war room 25 oct 2012 eve of election update
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War Room 25 Oct 2012 Eve of Election Update. War Room. Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome. Eve of Election Update. Fiscal Cliff – Brinksmanship Assumed Housing – Rebound Emerging - PowerPoint PPT PresentationTRANSCRIPT
War Room 25 Oct 2012
Eve of Election Update
War Room•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
Eve of Election Update
I. Fiscal Cliff – Brinksmanship Assumed
II. Housing – Rebound Emerging
III. Europe – Debt Crisis = no. Recession = yes
IV. Scenarios
HiddenLevers
FISCAL CLIFF – BRINKSMANSHIP ASSUMED
Fiscal Cliff - BasicsTAX INCREASES
• Bush Tax Cuts – Average family gets $3000 tax hike
• Cost of Bush tax cuts expiring over next decade - $4 trillion
• Payroll Tax Cuts expire
• Medicare tax on high earners (Obamacare)
• Estate Tax goes from 35% 55%
• Capital Gains + Dividends Tax : 15% normal income tax rates
• Total tax increase: almost $500b
SPENDING CUTS
• First spending decline since 1999
• Obama – Stimulus spending = over
• Unemployment extensions = over
• Teacher + Police earmarks = expired
• Fed - Operation twist – over
• Debt Ceiling hit end of 2012
• Defense spending cuts – $500b
• Discretionary spending cuts– $700b
Total Impact of Tax Increases + Spending cuts
Total = 5% of GDP
TAXMAGEDDON
Fiscal Cliff – Basics
Romney + GOP Congress
Romney + Dem Congress
Obama + GOP Congress
Obama + Split Congress
Obama + Dem Congress
Romney + Split CongressStatus Quo
ObamaDem 53/47GOP 242/193
execsenatehouse
(pipe dream)
(pipe dream)
Fiscal Cliff – Post-Election Behavior Change?
congress since 2010
congress post-election
Seriously?
“Administration officials have been expressing that confidence for weeks, even as they say no real negotiations are happening.” – NY Times
Two thirds of economists assume resolution without damage to economy – USA Today
Potential Trump Card:
1. Obama win = clock ticking + some new clout
2. Defense spending + Bush tax cuts = GOP agenda
Conclusion Romney wins – lame duck, can kicked into 2013Obama wins – worst case more likely, but GOP may buckle
Fiscal Cliff Update – Worst Case Scenario Advantages of Worst Case Scenario
• No sudden economic collapse
• Falling market forces government to focus
• Deficit Balanced – automatic austerity
Disadvantages
• Long term effects of belligerent parties
• Recession very likely – 5% hit to GDP
1840s – worse than Thelma + Louise
• Disagreement between north + south on tariffs on Euro goods
• 1830 agreement that in 10 years tariffs would be eliminated (Think Bush Tax Cuts)
• 1838 major financial crisis after boom
• 1840 US sliding into deep depression
• 1842 1/3 of states defaulted on foreign loans President Tyler cabinet resigned
The Deal:
• John Tyler vetoed bills to keep high tariffs
• Original bargain struck 10 years before abandoned
• Tariff preserved but way lower
• Southern states seething led to secession/war
Fiscal Cliff Update – Effect on USD + Treasuries
Dollar Rally in Fiscal Cliff
MACRO:Flight to dollar as safety
FUNDAMENTALS: Lower Deficit = Stronger USA
Rally in US Treasuries 2011
Counter-intuitive – 10y integrity
2012: Intuitive – stronger USA
HOUSING – REBOUND EMERGINGHiddenLevers
Housing - Competing Trends:
Long Term Home Prices - Downward
Housing - Competing Trends:
Affordability
Affordability is highest in decades
Historically low mtg rates + price declines
75% of homes sold now affordable to median income buyers
In many markets buying < renting
Sources: National Associations of Realtors, Home Builders, and Wells Fargo
NAR Affordability Index
NAHB Housing Opportunity Index
Home builders' confidence and stock prices soaring over last 2 years
US home sales + new housing construction starts both rising since bottom in early 2011
Housing - Competing Trends:
Home Sales + Construction Upward
Source: HiddenLevers
Housing - Competing Trends:
Home Price + Foreclosure Issues Remain
Low mortgage rates + low home prices = affordability
But home prices continue to drag on household wealth
Residential foreclosures remain high + existing home sales trend much weaker than new home sales
Source: HiddenLevers
Consequences:
1. Home prices may suffer up to 30% more downside
2. Good chance of US economy going into recession
3. Pendulum’s don’t stop in the middle
4. Home ownership dies as an American tradition
Housing Update – Rebound Emerging
Consequences:
1. S+P to new highs, but muted impact from here
2. Industrial commodities will benefit most
3. Employment picture change will be cause
4. Rebound will in turn affect employment in sector
EUROPE – DEBT CRISIS = NO. RECESSION = YES.HiddenLevers
Europe – Basics
S&P + Euro continue to move in lockstep, up + down over 3 months
Source: HiddenLevers
Europe Update – Draghi commitment Spanish Bonds – 10Y Benchmark Yields
Source: Bloomberg
1. ECB pledged unlimited bond purchases to Spain
2. Spain bond yields have fallen considerably since early Sept
3. ECB interventions key to this decrease
4. Spain default = Euro Zone
5. Pulse of banking crisis rests on this lever, no matter what drama is in news
Europe Update – Now in Recession
• ECB intervention = buying time
• ECB so far unwilling to engage in QE a la Fed
• European austerity policies failed to deliver growth
• Even German economy sliding now
US big caps pulling out of Europe
no more diapers
plant shut downs
$15b out of EU banks
Europe Update – Why no action? Significance
• Greek economy shrunk almost 20% since peak
• Unemployment in Greece at 25% = Depression levels
• Unemployment in Germany at 5% = Germans not feeling pinch
Source: Economist
Guidance
1. Spain default or other PIIGS follow Greece out
2. Poorly handled, with no plan of action = bloodbath
3. At risk – anything priced in US Dollars
4. Defending Euro/Swiss Peg will be difficult
5. Think Lehman
Europe Update – Greece Defaulted, did not Exit
Guidance
1. Greek default + Euro exit almost fully priced in
3. Well handled, with guidance and action = rally
4. Proof - Gold is a commodity, not a reserve currency
5. Think GM, Bear Stearns
SCENARIOSHiddenLevers
HiddenLevers – Product Update
• iPad app now in App Store – very beta
• House-holding of portfolios
• Advanced Analytics – multiple time frames
Coming soon – Integrations:1. Schwab Portfolio Center
2. Money Guide Pro
3. Fortigent