Post on 25-Nov-2021
An Overview of the U.S. An Overview of the U.S. EconomyEconomyPresented by Daniel North, Euler Hermes ACI, June 9rd , 2010
2© Copyright Euler Hermes May 2010
The Overview, The Overview, June,June, 20102010
•• Good NewsGood News
•• Bad NewsBad News
•• News from the Future News from the Future
3© Copyright Euler Hermes May 2010
The Overview, The Overview, June,June, 20102010
•• Good NewsGood NewsThe Recession is OverThe Recession is Over
•• Bad NewsBad NewsInflation is on the WayInflation is on the Way
•• News from the FutureNews from the FutureChange Change
4© Copyright Euler Hermes May 2010
The Overview, The Overview, JuneJune 20102010Good News Good News -- The Recession is The Recession is OverOver
How we got in / out How we got in / out What the data saysWhat the data says
Bad News Bad News -- Inflation is on the WayInflation is on the WayMonetary and Fiscal policyMonetary and Fiscal policy
Consumer prices, interest rates, oil, Consumer prices, interest rates, oil, bubblesbubbles
Deficits and DebtDeficits and Debt
News from the FutureNews from the FutureChangeChange
5© Copyright Euler Hermes May 2010
Not around Not around here pal.here pal.
6© Copyright Euler Hermes May 2010
Source: NBER
The Business Cycle and RecessionsThe Business Cycle and Recessions
Source: NBER
The Business Cycle and RecessionsThe Business Cycle and Recessions
Expansion, 57
7© Copyright Euler Hermes May 2010
Source: NBER
The Business Cycle and RecessionsThe Business Cycle and Recessions
Expansion, 57 Recession10/20
Cycle, 67
8© Copyright Euler Hermes May 2010
Source: NBER
The Business Cycle and RecessionsThe Business Cycle and Recessions
Expansion, 57 Recession10/20
Cycle, 67
“recession over” is a direction - better
9© Copyright Euler Hermes May 2010
Source: NBER
The Business Cycle and RecessionsThe Business Cycle and Recessions
Expansion, 57 Recession10/20
Cycle, 67
averageaverage
goodgood
“recession over” is a direction - better
Business conditions Business conditions are a level:are a level:
badbad
10© Copyright Euler Hermes May 2010
•• ““The recession is over.The recession is over.”” = = ““Most measures of Most measures of economic activity are getting better.economic activity are getting better.””
•• But the But the unemployment rateunemployment rate is still is still highhigh –– it it lags lags -- and thatand that’’s why it feels like wes why it feels like we’’re still in re still in a recession.a recession.
•• Feel better: for the unemployment rate to Feel better: for the unemployment rate to improve, the recession must end. improve, the recession must end.
•• And it has.And it has.
11© Copyright Euler Hermes May 2010
•• Forces starting and ending the recession:Forces starting and ending the recession:•• OilOil•• HousingHousing•• Fed policiesFed policies•• FearFear
•• GDP: $14T, 3.3% ave. growthGDP: $14T, 3.3% ave. growth
The Overview, The Overview, JuneJune 20102010The Recession is OverThe Recession is Over
12© Copyright Euler Hermes May 2010
-200%
-100%
0%
100%
200%
300%
400%19
7119
7319
7519
7719
7919
8119
8319
8519
8719
8919
9119
9319
9519
9719
9920
0120
0320
0520
0720
09
-5%
0%
5%
10%Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks damage the economy… but it takes awhile
Oil Price Shocks and the Economy
290%
140%
56%38%21%
28% 36%41
-50%
13© Copyright Euler Hermes May 2010 house pricehouse price
-4%
-2%
0%
2%
4%
6%
Mar-19
74Mar-
1976
Mar-19
78Mar-
1980
Mar-19
82Mar-
1984
Mar-19
86Mar-
1988
Mar-19
90Mar-
1992
Mar-19
94Mar-
1996
Mar-19
98Mar-
2000
Mar-20
02Mar-
2004
Mar-20
06Mar-
2008
Mar-20
10
lowest in29 yrs
HIGHWAY MILES DRIVEN Rolling 12 mo. %Change
source: Federal Highway Administration
14© Copyright Euler Hermes May 2010
The Housing MarketThe Housing Market
More houseMore house
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Mar-20
02
Mar-20
03
Mar-20
04
Mar-20
05
Mar-20
06
Mar-20
07
Mar-20
08
Mar-20
09
Mar-20
10
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
M / M Y / Y
Case - Shiller Home Price Index, % Change
S&P/Case-Shiller
16%? How about 6%
+4.4% anlzd ratesince April low
15© Copyright Euler Hermes May 2010
Existing 1 family home sales up Existing 1 family home sales up 21%21% y/yy/y
New 1 family home sales up New 1 family home sales up 48%48% y/yy/y
Months supply of existing homes down Months supply of existing homes down 25%25% to to 8.48.4 from 4/08 high of 11.2from 4/08 high of 11.2
Months supply of new homes down Months supply of new homes down 59%59% to to 5.05.0 from 1/09 high of from 1/09 high of 12.112.1
Starts up Starts up 41%41% y/y, permits up y/y, permits up 17%17%
