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January 9th , 2009 Damien Cleusix email@example.com d i @ l 6
First Quarter 2010
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First Quarter 2010
The collapse has been avoided thanks to the resolve of Central banks and governments around the world but we will still have to deal with the aftermath of the biggest credit bubble in history They have managed to prop up assets prices (buying them history. them, changing accounting rules and providing huge amount of emergency liquidity) and lower interest payments. This pushed the overall debt to assets lower and improving interest coverage but they can not do this forever… The recession which has probably ended during the summer, was not a typical inventory-led one were more that 75% of the p y g , yp y decline is due to de-stocking. It was the beginning of a "balance sheet" recession which is going to haunt us for many years with poor growth and intermittent relapses into recession (here we are talking about developed leveraged countries, financially unleveraged developing countries will suffer because of their operating leverage but will end up as winners if they make the right reforms… and of course there is China which will have a very volatile path in the next 3-4 years) The deleveraging process in unavoidable. Analysts have spent a great deal of time commenting on the collapse of credit availability but we think the biggest problem for growth in the medium-term will be a lack of credit demand. Many households and companies have realized that they could go under and they are going to build a buffer... Nationalism and protectionism will gain in popularity while there is a big risk that regulators will go on a rampage (we see a strong risk of this cyclical ERROR, like the commercial banks reserve increase in the 30’s or the VTA hike in Japan in the 90’s, done by regulators) after doing too little for so many years…Populism will be a winning strategies for politicians, even more than before… The current macro data has surprised on the upside with the success of the cash for clunkers schemes around the world (which probably added up to 4% to US growth in the third quarter), various forms of help for first time home buyers, the socialization of the credit market in the US and Europe or the credit explosion in China... We continue to see the current improvement as a normal snap b k f l back from th worst macro environment since th 30' It should not b confounded with a strong recovery. the t i t i the 30's. h ld t be f d d ith t
First Quarter 2010
Clue6 First Quarter 2010 . Central Banks will have to first give clear guidelines on how they are going first to exit the qualitative phase of their easing now that markets have normalized. but not otherwise. least). Much more is needed as they have. only been able to compensate for the loss of other incomes in the US.) to avoid a total freeze and collapse of the credit markets and a debt deflation dynamic to develop.Executive Summary 3 The traditional swing factors I. They should do the same for the quantitative part. Central Banks might even start charging instead of paying interest on the reserves they hold on behalf of the commercial banks. g The fate of the current recovery hangs on the exit strategies for the monetary and fiscal stimuli. This would encourage them to put the money elsewhere into the economy. The QEs were legitimate (even in our eyes.e.. for the moment. how the financial markets will interpret them and the unavoidable errors which will be made… Fiscal Stimuli have been helpful but their long-term effects will be sub-optimal as long as they are considered as a shortterm fix and that they are not constructed to foster future productivity and labor market growth.. Aggregate disposable incomes and net worth level influence on savings should be followed carefully as they will be the keys on how quickly the consumption behavior will change. Consumption should continue to be a drag in the developed world for some times.. Deflation is still a real risk (we would even say a fact…and we are talking about price deflation including assets price and not in the sense of money in circulation…as the current inflation worries will pave the way for a new wave of deflation) and we would thus like to see the quantitative part continuing a bit longer. The Swedish Riksbank has started such a scheme and the BoE is discussing the same. inventories.. residential investments and autos which have historically accounted for almost all the volatility in GDP are not expected to have the same impact this time as in the past (and the autos part is probably already behind us in the US and Europe at least) us.
..Executive Summary 4 Expect macro numbers to continue to move in the right direction (and in the next 3-6 months the rate of change is likely to be increasingly positive as it will be calculated against 12 month old data..) until Q2 2010 at least.. This does not necessarily imply a double dip as much will depend on the behavior of households and the impact of fiscal and monetary authorities policies or lack of policies. After that… we will remember that we are living in the aftermath of the biggest credit bubble in history. Europe should be the focus of your attention as there is a high probability that the next “crisis” will have its epicenter there… In the next few years the world economy will be more volatile than in the 20 years pre-2007… with dramatic consequences on assets valuation ratios (cheap tomorrow will be much cheaper than what was deemed cheap between 1990-2007)… Clue6 First Quarter 2010 .
Macro: The Causes of the Current Crisis – Another Repeat We need to put the rest of the macro analysis into perspective… The NYT recently published an article by R. The end result is that banks can not lend while there has not been any addition to the productive capacity… This bubble will also generate new regulations which will imperil financial innovations in the future (some will be good and necessary. He wrote: 5 "What happened? Economic analysts often turn to indicators like employment..Shiller titled "An echo Chamber of Boom and Bust". It is thus important to try. when in fact they are merely symptoms. Money velocity will decline… Clue6 First Quarter 2010 .. houses. We will surely see some bubbles develop and pop along the way but the wash out will take much more time than one thinks. to identify the potential triggers before they occur. as much as possible." That's it. housing starts or retail sales as causes of a recovery. One of the key is to see how the markets react when they occur to see if they really are the “turning point”.. (As we said some emerging economies will be able to do quite well if they have the courage to make the necessary domestic reform and let Bretton Woods 2 die away) This credit bubble was a bad bubble. For a fuller explanation.. markets trends change as the investors universal beliefs are proven wrong while during trends the markets make the opinion. investors rebalance. The chain of events have unraveled as expected and should continue to do so. the triggers are often hard to identify (in hindsight it always seems a self evidence). banks.. Market perception is of utmost importance and the less it can discount the consequences the larger the volatility… y What did cause the current crisis? Since the Spring of 2006 we have been warning that the credit build up the world economy (mainly US and Europe) was experiencing would lead to a major shift in governments. Regulators would wake up. As with every trend. A shift that would be a generational event (so it j g p p g ( should last for approximately a generation). At turning points. some bad) and lower banks capacity to lend.. investors and consumers perceptions and behaviors. look beyond the traditional economic links and think of the world economy as driven by social epidemics. this development will not be linear and we will have phases when investors will believe that the sky is the limit but they will be proved wrong. These social epidemics can travel as swiftly as swine flu both spread from person to person and can reach every corner of the world in short order. banks behave like banks.It was mainly financed by banks and impacted unproductive assets. by reason or constraint. their portfolio toward less risky assets and consumers spend less than what they earn. contagion of ideas and huge feedback loops that gradually change world views. At turning points.
