the truth about lying: an economic analysis

The Truth About Lying: A Collection of Made-Up Statistics that Aren’t HelpingMade-Up Statistics that Aren’t Helping

Joe Morgan

[email protected]

@SVBJoeMorgan

Today’s Agenda

� Lies:� Housing is Booming!

� Employment market has recovered

� Markets are stable

�Damned Lies:� Austerity/Growth are the only options

� Low Rates and QE will create a full recovery� Low Rates and QE will create a full recovery

�Statistics:� The Euro must survive

� Credit quality is defined by Moody’s/S&P/Fitch

�Calling for another recession would be a lie too…

Consumer Activity Govt

Business Investment

Net Exports

70% 20% 13% -3%

Jobs Housing

GDP:

What’s Important?

Jobs Housing

Set by Policy

Cannot Move Significantly in

Short Run

Housing is Booming!

800

900

1000

1100

Th

ou

san

ds

Housing Starts

5

400

500

600

700

800

Th

ou

san

ds

Source: Census Bureau, SVB Asset Management

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Ho

me

Su

pp

ly (

mo

nth

s)

Hom

e S

ale

s (

Mill

ions)

Total Sales (new & existing) Existing Home Supply

The Housing Market Key Economic Driver

Home Sales & Supply

Housing Starts Home Prices – Indexed to 100

� Housing was a main driver of economic growth in the fourth quarter with residential fixed investment increasing 17.6 percent.

� Home sales, both new and existing, continued their upward trend. Sales of existing homes hit a three-year high at an annual pace of 4.98 million in February.

� Greater housing demand combined with lower home supply drove home values higher. As shown by the S&P/Case-Shiller index of property values, prices climbed over 8 percent on a year-over-year basis in their 20-city composite – the largest gain since 2006.

Source: National Association of Home Builders (NAHB), Census.gov, S&P, and SVB Asset Management.

0.0

0.5

1.0

1.5

2.0

2.5

Mill

ion

s

Housing Starts

90

110

130

150

170

190

210

230

250

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Case Schiller 20 City FHFA Purchase Median Home Price

Home Prices – Indexed to 100

6

SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 14)

Housing Starts – Best Since 2008!

200.0

250.0

300.0

350.0

1.5

2.0

2.5

3.0

Mill

ion

s

Mill

ion

s

7

0.0

50.0

100.0

150.0

0.0

0.5

1.0

1.5

Mill

ion

s

Mill

ion

s

Housing Starts Population


The Housing Market Key Economic Driver

Homeownership Rate Housing Affordability Composite Index

Home Foreclosures - % of Total Loans

62.0%

64.0%

66.0%

68.0%

70.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

0.0

50.0

100.0

150.0

200.0

250.0

Aff

ord

ab

ility

In

de

x

Housing Affordability 30 Year Fixed Mortgage Rates

Source: Census.gov, National Association of Realtors and SVB Asset Management.

Home Foreclosures - % of Total Loans

� The homeownership rate hovered around 65.5 percent last year, down from its peak of 69 percent in 2004, as we saw a shift towards renting over the past few years.

� Record low interest rates caused by easy monetary policy and depressed home values prompted more home buyers to enter the market last year. Approximately a third of sales are cash buyers, however, and investors compromised the majority of these sales.

8

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


Housing is Booming!

800

900

1000

1100

Th

ou

san

ds

Housing Starts

9

400

500

600

700

800

Th

ou

san

ds


Employment Has Recovered

9.5%

10.0%

10.5%

Unemployment Rate

10

7.5%

8.0%

8.5%

9.0%

Source: BLS, SVB Asset Management

Unemployment and Nonfarm Payrolls

0.0%

5.0%

10.0%

15.0%

20.0%

-200.0

0.0

200.0

400.0

600.0

Th

ou

sa

nd

s

11

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

-1,000.0

-800.0

-600.0

-400.0

-200.0

Th

ou

sa

nd

s

Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)


-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

-1,000.0

-800.0

-600.0

-400.0

-200.0

0.0

200.0

400.0

600.0

Th

ou

sa

nd

s

Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)

Employment Acceleration Needed

Employment Landscape

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

104,000.0 106,000.0 108,000.0 110,000.0 112,000.0 114,000.0 116,000.0 118,000.0 120,000.0 122,000.0 124,000.0

Thousands

Th

ou

sa

nd

s

Full Time Employment (LHS) Part Time for Economic Reasons (RHS)

Full-Time Employment

Long Term Unemployment

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%

Recession Period Unemployed 27 Weeks and Over

Source: U.S. Bureau of Labor and Statistics (BLS), SVB Asset Management, National Bureau of Economic Research (NBER). Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months.