The Housing Market: The Housing Market: More strong dataMore strong data
Intro ycIntro yc
16© Copyright Euler Hermes May 2010 fearfear
-4%
-2%
0%
2%
4%
6%
8%
10%1Q
74
1Q76
1Q78
1Q80
1Q82
1Q84
1Q86
1Q88
1Q90
1Q92
1Q94
1Q96
1Q98
1Q00
1Q02
1Q04
1Q06
1Q08
-200
-100
0
100
200
300
400
500
Steepness of Yield Curve:10yr-3 mo Treasuries (bps)
Real GDP Growth,Y/Y % Change
Source: Census Bureau, Federal Reserve
The Treasury Yield Curve vs. GDP
17© Copyright Euler Hermes May 2010 fearfear
-4%
-2%
0%
2%
4%
6%
8%
10%1Q
74
1Q76
1Q78
1Q80
1Q82
1Q84
1Q86
1Q88
1Q90
1Q92
1Q94
1Q96
1Q98
1Q00
1Q02
1Q04
1Q06
1Q08
1Q10
-200
-100
0
100
200
300
400
500
Steepness of Yield Curve:10yr-3 mo Treasuries (bps)
Real GDP Growth,Y/Y % Change
Source: Census Bureau, Federal Reserve
The Treasury Yield Curve vs. GDP
18© Copyright Euler Hermes May 2010
How we got here How we got here -- fearfear
0%
1%
2%
3%
4%
5%
01-Ju
l-200
814
-Jul-2
008
25-Ju
l-200
8
07-A
ug-20
08
20-A
ug-20
08
02-S
ep-20
08
15-S
ep-20
08
26-S
ep-20
0809
-Oct-
2008
22-O
ct-20
08
04-N
ov-20
08
17-N
ov-20
08
28-N
ov-20
08
11-D
ec-20
08
24-D
ec-20
08
06-Ja
n-2009
19-Ja
n-2009
30-Ja
n-2009
12-Feb
-2009
25-Feb
-2009
10-M
ar-20
09
23-M
ar-20
09
03-A
pr-20
09
16-A
pr-20
09
29-A
pr-20
09
12-M
ay-20
09
25-M
ay-20
09RISK MEASURES IN THE CREDIT MARKETS
1 mo. LIBOR: rate banks charge each other
TED spread: banks'lending - borrowing rates
Sept. 15th;AIG, Merrill,
Lehman
source: Financial Times,Merrill Lynch,Federal Reserve
Commercial Paper - Treasuries: default risk
Spreads returning to "normal"
Fed Fed
19© Copyright Euler Hermes May 2010
How we got here How we got here -- fearfear
-80
-60
-40
-20
0
20
40
60
80
100
2Q93
2Q94
2Q95
2Q96
2Q97
2Q98
2Q99
2Q00
2Q01
2Q02
2Q03
2Q04
2Q05
2Q06
2Q07
2Q08
2Q09
2Q10
Tightening conditions, large firmsWidening spreads, large firms
source: Federal Reserve
Net % of Banks...
6 Q's up (bad)
6 Q's down
(good)
credit just got easier!
20© Copyright Euler Hermes May 2010
OK, fine, 4 forces working for usOK, fine, 4 forces working for us……
..but what are the results?..but what are the results?
21© Copyright Euler Hermes May 2010
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Q1-197
9Q1-1
981
Q1-198
3Q1-1
985
Q1-198
7Q1-1
989
Q1-199
1Q1-1
993
Q1-199
5Q1-1
997
Q1-199
9Q1-2
001
Q1-200
3Q1-2
005
Q1-200
7Q1-2
009
Real Gross Domestic Product (GDP)annualized quarterly growth rate
source: BEA
Consensus forecasts generally 3%- 4% in 2010
3 consecutive quarters up !
22© Copyright Euler Hermes May 2010
ConsumerConsumer
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
Q1-197
9Q1-1
981
Q1-198
3Q1-1
985
Q1-198
7Q1-1
989
Q1-199
1Q1-1
993
Q1-199
5Q1-1
997
Q1-199
9Q1-2
001
Q1-200
3Q1-2
005
Q1-200
7Q1-2
009
Consumption Component (C) of Real GDPannualized quarterly growth rate
source: BEA
Even without Cash for Clunkers, 3Q consumer = +1.1%
3 consecutive quarters up !
Consensus forecasts generally 2%-4% in 2010
23© Copyright Euler Hermes May 2010
ConsumerConsumer
-4%
-2%
0%
2%
4%
6%
8%
10%A
pr-1
970
Apr
-197
2
Apr
-197
4
Apr
-197
6
Apr
-197
8
Apr
-198
0
Apr
-198
2
Apr
-198
4
Apr
-198
6
Apr
-198
8
Apr
-199
0
Apr
-199
2
Apr
-199
4
Apr
-199
6
Apr
-199
8
Apr
-200
0
Apr
-200
2
Apr
-200
4
Apr
-200
6
Apr
-200
8
Apr
-201
0
source: BEA
Real Personal Consumption Expenditures, y/y% Growth Rate
pent-up demand
24© Copyright Euler Hermes May 2010
ConsumerConsumer
-4%
-2%
0%
2%
4%
6%
8%
10%A
pr-1
970
Apr
-197
2
Apr
-197
4
Apr
-197
6
Apr
-197
8
Apr
-198
0
Apr
-198
2
Apr
-198
4
Apr
-198
6
Apr
-198
8
Apr
-199
0
Apr
-199
2
Apr
-199
4
Apr
-199
6
Apr
-199
8
Apr
-200
0
Apr
-200
2
Apr
-200
4
Apr
-200
6
Apr
-200
8
Apr
-201
0
source: BEA
Real Personal Consumption Expenditures, y/y% Growth Rate
pent-up demand
pent-updemand
25© Copyright Euler Hermes May 2010 Fed Fed
30
35
40
45
50
55
60
65
5/00
5/01
5/02
5/03
5/04
5/05
5/06
5/07
5/08
5/09
5/10
Institute of Supply Management (ISM) Indices(>50 Expansion, <50 Contraction)
Monthly survey asks if conditions are same, better, or worse for: new orders, production, employment, supplier deliveries, inventories, customer inventories, prices, backlogs, new export orders, imports.
record low
26© Copyright Euler Hermes May 2010 D G OD G O
10
20
30
40
50
60
70
80
90
100
May-20
00May
-2001
May-20
02May
-2003
May-20
04May
-2005
May-20
06May
-2007
May-20
08May
-2009
May-20
10
TotalNew OrdersEmploymentPrices
Institute of Supply Management (ISM) Indices(>50 Expansion, <50 Contraction)
Monthly survey asks if conditions are same, better, or worse for: new orders, production, employment, supplier deliveries, inventories, customer inventories, prices, backlogs, new export orders, imports.
whoa!
