Transcript 20242_JHA Dynamics 09 printable

Life After Stimulus:
When Reflation Meets
Deleveraging
March 4, 2009
Presented by Jerry Lynch
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Leading Economist
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September 7, 2008 – November 18, 2008
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Fannie Mae/Freddie Mac Bailed Out
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Central Banks Coordinate Rate Cuts
Lehman Bankruptcy
Bank Of America/Merrill Lynch
Federal Reserve Rescues AIG
Bailout Plan
Goldman And Morgan Stanley Become Banks
Washington Mutual Seized
Wells Fargo Acquires Wachovia
Crisis Spreads To Europe
Treasury To Inject Capital In Banks
Obama Elected
Detroit Seeks Bailout
China Proposes Stimulus
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Conclusions
Deleveraging
Recession
Policy Response
Global
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Three R’s
Reliquify
Recapitalize
Re-Regulate
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Response
Ad Hoc
Ideology
Politics
Fear
6
Stimulus
Fiscal/ Monetary Stimulus
Secular
U.S.
Real Economic
Growth
Cyclical
Global Forces
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Where Are We Now?
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U.S. Real GDP
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Unemployment Rate vs. Broader Total Unemployed*
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Industrial Production (January)
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Shedding Workers
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Unemployment Rate
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U.S. Real Consumer Spending
Y/Y % Dec. – 1.7%
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Housing Starts
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Homeowner Vacancy Rate
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Median Family Home Price Relative to
Median Family Income
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Capital Utilization
Manufacturing (SIC) SA, % of Capacity
Source: Federal Reserve Board, Merrill Lynch
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U.S. Trade in Goods
Exports vs. Imports
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“Beggar Thy Neighbor”
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Year over Year Change (%)
German Industrial Production
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Crisis of Confidence
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Japanese Exports
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Sources of Remittances by Recipient Regions, 2008
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Remittances and Capital Flows to
Developing Countries
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Top 10 Remittance-Recipient Developing
Countries in 2008
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Recession
Classic
Non-Classic
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Classic Recession
Characterized by:
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Inventory cycle
80% of decline in GDP due to de-stocking in manufacturing sector
Traditional stimulus almost always works to absorb excess by stimulating demand
Lasts 18 months
Non-Classic Recession
Characterized by:
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Balance sheet compression
Deleveraging
Debt elimination
Rising saving rates
Expansion of government’s balance sheet to offset contraction in private sector
3 years or more
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Historical Recession Analysis
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Job Losses in Recent Recessions
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Job Losses* in Post WWII Recessions
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Job Losses in Post WWII Recessions
Current
Recession
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Where Are We Heading?
Leverage
Deleverage (Trigger Event)
Liquidity
Economic Impact
(Duration And Depth Of Downturn)
Shape Of Recovery
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Leverage
Liquidity
Low Interest Rates
New Banking
System
Confidence
Leverage
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On the Hook
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Deleveraging
Leverage
Deleveraging
Deleveraging is a process not an event.
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Components of GDP
Consumption
70%
+
Investment
16%
+
Net Exports
<1>%
+
Government
15%
=
GDP
Source: BLS, GR-NEAM Analytics
100%
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Total U.S. Debt
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Leverage
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Consumer
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Consumer
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GDP Growth
GDP Growth: With and Without Mortgage Equity Withdrawal
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Deleveraging:
Has Process Begun?
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Growth in Household Debt
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Growth in Non-Financial Corporate Debt
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Growth in Federal Debt
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Is There a Shortage of Credit?
