David Rosenberg: "It's A Gas, Gas, Gas!"

Tyler Durden's picture

Once again, if one wants to get nothing but schizophrenic noise from several momentum chasing vacuum tubes which very way may take the market to all time highs on 1 ES contract churned back and forth, by all means focus on the "market" which for the past three years is merely a policy vehicle of the monetary-fiscal fusion regime (thank you Plosser for confirming what we have been saying for years). For everyone else, here is the traditionally solid economic commentary from David Rosenberg. Considering that the central planners have pumped $7 trillion, or 50% of their balance sheet, in the stock market in the past 4 years, to offset precisely the warnings that Rosenberg issues on a daily basis, we are far beyond debating whether or not those who observe the economy realistically are right or wrong. The only question is whether the central banks can continue to expand their balance sheet at an exponential phase to offset the inevitable. Answer: they can't.

From Gluskin Sheff's David Rosenberg


"There are fluctuations in the market that don't mean anything."

Ira Gluskin, February 14, 2012

If there was a Rule #11 added to Bob Farrell's list of gems, this would be it. We have added this ditty before from Ira, and will continue to do so as a reminder. A reminder of what you ask? A reminder of how the stock market can be divorced from economic realities for a period of time. The stock market ignored the perils of the busted tech bubble for a good eight months back in 2000, ultimately to its own chagrin. It ignored the meltdown in the housing and mortgage market for at least 10 months back in 2007. The examples can go on, but hopefully the point is taken.

At any given moment of time, the market is driven by a variety of factors. Some are more important than others, and they include technicals, seasonals, sentiment. fund flows, valuations and, Of course, the fundamentals. The key driving force this year has been the expanded P/E multiple, in line with a 16 reading on the VIX index, as the markets seem to believe that the massive expansions of global central balance sheets will end up saving the day for dilapidated sovereign government balance sheets and woefully undercapitalized European banks. Too bad the Graham and Dodd classic text on value investing didn't include a chapter on central bank money-printing.

From our lens, liquidity-based rallies are fun to trade, but tend to have a relatively short shelf life. Imagine what is on everyone's minds for the coming week is not the economic data or earnings results but instead the second LTRO round on Wednesday — this is what investors are biting their nails over: will it be 1 trillion euros or 'just' 300 billion? Page M10 of Barron's dubs this the 'LTRO put', which "sparked a massive risk-on rally in global markets". Incredible how easy it is to avert a bear market why didn't the Fed do this in 2007 and 2008, simply print money — and help us avoid the Great Recession?

What about the fundamentals? Well, let's have a look at earnings. It is completely ironic that we would be experiencing one of the most powerful cyclical upswings in the stock market since the recession ended (the S&P 500 is now up 25% from the October 3rd nearby low) at a time when we are clearly coming off the poorest quarter for earnings, in every respect. The YoY trend in operating [PS is now below 6%, and without Apple, growth has basically vanished altogether (down to a mere +2.8%). Corporate guidance over the past three months is at the lowest point since August 2009 — before the term 'green shoots' was invented! Only 44% of companies beat their revenue targets, the weakest since the first quarter of 2010: and 64% surpassed their profit estimates and this too is the lowest since the third quarter of 2008.

If memory serves me correctly, you did not want to go long the market heading into either the second quarter of 2010 or the fourth quarter of 2008 with these factoids in hand. I have to admit that I find it perplexing as to why so many folks dub this a tech-led rally when we came off a week that saw both Hewlett- Packard and Dell disappoint in their Q4 earnings results — the former with a 7% YoY revenue dive.

All that said, the S&P 500 did manage to close out the week at 1,365.74 and establish a level not seen since June 5, 2008 (only 200 points shy of setting a new all-time high —Jeremy Siegel must be licking his chops). If you are wondering why it is that consumer sentiment jumped to 75.3 in February (better than the reading that was widely expected), this is the reason. The University of Michigan index does a much better job tracking the equity market than it does the labour market or consumer spending for that matter.

Page 13 of the weekend FT quotes a strategist as saying

"... we also had a combination of a couple of good earnings reports and little bright signs coming from the housing and labour markets. Some people are even talking about the S&P 500 hitting the 1,400 mark."

