Transcript Document

Economic Recovery At Risk?
March 16, 2010
Dwight Johnston
Agenda
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The Trade
Job outlook – clear as mud
Second dip ahead
Scenarios
Risks
Most Likely
(From Jan. 2009)
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Economic recovery will fall far short
End of recession won’t feel like it
But job losses should abate
Housing still in bottoming process
Best case – Economy bottoms in ‘09
Greatest risks are to the downside
Keys to 2009
(From Jan. 2009)
• Don’t lose sight this is the biggest credit
event in history – no quick rebound
• Remember that the investor base for most
credit products decimated – rebuilding will
take years – “Shadow banking” gone
• Govt. intervention knows no boundaries
• Generational change in consumer
psychology – Boomers lower expectations
• After this deep recession ends – series of
mini-recoveries and mini-recessions
The Trade – Simple Version
• Global traders borrow in $ - sell $ to buy euro
etc. to invest in Greek bonds
• Market values plummet; liquidity issues
• Forced to sell good assets to buy $ to repay
loans/margin
• Higher $ pressures other global trades –
force out of positions
• Risk – Banks that provided loans –
Financial Meltdown II
Financial Landscape Has Not Changed
• “Extend and pretend” – can banks
continue to out-earn future losses?
• Commercial R.E. still to come;
Foreclosure losses still a work in
progress
• “Too big too fail” problem even bigger
• Nothing fundamental has changed
• Risk appetite surges – spreads
Census Hiring Will Muddle Picture –
Nonfarm Payroll Numbers Need a Big *
(Nonfarm Payrolls Change – Thousands)
Projected
Ja
n-0
Ap 6
r-0
Ju 6
l-0
Oc 6
t-0
Ja 6
n-0
Ap 7
r-0
Ju 7
l-0
Oc 7
t-0
Ja 7
n-0
Ap 8
r-0
Ju 8
l-0
Oc 8
t-0
Ja 8
n-0
Ap 9
r-0
Ju 9
l-0
Oc 9
t-0
Ja 9
n-1
Ap 0
r-1
Ju 0
l-1
Oc 0
t-1
0
400
300
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100
0
-100
-200
-300
-400
-500
-600
-700
-800
400
300
200
100
0
-100
-200
-300
-400
-500
-600
-700
-800
Jobs in 2010 – Volatile Numbers
• Census hiring will add 1.2 million parttime/full-time – most gone by year-end
• Will census act as stimulus?
• State & Local Govt jobs back at risk – 12 million at stake
• A new jobs bill?
• Shocking stat – ‘99 workers 129mm;
demo gains 29mm; ‘10 workers 129mm
California – Almost Michigan
Low UR
California
4.6%
High UR Current
12.5%
Orange Co.
3.0%
10.1%
LA/Long
Beach
4.0%
12.5%
San Bern/Ont/
Riverside
4.5%
15.0%
California Not Likely to Lead
• Too much of California’s growth was
construction based and r.e. profit-based
• Unemployment woes severe for some time
• Port business could be a plus but California
not in control
• Budget woes not conducive to attracting new
businesses
• While not a leader, will make a great follower
– human resources, desirability, reputation for
innovation
GDP – Government Driven Progress
Percent
Chain Weighted SAAR – Annualized Change YOY
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
Projected
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Second Dip Ahead
• The stock market is not the economy
• Do not under-estimate the lack of
stimulus – fiscal and monetary
• At end of 80’s recession consumer debt
46% of GDP – Today it’s 96%
• This was a monumental collapse of
asset prices – leaving behind a
mountain of debt
How Low Can We Go?
Current
Price ‘07
San Diego $565,000
Required
Price
Change
-29.3%
-$165,000
River/SB
$390,000
-41.0%
-$160,000
LA
$570,000
-39.5%
-$225,000
The O.C.
$720,000
-34.0%
-$245,000
Source: Burns Real Estate Consulting
Great Progress! – Sort Of
Peak Price
Mostly 2007
Actual
Decline
Current
Price
San Diego
$565,000
-38.0%
$350,000
O.C.
