Fixed-income strategyA tour of inflation . . .. . .and why the world (& the UK) is not rosyMarch 2011Andrew Roberts“The ri...
CLIENTLOGORBS000002Risky assets doing fine… on. Well, they were up to last week5560657075808590Feb-09 Jul-09 Dec-09 May-10...
RBS000003Data surprises are already at all time highs. Worrying for equity bullsSurprise-2.0-1.5-1.0-0.50.00.51.01.5Mar-02...
RBS000004What about the oil effect? About to hit6810121416182067 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 ...
RBS000005The rate of change can count . . . beware sharp rises-75%-55%-35%-15%5%25%45%65%85%105%125%Dec-1961May-1967Nov-19...
RBS000006Real wages the key in H2. Already plunging, falling further in zones withspare labour-3-2-101234567Mar-71Mar-74Ma...
RBS000007Eg US unemployment is high. Extraordinarily high in some measuresSource: Courtesy of ShadowStats.comThe augmented...
RBS000008EMU: where is inflation going to come from? Wages low, demands high– Negotiated wages outlook weak. Was at weakes...
RBS000009What about the UK? In poor shape, according to balance sheet-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0Mar-88 ...
RBS0000010Risk assets are recovering, but UK production is notUK production hardly bounced whatsoever, despite -26% sterli...
RBS0000011What about the UK? Retail sales news mixedRetail sales(ex. auto) - ChangeYoY-8-6-4-202468Feb-05Jul-05Dec-05May-0...
RBS0000012UK fiscal tightening set to biteGovernment balances(%of GDP)-12.0-10.0-8.0-6.0-4.0-2.00.02.0AustraliaCanadaFranc...
RBS0000013Sticky UK inflation, yes … taxes & external influences-101234562004 2005 2006 2007 2008 2009 2010 2011UKEMUHICP ...
RBS0000014UK CPI forecasts-2.00-1.000.001.002.003.004.005.006.00Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-...
RBS0000015What are inflation options telling you? That the UK is seen to have aninflation problemEMU1520253035404550Feb-10...
RBS0000016Bank balance sheets not fixed. Credit to tighten for yearsThe knock-out punch that deleveraging delivers. 6 year...
RBS0000017No-one wants any credit when you are deleveraging . . .UK: more credit available UK: that nobody wants
RBS0000018UK rates already discounted a lot higherUK rates already seen to rise significantly01234561 3 5 7 9 11 13 15 17 ...
RBS0000019EMU debt sustainability1.72.7 2.8 2.8 2.93.23.4 3.53.7 3.74.35.14.20123456GreecePortugalHollandGermanySpainItaly...
RBS0000020Nominal growth minus long-term interest rates-8-6-4-20246GreeceIrelandPortugalSpainItalyFinlandNetherlandsBelgiu...
RBS0000021A Fiscal Risk IndexSource: Maplecroft, February 2011“…identify countries that will come under increasing economi...
RBS0000022Uncomfortable bedfellowsChanges in public debt, 2008-2011, & 2008-2015Source: IMF Fiscal Monitor, November 2010E...
RBS0000023UK funding needs coming down. From a high level, but falling0501001502002502009/10 2010/11 2011/12 2012/13 2013/...
RBS0000024UK: logically, doing what it says on the tinGilts have just been on one big round trip (10-yr spread to bunds)-8...
RBS0000025http://strategy.rbsm.com/disclosures - View this page for additional Important Disclosure Information for Resear...
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A Tour of Inflation . . . . . .and why the world (& the UK) is not Rosy

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A Tour of Inflation . . . . . .and why the world (& the UK) is not Rosy

  1. 1. Fixed-income strategyA tour of inflation . . .. . .and why the world (& the UK) is not rosyMarch 2011Andrew Roberts“The rise and fall of civilizations are linked to demographic trends” (Source: CIA)
  2. 2. CLIENTLOGORBS000002Risky assets doing fine… on. Well, they were up to last week5560657075808590Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11AUD/JPY-2000-1500-1000-500050091 93 95 97 99 01 03 05 07 09 11RBS Risk appetite indicatorRisk-offRisk-on1060110160210Feb-09 Aug-09 Feb-10 Aug-10 Feb-110102030405060Treasury Option Volatility EstimateVIX Index (rhs)020406080100120140Jun-08 Jan-09 Aug-09 Mar-10 Oct-10EUR FRA/OIS SPRD 3M,4th futureGBP FRA/OIS SPRD 3M,4th futureUSD FRA/OIS SPRD 3M,4th future2030405060Feb-07 Nov-07 Aug-08May-09Feb-10 Nov-10World Equity0200400600800100012001400Feb-07 Dec-07 Oct-08 Aug-09 Jun-10US Industrial 10-yrBenchmark - USTreasury 10-yrB rated industrials
