The Truth About Lying: A Collection ofMade-Up Statistics that Aren’t HelpingMade-Up Statistics that Aren’t HelpingJoe Morg...
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Today’s AgendaLies:Housing is Booming!Employment market has recoveredMarkets are stableDamned Lies:Austerity/Growth are th...
ConsumerActivity GovtBusinessInvestmentNetExports70% 20% 13% -3%Jobs HousingGDP:What’s Important?Jobs HousingSet by Policy...
Housing is Booming!80090010001100ThousandsHousing Starts5400500600700800ThousandsSource: Census Bureau, SVB Asset Management
0.02.04.06.08.010.012.014.03.04.05.06.07.08.09.0HomeSupply(months)HomeSales(Millions)Total Sales (new & existing) Existing...
Housing Starts – Best Since 2008!200.0250.0300.0350.01.52.02.53.0MillionsMillions70.050.0100.0150.00.00.51.01.5MillionsMil...
The Housing Market Key Economic DriverHomeownership Rate Housing Affordability Composite IndexHome Foreclosures - % of Tot...
Housing is Booming!80090010001100ThousandsHousing Starts9400500600700800ThousandsSource: Census Bureau, SVB Asset Management
Employment Has Recovered9.5%10.0%10.5%Unemployment Rate107.5%8.0%8.5%9.0%Source: BLS, SVB Asset Management
Unemployment and Nonfarm Payrolls0.0%5.0%10.0%15.0%20.0%-200.00.0200.0400.0600.0Thousands11-25.0%-20.0%-15.0%-10.0%-5.0%-1...
-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%-1,000.0-800.0-600.0-400.0-200.00.0200.0400.0600.0ThousandsNon-Farm Payroll (LHS) ...
Employment Acceleration NeededFewer Workers Supporting Greater Population Will the Recent Spike in Earnings Hold Up?Hires ...
Employment – Payrolls Not Keeping Up With Population290.0300.0310.0320.0330.0140.0150.0160.0170.0180.014250.0260.0270.0280...
Year Payrolls2008 -3.6 mm2009 -5.1 mm2010 +1.0 mm2011 +2.1 mm2012 +2.2 mmJob growth barelyoutpacing natural laborforce gro...
Employment Has Recovered9.5%10.0%10.5%Unemployment Rate167.5%8.0%8.5%9.0%Source: BLS, SVB Asset Management
The Markets – Yields Are Stable10.0%15.0%20.0%170.0%5.0%5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit Rat...
Bond Market Will the Momentum Continue?Since 2008, bond markets haveproduced four consecutive yearsof positive total and e...
The Markets – Rates Move in Trends10.0%15.0%20.0%190.0%5.0%5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit ...
3.0%4.0%5.0%6.0%The Markets – A Closer Look200.0%1.0%2.0%5-Yr UST 2-Yr UST O/N Deposit RateSource: Bloomberg, SVB Asset Ma...
The Markets – Spreads Are More Stable Than Rates4.0%5.0%6.0%7.0%Investment Grade Yield Spread210.0%1.0%2.0%3.0%4.0%Source:...
The Markets – Yields Are Stable10.0%15.0%20.0%220.0%5.0%5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit Rat...
The Markets – Stocks Are Stable10001200140016001800S&P 500230200400600800S&P 500Source: Bloomberg, SVB Asset Management
The Markets – VIX at historic lows304050608001000120014001600180024010200200400600800S&P 500 VIXSource: Bloomberg, SVB Ass...
The Markets – Defensive Sectors Leading the WayTelecomUtilities Cons Staples Healthcare25Source: Bloomberg, SVB Asset Mana...
The Markets – Defensive Sectors Leading the Way26Source: WSJ, April 30, 2013
S&P 500 Companies Room to AccelerateS&P 500 companies continue toconserve cash, although the level ofgrowth in cash balanc...
