Download CLTC 2016 Economic Summit Power Point Presentation by Dr. Mark

Playing Ball in the Later Innings
Dr. Mark G. Dotzour
College Station, Texas
[email protected]
Blog at www.markdotzour.com
Since 1945,
there have been 11 economic cycles
• The average recession has been 11.1 months
• The average expansion has been 58.4
months
Source: National Bureau of Economic Research
Since 1945
there have been 11 economic cycles
• The average recession has been 11.1 months
• The average expansion has been 58.4 months.
• As of May, the current expansion is 83 months.
Source: National Bureau of Economic Research
Since 1945
Longest U.S. Economic Expansions
•
•
•
•
•
Mar 1991 to Mar 2001
Feb 1961 to Dec 1969
Nov 1982 to Jul 1990
Jun 1938 to Feb 1945
Nov 2001 to Dec 2007
120 months
106 months
92 months
80 months
73 months
Nationally
the Bullish Outlook Continues
U.S. Leading Index
of Economic Indicators
Consumers Spending Money Again
Real Retail and Food Services Sales
200,000
190,000
Millions of Dollars
180,000
170,000
160,000
150,000
140,000
130,000
120,000
110,000
Jan-92
May-95
Sep-98
Jan-02
May-05
Sep-08
Source: Federal Reserve Bank of St. Louis/FRED
Jan-12
May-15
Light Weight Vehicle Sales:
Autos & Light Trucks
Light Weight Vehicle Sales: Autos & Light Trucks
25
15
10
5
Sep-15
Source: U.S. Dept. of Commerce: Bureau of Economic Analysis/FRED
Jan-10
May-04
Sep-98
Jan-93
May-87
Sep-81
0
Jan-76
Millions of Units
20
Manufacturers’ New Orders:
Nondefense Capital Goods Excluding Aircraft
Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft
77,000
72,000
62,000
57,000
52,000
47,000
42,000
37,000
Source: Dept. of Commerce: Census Bureau
Jun-15
Feb-12
Oct-08
Jun-05
Feb-02
Oct-98
Jun-95
32,000
Feb-92
Millions of Dollars
67,000
Corporate Profits
(With Inventory Valuation Adjustment &
Capital Consumption Adjustment)
Corporate Profits After Tax with Inventory Valuation
Adjustment (IVA) and Capital Consumption Adjustment
1,800
1,600
1,200
1,000
800
600
400
Jul-09
Oct-99
200
Jan-90
Billions of Dollars
1,400
Source: U.S.Dept. of Commerce: Bureau of Economic Analysis
Corporate Hiring Plans:
Next 6 Months
Q4-15 Q3-15 Q2-15 Q1-15
More Jobs
35%
33%
34%
40%
Less Jobs
34%
32%
26%
23%
Source: Business Roundtable
Small Business Outlook
“Planning To Hire People In The Next Three
Months”
Planning to Hire People in the Next Three Months
25
20
10
5
0
-5
Source: National Federation of Independent Business
Jan-16
Apr-15
Jul-14
Oct-13
Jan-13
Apr-12
Jul-11
Oct-10
Jan-10
Apr-09
Jul-08
Oct-07
Jan-07
Apr-06
Jul-05
Oct-04
Jan-04
Apr-03
Jul-02
Oct-01
Jan-01
Apr-00
Jul-99
-10
Oct-98
Net % of Respondents
15
Job Growth in the 21rst Century
2000
TX
CA
FL
AZ
VA
NC
GA
WA
CO
2015
9,929,387 12,494,350
16,033,179 17,798,614
7,565,981 9,153,264
2,410,581 2,959,518
3,522,865 4,051,908
3,986,151 4,495,473
4,071,557 4,549,951
2,901,492 3,343,992
2,294,408 2,718,698
Change
2,564,963
1,765,435
1,587,283
549,937
529,043
509,322
478,394
442,500
424,290
Total Texas Non-Farm Employment
12,500
10,500
9,500
8,500
7,500
Source: Federal Reserve Bank of Dallas
Jan-16
Jan-14
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
6,500
Jan-90
Thousands of Workers
11,500
Mythical Chimera
• Something that exists only in the imagination
and is not possible in reality.
