From David Rosenberg "Turning Bullish"
Some of the point he does not joke about
Savings rate could head back to the 10-12% range
Looking ahead, we believe that the bottom in housing is still several quarters away, and there is at least another 15% downside potential. As a stand-alone static shock, the lagged impact on consumer spending would be -3% annually for each of the next three years, suggesting, in turn, that the savings rate could head back to the 10-12% range that prevailed before we became a consumer society that was relying on parabolic asset inflation to fund retirement needs.
A lethal deflationary combination
The combination of a 10% savings rate and 10% unemployment rate is a lethal deflationary combination that the Obama dream team of economists seems prepared to fight hard against, and we wish them good luck, but we think we are in for another year of very weak economic growth that warrants a focus on safe income wherever you can get it, and a focus on high-quality assets and defensive sectors in the equity market.
Housing demand remains weak
There is no doubt that the decline in interest rates is providing a major thrust toward a mortgage refinancing boom, which will help put cash in people’s pocket, at least for a while. But mortgage applications for new home purchases, while off the lows, are lagging behind, and it remains to be seen if they even turn into approvals. The latest NAHB index for March suggested very little traffic at showrooms (this subindex fell to 9 in March from 11 in February, in fact, the third lowest print on record). As the nearby charts show, consumer plans to buy a home in the next six months have actually fallen to a 27-yeaar low after declining in March for the third consecutive month. Demand is so weak, that it is now taking a record of nearly 10 months for the builders to find a buyer of a newly-completed home.
A secular shift in attitudes towards credit
Attitudes toward housing have changed, and it looks increasingly as though this is more of a secular shift than something that is merely cyclical, and perhaps it is because people are much more fearful of taking on any new debt – at any cost – after the misery that the past decade of excessive leverage has left in its wake. Housing, like autos, is extremely credit sensitive, and every survey we see (NACM, Fed Loan Officer Survey) shows that household demand for credit is at or near record lows.
Ongoing deterioration in the labor market
Also undermining the outlook for housing demand is the ongoing deterioration in the labor market. The ADP employment report showed that a record 742,000 private sector jobs were lost in March, bringing the cumulative decline to 3.6 million over the past six months. The Challenger data revealed that over 150,000 workers received pink slips last month, a 180% surge from a year ago. The JOLTS (Job Opening Labor Turnover Survey) data indicate that job openings have plunged more than 30% in the past year, while new hirings are down close to 12%.
Plunging household income
The widening slack in the labor market is taking a serious toll on the household income statement. Total personal income, excluding government benefits, has contracted by $234 billion since peaking six months ago (a 4.5% decline at an annual rate) – a plunge of unprecedented proportions. So not only have the boomers lost $20 trillion of net worth during this bear market (including our estimate for first quarter), but the flow of income from the workforce is declining at a near-record rate as well. Be assured that the Baby Boomers’ investment behavior is going to change based on this dual squeeze on the balance sheet and income statement, and, to repeat, these shifts are permanent (as much as anything can be), not transitory.
S&P 500 will hit new lows, in our view
We remain of the view that the risk of earnings disappointments will take the S&P 500 to new lows before the bear market runs its course. Based on the outlook for corporate profits and the typical trough P/E multiple that characterized recession bear markets, it would not surprise us to see the S&P 500 gravitate in a 475-650 range for an extended period of time.
Will retest or break below 2% on the 10-year Treasury note
As for the here and now, just consider that consumer discretionary stocks have outperformed the market by 520 bps since the S&P 500 hit its interim low back on March 9, while the homebuilders have outperformed by nearly 2000 basis points. It could be time to sell some calls. As for bonds, we would just have to assume that if the yield on the 10-year note sank to 2% in December on the rumor of the Fed buying Treasuries, we will ultimately retest or perhaps even break below that level on the fact. Considering that the 10-year T-note tested the 3% threshold no fewer than four times before the Fed made its quantitative easing announcement last month, at least we know what the risks are to the view. It seems pretty one-sided.
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