Tuesday, August 4, 2009

History doesn't repeats it rhymes, correlations abound?

Just reading through Gluskin-Sheff's Chief Economist David Rosenberg musings on the market. The whole report is worth the read, you will have to register with the firm though.

The salient point, at least as far as this post is concerned is about how this latest burst in the S&P500 index is reminiscent of 2001 and 2002.

Then: Big 3 unleash 0% financing to bring about car sales. Annualized sales jump from 16.1 million units to 21.7 million units in just one month!

Now: Government let's Cash for Clunkers rip and car sales jump from a run rate of 9.2 million units to 11.2 million.

However, as Rosenberg points out this does little to build actual demand, while it seems that demand is increasing what occurs under the headline numbers is that sales are brought forward from the future. Say Consumer Bob was going to buy a car once he received his annual bump in salary in December. Now that the program is in force he would be wise to take the 4,500 the government was offering, plus what ever other rebates the manufacturers are offering to clear inventory for the new model year that begins in October. So his consumption from December is moved up. It did not create a new job and hence a new salaried person to purchase a car, or a recently minted 16 year old to stop riding the cheese wagon. So what happens once the demand is brought forward, it just leaves a lumpy distribution of sales.

Take this hypothetical say the new normal is for 12 million cars a year. So that is 1 million a month. With the new incentive structure fomented by the federalis instead of having a constant million a month, it instead
Jan- 1.0
Feb- 1.0
March- 1.0
May- 1.0
June- 1.0
July- 1.9
Aug- 1.6
Sept- 1.7
Oct- 0.4
Nov- 0.1
Dec- 0.3

So that all that ends up happening is that we have positive numbers now and then negative surprises later. So GDP looks good in the 3rd quarter but against all expectations worse in the 4th quarter. This leads to worry and the market falls again. But let's look and see what happened back in 2001/2

• 2001Q3: -1.1%
• 2001Q4: +1.4%
• 2002Q1: +3.5%
• 2002Q2: +2.1%
• 2002Q3: +2.0%
• 2002Q4: +0.1%

Just as it was written. The temporary boost then faded and the market lows were not reached until 2003. So will it happen again? Not sure, history doesn't repeat itself but America has placed itself into a very similar situation. Just a quick example, imagine that the government stimulus is akin to taking a child who just fell off his bike and attaching training wheels. Once the stimulus/training wheels comes off what happens, well the government and the Federal Reserve hopes that the economy/child will propel itself, but he may just end up in the hedge again.

I''l close with a direct quote from Rosenberg "The asset deflation, which included housing this time around, has been three times more intense (than 2001/2) and coupled with a broken-down credit market. It is vital as we go through this intermittent period of auto-related spending and output activity, to recall that similar period seven years ago and what we learned was that sustainability proved to be elusive."

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