Mark Dotzour’s Chimera:
Winning the Masters with an 15 Handicap
Japan’s Chimera:
Quantitative Easing in a “New Dimension”
On Apr 4, 2013 BOJ will buy
50 trillion in JGB and 10 trillion
in Nikkei ETFs
Plan to double the monetary
base from 135 trillion yen
to 270 in two years.
Government Pension
Investment Fund will cut
holdings of government bonds
from 60% to 35% to increase
demand for stocks.
“This is taking monetary easing
into an entirely new dimension.”
H. Kuroda, Governor BOJ
Japan is Imploding
• Major banks are offering home loans at .5%
interest
• Popular trade is to short yen and buy Nikkei. If
traders sell stock and buy back yen, the yen
increases in value.
• Government debt burden is now 200% of GDP.
• The economy shrank in 4Q15 and could lead to
the third technical recession in four years.
• Yield on 10-year JGB was .15% in 1999!
Japan is Imploding (Then)
• Shinzo Abe was elected Prime Minister (12/2012)
after promising unlimited quantitative easing
• Since BOJ governor Kuroda took office in March
2013, the central bank has sharply increased its
purchases of stock ETFs.
• During the past two years, the BOJ has been
buying stocks roughly once every three days.
• The Topix Index has gained more than 50% since
the start of the new policy.
– WSJ 3/12/15
Japan is Imploding (Now)
• The BOJ is now a top-ten stock holder in about
90% of the stocks on the Nikkei 225.
• The Nikkei is down 9% so far in 2016.
• Buying 3 trillion yen of stock every month.
• Goldman estimates by 2017, the BOJ will be the
largest stockholder in 40 of the Nikkei companies.
• BOJ currently owns about 55% of the ETF market.
• Won’t sell ETF holdings until 2026.
Chinese Chimera:
The Shanghai Stock Exchange
Plunged 30% in three
weeks in June 2015.
• You can buy, but you
can’t sell.
• Please borrow money
to buy stocks.
• Half of all shares are
suspended from
trading.
• Declared war on
“foreign puppet
masters” and vicious
short sellers.
European Chimera:
I can help countries
that are heavily in
debt by loaning
them even more
money.
“The Governing Council is willing and
able to act by using all the instruments
available within its mandate if
warranted in order to maintain an
appropriate degree of monetary
accommodation. “
Draghi, November 3, 2015
Eurozone Lethargy Continues
• EU now predicts GDP of the 19-nation area to expand just 1.6% this
year, less than the 1.7% growth of 2015, while consumer prices are
seen up 0.2%, significantly below the 0.5% increase projected in
February. May 3, 2016
•
Tensions between the ECB and Germany are continuing to escalate,
after Mario Draghi suggested that Germans are responsible for a
"global savings excess" that has led to ultra low interest rates.
"There is a temptation to conclude that since very low rates
generate these challenges, they are the problem. But they are not
the problem. They are the symptom of an underlying problem,
which is insufficient investment demand, across the world, to
absorb all the savings available in the economy.“ May 3, 2016
Bad News Lifts US Stocks
The Dow jumped 322 points or 3% to 11,176 as a new
round of bleak economy data buoy investor hopes that
Mr. Bernanke will step in with some sort of monetary
stimulus.
WSJ August 24, 2011
Dow surges 217 points after signs of lackluster
economic data have reduced the odds of an interestrate increase by the Fed this year.
WSJ October 16, 2015
Dow soars more than 300 points because ECB Draghi
says it will do more QE if needed.
