Economic Update 2015: Economic Bubble Baths October 26, 2015 IASA Fall Conference Atlanta, GA Stephen Colavito, Jr. Executive Director - Investments Oppenheimer

Economic Update 2015: Economic Bubble Baths

October 26, 2015IASA Fall ConferenceAtlanta, GA

Stephen Colavito, Jr.Executive Director - Investments

Oppenheimer & Co. [email protected]

“Economic Bubble Baths”

• Useless trivia:

The history of the rubber duck is linked to the emergence of rubber manufacturing in the late 19th century. The earliest rubber ducks were made of hard rubber. Then sculptor Peter Ganine created a sculpture of a duck in the 1940s, then patented it and reproduced it as a floating toy, of which over 50 million ducks were sold.

Source: Wikipedia, October - 2015 For Illustrative Purposes Only

“The Fed – aka: Our Rubber Duck”

• The Federal Reserve – Moved from Passive to Active

• The Federal Reserve – Used emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to institutions to stabilize the financial markets. Those programs amounted to more than $1 trillion dollars in late 2008 and included:

• - Credit Easing (expansion of balance sheet)

• - Term Action Facility (TAF)

• - Dollar Swap Lines

• - Term Securities Lending Facility (TSLF)

• - Primary Dealer Credit Facility (PDCF)

• - Asset-Backed Commercial Paper Money Market Mutual Liquidity Facility (AMLF or MMMF)

• - Commercial Paper Funding Facility (CPFF)

• - Term Asset-Backed Securities Loan Facility (TALF)

• - QE1, QE2 & QE3

• - Operation Twist

Newton’s Third Law Of Motion – “For every action, there is an equal and opposite reaction.”

Source: Government Accountability Office - 2011 For Illustrative Purposes Only

The Rubber Duck

For illustrative purposes only.

Tiny Bubbles…Forward Economic Estimates

Source: Bloomberg, October 2015For Illustrative Purposes Only.

Past performance is not indicative of future results.

Tiny Bubbles…Forward Economic Estimates

Source: Bloomberg, October 2015For Illustrative Purposes Only.


Tiny Bubbles…Forward Rate Estimates

Source: Bloomberg, October 2015 For Illustrative Purposes Only.


Bubble Curve – A History of Interest Rates

Source: Bloomberg October 2015 For Illustrative Purposes Only

Bubble Curve – A History of Interest Rates

Source: Bloomberg October 2015 For Illustrative Purposes Only

Basics of a Bubble

Bubble Characteristics:•A basic characteristic of (any) financial bubbles is that most participants suspend disbelief during the “bubble phase.” We observe a failure to recognize that regular market participants and other forms of traders (sellers/buyers) are engaged in a speculative exercise that is not supported by previous valuation techniques. •Most important, bubbles are usually identified only in retrospect, after the bubble has burst.

Four Well-Known Bubbles:•The Dutch Tulip Bubble of 1637•Japan’s Real Estate and Stock Market Bubble -1989•The Dot-Com Bubble - 1999-2000•US Housing and Stock Market Bubble - 2008

Source: Bloomberg & Investopedia For Illustrative Purposes Only

5 Potential Steps Of A Bubble

5 Potential Steps of a Bubble

•Displacement •Boom•Euphoria•Profit Taking•Panic

Source: Bloomberg & Investopedia For Illustrative Purposes Only

Step One: Displacement

• Displacement: Displacement occurs when investors become enamored of a new paradigm, such as an innovative new technology or interest rates that are historically low.

For Illustrative Purposes Only.


For Illustrative Purposes Only

• Displacement: Displacement occurs when investors become enamored of a new paradigm, such as an innovative new technology or interest rates that are historically low.

http://economistsview.typead.com/timduy/

Source: Economistview.com


• Displacement: A displacement occurs when investors become enamored of a new paradigm, such as an innovative new technology or interest rates that are historically low.

For Illustrative Purposes Only. Source: FRED

Step Two: Boom!

• Boom: Following a displacement, prices at first rise slowly, then gain momentum as more and more participants enter the market, setting the stage for the boom phase.

For Illustrative Purposes Only. Source: stockcharts.com

Step Two: Boom!



Step Two: Boom!



Step Two: Boom!



Step Two: Boom!


For Illustrative Purposes Only. Source: Paragon.

Step Two: Boom!


For Illustrative Purposes Only. Barclays US Long Treasury Index (TLT) Modified Adjustment Duration.

Step Three: Euphoria

• Euphoria: During this step, investors throw caution to the wind, as asset prices move higher. The “greater fool” theory plays out everywhere.

• Recent examples of market euphoria:• - Japanese Real Estate Bubble - 1989• - Dot-Com Bubble - 2000• - US Real Estate Bubble - 2008


Step Three: Euphoria in Today’s Market?


• Unicorn Companies: Buying Unprofitable IPOs.


Step Three: Euphoria in Today’s Market?


• Example: Jet.com value $3 billion dollars! (source WSJ 7/20/2015)


Step 4: Profit Taking

• Profit Taking: By this time, the smart money, heeding the warning signs, is generally selling out of positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one’s financial health, because, as John Maynard Keynes put it, “the markets can stay irrational longer than you can stay solvent.”

