Download Marco Consulting Group

The Crash of 2008 and Its Aftermath
Jack Marco
Chairman/ Sr Consultant
Marco Consulting Group
August 2010
Outline
 Part 1: 2008 Year in Review
 Part 2: 2009 Year in Review
 Part 3: 2010 First Half Year in Review
 Part 4: 2010 What Lies Ahead
 Part 5: How Pension Funds Suffered After 2008
Marco Consulting Group
2008 Year in Review
Jump on the Housing Bandwagon
S&P/Case-Shiller United States Home Price Index
350
300
+206%
250
(3-87 to 9-06)
200
-21%
150
(9-06 to 9-08)
100
50
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
Mar-92
Mar-91
Mar-90
Mar-89
Mar-88
Mar-87
0
Source: Bloomberg, 1987 index level set to 100
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Homeowners…
…took on too much debt
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
Debt $
Debt %
20
19
18
17
16
15
Source: Federal Reserve
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Debt Payments as % of Income
Total Debt Outstanding ($B)
Household Debt
Mortgage Lenders…
…issued risky mortgages and quickly sold them
Types of Mortgages Issued
Agency
Jumbo
Alt-A
Subprime
Other
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000
2001
2002
2003
2004 2005
2006
2007
2008
Source: PIMCO, UBS (2000-2007), JPMorgan (2008)
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Credit Freeze
 First Half of 2008
– Overall lending slows
– Lending frozen in risky areas
(e.g., subprime, leveraged loans)
– Belief that government will step in
(Bear Stearns)
 Second Half of 2008
– Lehman bankruptcy
– Paralyzed by headlines
– Lending frozen across the board
(prime mortgages, corporate bonds,
commercial paper, interbank lending)
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Headlines #1: Bankruptcy
 Bankruptcy or similar failure
– Lehman Brothers
– FDIC seized 25 failed banks (IndyMac, Washington Mutual)
– Retailers (Linens n’ Things, Sharper Image)
– Others (ATA Airlines, Icelandic banks)
 Reaction: Stocks ↓. Bonds ↓.
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Headlines #2: Government Assistance
 Temporary government protection
– Bear Stearns: JPM purchase with Fed $30 billion guarantee
– Fannie Mae, Freddie Mac: conservatorship
– AIG: $152 billion rescue package (loans and investments)
– Dozens of major banks: accept $250 billion in government capital in exchange
for preferred shares
 Reaction: Stocks ↓. Bonds stabilize or ↑.
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Headlines #3: Private Assistance
 Acquired or re-capitalized
– Countrywide: acquired by Bank of America
– Merrill Lynch: acquired by Bank of America
– Morgan Stanley: $9 billion investment from Mitsubishi UFJ
– Goldman Sachs: $5 billion investment from Buffet/Berkshire
– GE: $3 billion investment from Buffet, $12 billion from others
– Wachovia: acquired by Wells Fargo
– National City: acquired by PNC Financial
 Reaction: Stocks ↑. Bonds ↑.
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Headlines #4: Bank Holding Companies
 Applied for federal bank charter
– Morgan Stanley
– Goldman Sachs
– American Express
– GMAC
 Benefits: collect retail deposits, FDIC guarantee on bank debt, access to
Fed’s discount window
 Trade-Offs: bank regulators, higher capital requirements
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Massive Sell-Offs
Cumulative Returns in 2008
US Large Cap
Aggregate Bond
40%
US Small Cap
High Yield Bond
Intl Equity
Commodities
Emrg Mkt Equity
Cumulative Return
20%
5.2%
0%
-20%
-26.2%
-33.8%
-35.6%
-37.0%
-43.4%
-53.3%
-40%
-60%
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
-80%
Source: Bloomberg
Marco Consulting Group
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0
Marco Consulting Group
90
80
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
Jan-92
Jan-91
Jan-90
Expected 30-day volatility - S&P 500
Record Highs for Volatility
VIX Volatility Index
Credit
Crunch
70
60
50
40
30
20
10
Source: CBOE
12
Flight to Quality
Safety in U.S. Government assets
 U.S. dollar
 U.S. Treasuries
Risk assets
 Sell anything with any level of risk
 Higher correlations across the board
Technical reaction, not fundamental
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Strength of U.S. Dollar