Actually, earnings growth and earnings estimates are going down on net. As is corporate guidance, what little of it there is. The bright signs from housing are really a commentary on the balmy weather skewing the seasonally adjusted data and there is certainly no sign of any recovery in prices (it's incredible how so many people get excited over a 321,000 new home sales tally — never mind that they are still near record lows in per capita terms). To be sure, the new housing inventory is down to a six-year low of 5.6 months supply, but taking into account the supply coming down the pike from foreclosures, the entire backlog in the pipeline is at least double that posted number.


The precious metals market is hardly signalling good times ahead — rather more turbulent times ahead — as gold finished last week near a three-month high (silver has been behaving even better and platinum has hit its best level in five months).

Meanwhile, what is largely being ignored is the rapid move up in oil prices as Iran-based tensions escalate further. The WTI crude price rose to nearly $110/bbl and more importantly. Brent has soared over $125/bbl (highest level since August 2008), and forward contracts are pointing to gasoline breaking back above $4 a gallon in the next two to three months (already there in California and within 10 cents in New York state). The nationwide average has already risen 37 cents in just the past month and 7 cents last week alone — it hasn't been long enough to show through in the confidence surveys, though let's face it, we are seeing early signs already of some fraying at the edges in the retail sector — despite the apparent improvement in the labour market (indeed, it is income that people spend, and growth on this front, let's be honest, has been less than stellar).

Meanwhile, as if to represent the consensus of opinion out there. page A2 of the weekend WSJ quotes a pundit as saying "$4 probably isn't going to be the threshold that changes peoples' behavior this time. I think people have gotten used to $4".

What claptrap. Its not that people have gotten used to $4 — it's only there in the Golden State, Hawaii and Alaska ... wait until it grips the whole country. And consumers have yet to fully process this rapid move up in gas prices, but recall what happened a year ago. To be sure, there was no recession, but economic growth came to a virtual halt in the first half of the year because of the impact that energy costs exerted on the GDP price deflator. Second, it is not the level but the change in prices at the pump that influences the growth rate of the economy — every penny at the pumps siphons away around $1.5 billion from consumer wallets into the gas tank. Moreover, a little history lesson for the pundit quoted above. According to work conducted by the University of California at San Diego and cited on page 14 of the weekend FT. all but one of the 11 post-WWII recessions followed an oil shock (the lone exception was the 1960 downturn). Recall what happened the last two times Brent hit current levels — in 2008 (recession) and 2011 (stall speed). Neither outcome was very good.

The key is how long this elevated energy price environment sticks around in terms of overall economic impact. Brent had already been hovering near $110/bbl for 12 months but this most recent price run-up has actually taken the 200-day moving average higher now than it was in the 2008 recession year. Let's keep in mind that the jump in crude prices has occurred even with the Saudis producing at its fastest clip in 30 years — underscoring how tight the backdrop is. Even with slowing demand in the weak economies of the 'developed world', continued rapid growth in emerging markets is providing an offset on the demand side (which does little good for the American or European consumer).

Meanwhile, estimates of spare capacity are all over the map but what we do know is that just to meet the burgeoning demands of the emerging market world requires a further 1 mbd this year of production — and yet supplies are being withdrawn. It will not be very difficult to see oil retest $150 a barrel, and we are talking WTI here, not Brent.


It is also fascinating to watch the action in the much-despised Treasury market (the net speculative short position on the 10-year 1-note is 63,328 contracts on the CBOT while the comparable for Dow contracts is net long 14.803 contracts). Despite the slate of supply last week ($99 billion of new issue activity) the yield on the 10-year T-note closed at 1.98%. Someone out there (Bernanke?) is
coming in and buying whenever the yield pops above 2% — a level that simply is not being sustained on apparent break-outs. The long bond yield actually finished the week lower in yield at 3.1% from 3.14% (the 10-year was down 2bps).

At a time when energy prices are spiking, this is a clear sign that the bond market is treating this as a deflationary shock rather than a durable increase in inflation. That makes total sense to us. It's not as if global consumption is going up — even with higher auto sales, Americans are spending less time on the road: miles driven are down 1% over the past year. And the IEA (International Energy Agency) has cut its 2012 forecast for global oil demand twice since the beginning of the year. This is an exogenous supply shock, pure and simple.


And now the consensus is that the recession in the euro area will be mild because of one month's worth of diffusion indices. Such is human nature — extrapolate the most recent economic indicator into the future. The region suffers from a credit shock, a fiscal shock, and now an oil shock and at the same time, an overvalued currency. What is the euro doing at an 11-week high and how does this help the region export its way out of its economic downturn? Yet there are still a net short 137,479 speculative euro contracts on the CME, which could have a further impact as they cover in the near-term; there are 17,136 net long yen contracts and 29,101 net long speculative U.S. dollar contracts.

