Transcript Economic Update October 2011 Recession and EU Crisis

Economic Update October 2011
Recession and EU Crisis
Daryl Montgomery
November 3, 2011
Copyright 2011, All Rights Reserved
The contents of this presentation are not intended as a recommendation to buy or sell any security.
Summary
• Two biggest issues are whether developed
countries are in recession and how EU debt crisis
will continue to unfold.
• U.S. Q3 GDP does not indicate U.S. avoided
recession.
• EU banks are not going to be made solvent by
recent bailout decisions.
• Even with 50% selective default, Greece is still
not fixed. Deal in question.
• Portugal, Ireland, Spain, Italy still in trouble.
• Centrals banks pumping money into system.
Fiscal State of U.S. – National Debt Clock
• National Debt: $14.9 trillion
State and Local Debt $3.0 trillion
Unfunded liabilities $116 trillion.
• Debt to GDP ratio 99.6% (actually much higher).
• Doesn’t include Federal Reserve or Fannie Mae,
Freddie Mac and FHA obligations.
• Debt Ceiling at $16.4 trillion (up to election).
• Budget Deficit for 2011 was $1.3 trillion.
• Estimated Deficit for 2012 is $1.1 trillion.
• 2011 Trade Deficit estimated at $538 billion
(dependent on price of oil).
U.S. Monetary Base
Growth in Monetary Base
Recent Growth in M1 Money Supply
Historical Growth of M1
Q3 GDP
• Up 2.5% vs. up 2.9% in Q4 2007.
• Lower inflation rate, 3.3% in Q2 vs. 2.0% in
Q3 explains better results by itself.
• Consumer spending up 2.4% vs. 0.7% in Q2
even though consumer confidence back to
credit crisis levels.
• Business spending on equipment up 17.4%,
on structures 13.3%. Indicates big boom.
• Expect several downward revisions in next
few years, just like other GDP reports.
This Year’s GDP Revisions Compared to Last Year
Blue line original numbers. Red line revised numbers.
GDP Has Been Inflated by Fed Money Printing
• Fed’s balance sheet has increased by $2+ trillion
since end of 2007.
• GDP after revisions was just over $13.2 trillion
(2005 chained dollars). Up about $600 billion
from bottom.
• Without money printing would GDP be $11.2
trillion or 16% lower (compared to $13.3 trillion
in Q4 2007)?
• Current dollar GDP is $15.004 trillion. Without
money printing would it be $13.0 trillion?
Other Economic Indicators
• October Manufacturing PMI U.S. 50.8, China
50.4, UK 47.4, EU 47.1, Brazil 46.5
• U.S. Unemployment rate 9.1%.
• Consumer credit decreasing at 4.5% annually.
• Consumer confidence at 39.8, worst since March
2009.
• Retail sales up 8.8% yr over yr, unadjusted for
inflation.
• Official CPI inflation 3.9% yr over yr (Shadow
Stats around 11%).
Shadowstats.com and Reported U.S. CPI
Nominal Retail Sales
Inflation Adjusted Retail Sales
Problems in the EU Not Resolved
• Greek bailout timeline supposed solutions:
May 2010 - €110 billion
July 2011- €109 billion, plus 21% bondholder loss
October 2011 - €130 billion, plus 50% bond loss for
creditor other than EU/IMF
• Referendum crisis arises only 4 days later.
• One-year interest rates in Greece before Oct plan as
high as 193%, fell to 154%, then rose to 206%.
• Hard default would be around 75% or more.
• Would be bigger than Russian default in 1998.
• EFSF (European Financial Stability Fund) is to
be leveraged from €440 billion to one trillion
euros. This is borrowed/printed money.
• EFSF to be used to buy debt from PIIGS and
for bank recapitalization (ie. bailouts)
• Banks are to raise capital other ways first. This
will lead to tighter credit in EU.
• Dexia Bank already failed, more to come.
Who Owns Greek Debt?
Greek One-Year Bond Yields
Greek 10-Year Bond Yields
Portuguese 10-Year Bond Yields
Italian 10-Year Bond Yields