Nominal Dollar Broad Index
140
130
Index Level
120
110
100
90
80
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
Jan-00
70
Source: Federal Reserve’s trade-weighted US dollar index
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Treasury Yields Pushed to Zero
3M LIBOR
6%
Fed Funds Target
3M TBILL
5%
4%
3%
2%
1.43%
1%
0.25%
0.08%
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
0%
Source: Bloomberg
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Demand Higher Yields from Risky Bonds
2500
2000
1500
1000
10y Avg
High Yield
1812
598
CMBS
990
141
ABS
967
136
Corporate
604
156
MBS
165
70
Agency
20
11
Source: Option-adjusted spreads on Merrill Lynch indexes through 12-31-08
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Dec-08
Dec-08
Dec-08
Nov-08
Nov-08
Oct-08
Oct-08
Sep-08
Sep-08
Aug-08
Aug-08
Jul-08
Jul-08
Jul-08
Jun-08
Jun-08
May-08
May-08
Apr-08
Apr-08
Mar-08
Mar-08
Feb-08
Feb-08
Jan-08
0
Jan-08
500
Jan-08
Excess yield over Treasuries (basis points)
12/31/2008
Imagine a World Where…
 People can’t get mortgages
 People can’t get car or student loans
 Companies can’t raise funds for new
factories or new products
 Companies have to stash more cash
to cover payroll or operating costs
 Banks don’t want to lend to each other
Marco Consulting Group
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Government Intervention
 Buyer of last resort
 Lender of last resort
 U.S. Treasury
 U.S. Federal Reserve
 Foreign governments
 Foreign central banks
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U.S. Bail-Out: TARP
 $700 billion Troubled Asset Relief Program (TARP)
 Run by the U.S. Treasury
 Waiting for Congress to release second installment of $350 billion
Amount
($ billions)
Project
Purchase shares of healthy banks
$250
Buy AIG preferred shares
$40
Fed program to guarantee ABS
$20
Citigroup investment
$25
Auto industry (GM, Chrysler, GMAC)
$23
Total
$358
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U.S. Bail-Out: Other Actions
Who
Month
Announced
Action
Fed
Lowered federal funds rate seven times
Fed
Opened discount window to lend to investment
banks
Fed
Currency swaps with 14 other central banks
Sept
To provide US dollars where supply is
tight
Money market insurance program
Sept
To guarantee safety of money market
deposits
SEC
Banned short selling of select stocks
Sept
To temporarily ease downward price
pressure
FDIC
Guaranteed newly issued senior bank debt
Oct
To promote liquidity
Fed
Buying 3-month commercial paper (highly rated,
unsecured and asset-backed)
Oct
To provide funds to companies to
continue operations
Fed
Buying $600 billion in agency debt and agency
MBS (Ginnie, Fannie, Freddie)
Nov
To lower mortgage rates
Fed
Lending up to $200 billion, taking ABS (auto,
credit card, student, and small biz loans) as
collateral
Nov
To encourage banks to continue creating
these loans
Treasury
All Year
Purpose
March
Marco Consulting Group
To encourage banks to lend
To provide source for emergency funds
20
U.S. Bail-Out: Other Actions
Who
Month
Announced
Action
All Year
Purpose
Fed
Lowered federal funds rate seven times
Fed
Opened discount window to lend to investment
banks
Fed
Currency swaps with 14 other central banks
Sept
To provide US dollars where supply is
tight
Treasury
Money market insurance program
Sept
To guarantee safety of money market
deposits
SEC
Banned short selling of select stocks
Sept
To temporarily ease downward price
pressure
FDIC
Guaranteed newly issued senior bank debt
Oct
To promote liquidity
Fed
Buying 3-month commercial paper (highly rated,
unsecured and asset-backed)
Oct
To provide funds to companies to
continue operations
Fed
Buying $600 billion in agency debt and agency
MBS (Ginnie, Fannie, Freddie)
Nov
To lower mortgage rates
Fed
Lending up to $200 billion, taking ABS (auto,
credit card, student, and small biz loans) as
collateral
Nov
To encourage banks to continue creating
these loans
March
Marco Consulting Group
To encourage banks to lend
To provide source for emergency funds
21
U.S. Bail-Out: Other Actions
Who
Month
Announced
Action
Fed
Lowered federal funds rate seven times
Fed
Opened discount window to lend to investment
banks
Fed
