From Myth To Reality With David Rosenberg

Tyler Durden's picture

From Gluskin Sheff's David Rosenberg

Myths And Realities

Markets always operate at the margin. And what just happened at the political level was an 11th-hour deal that effectively removed the risk of a severe fiscally-induced recession, supposedly beginning this quarter. Whatever odds there were of this occurring, and judging by levels of market valuation and investor sentiment surveys, there was some, but never a whole lot of "fiscal cliff being entertained as a base-case scenario, it is that "some", no matter how small, that was removed from the range of near-term possible outcomes.

So after the worst post-Christmas market performance since 1937, we had the largest surge to kick off any year in recorded history. The Dow soared 308.41 points, or 2.4%, to 13,412.55 with all 30 components in the black. The S&P 500 index climbed 36.23 points, or 2.5%, to 1,462.42, again with all ten sectors participating. The Nasdaq composite added 92.75 points, or 31%, to 3,112.26. Breadth was solid with ten stocks rising on the Big Board for every decliner. And volume reached 4.2 billion shares across the major exchanges.

The myth is that we are now seeing the clouds part to the extent that cash will be put to work. Not so fast. It is very likely that much of the market advance has been short-covering and some abatement in selling activity.

The myth is that the GOP caved in with the House vote (257-167) showing 85 Republican Congressman voting in favour of this fiscal deal. And only five GOP senators voted "no" in an 89-8 pro-deal split But keep in mind that, as was the case in the Fall of 2010, we had a lame-duck Congress on our hands, ready and willing to go the easy route. Not only that, but we also had a President this time aching to vacation in Hawaii — so the quicker a deal could be cobbled together, the longer Mr. Obama could spend surfing and sunning with his family.

The reality is that the tough choices and the tough bargaining have been left to the next Congress and are about to be sworn in.

For the time being, the markets can revel in the In the fact that the worst of the economic effects of the fiscal cliff was averted, but there are more chapters of this book to be written, and the Republicans in the House believe they were elected to cut spending as much as the White House believed it was elected to tax the rich and at least partly redress the income inequality dilemma.

The myth is that political compromise won the day. No doubt, the avoidance of the "cliff" was engineered by the Republicans abandoning a 20-year pledge to never again raise tax rates. What they now get in return after they gave the President what he wanted in terms of tax rate hikes (even if he raises his limit to $450k from $250k per couple) will be interesting to see, especially since there is only a two-month extension of the automatic spending cuts (starting with $110 billion this year) and the time they are slated to kick in is around the same time the Treasury will no longer be able to circumvent the debt ceiling issue. This time, there is no post-election wrath over the GOP overstepping its bounds by resisting hikes in top marginal rates — hikes that the Administration viewed as a mandate.

During the campaign, the President made spending curbs and deficit reduction key planks of his campaign (to the angst of his left-wing ranks). So this is the next chapter in this saga —a possible repeat of the rancor during the SLIM mer of 2011 when the prospect of the debt ceiling being pierced and the risk of default (as preposterous as that is for a country that is home to the world's reserve currency) dominated the headlines and market sentiment at the time S&P was quick off the mark to say that the 'deal' has done little to alter the rating agency's "negative credit outlook" on its already-lowered AA+ ranking on US sovereign debt.

So as equities now retest the cycle highs, it would be folly to believe that we will not experience recurring setbacks and heightened volatility along the way. This makes for a terrific backdrop for nimble trading but beyond that, long-only strategies would be well advised to hedge with calls on volatility given how cheap this insurance is right now Suffice it to say, trying to assess the situation through a "glass half full" lens, that this latest round of 'compromise' is going to lead to some thoughtful deliberation supported by the political capital that exists at the very beginning of the election cycle — in stark contrast to the heat of the last 12 months that was all about re-election. So the future now will be dealing with what was not dealt with in the latest go-around — which means tax reform, entitlement reform and fiscal belt-tightening that prevents the deficit from becoming increasingly structural in nature.

The myth is that the economy escaped a bullet here. The reality is that even with the proverbial "cliff" having been avoided, the impact of the legislation is going to extract at least a 1 1/2 percentage point bite out of GDP growth. Assuming a 2-2.5% private sector growth rate, this implies fractional growth in real economic activity for the coming year. If 1% is deemed to be the cut-off for stock market performance, 2013 is going to prove to be a very dicey call. Fractional economic growth is not constructive for profits especially with no more mom for margin expansion, and at this point it is hard to drum up a scenario where average P/E multiples can rise with the uncertainty over spending cuts and the debt ceiling issue looming at the end of the first quarter.