The confidence in the system has now been eroded but not as much as one would have expected. many believe that the Fed has saved the day… once more. Apparent.. technological advances.e. the imagination of the investment banks and hedge fund quant desks or the semi-coma in which regulators seemed to have fallen allowed it to reach unheard of proportions but without this deification of Central Banks it would not have reached such a monstrous size. This will in all p y y gp g y. The impact has been much stronger on non-financial leveraged economy were the multiplication effect was in full swing (and was also helped by some government directives in less democratic countries like China). a big chunk of the announced stimuli is yet to be spent). p g p y y living frugally and probably killed the “consume now save later or never “ mentality which was prevalent in many developed economies ex-Japan.. believed stability. A. companies panicked slashing down production (with industrial production falling much more rapidly than sales) and laying off workers en masse. led to too much risk being taken and instability.. The bubble also submerged a high number of countries. enterprises and individuals with debt obligations which can not be paid or only by g g . Borrowing will be a dirty word and consumers will retrench to build up their savings. to a global expansion of capacity which is going to haunt us for some time. We continue to see the current phase as simple normalization from the panic experienced at the end of last year and earlier this year on the back of an aggressive rise in excess money (monetary expansion over GDP growth or industrial production) and huge fiscal stimuli (even if beside China. So now let's look at the various elements in more details… Clue6 First Quarter 2010 . Paradox Credibility . Overcapacity will dramatically reduce the “earning power “ of the global economy. by artificially lowering the cost of capital. p y p g g g likelihood encourage new protectionist measures around the world (not to be compared with the 30’s but… The consequence will be what Pimco’s B. Finally it led. deglobalization and reregulation… g But now for the present and near future. especially where the operating leverage is high.Gross calls the “New Normal” I. Yes.. Indeed. Trade was frozen as letters of credits could not be emitted. The latter point applies especially to the US. Greenspan called it the "Paradox of Credibility“.Macro: The Causes of the Current Crisis – Another Repeat 6 The bubble was born out of the belief that Central Banks had tamed the business cycle and that they would use any means to prove it. deleveraging (both financial and operating).
Clue6 S l b Cl Source: Bloomberg..... Clue6 S l b Cl 6 as noted last September and imply a continuing deterioration here. The NFIB current level is consistent with an ISM manufacturing Index of 44. so maybe not as bearish as otherwise. y g g y The Japan Economy Watchers Expectation survey has continued to deteriorate (Chart 2)....Euro and China Leading Indicators ISM Manufacturing New Orders to Inventories Ratio We are starting to see some divergences appear in leading indicators (Chart 1).... Chart 3 US Real-Time GDP Estimation Source: J Hamilton J. As an aside. when the next shoe.). growth expectation could be too low for Q4 2009 and Q1 2010 while the expectation for Q3 2010 and forward are probably too high. probably Europe..). This is an excellent leading indicator of the ISM manufacturing survey Source: Bloomberg. the Central Banks stance and..Macro: Leading Indicators Chart 1 US Leading Indicators Smörgasbord Chart 2 7 Japan . partly as a consequence. drops.. Clue6 First Quarter 2010 .. The Chicago Fed National Activity Index YoY momentum has turned down. but a lot depend on the evolution of the fiscal stimuli. The same is true for the NFIB index (and we will have more to say on small companies latter. Remember that Japan is leveraged to the global cycle and has tended to lead other countries (note that the Yen strength should also be taken into account. the Topix correlation with this survey is extremely high so use it when looking at your Japanese market exposure… All in all.. almost 10 points below current levels levels… The non-manufacturing ISM is continuing to print significant lower readings than the manufacturing survey.. The Conference Board leading indicator monetary and financial indicators remain strong while the real economy indicators are rising much less vigorously.
Clue6 Bloomberg Clue6 First Quarter 2010 . 4). Previous rebounds have been the result of short supply and as we will show later. This is the past.…) Residential investment is not likely to be a major drag for future growth now that it represents 2. beside encouraging people to take on more debt (yes more. residential investment and autos..even if governments are directly or indirectly lending money. They are inventories. Note that ISM inventories indices are falling again (to 8 months low) despite the fact that the supplier deliveries is above 50… Inventories are hard to finance which leads to potential sales lost… For autos.... ( p g y ) has. Fiat. pushed forward future sales. Let's not forget that the last 2 factors are usually debt-financed and debt is harder to come by these days (and actors not necessarily willing to borrow… see balance sheet recession later). supply is plentiful even if the visible one has decreased substantially in the past few month.. courtesy of the tax y p y credits. They might represent a low percentage of the overall GDP but believe it or not they have contributed to all of the GDP decline in previous recession before the current one (without them we would not have had a recessions ) They also contributed to a big part of the initial rebounds (Chart 4) recessions…). Inventories have less influence as they represent a smaller share of GDP and they remain high (Chart 5).). the cash for clunkers scheme (and similar programs in Germany and other countries) .Macro: Leading Indicators Let's call them the swing factors.5% to the growth announced for Q4 2009 and Q1 2010.5% average but the first time home buyer tax credit has been extended both in time and scope which will be helpful.3% of GDP from a 6% peak and a historical 4... history and the only lasting mark is a relative increase in consumer leverage and some auto manufacturer stocks slowly becoming attractive short again (Ford. Source: Morgan S l S Stanley 8 Chart 4 US GDP and Swing Factors Chart 5 Census Bureau Businees Inventory to Sales Ratio Source: Bloomberg.. But one has to remember that it is the inventories quarterly rate of change which counts so even if inventories continue to decline in Q4 they will only have to decline less than in Q3 to have a positive contribution to GDP… They will add up to 4.
Chart 7 US Net Private Investments For exports. consumption and export. lower currency and companies eager to find new market to compensate for the sluggish domestic one.. We will show that g government spending will have a major positive impact in the short-term but then… while p g j p p consumers spending. Clue6 S l b Cl 6 9 Chart 6 US Fixed Investment to GDP Ratio Anyhow... This is typical of balance sheet recession where debt reduction is more important than profit maximization. Higher productivity. we might have a positive surprise given the very low USD and the fact that the US labor force has declined much more than the US GDP while it has only declined by 1% in Europe and UK and 2% in Japan.. while it might continue to rebound in the medium-term.. what more could you ask for.. will slow again as soon as their net worth starts to decline again… Private investment have been declining rapidly recently (Chart 6).. private investments. Source: Morgan Stanley Clue6 First Quarter 2010 .. Even in Japan. This is a global phenomenon for developed economies.. In the US there are no net private investments (Chart 7).Macro: Leading Indicators It leaves us with government spending. fixed capital investment as a percentage of GDP have declined to 20% from 24% a year ago and a 32% peak in 1991. the perennial "over-invester". Source: Bloomberg. we should witness increase capex in the quarters to come with the Conference Board CEO Confidence index recently rising above 60 which is consistent with YoY 8% capex growth in the quarters to come.. Government spending and consumption will be analyzed in more details later. despite the fact that companies have a positive financing gap.