Currency swaps with 14 other central banks
Sept
To provide US dollars where supply is
tight
Money market insurance program
Sept
To guarantee safety of money market
deposits
SEC
Banned short selling of select stocks
Sept
To temporarily ease downward price
pressure
FDIC
Guaranteed newly issued senior bank debt
Oct
To promote liquidity
Fed
Buying 3-month commercial paper (highly rated,
unsecured and asset-backed)
Oct
To provide funds to companies to
continue operations
Fed
Buying $600 billion in agency debt and
agency MBS (Ginnie, Fannie, Freddie)
Nov
To lower mortgage rates
Fed
Lending up to $200 billion, taking ABS (auto,
credit card, student, and small biz loans) as
collateral
Nov
To encourage banks to continue creating
these loans
Treasury
All Year
Purpose
March
Marco Consulting Group
To encourage banks to lend
To provide source for emergency funds
22
Central Banks Drop Rates
Central Bank Interbank Lending Rates
US
England
Canada
Australia
Europe
Japan
8
7
6
5
4
3
2
1
0
Source: Bloomberg
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$-
Marco Consulting Group
$300,000
$150,000
6
$100,000
4
$50,000
2
0
Source: National Association of Realtors
24
Months Supply
$181,300
$200,000
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Median Price
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
$229,000
$250,000
Jun-07
May-07
Apr-07
Mar-07
Feb-07
2006
2005
Median Price
Concern 1: Housing
Home Sales
Months Supply
11.2
12
10
8
Concern 2: Economy and Unemployment
300
8.0
Change in Nonfarm Payrolls
Unemployment Rate
177
200
162
7.0
140
107
100
57
46
25
74
81
60
41
6.0
0
-100
-76
-83
-88
-67
-47
5.0
-67
-100
-127
-200
4.0
-300
3.0
-400
-403
2.0
-423
-500
-524
-600
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
-700
1.0
-584
0.0
Source: Bureau of Economic Analysis
Marco Consulting Group
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Unemployment Rate
Change in Nonfarm Payrolls (000s)
126
7.2
Hopeful Sign 1: Historical Recessions
Peak
Trough
Months
Peak
Trough
Months
Sept. 1902
Aug. 1904
23
Nov. 1948
Oct. 1949
11
May 1907
June 1908
13
July 1953
May 1954
10
Jan. 1910
Jan. 1912
24
Aug. 1957
April 1958
8
Jan. 1913
Dec. 1914
23
April 1960
Feb. 1961
10
Aug. 1918
March 1919
7
Dec. 1969
Nov. 1970
11
Jan. 1920
July 1921
18
Nov. 1973
March 1975
16
May 1923
July 1924
14
Jan. 1980
July 1980
6
Oct. 1926
Nov. 1927
13
July 1981
Nov. 1982
16
Aug. 1929
March 1933
43
July 1990
March 1991
8
May 1937
June 1938
13
March 2001
Nov. 2001
8
Feb. 1945
Oct. 1945
8
December 2007
Average
14
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Source: NBER
Hopeful Sign 2: Average Drawdowns
S&P 500 Index Returns
Peak
Bottom
Duration
Decline
11/29/1968
5/26/1970
18 months
-36.1%
1/11/1973
10/3/1974
21 months
-48.2%
11/28/1980
8/12/1982
20 months
-27.1%
8/25/1987
12/4/1987
3 months
-33.5%
7/16/1990
10/11/1990
3 months
-19.9%
3/24/2000
10/9/2002
31 months
Average decline for prior 7 events
-49.1%
-35.7%
Peak
Bottom
Duration
Decline
10/9/2007
11/20/08
13 months
-50.7%
 Average return for the 3 months following the bottom of a cycle: +13.9%
 Average return for the 12 months following the bottom of cycle: +34.9%
 Return from 11/20/08 to 12/31/08: +20.5%
Source: Attalus Capital, Morningstar
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Hopeful Sign 3: Forecast
MSNBC Year-End Economic Roundtable
Forecast for GDP Growth
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Scott Anderson, Senior Economist, Wells Fargo
-5.6%
-3.8%
-0.5%
1.7%
2.2%
Nariman Behravesh, Chief Economist, IHS Global Insight
-6.5%
-4.0%
-0.7%
0.7%
1.4%
Michael Englund, Chief Economist, Action Economics
-6.5%
-3.0%
1.0%
2.0%
2.5%
Ethan Harris, Co-head, U.S. economics research, Barclays Capital
-4.5%
-4.5%
-1.0%
2.0%
3.0%
Jan Hatzius, Chief U.S. Economist, Goldman Sachs
-5.0%
-3.0%
-1.0%
1.0%
1.0%
Ed Leamer, Forecast Director, UCLA Anderson Business School
-4.1%
-3.4%
-0.8%
0.2%
1.0%
Mickey Levy, Chief Economist, Bank of America
-5.7%
-3.6%
-0.8%
2.1%
2.9%
Joel Naroff, President, Naroff Economic Advisors
-5.1%
-0.6%
1.1%
2.0%
4.8%
David Rosenberg, Chief North American Economist, Merrill Lynch
-4.5%
-4.2%
-3.3%
-0.8%
0.0%
John Silvia, Chief Economist, Wachovia Corp.
