Icap Global Macro Monitor

8/9/2019 Icap Global Macro Monitor

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ICAP Futures LLC

ICAP Global Macro MonitorNicolas Lenoir, Chief Market Strategist

April 20 2010


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Global Macro Monitor

3

Private vs. Public GDP 4

Restart Private Credit? 5

Expand Public Spending? 6

Between a Rock & a Hard Place 7

Deflationary Case & Aging Population 8

Consequences on Investing 12

FAQ & Appendices 14

Growth Outlook 3


3/14

3

Growth Outlook: Just a Blip?

Was the 2008 crisis just a blip?

Factoring the inventory rebound coming down

the pipeline nominal GDP will reach new highs

by Q3 2010

Nasdaq is only 13% from the 2007 highs

Commodity prices have recovered to their 2007

levels as well for the most part

Banks are reporting record profits

Central banks around the world are starting to

remove accommodative policies

On April 15 2010, the daily momentum on the

Nasdaq measured using the 21-day RSI was at

its highest since December 1999

Highlights

Nasdaq

Nominal US GDP


4/14

4

Private vs. Public: 2 Different Stories

Subtracting government spending from GDP, we

find that the private sector GDP is barely flat YoY

Around the world governments have taken over

for the private sector, Chinas stimulus package

for 2008 was 14% of GDP

The US Federal Reserves balance sheetexpanded by $1.4Tr to compensate for credit

contraction

But consumer credit outstanding is still shrinking

and the deleveraging process is in its early

stages

The Federal Reserves balance sheet is

expected to shrink slowly as asset purchase

programs have expired

Highlights

Total Outstanding Consumer Credit in the US

US GDP Vs. US PRIVATE SECTOR GDP

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"US GDP"

"US PRIVATE SECTOR GDP"


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5

Restart Private Credit?

A strong February reading was cancelled out by

March, April will be crucial to tell if the consumer

is back spending money she/he does not have

Small businesses are still reporting difficulty

accessing credit

Lending standards have been tightened and it ispreferable to stay away from what caused our

downfall in the first place, GSEs now represent

90% of the MBS market

Total US debt as a percentage of GDP is

skyrocketing

The last 30 years of growth have been fuelled by

an expansion from 160% to 380% of the debt to

GDP ratio: we simply cannot keep carrying on

The savings rate after briefly flirting with 7% is

now back to 3% and headed lower; it is dramatic

Highlights Consumer Credit Report

Total Debt Picture


6/14

6

Expand Public Spending?

Some Pictures Are Worth 1,000 Words

Since 1970 federal spending has increased 7X

as much as the median income

Since 1980 the 5th percentile for household

income has grown at 3 times the annual pace of

the average household income

Total Public Debt Outstanding grew by $4Tr sincethe end of 2006

Many worry that excessive issuance will lead to

failed auctions resulting in a dangerous bear

market for US Treasuries

Japan went down the path before us; 20 years

later all they have is a 200% public debt to GDP

ratio to show for it along with a soon-to-be

negative savings rate

Highlights


7/14

7

Between a Rock & a Hard Place

Consumer credit has not restarted meaningfully yet, and public debt is reaching worrying levels so the

government cannot keep acting as the engine of growth much longer

Q2 numbers will impress because of inventory rebuilding but once that momentum abates the scrutiny

on federal spending as the only engine of growth will intensify

Two possible scenarios:

Private sector lending rises again holding growth between 2.5% and 3.5% until the inventory cycle

peaks, then closer to 2% once the government progressively pulls out stimulus and the cycle peaks

The federal government is forced to step up again as private sector growth falters again

Two scenarios for the economy yet three scenarios for the bond market:

The economy grows enough for the federal government to pull back spending and the FederalReserve to normalize rates in 2011 avoiding a financing crisis: 10% probability

