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Staying Alive
 

Staying Alive

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    Staying Alive Staying Alive Presentation Transcript

    • Turmoil amid … Jim Glassman Less than $5,000 per capita GDP $5,000 - $10,000 per capita GDP Over $10,000 per capita GDP Circa 1980
    • … a Great Awakening Less than $5,000 GDP per person $5,000 - $15,000 GDP per person Over $15,000 GDP per person Circa 2005
    • Ten surprises …
      • Real GDP growth
      • % change over the four quarters of the year
      • 2007 2008
      • United States 2.3 2.2
      • Europe (EU-11) 1.9 1.2
      • Japan 1.3 0.0
      • Newly industrializing 8.1 6.6
      • China 10.8 10.2
      #1. The slowdown more global
    • #2. The US economy steadier … US real GDP (percent change from four quarters earlier) Source: US Department of Commerce
    • … steadier, even though oil “ate” the fiscal stimulus US real GDP (chained 2000 dollars) Source: Macroeconomic Advisers LLC
    • #3. The housing drag more contained Selected GDP measures (percent change from four quarters earlier) Source: US Department of Commerce
    • #4. The housing ATM not such a big deal Home equity extracted ($ billions) Real consumer spending (% ch vs four quarters earlier) Sources: US Department of Commerce; Federal Reserve Board
    • #5. Employment weaker … Employment and real GDP (percent change from four quarters earlier) Sources: US Department of Commerce; US Department of Labor
    • … and unemployment up more than usual Unemployment rate (percent of the labor force) Sources: US Department of Commerce; US Department of Labor
    • #6. Education matters more than usual Unemployment rate by maximum educational level achieved (percent of the labor force) Source: US Department of Labor
    • #7. Productivity surprisingly robust for a slowdown Labor productivity (percent change from four quarters earlier) Sources: US Department of Labor
    • #8. Profit margins remain near records Profits (percent of Gross Domestic Income) Sources: NBER recession bars; US Department of Commerce; Standard & Poor’s
    • #9. Inexplicable oil surge Global oil demand (millions of barrels daily) Oil prices (dollars per barrel) Sources: US Department of Energy; American Petroleum Institute
    • #10. Despite rising inflation “readings” … Oil ($/barrel) Inflation (percent change from 12 months earlier) Sources: NBER recession bars; US Department of Commerce
    • … a more sanguine investor community 10-year inflation expectations (percent) Sources: Bloomberg; Federal Reserve Board
    • Key issues in the outlook …
    • #1. The housing debacle …
    • Inflated valuations are largely history … Nominal income per household and house prices (ratio to 1970 Q1 level) Sources: Standard & Poor’s; US Department of Commerce
    • … that’s why price declines are slowing Selected measures of existing house prices (percent change from 12 months/4 quarters earlier) Sources: Standard & Poor’s; Ofheo; Census
    • The GSE rescue broke the ice in credit markets 30-year mortgage rate (percent) Source: Bank Rate Monitor
    • Builders still have some wood to chop … Housing starts (thousands at an annual rate) Unsold new single family houses (thousands) Source: Census Department
    • … maybe another year of “slow” ... Housing starts (thousands at an annual rate) Unsold new single family houses (months’ supply) Source: Census Department
    • What building takes, exports give Contribution of selected sectors to growth (pct points contribution to year-over-year real GDP growth) Source: US Department of Commerce
    • #2. The oil spasm …
      • Population and oil demand
      • Oil demand
      • Population (mln bbl daily)
      • United States 300,000,000 20.0
      • India 1,400,000,000 6.5
      • China 1,300,000,000 2.5
      There’s always a fundamental logic
    • But market signals have the last word … Petroleum, WTI ($/gallon) Pump price of gasoline ($/gallon) Source: Baker Hughes
    • … when demand and supply respond Gasoline consumption (billions of 2000 dollars) Gasoline prices (chain price index) Source: US Department of Commerce
    • It’s about the future, not the now, and that’s what specs do Global oil demand (millions of barrels daily) Petroleum, WTI (dollars per barrel) Source: American Petroleum Institute
    • Why oil matters in the short run … some scenarios Contribution to real GDP growth (contribution to percent change from four quarters earlier) Sources: US Department of Commerce; JPMorgan Chase &Co.
    • #3. The food debacle …