Brent crude oil hit a record high in euro terms (in Sterling as well) last week and has surged 11% in just the past month on this basis, and even if prices stay where they are, what energy is going to absorb out of Eurozone GDP this year will be 5.5%, which would surpass the 2008 recession shock of 4.8% (the highest drainage from the economy in three decades — see Soaring Oil Price Threatens Recovery on page 14 of the weekend FT).


The U.S. economy is either generating jobs in low-paying service sector jobs or the employment that is coming back home in manufacturing is doing so at lower wage rates than when these jobs left for Asia years ago. So much for wage stickiness. Throw in rising gasoline prices and real incomes are in a squeeze, and there is precious little room for the personal savings rate to decline from current low levels. On a year-to-year basis, real after tax incomes are running fractionally negative and in the past that was either associated with an economy in recession, about to head into recession or just coming out of recession. So perhaps there is no contraction in real GDP just yet. but there is one in real incomes.

What else do people spend? Their wealth. And here too, courtesy of a flat equity market performance and renewed declines in home values, household net worth also contracted in the past year. So here we have real incomes and wealth both deflating and the masses believe that recession is off the table because of a liquidity-induced four-month rally in the stock market. Go figure.


But David, things are up in nominal terms: just as the Chairsatan wants it. And never forget: daytraders who fail to realize that the market is down 50% in real terms in the past decade will be spot on in jumping out of stocks the next time we get an HFT STOP moment.

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GeneMarchbanks's picture

I see you're going with markets in quotes. Good decision. When did Rosy become Dr. Obvious?

carbonmutant's picture

No need for that 24 Hour Fitness contract either....

markmotive's picture

People can only be manipulated and purposely confused for a while. Eventually - usually when bread is being rationed to the public yet hoarded by the elites - the masses wake up and in a seemingly spontaneous rage coordinate to topple their oppressors.

This is what happend in Russia in 1917. Could it happen again?


EscapeKey's picture

It's worth throwing in here, that Communism only survived during its early stages, due to the "New Economic Policy", which to the untrained eye looks a lot like capitalism.

But don't tell that to socialists.

Michael's picture

Those socialists with Prime and Jumbo loans are defaulting on the mortgages like crazy now and it's a business decision to do so, not a social decision. 

lincolnsteffens's picture

There was rage in Russia at the Monarchy. The Tsar at the time actually contributed to the riot with a purpose. He wanted a riot to break out so his soldiers could brutally end it in such utter annihilation that all those contemplating rioting in the future would be cowed into submission. The best laid plans of men sometimes fail as did the Tsar's. The soldiers were persuaded by the crowd not to fire on their own citizens thus cementing the Tsars fate.

Would the militarized police and armed forces stand down rather than fire on or brutally restrain their own countrymen in the US? Unfortunately we may get that answer within a few years. The TSA won't be on the citizen's side nor will the Homeland Security bunch but the local police and the military could eventually come around. I think the only way to avoid riots or revolution is for the law makers and top level Administration traitors will have to resign and apologize for their part in the legalized racketeering they took part in.

EscapeKey's picture

Clearly the Keynesian indoctrinated economists working as statisticians at the BLS know better about inflation that the hundreds of million people shopping at Wal-mart.

On a serious note, all those Keynesian indoctrinated idiots who always jump to the defense of the BLS always seem to ignore that IF growth was calculated for the 19th century the same obviously fraudulent way we do now, growth would be FAR higher in the 19th century than it is now.

The invention of the washing machine alone, which freed up hours for millions of wives, would alone surely be estimated in tens of percent? But hey, even merely suggesting that the current methods of calculating inflation are flawed MEAN YOU'RE A LOONEY.

vast-dom's picture

Conclusion: MESS TETTERING ON MASSIVE CORRECTION, hopium and synthetic injections notwithstanding.


slaughterer's picture

Until we get that HFT STOP moment, permabears like Rosie will look hopelessly out of sync with the times.  But Rosie will be proven right, eventually, just not right now.  I remember Rosie gloating on Bloomberg TV a few months  ago that he was 99% sure of a global recession.    Anybody initiating a short on that call is dead and buried by now and probably hates Rosie.    Too bad because Rosie is one of the smartest kids on the block and time always proves Rosie right.    Good that Gluskin has a bullish PM to counter-balance the Rosie gloom factor. 

slaughterer's picture

Prediction for 2012: the next "flash crash" will be UPWARD.

