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Sunday, February 26, 2006

Merrill Lynch's Rosenberg: Five Macro Misperceptions

by Calculated Risk on 2/26/2006 06:03:00 PM

Merril Lynch economist David Rosenberg discusses (pdf): Reassessing Hard Landing Risks

... I’d just like to go through briefly what I took away from a week-long marketing swing through Europe last week, because everywhere I went, I was greeted with these five macro beliefs, or what I call major macro misperceptions:

(i) that the U.S. economy is booming;

(ii) the consumer is going to remain underpinned by record wealth even as the Fed raises rates and the housing market slows;

(iii) that high-end retailing stocks will be safe because the ‘well off’ homeowner did not play a role in the housing boom;

(iv) interest rates are still far too low to generate any weakness in the economy;

(v) the tight labor market is on the precipice of triggering wage inflation, and therefore the Fed has much more to do.
See the link for Rosenberg's discussion and many interesting graphs. Here are his comments on the US consumer:
Misperception #2 – "don’t worry about the consumer; the level of household net worth is at a record high."

We heard that all the time, household net worth is over $50 trillion, and the level of bank deposits and money market fund holdings, are at record highs and somehow this accumulated savings will keep the consumer afloat even if the Fed tightens further. Well, we went back into the history books and found that U.S. household net worth hit a RECORD level in the quarter before every recession in the post-war era. Not only that, but in every recession outside of the 2001 episode when the equity market melted, household net worth rose throughout the entire period of negative GDP growth. So basically, net worth goes up before, during and after recessions, and it would make sense that with personal income setting new records practically every quarter, that the level of savings would too. In other words, the level of net worth is a pretty useless leading economic indicator, and the notion that households will draw down their level of savings – savings hopefully intended to fund retirement – to satisfy current consumption instead sounds pretty spurious to me.