market and economic discussion - wyoming · market and economic discussion september 14, 2017 . ......

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Market and economic discussion

September 14, 2017

1 | FOR INSTITUTIONAL/WHOLESALE/PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – NOT FOR RETAIL USE OR DISTRIBUTION

Hurricane Harvey

• Impacted area GDP and population 7x and 4x the

one impacted by Katrina

• Losses from Harvey estimated at 0.4% of US GDP,

could be 3x-4x higher

• Harvey destroyed half a million cars, 40,000 homes

and 25,000 jobs.

• History of natural disasters: most economic impacts

are transitory given rebuilding and reconstruction

0.8

0.9

1.0

1.1

1.2

1.3

1.4

-10 -8 -6 -4 -2 0 2 4 6 8 10

Year before/after disaster

Source: "Catastrophic natural disasters and economic growth", InterAmerican Development Bank, June 2010. Data = disasters above 90th percentile.

Limited economic impact from natural disastersReal GDP/capita in countries w/ nat. disasters, 1970-2008

Actual real GDP/capita

Counterfactual real GDP/capita

(no disaster)

• In the wake of the 1995 Kobe earthquake in Japan (6,400 fatalities and cost = 2.5% of Japanese GDP), media

reports suggested it could take Kobe a decade to recover

• Within 18 months, Kobe manufacturing activity was at 98% of pre-disaster trend, imports recovered,

exports back at 85% of capacity and 79% of shops reopened

• This is not uncommon. Countries with higher income, higher educational attainment, greater openness,

more complete financial systems, better developed supply chains and decentralized governments experience

fewer losses after natural disasters


North Korea

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2003 2006 2009 2012 2015

Source: US Korea Institute at Johns Hopkins SAIS. 2016.

China-North Korea trade% of total North Korean trade

40% 50% 60% 70% 80% 90%

North Korea:China

Mongolia:China

Canada:USA

Mexico:USA

Nepal:India

Myanmar:China

Namibia:South Africa

Belarus:Russia

Honduras:USA

Kyrgyzstan:China

Source: IMF Direction of Trade Statistics, Johns Hopkins SAIS, JPMAM, 2014.

10 highest trade concentrations in the world Bilateral Country A:Country B trade as a % of total Country A trade


Summer 2017 news headlines


What matters most

Lead

ing

In

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CE

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en

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Payro

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row

th

GD

P g

row

th

Fo

rward

12 m

o p

rofi

ts

Sm

all

Bu

s O

pti

mis

m

ISM

man

ufa

ctu

rin

g

Fin

an

cia

l C

on

dit

ion

s

Tra

ilin

g 1

2m

pro

fits

Po

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ncert

ain

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Geo

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liti

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isk

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%When indicator was above average

When indicator was below average

Source: JPMAM, Conference Board, BLS, BEA, NFIB, ISM, Chicago Fed, S&P, Boston College, Stanford University.

What should investors pay attention to? Jobs, confidence & profitsAverage monthly S&P 500 returns, Jan 1985 - Aug 2017


The example of Brazil

1.5

2.0

2.5

3.0

3.5

4.0-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2013 2014 2015 2016 2017

Source: BCB, Haver. Bloomberg. June 2017.

Brazil current account deficit% of GDP

Current account deficit

USD/BRL

6%

8%

10%

12%

14%

16%

0%

2%

4%

6%

8%

10%

12%

2013 2014 2015 2016 2017

Source: OECD, Haver. July 2017.

Brazil inflation and policy rateY/Y % change Policy rate, %

Consumer price

inflation

Policy rate

50

60

70

80

90

100

110

2013 2014 2015 2016 2017

Source: Fundaçâo Getúlio Vargas, Confederaçâo Nacional da Indústria. July 2017.

Brazil: business and consumer confidence, Index, Jan. 2013 = 100

Consumer confidence

Business confidence

-3%

-2%

-1%

0%

1%

2%

2013 2014 2015 2016 2017Source: Instituto Brasileiro de Geografia e Estatística. June 2017.

Brazil: employment growthY/Y % change of 3-month moving average

60

65

70

75

80

85

90

95

100

105

2013 2014 2015 2016 2017

Source: Bloomberg. September 1, 2017.

Industrial metals pricesPrice index, Jan. 2013 = 100

30

40

50

60

70

80

90

100

110

2013 2014 2015 2016 2017


Brazil equity marketsMSCI Brazil Index, 2013 = 100

Dots= major developments in "Operation Car Wash"


Global economy improving

2.0

3.0

4.0

5.0

6.0

7.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015 2016 2017

Source: Goldman Sachs Global Investment Research. July 2017.

High-frequency GDP growth estimatesContemporaneous growth, m/m % change annualized

Developedworld

Emergingmarkets


Q2: good quarter for global profits

0%

5%

10%

15%

20%

25%

US Europe Japan EM

2Q17 FY 2017

Source: IBES, Factset, JP Morgan, Morgan Stanley. August 2017. Indices used: S&P500, Stoxx600, MSCI Japan, MSCI EM.

