Transcript John Jung - BB&T Capital Markets

Bumpy Journey to a New Normal
CCIM Presentation
Presented by:
John B. Jung, Jr., Senior Managing Director, BB&T Capital Markets
1
March 16, 2011
Important Disclaimers
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Stringfellow, LLC, is a wholly-owned, nonbank subsidiary of BB&T Corporation. Securities and insurance
products or annuities sold, offered or recommended are not a deposit, not FDIC insured, not bank
guaranteed, not insured by any federal government agency and may lose value.
The information contained herein, while not guaranteed by BB&T Capital
Markets, has been obtained from sources which we believe to be reliable and accurate. This material is
not to be considered an offer or solicitation regarding the sale of any security.
Discussions of past performance do not imply a guarantee of future results.
Comments regarding tax implications are informational only. Scott & Stringfellow and its representatives
do not 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.
2
“Never make predictions, especially about the future.”
- Casey Stengel
3
Positive Sign: Consumer Spending
•
2010 saw positive growth in U.S. consumer spending
U.S. Consumer Spending Growth
Consumer Spending Growth
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
2004
2005
2006
2007
2008
2009
2010
Source: FactSet, data as of December 31, 2010
4
Positive Sign: Manufacturing
•
Business momentum recovered after summer softness
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
Source: ISM, BBTCM Research
5
Positive Sign: Bank Lending
•
Loan growth appears to be turning the corner
Loans Outstanding (YOY%)
Source: FRB, RidgeWorth Investments
6
Positive Long-Term Trend in GDP Growth
•
Although we saw a decrease in the real growth rate in U.S. GDP per capita during the
recession, a reversion to the historical trend line would seem appropriate given past
occurrences
Long-Term Real Growth in U.S. GDP Per Capita (1871-2009)
Source: VisualizingEconomics; MorningWorth
7
Technically, The Recession Is Behind Us
•
Although the most recent recession was particularly severe, it was only slightly above
average in terms of duration
Recession Start Date
Length of U.S. Recessions (1900-Present)
Sep-1902
May-1907
Jan-1910
Jan-1913
Aug-1918
Jan-1920
May-1923
Oct-1926
Aug-1929
May-1937
Feb-1945
Nov-1948
Jul-1953
Aug-1957
Average length of
recession
Apr-1960
Dec-1969
Nov-1973
Jan-1980
Jul-1981
Jul-1990
Mar-2001
Dec-2007
0
Source: National Bureau of Economic Research
12
24
36
48
Months
8
But The Effects Continue To Be Felt
•
Due to the severity of the most recent recession, the recovery has been much slower
and less pronounced than the recovery periods from past recessions
Percentage Change in Economic Indicators Following Recession
Note: Covers eight recession cycles going back to 1950 (does not include the truncated 1980 recession)
Source: Haver Analytics, Gluskin Sheff
9
What Drove The Great Recession?
•
80% of GDP is tied to consumer spending
U.S. Household Debt as a Percent of GDP
100%
80%
?
60%
The Great
Recession?
40%
The Great
Depression
20%
0%
1918
1923
1928
1933
1938
1943
1948
1953
1958
Household debt / GDP
1963
1968
1973
1978
1983
1988
1993
1998
2003
2008
Non-corporate Net Private Debt to GDP
Source: U.S. Census, U.S. Federal Reserve Flow of Funds. Please note non-corporate net private debt is used as a proxy for household debt (going back to 1918) as the Federal Reserve did not
begin tracking U.S. household debt until 1950
10
Pre-Recession Economy
Leveraged Economy (1946 – 2007)
1. Rising Asset
Prices
5. Increased
Leverage
4. Greater Risk
Taking
 Low Core Inflation
 Strong Growth
 Low Unemployment
2. Declining Risk
Premium
3. Reach for
More Yield
11
Structural Shift in U.S. Economy – The New Normal
De-Leveraged Economy (2007 - ?)
