David Rosenberg - "Let's Get Real - Risks Are Looming Big Time"
Earlier, you heard it from Jeff Gundlach, whom one can not accuse (at least not yet) of sleeping on his laurels and/or being a broken watch, who told his listeners to "reduce risk right now" especially in the frenzied momo stocks. Now, it is David Rosenberg's turn who tries to refute the presiding transitory dogma that 'things are ok" and that a Greek default will be contained (no, it won't be, and if nobody remembers what happened in 2008, here is a reminder of everything one needs to know ahead of the "controlled", whatever that is, Greek default). Alas, it will be to no avail, as one of the dominant features of the lemming herd is that it will gladly believe the grandest of delusions well past the ledge. On the other hand, they don't call it the pain trade for nothing.
From Gluskin Sheff
LET'S GET REAL
We are constantly being told how much better the economy is doing. It's incredible what the January employment report did to people's perceptions of the macro landscape. It's as if we were just transported to the mentality that prevailed this time last year. Below we chart out the YoY trend in core capex orders on a quarterly basis ... the pace has slowed now for six quarters in a row.
The peak was 20.8% in the second quarter of 2010, but then again, that comparison was skewed by coming off the depressed 2009 base. In Q4 of last year, the trend moderated to 7.3% from 9.5% in Q3, to actually stand at its lowest level since the end of 2009. Food for thought.
Maybe the economy seems to be doing better because we have all adjusted our expectations so radically after being disappointed for so long — I mean — take 2011 as an example. A year that would normally see 5% real GDP growth for this stage of the cycle came in at a woeful 1.7%. This, despite a $3 trillion Fed balance sheet (triple its normal size), zero percent policy rates now for three years and now going on year number four of $1 trillion-plus fiscal deficits. Based on all this stimulus, if this were a normal post-recession recovery, GDP growth would be 8% right now, not sub-2!!
RISKS LOOMING BIG TIME
I remain amazed at how the consensus economics community is so certain the U.S. economy has suddenly hit escape velocity ... again! The economy is on major duty life-support and yet the recession, we are told, ended nearly three years ago. And the best the economy can do is a trailing GDP trend of 1.7%. Go figure. Housing has bottomed, we are also told. No kidding? From a real GDP standpoint, residential construction has actually contributed to headline growth for three quarters in a row, and overall growth was still tepid.
In any event, in terms of peak contribution, it's probably over. And yet economists talk about this as if it's new and not already priced into the market. Of course auto sales are doing fine and this is a heck of a model year—this is an area where an argument can be made that there is some pent-up demand. But what is interesting is that miles driven are down nearly 1% on a YoY basis — buy more cars, drive them less. But autos are just 10% of total consumer spending on goods and the improving trend here masks a serious deceleration in service expenditures, which represent the bulk of household outlays.
One wild card is gasoline prices which are on a rising trend. Four bucks by May looks realistic and that alone would siphon around $70 billion from consumer pocketbooks right into the gas tank. Capital spending growth is following the pace of corporate profits on a downward trend to boot. The boost from inventory accumulation is behind us. Governments are bent on austerity — that remains a secular theme. The biggest hurdle ahead: the hit to the economy from a widening trade deficit. The numbers out for December we saw on Friday were the thin edge of the wedge — that widening occurred for different reasons (inventory-induced import boom). Wait until the European recession and Asian slowdown hits the export sector.