David A.

Rosenberg September 29, 2010

Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Breakfast with Dave

DUE TO BUSINESS TRAVEL, BREAKFAST WITH DAVE WILL NOT BE
PUBLISHED TOMORROW, BUT RETURNS ON FRIDAY IN THIS ISSUE
• While you were sleeping:
WHILE YOU WERE SLEEPING the big news is that of
asset classes that
The big news is still that asset classes that traditionally move inversely are now
traditionally move
moving in tandem — stock prices, bond prices, and the gold price. As far as the inversely are now moving
latter is concerned, have a look at Martin Wolf’s column today on page 11 of the in tandem — stock prices,
FT — Currency Wars in an Era of Chronically Weak Demand — and also see bond prices, and the gold
Currency Wars: A Fight to be Weaker on page C1 of the WSJ. Perhaps all three price
are strengthening on the same prospect — the Fed’s strong hint of another • Lack of confidence: the
round of quantitative easing (QE). The Fed, after all, would be buying Treasuries Conference Board’s
so it is perfectly understandable why they would rally. More money printing consumer confidence
means more U.S. dollar depreciation, which would obliviously be positive for gold index sagged to 48.5 in
(have a look at Gold Forecast $1,450/oz on page 25 of the FT. September from 53.2 in
August
The equity market seems to be the odd man out but we would surmise that it is • It wasn’t just consumer
rising on hopes that QE2 will be successful yet in stimulating final demand confidence that’s in a
growth. From our lens, the jury is out on the efficacies of lower interest rates in funk, business sentiment
slips too in Q3
an environment of contracting credit, especially considering what little impact
the sharp plunge in yields and radical expansion of the central bank balance • House prices dip in the
sheet have already exerted. A record low 0.64% yield on the 10-year TIPS U.S.: the Case-Shiller
strongly suggests that the bond market is sniffing out a renewed contraction and Composite-20 index fell
0.1% MoM in July — first
the pace of economic activity before too long.
decline in four months and
is likely the re-emergence
We have long been of the view that the trauma that hit the U.S. household of its primary downward
balance sheet — the largest balance sheet on the planet — has led to a dramatic trend
shift in consumer attitudes towards spending, credit and homeownership. With
• Richmond, poor man: the
that in mind, it is somewhat comforting to see society moving from denial to litany of softer regional
acceptance as it pertains to the secular changes in spending and saving economic reports
behaviours that is truly underway. For a real life view of the challenges that lie continues unabated
ahead have a look at the front page article of the USA Today titled Recession’s
Impact on Us: Lifestyle Changes Deep, Long Term.

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net
worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports, visit www.gluskinsheff.com
September 29, 2010 – BREAKFAST WITH DAVE

CHART 1: RECORD IMPLOSION IN HOUSEHOLD NET WORTH

United States: Household Net Worth (three-year percent change)
60

40

20

-20

-40
55 60 65 70 75 80 85 90 95 00 05 10

Shaded region represent periods of U.S. recession. Source: Haver Analytics, Gluskin Sheff

LACK OF CONFIDENCE It is now clear that we never

It is now so clear that we never did have an organic recovery on our hands. did have an organic recovery
Growth is vividly slowing down in North America, and deflation, not inflation, is on our hands in the U.S. —
the primary risk. After all, if disinflation was the primary trend for 30 years growth is slowing down and
amidst a secular credit expansion, it surely stands to reason that as credit deflation, not inflation, is the
contracts, and with the underlying inflation below 1% and a huge output gap of primary risk
6.5%, deflation is a totally realistic scenario. The bond market is signalling some
deflationary event of great magnitude (could be an unexpected stock market
shock?). Bond yields will follow the 2-year note yield and will completely melt
before this interest rate cycle is complete.