27© Copyright Euler Hermes May 2010 Trck tonTrck ton
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Apr-20
08Ju
n-2008
Aug-20
08Oct-
2008
Dec-20
08Feb
-2009
Apr-20
09Ju
n-2009
Aug-20
09Oct-
2009
Dec-20
09Feb
-2010
Apr-20
10
Manufacturers' NewOrders: Durable Goods
Manufacturers' NewOrders: NondefenseCapital Goods ex Aircraft
NDCGXA up 21% since 4/08 low
DGO up 21% since 3/08 low
Durable Goods Orders, y/y % Growth(note: Manufacturers' New Orders for Nondefense Capital Goods ex Aircraft, is a
carefully watched indicator of future business spending.
source: Census Bureau
28© Copyright Euler Hermes May 2010
EmploymentEmployment
300
400
500
600
700
May-08
Sep-08
Jan-0
9
May-09
Sep-09
Jan-1
0
May-10
Weekly Jobless Claims, 000's, 4 wk rolling ave.
source: Labor Dept.
-30% sincepeak
29© Copyright Euler Hermes May 2010
EmploymentEmployment
-1,000
-800
-600
-400
-200
0
200
400
600
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
3%
4%
5%
6%
7%
8%
9%
10%
11%
Non-Farm Payroll Jobs Created (000's) (left scale)
Jobs Created and The Unemployment Rate
source: Labor Department
UnemploymentRate (right scale)
positive past 6/7 months !
30© Copyright Euler Hermes May 2010
EmploymentEmployment
-1,000
-800
-600
-400
-200
0
200
400
600
May-00
May-01
May-02
May-03
May-04
May-05
May-06
May-07
May-08
May-09
May-10
3%
4%
5%
6%
7%
8%
9%
10%
11%
Non-Farm Payroll Jobs Created (000's) (left scale)
Jobs Created and The Unemployment Rate
source: Labor Department
UnemploymentRate (right scale)
positive past 6/7 months !
31© Copyright Euler Hermes May 2010
EmploymentEmployment
bruptbrupt
-1,000
-800
-600
-400
-200
0
200
400
600
800
1,000
Mar
-70
Mar
-72
Mar
-74
Mar
-76
Mar
-78
Mar
-80
Mar
-82
Mar
-84
Mar
-86
Mar
-88
Mar
-90
Mar
-92
Mar
-94
Mar
-96
Mar
-98
Mar
-00
Mar
-02
Mar
-04
Mar
-06
Mar
-08
Mar
-10
Non-Farm Payroll Jobs Created (000's) (left scale)
Jobs Created
source: Labor Department
Always back & forth at change
32© Copyright Euler Hermes May 2010
EmploymentEmployment
We are right on the cusp We are right on the cusp of steadyof steady job growthjob growth
•• The pattern, and the trend, are right The pattern, and the trend, are right •• Weekly jobless claims approaching 450kWeekly jobless claims approaching 450k
level which would indicate job growthlevel which would indicate job growth•• ISM employment index now >50ISM employment index now >50•• Unemployment peaked at 10.1% in Oct,Unemployment peaked at 10.1% in Oct,
now now 9.7%9.7%--temp. gets worse as unemployed temp. gets worse as unemployed job seekers rejob seekers re--enter job forceenter job force
•• 6/76/7 mos. had positive job mos. had positive job growthgrowth•• FedFed signalingsignaling
bruptbrupt
33© Copyright Euler Hermes May 2010
Bankruptcies also lagBankruptcies also lag
recaprecap
0
5,000
10,000
15,000
20,000
25,000
30,000Q
4-19
82
Q4-
1984
Q4-
1986
Q4-
1988
Q4-
1990
Q4-
1992
Q4-
1994
Q4-
1996
Q4-
1998
Q4-
2000
Q4-
2002
Q4-
2004
Q4-
2006
Q4-
2008
Q4-
2010
U.S. Business Bankruptcy Filings, quarterly
`
40-50% annual growth rate from
2008 - 2009...
2010 f'cast = -5%,but still near
highs of 1990s
...now down 2 consec Q's,first since 2004
34© Copyright Euler Hermes May 2010
RecapRecap
•• 4 forces caused recession, now helping 4 forces caused recession, now helping recoveryrecovery
•• Consumer, manufacturing sectors Consumer, manufacturing sectors positive and improvingpositive and improving
•• Employment lagging but getting betterEmployment lagging but getting better•• Bankruptcies lagging but getting betterBankruptcies lagging but getting better•• On to Inflation, the future, conclusionOn to Inflation, the future, conclusion
35© Copyright Euler Hermes May 2010
INFLATIONINFLATION
36© Copyright Euler Hermes May 2010
InflationInflationSimple exampleSimple example
Today:Today:Lend $1 @10%. Loaf of Bread costs $1Lend $1 @10%. Loaf of Bread costs $1
Inflation goes to 20%Inflation goes to 20%
A Year later:A Year later:Creditor gets $1.10 back.Creditor gets $1.10 back.But now loaf of bread costs $1.20.But now loaf of bread costs $1.20.
Creditors lose.Creditors lose.Debtors like the U.S. government, win.Debtors like the U.S. government, win.
