David Rosenberg On The Coming Gunfight At The OK Corral Between Mr Market And Mr Data

Tyler Durden's picture

While the market continues to simply fret over when and where to start buying up risk in advance of inevitable printing by the US and European central banks, those of a slightly more contemplative constitution continue to wonder just what it is that has allowed the US to detach from the rest of the world for as long as it has - because decoupling, contrary to all hopes to the contrary, does not exist. And yet the lag has now endured for many more months than most thought possible. And making things even more complicated, the market which doesn't follow either the US nor European economy has decoupled from everything, breaking any traditional linkages when analyzing data, not to mention cause and effect. How does reconcile this ungodly mess? To help with the answer we turn to David Rosenberg who always seems to have the question on such topics. His answer - declining gas prices (kiss that goodbye with WTI at $103), and collapsing savings. What happens next: "in the absence of these dual effects — lower gas prices AND lower savings rates — we would have seen real PCE contract $125 billion or at a 3% annual rate since mid-2011 (looking at the monthly GDP estimates, there would have also been zero growth in the overall economy). Instead, real PCE managed to eke out a 2.7% annualized gain — but aided and abated by non-recurring items. Yes, employment growth has held up, but from an income standpoint, the advances in low paying retail and accommodation jobs have not compensated the losses in high paying financial sector and government employment." Indeed, one little noted tidbit in the monthly NFP data is that those who "find" jobs offset far better paying jobs in other sectors - as a simple example the carnage on Wall Street this year will be the worst since 2008. So quantity over quality, but when dealing with the government who cares. Finally, will the market continue to decouple from the HEADLINE driven economy, which in turn will decouple from everyone else? Not unless it can dodge many more bullets: "As was the case last year, the first quarter promises to be an interesting one from a macro standpoint. The U.S. economy has indeed been dodging bullets for a good year and a half now. It might not be October 26, 1881, but something tells me we have a gunfight at the O.K. Corral on our hands this quarter between Mr. Market and Mr. Data." Read on.

From Gluskin-Sheff

Less Than Meets The Eye

Some members of our investment team asked me yesterday what numbers out of the U.S. have come out soft of late. Well, here's a short list we came up with:

  • Industrial production
  • Core orders
  • Core shipments
  • Home prices (every measure)
  • Real disposable income
  • Real PCE for November

Keep in mind that Q3 GDP was marked down to sub-2% and I think Q4 will be around 3%. Last year's Q4 also surprised to the high side but was no predictor for the next two-three quarters. To be sure, the economy has done better than I had thought five-six months ago, but much of what "bounce" we got was a belated comeback in auto production, the sharp decline in gas prices (which I wasn't expecting) and the pullback in the savings rate which I can't see being sustained. We are creating more jobs, but in low-paying industries and losing them in high-paying government and financial sector jobs.

Hence no growth in real personal income. I see that as a problem for it means that either exports accelerate or the savings rate declines to underpin the economy going forward. U.S. home prices have sagged more than 20% annual rate in the past four months and represents a substantial wealth loss for homeowners and calls into question the degree to which home inventories have receded in terms of creating a true and durable demand-supply balance.

It is useful to compare and contrast the GDP and GDI (Gross Domestic Income) data. Earlier in 2011, the latter suggested that the surprising weakness in the former was overdone. Now the tables have turned — the "pickup" in spending is not being validated by the income data, which have all but stagnated in Q2 and Q3.

Based on the real personal income data, there is no growth in Q4 thus far and it looks as though profits, at least based on S&P 500 data fell for the first time since the recession ended 21/2 years ago. That would mean a third quarter of flattish or even negative GDI data and believe me, if this is what the more closely-watched GDP was flagging right now, the markets would be under some pressure — assuming denial was held at bay.

Okay, so to recap: We have real personal disposable income growth running at a mere +0.5% annual rate in Q4. And according to S&P 500 EPS data, corporate profits are contracting at a 3.8% annual rate for Q4. This is the first sequential decline since the fourth quarter of 2008. So at best we have a flat quarter for real GDI on our hands — for the third quarter in a row (after 0.2% at an annual rate in Q2 and Q3). Now that doesn't classify as a recession —just the next rung up that is called stagnation. This in turn explains why bonds got a heck of a lot more expensive in the past year and why it is stocks got a whole bunch cheaper. The U.S. economy, more from an income than spending perspective perhaps, is skating on some very thin ice here.

Let's do some arithmetic to help explain what has happened on the spending side.

First, since mid-2011, gasoline prices have plunged 60-cents, which is in effect an $80 billion tax cut for the household sector. The problem is that this windfall is behind us, sadly enough. Eighty billion dollars at an annual rate is akin to a 4% pay raise for the average worker in real terms. That's hardly trivial for the likes of Bob Cratchit, we can assure you.

Second, since June, the personal savings rate has plunged from 5% to 3.5%. This sort of decline over such a short time span has occurred but five times in the past 12 years. This in turn freed up $150 billion at an annual rate in real terms yet again for spending purposes.

So we have a total of $230 billion of support that temporarily bolster the consumer since the mid part of 2011.