Again, the myth is that Washington gave its citizens a deal. The reality is that it was a desperate 11th-hour deal devoid of resolving many crucial long-term fiscal issues. And the deferral of the spending cut makes the debt ceiling issue that much more acute. And note that the 1.5 percentage point fiscal drain becomes closer to two percentage points from GDP for 2013 if/once these slated spending cuts live to see the light of day. So yes, yes, the 'deal' manages to avert the fiscal cliff, but still leaves in place a degree of policy uncertainty high enough to limit the potential for any multiple expansion, at least in my view.

There is another myth that less than 1% (0.7%) of Americans will get hit with a higher tax bill in 2013. How disingenuous. It is true that the biggest single item in the bin is the permanent extension of income tax rates originally put in place in 2001 and 2003 for all income below $400,000. The Alternative Minimum Tax (AMT) is patched permanently to avoid raising taxes on middle-income tax payers. The bill extends for another year unemployment benefits for people unemployed longer than 26 weeks (relief of about $30 billion and there were also other 'breaks that were extended, like the Earned Income Tax Credit, and the Child Tax Credit, as well as for businesses through tax credits for R&D and a one year extension of 50% bonus depreciation — allowing businesses to write off 50% of the value of new investments).

But for those individuals fortunate enough to earn above $400,000, tax rates rise to 39.6% from 35%. Tax rates on capital gains and dividends will remain at 15% for income below $400,000, but will rise to 20% for income over $400,000 plus a new 3.8% Medicare contribution tax (as specified under the Affordable Care Act) as of January 1st this year to total 23.8%. Within this income threshold, estate taxes also rise from 35% to 40% with an exemption of $5 million. Keep in mind that even though the top 1% are affected, increasing top marginal tax rates typically have the highest multiplier or 'ripple' impacts on economic activity — what makes for good politics doesn't necessarily make for good economics.

Not only that, but the Bill did not extend the payroll tax holiday as was the case in late 2010. Payroll taxes will immediately rise from 4.2% to 6.2% and represents an average tax increase of $700 on all U.S. households.

So while income tax tables stay the same for just about everyone, 77% of filers will indeed be paying a higher tax bill this year compared with 2012. As per the Tax Policy Center, households that earn between $500k and $1 million, it will see an average $15k hit to disposable incomes this year. For those above $1 million, the average bite is $170k (a couple right at the million mark will pay $37k extra 90% of the tax take occurs at $1 million and up). By the way, even those workers who make between $50k and $75k a year will face a tax hike of $822 in 2013 — oh, that's about equivalent to an iPad with 3G capabilities, just for some perspective... either that or a year's worth of daily Spam consumption.

So here are the takeaways. This is less a deal, far from the grand bargain most business executives were hoping for, and really just more in the way of patchwork policy. I'm far from impressed with how Washington works. Bring back Jefferson Smith and Frank Capra. Meanwhile, the countdown to the next crisis begins with the government's $16.4 trillion borrowing authority running
out by the end of March, and with the Republicans who control the House feeling far less pressure to acquiesce without meaningful spending, tax expenditure and entitlements reforms.

The final myth relates to the incoming economic data and that we are seeing global strength. The reality is that the macro backdrop is still quite fragile and what passes as 'strength' today would have been considered a shock to most pundits in prior up-economic cycles. The ISM is a case in point. The markets loved the headline print of 50.7 in December, higher than both expectations of 50.5 and the previous month's 49.5 reading. Meanwhile. December's modest bounce off the post-recession low of 49.5 in November was not enough to offset the 2.2 point falloff registered in November. New orders stagnant at 50.3 was tied for the lowest since August. Production dipped to 52.6 from 53.7, the first decline in four months. So the gain was led by employment, which posted a 4.3 point gain to 52.7, which doesn't say a whole lot about productivity seeing as the output component actually slowed in the ISM report. Not only that, but the share of manufacturers reporting positive momentum in December came in at just 39%, a four-year low and the exact same level prevailing in December 2007 (the same month the recession that few saw coming actually began).

Meanwhile, the euro zone PMI came in a tad worse than initial flash estimates — the final December manufacturing PMI was 46.1 versus the preliminary 46.3 print Germany in particular saw declines in both output and new orders while Spain contracted for an amazing 20th consecutive month. Meanwhile, new car registrations sank to a 15-year low in France last month and to the lowest levels ever recorded in Spain (we're talking about some time before 1989! Then again, who needs a car to drive to work when there is no work?).

