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2016 ECONOMIC
LUNCHEON SEMINAR
The Keys to SurThrival:
Learn to not only survive, but thrive
in Alaska’s dynamic economy
ALASKA ECONOMIC UPDATE
Mark Edwards
Senior Vice President
Senior Credit Underwriter
Bank Economist
2
• Sharp drop in oil prices has created uncertainty
• State and Federal budget issues create drag on
government jobs and related construction.
• Department of Labor predicts -2,500 jobs, -0.7%
• Private sector growth in tourism, retail, native
corporations and health care help offset.
• Summer tourism +7% last year, 2 million total
ALASKA’S MAJOR ECONOMIC ISSUES
3
• Per capita income +3.8% 2015, $55,940, 6th in US
• Inflation 2015, -0.1% Anchorage, +0.7% US
• Flat population 737,625. 0% growth for 2 years.
• 339,300 payroll jobs +0.5% in 2015, +1,700 jobs
• Real estate stable, aided by low interest rates.
Anchorage average home price +2.3% last year
ALASKA’S 2015 MACRO INDICATORS
4
0%
2%
4%
6%
8%
10%
12%
14%
16%
18% 16.6% In 1981
3.69% March 2016
30 YEAR CONVENTIONAL MORTGAGE
ALASKA BUILDING PERMITS
6
Number of new, privately owned housing, 1-5 units authorized
0
2000
4000
6000
8000
10000
12000
1291
11,248
FORECLOSURE AND DELINQUENCY
RATES 1-4 UNIT RESIDENTIAL PROPERTIES
7
National
Rank Alaska U.S.
Delinquencies, total 4Q 2015 2nd best 2.7% 5%
Foreclosures, total in progress 4th best 0.7% 1.8%
Subprime delinquencies
Best in
Nation 6.3% 16.2%
Subprime foreclosures
Best in
Nation 1.7% 7.8%
DON’T PANIC!
PREPARE
• Cash is King. Slow dividends to conserve cash.
• Take advantage of historically low interest rates.
Consolidate or refinance debt, and reset amortization.
• Consider selling underutilized or non-performing assets
• If sales slow you may need cash to service debt and rent
• Be careful of more fraud and slow A/R turn in a recession
A FEW TIPS TO SURTHRIVE
10
• Track economic variables that most affect your industry
• Are any of your key customers or suppliers impacted?
• Any business segment that could benefit from outsourcing?
• Shift employee focus from past problems to future
opportunities to help morale and productivity.
• The future is not determined by external events, but rather
how we respond to them.
A FEW TIPS TO SURTHRIVE
11
ALASKA CRUDE PRICES 2004 - 2016
$0
$20
$40
$60
$80
$100
$120
$140
$160
Dollars per Barrel High $134 June 2008
$37 December 2008
Prices over $100 April 2011 to July 2014
$38 March 2016
Traditional Correct Answer:
- Too much spending, oil prices are volatile and oil
production continues to decline.
Real Deeper Reason:
- Many of the main revenue sources are off limits to spend.
ALASKA IS RICH WITH ASSETS. WHY
DO WE HAVE A CASH FLOW PROBLEM?
13
Principle assets of the State of Alaska
Energy wealth – heavily taxed and paying a lions share of
State services
104 million acres of State land – only ½% is privately owned,
no tax base for municipal services to reduce burden of State
Investment Accounts - $53 billion Permanent Fund mostly off
limits, other accounts not invested aggressively because
liquidity needed for current deficits.
State taxing authority – lowest use of taxes in all 50 states
ALASKA IS RICH WITH ASSETS. WHY
DO WE HAVE A CASH FLOW PROBLEM?
14
• Everything must be on the table for negotiations, it will take
“all of the above” to close this large of a gap.
• State government must diversify its revenue stream
• We will likely have to accept less government services and
spending and pay more personally for it.
• Ensure a stable business climate for future investment
• Support leaders faced with these though decisions.