Clue6 Bloomberg Clue6 First Quarter 2010 . It is still 14% below the April 2008 peaks but the September MoM increase was the biggest on record… We thought the decline was exaggerated by the almost impossibility to get letters of credit for trade late last year and that it would warrant at least a small snap back… so far so good… Export growth in South Korea (more timeliness and strong correlation with the world trade data) has continued to improve but the recent rebound into positive territory is mainly due to the base effect (November last year was horrible) In fact export are lower today than in September horrible). increase regulation and tax hikes. especially when the growth cycle turns down again. Russia…) and some devaluation (Vietnam). Indonesia. Expect this trend toward greater protectionism and/or competitive devaluations (even the SNB does it nowadays) to continue going forward. The others are war. monetary policy mistakes. We are also seeing a lot of new capital control measures being instituted (Brazil. September… Manufacturing companies have been underperforming relative to the KOSPI for some time and it has been a good leading indicator of deteriorating exports… The underperformance has accelerated recently… Chart 8 World Trade Volume 10 Source: Netherland Bureau for Economic Policy A l i Clue6 S h l d f i li Analysis.but do not expect a return to the 30’s tariffs and trade wars… Remember that protectionism is one of the five government cardinal sins according to Charles Gave..Macro: Trade Global trade has finally started to rebound with growth accelerating in the recent past (Chart 8). We will have more to say on them later… Chart 9 South Korean exports Source: Bloomberg. Taiwan. Cl 6 Protectionism has been again on the agenda recently (many fiscal stimuli had a buy domestic bias but this was not a bilateral measure so less likely to make the front page).. South Korea.
Koo's "Balance Sheet Recession" framework. Europe and Japan won’t have the luxury to wait… The markets will force them (and the stronger the recovery the quicker government will feel the market pressure) to put their finance in order (if it is possible… which we doubt on a longer-term perspective with the potential exception of the US) Balance Sheet Recession 11 Source: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession. we have used R. R. Koo Clue6 First Quarter 2010 . It was d l d when analyzing th economic developed h l i the i agents behavior following a credit bubble (see "The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession“ by R.Koo). In this environment household and business environment. reduce their debt despite massive monetary accommodation. The economy relapses every time the government tightens its belt as has been the case in Japan during the past 20 years Stimuli can only been removed when the deleveraging phase is completed and balance sheets are repaired repaired… … but unfortunately government in the US.Macro: Credit Since last year.
Clue6 b Cl 6 First Quarter 2010 .. for example...35 to get back to their 1990-2000 average leverage. We are also seeing new CLO tranches being launched. Investors memory must h I t t have shorten even more h t than what we feared… As in 2007 look attentively when PE firms come to the market to sell the shares they own or even better when they become public company (some have yet to do it)…Blackstone marked the peak in 2007… Clue6 Chart 12 Euro and US Libor-OIS Spread Chart 13 Moodys BAA Spreads Source: Bl S Bloomberg. Note that households would have to pay back USD Tn 4.. Source: Morgan S l S Stanley Source: Bloomberg. Clue6 b Cl 6 Source: Bl S Bloomberg. Clue6 S l b Cl 6 12 Chart 10 Bank Credit to the Private Sector Chart 11 US Household Debt Burden On Chart 12 and 13 one can see that the credit markets have mostly normalized from the panic levels of late last year… We W are even seeing new i i issuances of cov lit (f f lite (few conditions attached). and that is hard for them to lower their leverage quickly except by using personal bankruptcy so this will be a long story.Macro: Credit The west is overleveraged… and it will take a lot of time for leverage to normalize… Welcome to the “balance sheet recession”… There are many metrics one can look at as. bank credit to the private sector as a percentage of GDP (Chart 10) or the household debt to total asset (stock) and personal disposable income (flow) (Chart 11). pig toggle (debt principal and interest paid with more debt) or dividend recaps (debt to pay dividend) bonds and loans.
.…) The NFIB credit condition index which measure loan availability compared t 3 months ago i at l il bilit d to th is t 15 just 1 point away form the all time low of 16. more in 2010… Local banks will be hardest hit by the coming wave of d f lt ( f default (commercial real estate which i l l t t hi h represents up to 40% of the loans’ book. Clue6 Bloomberg Clue6 First Quarter 2010 .5 tn.5 tn..7 tn. revolving and non-revolving is declining at a historic rate (Chart 17). Cl 6 S d l Clue6 Chart 16 NFIB Expected Credit Conditions Chart 17 Consumer Credit Outstanding % Change YoY Source: Bloomberg. loans to companies. to 3.Macro: Credit Bank are still tightening credit standard in the US (Chart 14) and Europe (none are easing…) while demand remains low (Chart 15). Even the amount of mortgage outstanding is declining declining. Small companies are feeling especially hit. Did you know that 82% of small companies consider credit card has a vital form of financing along with loans from local banks… Credit C di card li d lines h have already b l d been cut f from usd d 4. and they are expected to decline by 1. Cl 6 S d l Clue6 Source: Federal Reserve. Clue6 Bloomberg Source: Bloomberg. 29% of companies said their borrowing needs have been satisfied (one of the lowest reading in the history of the dataset while 10% responded that they were not (same level as in March 2009…) Consumer credit. Chart 14 Fed Senior Loan Survey C&I Credit Standard Tightening as a % of Total Chart 15 13 Fed Senior Loan Survey C&I Credit Demand Increasing as a % of Total Source: Federal Reserve.
L..Macro: Credit Mortgage rates are kept down thanks to the origination spree of government-backed entities (with the FHA taking the lead) (Chart 18) and the buying of the emitted paper by the Fed (which has already bought more than usd 1 tn. Tepper. J. Krainer .. Federal Reserve Bank of San Francisco Source: Credit Suisse Chart 20 US Loan Loss Reserve lending—identified here by Ginnie Mae's share—has revived this segment of the market…. By the first quarter of 2008...). it has said it would buy before the end of Q1 2010). In this regard one has also to note that many great investors (D... Paulson. the subprime share was effectively zero. he share of borrowers with FICO credit scores lower than 660 has returned to just higher than 20%. Source: FDIC Clue6 First Quarter 2010 ..) are positive on the large bank stocks. increased FHA d Chart 18 Investor Type Share of New Loan Originations Chart 19 Scheduled Mortgage Resets 14 Source: “Recent Developments in Mortgage Finance “. approximately 10% of originations in our sample were l b l d b f l labeled by originators as "subprime. Si ff ti l Since th i then. of the usd 1. Ainslie) and some of the most prominent member of the "those who saw it coming" group (J. Krainer) 2006 Delinquencies are still rising and we are entering in the second phase of exotic mortgage resets (Chart 19) which will have a dramatic impact (bank loss. increase in foreclosure.. A relapse is a possibility (but not a certainty). the same share as when subprime securitization peaked in 2006” (J.. “In the fourth quarter of 2006. We will have to monitor carefully bank relative performance (stocks and CDS). So the jury is still out... subprime loans are estimated to have made up about 20% of originations in 2006.2 tn." For the entire universe of mortgages.
