Transcript [Presentation Subject]

January 7 – 9, 2011
12th FIMMDA – PDAI
Annual Conference
Udaipur
Pankaj Vaish
Head of Markets, South Asia, Citi
January 8, 2011
Volatility levels in U.S. resembled the 1930s
Rolling 90-day Standard Deviation of S&P 500*
*From 1919 to 1927 daily return are to the Dow Jones Composite Portfolio
Source: Global Financial Data, NSI
2
Credit Spreads were discounting 1930s style credit cycle
US BAA-AAA Corporate Spreads
Source: NBER, Datastream, NSI
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Relative performance like Depression
12 Month Rolling relative US Stock / Government Bond Return
Source: NSI
4
US Macro economy – Great Depression
 Real GDP (constant 1999$) dropped between 27% to 35%, depending on source.
 Unemployment reached 25% in 1933, fell to 9% in 1937 and then remained in double digits
till about 1940 when preparations for War began.
Source: based on data in Susan Carter, ed. Historical Statistics of the US: Millennial Edition (2006) series Ca9.
5
Sensex P/E in Feb 2009
P / E Levels
Source: Bloomberg
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Bernanke’s Rationale for QE2 (Transcript of “60 Minutes” Interview, Dec 2010)
Q: What did you see that caused you to pull the trigger on the $600 billion, at this point?
A: It has to do with two aspects. the first is unemployment The other concern I should
mention is that inflation is very, very low, which you think is a good thing and normally is a
good thing. But we’re getting awfully close to the range where prices would actually start
falling …
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U.S. Core PCE Deflator
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NAPM Prices Paid Index
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Bernanke’s Rationale for QE2 (Transcript of “60 Minutes” Interview, Dec 2010)
Q: Many people believe that could be highly inflationary. That it’s a dangerous thing to try
A: Well, this fear of inflation, I think is way overstated. we’ve looked at it very, very
carefully. We’ve analyzed it every which way. One myth that’s out there is that what we’re
doing is printing money. We’re not printing money. The amount of currency in circulation is
not changing. The money supply is not changing in any significant way. What we’re doing
is lowering interest rates by buying treasury securities. And by lowering interest rates, we
hope to stimulate the economy to grow faster. So, the trick is to find the appropriate
moment when to begin to unwind this policy. And that’s what we’re going to do.
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U.S. Currency in Circulation
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U.S. M2
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US 10 year Treasury Yield
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Japan Nominal GDP vs 10-year JGB
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Commodities – “In fashion” asset class!
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Bernanke’s Rationale for QE2 (Transcript of “60 Minutes” Interview, Dec 2010)
Q: Can you act quickly enough to prevent inflation from getting out of control?
A: We could raise interest rates in 15 minutes if we have to. So, there really is no problem
with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at
the appropriate time. Now, that time is not now.
Q: You have what degree of confidence in your ability to control this?
A: One hundred percent.
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“One Hundred Percent” sure??
Chairman Ben S. Bernanke
At the Federal Reserve Bank of Chicago’s 43rd Annual
Conference on Bank Structure and Competition, Chicago, Illinois
May 17, 2007
The Subprime Mortgage Market
…All that said, given the fundamental factors in place that should support the demand for housing, we
believe the effect of the troubles in the subprime sector on the broader housing market will likely be
limited, and we do not expect significant spillovers from the subprime market to the rest of the economy
or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue
to perform well. Past gains in house prices have left most homeowners with significant amounts of home
equity, and growth in jobs and incomes should help keep the financial obligations of most households
manageable.
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MSCI EM Vs SPX
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DXY
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US Macro Performance into QE2
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Bank Lending Needs to Pick Up…seriously!
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