DRIVING PRINCIPLES FOR A SOLUTION
15
THANK YOU
Mark Edwards Senior Vice President
Senior Credit Underwriter
Bank Economist
Pacific Portfolio Consulting, LLC
Economic & Capital Market Outlook
Northrim Bank Economic Luncheon Seminar April, 2016
601 Union Street, Suite 4343
Seattle, WA 98101
206-623-6641
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 18
Key Points of Today’s Presentation Global Economy:
• Slow & steady, no recession this year
• Developed economies: U.S. > Europe > Japan
• EMs stabilizing, China poised for near-term up-tick
• All major central banks increasingly biased towards easier policy
Capital Markets:
• Risk assets have run far & fast, be prepared for consolidation or even pullback
• Tone of market swinging in favor of “risk-on” factors
• Prior leaders out-of-favor, beaten down areas moving to forefront (small-caps, EM)
• Still looking for modestly positive 2016 stock market overall as:
• Oil recovery, weak US Dollar set stage for earnings beat vs. lowered target
• P/E’s get a boost from lower volatility
• Credit spreads have eased (a good thing), but still offer reasonably attractive risk-reward
Primary Risks:
• China hard landing or major Yuan devaluation (neither is part of our base case)
• Policy mistake by the Fed (looks unlikely to us; if anything, we think Fed will err on the dovish side)
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 19
Market-based Recession Flags Receding
Source: Bloomberg
-60
-40
-20
0
20
40
60
80
100
MSCI ACWI YoY % Chg
0
500
1000
1500
2000
2500
Barclays HY Spread to 10Y Tsy
LT Avg Spread = 527bps
?
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 20
Economic Data Continue To Reject Recession Claims
Source: Bloomberg
The yield curve has typically inverted prior to recession
Albeit at a slow pace, leading indicators continue to advance
U.S. has never gone into recession with this much slack
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 21
Global Economy Poised For Improvement
Source: Bloomberg
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable.
45
47.5
50
52.5
55
57.5
60
62.5
ISM US Manufacturing Index
7/09 1/10 7/10 1/11 7/11 1/12 7/12 1/13 7/13 1/14 7/14 1/15 7/15 1/16
-12.5
-7.5
-2.5
2.5
7.5
12.5
17.5
Avg MoM Change Regional Fed Mfg Surveys
22
Signs Of A Turn In Manufacturing?
Source: Bloomberg
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 23
Consumer Remains The Key For Now
Source: Bloomberg
Even with a 20% rise since mid-Feb, lower gas prices still driving consumer savings of $100b-$200b per year
Wage growth is finally perking up and expected to continue
Still down 45%
over 2 years
Still down 25%
since mid-2015
Gas Price $/Gallon
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 24
Employment Remains A Highlight
Source: Bloomberg
• Payrolls remain solid, while participation rate is showing clear improvement
• Offers potential to add significant new jobs without spiking wage gains (which could force the Fed’s hand)
FOMC long-term est.: 4.8% PPC 2016 Outlook: 4.84%
US Unemployment Rate
Non-farm Payrolls MoM Chg
Labor Participation Rate
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 25
Global Feedback Loops Drive Major Fed Policy Shift
Source: Bloomberg
Futures market
prices show investor
expectations Narrowing
expectations gap
Fed guidance moved
sharply lower in Q1
Year-end
2015
Current
•Fed consensus down from 4 ¼-point hikes in 2016 to 2, expects to play catch-up in later years
•Market pricing in roughly 1 hike/year; could be more of an issue next year.
•Policy risk reduced as Fed poised to err on side of more inflation/fewer rate hikes near-term
Market
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 26
Europe: All The Right Moves, None Of The Results
Source: Bloomberg
ECB QE
Begins
ECB QE
Announced
?
Euro Stoxx 600
EPS Estimates
US$/Euro
Long-term Inflation
Expectations
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 27
Japan: Is Abenomics Missing The Target?
