David Rosenberg: "RIP Wealth Effect"

Tyler Durden's picture

by David Rosenberg of Gluskin-Sheff

Wealth Effect R.I.P.?

So the Fed is pinning its hopes on stimulating the economy via the wealth effect again, as it did when it revived the post-tech-wreck asset bubble in housing and credit in that now infamous 2003-07 period of radical excess. But here's the rub. While there is a wealth effect on spending, the correlation going back to 1952 is only 57%. But the correlation between spending and after-tax personal incomes is more like 75%. The impact is leagues apart. And that is the problem here, as we saw real disposable personal income decline 0.3% in August for the largest setback of the year. The QE2 trend of 1.7% is about half the 3.2% trend that was in place at the time of 0E2. Not only that, but the personal savings rate is too low to kick-start spending, even if the Fed is successful in generating significant asset price inflation. The savings rate now is at a mere 3.7%, whereas it was 6% at the time of QE1 back in 2009 and over 5% at the time of QE2 2010 — in other words, there is less pent-up demand right now and a much greater need to rebuild rather than draw down the personal savings rate. This is a key obstacle even in the face of higher net worth.

What is fascinating is that the rise in net worth looks fairly tenuous. Yes, home prices have risen on the back of tighter supplies but the builders have ramped up production by nearly 30% over the past year. And the first-time buyer is dormant, which means that the key source of demand in the food chain is still missing, and investor-based buying will only go so far in terms of sustaining any further home price appreciation.

But it is the action in the equity market that is most telling. This is the first time after any major central bank incursion — QE1, QE2, Operation Twist and LTRO — that 13 (trading) days after the announcement, the stock market is lower. The S&P 500 has dropped 1% since the day of the Fed meeting whereas it was up an average of 4% at this juncture following the other four announcements. I had said earlier that the Fed has likely established a firm floor but it looks clear that the more ominous global economic backdrop has also established a ceiling — I mean, weren't the lagging hedge funds supposed to have been piling in by now? And all of the cyclical sectors are lower which again is highly atypical—all down around 2%. And if there was a group that the Fed was really trying to support it was the Financials and this sector is down 3% along with basic materials. Go figure. The more defensive areas like Health care, Utilities and staples have outperformed, which is very rare after a QE announcement out of the Fed.

At the same time, the yield on the 10-year T-note. which is usually steady around this time following a post-QE announcement, has fallen more than 10 basis points this time around. The TSX has turned in a similar though less dramatic swing this time - Financials and Materials, which had cheapened up far more going into this than their U.S. counterparts, have actually hung in, as has the overall Canadian market (though to be fair, it is usually up 2% by now).

As the accompanied charts illustrate, one obstacle for the equity market of late has been sentiment and positioning. The Market Vane Bullishness index is at the high end of the range and as the latest CFTC (Commodity Futures Trading Commission) data indicate, the net speculative long positions on the S&P 500 and Nasdaq on the CME have already surged to record high levels. In other words, a lot of the buying power that pundits were expecting has already been exhauisted.

The pace of economic activity is weakening, with all deference to ISM. With profits faltering and wage earnings slowing down, we have a situation where Gross Domestic Income softened to a mere 1.7% annual rate in Q2 from 6.1% in Q1 and 4.6% in Q4 of last year. This was the weakest performance since the third quarter of 2009 just as the worst recession in seven decades was ebbing. In real terms, GDI actually stagnated — up a mere 0.16% annual rate, a buzz-cut from the 3.8% pace in Q1 and 4.5% in Q4, again the weakest tally since Q3 last year and the second weakest since Q2 2009. This puts the GDP slowdown in Q2 into perspective. GDP is all about spending. GDI is all about income. And it is income that drives confidence, spending, and ultimately prosperity — not the other way around.

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Slope of Hope's picture

Meanwhile, looks like the algo-bots are on GDX today.

fonzannoon's picture

and the obamabots are on crude.

NewThor's picture

October 3rd, 2008.

The day America died and became a zombie slave to Central Banks.

"To the great one of Ceramon-agora,
The crusaders will all be attached by rank,
The long-lasting Opium and Mandrake,
The "Dragon" will be released on the third of October."
Nostradamus century: 9, quatrain: 62

 The Emergency Economic Stabilization Act of 2008 (Division A of Pub.L. 110-343, 122 Stat. 3765, enacted October 3, 2008), commonly referred to as a bailout of the U.S. financial system.

unhappy anniversary, bitchez!