China saw a 51.5 PMI, up from 50.5 in November. Domestic orders hit a 23-month high of 52.9 from 50.8 — but export orders slipped to 49.2 from 52.1. This dichotomy suggests that the governments latest infrastructure stimulus package is percolating through domestic order books but that foreign-derived demand is sagging on the back of still-weak economic conditions globally.

After all, just because the unexpected 0.3% decline in November US construction spending (together with downward revisions to the data reported for September and October) was ignored by Mr. Market in yesterday's monstrous relief rally, doesn't make it unimportant. Unlike diffusion indices, construction expenditures (the slide centered in non-residential activity) feed directly into real GDP growth, which looks set to do little better than achieve a feeble 1.5% annual rate in Q4, and likely closer to flat this quarter.

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Snakeeyes's picture

Fed said no more QE (allegedly). But the housing market is fluttering, mortgage purchase apps are flatlined, mortgage refis are cooling off. Will Ben that to pump air in housing AND stocks again? If not, watch for stocks to flounder.

P.S. I ate dinner in DC with ZH writer Chris Whalen. We chatted about ZH, the economy and ...

slyhill's picture

FED didn't SAY anything.

knukles's picture

Myth, "Whew, glad that's all fixed"
Reality. absolutely nothing has changed.

asteroids's picture

"The stock market is not the economy" If the last 4 years has taught us anything, Obozo and company will let the economy rot just as long the IWM goes up.

GetZeeGold's picture



"The stock market is not the economy"

You better not let Liesman hear you say that.


FED didn't SAY anything.

You didn't notice the stern look?

CrashisOptimistic's picture

People who pimp blogs on someone else's traffic are among the lowest forms of life on the planet.

economics9698's picture

Aziznomics got started that way.

Atomizer's picture

P.S. I hid under the table in DC, in which ZH writer Chris Whalen dined. I tickled his feet & whispered about ZH, and the economy...then inquired if he could toss me some table scraps down underneath.

Fixed that for you. /humor

ihedgemyhedges's picture

Are you sure it was scraps and not salad tossed underneath that table?????????

ball-and-chain's picture

Ben's man-tits have to work overtime.

His mammeries have no choice.

That QE milk has to keep pumping or we'll fall into a deflationary depression.

We ARE the new Japan.

Notarocketscientist's picture

And.... and what?

He took you back to his room and rogered you 3 x then threw you out in the hall and then composed a song that goes like this

"hickory dickory dock snakeyes was sucking my cock - the clock struck 2 - I blew my goo - I threw the fucking qwiff out in the hall and said fuck off you rat bastard'

Go Tribe's picture

The Fed was simply firing another warning shot over DC's bow. Get the fiscal house in order, because the punch bowl WILL be pulled one day. Markets will be back next week.

Notarocketscientist's picture

MSM spin of the day - courtesy of CNBS

End of Stimulus? Behind Fed's Surprise Statement

Case Study: How to create hope and confidence in a collapsing economy.

Problem - people are seeing that the endless rounds of money printing are not working - they have no jobs - 1/5th of them are now on food stamps - they are no longer believing the headlines

Solution - since everyone knows the only weapon the govt has left is money printing - and money printing is not working - announce that some in the govt/Fed expect money printing to stop - perhaps as early as next year

Interpretation by the Masses - oh this is good - the money printing MUST be working - and if I only wait another year or so then everything will be back to normal - because if they are saying the money printing will stop that means in one year there will be the long awaited recovery

Reference Edward Bernays for more on how to control the masses...

Everyman's picture

Well Here is some "reality frm FINVIZ with the futures:


  Crude Oil 92.34 -0.58 -0.62% Natural Gas 3.2000 0.0000 0.00% Gold 1646.90 -27.80 -1.66% Dow 13318.00 +13314.00 +332,850.00% S&P 500 1453.60 +1454.00 -363,500.00% Nasdaq 100 2724.75 +2725.25 -545,050.00% First Time Here?
Forex & Bonds Last Change Change % EUR/USD 1.3033 -0.0015 -0.11% USD/JPY 87.62 +0.39 +0.45% GBP/USD 1.6077 -0.0029 -0.18% 5-Year Treasury 0.83 +0.004 +0.48% 10-Year Treasury 1.93 +0.008 +0.42% 30-Year Treasury 3.14 +0.004 +0.13%

That is the DOw and S&P up 365,000 percent.  Gotta love the machines!