Long Term Unemployment� Unemployment rate in the U.S. decreased to 7.7 percent in February

2013 from 7.9 percent in January 2013, driving the rate down to its lowest in over four years.

� Total nonfarm payroll employment increased by 236,000 in February. The main sectors that added jobs were professional and business services, construction, and healthcare.

� The number of long-term unemployed has not improved very much and remained close to 4.8 million in February, almost 40.2 percent of the unemployed are long-term .

� Labor force participation continues to be low, as workers opt for early retirement or stop searching entirely.

12


Employment Acceleration Needed

Fewer Workers Supporting Greater Population Will the Recent Spike in Earnings Hold Up?

Hires and Quits Remain Depressed

57.0%

59.0%

61.0%

63.0%

65.0%3.0%

5.0%

7.0%

9.0%

11.0%

Unemployment Rate (LHS)

Employment to Population Rate (RHS)

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

62.0%

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

Labor Force Participation Rate (LHS)

Avg Hourly Earnings Growth (RHS)

Source: U.S. Bureau of Labor Statistics (BLS), SVB Asset Management.

Hires and Quits Remain Depressed

� Workers as a percent of the total population remain depressed even as the unemployment rate declines due to people dropping out.

� Average hourly earnings growth increased in recent quarter, but total hirings have yet to turn upward.

� Turnover, as measured by job hires and quits remains depressed vs. recent growth trends.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Job Hire Rate Job Quit Rate


13

Employment – Payrolls Not Keeping Up With Population

290.0

300.0

310.0

320.0

330.0

140.0

150.0

160.0

170.0

180.0

14

250.0

260.0

270.0

280.0

110.0

120.0

130.0

140.0

Nonfarm Payrolls (lhs) Population (rhs)


Year Payrolls

2008 -3.6 mm

2009 -5.1 mm

2010 +1.0 mm

2011 +2.1 mm

2012 +2.2 mm

Job growth barely outpacing natural labor force growth of ~ 1mm jobs per year

Employment Growth About 6mm Jobs Behind

2012 +2.2 mm

Gross -3.4 mm

5 Yrs Labor Force Growth

-5 mm

To get back to 4.9% Unemployment

Need 8.4 mm jobs immediately

To reach 6.5% unemployment

Need ~ 6 mm jobs immediately

Source: Bloomberg, SVB Asset Management


15

Employment Has Recovered

9.5%

10.0%

10.5%

Unemployment Rate

16

7.5%

8.0%

8.5%

9.0%


The Markets – Yields Are Stable

10.0%

15.0%

20.0%

17

0.0%

5.0%

5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit Rate


Bond Market Will the Momentum Continue?

Since 2008, bond markets have produced four consecutive years of positive total and excess returns.

Bonds exhibited positive performance led by Banking, Insurance, and Financial Services sectors. U.S. Treasuries had their third worst return in the last 16 years at 2.16 percent, compared to 2008, which had the best return at 13.98 percent.

The biggest long-term risk is a reversal in central bank policies. At record low yields, total returns would be significantly exposed to any tightening policy. However, 5.4%

6.0%

6.5%

7.2%

7.3%

7.5%

9.6%

12.9%

13.1%

0.0%

1.6%

7.1%

8.9%

9.2%

9.9%

9.9%

10.2%

11.8%

15.3%

15.0%

2.2%

3.0%

Automotive

Services

Basic Industry

Media

Telecommunications

Energy

Financial Services

Insurance

Banking

US Treasury

US AgencyU.S.

U.S.

any tightening policy. However, this should not be a concern for 2013.

1.3%

2.5%

7.8%

2.4%

4.2%

4.2%

4.5%

5.2%

2.6%

3.2%

9.1%

4.7%

6.7%

7.0%

7.1%

7.6%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

MBS

ABS

CMBS

Technology & Electronics

Consumer Non-Cyclical

Consumer Cyclical

Healthcare

Capital Goods

Total Return % 12-mo Excess Return % 12-moSource: Bloomberg, BoAML and SVB Asset Management.