Federal Reserve Top GearAs the Federal Reserve embarkson more quantitative easing, theU.S. balance sheet continues togrow....
The Markets – Earnings Outlook Droops29Source: Census Bureau, SVB Asset Management
The Markets – Revenue Outlook Droops, Too!30Source: Census Bureau, SVB Asset Management
The Markets – Stocks Are Stable10001200140016001800S&P 500310200400600800S&P 500Source: Bloomberg, SVB Asset Management
“Austerity” or “Growth” Are Our Only Options32
Austerity or Growth: Hauser’s Law15%20%25%30%8,000.010,000.012,000.014,000.016,000.018,000.0Millions33Source: US Treasury,...
Austerity vs. Growth: Spending = Taxes2000250030003500400034Source: US Treasury, SVB Asset Management050010001500Federal R...
Austerity vs. Growth: Obama Gets No Revenue Growth6.0%8.0%10.0%12.0%14.0%16.0%6.0%8.0%10.0%12.0%14.0%16.0%Growth of Expend...
Only when it becomes too costly NOT to work together6.0%7.0%8.0%9.0%10.0%10 Year TreasuryWhen Will Politicians Work Togeth...
“Austerity” or “Growth” Are Our Only Options37
The Fed – Low Rates and QE Will Create a Full Recovery4.0%5.0%6.0%7.0%Fed Funds Rate38Source: Bloomberg, SVB Asset Managem...
1.01.21.41.61.82.0But Money Isn’t Moving Through the SystemSource: Federal Reserve Bank of St. Louis, Bloomberg, SVB Asset...
Federal Reserve Trying to Get on TrackThe Fed has continued with itsQE3 program. As announcedin the December FOMCmeeting, ...
What Is the Purpose of QE?2.0%3.0%4.0%TIPs Inflation Estimate41Source: Bloomberg, SVB Asset Management-1.0%0.0%1.0%2.0%1/5...
4.05.06.07.0The Feds Balance Sheet ($ Trillions)Size of the Fed’s Balance SheetSource: The Federal Reserve, SVB Asset Mana...
Who Is Benefiting From Low Rates and QE?43
The Fed – Low Rates and QE Will Create a Full Recovery4.0%5.0%6.0%7.0%Fed Funds Rate44Source: Bloomberg, SVB Asset Managem...
Europe – The Euro Must Survive45Source: Census Bureau, SVB Asset Management
-8.0%-4.0%0.0%4.0%8.0%UK Germany France Italy SpainEurope Could Use a BoostGDPThe euro zone economy is poised to contract ...
1.11.21.31.41.51.61.71.31.41.51.61.7EUR/USDGBP/USDGBP EUREurope What Will Put the Brakes on the Euro?Currency PerformanceT...
Mobility rates are about 1/10th of United States level.20.0%25.0%30.0%Unemployment RatesLabor Immobility: People Will Not ...
Capital is Immobile – By Regulatory Design!Multiple banking regulators encourage safety within countries (ECB tothe rescue...
A single monetary policy causes more harm than goodNo adjustment across economies at varying stagesNegates half the tools ...
Europe – The Euro Must Survive51Source: Census Bureau, SVB Asset Management
Credit Quality Is Defined By S&P, Moody’s and Fitch52Source: Census Bureau, SVB Asset Management
Considering investment grade alternatives…“Old Normal” “New Normal”Treasury AAA Highly Securitized AAAAA Treasury AATreasu...
Issuer Name Duration Limit S&P Long-term Moodys Long-term Fitch Long-termAT&T Corp 1 Year A- A2 ARio Tinto Plc 1 Year A- A...
Credit Quality Is Defined By S&P, Moody’s and Fitch55Source: Census Bureau, SVB Asset Management
The Good News: There Won’t Be Another Recession Soon56
Corporate Balance SheetsBank Balance SheetsConsumer Balance SheetsExcess Cushion Against Potential Hard TimesEnergy Indepe...