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Credit Conditions
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Market Cap
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Market Cap
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TARP
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U.S. Banks’ Willingness to Lend to Consumers &
Demand for Consumer Loans
Quarterly (% more willing minus % less willing)
Consumer Demand
Willingness to Lend
Source: Federal Reserve, Sr. Loan Officer Survey, Through Q4 2008
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Record Wealth Implosion
Households & Nonprofit Organizations: New Worth
Difference – Year to Year NSA, Bil$
Source: Federal Reserve Board, Merrill Lynch
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Household Balance Sheet
NEW
WORTH
86K
87K
NEW
WORTH
57K
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Retirement Preparation
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Returning to Work
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Shadow Banking System
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Consumer Loans Outstanding
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Growth in ABS Debt
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Stimulus
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Summary
Disbursements or
Committed Funding
Potential
(in billions)
(in billions)
Federal Reserve
Treasury
Other Agencies
1,238
4,316
332
3,912
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2,207
1,571
10,435
MEMO: U.S. Nominal GDP, Estimated 2008 $14,500 Billion
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Budget Projections
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“American Recovery and
Reinvestment Act of 2009” Timing
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Job Effects of the Components of the
Recovery Package
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Global Real GDP Growth
1993
Source: IMF 2007 World Economic Outlook (October 2007)
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Global Real GDP Growth
2008
Source: IMF 2007 World Economic Outlook (October 2007)
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Global Current Account Balance
(U.S. Dollars)
1997
Source: IMF 2007 World Economic Outlook (October 2007)
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Global Current Account Balance
(U.S. Dollars)
2006
Source: IMF 2007 World Economic Outlook (October 2007)
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Foreign Purchases
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Marketable Treasuries
49%
22%
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Issues/Risks
• Protectionism
• Economic, Financial and Political Stability of
Countries with Assets
• Role of Government in Capital Markets
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Inflation
Monetary Standard
Average Inflation Rate
Commodity (Typically Gold Standard)
1.75%
Fiat (Paper Money)
9.17%
Source: Federal Reserve Bank of Minneapolis, Rolnick, 1998
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Conclusion
• Next Year or So Likely Sees Lower Inflation or
Deflation as Economies Slow
• But History of Paper Money is Inflationary –
Effect of Massive Government Response?
• Caveat: How Long Will Foreign Creditors Put Up
With This? They Could Force U.S. Inflation Down
By Going on Strike.
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It’s a Non-Classic Recession
Mean Reverting Process
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PCE as a % of GDP & Population Demographics
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Personal Consumption Expenditures
(PCE) & Household Debt
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Savings Rate Must Rise, And It Will
Personal Saving Rate SAAR, %
Source: Bureau of Economic Analysis, Merrill Lynch
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U.S. Homeownership Rate From 1965-2008
U.S. Homeownership Rate From 1965-2008
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1965
1969
1973
1977
1981
Annual Home Ow nership Percentage
Source: GR-NEAM Analytics
1985
1989
1993
1997
2001
2005
2009
Average Home Ow nership Percentage from 1965 to 2008
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Total Household & Business Credit/GDP: Ratio
Source: Federal Reserve Board, Merrill Lynch
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Conclusion
Ability of Policymakers to:
• Recreate Credit Cycle
• Reinflate Asset Values
• Ignite a Consumer Led Recovery
Inhibited by Secular Change in Attitudes Toward:
• Savings
• Credit
• Discretionary Spending
• Homeownership
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New Normal
Global Economic Drivers
China
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Chinese Banks’ New Loans
1,600
(bn yuan)
1,400
1,200
1,000
800
600
400
200
0
Apr 04
Sep 04
Feb 05
Jul 05
Dec 05
Jun 06
Nov 06
Apr 07
Sep 07
Mar 08
Aug 08
Jan 09
(200)
Source: CLSA
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“We’re certainly in the midst of a once-in-a-lifetime set of
economic conditions. The perspective I would bring is not
one of recession. Rather, the economy is resetting to a
lower level of business and consumer spending based
largely on the reduced leverage in the economy.”
- Steve Ballmer, CEO Microsoft
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Capital Markets
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Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
S&P 500 Composite Daily Close
S&P500 Composite Daily Close
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
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Worst Decade Yet
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Growth in Total U.S. Credit Market After-Tax
U.S. Corporate Profits
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S&P 500 Earnings, Quarterly
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10yr U.S. Corporate A vs. 10yr U.S. Gov’t on the Run
Source: GR-NEAM Analytics
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Moody’s Baa Less Aaa
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Secular
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Developing
Economies
United States
Currency
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Anything but
the Dollar
United States $
Foreign Sales Trade
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International
Domestic
Inflation
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Higher Inflation
Deflation
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Restrained
Capacity
Collapse in
Demand
Theme
Growth Story
Energy
Cyclical
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The Cost of Credit
1946
• High Savings Rate
• Banks Highly Liquid
• Limited Private Debt
• Beginning of Boom
Now
• Private Sector
Over Leveraged
• Federal Government
Active Borrower
• Financial Institutions
Over-Levered
• Recession
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