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2010 and Beyond – Navigating the New Economy. FPPA Presentation. February 23, 2010. Disclaimers. - PowerPoint PPT Presentation
Citation preview
1
February 23, 2010
FPPA Presentation
2010 and Beyond – Navigating the New Economy
2
The information contained herein, while not guaranteed by BB&T Capital Markets, has been obtained from sources which we believe to be reliable and
accurate. This material is not to be considered an offer or solicitation regarding the sale of any security.
Discussions of past performance do not imply a guarantee of future results.
BB&T Capital Markets is a division of Scott & Stringfellow, LLC, member NYSE/SIPC. Scott & Stringfellow, LLC, is a separate, non-bank subsidiary of
BB&T Corporation. Securities and insurance products or annuities sold, offered or recommended are not a deposit, not FDIC insured, not bank guaranteed, not
insured by any federal government agency and may lose value.
Disclaimers
3
The Panic of 1907by Robert F. Bruner and Sean D. Carr
1. System Complexity – interconnectivity2. Buoyant Growth – insatiable demand for capital and
liquidity3. Inadequate Safety Buffers – capital and regulatory4. Adverse Leadership – conflicting goals5. Cognitive Bias – that can’t happen6. Real Economic Shock – asset devaluation7. Failure of Collective Action
“History may not repeat itself, but it rhymes.” -Mark Twain
What happened?
4Source: Bloomberg.
Asset InflationAsset Inflation Asset DeflationAsset Deflation
Federal Funds Rate
Large Write Downs
Declining Growth
Higher Unemployment
Low Core Inflation
Strong Growth Low
Unemployment
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Jan. '03 Jul. '03 Jan. '04 Jul. '04 Jan. '05 Jul. '05 Jan. '06 Jul. '06 Jan. '07 Jul. '07 Jan. '08 Jul. '08 Jan. '09
2. Declining
Risk Premium
3. Reach for More
Yield
4. Greater
Risk Taking
5. Increase
d Leverage
1. Rising Asset Prices
5. Reduced Leverage
4. Flight to Safety
3. Need for
Liquidity
2. Increasin
g Risk Premium
1. Declining Asset Prices
Where are we?
5
Who’s to blame?
6
• Chronic Budget Shortfalls– 46 of the last 50 years
• Freddie Mac / FNMA– Affordable Housing
• Regulators – SarbOx, SEC, FDIC
• Wall Street / Banks– Uncontrolled Greed or Political Scapegoats– Rating Agencies
• Consumers – over-leveraged– Why not part of the discussion?
Who’s to blame?
7
0%
20%
40%
60%
80%
100%
1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
Household debt / GDP Non-corporate Net Private Debt to GDP
The Great DepressionThe Great Depression
Source: U.S. Census, U.S. Federal Reserve Flow of Funds. Please note non-corporate net private debt is used as a proxy for household debt (going back to 1918) as the Federal Reserve did not begin tracking U.S. household debt until 1950
?
U.S. Household Debt as a Percent of GDP
Who’s to blame?
8Source: Congressional Budget Office; U.S. Department of the Treasury. These figures represent federal debt that is subject to limitations only.
The 2009 Gross Federal Debt is $11.9 trillion, which represents a 29.9% increase since 2007
$40,000 per person - $5,000 increase this fiscal year
~85% of Total
~7.5% of Total
Gross Federal Debt
Who’s to blame?
$5,696 $5,883$6,947
$8,115$9,145
$14,341$15,856
$17,456
$19,097
$20,639
$11,876
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1999 2001 2003 2005 2007 2009P 2011P 2013P 2015P 2017P 2019P
U.S
. Gro
ss F
eder
al D
ebt (
$ bi
llion
s)
9
Government’s role?
1. Financial System “Bailout”: if we all agree financial system stability is the goal, did we market the solution effectively and did we take the correct steps?
• Bear Stearns / Washington Mutual / AIG / Lehman / Money Markets / Merrill Lynch / Fannie Mae and Freddie Mac / Wachovia
10
Government’s role?
2. But did the government’s role in preserving the financial system give them the “opportunity” to take a larger role in the economy?
• Stimulus I and II
• Additional Regulation – FDIC Bankruptcy
• Chrysler, General Motors, GMAC, AIG2
• Federal Reserve involvement in the debt markets
• Tax Policy – Job Creation
11
What lies ahead – is September 2007 a policy initiative?
Are we bucking reality – has the world economy changed and our efforts to date are pretending
that change did not occur?
12Source: U.S. Department of Labor; Bureau of Labor Statistics
U.S. Unemployment Rate and Number of Workers Unemployed
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Une
mpl
oym
ent R
ate
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
Num
ber Unem
ployed (millions)
Unemployment Rate Number Unemployed
The Bureau of Labor Statistics reported an unemployment rate of 10.2% for October 2009 – how did jobs get lost and the unemployment rate go down?