DisclosuresThis material, including without limitation the statistical information herein, is provided for informational p...
SVB Asset ManagementJoe Morgan, CFAChief Investment Officer, SVB Asset Managementjmorgan@svb.com@SVBJoeMorganWeekly news s...
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The Truth About Lying: An Economic Analysis

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A collection of economic statistics that are not helping the movement toward recovery.

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The Truth About Lying: An Economic Analysis

  1. 1. The Truth About Lying: A Collection ofMade-Up Statistics that Aren’t HelpingMade-Up Statistics that Aren’t HelpingJoe Morganjmorgan@svb.com@SVBJoeMorgan
  2. 2. 2
  3. 3. Today’s AgendaLies:Housing is Booming!Employment market has recoveredMarkets are stableDamned Lies:Austerity/Growth are the only optionsLow Rates and QE will create a full recoveryLow Rates and QE will create a full recoveryStatistics:The Euro must surviveCredit quality is defined by Moody’s/S&P/FitchCalling for another recession would be a lie too…
  4. 4. ConsumerActivity GovtBusinessInvestmentNetExports70% 20% 13% -3%Jobs HousingGDP:What’s Important?Jobs HousingSet by PolicyCannot MoveSignificantly inShort Run
  5. 5. Housing is Booming!80090010001100ThousandsHousing Starts5400500600700800ThousandsSource: Census Bureau, SVB Asset Management
  6. 6. 0.02.04.06.08.010.012.014.03.04.05.06.07.08.09.0HomeSupply(months)HomeSales(Millions)Total Sales (new & existing) Existing Home SupplyThe Housing Market Key Economic DriverHome Sales & SupplyHousing Starts Home Prices – Indexed to 100Housing was a main driver of economic growth in thefourth quarter with residential fixed investmentincreasing 17.6 percent.Home sales, both new and existing, continued theirupward trend. Sales of existing homes hit a three-yearhigh at an annual pace of 4.98 million in February.Greater housing demand combined with lower homesupply drove home values higher. As shown by theS&P/Case-Shiller index of property values, pricesclimbed over 8 percent on a year-over-year basis intheir 20-city composite – the largest gain since 2006.Source: National Association of Home Builders (NAHB), Census.gov, S&P, and SVB Asset Management.0.00.51.01.52.02.5MillionsHousing Starts901101301501701902102302502002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Case Schiller 20 City FHFA Purchase Median Home PriceHome Prices – Indexed to 1006SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 14)
  7. 7. Housing Starts – Best Since 2008!200.0250.0300.0350.01.52.02.53.0MillionsMillions70.050.0100.0150.00.00.51.01.5MillionsMillionsHousing Starts PopulationSource: Census Bureau, SVB Asset Management
  8. 8. The Housing Market Key Economic DriverHomeownership Rate Housing Affordability Composite IndexHome Foreclosures - % of Total Loans62.0%64.0%66.0%68.0%70.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%0.050.0100.0150.0200.0250.0AffordabilityIndexHousing Affordability 30 Year Fixed Mortgage RatesSource: Census.gov, National Association of Realtors and SVB Asset Management.Home Foreclosures - % of Total LoansThe homeownership rate hovered around 65.5 percentlast year, down from its peak of 69 percent in 2004, aswe saw a shift towards renting over the past few years.Record low interest rates caused by easy monetarypolicy and depressed home values prompted morehome buyers to enter the market last year.Approximately a third of sales are cash buyers,however, and investors compromised the majority ofthese sales.80.0%1.0%2.0%3.0%4.0%5.0%SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 15)
