Transcript John Jung - National Outlook - (CCIM) North Carolina Chapter

2012 and Beyond:
Navigating the New Economy
Presented by
John B. Jung Jr.
Senior Managing Director, BB&T Capital Markets
North Carolina – CCIM Presentation
March 21, 2012
Important Disclosures
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considered an offer or solicitation regarding the sale of any security.
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provide tax or legal advice. You should consult your individual tax or legal professional before taking any action
that may have tax or legal consequences.
“Never make predictions, especially about the future.”
- Casey Stengel
Improving Signs: Consumer Confidence & Spending
Consumer confidence has trended up since the all-time low in February 2009 and
consumer spending continues to recover.
U.S. Consumer Spending Growth
U.S. Consumer Confidence
1.5%
Consumer Spending Growth
Consumer Spending Growth
120
100
80
60
40
20
0
2004
1.0%
0.5%
0.0%
-0.5%
-1.0%
2005
2006
2007
2008
2009
2010
2011
-1.5%
2004
2005
2006
2007
2008
2009
2010
Source: FactSet, /Source: Reuters, www.MillionaireCorner.com
4
4
2011
Improving Sign: Manufacturing
Since the middle of 2009, companies have ordered goods at improving levels.
ISM Manufacturing New Orders Index
New Orders (Seasonally Adjusted)
80
70
60
50
40
30
20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: ISM, BBTCM Research
5
5
Positive Trend: Long-Term GDP Growth
Long-Term Real Growth in U.S. GDP Per Capita (1871-2009)
2011
Source: VisualizingEconomics; MorningWorth
6
6
So, Why Doesn’t the Recovery Feel Better?
Recession Start Date
Length of U.S. Recessions (1900-Present)
Sep-1902
May-1907
Jan-1910
Jan-1913
Aug-1918
Jan-1920
May-1923
The most recent recession is technically
behind us - it was only slightly above
average in terms of duration.
Oct-1926
Aug-1929
May-1937
Feb-1945
Nov-1948
Jul-1953
Aug-1957
Average length of
recession – 14 months
Apr-1960
Dec-1969
Nov-1973
Jan-1980
Jul-1981
Jul-1990
Mar-2001
Dec-2007
0
12
24
36
48
Months
Source: National Bureau of Economic Research
7
7
Why Do the Effects Continue To Be Felt?
Percentage Change in Economic Indicators Following Recession
What is old normal?
What we are dealing with?
Average, 3 Years After The Start of Recession (1)
30%
25%
20%
15%
10%
5%
0%
27.0% 26.8%
Current Cycle (4 years from the end of 2007)
30%
25.0%
23.8%
10%
21.7%
(10%)
16.9%
13.0%
6.2%
0.5%
(0.2%)
(4.6%) (4.7%) (4.2%)
(8.6%)
(30%)
11.6% 11.4%
(31.9%)
7.0%
(50%)
(70%)
(73.8%)
(90%)
“This country had a huge, huge wound…It takes time for wounds to heal, regardless of how good the care is.”
-Warren Buffet
(1) Covers eight recession cycles going back to 1950 (does not include the truncated 1980 recession)
Source: Haver Analytics, Gluskin Sheff, U.S. Census, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, U.S. Treasury
8
8
What Drove The Great Recession?
U.S. Household Debt as a Percent of GDP
100%
80%
?
60%
The Great
Recession?
40%
20%
The Great
Depression
0%
1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Household debt / GDP
Source: U.S. Census, U.S. Federal Reserve Flow of Funds.
9
Old Normal vs. New Normal
Old Normal
(1946 – 2007)
New Normal
(2007 - ?)
1. Rising Asset
Prices
1. Stabilizing
Asset Prices
2. Declining
Risk Premium
4. Increased
Leverage
3. Aggressive
Investing
 Strong Growth
 Low Unemployment
 Aggressive Consumer Spending
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2. Increasing
Risk Premium
4. Reduced
Leverage
3. Need for
Liquidity
 Limited Growth
 High Unemployment
 Lower Consumer Spending
New Economy Characteristics
•
Muted domestic economic growth
– Persistently high unemployment
– Continued asset re-pricing
– Continued de-leveraging
– Large public deficits and debt
•
11
Global Marketplace
“New Normal” Characteristics - Employment
•
The average length for an unemployed person is 40.5 weeks – the longest period ever
–
•
6.3 million people have been unemployed for over six months
Although the U.S. has lost nearly 8 million factory jobs since manufacturing employment peaked in mid1979, the U.S. remains the No. 1 manufacturing country in the world, out-producing No. 2 China by a
staggering 25%
–
U.S. Labor Productivity is up over 50% in the last two decades
Employment – Percent of
Previous Peak
U.S. Labor Productivity –
Real Output ($ in billions)
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
1992
12
1994
1996
1998
Source: U.S. Department of Labor; Bureau of Labor Statistics; FactSet, Associated Press
2000
2002
2004
2006
2008
2010
“New Normal” Characteristics – Asset Re-pricing
U.S. Real Wage Growth
Home Price Indices
25.0%
25.0%
25.0%
25.0%
20.0%
20.0%
20.0%
20.0%
15.0%
15.0%
15.0%
15.0%
10.0%
10.0%
10.0%
10.0%
5.0%
5.0%
5.0%
5.0%
0.0%
0.0%
0.0%
0.0%
(5.0)%
(5.0)%
(5.0)%
(5.0)%
(10.0)%
(10.0)%
(10.0)%
(10.0)%
(15.0)%
(15.0)%
(15.0)%
(15.0)%
(20.0)%
(20.0)%
(20.0)%
(25.0)%
(25.0)%
(20.0)%
(25.0)%
1990
1992
1994
1996
1998
2000
2002
2004
(% 1YR) Average Real Wage
Recession Periods - United States
2006
2008
2010
1990
1992
1994
1996
1998
2000
2002
2004
S&P/Case-Shiller - 10 City Composite
Recession Periods - United States
2006
2008
2010
(25.0)%
•
Foreclosures on homes amount to roughly one-quarter of existing home sales and roughly 25% of mortgage
holders are underwater on their home loans
•
U.S. homes are projected to have lost $681 billion in value during 2011…35% less than the $1.1 trillion lost in 2010
–
•
Real estate experts now believe it will take 20 years to recoup the $6 trillion worth of housing value
destruction seen in the last five years…after adjusting for inflation, values will never catch up
Housing affordability below pre-recession levels – the ratio of housing prices to annual household income has
fallen from 2.3x during the peak of the bubble all the way back to 1.6x (well below the average of 1.9x).
