Strange New World “I pass with relief from the tossing sea of Cause and Theory to the firm ground of Result and Fact.” – Winston Churchill (The Story of the Malakand Field Force, 1898 – near the Swat Valley, Pakistan) January 14, 2010 Lawrence Speidell Chief Investment Officer, CEO Frontier Market Asset Management larry@frontiermkt.com
It’s about people
Strange New World
Strange New World
“When the situation was manageable, it was neglected, and now that it is thoroughly out of hand, we apply too late the remedies that might have affected a cure” – Winston Churchill Treasury Bill Rate (90 day) 7 6 Fed Funds 5 4 3 2 1 90 day T-bill 0 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
“The Fed’s job is to provide liquidity” - John Rutledge Monetary Base 2000 1600 1200 11-Sep-01 800 Y2K (Year 2000) Source: St. Louis Fed, January 2010 400 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
The Recovery Source: Raymond James, Jeffrey Saut, Nov 2009
Strange New World
Strange New World http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html
Consumers – Job Cuts http://www.calculatedriskblog.com/2009/11/unemployment-stress-tests-unemployed.html
Consumers Employment to Population Ratio http://www.calculatedriskblog.com/2009/11/employment-population-ratio-record-part.html
Consumers – Job Cuts 10 Payrolls 11 Unemployment Claims 9 Unemployment Rate & Wkly Hours 300 700 7000 35 10% 200 6500 650 Continuing 35 100 6000 9% Claims 600 0 5500 8% 34 550 -100 5000 7% -200 500 4500 34 -300 4000 Non-Farm Payroll Chg 6% 450 -400 33 3500 INITIAL Mfg Payroll Chg 5% Unemployment Rate 400 -500 3000 CLAIMS Avg Wkly Hours 33 -600 350 4% 2500 -700 300 2000 3% 32 Jun-09 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Apr-09 Aug-09 Oct-09 Dec-09 1997 1999 2001 2003 2005 2007 23-Jan-09 20-Mar-09 15-May- 10-Jul-09 04-Sep-09 30-Oct-09 25-Dec-09 08-Jan-10 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09
Negative Net Worth in 8.3 million Homes Consumers
Consumers: Balance Sheet for Median Household 2004 2007 2009 Income $47,500 $47,300 $47,300 Assets Bank accounts 3,300 2,700 2,700 Retirement savings 19,000 23,900 17,900 Vehicles 14,400 14,600 14,600 Primary residence 148,300 150,000 125,400 Total assets 185,000 191,200 160,600 Liabilities Mortgage on primary residence 84,800 88,700 88,700 Installment loans 11,800 12,800 12,800 Credit cards 2,400 2,400 2,400 Total liabilities 99,000 103,900 103,900 Net worth $86,000 $87,300 $56,700 http://www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf http://baselinescenario.com/2009/02/15/household-assets-debt-savings-federal-reserve-survey/
Negative Net Worth in 10.7 million Homes Wall Street Journal 11/24/09
Consumers: Car Costs "You used to be able to find a decent car for $2,500, and you can't anymore, especially in the past two months," “Used-vehicle prices have risen above their book values, making it tougher for customers to secure financing” http://readingeagle.com/article.aspx?id=162023
College Costs Consumers:
Savings Rate Will Rise Personal saving as a percentage of disposable personal income 30 25 20 15 10 5 0 Source: BEA, Outlook/Savings NIPATable Nov 2009 -5 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007
Strange New World Debt/Assets Assets Debt Debt Payments / Income Source: Laffer Associates 2010
Vicious or Virtuous Circle? Consumer & Production…. or Production & Consumer 5 ISM Manufacturing Index 13 Consumer Confidence 65 160 Consumer Confidence 60 140 Expanding Consumer Sentiment (U 55 Mich) 120 50 Contracting 100 45 80 40 ISM Manufacturing Index 60 35 ISM NonManufacturing Index 40 30 20 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Jun-09 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Apr-09 Aug-09 Oct-09 Dec-09 6 Production & Orders 14 Retail Sales % Chg 3 1.5 1 0.5 -1 -0.5 -3 -1.5 Industrial Prodn % Chg -5 Retail Sales -2.5 Dur Gds xTransport Retail Sales ex Autos -7 -3.5 Apr-09 Aug-09 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Jun-09 Oct-09 Apr-09 Aug-09 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Jun-09 Oct-09 Dec-09
Housing and Autos 15 Housing 16 More Housing Data Housing Starts New Homes 13.5 Bldg Permits Month Supply 1900 Vehicle New Home Sales Sales 11.5 1500 9.5 1100 7.5 700 5.5 Existing Home 300 Sales Jun-09 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Apr-09 Aug-09 Oct-09 3.5 Jun-09 1997 1999 2001 2003 2005 2007 Dec-08 Feb-09 Apr-09 Aug-09 Oct-09 Dec-09
Housing 2.5% of GDP versus 6.3% Residential Construction % GDP 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007 Outlook/GDP NIPATable.xls
Outlook/GDP NIPATable.xls 2007 2001 1995 1989 1983 1977 Inventory Chg / GDP 1971 1965 Inventory Cycle 1959 1953 1947 1941 1935 1929 5% 3% 1% -1% -3% -5%
Corporate Cash is High
Government Stimulus is Underway
Government Risk
Source: Laffer Associates 2010 Government Risk
Government Risk
The Depression 1929-1939
The Depression – Tight Money
The Depression – Tight Money
The Depression - Taxes Up
The Depression – Unemployment 25%
One World…or Two
Emerging/Frontier Countries: Under $10,000 GDP/capita
Frontier Countries: Not in MSCI Emerging Markets Index .