Source: Bloomberg
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 28
China Outcomes Will Be Critical
Source: Bloomberg
Hard-landing risk reduced as China backtracks to make growth top priority
Better growth benefits oil , commodities, reduces temptation for a big Yuan deval, to benefit of EMs & risk assets in general
Near-term cyclical upturn potentially coming at cost of greater long-term risk
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 29
Pause In Dollar’s Advance A Key Driver
Source: Bloomberg
Average of ‘80s & ‘90s bull markets:
+8.5%/year appreciation, 5.75 year duration
• After strong multi-year run, US$ currently flat year-over-year
• Beneficiaries:
EM economies
Commodities
Corporate earnings
Risk Assets in general
+31%
4.6 years
US Trade-Weighted
Dollar
+19%
1.76 years
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 30
Oil Appears To Be Forming A Bottom
Source: Bloomberg
• Supply glut has resisted massive
declines in price and the rig count
• Bottoming process appears to be
unfolding; this won’t be a V-shaped
recovery
OPEC U.S.
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable.
+12.3%
+16.4%
+7.8%
+13.4%
+0.6%
+7.6%+5.5%
+1.4%
-4.4%
-0.4%
-14.6%
+1.1%
-4.6%
-24.7%
-9.2%
-15.1%
-11.8%
-7.9%
+1.7%
-4.1% -5.9%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Lrg-CapUS
Sm-CapUS
FgnDev
EM Bond HighYield
Cmdty
2015
2016 thru 2/10
Since 2/11/16*
31
Just In Case You Blinked…
Source: Bloomberg
*Thru market close 4/4/2016
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable.
Index (as of 3/31/2016) 1Q16 1Yr
(Annualized) PPC Long-term
Risk Premia
Assumptions Last 3
Yrs
Last 5
Yrs
Last 10
Yrs
Citi 3-month T-Bills 0.05% 0.08% 0.05% 0.06% 1.07% -
Barclays Int. Govt/Credit 2.45% 2.06% 1.83% 3.01% 4.34% +1.70%
Opportunistic Bonds* 5.04% 2.88% 1.54% 3.26% 5.70% +3.70%
S&P 500 1.35% 1.78% 11.82% 11.58% 7.01% +6.50%
Russell Mid Cap 2.24% -4.04% 10.45% 10.30% 7.45% +7.50%
Russell 2000 -1.52% -9.76% 6.84% 7.20% 5.26% +8.50%
MSCI EAFE -2.88% -7.87% 2.68% 2.76% 2.27% +6.50%
MSCI EAFE Small Cap -0.52% 3.53% 7.63% 5.93% 3.79% +8.50%
MSCI Emerging Markets 5.75% -11.70% -4.15% -3.80% 3.34% +9.50%
Wilshire REIT 5.20% 4.76% 11.07% 12.11% 6.29% +5.00%
Bloomberg Commodity 0.42% -19.56% -16.87% -14.15% -6.16% +2.00%
Credit Suisse Liquid Alts -0.12% -3.43% 2.56% 1.98% 4.33% +3.50%
32
1Q’16 Capital Market Performance
Source: Morningstar Direct *60% Merrill Lynch Global Broad/ 40% Merrill Lynch Global HY & Emerging
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 33
Should We Be Bracing For A Bear Market?
