RISKS TO THE OUTLOOK
David Rosenberg provided a nice list of risk in this morning’s client letter. The one major risk that Rosenberg and the market is largely overlooking at this juncture is the housing double dip. This has the potential to be THE most important story of 2011. As I’ve previously explained, declining asset values are highly destructive during a balance sheet recession. If the housing double dip surprises to the downside the problems that we’ve swept under the rug will quickly reemerge and this time there won’t be any political will for government intervention.
I still believe we are mired in a balance sheet recession that will result in below trend growth, deflationary risks and leaves us extremely vulnerable to exogenous risks that could exacerbate the current malaise. Rosenberg’s excellent list follows:
1. China is getting more active in its policy tightening moves as inflation pressures intensify. It’s not just food but wages too. Headline inflation, at 4.4%, is at a 25-month high. The People’s Bank of China (PBOC) just hiked banking sector reserve ratios by 50 basis points to 18.5% — the second such increase in the past two weeks and the fifth for the year. This could well keep commodity prices under wraps over the near-term.
2. European debt concerns will not be fully alleviated just because a rescue plan has been cobbled together for Ireland as it deals with its banking crisis. The focus will now likely shift to other basket cases such as Portugal and Spain. Greece has a two-year lifeline before it defaults. This saga is going to continue for some time yet.
3. Massive tightening in U.S. fiscal policy coming via spending cuts and tax hikes. This is the part of the macro forecast that is not given enough attention. See States Raise Payroll Taxes to Repay Loans on page A5 of the weekend WSJ.
4. Gasoline prices are about six cents shy of re-testing the $3-a-gallon threshold for the first time since mid October 2008. On a national average basis, prices at the pump are up 26 cents from a year ago — effectively draining about $25 billion out of household cash flow. Tack on the coming extended and emergency jobless benefits that lapse at the end of the month and you are talking about at least another $30 billion of lost income for the personal sector in the four quarters. These two effects come to a 1.5 percentage point negative influence on fourth quarter GDP.
5. Many goodies will expire at the end of the year and question marks linger over whether they will be extended. These range from the Build America Bond program that subsidized municipal issuance, the Bush-era tax cuts, the extended/emergency jobless benefits, and the little-known Obama tax benefit called the Making Work Pay Credit. The last initiative could be another $61 billion hit to consumer spending; most individuals don’t even realize they are receiving this money as it is typically received by a reduction in federal withholding from each paycheck, typically $60 per month or so.
Source: Gluskin Sheff
nother bank crisis in ’11 alla chris whalen is my bet
The price action is increasingly suggesting the biggest risk to any one individual’s outlook is not being invested in this market.
Add a disappointing Irish bail-out and political discord in the country, spreading contagion risks that have resulted and a hedge fund insider trading probe to items that have been unable to send the market down sustainably.
If/when we break 1230, lights out – 98-00 in full effect.
Very true B Ferro…the current risk is holding fiat currency.
I wonder how much of the Emerging Markets inflation we’re seeing is a consequence of the Yen carry trade being replaced (by an ultimately larger) USD carry trade?
Should the Fed back away from long-dated t-bonds (ultimately it *has* to) then we could see it transitioning into a smaller carry-trade, leading into reduced inflation for the EMs.
I generally agree with Rosenberg, that disinflation / deflation is still with us. Those that counter his position usually do so by pointing at the inflation of the EMs. I’d counter that by stating that EM inflation is largely a consequence of US capital outflows that can change rapidly if the Fed adjusts its sails.
I only take issue with the inference of Rosie’s #4. US oil inventories are way too high to justify current prices. I expect reality to rear its head in the near future to ease pressure here.