18

The Markets – Rates Move in Trends

10.0%

15.0%

20.0%

19

0.0%

5.0%



3.0%

4.0%

5.0%

6.0%

The Markets – A Closer Look

20

0.0%

1.0%

2.0%

5-Yr UST 2-Yr UST O/N Deposit Rate


The Markets – Spreads Are More Stable Than Rates

4.0%

5.0%

6.0%

7.0%

Investment Grade Yield Spread

21

0.0%

1.0%

2.0%

3.0%

4.0%


The Markets – Yields Are Stable

10.0%

15.0%

20.0%

22

0.0%

5.0%



The Markets – Stocks Are Stable

1000

1200

1400

1600

1800

S&P 500

23

0

200

400

600

800

S&P 500


The Markets – VIX at historic lows

30

40

50

60

800

1000

1200

1400

1600

1800

24

0

10

20

0

200

400

600

800

S&P 500 VIX


The Markets – Defensive Sectors Leading the Way

TelecomUtilities Cons Staples Healthcare

25


Energy

Materials

Industrials Financials

Cons Discretionary

The Markets – Defensive Sectors Leading the Way

26

Source: WSJ, April 30, 2013

S&P 500 Companies Room to Accelerate

S&P 500 companies continue to conserve cash, although the level of growth in cash balances has tapered off in recent quarters.

On the other hand, S&P 500 companies have greatly reduced their leverage ratios, likely due to limited capital and investment opportunities.

Companies have plenty of dry powder on their balance sheets, both in cash and further leveraging up, to take advantage of

Debt to Equity Ratio and Cash on Balance of S&P 500 Companies

$150.0

$200.0

$250.0

$300.0

$350.0

155.0%

175.0%

195.0%

215.0%

235.0%

Bill

ion

s

up, to take advantage of opportunities if global economies improve.

Source: Bloomberg and SVB Asset Management.

$0.0

$50.0

$100.0

$150.0

75.0%

95.0%

115.0%

135.0%

Total Debt to Total Equity (LHS) Cash & Equivalents (RHS)


27

Federal Reserve Top Gear

As the Federal Reserve embarks on more quantitative easing, the U.S. balance sheet continues to grow.

At the current pace of $85 billion dollars per month of combined mortgage backed securities and longer-term treasury purchases, the Fed’s balance sheet will be close to $4 trillion dollars by year end. That is more than quadruple where the balance sheet was at the start of the financial crisis.

Recent Balance Sheet Trends

$1.5

$2.0

$2.5

$3.0

$3.5

Tri

llio

ns

Other Fed Reserve Assets

Central Liquidity Swaps

Other

Aurora

Maiden Lane III

Maiden Lane II

Maiden Lane I

TALF

AIG

Seasonal Credit

Despite all the effort by the Federal Reserve with monetary policy, the U.S recovery is yet to pick up speed.

Source: Federal Reserve and SVB Asset Management.

28

$0.0

$0.5

$1.0

$1.5

Secondary Credit

Primary Credit

Other Loans

Treasury Currency Outstanding

Special Drawing

Gold Stock

MBS

Federal Agency Debt Securities

U.S. Treasury Securities


The Markets – Earnings Outlook Droops

29


The Markets – Revenue Outlook Droops, Too!

30


The Markets – Stocks Are Stable

1000

1200

1400

1600

1800

S&P 500

31

0

200

400

600

800

S&P 500


“Austerity” or “Growth” Are Our Only Options

32

Austerity or Growth: Hauser’s Law

15%

20%

25%

30%

8,000.0

10,000.0

12,000.0

14,000.0

16,000.0

18,000.0

Millio

ns

33

Source: US Treasury, SVB Asset Management

0%

5%

10%

-

2,000.0

4,000.0

6,000.0

8,000.0 Millio

ns

US Government Expenditures (lhs) US GDP (lhs) As a % (rhs)

Austerity vs. Growth: Spending = Taxes

2000

2500

3000

3500

4000

34


0

500

1000

1500

Federal Revenue Federal Expenses

Austerity vs. Growth: Obama Gets No Revenue Growth

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Growth of Expenditures Growth of Revenues

35


0.0%

2.0%

4.0%

6.0%

Carter Reagan Bush 41 Clinton Bush 43 Obama0.0%

2.0%

4.0%

6.0%

Carter Reagan Bush 41 Clinton Bush 43 Obama

� Only when it becomes too costly NOT to work together

6.0%

7.0%

8.0%

9.0%

10.0%

10 Year Treasury

When Will Politicians Work Together?