  3. 3. RBS000003Data surprises are already at all time highs. Worrying for equity bullsSurprise-2.0-1.5-1.0-0.50.00.51.01.5Mar-02 Mar-04 Mar-06 Mar-08 Mar-10RBS data surprise index, sample of USA & Germany front line data.Normalised surprise indices, monthly data to end-Feb 2011
  4. 4. RBS000004What about the oil effect? About to hit6810121416182067 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11USCPI UrbanConsumersGasoline/ UShourlywage900100011001200130014001500Feb-06Aug-06Feb-07Aug-07Feb-08Aug-08Feb-09Aug-09Feb-10Aug-10Feb-1100.511.522.533.544.55EU27gasoilpumppriceindexGerman2-yryieldDemand drivenDemanddriven: up tonow
  5. 5. RBS000005The rate of change can count . . . beware sharp rises-75%-55%-35%-15%5%25%45%65%85%105%125%Dec-1961May-1967Nov-1972May-1978Oct-1983 Apr-1989Oct-1994 Mar-2000Sep-2005-2-101234567Oil PriceYoY%change WorldGDPgrowthYoY%change(rhs)-75.00%-25.00%25.00%75.00%125.00%175.00%225.00%275.00%325.00%375.00%Dec-1961May-1967Nov-1972May-1978Oct-1983 Apr-1989 Oct-1994 Mar-2000Sep-2005Mar-2011-3-2-1012345678Oil Price2yr change WorldGDPgrowthYoY%change(rhs)
  6. 6. RBS000006Real wages the key in H2. Already plunging, falling further in zones withspare labour-3-2-101234567Mar-71Mar-74Mar-77Mar-80Mar-83Mar-86Mar-89Mar-92Mar-95Mar-98Mar-01Mar-04Mar-07Mar-10Germany, Realcompensation rate,total economy, yoyUnited States, Realcompensation rate,total economy, yoy-6-4-20246810Mar-71Mar-74Mar-77Mar-80Mar-83Mar-86Mar-89Mar-92Mar-95Mar-98Mar-01Mar-04Mar-07Mar-10United Kingdom, Real compensation rate,total economy, yoySweden, Real compensation rate, totaleconomy, yoyThe big theme (even though no-one is discussing it). Spare labour capacity = no wage bargaining
  7. 7. RBS000007Eg US unemployment is high. Extraordinarily high in some measuresSource: Courtesy of ShadowStats.comThe augmented U-6 rate includes long-term discouraged workers (defined out ofexistence in 1994). U-6 only includes short-term discouraged workersUnemployment Rate024681012Jan-50 Jan-58 Jan-66 Jan-74 Jan-82 Jan-90 Jan-98 Jan-06% Unemployed for >6m01020304050Jan-48 Jan-57 Jan-66 Jan-75 Jan-84 Jan-93 Jan-02 Jan-11
  8. 8. RBS000008EMU: where is inflation going to come from? Wages low, demands high– Negotiated wages outlook weak. Was at weakest ever last month– Parts of EMU approaching deflation already– Just popped up to due to fiscal tightening = higher VAT/taxes (notwithstanding oil)Source: RBS Euro economics00.511.522.533.5497 98 99 00 01 02 03 04 05 06 07 08 09 10 11EMU Negotiated Wages, % yoy EMU Core inflation, % yoy97-10 avg97-10 avg0.00.51.01.52.02.53.03.54.04.597 98 99 00 01 02 03 04 05 06 07 08 09 10 11Ger, Fra, Ita, Neth, Bel, Aut, Fin, LuxSpa, Gre, Por, Ire, Cyp, Mal, Svn, SvkTaxes77.588.599.51010.511Jan-91 Mar-95 Apr-99 May-03 Jul-07 Aug-11012345Eurozone UnemploymentEurostat Harmonised Index of Consumer PricesGerman wage claims in 2011Sector demandConstruction industry 5.9%Chemicals 6-7%Deutsche Telekom 6.5%Food and Catering 5-6%Public services €50 + 3%Coal industry Real wage riseTextiles 5%Insurance 6%Volkswagan 6%
  9. 9. RBS000009What about the UK? In poor shape, according to balance sheet-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.08.0Mar-88 Nov-90 Aug-93 May-96 Feb-99 Nov-01 Aug-04 May-07 Jan-10Government HouseholdsPrivatenon-financial corporations UnitedKingdomtorestoftheworldHouseholdfinancial balanceis negative35404550556065Mar-06Jul-06Nov-06Mar-07Jul-07Nov-07Mar-08Jul-08Nov-08Mar-09Jul-09Nov-09Mar-10Jul-10Nov-10USISMNon-Manufacturing UKServicesPMIEMUServicesPMI
  10. 10. RBS0000010Risk assets are recovering, but UK production is notUK production hardly bounced whatsoever, despite -26% sterling trade-weighted fallQ307 to Q40860708090100110Mar-78 Mar-82 Mar-86 Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10-15-10-5051015Industrial Production Change (YoY)
  11. 11. RBS0000011What about the UK? Retail sales news mixedRetail sales(ex. auto) - ChangeYoY-8-6-4-202468Feb-05Jul-05Dec-05May-06Oct-06Mar-07Aug-07Jan-08Jun-08Nov-08Apr-09Sep-09Feb-10Jul-10Dec-10UK EMU USBetter? No, with BRC retail sales at -0.4%yoy
  12. 12. RBS0000012UK fiscal tightening set to biteGovernment balances(%of GDP)-12.0-10.0-8.0-6.0-4.0-2.00.02.0AustraliaCanadaFranceGermanyGreeceItalyNetherlandsPortugalSpainSwedenSwitzerlandUnitedKingdomEuroareaTotalOECD2010 2011 2012