37© Copyright Euler Hermes May 2010
InflationInflationSeveral types of inflation:Several types of inflation:
•• Consumer price inflation Consumer price inflation -- breadbread•• Money price inflation Money price inflation -- interest ratesinterest rates•• Commodity price inflation Commodity price inflation -- oiloil•• Asset price inflation Asset price inflation -- stocks, housesstocks, houses
38© Copyright Euler Hermes May 2010
Monetary policy Monetary policy (Takes 3(Takes 3--5 Q5 Q’’s to work!)s to work!)•• Bernanke is student of the Great Depression Bernanke is student of the Great Depression --
move big and move fastmove big and move fast•• Slashed FF rate to 0%Slashed FF rate to 0%•• Invented many schemes to create liquidityInvented many schemes to create liquidity
Fiscal PolicyFiscal Policy•• $150B stimulus in 2008: tax rebates$150B stimulus in 2008: tax rebates•• $787B stimulus: lower taxes, increase $787B stimulus: lower taxes, increase
spending spending –– can work. can work. •• But itBut it’’s a terrible sham s a terrible sham -- 75% will be spent 75% will be spent afterafter
the recession! Inflation, deficit, debt.the recession! Inflation, deficit, debt.
No inflation now, but tremendous No inflation now, but tremendous inflationary pressures in pipelineinflationary pressures in pipeline
39© Copyright Euler Hermes May 2010
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%Q
4-22
Q4-
25Q
4-28
Q4-
31Q
4-34
Q4-
37Q
4-40
Q4-
43Q
4-46
Q4-
49Q
4-52
Q4-
55Q
4-58
Q4-
61Q
4-64
Q4-
67Q
4-70
Q4-
73Q
4-76
Q4-
79Q
4-82
Q4-
85Q
4-88
Q4-
91Q
4-94
Q4-
97Q
4-00
Q4-
03Q
4-06
Q4-
09
-30%
-20%
-10%
0%
10%
20%
30%
CPI 4qs % Δ
Monetary Base4qs % Δ
Source of Inflation: Too Much Money
source: Federal Reserve Bank of St Louis, BLS
40© Copyright Euler Hermes May 2010
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%Q
4-22
Q4-
25Q
4-28
Q4-
31Q
4-34
Q4-
37Q
4-40
Q4-
43Q
4-46
Q4-
49Q
4-52
Q4-
55Q
4-58
Q4-
61Q
4-64
Q4-
67Q
4-70
Q4-
73Q
4-76
Q4-
79Q
4-82
Q4-
85Q
4-88
Q4-
91Q
4-94
Q4-
97Q
4-00
Q4-
03Q
4-06
Q4-
09
-30%
-10%
10%
30%
50%
70%
90%
CPI 4qs % Δ
Monetary Base4qs % Δ
Source of Inflation: Too Much Money
source: Federal Reserve Bank of St Louis, BLS
41© Copyright Euler Hermes May 2010
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%Q
4-22
Q4-
25Q
4-28
Q4-
31Q
4-34
Q4-
37Q
4-40
Q4-
43Q
4-46
Q4-
49Q
4-52
Q4-
55Q
4-58
Q4-
61Q
4-64
Q4-
67Q
4-70
Q4-
73Q
4-76
Q4-
79Q
4-82
Q4-
85Q
4-88
Q4-
91Q
4-94
Q4-
97Q
4-00
Q4-
03Q
4-06
Q4-
09
-30%
-10%
10%
30%
50%
70%
90%
CPI 4qs % Δ
Monetary Base4qs % Δ
Source of Inflation: Too Much Money
source: Federal Reserve Bank of St Louis, BLS
42© Copyright Euler Hermes May 2010
0
500
1,000
1,500
2,000
2,500
1-08
3-08
5-08
7-08
9-08
10-08
12-08 2-0
9
4-09
6-09
8-09
9-09
11-09 1-1
0Federal Reserve Balance Sheet, $B
Total
Treas.
Agency
MBS
signalssignals
43© Copyright Euler Hermes May 2010
Subtle SignalsSubtle SignalsAugust FOMC meeting: August FOMC meeting: “…“…important to continue important to continue communicating that the Fedcommunicating that the Fed…… has the tools and has the tools and willingness to begin withdrawing monetary policy willingness to begin withdrawing monetary policy accommodationaccommodation…”…”
••Late September: mention reverse Late September: mention reverse reposrepos••Late October: Late October: ””ItIt’’s only a test..s only a test..””••November FOMC: reducing agency debt purchasesNovember FOMC: reducing agency debt purchases••December: Time DepositsDecember: Time Deposits••February: Interest on Deposits, Discount window, February: Interest on Deposits, Discount window, Treasury programTreasury program
So the tightening will happen becauseSo the tightening will happen because……
44© Copyright Euler Hermes May 2010
HereHere’’s what happens if you s what happens if you print a bit too much print a bit too much money:money:
45© Copyright Euler Hermes May 2010
Wholesale Price IndexWholesale Price Index
July 1914 July 1914 1.01.0
Jan 1919 Jan 1919 2.62.6
July 1919July 1919 3.43.4
German HyperinflationGerman Hyperinflation
46© Copyright Euler Hermes May 2010
Wholesale Price IndexWholesale Price Index
July 1914 July 1914 1.01.0
Jan 1919 Jan 1919 2.62.6
July 1919July 1919 3.43.4
Jan 1920 Jan 1920 12.612.6
Jan 1921 Jan 1921 14.414.4
July 1921July 1921 14.314.3
German HyperinflationGerman Hyperinflation
47© Copyright Euler Hermes May 2010
Wholesale Price IndexWholesale Price Index
July 1914 July 1914 1.01.0
Jan 1919 Jan 1919 2.62.6
July 1919July 1919 3.43.4
Jan 1920 Jan 1920 12.612.6
Jan 1921 Jan 1921 14.414.4
July 1921July 1921 14.314.3
Jan 1922 Jan 1922 36.736.7
July 1922July 1922 100.6100.6
German HyperinflationGerman Hyperinflation
48© Copyright Euler Hermes May 2010
Wholesale Price IndexWholesale Price Index
July 1914 July 1914 1.01.0
Jan 1919 Jan 1919 2.62.6
July 1919July 1919 3.43.4
Jan 1920 Jan 1920 12.612.6
Jan 1921 Jan 1921 14.414.4
July 1921July 1921 14.314.3
Jan 1922 Jan 1922 36.736.7
July 1922July 1922 100.6100.6
Jan 1923 Jan 1923 2,7852,785
July 1923 July 1923 194,000194,000
Nov 1923 Nov 1923 726,000,000,000726,000,000,000
German HyperinflationGerman Hyperinflation
49© Copyright Euler Hermes May 2010
Zimbabwean HyperinflationZimbabwean Hyperinflation
231 000 000% (official, July 08)89.7 × 1021% (HHIZ, 14 Nov 08)6.5 × 10108% (Forbes Asia, 22 Dec 08)
$250,000,000$250,000,000
50© Copyright Euler Hermes May 2010
The Fed is unlikely to let that happen.The Fed is unlikely to let that happen.