The total number of unemployed was approximately 15.7 million.
Over $20 million people received unemployment benefits in 2009.
What lies ahead – is September 2007 a policy initiative?
13
09/ 2007 02/ 2008 08/ 2008 02/ 2009 08/ 2009 02/ 201040%40%
60%60%
80%80%
100%100%
120%120%
S&P 500 Russell 2000 NASDAQ DJIA
Source: FactSet, data as of 2/15/10
What lies ahead – is September 2007 a policy initiative?
Historical Index Performance
% Appreciation Since 9/1/2007
Russell 2000 (23.0%)
DJIA (24.4%)
NASDAQ (15.9%)
S&P 500 (27.0%)
14
Housing PricesNew – down 17.2% from March 2007 peak
Existing – down 25.6% from July 2006 peak
Source: U.S. Census Bureau, National Association of Realtors
What lies ahead – is September 2007 a policy initiative?
Median Price of Single-family Home Sales
$150,000
$175,000
$200,000
$225,000
$250,000
$275,000
Dec-0
3
Jun-0
4
Dec-0
4
Jun-0
5
Dec-0
5
Jun-0
6
Dec-0
6
Jun-0
7
Dec-0
7
Jun-0
8
Dec-0
8
Jun-0
9
Dec-0
9
Existing Homes New Homes
-20%
-10%
0%
10%
20%
30%
Dec-0
4
Jun-0
5
Dec-0
5
Jun-0
6
Dec-0
6
Jun-0
7
Dec-0
7
Jun-0
8
Dec-0
8
Jun-0
9
Dec-0
9
YO
Y C
hange
15
Home SalesNew – down 74.4% from July 2005 peak
Existing – down 10.0% from June 2005 peak
Source: U.S. Census Bureau, National Association of Realtors
What lies ahead – is September 2007 a policy initiative?
Home Sales
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
SA
AR
(M
)
Existing New
-75%
-50%
-25%
0%
25%
50%
75%
Jan-9
0
Jan-9
1
Jan-9
2
Jan-9
3
Jan-9
4
Jan-9
5
Jan-9
6
Jan-9
7
Jan-9
8
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
YO
Y C
hange
16
Commercial Office Vacancy Rates & Office Asking Rents
0%
5%
10%
15%
20%
25%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
E
2010
E
2011
E
2012
E
2013
E
Vac
ancy
Rat
es %
(gr
ay li
ne)
$-
$5
$10
$15
$20
$25
$30
$35
Ask
ing R
ents $ (B
B&
T m
aroon lin
e)
Sources: REIS
•$1.3 Trillion to be refinanced by 2012 – How?
•U.S. office vacancies rose to the highest level in four years in the second quarter; 15.9 percent from 13.2 percent a year earlier. [Bloomberg – 7/7/2009]
What lies ahead – is September 2007 a policy initiative?
17
Ancillary musings
1. Can we pay our bills – municipal, state, federal? 2. Will any of our economy work in a deflationary
environment – who has the most to lose from deflation?
3. Have we put the fiscal stimulus in place to create
runaway inflation – who has the most to gain from inflation?
4. Have we saved the financial system or is there work to be done?
18
5. Can the government function as a profit center, and if so how do they get out (and what about Freddie and Fannie)?
6. Can we long-term de-lever the economy, and do we want to de-lever the economy?
7. Can we structure and regulate the banking system in a manner which minimizes risk but maximizes growth and opportunity – or does it remain a whipping boy?
Ancillary musings
19
Final thoughts
8. Course of Action• This has happened before, and it will happen
again - if the financial system is sound and the capitalist system is allowed to work we will recover.
• We have to avoid the inclination to over-regulate and to over-manage and to over-tax – very hard for the politicians.
• The folks who react rationally to the new circumstances are already the winners.
20Source: Bloomberg.
Asset InflationAsset Inflation Asset DeflationAsset Deflation
1. Consumer Leverage / Government Leverage
2. Economic Growth – Tax Increases
3. Unemployment – Job Creation
4. Asset Bubble – all assets or just stocks and housing
Large Write Downs
Declining Growth
Higher Unemployment
Low Core Inflation
Strong Growth Low
Unemployment
2. Declining
Risk Premium
3. Reach for More
Yield
4. Greater
Risk Taking
5. Increase
d Leverage
1. Rising Asset Prices
5. Reduced Leverage
4. Flight to Safety
3. Need for
Liquidity
2. Increasin
g Risk Premium
1. Declining Asset Prices
Final Thoughts