Earnings growth estimatesExpected y/y % change

S&P 500

• earnings growth of ~11% y/y

(+3.9% earnings surprise)

• revenue growth of 5.2%

(+0.4% surprise)

• net income margin expansion

of 38bp (+27bp surprise)

• Q1/Q2 two fastest quarters

since 2011


So far this year, global equity market rally is based on earnings rather than P/E expansion

40

50

60

70

80

90

100

110

120

'05 '07 '09 '11 '13 '15 '17

Source: MSCI, Datastream, Bloomberg. July 2017.

MSCI All-country worldIndex, 12/31/2016 = 100

Price

Earnings

9

11

13

15

17

'05 '07 '09 '11 '13 '15 '17

Source: MSCI, Datastream. July 2017.

MSCI All-country worldPrice-to-12 month forward earnings


Looking forward: more capex in the US and perhaps in Europe as well


Banking system risks?


Commercial real estate risks?

CRE borrowing/GDP

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16

Source: Federal Reserve Board, BEA. Q1 2017.

Commercial real estate borrowing well below prior peaks% of GDP


Leveraged loans and High yield risks?

Guidance regarding deals

with more than 6x

debt/EBITDA

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: Bridgewater Associates. August 2017.

Fed/OCC/FDIC guidelines resulted in slower leveraged loan and high yield issuance, net issuance % of GDP

Guidance release date


Asset pricing

0

20

40

60

80

100

120

140

160

180

200

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

BELOW equivalent-maturityUS Treasury

ABOVE equivalent-maturityUS Treasury

Source: Bank of America Merril Lynch. August 10, 2017.

Growing amount of Italian BB's yielding less than US Treasuries, Face value, EUR billions


Next area of market concern, and more valid one: what do the central banks do with their balance sheets?

-$0.8

-$0.4

$0.0

$0.4

$0.8

$1.2

$1.6

$2.0

$2.4

$2.8

2008 2010 2012 2014 2016 2018

Bank of EnglandEuropean Central BankBank of JapanFederal Reserve

Source: National central banks, J.P. Morgan. July 2017.

G-4 central bank assets US$ trillions, 12 month change

Projections


What the Fed is thinking

0%

1%

2%

3%

4%

5%

6%

2005 2007 2009 2011 2013 2015 2017 2019

Source: Bloomberg, Federal Reserve, JPMAM. July 31, 2017.

Market currently expecting a slower rate hike cycle than the median FOMC member, Fed funds target rate

Market

Median FOMC member

High FOMC forecast

Low FOMC forecast


Wage inflation picking up, but nothing alarming yet

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1997 2000 2003 2006 2009 2012 2015

Source: BLS, BEA, JPMAM. Note: prior to 2010, average hourly earnings are only for production and nonsupervisory workers. June 2017.

Measures of US inflationY/Y % change, 3-month average

Average hourly earnings

Employment cost index

Core PCE

-20%

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

'63 '67 '71 '75 '79 '83 '87 '91 '95 '99 '03 '07 '11Source: LSR, Byrne and Corrado, "ICT Prices and ICT Services: What do they tell us about Productivity and Technology?". 2017.

ICT price mismeasurement may be larger than previously thought, Y/Y % change in price

Official statistics

Byrne-Corrado estimates (2017)

U.K.

Germany

U.S.

CanadaEuro Area

Italy

France

Japan-0.4%

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%

2.4%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17

Source: J.P. Morgan, National statistics agencies. July 2017.

Developed world core inflationY/Y % change


Bottom line: this super-long cycle probably has more to run, although the pace of equity market gains in the developed world is likely to slow

17.2%15.6%

13.0%

5.7%

20.6%

13.9% 13.3%

22.6%

26.7%

19.1%

28.4%

44.2%

20.4%

12.5%11.1%

2.6%

6.8%

10.5% 11.3% 13.0%

21.3%

35.7%

13.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

AllCountryWorld

World exEM

USLarge Cap

USSmall Cap

Nasdaq Canada &Australia

Japan Europe Eurozone EMcommodityexporters

EM ex-Chinamanuf.

Chinaoffshore

Chinaonshore

USD returns

Local currency returns


YTD total returns on major equity markets/regionsPercent


Revisionist history: another look at US wealth and income inequality

15%

20%

25%

30%

35%

40%

45%

1960 1970 1980 1990 2000 2010

Source: "What do we know about evolution of top wealth shares in the United States?", Kopczuk (Columbia, AEA) 2015.

Top 1% wealth share in the US% share of total wealth

Capitalization method (Saez)

7%

10%

13%

16%

19%

22%

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10

Source: "Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality", Auten and Splinter (Treasury, JCT) 2016.

Top 1% income shares in the US% of total income

Saez/Piketty method


Revisionist history: another look at US wealth and income inequality

15%

20%

25%

30%

35%

40%

45%

1960 1970 1980 1990 2000 2010

Source: "What do we know about evolution of top wealth shares in the United States?", Kopczuk (Columbia, AEA) 2015.

Top 1% wealth share in the US% share of total wealth

Estate tax multiplier method

Capitalization method (Saez)

Survey of Consumer Finances method

7%

10%

13%

16%

19%

22%

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10Source: "Using Tax Data to Measure Long-Term Trends in U.S. Income Inequality", Auten and Splinter (Treasury, JCT) 2016.

Top 1% income shares in the US% of total income

Treasury/JCTmethod

Saez/Piketty method


The ARC and the Covenants 3.0

market and economic discussion - wyoming · market and economic discussion september 14, 2017 . ......

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