F inanc ial Adviso r magazine pre se nts I n the Afte rmath: - - PowerPoint PPT Presentation

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F inanc ial Adviso r magazine pre se nts I n the Afte rmath: - - PowerPoint PPT Presentation

May 25, 2023 129 likes •370 views

F inanc ial Adviso r magazine pre se nts I n the Afte rmath: Navigating the S o ve re ign F isc al Crisis www.fa-mag.c o m This is for informational purposes only and should not be construed as investment advice. The information

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SLIDE 1

F inanc ial Adviso r magazine

pre se nts

www.fa-mag.c o m

I n the Afte rmath:

Navigating the S

  • ve re ign F

isc al Crisis

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SLIDE 2

This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

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  • Q4 GDP growth was 5.7%
  • Leading indicators have soared
  • Job market appears to be stabilizing
  • Inventory rebuild should be strong, particularly in tech capital goods

U S e c o no mic re c o ve ry has be gun

This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

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SLIDE 4

In our view—

  • Consumer: must still reduce debt and save more; housing wealth unlikely to recover
  • Commercial Real Estate: more pain as office and apartment vacancies likely keep rising
  • Government Spending I: Federal stimulus peaks in 2010, then fades
  • Government Spending II: state and local govt. spending must fall to help balance budgets
  • Net Trade: benefits from lower dollar limited by oil, China, European demand weakness
  • Demographics: potential GDP growth looks likely to slow
  • Recoveries from debt/ banking crises typically are slow (‘80s UK, ‘90s Japan)

but the e c o no my fac e s massive he adwinds

This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

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SLIDE 5
  • Fiscal Risks to Treasury returns from massive bond supply and policy

gridlock

  • Inflation Risks to all bonds from higher core inflation from excessive

monetary stimulus if policy gridlock persists

  • Growth Risks to equities
  • Confidence Risks to all US dollar assets

transitio n to sustainable gro wth and satisfac to ry re al yie ld lo o ks highly unc e rtain

This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

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SLIDE 6

GLOBAL BOND FUNDS HOLD:

  • Non-US, high quality governments and supranationals (safety)
  • Emerging market debt (performance)
  • Corporate debt (performance)
  • Non-dollar securities (safety and performance in a dollar bear market)

adviso rs may want to c o nside r: dive rsify fixe d inc o me ho ldings by c urre nc y and quality

This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

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SLIDE 7

c o nsume r he adwind: pe rso nal saving rate may rise to re plac e lo st we alth

Percent

Personal Saving as a Percent of Disposable Personal Income

History Forecast 1 2 3 4 5 6 7 8 9 10 11 12 13 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11

Quarterly data; shaded areas denote NBE R-designated recessions. Source: Commerce Department; L oomis Sayles. History through Q32009; forecast through Q42011.

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SLIDE 8

c o nsume r he adwind: re side ntial mo rtgage de linque nc y rate still rising

Seasonally adjusted quarterly data; shaded areas denote NBE R-designated recessions. Source: Mortgage Bankers Association. History through Q32009.

Percent

Mortgage Delinquencies: All Loans, Total Past Due

3 4 5 6 7 8 9 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 10

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SLIDE 9

inve stme nt he adwind: vac anc y rate s are still c limbing

Quarterly data; shaded areas denote NBE R-designated recessions. Source: Commerce Department. History through Q32009.

Percent

National Vacancy Rates: Industrial, Downtown & Suburban Office Space

2 4 6 8 10 12 14 16 18 20 22 24 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Industrial Downtown Office Suburban Office

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SLIDE 10
  • Credit Suisse: $1.4 trillion of US commercial real estate loans maturing in

the next four years

  • Foresight Analytics: almost 55% of these are currently "underwater“ (1/2010)
  • $250 billion in CRE losses? Not good for regional banks, or for regional lending

Source: Federal Reserve Board/ Haver Analytics, 1/ 13/ 2010.

Loan Delinquency Rate: Commercial Real Estate Loans: All Comml Banks

S A, Percent 10 05 00 95 90 12.5 10.0 7.5 5.0 2.5 0.0

inve stme nt he adwind

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SLIDE 11

fisc al he adwind: OMB pro je c ts fe de ral de fic its will re main huge

Unified budget basis; fiscal years, annual data. Source: Office of Management and Budget; Commerce Department. Annual history/ forecast through FY 2019.

$ (Billion) Percent of GDP

Federal Government Surplus/Deficit

  • 2000
  • 1800
  • 1600
  • 1400
  • 1200
  • 1000
  • 800
  • 600
  • 400
  • 200

200 400 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20

  • 15.0
  • 13.5
  • 12.0
  • 10.5
  • 9.0
  • 7.5
  • 6.0
  • 4.5
  • 3.0
  • 1.5

0.0 1.5 3.0

OMB Projections (left scale) OMB History (left scale) %

  • f GDP

, History (right scale) Projections for %

  • f GDP

(right scale)

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  • OMB: net federal debt held by public, up $2.1 trillion in FY 2009
  • Up $9.6 trillion FY 2010 – FY 2019
  • Debt-GDP ratio rise to 76.5%, highest since 1950
  • May get worse in very long run

Source: Office of Management and Budget/ Haver Analytics, 8/ 26/ 2009.