  9. 9. Housing is Booming!80090010001100ThousandsHousing Starts9400500600700800ThousandsSource: Census Bureau, SVB Asset Management
  10. 10. Employment Has Recovered9.5%10.0%10.5%Unemployment Rate107.5%8.0%8.5%9.0%Source: BLS, SVB Asset Management
  11. 11. Unemployment and Nonfarm Payrolls0.0%5.0%10.0%15.0%20.0%-200.00.0200.0400.0600.0Thousands11-25.0%-20.0%-15.0%-10.0%-5.0%-1,000.0-800.0-600.0-400.0-200.0ThousandsNon-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)Source: BLS, SVB Asset Management
  12. 12. -15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%-1,000.0-800.0-600.0-400.0-200.00.0200.0400.0600.0ThousandsNon-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)Employment Acceleration NeededEmployment Landscape0.02,000.04,000.06,000.08,000.010,000.0104,000.0106,000.0108,000.0110,000.0112,000.0114,000.0116,000.0118,000.0120,000.0122,000.0124,000.0ThousandsThousandsFull Time Employment (LHS) Part Time for Economic Reasons (RHS)Full-Time EmploymentLong Term Unemployment0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%Recession Period Unemployed 27 Weeks and OverSource: U.S. Bureau of Labor and Statistics (BLS), SVB Asset Management, National Bureau of Economic Research (NBER).Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that theywant and are available for a job and have looked for work sometime in the past 12 months.Long Term Unemployment Unemployment rate in the U.S. decreased to 7.7 percent in February2013 from 7.9 percent in January 2013, driving the rate down to itslowest in over four years.Total nonfarm payroll employment increased by 236,000 in February.The main sectors that added jobs were professional and businessservices, construction, and healthcare.The number of long-term unemployed has not improved very muchand remained close to 4.8 million in February, almost 40.2 percent ofthe unemployed are long-term .Labor force participation continues to be low, as workers opt for earlyretirement or stop searching entirely.12SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 8)
  13. 13. Employment Acceleration NeededFewer Workers Supporting Greater Population Will the Recent Spike in Earnings Hold Up?Hires and Quits Remain Depressed57.0%59.0%61.0%63.0%65.0%3.0%5.0%7.0%9.0%11.0%Unemployment Rate (LHS)Employment to Population Rate (RHS)0.0%1.0%2.0%3.0%4.0%5.0%62.0%63.0%64.0%65.0%66.0%67.0%68.0%Labor Force Participation Rate (LHS)Avg Hourly Earnings Growth (RHS)Source: U.S. Bureau of Labor Statistics (BLS), SVB Asset Management.Hires and Quits Remain DepressedWorkers as a percent of the total population remaindepressed even as the unemployment rate declinesdue to people dropping out.Average hourly earnings growth increased in recentquarter, but total hirings have yet to turn upward.Turnover, as measured by job hires and quitsremains depressed vs. recent growth trends.0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%Job Hire Rate Job Quit RateSVB Asset Management | Quarterly Economic Report Q1 2013 (Page 9)13
  14. 14. Employment – Payrolls Not Keeping Up With Population290.0300.0310.0320.0330.0140.0150.0160.0170.0180.014250.0260.0270.0280.0110.0120.0130.0140.0Nonfarm Payrolls (lhs) Population (rhs)Source: BLS, SVB Asset Management
  15. 15. Year Payrolls2008 -3.6 mm2009 -5.1 mm2010 +1.0 mm2011 +2.1 mm2012 +2.2 mmJob growth barelyoutpacing natural laborforce growth of ~ 1mmjobs per yearEmployment Growth About 6mm Jobs Behind2012 +2.2 mmGross -3.4 mm5 Yrs Labor ForceGrowth-5 mmTo get back to 4.9%UnemploymentNeed 8.4 mm jobsimmediatelyTo reach 6.5%unemploymentNeed ~ 6 mm jobsimmediatelySource: Bloomberg, SVB Asset ManagementSource: BLS, SVB Asset Management15