Source: JP Morgan Asset Management; * Bear Return and Duration defined based on peak-to-trough periods
Bear markets don’t usually just “happen” but instead are
typically driven by one or more of the “usual suspects”
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 34
Don’t Be Surprised By A Pullback
Source: Bloomberg
+13% 2/11 thru mkt close 4/4/16
• Bounce off Feb 11 low retracing most of YTD loss
• Sentiment a key driver as recession fears have receded
• Unsustainable pace; consolidation or pullback likely within ongoing correction
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 35
Tone Of The Market Has Started To Turn
Source: Bloomberg
• Narrow 2015/early-2016 market favored defensive and momentum factors
• Post-2/11, sentiment has flipped to favor risk-on factors
• If sustained, this would add credence to the recent rally
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 36
Few Signs of Exuberance
Source: Bloomberg (Top), ICI, Morningstar Direct (Bottom)
Sentiment has rebounded after sinking below ‘08-’09 levels
- $114B - $23B
+ $200B
$(150)
$(100)
$(50)
$-
$50
$100
$150
$200
$250
Equity Bond Money Market
Cu
mu
lati
ve
Flo
ws
($
Millio
ns
)
Cumulative Fund Flows Since Mid-2014
% Investors
Bullish
% Investors
Bearish
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 37
Outlook For Corporate Profits Remains Mixed
Source: Bloomberg
•Profit cycle has peaked, given rising wages and lack of top-line growth
•Near-term, bar is low; firmer oil prices & US $ pullback could make for upside surprises
U.S. Corporate
Profits as % GDP
Employee Comp
as % GDP
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 38
Be Prepared For More Volatility
Source: Bloomberg
• Volatility is back near its lows on receding recession fears, oil price stability, and US $ weakness, helping to drive markets higher
• Further declines unlikely; need to see fundamentals improve or probably facing move back to higher levels
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 39
Even Modest Rate Increase Expectations Challenging
Source: Morningstar Direct
-12.5%
-7.5%
-2.5%
2.5%
7.5%
12.5%
17.5%
22.5%1
99
2
199
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
Price Return Coupon Component Total Return (Barclays Agg)
Boxed years = periods
of Fed tightening
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 40
Stressed Credit Markets Rebound
-4.1%
-1.0% -0.7%
1.7%
3.4%
2.1%
7.6%
2.6%
6.0%
2.8%
-0.2%
1.0%
-5.0%
-2.5%
0.0%
2.5%
5.0%
7.5%
10.0%
HY Lvgd Ln EM Debt TIPS Treas Agg
To
tal R
etu
rn %
Bond Market Returns – 1st Half vs. 2nd Half Q1
1/1 thru 2/10/16
2/11 thru 3/31/16
Source: Morningstar Direct
More Credit Risk More Interest Rate Risk
Since 2/11 inflection, easing credit spreads and a weaker
U.S. Dollar have driven a sharp recovery in the more
credit-sensitive and non-US segments of the market
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable.
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD'16
66.4% 31.8% 12.4% 25.9% 56.3% 33.2% 34.5% 36.0% 39.8% 5.1% 79.0% 28.6% 9.2% 18.6% 38.8% 31.8% 4.2% 5.8%
27.3% 31.0% 9.0% 9.8% 47.3% 26.0% 21.4% 32.6% 16.2% 1.8% 32.5% 26.9% 5.8% 17.9% 32.4% 13.7% 1.4% 5.2%
24.4% 10.1% 6.9% 3.6% 39.2% 20.7% 14.0% 26.9% 12.4% -12.1% 30.3% 19.2% 2.1% 17.6% 23.3% 4.9% 1.1% 2.5%
21.3% 6.3% 4.4% 2.7% 36.2% 18.3% 13.8% 18.4% 11.6% -31.1% 28.6% 16.8% 0.1% 16.4% 16.9% 3.6% 0.0% 1.4%
21.0% 6.2% 2.5% 1.8% 28.7% 12.6% 8.5% 16.0% 7.4% -33.8% 27.2% 15.3% -3.3% 16.0% 7.4% 3.1% -0.4% 0.4%
19.8% 1.3% -2.4% -6.0% 27.2% 10.9% 6.8% 15.8% 7.4% -35.7% 26.5% 15.1% -0.1% 14.9% 1.9% 2.7% -0.8% 0.4%
13.0% -3.0% -4.6% -9.4% 23.9% 9.3% 4.9% 13.2% 5.5% -37.0% 18.9% 8.2% -4.2% 3.9% 0.1% 0.0% -2.0% 0.1%
4.9% -9.1% -11.9% -15.7% 12.8% 9.2% 4.6% 4.8% 4.7% -39.2% 13.3% 5.9% -11.7% 3.2% -0.9% -1.8% -4.4% -0.1%
0.4% -14.0% -19.5% -20.5% 4.3% 3.0% 3.1% 4.1% -1.6% -43.1% 5.2% 5.5% -13.3% 0.1% -2.3% -4.5% -14.6% -1.5%
-2.6% -30.6% -21.2% -22.1% 1.2% 1.3% 1.6% 2.1% -17.6% -53.2% 0.2% 0.1% -18.2% -1.1% -9.5% -17.0% -24.7% -2.9%
Cash Foreign Developed Alternatives
Bonds Emerging Markets 60/40 Mix (PPC Balanced Growth)