1. Declining
Asset Prices
5. Reduced
Leverage
4. Flight to
Safety
 Large Write Downs
 Limited Growth
 Higher Unemployment
2. Increasing
Risk Premium
3. Need for
Liquidity
12
Characteristics of The New Normal
•
Muted economic growth
•
Continuing private sector de-leveraging
•
Continued asset re-pricing
•
Large public sector deficits and debt
•
Persistently high unemployment and growing underemployment
•
Regulatory uncertainty
•
Greater government role in the economy; increasingly political tone
“This country had a huge, huge wound…It takes time for
wounds to heal, regardless of how good the care is.”
-Warren Buffet
13
High Unemployment And Growing Underemployment
•
The total number of unemployed is approximately 14.5 million and 6.4 million have been
unemployed for six months or more (chronic unemployment)
•
There are almost 27 million people unemployed, disillusioned, or underemployed.
•
Companies are resisting policy measures aimed at pushing them to hire more people – will
this lead to investment
U.S. Unemployment Rate and
Number of Workers Unemployed
Number of Workers Employed
18
140
120
115
110
105
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
100
Number Unemployed (millions)
125
12
8%
10
6%
8
6
4%
4
2%
2
0
0%
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
130
10%
14
Number Unemployed
Unemployment Rate
Source: U.S. Department of Labor; Bureau of Labor Statistics; FactSet, Associated Press
14
Unemployment Rate
Number Employed (millions)
135
12%
16
Companies Doing More With Fewer Employees
•
Although the U.S. has lost nearly 8 million factory jobs since manufacturing employment
peaked in mid-1979, U.S. manufacturers have placed near the top of the world rankings in
productivity gains over the past three decades
•
Productivity increased 2.6% in the nonfarm business sector in the fourth quarter of 2010
•
The U.S. remains the No. 1 manufacturing country in the world, out-producing No. 2 China
by a staggering 40%
U.S. Labor Productivity
12.0%
12.0%
10.0%
10.0%
8.0%
8.0%
6.0%
6.0%
4.0%
4.0%
2.0%
2.0%
0.0%
0.0%
-2.0%
-2.0%
-4.0%
-4.0%
-6.0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
-6.0%
Source: U.S. Department of Labor; Bureau of Labor Statistics; FactSet, Associated Press
15
Housing Fueled Excessive Consumer Spending
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%
-20.0%
-25.0%
-25.0%
-25.0%
1990
•
1992 1994 1996 1998 2000 2002
2004 2006 2008 2010
(% 1YR) Average Real Wage
Recession Periods - United States
1990
1992
1994
1996
1998
2000
S&P/Case-Shiller - 10 City Composite
2002
2004
2006
2008
2010
Recession Periods - United States
-25.0%
5.5 million U.S. Households are tied to mortgages 20% or more above value
–
3.5 years to clear up the backlog of foreclosed properties
•
Real estate experts now believe that home ownership will never again yield rewards like
those enjoyed in the second half of the 20th century; 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
•
GSE restructuring – any form will lead to higher interest rates / higher down payments –
leading to lower home prices
Source: U.S. Census Bureau, National Association of Realtors, BBTCM Research, FactSet, Standard & Poor’s, Financial Times, NY Times
16
Housing Continues To Be A Long-Term Drag
•
New home sales are down 79.1% from their July 2005 peak; existing home sales are down
35.6% from their June 2005 peak.
•
Home price declines are accelerating according to a WSJ report based on data from
Q4. Inventory levels meanwhile are on the rise.
•
Housing affordability hits 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).
U.S. New Home Sales
Seasonally Adjusted Annual Rate (millions)
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Existing
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0.0
New
Source: U.S. Census Bureau, National Association of Realtors, BBTCM Research, FactSet, Wall Street Journal
17
Earnings Valued Less Than Before
•
The S&P 500 has returned to a similar level to what it was in the beginning of the
decade, yet the PE ratio is down about 40%
Historical Index Performance
100
S&P 500 Price To Earnings
1,800
90
26
24
1,600
60
1,200
50
1,000
40
800
30
20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
S&P 500
S&P 500 LTM EPS
600
S&P 500
S&P 500 EPS
1,400
70
S&P 500 P/E Ratio
22
80
20
18
16
14
12
10
8
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
S&P 500 Price to Earnings
Source: FactSet, data as of February 4, 2011
18
Is CRE The Next Shoe To Drop?
