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2013 FORECAST: A LOOK AHEAD Puget Sound Economic Forecast      Michael Dueker     Chief Economist    Russell Investments
2013 Economic Outlook: Will we avoid over-       exuberant near-term budget slashing?       Michael Dueker, Chief Economis...
Important Information and Disclosures           Nothing contained in this material is intended to constitute legal, tax, s...
Russell viewpoint:       Scenarios likely to shape asset returns in 2013 as a whole                                       ...
BCI forecasts look consistent with a 7.3 percent unemployment rate       in December 2013                                 ...
Employment forecast shows an average gain of 170 thousand per            month during 2013                                ...
Europe has a growth problem beyond current recession—       business cycle indexes for US and Eurozone             Eurozo...
Russell‘s forecast is 2.1 pct real GDP growth in 2013                                                          3.0        ...
Russell‘s inflation forecast remains close to 2 pct.                                                          3.0         ...
Investor complaint:            For how long do we have to live in a world in which               Greece not getting its n...
Political risk: not a one-off but a fact of life           It might not feel good to see politicians‘ hands on the rudder...
V810                                     0                                         2                                      ...
Tree-chopping analogy        After two rounds of QE by the Fed, some people consider QE to         be a tried-and-failed ...
The Fed‘s ‗scary‘ balance sheet: Will the Fed be       caught holding the bag?        p.14V810
How the Fed will shrink its balance sheet       (when the time comes)        p.15   Illustration only for future 3-month T...
V810
Super Mario (Draghi) is trying to change the game                Long Term Refinancing Operations                Prevent...
Greece is the Corvair of Europe:       Insolvent at any interest rate        ECB bond               Potential crisis    ...
The pain in Spain....               %                                         Unemployment Rates               30         ...
―You can always count on Americans to do the right        thing—after they‘ve tried everything else‖        —Winston Churc...
―You can always count on Americans to do the right       thing—after they‘ve tried everything else‖       —Winston Churchi...
What steps would enhance long-run investor confidence?                            › 19 percent solution?       Fiscal plan...
China‘s unbalanced economy               % of GDP     China: Consumption & Investment % of GDP                55          ...
If you build it, will they come?       Austria in Guangdong   The ghost city of OrdosV810
www.russell.com
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Michael Dueker Economic Forecast slides

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Michael Dueker Economic Forecast slides