Dr. Engali's picture

Well it can't be downward, this is a one directional market.

Silver Bug's picture

These stock price rises are all articificial its simply inflation kicking in. Hold your gold tight.



Ecoman11's picture

Billion Prices Project inflation index decoupling again http://bpp.mit.edu/usa/

TheSilverJournal's picture

If the real reasons for the rise in gas prices – printing money and central planning of the economy – are not addressed, then there will be literally no ceiling on how high gas prices go.


Vampyroteuthis infernalis's picture

then there will be literally no ceiling on how high gas prices go.

Disagree TSJ. In the end, someone will have to fork forth fiat cash to buy gas. No jobs means no cash means reduction in ability to pay. I doubt a gas station is going to keep jacking up prices if no one is buying enough to keep them in business. This is the reason why this inflationary spell is transitory. The real economy is being sucked dry with a commodities shock.

TheSilverJournal's picture

The real economy is being sucked dry by government stealing everyone's savings indirectly through ultra low interest rates and directly through printing money. Less being produced and higher prices go hand in hand. It is not consumption that drives and economy, it is production. Less production means fewer goods and fewer goods means higher prices. On the other side of the equation, fiat will continue to be pumped out at an ever increasing rate. No jobs does not mean no cash. If you're not willing to spend, the government will do it for you. There's budget deficits as far as the eye can see and rates can never be allowed to rise or the US will default. The US is borrowing 40% of what it spends, and with booming entitlements accounting for 2/3 of federal spending, budget deficits are only set to grow.


TheSilverJournal's picture

The commodity shock as you call it is the tax brought about by deficit spending. All of that newly printed fiat has to flow somewhere. The inflation tax is an evil tax that somehow Obama always forgets when he talks about not raising taxes. If you want social security, medicare, and medicaid, then you pay for it with higher gas prices.


amadeusb4's picture

Station owners have zero pricing power. They are dictated to by their suppliers. This is an interesting problem because I don't see big oil making concessions on price just to move product. Deflation on the other hand is a powerful mover and the only force that could conceviably cap prices both for oil and at the pump. However, Bernanke feels confident that he can CTRL+P the deflation away.

Unstoppable force about to meet immovable object. Place your bets.

amadeusb4's picture

Good comment by the way and I can't +1 it for some reason.

Dr. Engali's picture

You would think they could at least make this look like a real market. Maybe have an occasional down day. Just for shits and giggles.

GeneMarchbanks's picture

A one way street is still a street, no? Anyway on days like this I like to see 'pro' traders rationalize the 'market' for their beginner followers. I CQTM like some sinister cartoon villian.

The Big Ching-aso's picture



Severe gas pains in a civilized modern society is nothing to fart around with.

Shizzmoney's picture

The U.S. economy is either generating jobs in low-paying service sector jobs or the employment that is coming back home in manufacturing is doing so at lower wage rates than when these jobs left for Asia years ago. So much for wage stickiness. Throw in rising gasoline prices and real incomes are in a squeeze, and there is precious little room for the personal savings rate to decline from current low levels. On a year-to-year basis, real after tax incomes are running fractionally negative and in the past that was either associated with an economy in recession, about to head into recession or just coming out of recession. So perhaps there is no contraction in real GDP just yet. but there is one in real incomes.

What else do people spend? Their wealth.

Bingo.  Its almost as if the corporations/banks can't do simple implied math.

Catepillar shed manufacturing jobs in Canda because they could get them cheaper HERE.  P&G laid off 4K in workers, and were rewarded with a $2 increase in their stock price.  Without producing anything to be made for society; just pushing paper.

When people have enough to barely cover for bills, they'll adjust.  That doesn't bode well for the "profits" TPTB so lust after.  Unless you are McDonald's, as people flock to your shitty food to save a buck.


This MarketWatch article sums up the job prospects in this "real" economy well.

U.S. job quality is in trouble http://t.co/mTWoX56A

JW n FL's picture



'CIA feeds us bad info on Iran nukes' - IAEA ex-head


Milestones's picture

Excellent interview JW. More should read it! Thanks for the post.          Milestones

n8dawg84's picture

It will not be very difficult to see oil retest $150 a barrel, and we are talking WTI here, not Brent.