Remington IV's picture

" seeing the clouds part  " . . . just in time to get struck by a lightning bolt

q99x2's picture

Rosenberg Smoshinberg. He hasn't been paying attention. Maybe he can't afford it but the market always goes higher when the economy is expected to tank and not tank.

Go Tribe's picture

Just once I'd like to see him post his book when he does all this analysis.

ForWhomTheTollBuilds's picture

Is anyone else starting to feel like the US news cycle (fiscal cliff/debt ceiling/sequestration) is starting to feel like the same thing out of the European crisis?

I tried to keep up with the Greek "not-default" for a while and just found that I could not do it and hold a job at the same time. I chose to keep the job. So many deals, counter deals, confirmations, denials, personality changes, legal challenges, new rescue plans (each with its own acronym) etc etc etc

The American fiscal zigs and the zags are just too fast and too many now. I am officially baffled by bullshit.

billwilson's picture

1. The Fed can''t stop QE because then who would buy the bonds the government has to issue - about $1 trillion a year? Would put a nice crimp in the economy if that money had to come from investors ... not to mention a nice climb in rates .... unless China and Japan take over, yeah right.

2. The economy is slowly growing (at a snails pace) and that is the problem given the unprecedented stimulus and money printing. So far it can not outrun the increases in debt .... not a good race to be losing.

3. Inflation is coming ... just ask anyone doing business in china ... which itself is becoming more and bubbleesque. We can keep limping along for a while yet ..... until.

LetThemEatRand's picture

Myth versus Reality is a common theme in American Literature.  Something one learns with a liberal arts education.  But those are supposed to be worthless nowadays.

Cabreado's picture

"From Myth To Reality With David Rosenberg"

Mr. Rosenberg,

Here is a Myth for you to ponder:

An organization can keep on keepin' on with false leadership in control.

Here is Reality for you to chomp on:

False leadership is here.

So then, Commentary on broken markets is small, neglectful, self-serving drivel.

Pass it around.

CheapBastard's picture

I sold 40% of my equities on the Bubble up yesterday before it's too late. I'd rather have a little profit on my stocks (about 6%) then lose big time in the next crash which seems inevitable (at least to me it does).

Tinky's picture

"As per the Tax Policy Center, households that earn between $500k and $1 million, it will see an average $15k hit to disposable incomes this year."

Oh no! A $15,000 "hit" to disposable income? What a devastating prospect for those in that income bracket. 

Is there any way to donate to those unfortunate souls via Paypal?

Go Tribe's picture

No. You do it each April through your 1040.

Lord Of Finance's picture

I could lend them my food stamps.


  P.S.  I ate dinner in DC with QE architect Ben Bernanke. We chatted about QE, the economy and stuff.

NewThor's picture

Did he say where he will celebrate the arrival of Planet X (Comet ISON)?

Does he think MABUS is a cool nickname?

How do he and Geithner feel about Ghostbusters 2 being about them?

Lord Of Finance's picture

Ben says that his chairmanship is alligned with Planet X's orbit. Bens (he said I could call him MABs) departure from the fed in 2013 will be about 3,600 years from the departure of his emperorship of the 1st Babylonian dynasty in 1595 B.C. He will celebrate on the comet! He stated when ISON is visible in the night sky in the southern hemisphere is when he will announce the launch of QE7. Then he will depart and be swept up by the comet. He will return to earth in about 3,600 years to wreak even greater havoc.


Both he and Geithner were unsettled that the ghostbusters almost blew their cover back in 89, but luckily the 3rd installation of that movie was a flop thus blowing, whatever scent people may have had, off their trail. Except for you and the rest of us ZHers of course.

monad's picture

Fetch freedomainradio podcast #285, listen to the last 10 minutes starting at 35:00. Then #299.

Joe moneybags's picture

The Rosenberg article was a rehash of facts and analysis that have been well covered by previous articles, and comments, here at ZH.  A waste of column space.

Element's picture

Europe in protracted recession with slow if any emergence.

Asia set to stagnate, sans continued stimulus.

USA stagnating with no end in sight (except maybe cheaper oil).

Looks like its time to transfer more private-toxic-crap to the taxpayer's backs.

Hey, maybe they can get savers to invest in govt hope-bonds while derbanke debases the shit out of the dollar?

Why not? Japan did it, and look at them now!

OK ... bad example ...

Quinvarius's picture

The Fed cannot stop printing money or all of its member banks will die.  Hyperinflation is all we are getting.

Cloud9.5's picture

May 1, 1930

“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.”

– President Hoover