One World… or Two Population http://www.worldmapper.org/display.php?selected=117
One World… or Two Electric Power Production http://www.dailymail.co.uk/sciencetech/article-1217571/A-new-world-The-amazing-map-based-population-shows-Britain-big-player.html
The Poor World: Human Capital and Financial Opportunity . Market Cap 2007 World GDP 2007 Population 2007 United Frontier Frontier States 5.0% United Frontier 2.8% 5.1% Emerging States 18.1% United Markets EAFE 26.2% Emerging States 25.2% 10.0% Markets 31.3% 25.0% Emerging Markets 66.7% EAFE EAFE 43.8% 40.8%
One World… or Two
One World… or Two
Convergence is Accelerating GDP per Capita (2000 $) 100,000 Japan USA Cyprus $12400 Singapore 10,000 S Korea Mauritius $4300 Brazil $1323 Turkey 2004 $3200 Russia 1,000 Philippines Thailand China $538 India $187 Vietnam 100 $100 China India Japan South Korea Singapore United States Brazil Philippines Thailand Vietnam Russian Cyprus Mauritius Turkey ChinaGDPperCapita0607 10 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
Demographics Favor the Poor Countries Population Demographics Italy . 20 Japan Developed Markets Germany 18 Emerging Markets Greece Bulgaria Frontier Markets 16 Romania 14 Poland 12 Age > 64 Ireland 10 Argentina Singapore 8 China Sri Lanka 6 Vietnam Peru Pakistan 4 Zambia Bahrain Uganda 2 Nigeria UAE 0 0 10 20 30 40 50 60 Age < 15 Source: World Development Indicators, 2006 FrontierCountries0607
Population 10,000,000 Demographics 1.2% Africa 0.3% China -0.3% 1,000,000 Population -0.4% Europe 2011 2025 Growth Rate India Bulgaria 7.7 7.1 -0.6% 0.4% Ukraine 46.7 43.2 -0.6% US Belarus 9.8 9.1 -0.5% Moldova 3.6 3.4 -0.5% Russia Georgia 4.3 4.0 -0.5% -0.5% Lithuania 3.4 3.1 -0.5% 100,000 Russia 144.1 136.5 -0.4% -0.6% Japan Malawi 16.2 23.3 2.6% Occupied Palestine 4.6 6.6 2.7% Somalia 9.6 14.0 2.7% Australia Benin 9.5 13.8 2.7% 0.4% Tanzania 46.6 67.7 2.7% Burkina Faso 16.8 24.9 2.8% Afghanistan 30.2 45.1 2.9% 10,000 Uganda 35.0 53.6 3.1% Niger 16.5 27.4 3.7% -1.1% Bulgaria 0.1% New Zealand 1,000 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Source: UN Population, ChinaPop
Demographics Population (000) 2011 Population India China 2011 1,385,864 1,240,387 100+ 100+ 95-99 95-99 Females Females 90-94 90-94 Males Males 85-89 85-89 80-84 80-84 80+ 80+ 75-79 75-79 70-74 70-74 65-69 65-69 60-64 60-64 55-59 55-59 50-54 50-54 45-49 45-49 40-44 40-44 35-39 35-39 30-34 30-34 25-29 25-29 20-24 20-24 15-19 15-19 10-14 10-14 5-9 5-9 0-4 0-4 (80,000) (40,000) - 40,000 80,000 (80,000) (40,000) - 40,000 80,000 Source: United Nations Population Prospects, 2009
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