaviour of the Canadian dollar during this latest round of global turmoil also strongly suggests that this is a reliable currency to have exposure to, in contrast to the yen and Swiss Franc which are also considered to be safe-havens, at least you can pick up some yield at the front end of the Canada curve.

Source Gluskin Sheff


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Tue, 03/08/2011 - 10:39 | 1029429 hugovanderbubble
hugovanderbubble's picture

More QE`3 ..QE sub n....


Higher Hard assets prices....


Go ahead¡¡¡ Geithner and Bernanke destroy US and World Trade commerce...

Tue, 03/08/2011 - 10:50 | 1029445 dwdollar
dwdollar's picture

They will change their ideal from 2% to 5%.  Problem solved.

Tue, 03/08/2011 - 10:49 | 1029451 AN0NYM0US
AN0NYM0US's picture

 "All in, we see an uncertain economic climate."


Dave you say uncertain?? what happened to deflation and the end of the world?  

Tue, 03/08/2011 - 10:51 | 1029452 chubbar
chubbar's picture

The whole western world is bankrupt and needing their revenues to service their own issues. I just want someone to ask these guys who is going to step up to buy the trillions in U.S. sovereign debt instruments that will be auctioned over the next couple of years if it isn't the FED?

There isn't anyone else, that's the elephant in the room. Not headline inflation, european rates or any other metric they would use to argue either side of the "do we or don't we" QE 3.

What am I missing here?

Tue, 03/08/2011 - 10:53 | 1029462 TWORIVER
TWORIVER's picture

Copper chart is saying it's all over.

Tue, 03/08/2011 - 11:59 | 1029706 rosiescenario
rosiescenario's picture

Copper prices have been a real puzzle to me....with the bulk of copper consumed in construction activity the only explanation for what we have been seeing inits rise is due to hot money algo trading programs which can unwind even more quickly.

IMHO, Dr. Copper's forecasting ability no longer exists...the Dr. is now just another Wall Street whore.

Tue, 03/08/2011 - 10:58 | 1029470 reader2010
reader2010's picture

Inflate or die, that is Bernanke's mantra.

Tue, 03/08/2011 - 11:01 | 1029481 ChartreuseDog
ChartreuseDog's picture

The primary reason why so many investors believe that the economy is improving is because the surveys have been so strong — the ISMs, consumer confidence and regional Fed polls of manufacturing sentiment. The auto, claims, and the chain store sales data were also decent. But there is an array of other data reports like industrial production, single-family starts, real consumer spending, core capex orders and shipments, construction spending and new home sales that were all negative. So no, it is not apparent that we are seeing a uniformly strong U.S. economy at all, but then again, perceptions are often difficult to break.


So, the reason why the surveys have been strong is that the perceptions are good. The perceptions are good because the surveys are strong (and, the "let there never be heard a discouraging word" attitude from the MSM).

This all works great until it doesn't.


Tue, 03/08/2011 - 11:00 | 1029485 Mr Sceptical
Mr Sceptical's picture

This guy has got it all wrong since jackson hole in august, so ya sure there is lot of uncertainity out there....

Tue, 03/08/2011 - 11:06 | 1029492 markmotive
markmotive's picture

Did he just completely change his tune?

Are the deflationists now picking up on the fact that inflation can exist at the same time as an output gap?

According to shadowstats the real inflation is around 10%:

Tue, 03/08/2011 - 11:11 | 1029514 Scottj88
Scottj88's picture

Inflation is real...

Bankers are lying to us...

Let us try them all for high treason...

Tue, 03/08/2011 - 11:26 | 1029571 HedgeFundLIVE
HedgeFundLIVE's picture

totally agree here, eerie calm- great description.  market is delusional!:

Tue, 03/08/2011 - 11:43 | 1029636 Grand Supercycle
Grand Supercycle's picture

Feb 16 blog post:

When DOW/S&P500 etc. overdue correction commences, I expect:

US Dollar, various USDXXX currencies, VIX Index


Tue, 03/08/2011 - 14:59 | 1030406 Panafrican Funk...
Panafrican Funktron Robot's picture

Reversion to the mean.  It's a bitch, friends, unless you're on the right side of it.

Tue, 03/08/2011 - 12:03 | 1029729 rosiescenario
rosiescenario's picture

I am simple minded....inflation benefits the debtor....and who is the biggest debtor?....and who controls the presses?

Nice and steady 5% inflation which companies can plan for will eventually solve the underwater housing problem, save the banks holding that paper, bail out the underwater homeowner, and ruin all us old geezers enetering retirement....but that is a small sacrifice.

Tue, 03/08/2011 - 12:46 | 1029885 glenlloyd
glenlloyd's picture

with 5% real inflation and zirp it's a disincentive to save, there's no reward for the savings, and if you don't have savings, because in reality your losing money every day and, you don't have real capital for investment.

besides, i would argue that we're already at 5% inflation for the 'needs'. For everything else may be declining in price, but for what we need we're already there.

Tue, 03/08/2011 - 12:59 | 1029927 ElvisDog
ElvisDog's picture

The underwater housing problem is only solved if there is wage inflation that keeps up with the inflation of commodities. The reason what you wrote never works over the intermediate to long term is that wage inflation never keeps up with the increase in prices because there are always inefficiences in any economic system. Inflation will not save the day.

Tue, 03/08/2011 - 12:10 | 1029761 Stuck on Zero
Stuck on Zero's picture

Hasn't the last thirty years of U.S. history taught us anything?  Long and drawn arguments over growing government, growing the money supply or raising the debt ceiling and they all end up with exactly the ame result: growing government, growing the money supply or raising the debt ceilin.

Tue, 03/08/2011 - 12:13 | 1029768 99er
99er's picture


A slow but steady climb.

Tue, 03/08/2011 - 15:03 | 1030418 Panafrican Funk...
Panafrican Funktron Robot's picture

Yeah, it's weird to me that people were surprised by the march down (72-73 wouldn't be particularly shocking), and it's weird to me that people will be surprised by the march up.

Cycles are built into this, folks.  They're getting a lot more wild, of course, but they're still there.

Tue, 03/08/2011 - 12:47 | 1029875 Xkwisetly Paneful
Xkwisetly Paneful's picture

The answer is everyone dumping equities and commodities along with the current debt holders who don't want to get decimated. DEC 2008 US bonds sold for less than transaction costs. Shit hit fan and they paid the US to hold their money.


The better question is with the world bankrupt who is going to buy anything to drive already high prices higher.


Obviously equities and commodities went up with QE no reason they shouldn't come down when it goes away.


IT is very disturbing to anyone who bought this theory to begin with that Rosenberg is now on board,

his greatest skill is being perpetually wrong.

Tue, 03/08/2011 - 12:48 | 1029900 glenlloyd
glenlloyd's picture

yes, a whole range of investments benefited from QE, some will come down, the big question is how much they will come down and which ones.

Tue, 03/08/2011 - 17:15 | 1030800 depression
depression's picture

0.99999999999 correlation locked in on the Fed balance sheet = everything

Endgame starts when 10 year treasury breaks above 4.00%

Tue, 03/08/2011 - 15:06 | 1030429 Panafrican Funk...
Panafrican Funktron Robot's picture

Here's the bottom line:  My mom's (who is 63) stock index holdings went down about 45% during the last crash.  She said to me at the time "If it goes back up over about 12,000, I'm cashing out for good."  She cashed out for good as soon as it hit 12,000.  I promise you this is the top (at least for the next several months).  Look for QE3 to commence around the same time as last year, but stocks are going to get WTFCRUSHT in the meantime.

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