The economy slows and government spending keeps expanding to maintain growth in a slump that

carries on for several years: 70% probability

The US faces a refinancing crisis after other countries default due to the same problem: 20%

probability


8/14

8

The Deflationary Case

Demographics are going to play a fundamental

role in the next 20 years and it starts now

Using a distribution of the average salary as a

function of age, the aging of the baby boom

generation has been a major boost to GDP since

the 70s contributing as much as 2% and 1.5% on

average

For the next 30 years demographics will only

contribute 0.65% on average

The 65-year old or older population is going to

grow between 1.7% and 2.5% over the next 30

years against 1.15% on average over the last 20years

Highlights US Demographics


9/14

9

We Are not Alone

Aging in China will be exponentially worse due to

the one child policy

Also add in the fact that there are 58% men

when the natural observed population split is

48% men and 52% women

Currently the percentage of the Chinesepopulation which is outside of the workforce is

43%. Starting in 2012 this number is going to

move up to reach 60% in 2060

It will reach 50% before 2020

In the US this number is currently 35% according

to the official BLS releases; it has moved up from

33% in the last 10 years

Highlights Chinas Demographics


10/14

10

Aging & Demand for US Treasuries

There is a lot of talk about excess supply of US Treasuries, but very little comprehensive work is done

regarding demand

People are concerned about foreign demand for US Treasuries, but the USD remains the world reserve

currency, and the US Treasury market is the biggest and most liquid: what is the alternative?

Aging usually implies a more conservative portfolio allocation. Rule of thumb for investing states that

your fixed income allocation should grow by 1% every year

People over 50 own over 80% of the assets in circulation

American people own $41Tr of assets, a change of +1% in their asset allocation towards fixed income

represents $410Bn of additional demand

If the baby boomers own 80% or more of the assets, they could represent an additional $328Bn of

additional demand every year

A system which is overleveraged cannot afford high rates without triggering a jump in defaults, lower

equity prices, and in turn a higher demand for Treasury bonds


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11

Impact of Age on Yield

Consequences of an aging population and

excessive liquidity held by the older generations

means slower growth and low yields

30Y Treasury yields moved down from 14% to

4.7% over the last 30 years

IG credit spreads have recovered over 80% ofthe widening due to the 2008 crisis

In 2007 you were only paid 33bps a year to own

IG credit risk

It will all end in tears with skyrocketing interest

rates but until then we are stuck in a low yield

environment that can last for some time if we

believe modern Japanese history

How to invest in such a binary environment?

Highlights

IG 5Y CDS

30Y Treasury Yield


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12

Consequences on Investing

Buy and hold made increasingly harder as yields are decreasing and make the benefits of holding less

attractive relative to the dangers in the case of a crisis

Electronic trading, retail brokers, and faster circulation of information, have accelerated the speed at

which capital moves across asset classes

It is becoming increasingly important to allocate a greater share of a investment portfolios to tactical

strategies capable of thriving in any environment, relying on liquid markets which allow rapid liquidationif necessary, and benefitting from market volatility

Financial Futures are the ideal product for tactical allocations:

Abundant liquidity

Transparency

Scalability

No credit risk


13/14

13

Benefit of US Treasury Futures

US Treasury futures allow you to build a strategy set-up to outperform other fixed income vehicles

irrespectively of market conditions

Enhance return when rates are static by capitalizing on the option premium embedded in the US

Treasury futures

Benefit from lower rates by buying US Treasury futures thereby selling the embedded option which

loses value as rates move down

Benefit from higher interest rates by selling US Treasury futures thereby owning the imbedded option

which increases in value as rates move up

Lower transaction costs mean less dilution of performance

No issue with illiquid bonds in the case of market disruption


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FAQ & Appendices

ICAP Futures Sales & Trading www.icap.com

212-815-6802

Dean Aldrich Vice President [email protected]

Michael Lawrence Vice President [email protected]

Nicolas Lenoir S. V. P. [email protected] Market Strategist

Contact Details

Disclaimer: There are risks inherent in trading, including the risk of loss greater than the original investment. The opportunity for profit creates a corresponding

risk of loss. Anyone wishing to invest in any of the products mentioned should seek their own financial or professional advice.

ICAP Futures LLC is a member of the National Futures Association and registered as an FCM (NFA ID # 293651)
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Icap Global Macro Monitor