David Rosenberg from his June 5th commentary continues to discuss deflation-not inflation like many-deleveraging, and housing woes (emphasis mine). An excerpt:
WE CAN UNDERSTAND ALL THE ANGST SURROUNDING INFLATION
We just don’t agree with it. Inflation is about a sustained uptrend in the absolute price level; commodities going up only really tell us about what is happening to relative prices, that’s all. Because precious few final-state manufacturers or domestic retailers have any pricing power at all, the run-up in basic material costs either comes at the expense of profit margins or, as we just saw in the Canadian employment data, the labour market. For a taste of what we are talking about, go to Discounting by Pricier Chains Fails to Give Retail Sales a Lift on page B3 of the WSJ. When we read about price cuts failing to lift sales volumes, we start to contemplate the prospect that this cycle is turning more Japanese with every single data point. (Japan also enjoyed sporadic ‘green shoots’ too — they are called cherry blossoms over there — and intermittent stock market rallies and bond market selloffs, but the fundamental trend was really in one direction for the last 10-15 years for the economy and the asset classes.)
MORE EVIDENCE OF THE SECULAR SHIFT TOWARDS FRUGALITY
All one has to do is look at and admire the 13.0% increase in same store sales at Dollar General in Q1 as one example — in stark contrast to the negative results at most other retailers, not to mention the 9.2% in comparable sales at Dollar Tree.
HOUSING STILL IN THE DOLDRUMS
First, we saw from Toll Brothers and Hovnanian that revenues and orders are still in freefall (the entire group is up 5.0% year-to-date, believe it or not). Revenues at both companies are down around 50.0% YoY; deliveries at Hovnanian down 44.0% and signed contracts still down 29.0% from a year ago.
Second, MBA mortgage applications index fell 16.2% during the week ending May 29 — the level is at its lowest in 13 weeks. This was on top of the 14.2% decline seen last week. Since its recent peak, which was back just eight weeks ago, mortgage applications have plunged nearly 50.0%. The refinancing index (refi) is down 24.1% for the latest week, on top of the 19% fall seen last week. The level on the refi index is at its lowest in 16 weeks and from its recent peak, which also happened eight weeks ago, the index has shed nearly 60.0% (-57.0% to be exact).
This halt in activity was due to the massive rise in mortgage rates. The 30-year mortgage rate zoomed 44bps to 5.25%, the highest level since the end of January, and in the last two weeks mortgage rates have risen by 56bps. The 1-year ARM rate has also been gradually rising – up in five of out of the last six weeks — and is currently at 6.61% — highest since the week of December 5.
DELEVERAGING CYCLE FAR FROM OVER
The chart below is the ratio of household debt to total net worth — it has exploded to an all-time high of over 26.0%. Depending on where it normalizes — either to the pre-bubble level of 20.0% or the long-run norm of 16% — we are talking about between $3.0 and $5.0 trillion of debt elimination in coming years. The household debt to asset ratio (see Chart 2), now at 21.0% versus prior cycle lows of around 13.0%, would also be consistent with over $5.0 trillion of debt elimination. While there will undoubtedly be help from Uncle Sam and the lenders in the form of loan modifications and forgiveness, this overhang is still too big for the taxpayer to absorb. A goodly chunk of this excess debt — bringing credit into realignment with the permanently new and lower level of household net worth — is going to have to be paid down (or defaulted on). This is the lingering deflation risk that the bond bears have yet to factor in.
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