So change in balance sheet and public statements are So change in balance sheet and public statements are starting to signal gently that it WILL have to comestarting to signal gently that it WILL have to come
““But thereBut there’’s no sign of inflation and unemployments no sign of inflation and unemployment’’s s high!high!””
Of course there isnOf course there isn’’t! Thatt! That’’s not the point!s not the point!
The point is that inflation gets out of hand easily, and it The point is that inflation gets out of hand easily, and it takes a really long time for changes in monetary policy to takes a really long time for changes in monetary policy to have full effect; 3have full effect; 3--5 Qs.5 Qs.
First note that unemployment peaks around 1First note that unemployment peaks around 1--2 Qs after 2 Qs after recession endsrecession ends…… about about rightright
51© Copyright Euler Hermes May 2010
2%
4%
6%
8%
10%
12%
Feb-19
56Feb
-1959
Feb-19
62Feb
-1965
Feb-19
68Feb
-1971
Feb-19
74Feb
-1977
Feb-19
80Feb
-1983
Feb-19
86Feb
-1989
Feb-19
92Feb
-1995
Feb-19
98Feb
-2001
Feb-20
04Feb
-2007
Feb-20
10
0%
5%
10%
15%
20%
25%Unemployment rate (left axis)
Fed Funds (right axis)
Source: Federal Reserve, BLS
Federal Funds Rate vs Unemployment
52© Copyright Euler Hermes May 2010
2%
4%
6%
8%
10%
12%
Feb-19
56Feb
-1959
Feb-19
62Feb
-1965
Feb-19
68Feb
-1971
Feb-19
74Feb
-1977
Feb-19
80Feb
-1983
Feb-19
86Feb
-1989
Feb-19
92Feb
-1995
Feb-19
98Feb
-2001
Feb-20
04Feb
-2007
Feb-20
10
0%
5%
10%
15%
20%
25%Unemployment rate (left axis)
Fed Funds (right axis)
Source: Federal Reserve, BLS
Federal Funds Rate vs Unemployment
The Fed is usually too late: ave. 10 mos from peak unemployment to tightening.
53© Copyright Euler Hermes May 2010
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Feb-19
56Feb
-1959
Feb-19
62Feb
-1965
Feb-19
68Feb
-1971
Feb-19
74Feb
-1977
Feb-19
80Feb
-1983
Feb-19
86Feb
-1989
Feb-19
92Feb
-1995
Feb-19
98Feb
-2001
Feb-20
04Feb
-2007
Feb-20
10
0%
5%
10%
15%
20%
25%CPI (left axis)Fed Funds (right axis)
Source: Federal Reserve, BLS
Federal Funds Rate vs Inflation
A technical rebound in CPI, or the start of the chase?
54© Copyright Euler Hermes May 2010
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Feb-19
56Feb
-1959
Feb-19
62Feb
-1965
Feb-19
68Feb
-1971
Feb-19
74Feb
-1977
Feb-19
80Feb
-1983
Feb-19
86Feb
-1989
Feb-19
92Feb
-1995
Feb-19
98Feb
-2001
Feb-20
04Feb
-2007
Feb-20
10
0%
5%
10%
15%
20%
25%CPI (left axis)Fed Funds (right axis)
Source: Federal Reserve, BLS
Federal Funds Rate vs Inflation
The Fed is almost always too late: ave. 31 mos from tightening until peak CPI
A technical rebound in CPI, or the start of the chase?
55© Copyright Euler Hermes May 2010
Fiscal PolicyFiscal Policy
56© Copyright Euler Hermes May 2010
The Federal Reserve Bank at The Federal Reserve Bank at least has a plan to reduce least has a plan to reduce spending and mop up liquidity.spending and mop up liquidity.
The Federal GovernmentThe Federal Government’’s plan is s plan is to spend to spend moremore, to effectively , to effectively increaseincrease liquidity, and to liquidity, and to increaseincreasethe debt burden.the debt burden.