  16. 16. Employment Has Recovered9.5%10.0%10.5%Unemployment Rate167.5%8.0%8.5%9.0%Source: BLS, SVB Asset Management
  17. 17. The Markets – Yields Are Stable10.0%15.0%20.0%170.0%5.0%5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit RateSource: Bloomberg, SVB Asset Management
  18. 18. Bond Market Will the Momentum Continue?Since 2008, bond markets haveproduced four consecutive yearsof positive total and excessreturns.Bonds exhibited positiveperformance led by Banking,Insurance, and Financial Servicessectors. U.S. Treasuries had theirthird worst return in the last 16years at 2.16 percent, comparedto 2008,which had the best return at 13.98percent.The biggest long-term risk is areversal in central bank policies.At record low yields, total returnswould be significantly exposed toany tightening policy. However, 5.4%6.0%6.5%7.2%7.3%7.5%9.6%12.9%13.1%0.0%1.6%7.1%8.9%9.2%9.9%9.9%10.2%11.8%15.3%15.0%2.2%3.0%AutomotiveServicesBasic IndustryMediaTelecommunicationsEnergyFinancial ServicesInsuranceBankingUS TreasuryUS AgencyU.S.U.S.any tightening policy. However,this should not be a concern for2013.1.3%2.5%7.8%2.4%4.2%4.2%4.5%5.2%2.6%3.2%9.1%4.7%6.7%7.0%7.1%7.6%0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%MBSABSCMBSTechnology & ElectronicsConsumer Non-CyclicalConsumer CyclicalHealthcareCapital GoodsTotal Return % 12-mo Excess Return % 12-moSource: Bloomberg, BoAML and SVB Asset Management.SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 22)18
  19. 19. The Markets – Rates Move in Trends10.0%15.0%20.0%190.0%5.0%5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit RateSource: Bloomberg, SVB Asset Management
  20. 20. 3.0%4.0%5.0%6.0%The Markets – A Closer Look200.0%1.0%2.0%5-Yr UST 2-Yr UST O/N Deposit RateSource: Bloomberg, SVB Asset Management
  21. 21. The Markets – Spreads Are More Stable Than Rates4.0%5.0%6.0%7.0%Investment Grade Yield Spread210.0%1.0%2.0%3.0%4.0%Source: Bloomberg, SVB Asset Management
  22. 22. The Markets – Yields Are Stable10.0%15.0%20.0%220.0%5.0%5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit RateSource: Bloomberg, SVB Asset Management
  23. 23. The Markets – Stocks Are Stable10001200140016001800S&P 500230200400600800S&P 500Source: Bloomberg, SVB Asset Management
  24. 24. The Markets – VIX at historic lows304050608001000120014001600180024010200200400600800S&P 500 VIXSource: Bloomberg, SVB Asset Management
  25. 25. The Markets – Defensive Sectors Leading the WayTelecomUtilities Cons Staples Healthcare25Source: Bloomberg, SVB Asset ManagementEnergyMaterialsIndustrials FinancialsCons Discretionary
  26. 26. The Markets – Defensive Sectors Leading the Way26Source: WSJ, April 30, 2013
  27. 27. S&P 500 Companies Room to AccelerateS&P 500 companies continue toconserve cash, although the level ofgrowth in cash balances hastapered off in recent quarters.On the other hand, S&P 500companies have greatly reducedtheir leverage ratios, likely due tolimited capital and investmentopportunities.Companies have plenty of drypowder on their balance sheets,both in cash and further leveragingup, to take advantage ofDebt to Equity Ratio and Cash on Balance of S&P 500 Companies$150.0$200.0$250.0$300.0$350.0155.0%175.0%195.0%215.0%235.0%Billionsup, to take advantage ofopportunities if global economiesimprove.Source: Bloomberg and SVB Asset Management.$0.0$50.0$100.0$150.075.0%95.0%115.0%135.0%Total Debt to Total Equity (LHS) Cash & Equivalents (RHS)SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 26)27
