Transcript Click Here for His Presentation "Excess Supply/Past Credit Sweet

Excess Supply/ Past Credit Sweet Spot
April 2016
Steven Ricchiuto, U.S. Economist, 212-209-9432
Copyright (c) Mizuho Securities USA Inc. All Rights Reserved.
Conclusions
Domestic Economy
 Disappointing first half with real growth
 No acceleration into the second half
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 Growth expected to stay comfortably in 1.75% to 2.25%% range through December
 2016’s growth critically dependent on how quickly the Fed raises short-term rates and begins normalizing its portfolio.
 Currency market dynamics also key to 2016 outlook as it becomes clear Japan and Europe stuck in deflation

Importance of the Balance Sheet
 Economies are able to withstand unforeseen developments or external shocks when all of their balance sheets are healthy
 Recent financial crisis shows what happens when balance sheets become compromised
 After several years of restructuring, both the household and banking industry balance sheet restructuring are complete
Excess Supply a Problem for the Fed
 Lack of pricing power very evident in second quarter earnings reports as companies face an excess supply of both tradable
goods and commodities
 Dollar exchange rate is sensitive to an even marginal expected change in monetary policy
 Productivity decline over stated in terms of effect on potential growth
 Global economy also mired in below-trend growth trajectory, as China downshifts, and Japan and Europe face deflation
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Model Based Real GDP Forecast
Mizuho U.S. Macro Forecast
Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016
Real GDP (Q/Q%):
PCE Deflator (Y-O-Y%):
Fed Funds Rate
(Q4,%)
10-year Treasury Note (%):
2015
2016
2017
2.00%
1.4
1.75
2
2.1
2.25
2.4
1.8
2.1
1.3
1.3
1.5
1.4
1.3
1.3
1.5
1.4
1.6
0-0.25% 0.25-0.5% 0.25-0.5% 0.5-0.75% 0.5-0.75% 0.5-0.75% 0.25-0.5% 0.5-0.75% 0.75-1.0%
2.22%
2.19%
1.91%
2.15%
2.00%
2.05%
2.14%
2.06%
2.25
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Inflation no longer determines the business cycle
4
Credit flows determine business cycle
5
Credit cycles evolve differently than inflation cycles
6
Monetary Policy
7
Dual mandate trade-off ?
8
Financial system health is no longer a key policy concern
9
Monetary policy remains accommodative
10
End of QE already evident in reserve market
11
Demand and liquidity risk showing up in spreads
Commercial Paper Spread
12
Credit Considerations
13
Banks seem to be sensing increased risk in lending (C&I loans)
14
Banks a lot less aggressive in lending (Consumer)
15
A lack of demand shows banks have been more conservative than suggested
16
Banking System Balance Sheet
Banking system nearing completion of its restructuring
18
Corporate Balance Sheet
Corporate sector leveraging its balance sheet
20
Credit markets no longer constraining the economy
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Non-financial corporate leverage has increased to drive up stocks
22
Duration extension has run its course
23
Corporate debt burden is healthy
24
Household Balance Sheet
Household savings should continue to rise
26
Household deleveraging still underway
NET HOUSEHOLD LIABILITIES = TOTAL HOUSEHOLD LIABILITIES MINUS CASH, CHECKING
ACCOUNTS, TIME DEPOSITS, AND MONEY FUND BALANCES
27
Consumer balance duration extension has run its course
28
Household debt burden is a positive
29
Asset side of household balance sheet recovery has lost momentum
30
Corporate share of national income: Inflection or turning point ?
31
Valuation Considerations
Low long-term rates has boosted P/E but is the bloom off the rose
33
Some models suggest stocks are no longer cheap
* = Non-Financial corporate profits are profits from domestic operations only and include privately held companies, LLCs and sub chapter “s”
corporates while S&P EBITDA includes financial companies as well as profits of overseas subsidiaries not just those repatriated.
34
Earnings are not driving valuations
35
Deflation risk is rising
36
TIPS inflation breakeven back to Fed PCE target
37
Liquidity premium remains evident in the market
38
Consumers shift purchases to avoid price increases
39
Auto Appendix
Auto sales dominating retail activity
41
Auto assemblies out of step with the rest of manufacturing
42
Auto dealer inventory inflated
43
Housing market appendix
Housing market correction has run out of steam
Vacant single-family homes weighing less on the market
45
Rents seems to be keeping pace with home prices
46
Banks are less accommodative
47
Recovery in new starts is shallow
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