WSJ October 23, 2015
U.S. Stock Market “Investors”
High-frequency trading now accounts for more
than half of all stock trading volume in the US as
banks, hedge funds and institutional investors
seek to gain an edge…”
WSJ July 30, 2009
Stock Buybacks Proliferating
Source: FACTSET Buyback Quarterly December, 2015
Margin Debt
Debit Balances at Broker/Dealers
Debit Balances in Margin Accounts at Broker/Dealers
600,000
500,000
300,000
200,000
100,000
Source: New York Stock Exchange
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
0
Jan-98
Millions
400,000
Mar 2000 Dow 11,234
Mar 2001 Dow 9,106
Mar 2002 Dow 7,415
Jul 2007 Dow 14,021
Jul 2008 Dow 10,827
Jul 2009 Dow 8,087
Inflation Rate Remains Low
Consumer Price Index for All Urban Consumers: All Items
30
25
Percent Chg. From Year Ago
20
15
10
5
0
-5
-10
-15
-20
Jan-20
Jul-34
Jan-49
Jul-63
Jan-78
Source: U.S. Dept. of Labor: Bureau of Labor Statistics
Jul-92
Jan-07
University of Michigan Inflation
Expectation
University of Michigan Inflation Expectation©
12
10
Percent
8
6
4
2
0
Jan-78
May-83
Sep-88
Jan-94
May-99
Source: Thomson Reuters/University of Michigan
Sep-04
Jan-10
May-15
Low Interest Rates
Around the World
German 2-year
German 5-year
-.46
-.25
German 10-year
Swedish 10-year
Dutch 10-year
Swiss 10-year
.30%
.61%
.40%
-.34%
Japanese 10-year -.09%
The End of the Credit Super Cycle?
Maybe Not
20.0
18.0
30 year mortgage rate
10 year treasury rate
16.0
14.0
10.0
8.0
6.0
4.0
2.0
Source: Board of Governors of the Federal Reserve System/FRED
Apr-09
Dec-02
Aug-96
Apr-90
Dec-83
Aug-77
0.0
Apr-71
Percent
12.0
The Energy War Escalates
Saudi Arabia
Saudi Arabia has announced it will raise domestic petrol prices by
more than 50 per cent for some products.
Prices will increase for electricity, water, diesel and kerosene, after
the country posted a deficit of $135 billion in 2015.
The 2015 deficit is the highest in the history of Saudi Arabia, which
relies on oil for 90 per cent of public revenues. Contemplating
selling a portion of ARAMCO to raise money.
The IMF has warned Riyadh that failure to cut spending and
implement reforms will eat up the country's fiscal reserves in just
five years
February 3, 2016
Middle East Budget Strains
The Saudi Binladin Group is the largest
construction company in the Persian
Gulf region. They have an estimated
$30 billion in debt
They haven’t paid subcontractors and
suppliers for months. The Saudi
government is delaying payment for
completed projects.
WSJ 3/26/16
Investment Themes for 2016
• Mortgage rates unlikely to increase above 4 percent
• Home price appreciation to continue in most markets
• Currency declines will reduce foreign purchases of US real
estate from Russian, Canada and Mexico.
• Anti-corruption policy in China could reduce Chinese
purchases of US real estate
• New federal transparency rules on cash purchases will
reduce foreign buying demand in the US
• Foreign pension funds have strong appetite for US CRE
• Japanese REITS have strong appetite for US CRE
Investment Themes for 2016
• Europe, China and Japan printing money with little result
• Emerging market countries experience inflation &
recession
• No American inflation until year after oil price bottoms
• A couple of meaningless rate hikes by the Federal Reserve
• GDP ambles along at a tepid 2% growth rate
CRE Pricing Outlook
• China selling US Treasury bonds and still our
yields continue to fall.
• Forget the BRIC countries.
• Increased JREIT purchases as part of BOJ QE
campaign.
• “We are in an environment where very few of
the classic, liquid, safe assets have provided
much protection whatsoever. “ WSJ 1/8/16
Pension Interest in CRE
Nov 2011: CALSTERS back off $2.5 billion
allocation to commodities. Since 2007, they have
lost 13% in the sector.
Oct 2014: CAPERS raises its real estate allocation
to 11%, requiring another $7 billion in property
Dec 2014: San Francisco pension plans to
increase its real estate allocation from 8% to 17%.
May 2016: Norway’s Government Pension Fund
earned 2.7% in 2015. Plans to increase it’s
allocation to real estate from 5% to 7%.