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

36

“Austerity” or “Growth” Are Our Only Options

37

The Fed – Low Rates and QE Will Create a Full Recovery

4.0%

5.0%

6.0%

7.0%

Fed Funds Rate

38


0.0%

1.0%

2.0%

3.0%

4.0%

1.0

1.2

1.4

1.6

1.8

2.0

But Money Isn’t Moving Through the System

Source: Federal Reserve Bank of St. Louis, Bloomberg, SVB Asset Management

39

0.0

0.2

0.4

0.6

0.8

Money Multiplier

Federal Reserve Trying to Get on Track

The Fed has continued with its QE3 program. As announced in the December FOMC meeting, the Committee will continue with purchases of mortgage backed securities at the pace of $40 billion per month and longer-term treasury securities at the pace of $45 billion a month.

The Fed is using the unemployment rate and inflation rate as thresholds to monitor the need for monetary

Fed Inflation, Employment Thresholds Worry Two of the Fed Presidents

U.S. Unemployment Target 6.5%

Core PCE Threshold 2.5%

4.0%

6.0%

8.0%

10.0%

12.0%

1.0%

2.0%

3.0%

monitor the need for monetary policy. The unemployment target is set at 6.5 percent and looser monetary policy will continue as long as inflation remains below 2.5 percent.

The U.S. economy has a ways to go before reaching 6.5% unemployment, estimates are for another 2 years before reaching the target. Meanwhile, inflation remains muted.

Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS) and SVB Asset Management.


40

U.S. Unemployment Target 6.5%

0.0%

2.0%

0.0%

Core PCE (LHS) Core PCE Threshold (LHS)

U.S. Unemployment Rate (RHS) U.S. Unemployment Target (RHS)

What Is the Purpose of QE?

2.0%

3.0%

4.0%

TIPs Inflation Estimate

41


-1.0%

0.0%

1.0%

2.0%

1/5/2007 1/5/2008 1/5/2009 1/5/2010 1/5/2011 1/5/2012 1/5/2013

QE1

QE2

QEternity

4.0

5.0

6.0

7.0

The Fed's Balance Sheet ($ Trillions)

Size of the Fed’s Balance Sheet

Source: The Federal Reserve, SVB Asset Management

0.0

1.0

2.0

3.0

4.0

42

Who Is Benefiting From Low Rates and QE?

43

The Fed – Low Rates and QE Will Create a Full Recovery

4.0%

5.0%

6.0%

7.0%

Fed Funds Rate

44


0.0%

1.0%

2.0%

3.0%

4.0%

Europe – The Euro Must Survive

45


-8.0%

-4.0%

0.0%

4.0%

8.0%

UK Germany France Italy Spain

Europe Could Use a Boost

GDP� The euro zone economy is poised to contract by 0.5 percent or

more in 2013, continuing the lackluster performance of the previous two years. Even Germany appears to be in danger of slipping into a recession.

� Italy was downgraded by Fitch recently, while talk of a tax on bank deposits in Cyprus caused a ripple effect across Europe in mid-March. These types of occurrences illustrate the current fragility of sentiment in Europe.

� The ECB is resisting further rate cuts for now, but will cut later this year.

� What is needed by most struggling economies in Europe is economic growth to boost tax revenues and slow soaring unemployment . However, the deficit situation has handcuffed fiscal spending and retail spending is unlikely to rise unless confidence does.Consensus GDP Forecast


confidence does.

� Growth forecasts for the major European economies are if anything overly optimistic; it is hard to pinpoint a potential catalyst for growth in this environment.

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

UK Germany France Italy Spain

Consensus GDP Forecast


46

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.3

1.4

1.5

1.6

1.7

EU

R / U

SD

GB

P / U

SD

GBP EUR

Europe What Will Put the Brakes on the Euro?

Currency Performance� The EUR is poised to go lower, weighed down by concerns

about the debt crisis, a widening recession and continuing political uncertainty.

� The GBP registered gains against the EUR for several months, but has begun to lose ground recently, as the economy struggles to recover from the economic downturn.

