Download The Recession Strikes Back

War Room 11 Oct 2011
The Recession Strikes Back
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The Recession Strikes Back
• Europe Recap
• US exposure to Europe
• USA Macro Snapshot
• Why does it feel so bad?
Europe – where are we right now?
2008 – toxic debts on bank balance sheets.
Don’t get caught up in the noise:
2011 – toxic debts now on public balance sheets.
•Slovakia Vote
•Politician PR Efforts
Europe’s two big problems:
•Oversold rallies
1. Recapitalization of EU Banks
•Protests
2. Credible plan to preserve the stability
sovereign debt of Spain + Italy
LET THE DATA GUIDE YOU
PIIGS debt (as % of GDP):
Greece more than double Argie + Russia at default
160
Greece
140
Italy
Ireland
120
Germany
100
Argentina
default:
80
65%
60
Russia
default:
57%
40
20
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: World Economic Outlook, April 2011, International Monetary Fund
2010
2011
Preparing for Greek Default
Euro Crisis Averted  Now impossible scenario
Greek Bailout package:
July
Soft Restructuring – lower rates + extend maturity
21% discount in bond restructuring established
Oct
Hard Restructuring – principal reduction
50-60% discount now needed
Sources:
Jean-Claude Juncker, Euro Group President
Standard + Poors
Ottmar Essing, former ECB Chief Economist
Thomas Straubhaar, Director of World Economic Institute
Greek Default guaranteed
1. Euro Zone Dismissal?
2. Can fallout be contained?
Currencies + Markets = basics
Dollar + Euro – inverse correlation
Dollar + S/P 500 – inverse correlation
US Economy:
exposure to Europe
EU – double dip recession begun
Markit Eurozone Purchasing Managers Index: 50.4
(Contraction is anything below 50)
US Banks:
exposure to EU defaults + EU bank counterparties
Tim Geithner, U.S. Treasury Secretary
“The direct exposure of the US financial system to the countries
under the most pressure in Europe is very modest… very limited”
Congressional Research Service
641 billion usd
US Banks exposure to PIIGS
1.2 trillion usd
US Banks exposure to German + French Banks
holdings – loans, derivative contracts, guarantees, credit commitments
Geithner is wrong!!
US + EU Contagion
Euro Banks
- Three banks nationalized in the last week
- Dexia = 5.4 billion euros in exposure to Greek Debt
2008 Contagion as guide
- Counterparty risk coming to fruition eliminates hedges
- US govt kept AIG artificially alive to pay out other banks
- Equity markets took SIX weeks to bottom post-Lehman
Historical
- 1931 Austrian bank Credit Anstalt led to contagion in US
- 1931-33 period saw bank runs in Europe + US
2011 downside potential worse than 2008
Can Greek Fallout Be Contained?
Consequences:
Consequences:
1.
Greece likely exits Euro
1.
Credit Crunch in lending to Italy + Spain
2.
Drachmas already trading on “when issued” basis
2.
Other PIIGS decide to leave the Euro
3.
No carte blanche for other PIIGS
3.
EU deep recession
4.
Recapitalization plan works
4.
Contagion spreads to US banks
The Recession Strikes Back
US ECONOMY – OCTOBER SNAPSHOT
The VIX experienced its second highest spike ever in early August,
indicating the extent to which fear has taken over the market.
Why does it still feel like a recession? From a jobs perspective,
we're still at a level of jobless claims consistent with the previous
two US recessions (early 90's and early 2000's).
While much of the rise in retail sales since 2009 can
be explained by inflation, sales have held up this year
and are still growing at 3% net of inflation.
US Indicators: ISM, Oil, and BDI
Dry shipping rates up, oil down:
Two positive trends
ISM Indexes both holding over 50 for now
Total Employment Down, Down, Down
Total US employment peaked at 138 million
in 2007, and is still 6 million below that
level, even as the US population has grown
by 8 million.
Employment Ratio: Down, Down, Down
No comparable drop in employment ratio
has occurred since the Great Depression.
US GDP and Productivity in Context
When GDP growth drops
below the red line
(population growth), it feels
like a recession.
Productivity rises tend to accompany
layoffs – in this context, low current
productivity growth isn't all bad.