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Financial Advisor magazine
presents
www.fa-mag.com
In the Aftermath: Navigating the Sovereign Fiscal Crisis
This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy. Any judgments and
assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.
• Q4 GDP growth was 5.7%
• Leading indicators have soared
• Job market appears to be stabilizing
• Inventory rebuild should be strong, particularly in tech capital goods
US economic recovery has begun
This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy. Any judgments and assumptions are as of this date and are subject to change at any time due to
economic, market and other factors. Opinions expressed will evolve as future events unfold.
In our view—
• Consumer: must still reduce debt and save more; housing wealth unlikely to recover
• Commercial Real Estate: more pain as office and apartment vacancies likely keep rising
• Government Spending I: Federal stimulus peaks in 2010, then fades
• Government Spending II: state and local govt. spending must fall to help balance budgets
• Net Trade: benefits from lower dollar limited by oil, China, European demand weakness
• Demographics: potential GDP growth looks likely to slow
• Recoveries from debt/banking crises typically are slow (‘80s UK, ‘90s Japan)
but the economy faces massive headwinds
This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy. Any judgments and assumptions are as of this date and are subject to change at any time due to
economic, market and other factors. Opinions expressed will evolve as future events unfold.
• Fiscal Risks to Treasury returns from massive bond supply and policy
gridlock
• Inflation Risks to all bonds from higher core inflation from excessive monetary stimulus if policy gridlock persists
• Growth Risks to equities
• Confidence Risks to all US dollar assets
transition to sustainable growth and satisfactory real yield looks highly uncertain
This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy. Any judgments and assumptions are as of this date and are subject to change at any time due to
economic, market and other factors. Opinions expressed will evolve as future events unfold.
GLOBAL BOND FUNDS HOLD:
• Non-US, high quality governments and supranationals (safety)
• Emerging market debt (performance)
• Corporate debt (performance)
• Non-dollar securities (safety and performance in a dollar bear market)
advisors may want to consider: diversify fixed income holdings by currency and quality
This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy. Any judgments and assumptions are as of this date and are subject to change at any time due to
economic, market and other factors. Opinions expressed will evolve as future events unfold.
consumer headwind: personal saving rate may rise to replace lost wealth Percent
Personal Saving as a Percent of Disposable Personal Income
History Forecast
1
2
3
4
5
6
7
8
9
10
11
12
13
48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11
Quarterly data; shaded areas denote NBER-designated recessions. Source: Commerce Department; Loomis Sayles. History through Q32009; forecast through Q42011.
consumer headwind: residential mortgage delinquency rate still rising
Seasonally adjusted quarterly data; shaded areas denote NBER-designated recessions. Source: Mortgage Bankers Association. History through Q32009.
Percent Mortgage Delinquencies: All Loans, Total Past Due
3
4
5
6
7
8
9
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
10
investment headwind: vacancy rates are still climbing
Quarterly data; shaded areas denote NBER-designated recessions. Source: Commerce Department. History through Q32009.
Percent National Vacancy Rates: Industrial, Downtown & Suburban Office Space
2
4
6
8
10
12
14
16
18
20
22
24
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Industrial
Downtown Office
Suburban Office
• Credit Suisse: $1.4 trillion of US commercial real estate loans maturing in the next four years
• Foresight Analytics: almost 55% of these are currently "underwater“ (1/2010)
• $250 billion in CRE losses? Not good for regional banks, or for regional lending
Source: Federal Reserve Board/Haver Analytics, 1/13/2010.
Loan Delinquency Rate: Commercial Real Estate Loans: All Comml Banks
SA, Percent
10 05 00 95 90
12.5
10.0
7.5
5.0
2.5
0.0
investment headwind
fiscal headwind: OMB projects federal deficits will remain huge
Unified budget basis; fiscal years, annual data. Source: Office of Management and Budget; Commerce Department. Annual history/forecast through FY 2019.
$ (Billion) Percent of GDP
Federal Government Surplus/Deficit
-2000
-1800
-1600
-1400
-1200
-1000
-800
-600
-400
-200
0
200
400
60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20
-15.0
-13.5
-12.0
-10.5
-9.0
-7.5
-6.0
-4.5
-3.0
-1.5
0.0
1.5
3.0 OMB Projections (left scale) OMB History (left scale)
% of GDP, History (right scale)
Projections for % of GDP
(right scale)
• OMB: net federal debt held by public, up $2.1 trillion in FY 2009
• Up $9.6 trillion FY 2010 – FY 2019
• Debt-GDP ratio rise to 76.5%, highest since 1950
• May get worse in very long run
Source: Office of Management and Budget/Haver Analytics, 8/26/2009.