57© Copyright Euler Hermes May 2010
Spending, Deficits and DebtSpending, Deficits and Debt
GovGov’’t spendst spends $120$120
GovGov’’t gets tax revenuet gets tax revenue $100$100
DeficitDeficit $20$20
•• Treas. gets loan, issues $20 notes/bondsTreas. gets loan, issues $20 notes/bonds
•• Not a Ponzi scheme, no intent to deceive, Not a Ponzi scheme, no intent to deceive, return is fixed, debt retired, revolving return is fixed, debt retired, revolving creditcredit
58© Copyright Euler Hermes May 2010
59© Copyright Euler Hermes May 2010
60© Copyright Euler Hermes May 2010
1960 - '07Ave. Max
U.S. -2.1% -6.0%UK -2.2% -7.9%France -1.7% -6.0%Italy -6.0% -12.4%Japan -3.7% -10.2%Canada -1.8% -6.0%EU targ. 3.0%-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
Federal Budget Deficit as a % of GDP
Sources: The Federal Reserve. Congressional Budget Off ice
61© Copyright Euler Hermes May 2010
A New Era of A New Era of Responsibility!Responsibility!
1960 - '07Ave. Max
U.S. -2.1% -6.0%UK -2.2% -7.9%France -1.7% -6.0%Italy -6.0% -12.4%Japan -3.7% -10.2%Canada -1.8% -6.0%EU targ. 3.0%-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
Federal Budget Deficit as a % of GDP
Sources: The Federal Reserve. Congressional Budget Off ice
62© Copyright Euler Hermes May 2010
1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%
20%
30%
40%
50%
60%
70%
80%
90%
100%19
6219
6419
6619
6819
7019
7219
7419
7619
7819
8019
8219
8419
8619
8819
9019
9219
9419
9619
9820
0020
0220
0420
0620
0820
1020
1220
1420
1620
1820
20
Federal Debt as a % of GDP (CBO)
63© Copyright Euler Hermes May 2010
1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%
A New Era of A New Era of Responsibility!Responsibility!
20%
30%
40%
50%
60%
70%
80%
90%
100%19
6219
6419
6619
6819
7019
7219
7419
7619
7819
8019
8219
8419
8619
8819
9019
9219
9419
9619
9820
0020
0220
0420
0620
0820
1020
1220
1420
1620
1820
20
Federal Debt as a % of GDP (CBO)
64© Copyright Euler Hermes May 2010
1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%
A New Era of A New Era of Responsibility!Responsibility!
20%
30%
40%
50%
60%
70%
80%
90%
100%19
6219
6419
6619
6819
7019
7219
7419
7619
7819
8019
8219
8419
8619
8819
9019
9219
9419
9619
9820
0020
0220
0420
0620
0820
1020
1220
1420
1620
1820
20
Federal Debt as a % of GDP (CBO)
debt held by public
65© Copyright Euler Hermes May 2010
12%
14%
16%
18%
20%
22%
24%
26%19
5019
5219
5419
5619
5819
6019
6219
6419
6619
6819
7019
7219
7419
7619
7819
8019
8219
8419
8619
8819
9019
9219
9419
9619
9820
0020
0220
0420
0620
0820
1020
1220
1420
1620
1820
20
Revenue and Spending as a % of GDP (OMB)
Revenue
Spending
66© Copyright Euler Hermes May 2010
The Fiscal StimulusThe Fiscal Stimulus•• $787B stimulus spending: several more $787B stimulus spending: several more years, only $333 (42%) has been years, only $333 (42%) has been ““obligatedobligated””, only 35% has been , only 35% has been ““spentspent””
•• $150B $150B ““Jobs BillJobs Bill””
•• $25B to state govts to prevent layoffs$25B to state govts to prevent layoffs
•• Health Care!Health Care!
•• Note to CongressNote to Congress……
67© Copyright Euler Hermes May 2010
•• Deficit will contribute to Inflation Deficit will contribute to Inflation of Consumer Pricesof Consumer Prices
•• And will really contribute to And will really contribute to Inflation of Money Prices; Inflation of Money Prices; Interest RatesInterest Rates
68© Copyright Euler Hermes May 2010
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
0%
2%
4%
6%
8%
10%
12%
14%
as the deficit gets larger...
…interest rates climb
"Crowding Out:" The Budget Deficit vs. Interest Rates
Sources: The Federal Reserve. Congressional Budget Off ice
yield on 10 yr. Treasuries (rhs)
Deficit as a % of
GDP (lhs)
69© Copyright Euler Hermes May 2010
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
0%
2%
4%
6%
8%
10%
12%
14%
as the deficit gets larger...
…interest rates climb
"Crowding Out:" The Budget Deficit vs. Interest Rates
Sources: The Federal Reserve. Congressional Budget Off ice
yield on 10 yr. Treasuries (rhs)
Deficit as a % of
GDP (lhs)
70© Copyright Euler Hermes May 2010
DeficitsDeficits
•• Do usually cause money price inflation Do usually cause money price inflation (interest rates) as just shown(interest rates) as just shown
•• In this case, massive deficits also likely In this case, massive deficits also likely to cause FX$ inflation to cause FX$ inflation –– ““weakweak”” $...$...
•• Which will lead to commodity, Which will lead to commodity, particularly OIL price inflationparticularly OIL price inflation
71© Copyright Euler Hermes May 2010
-10%
-5%
0%
5%
10%
15%
Mar-19
99Mar-
2000
Mar-20
01Mar-
2002
Mar-20
03Mar-
2004
Mar-20
05Mar-
2006
Mar-20
07Mar-
2008
Mar-20
09Mar-
2010
-150%
-100%
-50%
0%
50%
100%
FX$ (inverted)Oil
FX$ vs. Oil, 12mo %change
Sources: Nominal Broad Trade-Weighted Exchange Value of the US$, Fed. Average Spot Price: Crude Oil: Average of Brent, Dubai & WTI (US$/Barrel); World Bank
FX$ weaker...