In 2014 alone usd 350 bio. workers. will go under between 2011-2015 (“The Buyout of America”.. When one see that Japanese banks can rise more than 10% on an article implying that the rules implementation might be delayed. dollar that will come due. g y y y g y y Usd 7 tn. Banks debt average maturity has also declined from 7. counter cyclical capital buffer or off balance sheet entities ban will lower lending capacity and could cause a new wave of volatility for the markets markets.. of high yield and leverage loans will have to be refinanced in the US and eur 60 bio. minimum standard funding liquidity. off balance sheets assets into the "big 4" sponsoring entities balance sheet in the US (and we now know that SIV assets can be of dubious quality.) Basel II should also start to be implemented at the start of 2010.. employing 3. J. Source: Moodys Source: Barclays S l 15 Chart 21 High Yield and Leveraged Loans Refinancing Needs Chart 22 Banks Debt Average Maturity Clue6 First Quarter 2010 .75 mio..2 years 5 years ago to 4..... Koshman) as they struggle to refinance the almost usd 1 tn. FASB 166-167 which should start to apply during Q1 2010 will bring back more than usd 500 bio..2 years today. 15% in 2012. one can see that they won't be optimal on a bank profit maximization angle.... 10% of the US high yield market will mature in 2011.Macro: Credit There are other risks one should keep in mind… Regulations imposing lower leverage on banks. 17% in 2013 and 20% in 2014. in Europe (Chart 21)… Some insiders are predicting that up to private equity owned companies. of their debt will mature by the end of 2012 (Chart 22). d ce b sw o ced o g e eg p e s (we gove e e s ). The imposition of compulsory contingent convertible debts for banks and the affirmation that government assistance will only be junior to depositors would also increase banks funding costs… There is also the refinancing risk with refinancing needs rising strongly just when government and central banks will be forced to tighten the grip by markets (well government at least).
Austria). one can see that European banks are most exposed to this risk.. The market is now starting to realize the sovereign problem with Greece (but it is just a beginning) and the bankruptcy of Hypo Group Adria (HGAA) in Austria is putting European Banks and their Eastern Europe exposure back on the table. European government are likely to tighten their budget first... European companies are less competitive (high currency. once we have identified potential risks. not enough firing... As always. 2007 Source: IMF Clue6 First Quarter 2010 . Spain. We have long argued that the next phase of the crisis will have its epicenter in Europe..Macro: Credit Emerging markets refinancing needs will also be very important (especially in Eastern Europe) (Chart 23). in assets. April 2009 ld i O l k” A il Furthermore as we will see later. not a question of if but when. for Austria it is equivalent to a bank with usd 2. 16 Chart 23 External Debt Refinancing Needs Source: S S Source: “ “World Economic Outlook” ..).5 tn.. banks have been much more timid to recognize their loss than their US or Japanese counterparts and are very exposed to Eastern Europe (which will experience an Asia 97-98 like crisis. Portugal. our role will be to monitor the indicators which will show if they materialize.... IMF.. On Chart 24. Chart 24 Liabilities to Advanced Economies’ Banks (% GDP).... with more than 75% of the total loans to emerging markets. One has also to take into account the need to finance the budget deficits on top of that and here again. Will a bank bankruptcy in Austria be one more the first domino to fall remember Kredisanstalt fall. There are sovereign problems (Greece..) and the housing bubble has yet to pop. Eastern Europe come into mind. Italy... in 1931. Irland. Note that while HGAA might seem small..
Bullard.. increasing the need to pay back debt.. productive capacity might have fallen (our no net investment graph before and the fact that many of the job losses are not cyclical are confirming this hypothesis). unemployment momentum (Chart 20). with rising inflation expectation. recently said. The ECRI future inflation gauge.Macro: Inflation Chart 25 US Core CPI and Unemployment Rate Momentum 17 Deflation. as in 2008. With deflation nominal incomes are likely to decline or only grow slowly. would be an initial inflation scare.. the output gap might be much lower than what is currently believed… Source: Bloomberg. Inflation is low (Chart 25) and with the deleveraging induced fall in money velocity. which would pave the way to a new phase of deflation) Clue6 First Quarter 2010 . Real rates will also be positive even if nominal ones are at 0… But as J. Kondratieff's "fall from plateau" we described in the past. Louis Fed. going to fall further.…)… Will be interesting to see how the Central Banks and markets react… Especially if food prices continue to rise (remember 2008 and the consequence it had in emerging markets…) But ultimately we still think that deflation will prevail… when we relapse at the end of 2010 beginning of 2011… A potential scenario.. president of the St. We could have 5-10% inflation rate on a YoY basis in some emerging market countries (India. Clue6 S l b Cl 6 Psychologically one should also take into account that the base effect will be negative in the months to come (rapidly declining price 8-12 months ago). falling rent (30% of the CPI) are all pointing toward outright deflation next year This will be the year.
)..... In 2007 we wrote that the US potential growth was overestimated. The Conference Board Employment Trend Index has also turned up... increase labor hours and hire temporary workers before hiring new workers.. We prefer to look at the number of hours worked and the temporary help index. up Nevertheless both the duration (Chart 28) and the percentage of unemployed not on temporary layoff (Chart 29) indicate that there is a fair amount of structural losses (credit related jobs created during the boom are gone. US Yes productivity has been rising fast but what if it ceased to be a major driver of growth (as we expect. it has long cycle and we are near/at the top).. Clue6 Bloomberg Source: Bloomberg. firms will first move workers from parttime to full time and overtime employment full-time employment. Indeed. As said in our last 2 presentations.. Did you know that there has not been any net private job creation in the past 10 years in the US. Clue6 S l b Cl 6 Chart 28 US Unemployment Duration Over 27 Weeks % of Total SA Chart 29 Percentage Of Unemployed Not On Temporary Layoff SA Source: Bloomberg. Clue6 Bloomberg First Quarter 2010 ... at least for now.. Clue6 S l b Cl 6 Source: Bloomberg. It still is... while for Japan it is so low that we are almost certain that it will grow quicker than estimated… Clue6 Chart 26 Broad U6 Unemployment Rate Chart 27 18 US Job Openings By Industry Total and Temporary Help Services Source: Bloomberg.. ceased to fall (Chart 27). and we prefer not talking about Europe.Macro: Consumers – Employment The broad Th b d U6 unemployment rate h d i l t t had improved d somehow (Chart 26) while job opening have. one should not put too much weight on those 2 numbers as they are lagging... Both have been improving recently (Chart 27)..