Large Cap Stocks Real Estate
Small Cap Stocks Commodities As of 3/31/2016
Wo
rst B
est
41
Be Prepared Not To Come In First (Or Last)
Source: Morningstar Direct
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 42
Be Prepared To Keep A Long-term Perspective
Source: Morningstar Direct
50
100
150
200
250
PPC Balanced Growth Strategy (60/40)
S&P 500 TR USD
Thru 3/31/2016
12/31/1998 = 100
249.5
231.9
A diversified long-term strategy may not be the top performer in any one period, but proves its merit over time
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 43
Disciplined, long-term Asset Allocation process forms foundation for portfolio strategies
Diversification through inclusion of assets with materially different characteristics will reduce overall portfolio risk in most environments
Modest Shifts in Allocation made around longer-term strategic allocations can add value by taking advantage of market opportunities when appropriate
Employ Active, Passive, & Absolute Return management styles within the overall portfolio strategy
Careful Selection, Monitoring, & Management of investment managers will add value
Remember that Investment Discipline always trumps emotion
Be Prepared To Stick To Your Long-term Plan
Not for reproduction and/or distribution.
All data obtained from sources believed to be reliable. 44
Views expressed are as of the date indicated; they are based on the information available at the time and are subject to changed based on economic, capital market, and other conditions. Any investment decision should be based on an individual’s own goals, time horizon, and tolerance for risk.
Past performance is no guarantee of future results. Investing involves risk, including the risk of loss of principal invested.
Diversification does not ensure a profit or guarantee against a loss. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, or economic developments. Investments in the securities of smaller, less well-known companies typically carries more risk than investing in larger, better-established companies since smaller companies generally have a higher risk of failure and, historically, have exhibited a greater degree of volatility.
Investing in non-U.S. markets entails a different set of risks than that typically associated with U.S. markets, including the possibility of currency fluctuations, political and economic instability, accounting changes, and foreign taxation, all of which can potentially have a material favorable or unfavorable impact on performance. Securities may be less liquid and more volatile. Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than U.S. and longer-established non-U.S. markets.
Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market.
Although bonds generally present less short-term risk and volatility than stocks, bonds are subject to interest rate risk (the risk that bond prices fall in response to an increase in interest rates) and default risk (the risk that an issuer will be unable to make timely payments of principal and interest due on the bond). In addition, bonds and many short-term investments entail great inflation risk (the risk that an investment’s returns will fail to keep pace with increases in the prices of goods and services) than stocks. Lower-quality fixed income securities generally offer higher yields but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
The value of an investment in commodities and/or commodity-linked derivatives can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Investments in real estate and related securities can be significantly affected by changes in real estate market and economic conditions, property taxes, tax laws, and interest rates. Such investments can be volatility on their own and should generally form only a small portion of an investor’s diversified portfolio to enhance diversification and act as a potential hedge against inflation. Real Assets may not be suitable for all investors.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Important Information
THANK YOU!