...oil rises
72© Copyright Euler Hermes May 2010
The Trouble With Oil isThe Trouble With Oil is……•• It may soar on deficits and $FX, but it is probably more likely It may soar on deficits and $FX, but it is probably more likely
to soar based on fundamentalsto soar based on fundamentals
•• Its Its daily supplydaily supply is fixed but is fixed but its demandits demand is everis ever--growinggrowing
•• ItIt’’s denominated in US$s denominated in US$
•• Its use is pervasiveIts use is pervasive•• $1B/day in US, or around 3% of GDP$1B/day in US, or around 3% of GDP
•• 85 million bbls produced / consumed daily worldwide. You used 2 85 million bbls produced / consumed daily worldwide. You used 2 gallons of oil today gallons of oil today –– 1.3 gallons came from foreigners1.3 gallons came from foreigners
•• In 1973 we relied on foreigners for only 19% of our oil, but OPEIn 1973 we relied on foreigners for only 19% of our oil, but OPEC C embargoed us, and drove us into recession. Today, we rely on embargoed us, and drove us into recession. Today, we rely on foreigners to provide 66% of our foreigners to provide 66% of our oil. Theoil. The outside world could easily outside world could easily crush crush us.us.
•• Drilling would be great, but itDrilling would be great, but it’’s a bit out of fashion at the moment.s a bit out of fashion at the moment.
73© Copyright Euler Hermes May 2010
•• SoSo wewe’’ve seen consumer, interest rate, ve seen consumer, interest rate, and commodity inflation.and commodity inflation.
•• FinalFinal Form of Inflation: BubblesForm of Inflation: Bubbles
•• HowHow did that mess just did that mess just happen?happen?
•• HowHow did that bubble form?did that bubble form?
•• HowHow about the one before that?about the one before that?••(and (and ChinaChina now, and now, and AustraliaAustralia now)now)
74© Copyright Euler Hermes May 2010
100%
120%
140%
160%
180%
200%
220%
240%
260%
Q459
Q461
Q463
Q465
Q467
Q469
Q471
Q473
Q475
Q477
Q479
Q481
Q483
Q485
Q487
Q489
Q491
Q493
Q495
Q497
Q499
Q401
Q403
Q405
Q407
Q409
2%
4%
6%
8%
10%
12%
14%
16%Outstanding creditmarket debt/GDP10 yr. Yield
The Big Picture; the Evolution of Easy Money
inflation whipped, interest rates fell
source: Federal Reserve
private label MBS
stock index options
interest rate options
interest rate swaps
secrtzation of mortgs
sec. auto, cred cards
75© Copyright Euler Hermes May 2010
100%
120%
140%
160%
180%
200%
220%
240%
260%
Q459
Q461
Q463
Q465
Q467
Q469
Q471
Q473
Q475
Q477
Q479
Q481
Q483
Q485
Q487
Q489
Q491
Q493
Q495
Q497
Q499
Q401
Q403
Q405
Q407
Q409
2%
4%
6%
8%
10%
12%
14%
16%Outstanding creditmarket debt/GDP10 yr. Yield
The Big Picture; the Evolution of Easy Money
inflation whipped, interest rates fell
source: Federal Reserve
private label MBS
stock index options
interest rate options
interest rate swaps
secrtzation of mortgs
sec. auto, cred cards
…"easy money"
76© Copyright Euler Hermes May 2010
But really, whoBut really, who’’s to blame for s to blame for the financial crisis?the financial crisis?
•• Community Reinvestment Act for promoting Community Reinvestment Act for promoting risky loansrisky loans•• Mortgage bankers and brokers for making Mortgage bankers and brokers for making those loansthose loans•• People for taking those loans when they People for taking those loans when they shouldnshouldn’’t have t have •• Fannie / Freddie for providing a market for Fannie / Freddie for providing a market for those loansthose loans•• Rating Agencies for being lulledRating Agencies for being lulled•• Regulators for not paying attentionRegulators for not paying attention•• Foreigners for lending us too much moneyForeigners for lending us too much money•• Investors for creating too much Investors for creating too much ““specspec”” housinghousing•• Investors for seeking too much risk in MBSInvestors for seeking too much risk in MBS
77© Copyright Euler Hermes May 2010
But really, whoBut really, who’’s to blame for s to blame for the financial crisis?the financial crisis?
•• Investors for panicking and paralyzing banksInvestors for panicking and paralyzing banks•• Alan Greenspan for inflating the housing Alan Greenspan for inflating the housing bubblebubble•• Ben Bernanke for bursting the housing bubbleBen Bernanke for bursting the housing bubble•• Paulson, Geithner, Bernanke, etc. for bailing Paulson, Geithner, Bernanke, etc. for bailing out all those banksout all those banks•• Paulson, Geithner, Bernanke, etc. for Paulson, Geithner, Bernanke, etc. for notnotbailing out that one bankbailing out that one bank•• Congress for not passing TARPCongress for not passing TARP•• Congress for passing TARPCongress for passing TARP
•• And most importantlyAnd most importantly……
78© Copyright Euler Hermes May 2010
But really, whoBut really, who’’s to blame for s to blame for the financial crisis?the financial crisis?
••……the Human Condition.the Human Condition.
•• Humans will always strive to improve their Humans will always strive to improve their status, and will always take risks to do it.status, and will always take risks to do it.
•• That will never change, and no amount of That will never change, and no amount of regulation canregulation can’’t stop the need to take risks.t stop the need to take risks.
•• So this is So this is notnot the last financial crisis you will the last financial crisis you will ever see. ever see. (Sorry).(Sorry).