For Illustrative Purposes Only. Source: Bank of America .



For Illustrative Purposes Only. Source: Bank of America .





For Illustrative Purposes Only. Source: Alhambra Capital Investment Partners



Source: Alhambra Capital Investment Partners For Illustrative Purposes Only.



For Illustrative Purposes Only. Source: Alhambra Capital Investment Partners .

Step 5: Panic

• Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Margin calls produce liquidations at any price. “Dogs and cats living together.” (source: Ghost Busters)

For Illustrative Purposes Only. Source: Hedgeye & Cartoon Stock 2015

Step 5: Panic

• Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. “Dogs and cats living together.” (source: Ghost Busters)


Source: Treasury, FRB, Haver Analytics, DB Global Markets Research

Step 5: Panic

• Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. “Dogs and cats living together.” (source: Ghost Busters)

For Illustrative Purposes Only. Source: Dealer Inventory .

What Could Help Prevent A Bubble?



• Economic Growth: An increase in the amount of goods and services produced per head of the population over a period of time.



Economic Growth: An increase in the amount of goods and services produced per head of the population over a period of time.

•US Headwinds:•- US Ranks 27th of 27 Median Household Income ($18,700)•- US Ranks 16th out of 23 Countries in Education and Skills•- US Ranks 16th out of 34 Countries in Internet Speed and Access•- US Ranks 33rd out of 145 Countries in Health•- US Ranks 36th out of 162 Countries with people living in poverty•- US Ranks 34th out of 35 Countries with children living in poverty•- US Ranks 17th out of 175 Countries with Corruption

(Source: Time Magazine June 2015)



• Moderate Inflation: A general increase in prices and fall in purchasing value of money.



• Real Employment Growth: A component of the Employment Situation Summary, reported monthly by the Bureau of Labor Statistics. The job growth figure is expressed as the gross number of jobs created in the American economy in the previous month.



• Real Employment Growth: U3 vs. U6

Source: ExpliStats.com from StadowStats and Bureau of Labor Statistics . For Illustrative Purposes Only.


• Real Employment Growth: Labor Participation Rate

For Illustrative Purposes Only. Source zerohedge.com

What Could Make a Bubble POP!


• Debt – The state of owing money.

• Verbal Case Study: Greece vs. Ireland 2009-2015

For Illustrative Purposes Only. Source: Cake Cartoons 2015.



• Verbal Case Study: Greece vs. Ireland 2009-2015




• Case Study: USA




• Case Study: USA




• Case Study: USA


Are We in a Bubble?

• Look for the 5 keys to bubbles.

• The Fed is still accommodative even through rates are likely to go higher.

• The US economy needs acceleration of M1 & M2 along with organic economic growth.

• The goal may be to try and inflate without runaway inflation.

• Watch valuations in world markets.

• 2016 is a key election cycle for economic growth.

Keys to Not Getting ‘Popped’

• Until rates move higher – global equities are likely to outperform• Start looking for opportunities outside the US. The world is global. Tilt toward lower

valuations.• Volatility is back.• If it sounds too good to be true…more than likely, it is.• Don’t be one-directional. Long only isn’t the only way to make money.• Don’t be afraid to take gains. Paying taxes on investments isn’t a bad thing (it

keeps you in business).• Bond investors need to watch the duration of their portfolios. Those investments

that are long-duration are subject to mark to market (MTM) movement. • Investment products matter. If we see a run for the exits, liquidity will be key.• Communication. The world sees information much faster so it’s important to be

ahead versus behind.

Questions & Answers

Stephen Colavito, Jr.

Executive Director - Investments

Oppenheimer & Co. Inc.

1200 Monarch Plaza

3414 Peachtree Road

Atlanta, GA 30326

(404) 262-5356

[email protected]

Website: http://fa.opco.com/stephen.colavito/

The S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry group representation. It is a market value weighted Index (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value. The Index is one of the most widely used benchmarks of US Equity Large Cap Performance.

The S&P 500 Buyback Index is designed to measure the performance of the top 100 stocks with the highest buyback ratios in the S&P500.

Barclays Capital Long U.S. Treasury Index includes all publicly issued U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade and have $250 million or more of outstanding face value.

The New York Composite Index measures all common stocks listed on the New York Stock Exchange and four subgroup indexes: industrial, transportation, utility and finance. The index tracks the change in the market value of NYSE common stocks and is adjusted to eliminate the effects of new listings and delistings. The market share of each stock is calculated by multiplying its price per share by the number of shares listed.

This presentation is intended for informational purposes only. The information provided herein is general in nature and should not be construed as a recommendation or an offer or solicitation to buy or sell any securities, nor does it represent legal or tax advice. Oppenheimer & Co. Inc., or any of its employees or affiliates, does not provide legal or tax advice. However, your Oppenheimer Financial Advisor will work with clients, their attorneys and their tax professionals to help ensure all of their needs are met and properly executed.

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Economic Update 2015: Economic Bubble Baths October 26, 2015 IASA Fall Conference Atlanta, GA Stephen Colavito, Jr. Executive Director - Investments Oppenheimer