they do not seem to be ready to hire. In the past 18 months. BLS Clue6 First Quarter 2010 . less than 30% workforce) have accounted for 45% of the job losses while in the previous recession it lost only 9%... f ll) h jobs ill be but i h k l h it Longer-term the job picture is grimmer. those j b will b temporary b sometimes the market see only what i wants.. the employment picture should improve in the medium-term (the models presented in September is still indicating net job creation for Q1 2010).5 mio..Macro: Consumers – Employment Chart 30 Distribution of Net Gain in Employment 19 Small companies (less than 500 employees) are employing 65% of the US workforce (Table 1). x S S Table 1 Employment Distribution Source: Clue6... Do not forget that the government will hire up to 1.but we will analyze this in due time as it does not really influence the near-term markets movement Source: BLS... This is a development to follow closely as it is different than previous cycles.... Given the readings of the various NFIB survey components. the smaller companies (less than 50 employees. persons for the 2010 census (this could add up to 700'000 jobs to the May nonfarm payroll). Nevertheless..
. As one can see on chart 32.. Personal current transfer receipts (~15%) from which one has to subtract the contributions for government ( 15%) social insurance (~8%) less taxes which are less tan 10% today.. more next year… Wage growth will thus be determinant as proprietor income and personal interest are likely to continue to fall while dividend incomes could rise some but not much… But there are other elements impacting disposable income and its discretionary use. Personal interest and dividend incomes (~16%). They might stay where they are but will not add usd 670 bio. Source: Bloomberg. Clue6 S l b Cl 6 Chart 32 Disposable Incomes Growth Components Clue6 First Quarter 2010 . disposable income would now be more than 5 % lower than 12 months ago. Proprietor Incomes (~9%). Without those contributions. (290 and 380 respectively).. Clue6 Bloomberg Source: Bloomberg..Macro: Consumers – Disposable Incomes Chart 31 Aggregate Income and Consumption 20 The correlation between wages growth and consumption has been high historically (Chart 31). transfer and tax cuts have added more than usd 670 bio. Consumption can only deviate from incomes if savings are drown down and/or credit is contracted… Aggregate paycheck should increase in the next quarter or 2 at least so this will support at least some consumption (but note how depressed it is)… Then… the balance sheet recession dynamic will prevail and consumption will grow less than aggregate income… There are other important elements to take into account to get to the personal disposable incomes aggregate.. Note that Americans are now receiving 2 times more in transfer that they are paying in taxes… It is doubtful that taxes and transfers contribution to total disposable income will continue to have the same positive contribution going forward. Indeed total personal disposable income is composed of: compensation of employees received (~68%).
.Macro: Consumers – Disposable Incomes On table 2. GDP Change given Various Personal Disposable Incomes and Saving Rate Source: Clue6 Clue6 First Quarter 2010 . If one regresses net worth to saving. pockets.. for each % point of decline so given the current 3....98%. We might have had a commodity price induced recession even without the financial crisis. They might have heard about it but there is nothing better than real experience to grasp an abstract concept concept. GDP components would have to add as much for GDP to be flat... At usd 2... It has removed usd 110 bio out of the consumer’s pockets bio. Never before have they seen what over-leverage could do.6 per gallon unleaded gasoline is usd 1 higher than at the start of the year and much higher than the level which were deemed to be impacting consumption negatively pre-2005. perceived or real will be one of the key so real.... save more or not. Commodity prices can h C dit i have a non-negligible i li ibl impact. W h t We have l long said th t l t year’s fi id that last ’ financial i l crisis masked the negative impact commodity prices had on global growth. Table 3 Our contention has been that the bursting of the credit bubble would change mentalities for a generation at least. So going forward we will have to follow closely how total compensation evolves. Source: Goldman Sachs 21 Table 2 US Household Discretionary Cash Flow Sensitivities The other main element going forward will be savings (Table 3) Will US households start to 3).75% impact from continued consumer credit fall for a grand total of 3-6%. savings seems to be were they should. so. one can see the various elements which can impact discretionary disposable income.46-5. For the saving rate net worth .5% decline it has already removed usd 90 bio.. One could add a 0. So our most bullish guess is that saving will rise to 5-7% next year and disposable income will fall 1-3%. If we were forced to we would bet that we will be in the middle range Ceteris paribus the non-private consumption range. The impact on GDP will be between 2. courtesy of Goldman Sachs.. paribus.5-0. Credit which we talked about earlier is removing usd 25 bio.
. even more with the extended tax credit but credit.) Activity is failing to really pick up outside of existing home sales (Chart 35)… The MBA purchase index remains very depressed as are new building permits… Clue6 Chart 33 US Household & Nonprofit Organizations Net Worth Chart 34 22 Ratio US One Family House Sold Annual Median Price to Median Household Income Source: Bloomberg. Clue6 S l b Cl 6 Chart 35 New Housing start and NAHB Market Index Chart 36 US House Prices YoY Source: Bloomberg..2 structural bull market can start. This implies a >20% decline in net worth (depending on the timing) to come or approximately usd 10 trn. existing owners do not really care except if they want to buy a more expensive house. Clue6 Bloomberg Source: Bloomberg.. Clue6 S l b Cl 6 Source: Bloomberg.. Affordability is at an all time high (fine for first time buyers.. we would expect real estate prices to fall 10-15% from current level so equities will have to fall by usd 7 8 trn Not tomorrow but at some 7-8 trn.Macro: Consumers – Wealth Net N t wealth h risen b usd 5 t d i th past 2 lth has i by d trn. point before this cycle ends.. So why should housing decline more as the downside momentum seems to be abating (Chart 36)? We are approaching fair value (Chart 34) but we are not there yet and with such an overshoot an undershoot is likely (and at this time our 10-15% decline would be too conservative)... The net worth to GDP ratio is once again hovering above 4.. Clue6 Bloomberg First Quarter 2010 . As we will explain... As we said this ratio is expected to fall to 3 2 or below before any 3... The most volatile components of net worth are equities which represent approximately usd 23 trn and real estate with usd 17 trn. during the t quarter (Chart 33)..