Yet real consumer spending since June has only risen by $105 billion at an annual rate in real terms.

That means that in the absence of these dual effects — lower gas prices AND lower savings rates — we would have seen real PCE contract $125 billion or at a 3% annual rate since mid-2011 (looking at the monthly GDP estimates, there would have also been zero growth in the overall economy). Instead, real PCE managed to eke out a 2.7% annualized gain — but aided and abated by non-recurring items. Yes, employment growth has held up, but from an income standpoint, the advances in low paying retail and accommodation jobs have not compensated the losses in high paying financial sector and government employment.

Now it may be the case that prices at the pump have bottomed, but why can't the savings rate still go down? Well, if it continued to decline at the rate since June, it would be at zero by summer. That is not impossible, but it's not exactly a base case scenario either. What we do know is that in Q2 and Q3 together, the combination of weak equity markets and eroding housing values dragged down net worth by some $2.5 trillion. Now there are not a whole lot of data samples to pick from historically, but the last two times this happened, the savings rate rose in the ensuing three months.

As was the case last year, the first quarter promises to be an interesting one from a macro standpoint. The U.S. economy has indeed been dodging bullets for a good year and a half now. It might not be October 26, 1881, but something tells me we have a gunfight at the O.K. Corral on our hands this quarter between Mr. Market and Mr. Data.

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The Axe's picture

I think the gunfight will be between which market mechanism blows up first...cause the markets are fucking broken...

slaughterer's picture

With the PMI fudge going full retard, could be 2 more quarters before Rosie gets his recession.  

redpill's picture

Recession is such an unhelpful word.  President Obama would like us to refer to it as "less recovery."

From now on if anyone uses the r word, please report them to DHS.  If you see something, say something.

HarryM's picture

You mean right after the election

redpill's picture

Sir, are you suggesting our noble executive branch of government would prod our uncorruptable, independent central bank into creating a false sense of economic improvement solely for the purposes of political expediency?  How dare you!

CompassionateFascist's picture

20 January 2013. National gunfight begins for real. Invest in lead.

CPL's picture

Mr Data has been dead for four years, his sons logic, reason and sanity keep showing up but they are just ignored.

Caviar Emptor's picture

whole family was stiffled at birth. But mr data was only injured, left for dead and now has gone rogue, swearing revenge....

Hephasteus's picture

He was sacrificed on the alter of disinformation technology. Shit from the anus of an intel cpu. Branded as credible because he's not a lying human he's just run by lying humans.

Now let me build a super computer real quick. The print subroutine is called. Would you believe?

redpill's picture

It would have been nice had Joe Retail Investor known that a few years back before the HFT algos ate his guts out like rabid tape worms, eh?

weinerdog43's picture

I could have sworn that Picard told me Mr. Data is still alive, but that it was Lol who was dead.

eureka's picture

THE gunfight - is between the elite's establisment apparatus and THE PEOPLE.

http://www.infowars.com/ron-pauls-iowa-finish-biggest-fraud-since-kenned...

Get up and get dirty. Destroy Romney and his campain. NOW !!!

Buck Johnson's picture

Your exactly right, which one will blow up first.  All the manipulations to the market has altered the system so much that you can't count on it working the way it should.

spekulatn's picture

David should stop using math. It no longer works in the real world.

 

WASF!

 

A Man without Qualities's picture

Given everything they have done to try to boost growth, why wouldn't they simply fudge the data?  This is America after all...

navy62802's picture

EUR-USD back below 1.30

Mr Lennon Hendrix's picture

Scottrader Soccer Moms everywhere have their shorts in!  Die Euro, die!  Give Patti and here family of 3.5 a Carribean Cruise!

slaughterer's picture

Daughter of Patti, Vera, is unfortunately embezzling dad's accountant for cash to fund the mother of all EUR/USD rallies.  Vera has posters of Stolper on her wall next to Justin Bieber.    The resulting EUR/USD rally will understandably have something completely juvenile and criminal about it.  

Caviar Emptor's picture

Scottrader Mom of the year made a bad trade, now turning tricks under the grand stand

LawsofPhysics's picture

What useless dribble from another paper pusher.  The numbers/data are, and will continue to be, rigged.  No gunfight necessary.

Johnny Yuma's picture

I wouldn't say useless. But keep in mind they're a predominently long only/buy and hold investment management firm so, that should be enough to discount a majority of what is being said as they don't want to scare their clients away. There's a gun fight in the markets every day by the way, nothing new there... 

LawsofPhysics's picture

I would say that there is manipulation everyday, don't know about a "gun-fight".  A gun fight implies both sides are armed.  In this case only ONE side has a printer.

StormShadow's picture

Bullshit! I got silver bullets. Too bad less than one man in 100 can say that.

TexasAggie's picture

Remember, this is akin to GIGO. The old definition: Garbage in - Garbage Out; however with the Bureau of lying statistics and some of the other similar orgs the new definition is more appropriate: Garbage in - Gospel out.

TexasAggie's picture

Remember, this is akin to GIGO. The old definition: Garbage in - Garbage Out; however with the Bureau of lying statistics and some of the other similar orgs the new definition is more appropriate: Garbage in - Gospel out.

