The U.S. & World Economy: The Good, the Bad, and the Ugly

Transcription

1 The U.S. & World Economy: The Good, the Bad, and the Ugly Michael Strauss Chief Economist and Chief Investment Strategist Commonfund October 16, 2012

2 The U.S. & World Economy: The Good, the Bad, and the Ugly Objective of today s session Obtain a greater understanding of the U.S. and key global economies Gain greater insight into the current global debt challenges Learn more about the importance of demographics, especially among working populations 2

3 Investment Outlook 2012 Commonfund Point-of-View Emerging market economies decelerate but remain the primary driver of global growth (3.5 percent) China Likely to decelerate from 9.0 percent to the percent range The combination of decelerating growth and peaking inflation should provide the environment for a soft landing and open the door for a series of monetary policy easing action. Europe will continue to have a challenging economic environment European club-med countries will experience rolling recessions Germany to experience weak growth at best Expect decline in overall European economic activity Kick the debt can down the road scenario to continue into 2012 United States Improving employment with real GDP growth of 2.25 percent in 2012 Continued improvement in U.S. corporate earnings Please see Important Notes Market Commentary. January

4 The Asian Century Shifting Patterns of World GDP United Kingdom 4% Germany 9% Japan 18% France 5% Italy 4% Other Developed 14% United States 24% Developing 22% 38% China 14% Developing (ex-china) United States 20% Japan 6% Other Developed 10% Germany 4% United Kingdom 3% France 3% Italy 2% Total Developing = 52% During the last 16 years World GDP growth has doubled, but developing economies have increased from 22 percent to more than 50 percent of World GDP, representing a 4X increase since Sources: ISI, CIA World Factbook estimates, (PPP basis) 4

5 The GDP Growth Rate Gap Compound annual growth rate in real GDP (%) 7 6 Emerging markets Developed markets percentage points 4.45 percentage points 4.13 percentage points estimate* NOTE: Developed markets include all OECD countries; emerging markets include all non-oecd countries. * These figures are projected by the International Monetary Fund. Source: BCG, New Markets, New Rules, Will Emerging Markets Reshape Private Equity? November

6 GDP for BRIC Economies (Year-To-Year Changes) Quarterly Data 3/31/1996 6/30/ BRIC Economies' Weighted GDP Mean = 7.4% 6/30/2012 = 5.7% Brazil 6/30/2012 = 0.5% Russia 6/30/2012 = 4.0% India 6/30/2012 = 5.5% Source: Haver Analytics China 6/30/2012 = 7.6% (IE46) Source: Ned Davis Research 6

7 GDP For Industrialized Nations (Year-To-Year Changes) Quarterly Data 3/31/1996-6/30/ Source: Haver Analytics Industrialized Nations' Weighted GDP 6/30/2012 = 1.3% Mean = 1.9% United States 6/30/2012 = 2.1% Eurozone 6/30/2012 = -0.5% Japan 6/30/2012 = 3.3% United Kingdom 6/30/2012 = -0.5% Canada 6/30/2012 = 2.9% (IE42D) Source: Ned Davis Research 7

8 Unemployment Rates Unemployment Rates For Industrialized Nations Monthly Data 1/31/1995-7/31/ Industrialized Nations' Weighted Unemployment Rate 5/31/2012 = 8.5% Mean = 6.8% Source: Haver Analytics 1995 (IE100) United States 7/31/2012 = 8.3% Eurozone 7/31/2012 = 11.3% Japan United Kingdom 2003 Canada The Big Four Unemployment Rates in Europe Monthly Data 1/31/1983-7/31/ Spain 25.1% France 10.3% Italy 10.7% Germany 5.5% /31/2012 = 4.3% 5/31/2012 = 8.0% 7/31/2012 = 7.3% 5 (IE1102) Source: Haver Analytics, Eurostat Source: Ned Davis Research 8

9 Web of Debt Amount owed between countries as of December 31, 2011 in billions of dollars Billions US$ $600 $500 $400 $300 $200 $100 US Germany France Britain PIIGS Gov't Debt to Primary European Countries $0 Greece Ireland Spain Italy Portugal Gov't* Household Corporate Total United States Greece Italy Spain Portugal Germany Sources: Bank for International Settlements, ISI *Incorporates latest IMF adjustments thru December

