Post-Bubble Global Trends AAPA Webinar February 18, 2009 Dr. Walter Kemmsies, Chief Economist Moffatt & Nichol Commercial Analysis Group
Takeaways The world economy is circling the drain World is wealthier but too much capital often pursues the same growth expectations Low cost of capital and too much leverage produced the twin bubbles Poor policymaker judgment turned a bad situation into a catastrophe The whole world is de-leveraging, which directly affects global trade Global New Deal Revival At best consumer spending is on hold while wealth is rebuilt Resource rich countries are suffering from falling income Debt-Deflation cycle is a substantial risk given inventory overhang Government spending is the near term engine of recovery Global bank bailouts are a threat to global trade No all clear until 2012 Central banks will have to withdraw money pumped into the global economy 2009 Economic Recovery Act may not have long term effects Globalization is unlikely to reverse - long term drivers of trade growth remain intact through the next decade US non-service export growth should be more aligned with import growth Source: Federal Reserve of St Louis, US Department of Commerce
The Cost of Capital Declined Substantially 18% 16% Nominal And Inflation-Adjusted 10-year US Treasury Bond Yields 14% 12% 10% Stock Market Bubble Pops China becomes largest buyer of US Treasury Debt 8% 6% 4% 2% 0% -2% -4% -6% 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 10-Year Treasury Bond Yield Since 2001 US and European interest rates have been at their lowest levels in four decades, driven down by Asian purchases of debt to peg exchange rates Japanese interest rates have been even lower since the late 1990s Source: Federal Reserve of St Louis, US Department of Labor, Moffatt & Nichol Inflation Adjusted
The Twin Bubbles: Commodities and Real Estate Real Estate and Commodity Price Trends 400 $150 350 $130 300 $110 House and CRB Price Index 250 200 150 $90 $70 $50 100 50 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Price per Barrel of Oil $30 $10 -$10 House Price Index CRB Metals Index Crude Oil Price Mistrust of equities and a low cost of capital spawned speculation in alternative asset classes China s growth was priced in too soon Olympics created a deadline Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Moffatt & Nichol
Unusual Coincidence Of Policy Errors Federal Reserve Policy Interest Rate Target for Federal Funds Letting Lehman fail in September shredded what little confidence remained FDIC Commissioner Sheila Bair s solution was ignored in favor of handing money to banks European Central Bank was raising its policy rate target while the EU economy was already in recession The first stimulus in Q2 2008 was too little, too late Source: Federal Reserve, National Bureau of Economic Analysis, Moffatt & Nichol 4
Small Banks Have Been Doing The Heavy-lifting Commercial and Industrial Loans Despite lower the Fed Funds rate, lending stagnated as large banks wrote down assets State and regional banks, savings & loans and credit unions propped the economy up and may have to continue to do so Foreign trade finance remains mostly unsupported by large banks Source: St Louis Federal Reserve, Moffatt & Nichol
The Fed Is Making A Dramatic Effort Now Adjusted Monetary Base 0% Fed Funds interest rate target and a doubling of the Fed s balance sheet have not reversed downward momentum in the economy We are in a liquidity trap Source: St Louis Federal Reserve, Moffatt & Nichol
Global Oil Production Has Exceeded Consumption Global Oil Production Kept Pace With Consumption 90 $160 85 $140 70 80 75 $120 $100 $80 $60 50 30 10 $40 70-10 $20 65 Source: International Energy Agency, Commodity Futures Trading Commission, Moffatt & Nichol 7 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Million Barrels Per Day Excess Supply $0-30 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Price of WTI Million Barrels Per Day Oil Prices Deviated From The Global Supply/Demand Balance Excess Demand Production MBPD Consumption MBPD WTI $/bbl Accumulated Excess Consumption MBPD (right axis) Oil Speculation Ahead of Oil Price Trends Since 2004 World oil consumption has grown despite declining in industrialized 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 $160 $140 $120 $100 $80 $60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Number of Futures Contracts Price Per Barrel of WTI Crude Oil Open Interest All Crude Oil Price Per Barrel - Right $40 $20 $0 nations. Globally oil production has exceeded consumption since 2004. High oil prices are more likely driven by financial capital flows than supply/demand fundamentals Oil prices are expected to remain in the $50-$80 per barrel range over the next 10 years
US Auto Sales At A 24-year Low 22 20 18 16 Sales Of Passenger Cars And Light Trucks Millions of Vehicles 14 12 10 8 6 4 2 0 Substantial rebates and 0% financing kept auto sales high during the 2001 recession, similar to the house market 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2001-2007 was the first economic expansion period where auto sales declined Vehicle sales declined despite manufacturer rebates and 0% financing Wars and subsequent speculative bubble in oil prices are to blame Outlook is more uncertain than when the Chrysler Loan Guarantee Act of 1980 was passed Source: Wards Automotive, Department of Commerce, NBER, Moffatt & Nichol Recession US Vehicle Sales US Vehicle Sales (12 MMA)
Inventories Are Declining While The Inventories-Sales Ratio Rises Inventory Growth Rates Source: US Department of Commerce, Moffatt & Nichol