In September, U.S. consumer confidence (according to the Conference Board)

sagged to 48.5 from 53.2 in August — the consensus was expecting 52.0. This
takes us all the way back to February and the fact that it slipped so badly in a
month that saw the equity market surge must be telling us that something,
somewhere else is not going well at all — most likely, in the labour market.
Indeed, the spread between the “jobs hard to get” and “jobs are plentiful”
series, which gapped up to a six-month high of 42.3 from 41.5 in August. This
foreshadows a rise in the unemployment rate, to 9.7% from 9.6% currently.
CHART 2: CONFERENCE BOARD EMPLOYMENT INDICATOR
POINTING TO AN INCREASE IN THE JOBLESS RATE
United States
Conference Board Employment Indicator
(Jobs Hard to Get minus Jobs Plentiful, percentage points: thick line, left hand s
Unemployment Rate
(percent, thin line, right hand side scale)
60 12

40
10

20
8

0
6
-20

4
-40

-60 2
70 75 80 85 90 95 00 05 10

Source: Haver Analytics, Gluskin Sheff

Page 2 of 7
September 29, 2010 – BREAKFAST WITH DAVE

Putting the headline 48.5 reading into perspective, consumer confidence

averages 72.9 in recessions and 100.2 in expansions. Maybe the National
Bureau of Economic Research jumped the gun. The chart of the “present
situation” does indeed flag no recovery, down nearly two points in September, to
23.1, and in fact, is back to levels prevailing in April 2009 (pre-green shoots!!).

CHART 3: PRESENT SITUATION INDEX DOES NOT FLAG A RECOVERY

United States: Conference Board Present Situation Index
(1985 = 100)
200

Home-buying plans in the U.S.

160 flirting near all-time lows,
according to the Conference
120 Board Consumer Confidence
Survey
80

40

0
70 75 80 85 90 95 00 05 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

Moreover, home-buying plans slipped from 2.1 to 1.9 in September — flirting

near all-time lows.

CHART 4: HOME BUYING INTENTIONS FLIRTING WITH ALL-TIME LOWS

United States: Conference Board Consumer Confidence Survey:
Plans to Buy a Home Within Six Months (percent respondents)

6.00

5.25

4.50

3.75

3.00

2.25

1.50
70 75 80 85 90 95 00 05 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

Page 3 of 7
September 29, 2010 – BREAKFAST WITH DAVE

Auto buying plans have stagnated at a putrid 4.7 level now for three months
running. So, if taking rates from 5.5% to zero could not revive credit-sensitive
spending, and if tripling the size of the Fed’s balance sheet could not revive
credit-sensitive spending, then why is it that we should believe that QE2 will be
any different?

Finally, what sort of “recovery” is this when 46.1% of consumers see business
conditions as “bad” while a mere 8.1% see them as “good”?

BUSINESS SENTIMENT SLIPS TOO Wondering why the labour

It wasn’t just the consumer in a deep funk, the Conference Business market indicators were so
Roundtable CEO poll plunged for the first time in a year — down eight points to weak in the consumer
86 in Q3. In case anyone is wondering why the labour market indicators were confidence index? Well, hiring
so weak in the consumer confidence index, well, hiring intentions in the CEO intentions in the CEO business
business survey took a dive. Only 31% of respondents plan to hire in the next survey took a dive in Q3
six months, well below the 39% print the last time the poll was taken in June.

HOUSE PRICES DIP

Well, we didn’t really need the Case-Shiller (CS) home price index to know that
residential real estate prices are dipping again — we already got that from the
recent FHFA, resale and new home sale reports. The CS Composite 20 series
dipped 0.1% MoM in July — the first decline in four months and quite likely the
re-emergence of the primary trendline … which is down.

RICHMOND, POOR MAN

The litany of softer regional economic reports continues unabated. The
The Richmond Fed
Richmond Fed index, if taken at face value, is pointing to a renewed contraction
manufacturing index, if taken
in industrial activity. The index slid from +11 in August to -2 in September, the
at face value, is pointing to a
weakest reading since the beginning of this year. Shipments slipped to -4 from
renewed contraction in
+11 and order volumes fell off the proverbial cliff: +41 in April, to +36 in May, to industrial activity
+25 in June, to +13 in July, to +10 in August, to a big fat ZERO in September.

In economics land, we would typically call that a trend. Capiche!

If you think that’s bad, backlogs went from zero to -11 — it was +16 in May.
Again, it is abundantly clear that labour market conditions deteriorated in
September — down to -3, a seven-month low, from +12 in August and +15 in
July. The average workweek also shrunk from +14 to zero.

