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Copyright (c) Mizuho Securities USA Inc. All Rights Reserved.
Rush to Judgement
March 2017
2
Conclusions
Domestic Economy
The shift in focus from monetary to fiscal policy stimulus is generally expected to prove successful in establishing a stronger
growth trajectory. Our expectation for growth and inflation are more modest than that being discounted by markets; however,
the bullish sentiment will dominate in 2017. Don’t ignore possible effects of Trumps “keep American Jobs in America”.
The anticipated Trump tax cut modeled on the Reagan stimulus plan faces excess supply not excess demand.. This
implies the long-term success of the program is in doubt, especially when demographic and relative market conditions are
taken into consideration. The Trump deregulation agenda is also much more limited that Reagan’s and their trade policies
are decidedly different.
Currency market dynamics will be the key to 2017 outlook as Japan and Europe remain stuck in deflation. The tax cut
assures a pick up in 2018; while, the longer-term outlook will depend more on what Trump can do to revive housing not
investment spending or trade.
No Recession Risk:
Despite increased leverage by the corporate sector and a shortening of duration by the households balance sheets remain
generally healthy.
Bank balance sheets have improved dramatically and even a modest easing of regulatory constraints will be credit positive.
The equity rally will help narrow spreads despite altered market dynamics as investors continue to grab yield.
The lack of corporate pricing power reflects excess supply of both tradable goods and commodities. Current Account data
support the excess supply story limiting the upside potential in long-term rates.
3
Model Based Real GDP Forecast/ Pre-Trump Victory
Mizuho U.S. Macro Forecast
Q1 2016 Q2 2016 Q3 2016 Q42016 Q1 2017 Q2 2017 Q3 2017 2017 2018
Real GDP (Q/Q%): 0.80% 1.4 3.5 1.9 2.25 2.3 2.5 2.3 2.50
Core PCE Deflator (y/y%) 1.2 1.3 1.75 1.75 2 2 2 1.68 1.75
Fed Funds Rate %* 0.25-0.5 0.25-0.5 0.25-0.5 0.5-0.75 0.75-1 1-1.25 1-1.25 1-1.25 1.5-1.75
10-year Note (%)* 1.92 1.75 1.56 2.13 2.75 3.00 2.75 2.50 2.50
Inflation no longer determines the business cycle
4
5
Credit flows determine business cycle
6
Credit cycles evolve differently than inflation cycles
7
Excess capacity is a global issue
8
Current account trends show excess supply
Total Credit to Non-Financial Sectors, including Government (% of GDP)
9
Production growth has been key to the shift to excess supply
10
Global trade helps explain shift to excess supply
11
Demographics is an important limitation of growth
12
Budget deficit limits benefit from fiscal stimulus
13
14
Monetary Policy
15
Dual mandate
Dual mandate
16
Dual Mandate
17
18
Financial system stress measures off their lows
19
Monetary policy remains accommodative
20
QE still accommodative
21
Liquidity issues, not credit deterioration, evident in spreads
Money market reform has effected spreads at the front end of the curve
22
23
Credit Considerations
24
Banks no longer easing lending standards (C&I loans)
25
Banks less aggressive in consumer lending
26
A lack of demand suggests banks are less accommodative than they indicate
27
Banking system restructuring nearing completion
Banking system restructuring nearing completion
28
Banks are a key reason for shallow growth trajectory
29
Corporate Spreads and Balance Sheet
31
Corporate sector leveraging its balance sheet
32
Corporate balance sheets becoming more levered
33
Energy has clearly affected bank performance
*Rebased 01/01/2015=100
34
Credit markets no longer a constraint on the economy
Corporate spreads reflect exposure as well as reduced liquidity
35
Non-financial corporate leverage has increased
36
Duration remains long
37
38
Corporate debt burden is healthy
Unique divergence in default rates
39
0
2
4
6
8
10
12
14
16
18 % Energy and natural resources All other sectors
Source: S&P
Household Balance Sheet
41
Household savings higher than before the financial crisis
42
Household deleveraging still underway
43
Consumer duration affected by auto leasing
44
Household debt burden is very low
45
Asset side of household balance sheet recovery has improved
Corporate share of national income has topped
46
Valuation Considerations
48
Low long-term rates has lifted the P/E
49
Stocks are expensive to NIPA profits
50
Stocks expensive to earnings
51
Deflation risks cannot be ignored
Consumers shift purchases to avoid price increases
52
53
Rent and healthcare pushing up PCE
54
Compensation shows no credible sign of acceleration
55
TIPS inflation breakeven below Fed PCE target
56
Liquidity premium remains evident in the market
Auto Appendix
58
Auto sales dominating retail activity
59
Auto assemblies out of step with the rest of manufacturing
Factory sector is still important
60
Median age of vehicles supports sales
61
62
Used car prices could become a negative for new car sales
Auto loan rates are at record lows
63
Sales of heavy trucks reflects reduction in global trade
64
Dealer inventory is a problem for industry
65
Housing market appendix
67
Housing market correction has run out of steam
68
Rising home prices supporting rent
Household formation not going to boost home demand
69
Homeowner vacancy rate no longer a drag
70
Rental vacancy rate suggests overbuilding a regional problem
71
72
Restructuring has kept LTV high
73
Recovery in new starts is shallow
Single family demand may be recovering
74
Oil appendix
Estimated total OPEC Crude Oil Production
76
U.S. crude oil inventory and WTI
77
International appendix
World GDP Breakdown, Pre-Reagan (1981-1989) vs now
79
Gross domestic product, current prices 1980 $Bln 2015 $Bln
US 2,862.48 17,947.00
Eurozone 2,828.99 11,530.91
Japan 1,086.99 4,123.26
China 302.94 10,982.83
ROW 4,017.28 28,586.99
World 11,098.68 73,170.99
US, 2,862.48 , 26%
Eurozone, 2,828.99 ,
25%
Japan , 1,086.99 ,
10%
China, 302.94 , 3%
ROW, 4,017.28 ,
36%
1980 $Bln
US, 17,947.00 ,
24%
Eurozone, 11,530.91 ,
16%
Japan , 4,123.26 , 6%
China, 10,982.83 ,
15%
ROW, 28,586.99 ,
39%
2015 $Bln
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