David A.

Rosenberg April 30, 2010

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

MARKET MUSINGS & DATA DECIPHERING

Lunch with Dave

U.S. GDP REVIEW — ONCE AGAIN, LESS THAN MEETS THE EYE
IN THIS ISSUE
While many economists will undoubtedly rejoice over the strongest headline
GDP results in six years, today’s Q1 2010 number actually came in a tad light • U.S. GDP review — once
again, less than meets the
relatively to expectations, not to mention the fact that it was a very mixed
eye
performance, from a sector standpoint. Real GDP expanded at a 3.2% annual
rate versus the 3.4% rate that the consensus had penned in, and once again the • One amazing equity rally in
mathematics of a renewed inventory build was responsible for half the GDP the U.S., but … there are at
least four
growth last quarter.
nonconfirmations that is
cause for pause
No doubt the consumer was in a better buying mood in Q1 with volume spending
up 3.6% annual rate but if truth be told, if not for the drawdown in the savings • Land of the rising sun?
Japan just printed a slate
rate (to 3.1% from 3.9%) household expenditures would have barely exceeded a
of very constructive
2.5% annualized pace. The savings drawdown, along with the fact that real economic data points
personal income excluding government transfers basically stagnated in the first
quarter, leaves us with a view that this rebound in consumer spending growth • China, the golden touch?
According to the World
was more of a blip than a sustainable uptrend.
Gold Council, China is
expected to double its gold
Capital spending (equipment and software) was a bright light in the GDP report, consumption over the next
expanding at 13.4% annual rate on top of the 19% pickup in the final three decade
months of 2009. Considering that whatever organic income growth the
• Canada’s labour market
economy is generating is being concentrated in the corporate sector, along with maybe not as pristine as
the fact that a tremendous amount of capacity has been taken out of the system we all thought
over the past two years in the manufacturing sector, it should really come as no
• The question and answer
surprise that business spending is firming up.
session with BoC
Governor Mark Carney
Unfortunately, capex only represents a 6.5% share of GDP and there are other during his speech before
areas of the economy that are contracting and thereby exerting an offsetting the Standing Senate
impact. The relentless overcapacity in the commercial real estate sector Committee on Banking
continues to wreak havoc, underscored by the 14% decline in non-residential was very informative
construction last quarter. On top of this, residential construction swung back to • U.S. initial jobless claims
a contraction of 11% at an annual rate, which makes you wonder about the — looking past the noise
outlook after the homebuyer tax credit expires.
• Extended unemployment
benefits in the U.S. about
The fiscal crunch in the State and local government sector prompted the largest to expire
downsizing in any quarter (down 3.8 % at an annual rate, the largest quarterly
decline in three decades). For all the talk about “shovel-ready” infrastructure
projects, federal expenditures (nondefense) actually slowed to a 1.7% annual
rate, leaving the entire government sector as an overall drag on GDP. This may
be the early signs of fading stimulus, which will only be extenuated by the
reduction in government support programs going forward (the expiry of jobless
benefits, as one example).

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
April 30, 2010 – LUNCH WITH DAVE

We have may have a statistical recovery on our hands, but it is extremely It is still completely
anaemic benchmarked against the amount of pro-cyclical government abnormal for the economy to
assistance ranging from bailouts to a microscopic policy rate, to a $1.4 trillion still be running at a level
fiscal deficit, to a pregnant $2.3 trillion Federal Reserve balance sheet. below the pre-recession
peak at this stage of the
If this were a normal, garden-variety cycle, as opposed to a secular period of cycle
unrelenting private sector credit-contraction, the various Federal government
interventions would have already been triggering a rebound in real final sales
growth closer to a 3.1% annual rate. Instead, real final sales (GDP less
inventories) has only managed to eek out gains of 1.5%, 1.7%, 1.6% in each of
the past 3 quarters. On this basis, this post-recession recovery goes down as
one of the weakest in the 60-plus year history of the data series.

Not only that, but it is still completely abnormal for the economy to still be
running at a level below the pre-recession peak at this stage of the cycle.
Normally, nine quarters after the onset of the downturn, the level of real GDP is
not only hitting a new high, but 12% above the prior cycle high. Here were are
today, nine quarters after the onset of the “Great Recession” and despite all the
kings horses and all the kings men, the Humpty Dumpty economy is still 1%
lower today that it was in the fourth quarter of 2007.

ONE AMAZING RALLY, BUT ...