� A lower EUR is in Europe’s interest, despite occasional talk to the contrary. It remains one of the few ways to stimulate growth, using a weak currency to fuel export competitiveness.

� The EUR does not require a break up of the euro zone to head lower; economic and political uncertainty coupled with continuing subpar growth is sufficient to cause a further fall.

10Y Sovereign Yields


� Lower yields would normally help boost economic activity, but sovereign spreads to Germany remain wide. As a result, the countries that would really benefit from lower borrowing costs don’t reap the benefit.

� Longer term, the EUR could recover against the USD, assuming the euro zone survives this crisis. Europe has a stronger balance of payments position than the U.S. and a central bank with a single mandate of controlling inflation, which should lead to a less expansionary monetary policy. However, as John Maynard Keynes famously said, “In the long run we are all dead”.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

ES FR IT DE

10Y Sovereign Yields


47

� Mobility rates are about 1/10th of United States level.

20.0%

25.0%

30.0%

Unemployment Rates

Labor Immobility: People Will Not Move Across Borders

Source: “Geographic Mobility in the European Union” European Commission, SVB Asset Management

0.0%

5.0%

10.0%

15.0%

Nevada

N. Dakota

48

� Capital is Immobile – By Regulatory Design!

� Multiple banking regulators encourage safety within countries (ECB to the rescue?)

� Banks encouraged to buy debt issued by host country but avoid others

What About Capital?

� Banks encouraged to buy debt issued by host country but avoid others

� Banks encouraged to “sweep” cash out of risky countries within the eurozone

49

� A single monetary policy causes more harm than good

� No adjustment across economies at varying stages

� Negates half the tools government has to affect the economy

� Acts like a “pegged” currency (All currencies eventually become “unpegged”)

But What Is Really Wrong?

“unpegged”)

The euro is a fine political accomplishment, but a horrid economic situation

50

Europe – The Euro Must Survive

51


Credit Quality Is Defined By S&P, Moody’s and Fitch

52


Considering investment grade alternatives…

“Old Normal” “New Normal”

Treasury AAA Highly Securitized AAA

AA Treasury AA

Treasury Downgrade Effectively Shifts Entire Scale

Corp A Corp A

BBB BBB

� The Treasury curve is the “benchmark” for pricing and quality in the corporate bond market.

� The flood of downgrades in ‘08 – ’11 was a “resetting” of the credit scale by the NRSROs.

Issuer Name Duration Limit S&P Long-term Moody's Long-term Fitch Long-term

AT&T Corp 1 Year A- A2 A

Rio Tinto Plc 1 Year A- A3 A-

Vodafone Group PLC 1 Year A- A3 A-

Lowe's Companies, Inc 1 Year A- A3 WD

Apache Corp 1 Year A- A3 BBB+

Campbell Soup Co. 1 Year BBB+ A2 A-

Bank of America N.A. 1 Year A A3 A

Sampling of A3/A- Issuers

Bank of America N.A. 1 Year A A3 A

Goldman Sachs Group Inc 1 Year A- A3 A

Morgan Stanley 1 Year A- Baa1 A

Citigroup Inc 1 Year A- Baa2 A

Anheuser-Busch InBev NV 2 Years A A3 A

American Express 2 Years A- A2 A+

Target Corporation 2 Years A+ A2 A-

JPM Subordinated Debt 2 Years A- A3 A

WFC Subordinated Debt 2 Years A A3 A+

Credit Quality Is Defined By S&P, Moody’s and Fitch

55


The Good News: There Won’t Be Another Recession Soon

56

� Corporate Balance Sheets

� Bank Balance Sheets

� Consumer Balance Sheets

Excess Cushion Against Potential Hard Times

� Energy Independence….?

� Our Culture of Consumerism (GDP is 70% Consumption)

57

Disclosures

This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as asolicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.

All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and its affiliates and is for informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of SVB Asset Management. All trademarks, service marks and logos used in this material are trademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliates or other entities.

58

SVB Asset Management

Joe Morgan, CFA

Chief Investment Officer, SVB Asset Management

[email protected]

@SVBJoeMorgan

Weekly news summary and commentary: www.svb.com/ciovantage

59

the truth about lying: an economic analysis

Economy & Finance

svb asset management

economic report q1

employment market

depressed home values

census bureau

bureau of labor

sales of existing homes

greater housing demand