  28. 28. Federal Reserve Top GearAs the Federal Reserve embarkson more quantitative easing, theU.S. balance sheet continues togrow.At the current pace of $85 billiondollars per month of combinedmortgage backed securities andlonger-term treasury purchases,the Fed’s balance sheet will beclose to $4 trillion dollars by yearend. That is more than quadruplewhere the balance sheet was at thestart of the financial crisis.Recent Balance Sheet Trends$1.5$2.0$2.5$3.0$3.5TrillionsOther Fed Reserve AssetsCentral Liquidity SwapsOtherAuroraMaiden Lane IIIMaiden Lane IIMaiden Lane ITALFAIGSeasonal CreditDespite all the effort by the FederalReserve with monetary policy, theU.S recovery is yet to pick upspeed.Source: Federal Reserve and SVB Asset Management.28$0.0$0.5$1.0$1.5Secondary CreditPrimary CreditOther LoansTreasury Currency OutstandingSpecial DrawingGold StockMBSFederal Agency Debt SecuritiesU.S. Treasury SecuritiesSVB Asset Management | Quarterly Economic Report Q1 2013 (Page 17)
  29. 29. The Markets – Earnings Outlook Droops29Source: Census Bureau, SVB Asset Management
  30. 30. The Markets – Revenue Outlook Droops, Too!30Source: Census Bureau, SVB Asset Management
  31. 31. The Markets – Stocks Are Stable10001200140016001800S&P 500310200400600800S&P 500Source: Bloomberg, SVB Asset Management
  32. 32. “Austerity” or “Growth” Are Our Only Options32
  33. 33. Austerity or Growth: Hauser’s Law15%20%25%30%8,000.010,000.012,000.014,000.016,000.018,000.0Millions33Source: US Treasury, SVB Asset Management0%5%10%-2,000.04,000.06,000.08,000.0MillionsUS Government Expenditures (lhs) US GDP (lhs) As a % (rhs)
  34. 34. Austerity vs. Growth: Spending = Taxes2000250030003500400034Source: US Treasury, SVB Asset Management050010001500Federal Revenue Federal Expenses
  35. 35. Austerity vs. Growth: Obama Gets No Revenue Growth6.0%8.0%10.0%12.0%14.0%16.0%6.0%8.0%10.0%12.0%14.0%16.0%Growth of Expenditures Growth of Revenues35Source: US Treasury, SVB Asset Management0.0%2.0%4.0%6.0%Carter Reagan Bush 41 Clinton Bush 43 Obama0.0%2.0%4.0%6.0%Carter Reagan Bush 41 Clinton Bush 43 Obama
  36. 36. Only when it becomes too costly NOT to work together6.0%7.0%8.0%9.0%10.0%10 Year TreasuryWhen Will Politicians Work Together?Source: Bloomberg, SVB Asset Management0.0%1.0%2.0%3.0%4.0%5.0%6.0%36
  37. 37. “Austerity” or “Growth” Are Our Only Options37
  38. 38. The Fed – Low Rates and QE Will Create a Full Recovery4.0%5.0%6.0%7.0%Fed Funds Rate38Source: Bloomberg, SVB Asset Management0.0%1.0%2.0%3.0%4.0%
  39. 39. 1.01.21.41.61.82.0But Money Isn’t Moving Through the SystemSource: Federal Reserve Bank of St. Louis, Bloomberg, SVB Asset Management390.00.20.40.60.8Money Multiplier
  40. 40. Federal Reserve Trying to Get on TrackThe Fed has continued with itsQE3 program. As announcedin the December FOMCmeeting, the Committee willcontinue with purchases ofmortgage backed securities atthe pace of $40 billion permonth and longer-termtreasury securities at the paceof $45 billion a month.The Fed is using theunemployment rate andinflation rate as thresholds tomonitor the need for monetaryFed Inflation, Employment Thresholds Worry Two of the Fed PresidentsU.S. Unemployment Target 6.5%Core PCE Threshold 2.5%4.0%6.0%8.0%10.0%12.0%1.0%2.0%3.0%monitor the need for monetarypolicy. The unemploymenttarget is set at 6.5 percent andlooser monetary policy willcontinue as long as inflationremains below 2.5 percent.The U.S. economy has a waysto go before reaching 6.5%unemployment, estimates arefor another 2 years beforereaching the target. Meanwhile,inflation remains muted.Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS) and SVB Asset Management.SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 18)40U.S. Unemployment Target 6.5%0.0%2.0%0.0%Core PCE (LHS) Core PCE Threshold (LHS)U.S. Unemployment Rate (RHS) U.S. Unemployment Target (RHS)