Ned Zeppelin's picture

Absolutely the truth - the day we figured out for sure who owned Congress.  Downhill ever since.

RiverRoad's picture

In my dreams the whole damn thing crshes a week before the election.

DavidC's picture

Please, PLEASE, can someone tell Bernanke this?!



LMAOLORI's picture



Bernanke wouldn't listen and he doesn't care anyway he's just like obama it's never his fault.

 Bernanke admits low interest rates hurt retirees, but blames recession

Is the Carlyle Group Expecting Major Price Inflation?

max2205's picture

Just wait...that 40 billion a month levered at 40x will blow your socks off.

Take a parachutte through

Quinvarius's picture

Still a bear after all these years, eh?  Good thing you don't do this for a living.

khakuda's picture

It was one thing to print money when people were panicking out of savings accounts and money market accounts in 2008.  Its entirely another to do it when the S&P is approaching record highs and monkeys can borrow money at 3.5% with 3% down to buy homes again.

That won't stop the Bernank, though.  He is hell bent on creating the mother of all bubbles in debt, equities and government deficits.  The economic aftermath of the fall won't be on his watch, so he really doesn't care.

Quinvarius's picture

You can't beat him.  That leaves one option.

SaveTheBales's picture

I'm trying, dammit.  How do you work these printer thingys?

insanelysane's picture

Tyler and ZHers,

This is the link to the bloomberg where they say that energy inflation has no effect on core inflation.  I guess people have more wealth when they spend all of their wealth buying fuel.



gjp's picture

This is another maddening day.  Crude and nat gas get waxed for another 4%, US dollar rises, bonds stay in their coma at absurdly low interest rates, most stocks fall (Russel, Europe, Japan), and yet AMZN, AAPL, WFM, HD, CRM, etc. are all up 1% or more.  So cracks appearing everywhere means we should bid up already ridiculous multiples because of confidence in the growth in these names? Outrageous.

Mark Carney's picture

true, but what you should really notice is how gold and silver are staying strong compared.......

gjp's picture

There is only one wealth effect they are after.  Effecting a transfer of more wealth from the masses to their cronies.

They may not see it like a transfer (honesty with themselves or anyone else is not their strong suit), but they will clearly do anything to avoid having the 0.1% take a loss, including throwing the 99% under the bus, again and again and again.

slaughterer's picture

Somethign HORRIBLE is going to be announced in AH today.  

q99x2's picture

That is what I say to KB as well. Investor-based buying will only go so far. 

azzhatter's picture

Let's see. In the past 4 years I have lost $160,000 on a real estate sale. My income is down by 2/3rd's and I'm receiving .25% on my savings. Yep, that wealth effect is really kicking in.


Fuck You Ben Bernanke

JuliaS's picture

Consider yourself lucky that you were able to get out. Lots of people are permanetly trapped, unable to sell, unable to move and switch jobs. Quarter percent on savings ain't that bad either when most receive nothing or a negative.

Your balance sheet is better than that of an average bank. You'll do fine... and welcome to the club.

RiverRoad's picture

Yeah, whoever can do that is lucky on both counts (home sale and a job) fer sure.

jimmyjames's picture

In other words, a lot of the buying power that pundits were expecting has already been exhauisted.


That is also why the old saying "markets crash on good news- not bad news"

QE was the supposed good news-we'll soon see if the old saying still holds water-

Currency is Debt's picture

There is no wealth at all in the real economy. There is a great depression n the real economy plain and simple. and as atested to by all economic indicators.

Only markets have decoupled in a cloud of monetary sorcery. Problem is the magic trick is not underpinned by fundamentals and reality. At present there is a divergence which is not based on current conditions, it must be based on future assumptions related to the obliteration of the value of usds and currencies. In addition to growing global population and the resource depletion.


honestann's picture

What people need to remember is that QE is not just "money printing", it is also "debt creation".  But the primary problem with the world economy is that debt is vastly too high, leaving people with less money to spend and save because they have to spend quite a bit each month to repay principle and interest on their debts.

Therefore, QE cannot improve the economy.  Period.  End of story.  What QE does is shift wealth from everyone into the hands of the predator-class.  Which is, in fact, the only purpose of QE.

Element's picture

Hi Ann, if you feel so inclined, maybe you could give i-dog (now an alleged 'chemical engineer' ...) a first-principles low-down on fraunhofer lines and their uses?