Source: U.S. Census Bureau, National Association of Realtors, BBTCM Research, FactSet, Standard & Poor’s, Financial Times, NY Times
13
“New Normal” Characteristics – De-Leveraging
•
The S&P 500 has been flat for the last decade; at the same time earnings have risen 75%;
resulting in the price to earnings level being down 43%
•
How much of the growth in earnings is tied to the growth in the international economy?
•
Is it better to invest at 24 P/E or 12 P/E?
Historical Index Performance
S&P 500 Price To Earnings
1,800
28
S&P 500 EPS
1,400
1,200
1,000
800
600
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
S&P 500
Source: FactSet, data as of December, 31 2011
14
S&P 500 P/E Ratio
1,600
24
20
16
12
8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
S&P 500 Price to Earnings
“New Normal” Characteristics – Large Public Deficits and Debt
•
Since the 1950’s we have borrowed on average 2% of GDP / in the four years of the current
administration we will average 10% of GDP
•
Informed constituencies can disagree on the number, but everyone agrees there is a real “debt
ceiling”.
Total U.S. Government Spending vs. Revenue as % of GDP
Source: Congressional Budget Office
15
Global Marketplace
•
Increased Economic Opportunity
–
•
Is the world our economic oyster?
European Union
– Potential for sovereign debt defaults in Europe
•
China
– Headed for a hard or soft landing?
•
Global Supply Chain Interruptions
– Middle East - world’s oil supply
– Japan earthquake
– Australian floods
16
“The nicest thing about not planning is that failure comes as a
complete surprise, rather than being preceded by a period
of worry and depression.”
- Sir John Harvey-Jones
17
Planning to Grow
•
Does government have a responsibility to “create” jobs – are there effective policy measures or
do we just need to save the money?
•
Should we support housing or let prices fall where they may – why are rational housing prices
bad for the economy?
•
Even though there is no concrete evidence the stimulus or quantitative easing worked – do we
continue to implement fiscal and monetary solutions? Are low interest rates a panacea?
•
Is the current regulatory environment undermining the recovery – are regulatory costs an
anchor around the neck of the economy?
•
Which do we combat – deflation (asset bubbles bursting – inability to pay collective debt) or
inflation (lower standard of living - the seeming ability to pay back our collective debt)?
18
Planning to Win
“Is the future what it used to be.”
-Yogi Berra (sort of)
•
If the financial system is sound and the capitalist system is allowed to work we will
continue to recover and grow – let the process work
•
The companies and organizations and governments who reacted rationally to the
“New Normal” are already the winners – rationalization (re-conceptualization) is a
major positive from the great recession
•
Do we have the ability to control the de-leveraging; or long term will the economy
find its own level? Are we then being realistic about trying to manage the deleveraging?
19
“We can’t solve problems by using the same kind of thinking we
used when we created them”
- Albert Einstein
20
Government Response
1.
Regulatory Overhaul
•
2.
Tax Code Reform
•
3.
21
By any measure the regulatory burden and costs to our economy is significant. Many
measures were well intentioned but the system has taken on a life of its own and the
costs far outweigh the benefits. A top to bottom regulatory review is necessary to
insure our global competiveness.
No matter how you feel about the level of taxes a complete reform (overhaul) of the tax
code is needed. A cogent and coherent code will lead to a conviction of certainty which
will allow capital to make informed decisions. Uncertainty about the present and future
code is anathema to a healthy and growing economy.
Fiscal Restraint
•
The current spending message out of Washington is on point – invest in education and
technology and infrastructure to spur growth.
•
In order to drive the engine of growth two things have to happen; Everyone will get
less and Everyone will pay more – and that involves defense and entitlements.
A Guide to Successful Discussions in DC
•
Innovation is essential, especially if it’s disciplined and focused on economic
outcomes
•
Compromise is paramount – my way or the highway is not an option
•
Get it right the first time – as time goes by our opportunities to be wrong diminish
22
“Men (or Women) make history, and not the other way around.
In periods where there is no leadership, society stands still.
Progress occurs when courageous, skillful leaders seize the
opportunity to change things for the better.”
- Harry S. Truman
23
Success starts here.
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