-5.9%
-3.4%
-1.8%
1.0%
1.9%
Diane Swonk, Chief Economist, Mesirow Financial
-6.3%
-3.0%
-0.8%
1.4%
1.9%
Lawrence Yun, Chief Economist, National Association of Realtors
-5.5%
-2.0%
-0.2%
1.4%
2.6%
Consensus
-5.4%
-3.2%
-0.7%
1.2%
2.1%
Source: MSNBC.com
Marco Consulting Group
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Hopeful Sign 4: Government Actions
Hooray!
Challenges
 More jobs
 Higher taxes later or spending cuts
 More infrastructure
 More stimulus checks
 More tax breaks
 Easier mortgages
elsewhere
 Infrastructure projects take time to get
running
 Mortgage modifications can hurt bond
investors
 Government spending can lead to:
– weaker dollar
– higher inflation
– being more indebted to other nations
Marco Consulting Group
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2009 Year in Review
2009: a Tale of Two Markets
Q1
Q2 to Q4
 In early 2009, investors were still
shell-shocked from 2008
 Investors begin risk-seeking typical of
 Credit markets still frozen
recoveries and market normalization
 Fear prevailed as investors kept
money on the sidelines
 “Green shoots” of economic recovery
 Bargain-hunting activity increase as
investors see oversold areas of
market
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Early 2009 Headlines...
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In January, Things Were Still Unraveling...
Characterized by:
The Downward Economic Spiral
 Market uncertainty: indicated by high
volatility; search for market bottom
Asset
Prices
 Declining consumer spending and
business investment
Investments
 Home prices in free fall
 Rising unemployment
Savings
Consumption
Spending
Dire negative expectations
and lack of credit
availability prevent a reset
of the system despite much
lower asset prices
Profits
Employment
Source: PIMCO
Marco Consulting Group
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Equity Markets Continued Heading South…
Cumulative Returns
10/9/2007 - 12/31/2009
0%
2008 decline = -37.0%
1/1/09-3/9/09 decline = -24.6%
-10%
-20%
-30%
-40%
10/9/07-3/9/09 total decline
from the market peak to the
market trough: -54.9%
-50%
-60%
10/07 12/07
02/08
04/08
06/08
08/08
10/08
12/08
Marco Consulting Group
02/09
04/09
06/09
08/09
10/09
34
12/09
Consumer Confidence Went With the Markets
 Consumer confidence bottomed in February
Consumer Confidence Index
160
140
Monthly Average
7/31/2000 – 2/28/09 = 94.7
120
100
80
60
40
2/28/09 level = 25.3
20
0
Jul-00
Sep-01
Nov-02
Jan-04
Mar-05
May-06
Jul-07
Sep-08
Dec-09
Source: The Conference Board (via Bloomberg). Consumer Confident Index through 2/28/2009.
Marco Consulting Group
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Government Intervention in 2009
 February 17: $787 billion government stimulus
package enacted
 February 18: Obama announces plan to aid
homeowners with mortgage payments
 March 18: Federal Reserve announces it will
increase its balance sheet to purchase additional
securities for the purpose of increasing liquidity
in credit markets
 March 23: Treasury details Public Private
Investment Program
 June 24: Bill with Cash for Clunkers provision
signed into law
Marco Consulting Group
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“Green Shoots” Appeared in Late Q1
“Green shoots” is a term used
colloquially to indicate signs of
economic recovery during an economic
downturn.