10 Governments Have Rarely Been Run So Poorly Governmental Structural Balance 4% 2% United States Canada France Germany Italy Japan Spain United Kingdom 0% -2% -4% -6% -8% -10% Sources: International Monetary Fund, World Economic Outlook Database, April

11 Governments Have Rarely Been Run So Poorly Government Debt as a Driver of Inflation Inflation Rate Government Debt/GDP Below 30% to 60% 60 to 90% Above 90% United States (1790 to 2009) Selected Emerging Markets (1946 to 2009) Source: Carmen M. Reinhart and Kenneth S. Rogoff, Growth in a Time of Debt 11

12 Summary of Federal Receipts and Outlays as Percentage of GDP FY1950 FY2011, Numbers in Percent (%) Percent of GDP 30 Outlays Receipts Sources: Brookings Institute 12

13 Total Federal Debt Outstanding As of January 2012 Trillions Source: Federal Reserve Bank of St. Louis 13

14 U.S. Unemployment Rate vs. Conference Board's Jobs Hard To Get Monthly Data 1/31/1978-8/31/ Unemployment Rate 7/31/2012 = 8.25% Scale Right ( ) Jobs Hard to Get Scale Left ( ) 10.8 Implied Unemployment Rate for 8/31/2012 = 7.84% Correlation Coefficient = Source: The Conference Board 3.8 (E835) Source: Ned Davis Research 14

15 Performance of Nonfarm Payrolls vs. Expansions Monthly Data 6/30/2007-7/31/2013 Performance of Nonfarm Payrolls vs. 1991, 2001 and Average of Last Six Expansions* Current Expansion Recession ended in June 2009 Average of Last Six Post WW II Expansion* 1991 Expansion Current Expansion 2001 Expansion 99.0 S (E0028A) "Jobless Recoveries" D M J S D M J S D M J S D M J S D M J S D M J 99.0 *Dates used for determining economic expansions are those designated by the National Bureau of Economic Research. The data has been adjusted for ease of comparison with the current cycle. Expansion starting dates used: November 1970, March 1975, July 1980, November 1982, March 1991 and November 2001 Source: Ned Davis Research 15

16 The Industrial Sector 120 Performance of Industrial Production vs Average of Last Six Expansions Monthly Data 6/30/2007-7/31/ Current Expansion ( ) Recession ended in June Average of Last Six Post World War II Expansions* ( ) 100 (E0027) 195 S D M J S D M J S D M J S D M J S D M J S D M Capex Performance vs 1991, 2001 and Average of Last Six Expansions Recession ended in June Current Expansion ( ) Monthly Data 8/31/2007-7/31/2014 Average of Last Six Post World War II Expansions* ( ) J Expansion ( ) Expansion ( ) Data Source: The Conference Board 87 (E0270) S D M J S D M J S D M J S D M J S D M J S D M J S D M J *Dates used for determining economic expansions are those designated by the National Bureau of Economic Research. The data has been adjusted for the ease of comparison with the current cycle. Expansion starting dates used are: November 1970, March 1975, July 1980, November 1982, march 1991, and November Source: Ned Davis Research 16

17 Household Debt Service and Financial Obligations Ratios Quarterly Data 3/31/1980-3/31/ Includes vehicle leases, rent, insurance, property taxes Renter Financial Obligations Ratio 3/31/2012 = 24.94% Scale Left ( ) Financial Obligations Ratio 3/31/2012 = 16.06% Homeowner Financial Obligations Ratio 3/31/2012 = 14.22% Scale Right ( ) Source: All data from Federal Reserve Board Minimum Debt Service Payment 13.5 Debt Service Ratio on Mortgage Debt and Consumer Credit /31/2012 = 10.98% as a % of Disposable Personal Income Mean = 11.99% (E0509) Source: Ned Davis Research 17