$720,000
-40.0%
$430,000
LA
$570,000
-44.0%
$320,000
San B/Riv
$390,000
-60.0%
$156,000
Source: Burns Real Estate Consulting
Housing Fundamentals –
Good to Great
• Most statistics support a bottoming
process is occurring – Psychology boost
• First time buyers very active
• Investors active (record 28%)– good and
bad
• Affordability best in years!
• Mortgage rates best in years! (at risk)
Housing Fundamentals –
Bad to Terrible
• “Bottom” – depends on jobs
• More pain in higher end likely
• More govt. support risks spread of walk
away incentive
• Foreclosures only delayed? – Shadow
inventory at record 3.4 million homes
• How negative would end of Fed mortgage
buying be? (Fed buys 75%)
Strategic Default – Now Trendy
• 1,000,000 walk-aways in 2009
• Articles now balanced but more
emphasis on positive aspects of default
• Wider acceptance in polls
• Risks will grow the longer home prices
remain flat in depressed areas with high
prices
Underwater Homes –
Incentive to Walk Away
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California – 36%
Nevada – 70%
Florida – 48%
Arizona – 51%
Suggestion for new NBC show Desperate Congresspersons
• Mid-term elections
• Son of stimulus - infrastructure? State jobs?
• More taxpayer money to cover mortgage
losses on modifications
• Fannie and Freddie folded into one; Rate
control? - private market dead – watch out for
commercial real estate programs
• More Fed meddling in securities markets –
Mortgage Rate Conundrum Who Will Replace the Fed?
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Ten Year
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FNMA MTG
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Buyers Cushion Mortgage Rates
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Big inflows into bond funds
Banks add mortgages with 0% funding
Pensions etc. add duration
Rise in rates would change the picture –
big extension risk
• Buyers become sellers
• Ultimate return to historical average
would boost mortgage rates by 75 b.p.s
Long-term Rates Still Low, But……
5
4.5
4
3.5
3
2.5
2
1.5
1
1/26/2009
0.5
2/10/2010
0
FFunds
3m
6m
12m
2Y
5Y
10Y
30Y
Long-term Problem –
Short-term Just Annoying
Range of Expectations for 12/31/2010
(March 2010 Bloomberg poll – 87 economists)
Low
Median
High
GDP
0.00%
2.90%
4.50%
UR
7.50%
9.40%
11.50%
CPI
1.00%
1.80%
5.00%
Fed
Funds
0-0.25%
.75%
1.50%
2-Year
1.00%
2.00%
3.30%
10-Year
2.50%
4.00%
5.50%
Three Scenarios – Crossroads?
• Low Rate Case – Bad assets drag on credit;
consumer shift intensifies; 2nd & 3rd dips –
Japanese scenario
20%
• Most Likely – Housing “process” continues; credit
market conditions stable; U.S. continues
recovery; true job growth still weak - Caution!
Long-term rates might rise
70%
• High rate case – Monetarist case. Dollar will
weaken and Fed’s money binge will produce
reduced foreign demand. Rates will surge on
Treasury needs.
10%
Fed Funds Scenarios
5
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3.5
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2.5
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1.5
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0.5
Rate Path # 1
Rate Path #2
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Rate Path #3
Ten-Year T-Notes
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6.5
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5.5
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3.5
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2.5
Rate Path # 1
Rate Path #2
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Rate Path #3
Final Thoughts
• Assume 2010 will look like second half 2009
• Worry about bubbles and second dips –
series of mini-recessions/mini-recoveries
• With luck, economy can build on small gains
– Benefits from weak dollar; census hiring
begets more hiring; foreclosures abate and
construction starts; real optimism returns –
not just “less bad”
• Lots of smart people (not on Wall Street)
believe economy will exceed expectations
Just for Credit Unions
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Be careful with mortgages
Loan performance no better/no worse
Vast differences locally
Credit unions could continue to benefit from
positive press - capitalize
• Brainstorm – What will your credit union
look like in permanently low rate
environment
Q and A
Dwight Johnston – [email protected]
Daily Market Comment & Longer-term Commentary available at
www.wescorp.org