David Rosenberg: "RIP Wealth Effect"
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.
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).
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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!
DavidC
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.
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.
http://www.bloomberg.com/video/energy-inflation-no-longer-means-core-inflation-tFin4R14Q1mLPRAzjC4S6Q.html
http://confoundedinterest.wordpress.com/2012/10/02/mortgage-rates-fall-t...
True, mortgage refinancing have increased quite a bit since QEternity began, but it won't offset the general trend.
http://confoundedinterest.wordpress.com/2012/10/03/mba-mortgage-refi-app...
This time people are refi-ing in order to drive down their monthly payment in order to have cash to eat with. People are refi-ing to survive, not to spend.
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.
Fuck You Ben Bernanke