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TRANSCRIPT
January, 2011
Economic Outlook: From Liquidate Everything to Whatever it Takes
Robert Spector, CFA
Vice President & Chief Economist
Economics1930s vs. Today: Policy Attitudes Could Not be More Different
> “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real
estate... It will purge the rottenness out of the system. High costs of
living and high living will come down. People will work harder, live a
more moral life. Values will be adjusted, and enterprising people will
pick up the wrecks from less competent people...” Attributed to
Andrew Mellon, Herbert Hoover’s Treasury Secretary
2
Andrew Mellon, Herbert Hoover’s Treasury Secretary
> “The Federal Reserve has done, and will continue to do, everything
possible within the limits of its authority to assist in restoring our
nation to financial stability and economic prosperity as quickly as
possible.” Fed Chairman Ben Bernanke, Feb 18, 2009
EconomicsWas QE2 Just About Boosting the Stock Market?
2.0
2.5
3.0
3.5
4.0
4.5
1800
1900
2000
2100
2200
2300
2400
2500
Fed Balance Sheet vs. U.S. Bond Yields
600
700
800
900
1000
1100
1200
1300
1400
1500
750
1000
1250
1500
1750
2000
2250
2500
Fed Balance Sheet vs. U.S. Stocks
3
Source: Haver Analytics, McLean Budden
2.01800
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Fed Bank Credit ($US Bln) 10-year Treasury Yield (%)
600750
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
Fed Bank Credit ($US Bln) S&P 500
MB Macro Themes
> Global economic expansion masks big regional differences
> U.S. improving, needs policy push
> Europe facing fiscal austerity
> No inflation in developed economies—monetary policy to remain easy
Economic Outlook
4
> Many emerging economies overheating, inflation/tightening risks rising
> QE2 unleashes FX/commodity volatility with little economic benefit
> This is not a normal cycle—de-leveraging not over
> Risks: Protectionism, U.S. housing, sovereign debt contagion, rising
commodity prices
EconomicsGlobal Growth Improving From Mid-2010 Slowdown
50
55
60
65
70
75
80
85
90
30
35
40
45
50
55
60
65
70
US Business and Consumer Surveys
50
60
70
80
90
100MB Cyclical Index
(Jan/92=100)
5
Source: Haver Analytics, McLean Budden
45
50
20
25
2007 2008 2009 2010 2011
ISM New Orders (Mfg) Consumer Expectations (University of Michigan)
40
50
2007 2008 2009 2010 2011
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Estimate of U.S. Housing Overhang :
% of Housing Stock Which is Vacant
Balanced Market
1.3 million unit overhang of homes/condos
130
140
150
160
170
180
190
200
210
U.S. Housing Prices(Jan/00=100)
EconomicsProblems Remain in U.S. Housing
6
Source: Haver Analytics, McLean Budden*Liquidity Proxy defined as real US M2 growth less industrial production
3.0
3.5
4.0
1969 1974 1979 1984 1989 1994 1999 2004 2009
130
2006 2007 2008 2009 2010
S&P/Case-Shiller CoreLogic
EconomicsU.S. Private Sector Credit-to-GDP Now Falling
200
250
300
350
Private Sector Debt as a % of GDP
7
50
100
150
1916 1926 1936 1946 1956 1966 1976 1986 1996 2006
Source: Haver Analytics, McLean Budden, Historical Statistics of the United States
EconomicsEurope’s Sovereign Debt Crisis Means Austerity or Default Looms
8
10
12
8
Source: Bloomberg, McLean Budden
2
4
6
Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
Greece Germany Ireland Portugal Spain
EconomicsGlobal Monetary Policy Rates (%)
3
4
5
6
7
9
0
1
2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
ECB Bank of Japan Bank of England U.S. Federal Reserve Bank of Canada
Source: Haver Analytics, McLean Budden
EconomicsGlobal Inflation Trends: Low in Major Economies, Rising in Emerging(year-over-year % change)
4
6
8
10
10
-2
0
2
2000 2002 2004 2006 2008 2010
OECD "BRICs"
Source: Bloomberg, McLean Budden
EconomicsCurrency Wars? Trade Wars?
11
Source: Dave Granlund
EconomicsPredictions for 2011
> Ranges will be large for most asset classes
> More volatility
> Rates will stay low
> Pricing power key in a low inflation world
> There is one easy bet for 2011 (and 2012 and 2013…)
12
> There is one easy bet for 2011 (and 2012 and 2013…)
-2
-1
0
1
2
3
Undervalued
Overvalued
EconomicsU.S. Government Bonds Offer Good Value(Proprietary Model Based on 10-Year Treasury Yields)
13
-4
-3
-2
1975 1980 1985 1990 1995 2000 2005 2010
Overvalued
Source: Haver Analytics, McLean Budden
EconomicsCanadian Dollar Overvalued
0.80
0.85
0.90
0.95
1.00
1.05
1.10
14
0.60
0.65
0.70
0.75
1975 1980 1985 1990 1995 2000 2005 2010
C$ in U.S. cents Fair-Value Estimate
Source: Haver Analytics, McLean Budden
Economics
15