. If home prices were to decline by 20% more we would have more than 45% of homeowners underwater. Only 30% of current sales are non real estate owned (foreclosed) and of those only 31% are unforced. Of all the markets it is the low end market which is booming as the rest has yet to recognize that prices have fallen and are trying to postpone sales as long as possible. we can expect to have approximately 2 mios foreclosed homes to hit the market on a yearly basis in the next 3 years (Chart 37)… Things could get even worse as US household percent owners equity in real estate has fallen to just above 40% recently. according to the Census Bureau.Macro: Consumers – Wealth As said.. 41% of conforming loans are forecast to be underwater against 16% today (47% vs. New home are hard to sell (Chart 38)... T2 Partners estimates that 24% of mortgage owners owe more than the house is worth (up from 6% at the end of 2007). houses... so only 10% of current sales are "normal". Moody's estimates is the same. In a recent paper Moral Mortgages "Moral and Social Constraints to Strategic Default on Mortgages" the authors see that strategic default (default even if you can afford to pay your mortgage bills) is likely to increase dramatically when homeowners are more than 15% underwater. Pending Month’s Supply Chart 38 US New One Fam.. there is a large discrepancy between existing and new home sales dynamic. The higher-end of the market will see much larger price decline. years (against an historical average of ~64.. Clue6 Source: First American C S i A i CoreLogic i 23 Chart 37 Visible vs.5%). 29% are investors and 43% first time buyers. If you consider that.. Clue6 Bloomberg First Quarter 2010 ... There are 5-8 mios houses sold every year in the US The 8 mios units were reached while homeownership rose from 64% to 69% during the pas 15 US... mortgage one can estimate that mortgage owners have on average approximately 20% equity in their have. Houses Median Nbr of Months For Sale Since Completion Source: Bloomberg. only 29% of current buyers are existing owners....for existing home sales.. The current improvement is concentrated in new home sales and. this limits the potential for prices to move up but there is more to this… Indeed.. We expect homeownership to fall back to 64-65% in the coming years which implies that we will have demand for 4-6 Mios houses during this period.. One important element here will be how homeowners react when underwater... If you consider that there are approximately 7 months of sales in inventory.. and that this time it will hit the prime market (80% of the mortgage market in the US. 28% for jumbos). 65% for conforming loans and 15% for jumbos). Deutsche Bank forecasts 48% homeowners underwater in Q1 2011.. We also have to repeat what we said in June and September. 32% of house owners did not have a mortgage..
Macro: Governments and Central Banks 24 Source: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession. Koo Clue6 First Quarter 2010 . R.
the 2 motors of growth. Furthermore the cash for clunkers and tax credit for first time home buyers are encouraging y g g present consumption at the cost of investments.Macro: Governments – Fiscal Stimuli The US has followed most of the remedies proposed by R. and they have done virtually nothing to abate the housing downturn.. Hussman puts it: “…our policy makers have aggressively crowded out private investment through this bailout policy. and the clearer it becomes that it is not working.org. Its main goal should be to increase productivity and encourage people to work. As we have said the fiscal stimuli should be oriented toward growth-enhancing investments and should be temporary for the non-productivity enhancing reforms (need a new vote to be prolonged). the improvement is due to a rebound in tax revenues not caused by a rise in tax rates… Source: Stimulus. They h ld be Th should b temporary to li i the i limit h increase of the real i f h l interest rate which would d hi h ld decrease the h stimuli effect on the economy.. Koo both on the fiscal and monetary side. Anyhow for the short-term it is the amount of money which is spent which count (unfortunately) and there are plenty more to spend (Chart 39) and Table 4. Extended ii to And keep in mind that there is a lag between the fiscal thrust and the fiscal impact… When looking at the cyclically-adjusted budget balance (Chart 40.. With regard to housing we repeat that we favor a debt to equity swaps where over-indebted homeowners would give a participation to the future value of their house in exchange to a diminution to their debt balance today.“. one see that it is expected to improve next year but we would not necessarily consider it as a sign of tightening if year. many reforms are permanent and as J.. In the US. which allocates good capital to the worst stewards. Clue6 S i l Cl 6 25 Chart 39 ARRA Spent Money Table 4 Clue6 First Quarter 2010 . Clue6 Source: stimulus.org.. next page).. The more details we get from the moratorium on foreclosure and HAMP program instigated earlier this year. Only a third of the ARRA has been spent t d t while th are almost usd 400 bi E t d d provisions t come… t to date hil there l t d bio.
” (E. This would cause a massive wave of defaults and decrease debt burdens significantly through bankruptcy and debt repudiation. This would allow the private sector to decrease debt burdens significantly over time through increased savings. Chart 40 Cyclicaly Adjusted Budeget Balance Chart 41 Cabinet Appointments: Prior Private Sector Experience 26 Source: C O Idea: A d S CBO d A. >3% real for 12-18 months) Beside there are 2 elements which needs to be taken into account State and local finances and the real unfunded account… obligations… Chart 42 Japan GDP Real Chained Price Public Demand SA YoY (lhs) and Topix Source: Bloomberg. the specter of big government and a long muddle through. This would cause a wave of defaults and decrease debt burdens through bankruptcy and debt repudiation. There are 3 main scenarios: “The Liquidation Scenario: decreasing aggregate demand and precipitating a major depression in order to liquidate zombie companies and malinvestment.Macro: Governments – Fiscal Stimuli The fate of the recovery l Th f f h later next year will d ill depend on d the decision of the government. This would simultaneously prevent the private sector from decreasing debt burdens through increased savings and maintain dependency on foreign sources of capital – all without ending the spectre of big government. Harisson) We will see… the fact that there are few in the current administration with a private sector experience (Chart 41) increase the risk that solution 1 and especially 3 will be chosen… But then the market might force their hand… p y g Keep in mind what happened in Japan every time spending momentum faltered on a 12 months YoY basis…(Chart 42) and spending will have to be cut and/or taxes be raised as soon as the economy show any sign of durable growth. Clue6 Bloomberg Clue6 First Quarter 2010 . The Glide Path Solution: increasing aggregate demand g gg g by maintaining government spending while trying to liquidate zombie companies and malinvestment. Meanwhile they will try to prop up zombie companies and maintain malinvestment. It also has the benefit of reducing dependency on foreign sources of capital The downside is a major increase in capital.Edwards d Source: JP Morgan S government debt. or. The Hoover Status Quo: decreasing aggregate demand and precipitating a double dip recession in order to reduce government deficits.
So this is not only an income statement problem but also a balance sheet problem. x Clue6 First Quarter 2010 ... Deficits are estimated to reach usd 180 bio.. if the economy recover (Chart 43)... Source: C S CBPP And do not only look at the recession induced problems but the more structural cost structure with extremely high health care and retirement benefits for public workers and as a consequence the grossly underfunded pension and "other post employment benefits" (OPEB) funds..) because the federal government has been helping (Chart 44). in 2012.keep an eyes on them.. Expenditures and Federal Grant in Aid Source: BEA..Macro: Governments – States and Locals Chart 43 Total States Budget Shortfall 27 Only 2 states have balanced budgets and 9 are in distress.. in 2011 and usd 120 bio... One can almost read daily on California woes in The Journal (and remember California is would be in the top 10 world GDP if it was a country. One can see that states and locals expenditure have yet to be cut (well once again if you do not live in California... One of our past concern was that part of the federal ARRA stimulus would be used to fill state and local budget. Chart 44 States and Locals Tax Revenue..).