Federal Reserve Chairman,
Ben Bernanke, made the
first public use of the
phrase by a Fed official in a
March 15, 2009 interview
with 60 Minutes
BusinessWeek cover, April 13, 2009. Bernanke photo from www.federalreserve.gov
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March 9th Market Turnaround
Cumulative Returns
10/9/2007 - 12/31/2009
0%
-10%
-20%
-30%
-40%
-50%
-60%
10/07 12/07
02/08
04/08
06/08
08/08
10/08
12/08
02/09
04/09
06/09
08/09
10/09
Source: Bloomberg, through 12/09
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12/09
S&P 500 Rebounded 66% Since March Bottom
Cumulative Returns
10/9/2007 - 12/31/2009
0%
66.1% rally since
March 9
-10%
-20%
-30%
-40%
-50%
-60%
10/07 12/07
02/08
04/08
06/08
08/08
10/08
12/08
02/09
04/09
06/09
08/09
10/09
Source: Bloomberg, through 12/09
Marco Consulting Group
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12/09
Consumer Confidence Turned Up in March
 Consumer confidence rebounded March through May; flat in the third quarter
 Still well-below average
Consumer Confidence Index
160
140
Monthly Average
7/31/2000 – 12/31/2009 = 90.5
120
100
80
60
40
Current level = 52.9
20
0
Jul-00
Feb-02
Sep-03
Apr-05
Nov-06
Jun-08
Dec-09
Source: The Conference Board (via Bloomberg). Consumer Confident Index through 9/30/2009.
Marco Consulting Group
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End of the Recession
 Economists indicate recession officially over in mid-year 2009
– Bernanke: “From a technical perspective the recession is likely over”
– Former Fed staffer: “June was mostly likely the trough”
– 41 of 51 economists surveyed by WSJ believe recession is over
 But things are still tentative…
– Unemployment
– Consumer spending
– Credit creation
– Housing prices
– Government programs
 Where are we today and where are we going?
Marco Consulting Group
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Yield Curve Steepening Process Began
 Beginning of Year and End of Year Difference
Treasury Yield Curve
12/31/2008
6.0
12/31/2009
5.5
4.64
5.0
Yield to Maturity (%)
4.5
3.84
4.0
3.5
2.68
3.0
2.68
2.21
2.5
1.55
2.0
1.5
1.0
0.5
0.44
0.34
0.0
3 mos
1 yr
5 yrs
10 yrs
30 yrs
Time to Maturity
Marco Consulting Group
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In the U.S., GDP Growth Was Positive in Second Half but Negative
for Full Year
U.S. GDP Growth
10
Real GDP Growth, % change q/q at an annualized rate
7.5
8
Percent Change from Prior Quarter
6.4
5.7
6
4.8
3.5
4
2.7
2.1
1.2
2 1.0
1.6
2.2 2.4
3.8
3.5 3.6
3
3
2.7
2.5 2.6
4.8
2.8
2.7
1.3
1.2
4.8
0.2
0.8
1.5
2.2
0.9
0.1
0
-0.5
-0.2
-0.5
-0.5
-1.0
-1.4
-2
Full year 2009 GDP
declined by 2.4%
-4
-6
-6.3 -6.1
-8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Morgan Stanley
Marco Consulting Group
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Potential Shapes of the Economic Recovery
 Economic Alphabet Soup
– V Shaped Recovery
– U Shaped Recovery
– W Shaped Recovery
– L Shaped Recovery
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V-Shaped Recovery Example
GDP Growth 1952-1955
15%
10%
5%
0%
-5%
-10%
1952
1953
1954
1955
 U.S. Recession of 1953
– GDP growth for this recession forms a classic v-shape
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U-Shaped Recovery Example
GDP Growth 1973-1975
S&P 500 Index 1973-1976
12%
140
10%
120
8%
100
6%
4%
80
2%
60
0%
40
-2%
20
-4%
-6%
0
1973
1974
1975
1976
1973
1974
1975
1976
 U.S. Recession of 1973-1975
– Recession is longer than a V-shaped recession with a less clearly-defined trough
– GDP may shrink for several quarters and only slowly return to trend growth
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W-Shaped Recovery Example
GDP Growth 1978-1983
8
6
4
2
0
-2
-4
1978
1979
1980
1981
1982
1983
1984
 Early 1980s Recession in the U.S.