Page 4 of 7
September 29, 2010 – BREAKFAST WITH DAVE

CHART 5: LABOUR MARKET CONDITIONS IN THE MANUFACTURING

SECTOR DETERIORATED IN SEPTEMBER
United States: Federal Reserve Bank of Richmond Manufacturing Survey:
Number of Employees Diffusion Index (percent)
20

-20

-40

-60
95 00 05 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

The inflation metrics were superb — if you are a bond bull, that is. Wages fell to
a five-month low of 8 from 13. Prices-paid receded to 1.31 from 2.19 in August,
and prices-received slid to 1.06 — the lowest in seven months — from 1.45 in
both July and August.

The service sector didn’t fare much better — according to the Richmond Fed,
revenues in the service sector came in at -5 in September from -10 in August.
This was the first back-to-back decline since the start of this year.

Yet again, the employment index was a notable blemish, and again, take a look at
the pattern: +10 in May, to +2 in June, to -6 in July, -8 in August and -12 in
September. A pattern to be sure. And again, disinflation pressure was
underscored by the ultra-low reading of 0.34, with respect to the pricing subindex.

CHART 6: DITTO FOR THE SERVICE SECTOR

United States: Federal Reserve Bank of Richmond Service Sector Survey:
Number of Employees (percentage increasing)
20

10

-10

-20

-30

-40
95 00 05 10

Shaded region represent periods of U.S. recession

Source: Haver Analytics, Gluskin Sheff

Page 5 of 7
September 29, 2010 – BREAKFAST WITH DAVE

Gluskin Sheff at a Glance

Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms.
Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to the
prudent stewardship of our clients’ wealth through the delivery of strong, risk-adjusted
investment returns together with the highest level of personalized client service.

OVERVIEW INVESTMENT STRATEGY & TEAM

As of June 30, 2010, the Firm managed
assets of $5.5 billion.
Gluskin Sheff became a publicly traded
corporation on the Toronto Stock
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remains 54% owned by its senior
management and employees. We have
public company accountability and
governance with a private company
commitment to innovation and service.
Our investment interests are directly
aligned with those of our clients, as
Gluskin Sheff’s management and
employees are collectively the largest
client of the Firm’s investment portfolios. shareholder-minded management and a
We offer a diverse platform of investment
strategies (Canadian and U.S. equities,
Alternative and Fixed Income) and
investment styles (Value, Growth and
1 2010 versus $5.4 million
Income).
The minimum investment required to
establish a client relationship with the
Firm is $3 million for Canadian investors
and $5 million for U.S. & International
investors.
PERFORMANCE
$1 million invested in our Canadian Value which we have the highest conviction.
Portfolio in 1991 (its inception date)
would have grown to $10.9 million on
2
We have strong and stable portfolio
management, research and client service
teams. Aside from recent additions, our Our investment
Portfolio Managers have been with the interests are directly
Firm for a minimum of ten years and we
aligned with those of
have attracted “best in class” talent at all
our clients, as Gluskin
levels. Our performance results are those
Sheff’s management and
of the team in place.
employees are
We have a strong history of insightful collectively the largest
bottom-up security selection based on client of the Firm’s
fundamental analysis.
investment portfolios.
For long equities, we look for companies
with a history of long-term growth and
stability, a proven track record,
$1 million invested in our
Canadian Value Portfolio
share price below our estimate of intrinsic
in 1991 (its inception
value. We look for the opposite in
date) would have grown to
equities that we sell short.
$10.9 million2 on June 30,
For corporate bonds, we look for issuers
with a margin of safety for the payment
for the S&P/TSX Total
of interest and principal, and yields which
Return Index over the
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credit risks involved.
We assemble concentrated portfolios —
our top ten holdings typically represent
between 25% to 45% of a portfolio. In this
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Our success has often been linked to our

long history of investing in under-followed

June 30, 2010 versus $5.4 million for the
and under-appreciated small and mid cap
S&P/TSX Total Return Index over the
companies both in Canada and the U.S.
same period.
$1 million usd invested in our U.S. PORTFOLIO CONSTRUCTION
Equity Portfolio in 1986 (its inception In terms of asset mix and portfolio For further information,
date) would have grown to $10.9 million construction, we offer a unique marriage please contact
usd on June 30, 2010 versus $8.6 million
2
between our bottom-up security-specific questions@gluskinsheff.com
usd for the S&P 500 Total Return Index fundamental analysis and our top-down
over the same period.
macroeconomic view.

Notes:
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2. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses. Page 6 of 7
September 29, 2010 – BREAKFAST WITH DAVE
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