Welcome to the Vitus Capital Blog!
Notes to myself, possibly of interest to others.
-- Bill Northlich

Thursday, November 29, 2012

Rosenberg: The big (deflationary) picture. Keynes! (Shhhhh...)

A 7% hole [$47 trillion] has been driven into the household balance sheet over a five year span, which has not happened since the 1930s. Household wealth is no higher today than it was in 2006. and this realization is really only now setting in.

The process of a secular rise in the US personal savings rate and the dampening effect this will have on aggregate demand will be incredibly disinflationary for some time. While fiscal stimulus indeed cushioned the blow, the current reality is one of restraint, at a time when the output gap is closer to 6% — where it normally is in periods of deep recessions - not year-four of an expansion.

From a topdown perspective, what drives inflation is the shape and interaction of two different curves - the economy's aggregate supply curve and the aggregate demand curve. The movements in these curves tell us where the “output gap" is at any moment in time — the "gap" between where the economy is actually operating and the level it would be operating at if it were running flat out at full employment. In other words. the “gap" measures the degree of slack in the labour and product markets, and this “gap" at 6% currently augurs for ‘fair-value‘ or ‘equilibrium’ policy rates to be -2.4% according to our research, which is why at the zero bound, the Fed has been and will continue to focus on nonconventional measures aimed at lowering the cost of capital.

Against this background. we continue to advocate a relatively high fixed-income orientation in the portfolio — a focus on S.l.R.P. (Safety and Income at a Reasonable Price). That includes high-quality corporates (and choose those with strong balance sheets, high cash reserves and minimal refinancing needs), crossover credits and credit arbitrage strategies. And in the equity market, continue to screen for dividend yield and consistent organic dividend growth in noncyclical industries.
Vitus: We've said before that if you can get through Rosie's pro-forma rants that supply-side is the only side, he's really a Keynesian. Note paragraph two above. In a foxhole there are no Atheists, and... In a deflation there are no deficit hawks? Anyway, when he goes to the data, he's been the rightest of the right (correctness-wise, v. politics-wise...) for a long time about the market(s), especially since '07 when we started following him closely.

No comments:

Post a Comment