Turmoil amid … Jim Glassman Less than $5,000 per capita GDP $5,000 - $10,000 per capita GDP Over $10,000 per capita GDP Ci...
…  a Great Awakening Less than $5,000 GDP per person $5,000 - $15,000 GDP per person Over $15,000 GDP per person Circa 2005
Ten surprises …
<ul><li>Real GDP growth </li></ul><ul><li>% change over the four quarters of the year </li></ul><ul><li>2007 2008   </li><...
#2.  The US economy steadier … US real GDP (percent change from four quarters earlier) Source: US Department of Commerce
…  steadier, even though oil “ate” the fiscal stimulus US real GDP (chained 2000 dollars) Source: Macroeconomic Advisers LLC
#3.  The housing drag more contained Selected GDP measures (percent change from four quarters earlier) Source: US Departme...
#4.  The housing ATM not such a big deal Home equity extracted ($ billions)  Real consumer spending (% ch vs four quarters...
#5.  Employment weaker … Employment and real GDP (percent change from four quarters earlier) Sources: US Department of Com...
…  and unemployment up more than usual Unemployment rate (percent of the labor force) Sources: US Department of Commerce; ...
#6.  Education matters more than usual Unemployment rate by maximum educational level achieved (percent of the labor force...
#7.  Productivity surprisingly robust for a slowdown Labor productivity (percent change from four quarters earlier) Source...
#8.  Profit margins remain near records Profits (percent of Gross Domestic Income) Sources: NBER recession bars; US Depart...
#9.  Inexplicable oil surge Global oil demand (millions of barrels daily)  Oil prices (dollars per barrel) Sources: US Dep...
#10.  Despite rising inflation “readings” … Oil ($/barrel)  Inflation (percent change from 12 months earlier) Sources: NBE...
…  a more sanguine investor community 10-year inflation expectations (percent) Sources: Bloomberg; Federal Reserve Board
Key issues in the outlook …
#1. The housing debacle …
Inflated valuations are largely history … Nominal income per household and house prices (ratio to 1970 Q1 level) Sources: ...
…  that’s why price declines are slowing Selected measures of existing house prices (percent change from 12 months/4 quart...
The GSE rescue broke the ice in credit markets 30-year mortgage rate (percent) Source: Bank Rate Monitor
Builders still have some wood to chop … Housing starts (thousands at an annual rate)  Unsold new single family houses (tho...
…  maybe another year of “slow” ...  Housing starts (thousands at an annual rate)  Unsold new single family houses (months...
What building takes, exports give Contribution of selected sectors to growth (pct points contribution to year-over-year re...
#2. The oil spasm …
<ul><li>Population and oil demand </li></ul><ul><li>Oil demand </li></ul><ul><li>Population (mln bbl daily)   </li></ul><u...
But market signals have the last word … Petroleum, WTI ($/gallon)  Pump price of gasoline ($/gallon) Source: Baker Hughes
…  when demand and supply respond Gasoline consumption (billions of 2000 dollars)  Gasoline prices (chain price index) Sou...
It’s about the future, not the now, and that’s what specs do Global oil demand (millions of barrels daily)  Petroleum, WTI...
Why oil matters in the short run … some scenarios Contribution to real GDP growth (contribution to percent change from fou...
#3. The food debacle …
This was “Made-in-Congress”, not China Corn prices received by farmers (dollars per bushel) Source: US Department of Agric...
When Washington wants to fix the problem, run for the hills Retail food prices (percent change at an annual rate over the ...
#4. Inflation, or not …
When it’s about oil, not aggregate demand … Oil ($/barrel)  Inflation (percent change from 12 months earlier) Sources: NBE...
…  it’s a relative price event, not inflation Selected CPI indexes (percent change from 12 months/four quarters earlier) S...
A clue: what is a COLA? Private sector workers who belong to a union (percent of the labor force) Source: US Department of...
The more we pay for energy, the less for other things Hourly wage gains (percent change from 12 months earlier) Source: US...
Wall Street knows all about this, even if its pundits don’t 10-year inflation expectations (percent) Sources: Bloomberg; F...
#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) ...
They borrowed more because they could … that was then Monthly financial obligations (percent of income)  Household debt (r...
Paying for health care this way costs us more Labor compensation share (percentage of Gross Domestic Income) Source: US De...
#6. Securitized under siege …
A bad bet won’t jeopardize securitized finance Assets held at financial intermediaries (share of all assets held at financ...
#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 & ...
…  in dark corners of the world … Real GDP in selected regions (percent change from four quarters earlier) Source: JPMorga...
…  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 recess...
It’ll be that way unemployment turns back down … Federal funds rate (percent)  Unemployment rate (percent) Sources: NBER r...
…  and it doesn’t compromise inflation Federal funds rate and inflation (percent) Sources: NBER recession bars; Federal Re...
Alternatively, a steep curve for a while Federal funds rate less 10-year rates (percentage points) Sources: NBER recession...
Lower natural level of interest rates Nominal and real 10-year Treasury yield (percent) Sources: NBER recession bars; Fede...