Other cntryOther cntry
79© Copyright Euler Hermes May 2010
A final word on inflationA final word on inflation
WeWe’’ve seen ve seen pressurespressures on consumer, interest on consumer, interest rate, and commodity inflation, butrate, and commodity inflation, but……
……other countries are already other countries are already feelingfeeling it, it, preparing for it:preparing for it:
•• Canada Canada –– raised onceraised once•• AustraliaAustralia –– raised six times, 1.5%raised six times, 1.5%•• India India –– raised twice for 50bps, fraised twice for 50bps, f’’cast 5.5% cast 5.5% inflation inflation •• China China –– put restrictions on lending to prevent put restrictions on lending to prevent bubblebubble
futurefuture
80© Copyright Euler Hermes May 2010
News From the FutureNews From the Future
81© Copyright Euler Hermes May 2010
India, 2%
China 8%
Japan 9%
EU 28%
U.S. 25%ROTW 27%
20092009
The World is Going to Change:The World is Going to Change:World GDPWorld GDP
Source: IMF, Prof. Jeremy Siegel
82© Copyright Euler Hermes May 2010
U.S. 10%
Japan2%
EU7%
China20%
India20%
ROTW41%
20502050
Source: IMF, Prof. Jeremy Siegel
The World is Going to Change:The World is Going to Change:World GDPWorld GDP
83© Copyright Euler Hermes May 2010
U.S. 10%
Japan2%
EU7%
China20%
India20%
ROTW41%
India, 2%
China 8%
Japan 9%
EU 28%
U.S. 25%ROTW 27%
20092009 20502050
Source: IMF, Prof. Jeremy Siegel
The World is Going to Change:The World is Going to Change:World GDPWorld GDP
Not misNot mis--managementmanagement
84© Copyright Euler Hermes May 2010
USUS45%45%
WEWE30%30%
CH <1%CH <1%
IN <1%IN <1%
USUS17%17%
WEWE9%9%
CH 20%CH 20%IN 14%IN 14%
85© Copyright Euler Hermes May 2010
The World is Going to ChangeThe World is Going to Change
Implications:Implications:
•• Protectionism will no longer be an optionProtectionism will no longer be an option•• Teach our children Chinese and Hindi, Teach our children Chinese and Hindi, not Spanish and Frenchnot Spanish and French•• It is 8x as many people, growing with 2nd It is 8x as many people, growing with 2nd mover advantage (phones, airports).mover advantage (phones, airports).•• It is It is notnot doomsday. It does doomsday. It does notnot mean the mean the end of U.S. prosperity, freedom or global end of U.S. prosperity, freedom or global importance, but it puts us more at riskimportance, but it puts us more at risk……
86© Copyright Euler Hermes May 2010
China says to the U.S.,China says to the U.S.,
““Get your house in order.Get your house in order.””
87© Copyright Euler Hermes May 2010
China says to the U.S.,China says to the U.S.,
““Get your house in order.Get your house in order.””
MoodyMoody’’s: s: …… doubtdoubt
88© Copyright Euler Hermes May 2010
•• 4 Forces4 Forces•• RecoveryRecovery•• InflationInflation•• Debt, deficitsDebt, deficits•• FutureFuture•• Risks Risks •• ConclusionsConclusions
RecapRecap
89© Copyright Euler Hermes May 2010
RisksRisks•• PIIGS damage the euroPIIGS damage the euro--zonezone•• DoubleDouble Dip Dip –– weak consumer + something else weak consumer + something else bad sends us back into bad sends us back into recessionrecession•• Housing market collapses / foreclosuresHousing market collapses / foreclosures•• Commercial real estateCommercial real estate•• State budgets brokenState budgets broken•• More wasteMore waste•• Oil prices spikeOil prices spike•• Increasingly divisive politics, populism / Increasingly divisive politics, populism / protectionismprotectionism•• Global growth Global growth stagnatesstagnates
90© Copyright Euler Hermes May 2010
ConclusionsConclusions•• Recession over thanks to oil, housing, interest rates, and lackRecession over thanks to oil, housing, interest rates, and lackof fear. Expect GDP growth of fear. Expect GDP growth of aroundof around 3% 3% overover next next few yearsfew years•• On brink of creating jobs, unemployment rate is near the On brink of creating jobs, unemployment rate is near the peak but will take years to come back down, hurting those in peak but will take years to come back down, hurting those in office. office. •• Inflation likely on the way, 2011 and beyondInflation likely on the way, 2011 and beyond•• Interest rates up soon, and then continuing next 2Interest rates up soon, and then continuing next 2--3 years3 years•• Monetary policy was great and is getting mopped up, but it Monetary policy was great and is getting mopped up, but it was too much to avoid consumer inflationwas too much to avoid consumer inflation•• Fiscal policy of huge deficits will cause money inflation Fiscal policy of huge deficits will cause money inflation (interest rates)(interest rates)•• Will also likely cause FX$ inflation, and oil price inflationWill also likely cause FX$ inflation, and oil price inflation•• Oil prices are problematic in several waysOil prices are problematic in several ways•• Bubbles are caused by Bubbles are caused by ““easy moneyeasy money”” which will come which will come around again some day as the credit cycle easesaround again some day as the credit cycle eases……
91© Copyright Euler Hermes May 2010
Finally, please, remember, this is a Finally, please, remember, this is a mostly mostly positivepositive presentation!presentation!
•• The economic news is The economic news is very goodvery good right right now.now.
•• We know about inflation ahead of time so itWe know about inflation ahead of time so it’’s s less of a less of a problem.problem.
•• Our fiscal situation is scary but it does Our fiscal situation is scary but it does notnot have to be have to be doomsday doomsday –– it can it can change.change.
•• We know about 8x as many people ahead of time so itWe know about 8x as many people ahead of time so it’’s s less of a problemless of a problem
•• The economic news is The economic news is very goodvery good right now.right now.
92© Copyright Euler Hermes May 2010
Thank you for your attention.www.eulerhermes.com
93© Copyright Euler Hermes May 2010
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