  13. 13. RBS0000013Sticky UK inflation, yes … taxes & external influences-101234562004 2005 2006 2007 2008 2009 2010 2011UKEMUHICP constant tax, % y/y859095100105110Feb-06 Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10US Composite Leading Ind.Total LeadingUK Composite Leading Ind.Total LeadingEMU Composite Leading Ind.Total LeadingJapan Composite Leading Ind.Total LeadingSpot the odd man out: before the turmoil, UK was showing weaker momentum (data up to end-2010)Source: OECD
  14. 14. RBS0000014UK CPI forecasts-2.00-1.000.001.002.003.004.005.006.00Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10Jul-10Jan-11Jul-11Jan-12Jul-12RPIRPI forecastCPICPI forecastil13s
  15. 15. RBS0000015What are inflation options telling you? That the UK is seen to have aninflation problemEMU1520253035404550Feb-10Mar-10Apr-10May-10Jun-10Jul-10Aug-10Sep-10Oct-10Nov-10Dec-10Jan-11Feb-11Mar-11<1%Between1%and2%>3%Probability of yoy inflation at various levelsin 10 yearsUK0102030405060708090Feb-10Mar-10Apr-10May-10Jun-10Jul-10Aug-10Sep-10Oct-10Nov-10Dec-10Jan-11Feb-11Mar-11<1%Between1%and2%>3%US10203040506070Feb-10Mar-10Apr-10May-10Jun-10Jul-10Aug-10Sep-10Oct-10Nov-10Dec-10Jan-11Feb-11Mar-11<1%Between1%and2%>3%
  16. 16. RBS0000016Bank balance sheets not fixed. Credit to tighten for yearsThe knock-out punch that deleveraging delivers. 6 years of deleveraging?Bank credit to the private sector (% of nominal GDP)
  17. 17. RBS0000017No-one wants any credit when you are deleveraging . . .UK: more credit available UK: that nobody wants
  18. 18. RBS0000018UK rates already discounted a lot higherUK rates already seen to rise significantly01234561 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49GBP USD EUR1yr swap rates, starting at various forwards
  19. 19. RBS0000019EMU debt sustainability1.72.7 2.8 2.8 2.93.23.4 3.53.7 3.74.35.14.20123456GreecePortugalHollandGermanySpainItalyFinlandBelgiumFranceAustriaIrelandUSAUK%-5.9-4.7 -4.7-1.8-1.5-1.1-0.8 -0.6 -0.6-0.2 -0.10.5-0.2-7-6-5-4-3-2-101GreeceSpainIrelandNetherlandsPortugalFinlandUnitedStatesBelgiumItalyFranceAustriaUKGermany%Difference versus 2000-07IMF estimates of mean nominal GDP growth 2011-15Growth is pivotalSpain, Portugal & Ireland all suffer massive drops in nominal growth compared to the years 2000-2007
  20. 20. RBS0000020Nominal growth minus long-term interest rates-8-6-4-20246GreeceIrelandPortugalSpainItalyFinlandNetherlandsBelgiumFranceGermanyUKUnitedStates2000-2007 2008-2015
  21. 21. RBS0000021A Fiscal Risk IndexSource: Maplecroft, February 2011“…identify countries that will come under increasing economic pressure infuture years due to low birth rates, high life expectancy and statecommitments to look after ageing populations.The index is calculated using eight indicators: child and old-agedependency ratios between 2010 and 2050; labour rates of the over-65s;GDP; debt; and public spending on pensions, health and education.”
  22. 22. RBS0000022Uncomfortable bedfellowsChanges in public debt, 2008-2011, & 2008-2015Source: IMF Fiscal Monitor, November 2010Easy to differentiate between:a) Countries that have gone beyond (?) or almostreached the point of no returnb) Countries that have terrible metrics but aredoing what is necessary (UK)c) Countries that are in the „bubbling under‟, nextcountries to be hit category (Spain, Portugal,France)d) Countries that have done less easing andshould be less punished (Italy, Australia, EM)Source: IMF World economic outlook, October 2010. Note: net debt for Japan
  23. 23. RBS0000023UK funding needs coming down. From a high level, but falling0501001502002502009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16Gilt issuance/grossfinancingrequirementGross Gilt salesAs of March Budget 2010: £187.3bnAs of April 2010 revision: £185.2bnAs of June 2010 emergency budget: £165.0bnCurrent: £165.2 Gilt salesCumulative fall in gross financing requirementannounced in June 2010 emergency Budget:-£106bn
  24. 24. RBS0000024UK: logically, doing what it says on the tinGilts have just been on one big round trip (10-yr spread to bunds)-80-60-40-20020406080100120Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11(bps)UK10yvs.FranceUK10yvs.GermanyThe 7 Dec 2009Budget give-away, & capitalflightThe great Gilt reappraisal
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