• The S&P 500 is now up 76% from the March 2009 lows. This goes down as We said earlier this year that
the sharpest up-move since the bungee jump in 1932-33 (no money was Japan was a “sleeper” and
made in equities for another decade after this initial sharp leg up). overnight the country printed
• The S&P 500 index has not had a three-day losing streak since mid-January. off a slate of consructive
This has not happened since 1980 (the market didn’t bottom for good for data points
another two years).
• Up days versus down days in 2010 is now at 66% — the highest ratio during
any year in over 30 years.
• The ratio of NYSE volume to Nasdaq volume (sign of speculation) is surging
beyond levels seen during any period in the past 10 years.
• Investors Intelligence bullishness hit 54% in the latest week — its highest level
since the 2007 all-time peak in the equity averages.

But ... there are at least four nonconfirmations.

First is the gold price — it is trending higher in U.S. dollar terms and surging in
Euro terms and is a hedge against financial instability. Meanwhile, the stock
market is trading as if we have financial nirvana on our hands.

Second is the bond market — a hedge against deflation and here we still have
the 10-year T-note yield hanging around 3.7% whereas if we were truly in a
wonderful refationary cycle, it should be north of 4.5% right now.

Third, the action in emerging Asian markets, which are trading below their recent
highs, and especially China, which is actually now 14% below the nearby peak of
late 2009 (during which the S&P 500 has risen nearly 10%).

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April 30, 2010 – LUNCH WITH DAVE

Fourth, there are some signs of a crack in credit quality. Global corporate
Gold demand in China is
spreads have widened 6bps this week, to 149bps and high-yield spreads have
expected to double over the
moved out 13bps, to 569bps. U.S. CDS spreads have also risen 5bps, to 94bps.
next decade, according to
As we saw in 2000 and again in 2007, credit leads equities.
the World Gold Council
LAND OF THE RISING SUN?
We said earlier this year that Japan was a “sleeper” (and we know Byron Wien
would concur) and overnight the country printed off a slate of consructive data
points. Industrial production bounced 0.4% in March, wages rose 0.8% YoY for
the first increase in 22 months and real household spending jumped 4.4%.
Consumer spending in Japan — wasn’t that an oxymoron for the past two
decades? Ostensibly, not the case any more.

CHINA: THE GOLDEN TOUCH?

In a recent report, the World Gold Council expects China (currently the second
largest consumer of gold in the world at US$14bln) to double gold consumption
over the next decade. The Chinese gold market has taken off since government
regulation was eased in 2002 — over the past five years, consumer demand for
gold has averaged 10% per year. In fact, even with strong growth over the past
five years, on a per capita basis the Chinese still lag behind India, Hong Kong and
Saudi Arabia in terms of gold consumption, so there is a lot of scope for catch up.

In 2009, which was a down year for jewellry demand overall, China bucked this
trend with 9% growth. Early reports suggest that 2010 is already shaping up to
be good year for jewellry demand — both Indian and Chinese demand for gold
jewellry were noted to have increased in the first quarter.

CANADIAN LABOUR MARKET — MAYBE NOT AS PRISTINE AS THOUGHT

Canada’s other employment report came out yesterday (the Establishment The Establishment
Survey, which is not widely followed since it is reported with a nearly two-month employment survey suggests
lag to the Labour Force Survey). There was some food for thought in the report, that the jobs market in
which suggested that the Canadian labour market is not quite as strong as Canada is not as strong as
widely believed. For example, from the end of Canada’s recession, the LFS many think
survey reported that the economy created nearly 85,000 jobs while the
Establishment Survey reported almost half of that increase, at 46,000.

Q&A WITH BoC GOVERNOR MARK CARNEY

Bank of Canada Governor Mark Carney appeared before the Standing Senate
Committee on Banking, Trade and Commerce. There was nothing new in his
speech, as it was identical to the one he delivered to The House of Commons
Standing Committee on Finance on Tuesday. However, the Q&A period did
catch our attention and here’s what Mr. Carney had to say on a variety of
topics:

Page 3 of 8
April 30, 2010 – LUNCH WITH DAVE

On Canada’s outlook vis-à-vis sovereign risk The question and answer

“The net result of this would be negative for growth in Canada, and being session with BoC Governor
central bankers, we've wrapped this all up neatly into a reference to a Mark Carney during his
downside risk to our forecast from sovereign risk.” speech before the Standing
Senate Committee on
On Greece Banking was very
“We have been in close discussions with our European partners, with the IMF, informative
with the countries concerned. There are negotiations ongoing. At this stage,
it's a serious situation. But these are productive negotiations and they're
continuing to make progress and we have expectation that they will be
fulfilled.”

