Hyde Park Blvd

David Rosenberg, he of Gluskin Sheff in Toronto, opines on US unemployment and the likelihood that 12% is not impossible, that structural problems may be around for a while:

Think about it. We haven’t yet hit bottom on employment but that will happen at some point. Employment is not going to zero, of that we can assure you. But when we do start to see the economic clouds part in a more decisive fashion, what are employers likely to do first? Well, naturally they will begin to boost the workweek and just getting back to pre-recession levels would be the same as hiring more than two million people. Then there are the record number of people who got furloughed into part-time work and again, they total over nine million, and these folks are not counted as unemployed even if they are working considerably fewer days than they were before the credit crunch began.

So the business sector has a vast pool of resources to draw from before they start tapping into the ranks of the unemployed or the typical 100,000-125,000 new entrants into the labour force when the economy turns the corner. Hence the unemployment rate is going to very likely be making new highs long after the recession is over — perhaps even years.

David Rosenberg of Gluskin Sheff provides an interesting picture of life across the border, and just how much different the economic mess looks from Toronto:

If there is one thing that Canadians are never happy with (in addition to their local hockey team) it is the Canadian dollar. When it was flirting near that record low of 62 cents nearly a decade ago, everyone lamented the future of the Loonie and closer ties to the U.S. were being recommended from various corners of Bay Street. It was too expensive to buy anything that was imported, it was too costly to make that annual trip to Florida, and tickets to a Broadway play were prohibitive. We felt poorer. We must have been doing something wrong.

Fast-forward to today. Canadians are now fretting about a strong currency. After all, it is going to crush our manufacturing sector, kill our export base and undermines our domestic competitiveness. Even the Bank of Canada commented on how the strength in the CAD is dampening our growth prospects, cutting its medium-term GDP growth forecast.

Remember, when currencies move there are going to be winners and losers. In its latest policy statement, the Bank of Canada said that “persistent strength in the Canadian dollar” is going to “slow growth and subdue inflation pressures.” So, in return for softer economic growth coming from a more challenging export outlook, what we get back is lower “inflation pressures.” The winner here is anyone who is seeking to borrow money to buy something because the stronger Loonie will prevent the BoC from taking the interest-rate punchbowl away any time soon.

For Canadian businesses, the silver lining is that it will be easier to attract talent today compared to a decade ago when the Loonie was sinking. Call it the reverse brain drain. Whatever it is, it is a good thing from a productivity standpoint, which is the cornerstone to our standard of living. That is why I think we should embrace this new era of Canadian dollar strength as opposed to resisting it.

Sorry for bringing more cold water, but David Rosenberg provides a valuable service by preaching caution:

The Chicago Fed’s national activity index, which is arguably the most reliable economic barometer around given its breadth of subcomponents, posted a -0.90 print in August and the key three-month average came in at -1.09, which, to be sure, is much better than the -1.61 figure in July, the -2.15 reading in June and the horrendous -3.63 posting at the turn of the year. However, the Chicago Fed warns that anything at -0.70 or more negative than that still signals an economy that is in contraction mode, though it is certainly not uncommon at all to be seeing a number like we saw in August occur after GDP has had its inflection point.

Our contention is that the equity market priced out the recession six-months ago and is now basically discounting three years worth of economic and profit growth. Indeed, on some valuation metrics, the S&P 500 is now trading at peak, not merely mid-cycle price-book, price-earnings and price-dividend ratios. Remember, the reason why the tortoise won the race in the end was because the hare tired himself out.

Via David Rosenberg at Gluskin Sheff in Toronto.  He’s not convinced, he just reports:

A freshly minted report from the Asian Development Bank forecasting faster-than-expected growth for the region — excluding Japan, growth is seen at 3.9% this year versus the March projection of 3.4%. This is having a fairly significant market impact this morning with credit risk declining, the U.S. dollar under renewed downward pressure (the Euro just crossed 1.48 for the first time in a year), commodities rallying right across the board, resource-based currencies, such as the Loonie and Kiwi (the latter also benefiting from a much lower current account deficit for the year ending June) and global equities, in most jurisdictions, in the green. U.S. equity futures are flying as the buy-the-dips psychology has become tremendously well entrenched — see Optimistic View on Rally on page 25 of the FT. A Barclays survey shows that bears are now capitulating en masse and now fewer than 1 in 5 believe this is a bear market rally ripe for correction.

David Rosenberg continues to run counter to the current wisdom, reign in expectations:

Those who believe that the banking sector crunch is fully behind us should read the WSJ article today on the topic — New Phase of Crisis, Securities Sink Banks. And those who believed that the road to recovery rested with the auto sector should also have a read of Rebates for ‘Clunkers’ to End Monday on page A3 of the WSJ. The program, which was creating all sorts of distortions, including higher used car prices, is a regressive tax for the low-income consumer.

As for those who believe that the housing market is stabilizing should have a read of the article Improving Home Sales Belie Market Reality on the front page of the Money & Investing section of the WSJ. The reality is that sales and pricing are currently being distorted by the wave of all-cash deals by investors who are looking to rent out foreclosed units and this wave of competing supply for the apartment market is dragging down rents — a critical driver of the inflation rate — for the first time in 17 years.

According to a survey conducted by the National Association of Realtors, 36% of all sales now involve “non-distressed” properties. And, the article titled Souring Prime Loans Compound Mortgage Woes in today’s WSJ is also worth a read for anyone who believes we are going to see anything closely resembling a normal recovery, and assumes, of course, that the usually wrong consensus is correct that this downturn is completely over and done with. Fully 12.2% of mortgages in 2Q were either in the foreclosure process or in arrears, up from 12.1% in 1Q and 9.0% a year ago.

David Rosenberg (no relation) is the chief economist and strategist at Gluskin and Sheff in Toronto. In the latest ‘Breakfast with Dave’ newsletter (breezy, interesting and well-informed), he muses about the likely persistence of the highest unemployment since the WWII and what’s in Obama toolbelt:

In addition to knowing it is going to be an election year in 2010, we also know that we have a President who has, step by step, been taking feathers out of FDR’s cap in dealing with this modern day depression.  The one item that has yet to be utilized is US Dollar depreciation, and if memory serves us correctly, FDR snuffed out the worst part of the Great Depression when he unilaterally devalued the dollar to gold in 1933 by 40% (and fixing the price of gold at $35/oz).  We’re not sure that President Obama is going to re-price the dollar price of gold.  Then again, can anything be ruled out?  But we are sure that as the unemployment rate makes new highs and increasingly poses a political hurdle in a mid-term election year, that it would make perfect sense, for a country that always operates in its best interest — even if it may not be in everyone’s best interest — to sanction a US dollar devaluation as a means to stimulate the domestic economy.

With that in mind, investors should be thinking of how to hedge or protect the portfolio against this not-so-remote possibility, namely:

• Commodities
• Gold
• Canadian dollar
• Resource sectors of the stock market
• US sectors that have high foreign exposure (materials, industrials, staples, health care)
• Canadian sectors that benefit from lower import costs (consumer stocks) but lose export competitiveness (manufacturers)

Thanks to reader RS for keeping me thinking.

Canadian bonds (a higher Canadian dollar will keep inflation low, hence reinforcing positive fixed-income returns)