After the “Runs of August” … Selected borrowing costs (percent) Source:s Federal Reserve Board; Bloomberg; JPMorgan Chase ...
…  investors will demand more protection High yield debt yield less 10-year Treasury yield (basis points) Source: JPMorgan...
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
Analysts’ Compensation:  The research analysts responsible for the preparation of this report receive compensation based u...
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Staying Alive

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Staying Alive

  1. 1. 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
  2. 2. … a Great Awakening Less than $5,000 GDP per person $5,000 - $15,000 GDP per person Over $15,000 GDP per person Circa 2005
  3. 3. Ten surprises …
  4. 4. <ul><li>Real GDP growth </li></ul><ul><li>% change over the four quarters of the year </li></ul><ul><li>2007 2008 </li></ul><ul><li>United States 2.3 2.2 </li></ul><ul><li>Europe (EU-11) 1.9 1.2 </li></ul><ul><li>Japan 1.3 0.0 </li></ul><ul><li>Newly industrializing 8.1 6.6 </li></ul><ul><li>China 10.8 10.2 </li></ul>#1. The slowdown more global
  5. 5. #2. The US economy steadier … US real GDP (percent change from four quarters earlier) Source: US Department of Commerce
  6. 6. … steadier, even though oil “ate” the fiscal stimulus US real GDP (chained 2000 dollars) Source: Macroeconomic Advisers LLC
  7. 7. #3. The housing drag more contained Selected GDP measures (percent change from four quarters earlier) Source: US Department of Commerce
  8. 8. #4. The housing ATM not such a big deal Home equity extracted ($ billions) Real consumer spending (% ch vs four quarters earlier) Sources: US Department of Commerce; Federal Reserve Board
  9. 9. #5. Employment weaker … Employment and real GDP (percent change from four quarters earlier) Sources: US Department of Commerce; US Department of Labor
  10. 10. … and unemployment up more than usual Unemployment rate (percent of the labor force) Sources: US Department of Commerce; US Department of Labor
  11. 11. #6. Education matters more than usual Unemployment rate by maximum educational level achieved (percent of the labor force) Source: US Department of Labor
  12. 12. #7. Productivity surprisingly robust for a slowdown Labor productivity (percent change from four quarters earlier) Sources: US Department of Labor
  13. 13. #8. Profit margins remain near records Profits (percent of Gross Domestic Income) Sources: NBER recession bars; US Department of Commerce; Standard & Poor’s
  14. 14. #9. Inexplicable oil surge Global oil demand (millions of barrels daily) Oil prices (dollars per barrel) Sources: US Department of Energy; American Petroleum Institute
  15. 15. #10. Despite rising inflation “readings” … Oil ($/barrel) Inflation (percent change from 12 months earlier) Sources: NBER recession bars; US Department of Commerce
  16. 16. … a more sanguine investor community 10-year inflation expectations (percent) Sources: Bloomberg; Federal Reserve Board
  17. 17. Key issues in the outlook …
  18. 18. #1. The housing debacle …
  19. 19. Inflated valuations are largely history … Nominal income per household and house prices (ratio to 1970 Q1 level) Sources: Standard & Poor’s; US Department of Commerce
  20. 20. … that’s why price declines are slowing Selected measures of existing house prices (percent change from 12 months/4 quarters earlier) Sources: Standard & Poor’s; Ofheo; Census
  21. 21. The GSE rescue broke the ice in credit markets 30-year mortgage rate (percent) Source: Bank Rate Monitor
  22. 22. Builders still have some wood to chop … Housing starts (thousands at an annual rate) Unsold new single family houses (thousands) Source: Census Department
  23. 23. … maybe another year of “slow” ... Housing starts (thousands at an annual rate) Unsold new single family houses (months’ supply) Source: Census Department
  24. 24. What building takes, exports give Contribution of selected sectors to growth (pct points contribution to year-over-year real GDP growth) Source: US Department of Commerce
  25. 25. #2. The oil spasm …
  26. 26. <ul><li>Population and oil demand </li></ul><ul><li>Oil demand </li></ul><ul><li>Population (mln bbl daily) </li></ul><ul><li>United States 300,000,000 20.0 </li></ul><ul><li>India 1,400,000,000 6.5 </li></ul><ul><li>China 1,300,000,000 2.5 </li></ul>There’s always a fundamental logic
  27. 27. But market signals have the last word … Petroleum, WTI ($/gallon) Pump price of gasoline ($/gallon) Source: Baker Hughes
  28. 28. … when demand and supply respond Gasoline consumption (billions of 2000 dollars) Gasoline prices (chain price index) Source: US Department of Commerce
  29. 29. It’s about the future, not the now, and that’s what specs do Global oil demand (millions of barrels daily) Petroleum, WTI (dollars per barrel) Source: American Petroleum Institute
  30. 30. Why oil matters in the short run … some scenarios Contribution to real GDP growth (contribution to percent change from four quarters earlier) Sources: US Department of Commerce; JPMorgan Chase &Co.
