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DEEP THOUGHTS BY DAVID ROSENBERG

As usual, David Rosenberg provides some superb macro thoughts on the markets:

It would seem that investors are taking comfort in the view that the U.S. labour market and home prices are stabilizing.  The problem with the former is that if it only stabilizes and does not improve, then a persistent 10% unemployment rate will, over time, lead to a deflationary environment, which is never good for equities unless driven by the kind of tech-led productivity gains we saw in the 1990s.  This deflation is caused by excess capacity and insufficient aggregate
demand — it’s not the same.  Jobless claims have to fall below 400k, not merely stabilize around 460-470k, before employment growth can resume.

A big impediment for the employment outlook is the fact that the State and local government sector employs 20 million people or 15% of the workforce (versus less than three million in the federal government) and is in major downsizing mode.  Today’s Investor’s Business Daily (page A2) mentions that more than 25% of Detroit’s public schools are closing their doors in June to stem budgetary red ink of $219mln.  Also see page A8 of the WSJ for how the lower levels of government are doing all they can to bolster their depleted revenue base (States Pressure E-Tailers to Collect Sales Tax).

As for home prices, we have a total of over 20 months’ supply of total housing inventory overhanging the residential real estate market when all the shadow inventory is accounted for; therefore, it is hard to believe that we have hit bottom in the home price deflation cycle.  And, the demand for homes, as we can see in the continued negative year-over-year readings in mortgage applications for new purchases and the receding new traffic index in the NAHB survey, is dormant at best.

Meanwhile, a wave of new supply is coming from strategic defaults, which now account for 35% of all defaults according to research published by the University of Chicago.  To be sure, the Case-Shiller index has emerged as the nonfarm equivalent to home price measures, and it has yet to roll over.  But it has slowed, and being a three-month average, it may take time to show deflation again.  The LoanPerformance home price index is down for four months running.  Freddie Mac’s conventional home price index fell 0.7% in Q4.  RadarLogic’s 25-city house price index is down for two months in a row and in four of the past five.

And, the FHFA index, which used to be the market-mover in years past, posted a 1.6% home price slide in December, which was the steepest decline since November 2008 — at the peak of the mania of the mid-1990s, this index began to show cracks about four months before the Case-Shiller did.  Stay tuned. It’s not often that we find ourselves in agreement with Larry Kudlow, but his comment on CNBC yesterday that he “needed a microscope to detect any signs of meaningful economic recovery” certainly did resonate.  From our lens, it’s more like a telescope, but why quibble?

Source: Gluskin Sheff

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