•
More than $1.4 trillion worth of commercial real estate paper is coming due by 2016 and
more than 50% is attached to properties that are currently underwater
U.S. CRE Mortgage Maturities
($ in billions)
350
U.S. CRE Mortgage Maturities
300
250
200
150
100
50
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
0
Source: Financial Sense
19
Global Marketplace – Game Changer?
•
•
•
BRIC (Brazil, Russia, India & China) countries
–
The fastest growing and largest emerging market economies in the world
–
China is the largest holder of U.S. debt ($906.8 billion) and the second largest
economy in the world
European Union
–
Greece bailed out in May 2010
–
Ireland bailed out in November 2010
–
PIIGS (Portugal, Italy, Ireland, Greece & Spain) countries owe the “Big Three” of
Europe (Germany, France, and Great Britain) more than $2 trillion in debt
Middle East Unrest
–
Harbinger of future turmoil?
Source: Forbes, Wall Street Journal, The Economist
20
Are there cards left to play?
•
The 2010 Gross Federal Debt was $13.2 trillion, a 43% increase since 2007 and
$44,000 per person
•
In 2010 the $1.3 trillion debt was equal to 9% of 2010 GDP / 2011 projected at $1.65
trillion
•
In 2011, the Gross Federal Debt is projected to exceed GDP (up $1.6 trillion) – when
interest rates rise, how will we amortize the debt?
U.S. Gross Federal Debt
$25,000
$20,000
$21,442
$19,729
($ billions)
$18,211
$16,723
$15,000
$15,259
$13,260
$10,000
$9,986
$5,000
$5,590
$7,544
$8,598
$6,354
$0
2000
2002
2004
2006
2008
2010P
2012P
2014P
2016P
2018P
2020P
Source: Congressional Budget Office; US Department of the Treasury.; These figures represent federal debt that is subject to limitations only
21
Is This Sustainable?
•
The chart below shows the proportion of GDP spent on entitlement programs (Social
Security, Medicare, and Medicaid) and interest compared with the proportion of GDP
that the government is expected to raise in the form of revenues
U.S. Federal Budget as a Percentage of GDP
Source: KPCB, Congressional Budget Office, The Economist
22
Unusually Uncertain Outlook
“The future ain’t what it used to be.”
-Yogi Berra
•
Which is a bigger problem – deflation (asset bubbles and unemployment) or inflation
(fiscal stimulus)?
•
Are the current levels of unemployment structural
•
Will housing be an “investment” in the future – or a place to live?
•
Can we long-term de-lever the economy and do we want to de-lever the economy?
•
Can we pay our bills – federal, state, municipal?
•
How does the global economy affect our domestic policies (do we still have control)?
23
Collective Response
•
This has happened before, and it will happen again – if the financial system is sound
and the capitalist system is allowed to work we will continue to recover and grow
(economic growth = job creation!)
•
We have to avoid the inclination to over-regulate and to over-tax – very anti-growth.
This is hard for the politicians who want to do something
•
The message out of Washington is on point – invest in education and technology and
infrastructure to spur growth – where will the money come from?
•
In order to pay for the engine of growth (and to get back on track) two things have
to happen:
–
Everyone will get less / Everyone will pay more (the devil being in the details)
•
The companies who reacted rationally to the new circumstances are already the
winners – rationalization is a major positive from the great recession
•
Recovery will take time – it took 60 years to get here; it will take more time than we
think / hope to get re-balanced
24
“We can’t solve problems by using the same kind of
thinking we used when we created them”
- Albert Einstein
25
Innovating through Recession
•
Listen to the market – it is quieter when it is less crowded – unmet needs abound
•
Invest in your customers – now they need you the most – loyalty hangs in the
balance
•
Offer more value to your customers
•
Improve and increase communication
•
Downturns provide an opportunity to widen the gap between you and your
competitors
•
Those who stay in the market and invest reap the rewards
•
Time is more important to the market than money
Innovation is a good cost!
Source: The Andrew Razeghi Companies
26
Working Together
27