Could someone please explain to this poor idiot (me) the difference between WTI and Brent?

EscapeKey's picture

Brent = UK, WTI = (Cushing, OK) US. Actual types of oil differ as well.

The cynic would add to this that the WTI is an artificial benchmark, which only a fraction of all oil is actually traded at, but is rather convenient as it's an easy way to CLAIM that oil is cheaper than it is (aka propaganda tool) for desperate governments.

johngoes's picture

In general terms (cause I don't know the specifics...) WTI is West Texas Intermediate which used to refer to the oil pulled from the Permian Basin of Texas. There's not as much pulled from there but the price still refers to oild generally destined for US consumption. Brent refers to oil pulled from the North Sea around England and generally destined for the European market.

Abitdodgie's picture

Brent is the good oil from Saudi and it does not take much refining and has about 5/6 million btu so it is also high energy and very good to make fuel , WTI is the stuff from say Alberta tar sands it takes a lot more to refine and it has way less energy in it 2/3 million btu ,so it does not make the best fuel but it is a very good lubricant eg synthetic oil , and so hence the price differance. that is a very basic explanation.

CrashisOptimistic's picture

The two have roughly the same BTU content per barrel.  API rating high 30s for both.  Specific gravity about the same with WTI slightly lighter. They are not particularly different in energy content, certainly not a factor of 2.  

The energy content rage about "oil" is calling a barrel of NGL (Butane or Propane) oil.  NGLs have on average about 55% the energy of crude.  They should not be recorded barrel for barrel in production numbers, but they are, and some say it's intentional obfuscation.

WTI and Brent are produced in two different places.  The North Sea oil field had segments of it named for birds, in this case the Brent Goose.

West Texas oil came from West Texas.

That's the only definitional difference.

itchy166's picture

Abit - that was very basic and very wrong.

carbonmutant's picture

Are the EU banks using their bailout money to invest in our equities market?

Gomie's picture

Listening to any "analyst" or Cramer-types on CNBC, Bloomberg, etc., they will all say earnings were strong or excellent. Very strange, since they weren't. And, outlooks for next Q were extremely murky at best. But when MSM wants unicorn and rainbows, that's what we get.

Alcoholic Native American's picture

I can't find an employer that will pay me what I feel I am worth.  I want to be paid at least the cost of living.  Also, I don't want to work long hours, maybe 4 hour shifts a couple days a week.  I don't compromise when it comes to spending time on things I want to do.  Benefits would be nice, I'm an army brat so I'm used to getting all that healthcare and dental stuff.  oh, and I don't want to have to drive to work, the place has to be within walking distance. 

Nobody will hire me!  WTF?

Dr. Engali's picture

Gas just went up 20 cents from the time I left for lunch to the time  got back. It's now 3.86 in Indiana.

Manthong's picture

"It is completely ironic that we would be experiencing one of the most powerful cyclical upswings "

It is NOT ironic.

                       It is ignorance on the part of some, criminal on the part of others and criminally negligent on the part of still others.

riphowardkatz's picture

" The only question is whether the central banks can continue to expand their balance sheet at an exponential phase to offset the inevitable. Answer: they can't."

Why can't they, at least not for a long time? Its a big big big world with lots of places for money to go.

Things look they are getting out of control and you will see lots of posturing which will create a deflation scare and they will be right back at it. 

adr's picture

Didn't you hear? The rally this morning was because the NAR reported that pending home sales were up 2.2%. HAHAHAHAHAHHAHA.


That's the story being reported. Of course pending sales can mean anything and the majority was probably brand new foreclosure sales or transfers from banks to the government.

Dr. Engali's picture

The NAR is a joke. Their number will be revised down next month.

EscapeKey's picture

Yes, but by then we will have NEW and IMPROVED fraudulent numbers which we can rally on.

Oh, not to forget, by then the downwards revision will be "priced in".

Dr. Engali's picture

My wife works in real estate and she says they get faxes with talking points addressing the accuracy,or lack there of, of the NAR's reporting figures

King_of_simpletons's picture

It is coordinated at the central level. Why do you think all the financial talk show hosts are bullish as ever reeling in the dumb sheep to plunk their cash into the stockmarket ?

mayhem_korner's picture



"Pending" Greek bailouts are up to.  Go figure.