..) Another area were many emerging markets (ex Eastern Europe and some Latin American countries) have a big comparative advantage...it won't be sufficient to avoid a fiscal crisis in many countries. yet it continues in the same direction unabated. it stops. Source: M S Measuring th Unfunded Obligations of E i the U f d d Obli ti f European C Countries J t i J. lower pension. There are countless episode of bubbles in financial history and in political history.. but as a citizen it is already too late.. Time to realize that the "acquis sociaux" were not a y q right but something which the state provided when they could.... they can not anymore...) . It continues (and you hear " it has been so in the x past years and we did not have a problem so why worry now. higher contribution..") until... even if the system is reformed (increase pension age...... Gokhale Clue6 First Quarter 2010 ..... The consequences will be a big increase in savings as citizens will slowly come to realize that they won't get what they were promised and increase in real rates as. A risk to keep at the back of one's head (and as always the market will probably give clear signal when to really worry about it as an investor.. note that this ratio is above 500% for the US too) sometimes in the next few years now that the "traditional deficits" the press is always talking about are exploding? This is a distinct possibility.Macro: Governments – Real Fiscal Burden Table 5 Fiscal Imbalance as a Percentage of GDP (2004) 28 Sometimes we know something is not sustainable. Could investors and the public start to price the real fiscal imbalance their countries are facing (Table 5...
The deleveraging phase should start. accessed at the private sector’s discretion. This is not to say that everything is rosy now but that only those who should will go under (another way to say it is that it is OK for the Central Banks to deal with the “confidence problem” but that It should not forget that there is also an important “Solvency Problem”. Central Banks are now facing a strong dilemma to decide when to normalize and how to communicate it. One part was active while the other was passive I.. Source: Bloomberg. temporarily. spreads moved so high where even conservatively managed companies were facing bankruptcy as p g y g p g p y they could not access short-term financing. The quantitative easing measures which aims at increasing the Central Banks balance sheet (note that some qualitative and quantitative easing can measures. The Fed and the BOE have been exemplary in this regard and have managed to restore some sort of calm to the market. not be totally separated as the CB have also increased their balance sheet by buying "private" paper). Spreads should be normalized but not pushed too low.e. The market should be given back its role of price fixer as soon as possible. This adds another layer of complexity where errors could be made… The Central Banks should first exit the qualitative easing measures Qualitative easing can be defined as changing the mix of the asset side of the measures. The exit of the passive part should not be considered as tightening but rather as a positive sign that the private sector feels strong enough not to need the Central Bank's hand. programs should be run down slowly and its impact on risky spreads analyzed carefully. By tightening too soon they risk killing a weak recovery. commercial banks in order to avoid an extremely destructive debt deflation spiral. Furthermore they also must to take into account that many unconventional measures have been implemented and that there are no prior record on how or when they should be exited. When the market literally closed. exited The exit should be coordinated with the government so that both fiscal and monetary stimuli are not exited at the same time. should continue for now (but the mix should Clue6 First Quarter 2010 . Central Banks. debt reduced and not only socialized in government balance sheet. By tightening too late they risk re-inflating the same kind of bubble which brought us where we were 6 months ago. For the active part.Macro: Central Banks – A Repeat Chart 45 Fed and ECB vs... Clue6 S l b Cl 6 Risky assets are rising strongly while the economic recovery is still in its infancy... Japanese Quantitative Easing 29 Last year we said that Central Banks would have to become..
Central Banks could also start to charge interest instead of paying it on reserve held on behalf of commercial banks to force the money into the economy. The risk is that it comes too late.Macro: Central Banks Chart 46 Federal Reserve Balance Sheet 30 slowly move toward only government bond paper.. failure to communicate on the exit strategies.. This is legitimate but here again the exit condition should be defined clearly. are ready to take). Source: Federal Reserve Board S d l d Clue6 First Quarter 2010 . in countries where indebtness is high..) (Chart 46) to fight deflation. would be very detrimental to the Central Bank national currency (but this might be something they aspire to but do not dare to say…). As an aside... The Riksbank is the first one to have done so… Short-term rates should be last to move.. late when the velocity of money has already started to improve markedly and that inflation overshoots (but that is probably a risk Central Banks .
. the situation looks better than in the US and Europe. the leverage problem has corrected during the last 20 years and if we do not take the high share of banks assets invested in equities.7 trn. The Yen is too strong and as long as trade flows remain low do not expect a strong recovery and this is what the Economy Watchers Expectation index (Chart 2) is confirming… y y p ( ) g Gross capital formation has slowed rapidly recently and this is a positive going forward as Japan continued to overinvest long after the bubble burst in 1990… It should find a way to increase the number of people working (more women in the workforce and more openness to immigration). its currency is overvalued and its central bank was rising rate late last summer. The labor force only declined by approximately 1% compared to 5% in the US… Guess who will be more competitive… The Eastern Part is on the brink and a crisis (Chart 47) much more severe than what happened in South-East Asia will only be avoided if the IMF and the EU show strong resolve. We expect productivity to be a positive surprise in the next 5-10 years as the country slowly turns shareholder friendly. lots of it to be implemented… Source: Daiwa So rce: Dai a Source: IMF Chart 48 Topix and Nominal GDP Clue6 First Quarter 2010 . y g In Japan. The DPJ victory might be a catalyst but reforms will take time.Macro: Rest of the World Chart 47 Eastern Europe External Flows 31 Europe looks less leveraged but is it really? Its financial system is more leveraged (even after correcting the difference between the IFRS and US-GAAP accounting rules) and holds more than 75% of the usd 4. loans which have been made to emerging markets (see chart 24)... It lacks the flexibility and the culture of success (defined as a failure being an y ( g experience and not a stigma) of the US. The commercial side has corrected in some places notably in the UK but the residential market is still near bubble highs (with the exception of Germany). Its housing market has yet to correct (See later). It is more dependant on export..