  1. 1. 2013 FORECAST: A LOOK AHEAD Puget Sound Economic Forecast Michael Dueker Chief Economist Russell Investments
  2. 2. 2013 Economic Outlook: Will we avoid over- exuberant near-term budget slashing? Michael Dueker, Chief Economist January 10, 2013V810
  3. 3. Important Information and Disclosures Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse purchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage backed securities, especially mortgage backed securities with exposure to sub-prime mortgages. Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results. Copyright© Russell Investments 2011. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty. Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. The Russell logo is a trademark and service mark of Russell Investments. Date of first use: January 2013 CORP-7323 This presentation was created for informational purposes only and is not meant for further distribution. 3V308
  4. 4. Russell viewpoint: Scenarios likely to shape asset returns in 2013 as a whole PROBABILITY ≈ 65% PROBABILITY ≈ 15% PROBABILITY ≈ 20% Equity markets have Modest recovery proceeds Downside to growth – greater upside potential with growth near 2.0 pct. recession or stagnation than economic growth if long-run concerns are Policymaker blunder addressed › Square-root-shaped (10%) recovery › Financial meltdown in Smooth › Inflation stays near Fed’s European periphery or › Risky assets rally across the board, target of 2 pct lawmaker-induced recession in U.S. bond yields rise › Equity valuations rise modestly modestly (upper single Economic stagnation/ digits) confidence slump (10%) Bumpy › Renewed drought in › Fed is perceived to be › Bond markets in the core jobs market behind the curve sell off mildly as U.S. › Negative equity price › Mediocre year for growth is not derailed; environment risky assets and bad year for fixed income 2.15% 10-year Treasury yield at end of 2013 Source: Russell Investments research. There is no guarantee that any stated expectations will occur. As of December 2012. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. p.4V308
  5. 5. BCI forecasts look consistent with a 7.3 percent unemployment rate in December 2013 Business cycle index as of December 2012 data Out of sample forecasts were calculated by simulating the time-series model into the future. 3 Source: Recession data from National Bureau of Economic Research YELLOW BARS INDICATE PERIODS OF RECESSION 2 sample st. devs. from zero 1 0 -1 -2 -3 Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx 5V810
  6. 6. Employment forecast shows an average gain of 170 thousand per month during 2013 Forecasts of nonfarm payroll employment changes as of November 2012 data Source: Actual employment data from St. Louis Feds FRED database 400 200 0 thousands of jobs -200 -400 -600 -800 http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx 6V810
  7. 7. Europe has a growth problem beyond current recession— business cycle indexes for US and Eurozone  Eurozone and U.S. business cycle indices (2007-2012) Values shown for the in- sample estimates and out- 3 of-sample forecasts are the median of the simulated 2 Sample standard deviations values for the quarter. Out- of-sample forecasts were calculated by simulating the 1 time-series model into the future. Source: U.S. recession 0 data from National Bureau of Economic Research. Data through 2012Q3 -1 -2 -3 Euro U.S. In-sample estimates | Out-of-sample forecast Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. There is no guarantee that the stated results will occur. Index performance is not indicative of the performance of any specific investment. Indexes are not managed and may not be invested in directly. 7V810
  8. 8. Russell‘s forecast is 2.1 pct real GDP growth in 2013 3.0 2.5 Annualized growth (%) 2.0 1.5 Source: Russell 1.0 Investments. Data as of 12/31/2012. The Blue Chip is a panel of approximately 50 top economic forecasters. 0.5 Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical - data. It is not 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 representative of a projection of the stock Russell Blue Chip market, or of any specific investment. 8V810
  9. 9. Russell‘s inflation forecast remains close to 2 pct. 3.0 2.5 Annualized growth (%) 2.0 1.5 Source: Russell Investments. Data as of 1.0 12/31/2012. The Blue Chip is a panel of approximately 50 top economic forecasters. Forecasting represents 0.5 predictions of market prices and/or volume patterns utilizing varying analytical data. It is not - representative of a 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 projection of the stock Russell Blue Chip market, or of any specific investment. 9V810
  10. 10. Investor complaint:  For how long do we have to live in a world in which Greece not getting its next installment of bailout money could set off a financial crisis?  We‘re not supposed to be like an emerging-market economy with recurrent crises?  Include additional Greece-like political risk factors on the list, such as our own fiscal cliff  Answer: for the indefinite future p.10V810 FINANCIAL PROFESSIONAL USE ONLY
  11. 11. Political risk: not a one-off but a fact of life  It might not feel good to see politicians‘ hands on the rudder, but with debt-to-GDP ratios near 100 percent in the wake of the Great Recession, auto-pilot does not work.  We simply have to accept this increased role of politicians in our lives, as much as we dislike the idea. p.11V810 FINANCIAL PROFESSIONAL USE ONLY
  12. 12. V810 0 2 4 6 8 -4 -2 2006-04-01 p.12 2006-07-01 2006-10-01 2007-01-01 2007-04-01 2007-07-01 2007-10-01 2008-01-01 2008-04-01 2008-07-01 made the grade 2008-10-01 2009-01-01 2009-04-01 2009-07-01 2009-10-01 2010-01-01 2010-04-01 2010-07-01 2010-10-01 2011-01-01 2011-04-01 4 qtr nominal GDP growth 2011-07-01 2011-10-01 2012-01-01 2012-04-01 Why QEternity? Nominal GDP growth has not 4 qtr nominal GDP growth
  13. 13. Tree-chopping analogy  After two rounds of QE by the Fed, some people consider QE to be a tried-and-failed strategy.  Think of a tree-chopping analogy, however. If one takes two swings at a tree with an axe, steps back and sees that the tree does not fall over, the conclusion is not that the axe cannot cut down the tree! 13V810
  14. 14. The Fed‘s ‗scary‘ balance sheet: Will the Fed be caught holding the bag? p.14V810
  15. 15. How the Fed will shrink its balance sheet (when the time comes) p.15 Illustration only for future 3-month T-bill yieldV810
  16. 16. V810
  17. 17. Super Mario (Draghi) is trying to change the game  Long Term Refinancing Operations  Prevented liquidity squeeze on European banks Outright Monetary Transactions To provide interest-rate subsidy to Spain, Italy  Longer term problems still not fixed  European recession, grinding in periphery  Ongoing fiscal austerity  New acronym: NTGES (Never To Grow European States) 17V810
  18. 18. Greece is the Corvair of Europe: Insolvent at any interest rate  ECB bond  Potential crisis purchases may solution: stronger solve Spain and growth, banking Italy funding needs union, subsidized interest rates p.18V810
  19. 19. The pain in Spain.... % Unemployment Rates 30 25 Latest 2007 20 15 10 5 0 Germany Italy France Ireland Portugal Greece Spain Source: Datastream p.19V810
  20. 20. ―You can always count on Americans to do the right thing—after they‘ve tried everything else‖ —Winston Churchill 20V810
  21. 21. ―You can always count on Americans to do the right thing—after they‘ve tried everything else‖ —Winston Churchill. With respect to the current situation in Europe, try substituting Germans for Americans in the quote above and see how it looks. 21V810
  22. 22. What steps would enhance long-run investor confidence? › 19 percent solution? Fiscal plans that › Divided government a help or hindrance? would put U.S. › Where are the reasonable people? on solid footing › What is a fiscal conservative? European › Wages rose too fast in peripheral states measures that › Uncompetitive, overvalued real exchange rate address › What example do we have of restoring overvalued real competitiveness through deflation, austerity? exchange rates Chinese growth › Current policy is of the “Damn the torpedoes” not based on variety rising Invest./GDP › Will investments yield disappointing returns? ratio p.22V810
  23. 23. China‘s unbalanced economy % of GDP China: Consumption & Investment % of GDP 55 50 45 40 Fixed Investment Consumption 35 30 25 20 1980 1985 1990 1995 2000 2005 2010 Source: Datastream p.23V810
  24. 24. If you build it, will they come? Austria in Guangdong The ghost city of OrdosV810
  25. 25. www.russell.com

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