  41. 41. What Is the Purpose of QE?2.0%3.0%4.0%TIPs Inflation Estimate41Source: Bloomberg, SVB Asset Management-1.0%0.0%1.0%2.0%1/5/2007 1/5/2008 1/5/2009 1/5/2010 1/5/2011 1/5/2012 1/5/2013QE1QE2QEternity
  42. 42. 4.05.06.07.0The Feds Balance Sheet ($ Trillions)Size of the Fed’s Balance SheetSource: The Federal Reserve, SVB Asset Management0.01.02.03.04.042
  43. 43. Who Is Benefiting From Low Rates and QE?43
  44. 44. The Fed – Low Rates and QE Will Create a Full Recovery4.0%5.0%6.0%7.0%Fed Funds Rate44Source: Bloomberg, SVB Asset Management0.0%1.0%2.0%3.0%4.0%
  45. 45. Europe – The Euro Must Survive45Source: Census Bureau, SVB Asset Management
  46. 46. -8.0%-4.0%0.0%4.0%8.0%UK Germany France Italy SpainEurope Could Use a BoostGDPThe euro zone economy is poised to contract by 0.5 percent ormore in 2013, continuing the lackluster performance of theprevious two years. Even Germany appears to be in danger ofslipping into a recession.Italy was downgraded by Fitch recently, while talk of a tax onbank deposits in Cyprus caused a ripple effect across Europe inmid-March. These types of occurrences illustrate the currentfragility of sentiment in Europe.The ECB is resisting further rate cuts for now, but will cut laterthis year.What is needed by most struggling economies in Europe iseconomic growth to boost tax revenues and slow soaringunemployment . However, the deficit situation has handcuffedfiscal spending and retail spending is unlikely to rise unlessconfidence does.Consensus GDP ForecastSource: Bloomberg and SVB Asset Management.confidence does.Growth forecasts for the major European economies are ifanything overly optimistic; it is hard to pinpoint a potentialcatalyst for growth in this environment.-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%UK Germany France Italy SpainConsensus GDP ForecastSVB Asset Management | Quarterly Economic Report Q1 2013 (Page 32)46
  47. 47. 1.11.21.31.41.51.61.71.31.41.51.61.7EUR/USDGBP/USDGBP EUREurope What Will Put the Brakes on the Euro?Currency PerformanceThe EUR is poised to go lower, weighed down by concernsabout the debt crisis, a widening recession and continuingpolitical uncertainty.The GBP registered gains against the EUR for several months,but has begun to lose ground recently, as the economystruggles to recover from the economic downturn.A lower EUR is in Europe’s interest, despite occasional talk tothe contrary. It remains one of the few ways to stimulate growth,using a weak currency to fuel export competitiveness.The EUR does not require a break up of the euro zone to headlower; economic and political uncertainty coupled withcontinuing subpar growth is sufficient to cause a further fall.10Y Sovereign YieldsSource: Bloomberg and SVB Asset Management.Lower yields would normally help boost economic activity, butsovereign spreads to Germany remain wide. As a result, thecountries that would really benefit from lower borrowing costsdon’t reap the benefit.Longer term, the EUR could recover against the USD, assumingthe euro zone survives this crisis. Europe has a strongerbalance of payments position than the U.S. and a central bankwith a single mandate of controlling inflation, which should leadto a less expansionary monetary policy. However, as JohnMaynard Keynes famously said, “In the long run we are alldead”.0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%ES FR IT DE10Y Sovereign YieldsSVB Asset Management | Quarterly Economic Report Q1 2013 (Page 33)47
  48. 48. Mobility rates are about 1/10th of United States level.20.0%25.0%30.0%Unemployment RatesLabor Immobility: People Will Not Move Across BordersSource: “Geographic Mobility in the European Union” European Commission, SVB Asset Management0.0%5.0%10.0%15.0%NevadaN. Dakota48