Mr Lennon Hendrix's picture

Cue Robo to write about LULU/CMG.

slaughterer's picture

Robolulu, robocmg, robonflx, robotivo, roboUST, robogoog... robobuil.

Cdad's picture

The "just one more day" market...pretending that decoupling is a sweet catalyst.  Ummm...I remember that thesis from 2008, thank you. 

Check your Roach Motel [SPY] volume today.  You can only see it if you have a one day chart up.  Pathetic.

Just one more day of made up catalysts and data fudging by a government that has no clue what to do with the aforementioned "mess."

Just one more day of naked shorting VIX instruments...check the volume on that last down move on the VIXY...while the short bus algos magically float equities for...just one more day.

If you ask me, the bullets have been flying for three months now [or three years depending on how you count it]...and there is no solution for the "mess" save for inflated assets to fall in relation to deteriorating and obvious macro truths.

Time for fund flow data yet?  Can't wait!

Just one more day for members of the financial services group to make their stupid comments on the BlowHorn [CNBC] and pretend their thoughts are important or clever...or in any way relevant. 

Mr Lennon Hendrix's picture

There is one more:  use the dollar as the funding mechinism to bail out Europe, and those dollars are locked and loaded.

slaughterer's picture

Amazing how those dogs of the Dow are being inflated.  Hope this earnings will be a gunfight with this stinking kennel of rabid, flea-bitten mutts.  

Caviar Emptor's picture

Market self-destrcuting as fewer and fewer want to play. Earnings yield is sky high compared with Treasury yields, and that signals huge risk. Chasing dividend yielders and junk bonds is going to kill lots of people

GeneMarchbanks's picture

Data? What's that?

Who cares if the filter interprets the data for you and says all is well no matter what?

sbenard's picture

Mish Shedlock also listed yesterday 11 business tax credits that expired at the end of 2011. He attempted to quantify their impact on the economy and especially industrial production. This may also bring a collision with reality soon.

sbenard's picture

Data? What data? We have printed prosperity now!

Cdad's picture

Speaking of printed prosperity, some criminal syndicate Wall Street firm is engaged in just that...on NLFX just now.

Johnny Yuma's picture

Ever notice how Gluskin Sheff's logo is eerily similar to Goldman Sachs? 

fonzanoon's picture

Maybe this is a slow motion crack up boom?

TheSilverJournal's picture

Housing is certainly set to dive hard (in real terms). 50% of mortgages are underwater when counting the right way, which is to include 6% commission and a bit extra for additional fees when looking at if the homeowner truly needs to bring cash to the table.

On top of that, the gov. is still backing over 95% of all newly issued mortgage. How is there capitalism in America if the government is on the hook for the largest asset that most people own?

http://TheSilverJournal.com

lolmao500's picture

Fundamentals, maths and reality are just conspiracy theories in this market.

Debugas's picture

modern school economists are incapable of projecting the future from here on because to project the future now it is vitally important to analyze the underlying physical world - will the consumer be able to adapt and re-adjust his behaviour e.x. relocate closer to his workplace and use less or no fuel, insulate his home and use less energy for heating etc. etc.; will producers be able to absorb more raw material cost increases and how much of a buffer they still have etc etc

To answer these questions one has to be a technician in the field and pure economists have no clue

apberusdisvet's picture

Keep taking the hopium pills, boys and girls; everything will be just great going forward.

sarc cubed/

Manthong's picture

So:

If Mr. Market, Mr. Data, and the Bernank (Fed) are the three characters in this western scene..

Who is playing who?

http://www.youtube.com/watch?v=CwcYIcn5ZEs&feature=related

Widowmaker's picture

Dear David,

Everything you say is self-serving bullshit to mask collusion and inhibit fraud-market discovery.

Shut the fuck up, your goose is dead pretending to do God's work -- you have nothing except sucking Ben's dick while crucifying savers and the US taxpayer.

If you were a champion of absolutely anything intelligent it would be to end TBTF and organized chaos. 

You won't which is how the world knows you are a fraud, too.

slewie the pi-rat's picture

L0L!!!

mr market is down for the count, eh?

hopelessly compromised?

i'm wondering if there's still an episode to come when mrs data asks her husband why her credit card is being refused and mrs market tells her husband that if he doesn't liquidate everything, right now, she's moving in w/ slewie!

stay tooned, BiCheZ!

Mark123's picture

Sub-prime credit is back (with a wink and a nod from the Fed and Govt) and that is why the bottom 50% are out shopping. 

 

Think about it....if you offer a poor person with no savings a new credit card what do you think they do?  Same goes for auto loans.  That is the USA decoupling miracle.

 

Once again the banksters are transferring real wealth to bankrupt consumers using debt....that will then default and be paid for by taxpayers.  Wonderful.

Cdad's picture

Sweet!  I need me a new VISA card...that I can default on later.

Mark123's picture

Don't forget to apply for a student loan, car loan and FHA backed mortgage as well. You should be able to arrange all this before you cross the Rio Grande.

As they say..."go big or stay home".