  31. 31. #3. The food debacle …
  32. 32. This was “Made-in-Congress”, not China Corn prices received by farmers (dollars per bushel) Source: US Department of Agriculture
  33. 33. When Washington wants to fix the problem, run for the hills Retail food prices (percent change at an annual rate over the most recent two years) Source: US Department of Commerce; US Department of Agriculture; JPMorgan Chase & Co. Note: 9 billion gallons of ethanol (the 2008 mandate) requires 3.27 billion bushels of corn which requires 20 million acres of farmland
  34. 34. #4. Inflation, or not …
  35. 35. When it’s about oil, not aggregate demand … Oil ($/barrel) Inflation (percent change from 12 months earlier) Sources: NBER recession bars; US Department of Commerce
  36. 36. … it’s a relative price event, not inflation Selected CPI indexes (percent change from 12 months/four quarters earlier) Source: US Department of Labor
  37. 37. A clue: what is a COLA? Private sector workers who belong to a union (percent of the labor force) Source: US Department of Labor
  38. 38. 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
  39. 39. Wall Street knows all about this, even if its pundits don’t 10-year inflation expectations (percent) Sources: Bloomberg; Federal Reserve Board
  40. 40. #5. For US consumers, the end of an era …
  41. 41. US consumers were blessed … Consumer spending (percent of GDP) Source: US Department of Commerce
  42. 42. … 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
  43. 43. They borrowed more because they could … that was then Monthly financial obligations (percent of income) Household debt (ratio to income) Source: Federal Reserve Board
  44. 44. Paying for health care this way costs us more Labor compensation share (percentage of Gross Domestic Income) Source: US Department of Commerce
  45. 45. #6. Securitized under siege …
  46. 46. 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
  47. 47. #7. The Great Economic Awakening …
  48. 48. The birth of economic miracles … US current account balance (percent of GDP) Source: US Department of Commerce
  49. 49. … lights turning on all around us … Global real GDP (percent change from four quarters earlier) Source: JPMorgan Chase & Co.
  50. 50. … in dark corners of the world … Real GDP in selected regions (percent change from four quarters earlier) Source: JPMorgan Chase & Co.
  51. 51. … because the earth is not flat China’s real per capita GDP (percent of the US level) Source: JPMorgan Chase & Co.
  52. 52. What it means for the future … Real GDP in selected regions (chained US dollars) Source: JPMorgan Chase & Co.
  53. 53. … activity will be more proportional to population Share of global real GDP (percentage) Source: JPMorgan Chase & Co.
  54. 54. Conclusion
  55. 55. Central banks shifting to “accommodative” … Federal funds rate (percent) Unemployment rate (percent) Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
  56. 56. 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
  57. 57. … and it doesn’t compromise inflation Federal funds rate and inflation (percent) Sources: NBER recession bars; Federal Reserve Board; US Department of Labor
  58. 58. Alternatively, a steep curve for a while Federal funds rate less 10-year rates (percentage points) Sources: NBER recession bars; Federal Reserve Board
  59. 59. 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
  60. 60. After the “Runs of August” … Selected borrowing costs (percent) Source:s Federal Reserve Board; Bloomberg; JPMorgan Chase & Co.
  61. 61. … investors will demand more protection High yield debt yield less 10-year Treasury yield (basis points) Source: JPMorgan Chase & Co.
  62. 62. If it’s global, the dollar will go up Real trade weighted dollar index (March 1973 = 100) Source: Federal Reserve Board
  63. 63. … because others are slowing too Percent change since July 21, 2005 (China’s revaluation) Source: Federal Reserve Board
  64. 64. Stocks, where we discount eternity … patience … Wilshire 5000 index of all publicly traded stocks (index) Source: Bloomberg
  65. 65. … to undo the “stagflation” trade Wilshire 5000 index of all publicly traded stocks (index) Source: Bloomberg
  66. 66. Analysts’ Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors and overall firm revenues. The firm’s overall revenues include revenues from its investment banking and fixed income business units. Principal Trading: JPMorgan and/or its affiliates normally make a market and trade as principal in the securities discussed in this report. Legal Entities: JPMorgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. J.P. Morgan Futures Inc. is a member of the NFA. J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority. JPMorgan Chase Bank, Singapore branch is regulated by the Monetary Authority of Singapore. J.P. Morgan Securities Asia Private Limited is regulated by the MAS and the Financial Services Agency in Japan. J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS License No: 238188) (JPMSAL) is a licensed securities dealer General: Information has been obtained from sources believed to be reliable but JPMorgan does not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer. Opinions and estimates constitute our judgment as at the date of this material and are subject to change without notice. Past performance is not indicative of future results. The investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. JPMorgan and/or its affiliates and employees may act as placement agent, advisor or lender with respect to securities or issuers referenced in this report. Clients should contact analysts at and execute transactions through a JPMorgan entity in their home jurisdiction unless governing law permits otherwise. This report should not be distributed to others or replicated in any form without prior consent of JPMorgan. U.K. and European Economic Area (EEA): Investment research issued by JPMSL has been prepared in accordance with JPMSL’s Policies for Managing Conflicts of Interest in Connection with Investment Research. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (all such persons being referred to as “relevant persons”). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Korea : This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Copyright 2008 JPMorgan Chase & Co. All rights reserved. Additional information available upon request.
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