  49. 49. Capital is Immobile – By Regulatory Design!Multiple banking regulators encourage safety within countries (ECB tothe rescue?)Banks encouraged to buy debt issued by host country but avoid othersWhat About Capital?Banks encouraged to buy debt issued by host country but avoid othersBanks encouraged to “sweep” cash out of risky countries within theeurozone49
  50. 50. A single monetary policy causes more harm than goodNo adjustment across economies at varying stagesNegates half the tools government has to affect the economyActs like a “pegged” currency (All currencies eventually become“unpegged”)But What Is Really Wrong?“unpegged”)The euro is a fine political accomplishment, but a horrid economicsituation50
  51. 51. Europe – The Euro Must Survive51Source: Census Bureau, SVB Asset Management
  52. 52. Credit Quality Is Defined By S&P, Moody’s and Fitch52Source: Census Bureau, SVB Asset Management
  53. 53. Considering investment grade alternatives…“Old Normal” “New Normal”Treasury AAA Highly Securitized AAAAA Treasury AATreasury Downgrade Effectively Shifts Entire ScaleCorp A Corp ABBB BBBThe Treasury curve is the “benchmark” for pricing and quality in the corporate bond market.The flood of downgrades in ‘08 – ’11 was a “resetting” of the credit scale by the NRSROs.
  54. 54. Issuer Name Duration Limit S&P Long-term Moodys Long-term Fitch Long-termAT&T Corp 1 Year A- A2 ARio Tinto Plc 1 Year A- A3 A-Vodafone Group PLC 1 Year A- A3 A-Lowes Companies, Inc 1 Year A- A3 WDApache Corp 1 Year A- A3 BBB+Campbell Soup Co. 1 Year BBB+ A2 A-Bank of America N.A. 1 Year A A3 ASampling of A3/A- IssuersBank of America N.A. 1 Year A A3 AGoldman Sachs Group Inc 1 Year A- A3 AMorgan Stanley 1 Year A- Baa1 ACitigroup Inc 1 Year A- Baa2 AAnheuser-Busch InBev NV 2 Years A A3 AAmerican Express 2 Years A- A2 A+Target Corporation 2 Years A+ A2 A-JPM Subordinated Debt 2 Years A- A3 AWFC Subordinated Debt 2 Years A A3 A+
  55. 55. Credit Quality Is Defined By S&P, Moody’s and Fitch55Source: Census Bureau, SVB Asset Management
  56. 56. The Good News: There Won’t Be Another Recession Soon56
  57. 57. Corporate Balance SheetsBank Balance SheetsConsumer Balance SheetsExcess Cushion Against Potential Hard TimesEnergy Independence….?Our Culture of Consumerism (GDP is 70% Consumption)57
  58. 58. DisclosuresThis material, including without limitation the statistical information herein, is provided for informational purposes only. The material isbased in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified byus and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax,investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant andspecific professional advice before making any investment decision. Nothing relating to the material should be construed as asolicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB FinancialGroup. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank,and may lose value.All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and its affiliates and is forinformational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied ordistributed to any other party, without the prior express written permission of SVB Asset Management. All trademarks, service marksand logos used in this material are trademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliatesor other entities.58
  59. 59. SVB Asset ManagementJoe Morgan, CFAChief Investment Officer, SVB Asset Managementjmorgan@svb.com@SVBJoeMorganWeekly news summary and commentary: www.svb.com/ciovantage59

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