Federal Debt Held by Public as a Percentage of GDP
15 10 05 00 95 90 85 80 75 70 65 60 55 50 45 40
120
100
80
60
40
20
government debt stocks are soaring
Source: OECD/Haver Analytics; 8/19/2009.
Japan: General Government Gross Financial Liabilities as % of GDP
United States: General Government Gross Financial Liabilities as % of GDP
Germany: General Government Gross Financial Liabilities as % of GDP
United Kingdom: General Government Gross Financial Liabilities as % of GDP
10 05 00 95 90 85 80 75 70
240
200
160
120
80
40
0
but G3 yields are little changed
Source: FRB, FT, Bbk/Haver.
09 08 07 06 05 04 03 02 01 00
8
6
4
2
0
US: 10-Year Treasury Note Yield at Constant Maturity (Avg., % p.a.)
Japan: 10-Year Government Bond Yield (%)
Germany: Central Government Securities- 9 to 10 Years (Avg., % p.a.)
• US working age population to slow from aging, lower fertility & less immigration
• Potential real GDP growth estimated to slow from 2.9% in 2000s to 2.2% in 2010s
demographic headwind
Source: Congressional Budget Office/Haver Analytics, 1/14/2010.
Real Potential Gross Domestic Product (CBO)
10-year % Change (Annual) Bil. Chn. 2000 $
20 15 10 05 00 95 90 85 80 75 70 65 60 55
4.4
4.0
3.6
3.2
2.8
2.4
2.0
trade headwind: eurozone GDP slowed in Q4
Source: Statistical Office of the European Communities, Haver Analytics.
09 08 07 06 05 04 03
1
0
-1
-2
-3
Euro Area 11-16: GDP at 2000 Prices, Flash Estimate
SWDA Q/Q % Change
china’s imports are growing, europe’s are not
Source: CC, Eurostat/Haver.
09 08 07 06 05 04 03 02 01 00 99
120000
100000
80000
60000
40000
20000
150000
125000
100000
75000
50000 0
China: Merchandise Imports, CIF SA, Mil. US $
EA 16: Imports: Total SA/WDA, Mil. EUR
is china’s 39% M1 growth an inflation risk?
Source: CNBS, PBC/Haver.
09 08 07 06 05 04 03 02 01 00
40
30
20
10
0
-10
China: Consumer Price Index (Y/Y % Change)
China: Money Supply- M1 (Y/Y % Change)
US dollar remains vulnerable to sentiment, carry
Source: JP Morgan; monthly data ended 8/31/2009.
70
80
90
100
110
120
130
Dec-
79
Dec-
82
Dec-
85
Dec-
88
Dec-
91
Dec-
94
Dec-
97
Dec-
00
Dec-
03
Dec-
06
Dec-
09
US
Dollar
JP Morgan Broad Real Effective X Rates
2000 = 100
• US growth will require positive net trade to replace the consumer
— Dollar weakness is more export-friendly
• Higher oil and metals, weaker finance implies adverse us terms of trade
• US dollar is now a funding currency
— Delayed tightening from the fed to foster global rebound
• Asian currencies will need to appreciate
• Commodity and EM currencies may be pulled along
the weak dollar thesis
This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy. Any judgments and assumptions are as of this date and are subject to change at any time due to
economic, market and other factors. Opinions expressed will evolve as future events unfold.
consider an expanded opportunity set: US is less than 40% of the global bond market
United States
Japan
Germany
France
United Kingdom
Italy
Spain
Canada
Netherlands
Supranational
Belgium
Australia
Austria
S. Korea
Other Countries
Barclays Capital Global Aggregate
% Market Value
Source: Barclays Capital, as of 12/31/2009.
compelling correlations: BGA & BGA Ex-US are weakly correlated to both S&P500 and MSCI EAFE
Source: Zephyr, data from January 2000-December 2009
January 2000 - December 2009 Barclays Global
Aggregate Ex-US Index Barclays Global Aggregate Index
Barclays Global Aggregate Ex-US 1.00 0.98
Barclays Global Aggregate 0.98 1.00
Barclays US-Only Aggregate 0.60 0.75
Barclays US Govt/Credit 0.60 0.75
Barclays US Corp High Yield 0.21 0.22
JPMorgan Emerging Mkt Debt 0.37 0.43
MSCI EAFE 0.39 0.34
S&P 500 0.17 0.14
questions & answers
thank you for attending
A recording and the slides of this presentation will be available at http://www.fa-mag.com/rolley
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CE SPONSOR: Charter Financial Publishing Network, Inc. CE SPONSOR ID NUMBER: 2839 PROGRAM NAME: The Aftermath Navigating The Sovereign Fiscal Crisis PROGRAM ID: 2232010 HOURS GRANTED: 1.00
In the Aftermath: Navigating the Sovereign Fiscal Crisis
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