18 Single-Family Home Inventories Monthly Data 6/30/1982-7/31/2012 (Log Scale) In Thousands 551 New Homes 510 7/31/2012 = 142 Scale Left 472 Total Inventories 7/31/2012 = 2242 Scale Right Existing Homes 7/31/2012 = 2100 Scale Right (E246K) Source: Haver Analytics Source: Ned Davis Research 18

19 Housing Affordability Total Single-Family Home Sales vs Housing Affordability Index (Smoothed) 201 Housing Affordability Index 6/30/2012 = Scale Left ( ) Total Single-Family Home Sales 3/31/2012 = 4.4 million, SAAR Scale Right ( ) 7.47 Monthly Data 3/31/1971-7/31/2012 (Log Scale) U.S. Department of Commerce Correlation Coefficient = (E876D) Sources: Haver Analytics, Source: Ned Davis Research 19

20 Demographics Age Cohorts Impact Economic Growth Demographics are a very powerful influence on economic growth. The growth rate of the working age population has a powerful positive impact on GDP growth and a critical driver of everything that occurs on a macro scale. The growth rate of the total population has a negative impact. A 1 percent increase in the growth rate of the working age population causes about a 1.5 percent increase in economic growth. If the dependent portion of the population (those under 15 and over 64) shrinks by 1 percent, it has a 1 percent positive impact on economic growth. A 1 percent increase in the population over 64 reduces GDP growth by about 1 percent. Please see Important Notes Market Commentary. 20

21 GDP Growth and Demographic Shares Demographic Changes, Financial Markets and the Economy, Arnott & Chaves, Financial Analysts Journal, Volume 68, number 1 21

22 Working Age Population Developed vs. Emerging Economy (Ages 15-64) as a % of Total Population Yearly Data 12/31/ /31/2050 (Log Scale) 68 Developed Economies Emerging Economies 64% 59 Source: U.S. Census Bureau 58% Source: Ned Davis Research, (IE819) 22

23 Japan Population By Age (as a % of Total Population) Yearly Data 12/31/ /31/ Ages % Ages % Ages % 12 Source: U.S. Census Bureau Source: Ned Davis Research, (IE3099) 23

24 China Population By Age (as a % of Total Population) Yearly Data 12/31/ /31/ Ages % Ages % 23% Ages Source: U.S. Census Bureau Source: Ned Davis Research, (IE15800) 24

25 United States Population By Age (as a % of Total Population) Yearly Data 12/31/ /31/ Ages % Ages % 20% Ages Source: U.S. Census Bureau E985A) Source: Ned Davis Research 25

26 Labor Force Participation Rate by Age Group Monthly Data 1/31/1948-7/31/ Age Rate (%) ( ) ( ) ( ) 40.2 Shaded areas represent National Bureau of Economic Research recessions (E105B) Source: Ned Davis Research 26

27 The Challenge of an Aging United States Population Source: ISI 27

28 Working Age Population Index, 2010=100 Percent Change in Working Age Population Relative to 2010 Ireland France Spain Italy Portugal Greece Germany Source: US Census Bureau International Data Base; ISI. 28

29 Equity Markets Remain Generally Attractive July 17, 2012 Global Comparison of Current P/E vs. Forward Earnings Growth Current P/E UK Europe USA World Japan Emerging 0 0% 2% 4% 6% 8% 10% 12% 14% Forward Earnings Growth Source: MSCI Indices, FactSet, Bloomberg 29

30 U.S. Treasury Yield Curve June 30, 2012 Yield (%) /30/2011 6/30/ mth mth Years Change in Yield (%) Source: Bloomberg 30

31 Real Rates Using the Core PCE Monthly Data 1/31/1960-7/31/ Real 10-Year Treasury Yields 7/31/2012 = -0.12% Mean = 3.1% Real 5-Year Treasury Yields 7/31/2012 = -1.03% Mean = 2.8% Real Fed Funds Target Rate 7/31/2012 = -1.52% Mean = 2.1% (E0763) Source: Ned Davis Research 31

32 Changes in International 10-Year Yields June 30, 2012 Change in Yield (%) Fiscal Year-to-date Change in Yield (%) Calendar Year-to-date US Germany Japan Australia Canada UK US Germany Japan Australia Canada UK 10-Year Yields (%) US Germany Japan Australia Canada UK Source: Bloomberg 32