On the main risk to global recovery

“The debt situation is one of the largest, arguably the largest, risk to securing
the global recovery.”

On the idea of global bank tax

“We look at that as, well, first off, good luck hanging onto the funds and not
diverting it off to something else. And secondly, isn't this going to change
behaviour in the sector because I know that you're going to rush in with that
big pot of money and bail me out. "This seems like a very foolish idea and so
we want no part of that.”

On the danger of not fixing fiscal problems

“The situation is serious and to fully answer your question ... what happens if
these steps aren't taken ... If they're not taken one can expect an increase in
longer-term interest rates on the global level and even though the Canadian
fiscal position is among the best if not the best of the G20, jointly the best I
guess with Australia, we will do better than others but we will be pulled up by
the rising global interest rates and that will have a knock-on effect on
investment and growth in this country.”

On fiscal stimulus limits

“There are limits to fiscal stimulus. There's requirements and there's been
clear messages sent from the market to a number of countries, to all of us
really, that we need to be on sustainable paths. If that's the only thing that
happens in our view, if the only thing that happens is a series of countries
respond as they should to these messages, tighten policy, fiscal policy,
move ... back more rapidly onto sustainable paths, the world is in some risk of
arriving in a situation of insufficient demand ... this is one of our two big
downside risks. The first is the Canadian dollar, the second is this dynamic.”

On bank capital
“The question for the system as a whole, including Canada, is what should this
new minimum be and should it also be higher than it is currently in Canada,
including in the quality of that capital. There are some merits to thinking
about further strengthening of the capital regime in this country as well.”

Page 4 of 8
April 30, 2010 – LUNCH WITH DAVE

INITIAL CLAIMS – LOOKING PAST THE NOISE

U.S. initial jobless claims fell 11k to 448K for the week of April 24, basically in-
Both initial and continuing
line with consensus expectations. Recent claims data have been volatile due to
claims seem to be stuck at
the Easter holiday and administrative problems, but if you look past the noise,
levels seen two months ago
claims have remained around the 450K level for the past 8-9 weeks. Continuing
claims fell 18K, to 4.645 million, the second consecutive weekly decline — but
again, aside from the recent volatility, continuing claims have been stuck around
4.65 million.

The U.S. labour market doesn’t seem to be showing great improvement given
that both initial and continuing claims appear to be stuck at levels seen two
months ago. Note that the reference week for nonfarm payrolls (due next
Friday) was last week’s claims report, so we haven’t seen much of a change to
the 175K consensus estimate after this report.

BENEFITS ABOUT TO EXPIRE

Personal income has managed to rise 2% in the past year in the United States
despite a near-10% jobless rate and the fact that employment, even with the
nascent rebound, is still down nearly 2% over the last 12 months. Fully 100%
of the income gain in the household sector has been due to government
transfer payments, which now account for almost one-fifth — by far a record —
of household income.

Private sector wages and salaries are still lower today than they were a year
ago and real organic personal income is down nearly 2% as well. This is why
there is still debate as to when and whether the recession has actually come
to a full stop — imagine a recovery devoid of organic income growth in the
consumer sector.

What is driving the income growth has been the surge in unemployment
What is driving the income
insurance benefits, which have ballooned to unprecedented levels and are up
growth has been the surge in
more than 50% from this time last year. So, Uncle Sam’s generosity has been a
unemployment insurance
key player and this is largely because no fewer than three times since the
benefits
recession began in December 2007, Congress has extended jobless benefits —
from 53 weeks to 99 weeks (about double what you can get in “socialist”
Canada). But this assistance is about to term out and with it, an estimated one
million folks receiving benefits are going to roll off in the next few months (there
are now an amazing 11 million or 70% of the jobless tally receiving benefits).
Considering that this means the loss of $320 per week, on average, for these
one million jobless who are about to see their benefits expire, we are talking
about a $16 billion hit to their pocketbooks. So the biggest mistake anyone can
make is to extrapolate today’s consumer-led GDP report into the future.

Page 5 of 8
April 30, 2010 – LUNCH WITH DAVE

CHART 1: UNCLE SAM’S GENEROSITY IS DRIVING INCOME GROWTH

United States: Personal Transfer Receipts:
Government Unemployment Insurance Benefits
(US$ blns)

150

125

100

75

50

25

0
60 65 70 75 80 85 90 95 00 05

Source: Haver Analytics, Gluskin Sheff

Page 6 of 8
April 30, 2010 – LUNCH 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
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1 December 31, 2009
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Portfolio in 1991 (its inception date)
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April 30, 2010 – LUNCH WITH DAVE
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