Unemployment Is Driving The Economy Towards Deflation Unemployment Claims Consumers are struggling to pay their debts which is impacting retail sales Lower sales means falling prices and falling profits and layoffs, while China exportdependent China struggles The burden of debt gets worse creating a vicious debt-deflation cycle Source: Bureau of Labor Statistics, Moffatt & Nichol 10
Look For All Clear In 2012 9% Real GDP Growth and Recessions 6% 3% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-3% Recession Real GDP %YOY Assuming the second stimulus begins to be deployed in Q2, expect recession to end in 2009-H1 but without the usual substantial recovery spike Deflation through the first half of 2009, then inflation will begin to rise, forcing the Fed to start tightening again, unless infrastructure investment has an immediate and significant impact on productivity Expect low growth through 2011; a mild recession is possible in late 2010/early 2011; After that we could have 7-8 years of strong growth Source: Department of Commerce, Moffatt & Nichol
China Is Also Slowing Down Significantly 20% China Real GDP and Electricity Production Growth 15% 10% 5% 0% -5% -10% Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Some fundamental data on China s economy is out of line with official macroeconomic statistics Like the US, Europe and Japan, China is also deploying a fiscal stimulus containing significant investment in infrastructure Source: Bloomberg, Moffatt & Nichol Electricity Real GDP
Economic Outlook for Major Trade Lanes US, Europe and Mediterranean Asia, Latin America and Caribbean 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-2% -2% -4% -4% US EU Mediterranean N Asia S Asia SE Asia EC S Amer Caribbean Cent America Near term is weak and mostly due to US and Europe Long term outlook is more robust due to Emerging Markets growing due to increasingly self-financed investment World trade patterns will change due to the changing relative size of emerging and mature economies over the forecast horizon Risks to this view: Bank bailouts produce a Smoot-Hawley effect on international capital movement Stability of the euro Emerging Markets policies focus on developing a middle class Source: International Monetary Fund, US Department of Commerce, Moffatt & Nichol
Foreign Exchange USD is approaching Fair Value against major currencies and is expected to stay there USD will lose value against emerging markets currencies over the next 10 years assuming they develop a middle class and inflation is controlled 160 US Dollar Indexes 140 120 100 80 60 40 20 0 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Broad Dollar Index Major Currency Dollar Index Emerging Market Currency Index Source: Federal Reserve, Moffatt & Nichol
Loaded TEU Forecast Summary - US 2007 2007-2013 CAGR 2007-2020 CAGR Imports Exports Total Share Imports Exports Total Imports Exports Total North Asia 11,542,916 4,355,308 15,898,225 55.1% 4.8% 7.5% 5.6% 6.8% 7.1% 6.9% SE Asia 1,600,483 788,903 2,389,386 8.3% 5.4% 7.0% 6.0% 7.4% 6.3% 7.1% South Asia 575,977 298,761 874,738 3.0% 7.6% 8.4% 7.9% 8.4% 8.3% 8.4% Europe 1,701,699 1,477,121 3,178,820 11.0% 2.9% 4.1% 3.5% 3.3% 3.2% 3.2% Mediterranean 852,215 687,011 1,539,226 5.3% 3.3% 7.9% 5.5% 4.5% 6.9% 5.6% Middle East 38,080 260,027 298,108 1.0% 4.3% 9.1% 8.5% 7.0% 7.3% 7.3% WC S America 282,773 206,014 488,787 1.7% 3.0% 7.8% 5.2% 4.1% 4.1% 4.1% EC S America 417,802 313,498 731,300 2.5% 3.6% 4.1% 3.8% 5.3% 3.9% 4.7% Cent Am/Carib 943,474 1,743,340 2,686,815 9.3% 2.7% 5.0% 4.2% 3.7% 4.4% 4.2% NAFTA 62,943 56,000 118,943 0.4% 3.2% 11.2% 7.3% 4.9% 10.7% 8.1% Australia/NZ 130,936 200,732 331,668 1.1% 3.6% 3.2% 3.4% 5.9% 3.1% 4.3% Africa 69,562 166,293 235,855 0.8% 3.3% 11.9% 9.7% 4.5% 11.6% 10.0% Other 30,951 62,598 93,549 0.3% 3.2% 1.9% 2.3% 5.3% 2.5% 3.5% Total 18,249,813 10,615,606 28,865,420 100.0% 4.6% 6.6% 5.3% 6.3% 6.1% 6.3% Long term loaded container volume growth forecasts are more conservative than in 2007: Lower growth in 2008-2009 than previously expected Slower offshoring pace and trade agreement progress over the next four years US is pulling the global economy with it as it circles the drain There are more reasons why volume growth could overshoot than undershoot the forecasts, such as Stronger growth in 2011 than anticipated due to further policy stimulus Infrastructure investment generates strong productivity gains Source: PIERS, Moffatt & Nichol
Global Commodities Trade Has Lagged Manufactured Trade World Trade and GDP Volume Indexes 1,900 6,000 1,700 5,000 1,500 1,300 4,000 1,100 3,000 900 700 2,000 500 1,000 300 100 0 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Agricultural Products Fuels and Mining Products Real GDP Manufactured Goods (right axis) Manufactured goods and nonagricultural products trade have grown faster than GDP. Agricultural products trade has lagged GDP and other trade in other products. The gap between manufactured goods and other products trade is expected to narrow. The outlook for bulk commodities depends on expectations for manufactured goods trade. CAGRs Manufactured Agricultural Fuels and Mining Real Period Goods Products Products GDP 1950-2006 7.6% 3.6% 4.2% 3.8% 1980-2006 6.3% 3.0% 2.6% 2.8% 1995-2006 6.9% 3.7% 3.2% 3.0% Source: World Trade Organization, World Bank, Moffatt & Nichol
Summary The world economy is circling the drain policymakers failed to contain the damage after speculative bubbles Global New Deal Revival government spending, not consumers, will drive growth In 2012, All clear for 8 Years until then relatively low trade volume growth Contact details: Walter Kemmsies Ph: +1 212 768 7454 wkemmsies@moffattnichol.com