33 10-Year U.S. Treasury Yield vs. S&P 500 Dividend Yield 1992 through June 30, 2012 Yield (percent) 10-year Treasury Yield S&P 500 Div Yield During FY12, the S&P 500 Dividend Yield surpassed the 10-Year US Treasury Yield for only the third time in the past 20 years. Source: Factset 33

34 Dow Industrials 2nd Presidential Year Cycle All Elections Incumbent Republican Party Wins Incumbent Republican Party Loses Incumbent Democratic Party Wins Incumbent Democratic Party Loses JAN (S01638A) 2010 FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Plotted Lines Are Equal-Weighted, Geometric Average Cycle Patterns Based on Daily Data From 1900 Through 2009 For Statistics On Election Year Returns, See Study T_10A Source: Ned Davis Research 34

35 Election Probabilities and Implications Election outcome Fiscal cliff outcome Winner of Probability White House/Congress Probability Probabilities Obama Wins 35% A Reconciliation 20% Split Congress B Lame Duck 10% (House: R, Senate: D) C Punt 60% D Fiscal Cliff 10% Obama Wins 25% A Reconciliation 2% Republicans control B Lame Duck 15% House and Senate C Punt 75% D Fiscal Cliff 8% Romney wins 35% A Reconciliation 25% Republicans control B Lame Duck 15% House and Senate C Punt 60% D Fiscal Cliff 0% Romney Wins 5% A Reconciliation 15% Split Congress B Lame Duck 15% (House: R, Senate: D) C Punt 68% D Fiscal Cliff 2% A. Reconciliation bill is signed by President in late January (17%) B. Compromise bill done during lame duck session (13%) C. Congress and White House punt fiscal cliff and vote to delay process by at least six months (64%) D. Impasse, fiscal cliff happens for six months (6%) 35

36 Evaluating the Fiscal Cliff Outcomes Full Expiration* Most Likely Outcome Full Extension Fiscal Drag percent percent No Change 2013 Real GDP Growth percent 2.2 percent 2.7 percent 2013 S&P Earnings $96 $108 $112 S&P 500 P/E Target (2013) 12.5x 13.7x 14x S&P 500 Price Target (Mid-year) U.S. 10-year note 1.25% 2.50% 3.00% * At least six months Source: Commonfund estimates 36

37 Major Themes, Issues and Questions for 2012 and Beyond People and corporations have started to deleverage. Now we need it from developed governments. Will corporations continue to do better than the economy? Do earnings and dividends matter? Can the U.S. register decent economic growth without government spending and without Europe? Debt and Deleveraging: Does Debt Matter? Europe then the U.S., is the boat big enough? Is it now about recovery rates for southern Europe? Does Spain become the new Greece? Will the EU/financial system in Europe survive? On any day at any time the rating agencies could downgrade any country and almost any financial institution in Europe. What is the difference between southern Europe and the U.S.? The world is still willing to buy our debt. What happens if they stop? Are Treasuries the mother of all bubbles? Do bonds (Treasuries) represent a greater risk than equities? Could we get a selloff in bonds that bring stocks with them (multiples compress)? Will Washington ever get it? When do we address the election? Is it a good or bad event? Is the next big domestic economic test post-election 2012? The global central banks are easing -- Have they just voted for the risk on re-inflation trade? The battle in China Is it a soft or hard landing? Is it about what China buys not what they make? Other international issues Maybe Japan looks a lot better Relative to Europe and the U.S. the Japanese government did the right things quickly. What about Canada, Australia, and the frontier markets/economies? Who can out China China or out Brazil Brazil? Do we look at the BRIICs (including Indonesia) rather than the BRICs? Keep an extra eye on the MENA--Libya, Egypt, Syria, Iran and those nukes? Will Turkey or Saudi Arabia be the keys to the Middle East? Watch out for new risks and surprises. How do we prepare for and react to the unexpected? Please see Important Notes Market Commentary. 37

38 Important Notes Market Commentary Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund managers. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. 38