We would avoid large CA deficit countries with high need of foreign capital as foreign investors are in a lose/lose situation. With regard to China. Balance sheets at all levels are healthy. we do not know as we can’t trust the data… It is still a relatively young economy which is likely to experience some booms/busts in the years to come. It will be important to see which countries in this group will be making reforms that encourage the emergence of strong domestic-oriented economies and ready to let their currencies appreciate. The big stimuli should be used to rebalance their economies toward less capital intensive industries and toward labor intensive service. So. We are puzzled by the admiration many have for the influence the government has on the market and its perceived proficiency… Never confound luck with talent… They have profited a lot from the global explosion in liquidity as their banking system was not “officially” impaired (low loan to deposit ratio)… y p g p q y g y y p ( p ) One should also keep in mind that J. We would favor CA surplus countries with high domestic savings and low leverage. They will be long-term winners but are likely to suffer greatly from the fallout of the above-mentioned. Their fiscal stimuli should have the same aims as the South-East Asian ones. This group will be the big winners in the next 10-15 years… Clue6 First Quarter 2010 . Either they devalue or they do nothing and the domestic economy collapse. Europe to revolt.Macro: Rest of the World 32 South-East Asia has experienced its debt deflation approximately 10 years ago. the US needs to save. Chanos has started to be a very vocal bear on China… We will write a chapter on it in the next quarterly were we will see if there is/are bubble(s) or not as a crisis would have enormous consequences on many assets… Latin America remains dependant on commodities but one could have genuine hope that the region won't fall back to its ills of the 80's and 90's. honestly. Japan’s consumers to wake up and Asia/Lat Am to spend…. The problem remains too high a dependency on external demand. easier access to credit and improvement of welfare.
the US total net saving has turned negative for the first time… This is t Thi i not good f i d for investments on a medium t l t t di to longer-term b i especially when so much of th US li biliti are already on f i t basis.Macro: US Total Net Saving 33 One of the area which was identified as a potential growth engine in the future in the US was investments. Investments need to be financed and while companies are saving a lots (but they have high absolute debt to equity level). i ll h h f the liabilities l d foreigners h d hands… Time to axe future potential growth even more… Clue6 First Quarter 2010 .
g . limit both in time and length the impact of a housing decline on consumption (wealth effect is y . secured by a pledge on the real property but for which the borrower is not p personally liable. Clue6 Source: IMF The housing bubble has bursed in the US but not elsewhere (except in Japan.Macro: Housing 34 Source: OECD. g p g p ( lower)… The trigger for a correction in Europe are probably higher interest rate and/or fiscal tightening… To observe attentively… especially in Europe including the UK and Australia Clue6 First Quarter 2010 . Germany and Switzerland)… In many countries the initial loan to value ratio is similar as in the US and you often have the possibility to loan the rest at a higher rate… An important difference is that in the most affected US states mortgage are nonrecourse loans I.e. . above all. this encourage the lender to find a solution and.
Macro: Consumption 35 We saw this circulate on the web recently… Interesting to see that healthcare account for all of the increase I spending in the past 50 years… As the population grow older the proportion spend on healthcare is likely to rise. g Maybe the healthcare sector will be the victim of a witch hunt sometimes in the future… Clue6 First Quarter 2010 . leaving less for the rest… p p g p p p y .
various forms of help for first time home buyers. Analysts have spent a great deal of time commenting on the collapse of credit availability but we think the biggest problem for growth in the medium-term will be a lack of credit demand. It was the beginning of a "balance sheet" recession which is going to haunt us for many years with poor growth and intermittent relapses into recession (here we are talking about developed leveraged countries.. We continue to see the current improvement as a normal snap back from the worst macro environment since the 30's. even more than before… The current macro data has surprised on the upside with the success of the cash for clunkers schemes around the world (which probably added up to 4% to US growth in the third quarter). financially unleveraged developing countries will suffer because of their operating leverage but will end up as winners if they make the right reforms… and of course there is China which will have a very volatile path in the next 3-4 years) The deleveraging process in unavoidable. Many households and companies have realized that they could go under and they are going to b ild a b ff d d h i build buffer. It should not be confounded with a strong recovery. Consumption should continue to be a drag in the developed world for some times Aggregate disposable incomes and net worth level influence times. in the US and Europe at least). Nationalism and protectionism will gain in popularity while there is a big risk that regulators will go on a rampage (we see a strong risk of this cyclical ERROR... the socialization of the credit market in the US and Europe or the credit explosion in China.. They have managed to prop up assets prices (buying them.e. was not a typical inventory-led one were more that 75% of the decline is due to destocking. on savings should be followed carefully as they will be the keys on how quickly the consumption behavior will change. residential investments and autos which have historically accounted for almost all the volatility in GDP are not expected to have the same impact this time as in the past (and the autos part is probably already behind us. This pushed the overall debt to assets lower and improving interest coverage but they can not do this forever… The recession which has probably ended during the summer. like the commercial banks reserve increase in the 30’s or the VTA hike in Japan in the 90’s. Clue6 First Quarter 2010 .Macro: Conclusions Macro 36 The collapse has been avoided thanks to the resolve of Central banks and governments around the world but we will still have to deal with the aftermath of the biggest credit bubble in history. inventories. changing accounting rules and providing huge amount of emergency liquidity) and lower interest payments. The traditional swing factors I. done by regulators) after doing too little for so many years…Populism will be a winning strategies for politicians.
but not otherwise. This does not necessarily imply a double dip as much will depend on the behavior of households and the impact of fiscal and monetary authorities policies or lack of policies. for the moment.Macro: Conclusions 37 The fate of the current recovery hangs on the exit strategies for the monetary and fiscal stimuli. how the financial markets will interpret them and the unavoidable errors which will be made… Fiscal Stimuli have been helpful but their long-term effects will be sub-optimal as long as they are considered as a short-term fix and that long term sub optimal short term they are not constructed to foster future productivity and labor market growth..) to avoid a total freeze y q p Q g ( y ) and collapse of the credit markets and a debt deflation dynamic to develop. Europe should be the focus of your attention as there is a high probability that the next “crisis” will have its epicenter there… In the next few years the world economy will be more volatile than in the 20 years pre-2007… with dramatic consequences on assets valuation ratios (cheap tomorrow will be much cheaper than what was deemed cheap between 1990-2007)… Clue6 First Quarter 2010 . They should do the same for the quantitative part. Central Banks might even start charging instead of paying interest on the reserves they hold on behalf p g g g g g p y g y of the commercial banks. This would encourage them to put the money elsewhere into the economy. Deflation is still a real risk (we would even say a fact…and we are talking about price deflation including assets price and not in the sense of money in circulation…as the current inflation worries will pave the way for a new wave of deflation) and we would thus like to see the q quantitative part continuing a bit longer.. The QEs were legitimate (even in our eyes...) until Q2 2010 at least.. Much more is needed as they have. only been able to compensate for the loss of other incomes in the US.... The Swedish Riksbank has started such a scheme and the BoE is discussing the same. g ) After that… we will remember that we are living in the aftermath of the biggest credit bubble in history. Central Banks will have to first give clear guidelines on how they are going first to exit the qualitative phase of their easing now that markets have normalized. Expect macro numbers to continue to move in the right direction (and in the next 3-6 months the rate of change is likely to be increasingly positive as it will be calculated against 12 month old data.
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