Federal Debt Held by Public as a Percentage of GDP

15 10 05 00 95 90 85 80 75 70 65 60 55 50 45 40 120 100 80 60 40 20

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go ve rnme nt de bt sto c ks are so aring

Source: OE CD/ Haver Analytics; 8/ 19/ 2009.

Japan: General Government Gross Financial Liabilities as %

  • f GDP

United S tates: General Government Gross Financial Liabilities as %

  • f GDP

Germany: General Government Gross Financial Liabilities as %

  • f GDP

United Kingdom: General Government Gross Financial Liabilities as %

  • f GDP

10 05 00 95 90 85 80 75 70 240 200 160 120 80 40

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SLIDE 14

but G3 yie lds are little c hange d

Source: FRB, FT, Bbk/ Haver.

09 08 07 06 05 04 03 02 01 00 8 6 4 2

US: 10-Year Treasury Note Yield at Constant Maturity (Avg., % p.a.) Japan: 10-Year Government Bond Yield (% ) Germany: Central Government Securities- 9 to 10 Years (Avg., % p.a.)

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SLIDE 15
  • US working age population to slow from aging, lower fertility & less immigration
  • Potential real GDP growth estimated to slow from 2.9% in 2000s to 2.2% in 2010s

de mo graphic he adwind

Source: Congressional Budget Office/ Haver Analytics, 1/ 14/ 2010.

Real Potential Gross Domestic Product (CBO) 10-year % Change (Annual)

  • Bil. Chn. 2000 $

20 15 10 05 00 95 90 85 80 75 70 65 60 55 4.4 4.0 3.6 3.2 2.8 2.4 2.0

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SLIDE 16

trade he adwind: e uro zo ne GDP slo we d in Q4

Source: Statistical Office of the E uropean Communities, Haver Analytics.

09 08 07 06 05 04 03 1

  • 1
  • 2
  • 3

Euro Area 11-16: GDP at 2000 Prices, Flash Estimate SWDA Q/Q % Change

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SLIDE 17

c hina’s impo rts are gro wing, e uro pe ’s are no t

Source: CC, E urostat/ Haver.

09 08 07 06 05 04 03 02 01 00 99 120000 100000 80000 60000 40000 20000 150000 125000 100000 75000 50000

China: Merchandise Imports, CIF SA, Mil. US $ EA 16: Imports: Total SA/WDA, Mil. EUR

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SLIDE 18

is c hina’s 39% M1 gro wth an inflatio n risk?

Source: CNBS, PBC/ Haver.

09 08 07 06 05 04 03 02 01 00 40 30 20 10

  • 10

China: Consumer Price Index (Y/Y % Change) China: Money Supply- M1 (Y/Y % Change)

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SLIDE 19

U S do llar re mains vulne rable to se ntime nt, c arry

Source: JP Morgan; monthly data ended 8/ 31/ 2009.

70 80 90 100 110 120 130 Dec-79 Dec-82 Dec-85 Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 US Dollar

JP Morgan Broad Real Effective X Rates 2000 = 100

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SLIDE 20
  • US growth will require positive net trade to replace the consumer

— Dollar weakness is more export-friendly

  • Higher oil and metals, weaker finance implies adverse us terms of trade
  • US dollar is now a funding currency

— Delayed tightening from the fed to foster global rebound

  • Asian currencies will need to appreciate
  • Commodity and EM currencies may be pulled along

the we ak do llar the sis

This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

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SLIDE 21

c o nside r an e xpande d

  • ppo rtunity se t: U

S is le ss than 40%

  • f the glo bal bo nd marke t

United S tates Japan Germany France United Kingdom Italy S pain Canada Netherlands S upranational Belgium Australia Austria S . Korea Other Countries

Barclays Capital Global Aggregate % Market Value

Source: Barclays Capital, as of 12/ 31/ 2009.

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SLIDE 22

c o mpe lling c o rre latio ns: BGA & BGA E x-U S are we akly c o rre late d to bo th S&P500 and MSCI E AF E

Source: Zephyr, data from January 2000-December 2009

January 2000 - December 2009 Barclays Global Aggregate Ex-US Index Barclays Global Aggregate Index

Barclays Global Aggregate Ex-US 1.00 0.98 Barclays Global Aggregate 0.98 1.00 Barclays US-Only Aggregate 0.60 0.75 Barclays US Govt/Credit 0.60 0.75 Barclays US Corp High Yield 0.21 0.22 JPMorgan Emerging Mkt Debt 0.37 0.43 MSCI EAFE 0.39 0.34 S&P 500 0.17 0.14

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SLIDE 23

que stio ns & answe rs

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thank yo u fo r atte nding

A recording and the slides of this presentation will be available at http://www .fa-mag.com/rolley This program has been approved by the CFP Board for 1 CE credit. Log on to: www/cfp.net/login Log in to your online CFP Board Account (email address and password are needed) CE SPONSOR: Charter Financial Publishing Network, Inc. CE SPONSOR ID NUMBER: 2839 PROGRAM NAME: The Aftermath Navigating The Sovereign Fiscal Crisis PROGRAM ID: 2232010 HOURS GRANTED: 1.00

I n the Afte rmath:

Navigating the S

  • ve re ign F

isc al Crisis

Pre se nte d by