    • This was “Made-in-Congress”, not China Corn prices received by farmers (dollars per bushel) Source: US Department of Agriculture
    • When Washington wants to fix the problem, run for the hills Retail food prices (percent change at an annual rate over the most recent two years) Source: US Department of Commerce; US Department of Agriculture; JPMorgan Chase & Co. Note: 9 billion gallons of ethanol (the 2008 mandate) requires 3.27 billion bushels of corn which requires 20 million acres of farmland
    • #4. Inflation, or not …
    • When it’s about oil, not aggregate demand … Oil ($/barrel) Inflation (percent change from 12 months earlier) Sources: NBER recession bars; US Department of Commerce
    • … it’s a relative price event, not inflation Selected CPI indexes (percent change from 12 months/four quarters earlier) Source: US Department of Labor
    • A clue: what is a COLA? Private sector workers who belong to a union (percent of the labor force) Source: US Department of Labor
    • The more we pay for energy, the less for other things Hourly wage gains (percent change from 12 months earlier) Source: US Department of Labor
    • Wall Street knows all about this, even if its pundits don’t 10-year inflation expectations (percent) Sources: Bloomberg; Federal Reserve Board
    • #5. For US consumers, the end of an era …
    • US consumers were blessed … Consumer spending (percent of GDP) Source: US Department of Commerce
    • … and saving fell because savings rose … that was then Household saving (percent of income) Net worth (ratio to income) Sources: US Department of Commerce; Federal Reserve Board
    • They borrowed more because they could … that was then Monthly financial obligations (percent of income) Household debt (ratio to income) Source: Federal Reserve Board
    • Paying for health care this way costs us more Labor compensation share (percentage of Gross Domestic Income) Source: US Department of Commerce
    • #6. Securitized under siege …
    • A bad bet won’t jeopardize securitized finance Assets held at financial intermediaries (share of all assets held at financial intermediaries) Source: Federal Reserve Board
    • #7. The Great Economic Awakening …
    • The birth of economic miracles … US current account balance (percent of GDP) Source: US Department of Commerce
    • … lights turning on all around us … Global real GDP (percent change from four quarters earlier) Source: JPMorgan Chase & Co.
    • … in dark corners of the world … Real GDP in selected regions (percent change from four quarters earlier) Source: JPMorgan Chase & Co.
    • … because the earth is not flat China’s real per capita GDP (percent of the US level) Source: JPMorgan Chase & Co.
    • What it means for the future … Real GDP in selected regions (chained US dollars) Source: JPMorgan Chase & Co.
    • … activity will be more proportional to population Share of global real GDP (percentage) Source: JPMorgan Chase & Co.
    • Conclusion
    • Central banks shifting to “accommodative” … Federal funds rate (percent) Unemployment rate (percent) Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
    • It’ll be that way unemployment turns back down … Federal funds rate (percent) Unemployment rate (percent) Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
    • … and it doesn’t compromise inflation Federal funds rate and inflation (percent) Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
    • Alternatively, a steep curve for a while Federal funds rate less 10-year rates (percentage points) Sources: NBER recession bars; Federal Reserve Board
    • Lower natural level of interest rates Nominal and real 10-year Treasury yield (percent) Sources: NBER recession bars; Federal Reserve Board; US Department of Commerce
    • After the “Runs of August” … Selected borrowing costs (percent) Source:s Federal Reserve Board; Bloomberg; JPMorgan Chase & Co.
    • … investors will demand more protection High yield debt yield less 10-year Treasury yield (basis points) Source: JPMorgan Chase & Co.
    • If it’s global, the dollar will go up Real trade weighted dollar index (March 1973 = 100) Source: Federal Reserve Board
    • … because others are slowing too Percent change since July 21, 2005 (China’s revaluation) Source: Federal Reserve Board
    • Stocks, where we discount eternity … patience … Wilshire 5000 index of all publicly traded stocks (index) Source: Bloomberg
    • … to undo the “stagflation” trade Wilshire 5000 index of all publicly traded stocks (index) Source: Bloomberg
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