– Also called a “Double Dip” recession
Marco Consulting Group
47
L-Shaped Recovery Example
GDP Growth in Japan 1987-2007
NIKKEI 225 (1984-2009)
10%
45000
8%
40000
35000
6%
30000
4%
25000
20000
2%
15000
0%
10000
-2%
5000
0
-4%
85
87
89
91
93
95
97
99
01
03
05
07
09
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
 Asset Price Bubble in Japan 1980s-1990s
Source: finance.yahoo.com. Penn World Tables
Marco Consulting Group
48
Key Themes in 2009
Unemployment
Credit Creation
Consumer Spending
Housing
Homes
Marco Consulting Group
Government Actions
49
Unemployment
Unemployment Rate
2000-2009
11%
10%
10%
9%
8%
7%
50-year average: 5.9%
6%
5%
4%
3%
2%
1%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Bureau of Labor Statistics
Marco Consulting Group
50
Unemployment
Change in Nonfarm Payrolls
Monthly Change in Nonfarm Payrolls (000s)
700
7.2 million total jobs
lost since Jan 2008
500
300
100
-100
-300
-500
-700
-900
2000
2001
2002
2003
2004
2005
Marco Consulting Group
2006
2007
2008
2009
51
Unemployment
 Second highest rate over last 60 years
Historical Peaks in Unemployment
12%
10.8%
11%
10%
10.0%
9.0%
Unemployment Rate
9%
8%
7.9%
7.5%
7.7%
7.0%
6.3%
7%
6%
5%
50-year Average: 5.9%
4%
3%
2%
1%
0%
1948
1952
1956
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Source: Bureau of Labor Statistics
Marco Consulting Group
52
2009
Consumer Spending
 Consumer confidence bottomed in March
 A reading above 90 means the economy is on solid footing. Above 100 signals
strong growth
Consumer Confidence Index
160
140
120
100
80
52.9
60
40
20
0
Jul-00
25.3
Feb-02
Sep-03
Apr-05
Nov-06
Jun-08
Dec-09
Source: The Conference Board (via Bloomberg). Consumer Confident Index through10/31/2009.
Marco Consulting Group
53
Consumer Spending
Personal Consumption Expenditures Growth
Components of GDP
from 2000-2009
Billions, USD
8%
$16,000
6%
LT Average
3.5%
4%
2.5% Housing/Construction
$14,000
8.4% Investment Ex-Housing
$12,000
20.8%
Gov’t Spending
$10,000
$8,000
2%
$6,000
0%
$4,000
-2%
$2,000
-4%
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-$2,000
71.1%
Consumption
-2.8% Net Exports
Source: Commerce Department
Source: BEA and JP Morgan Asset Management
Marco Consulting Group
54
Consumer Savings
U.S. Personal Savings Rate
(1959-2009)
14%
12%
10%
8%
6%
Long Term Average = 6.4%
4%
2%
0%
-2%
-4%
Consumer Spending Data Source: U.S. Department of Commerce Data as of 8/31/2009 Personal Savings Rate Data Source: St. Louis Federal Reserve Bank as of 11/30.2009)
Marco Consulting Group
55
Credit Creation
 Credit officers are still tightening their standards
U.S. Consumer Credit Conditions
Credit Card Loans
Other Loans
% of Banks Tightening Credit Standards
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Federal Reserve - Senior Loan Officer Survey
Marco Consulting Group
56
Housing Market
 Home prices may be stabilizing…
Case-Schiller Home Price Index
NAR Median Home Price
$150,000
200
Index Level
$200,000
Up
8%
$178,300
$164,800
Median Price
$250,000
$228,600
$300,000
Homes
250
150
May: Case
Schiller index
bottomed
100
$100,000
50
$50,000
0
$2006
Aug-07
Mar-08
Oct-08
May-09
Dec-09
2006
2007
2008
2009
Source: National Association of Realtors, data through December 2009. Standard & Poor’s Case Schiller Composite 10 Index, data October 2009
Marco Consulting Group
57
Government Actions
 …but is the stabilization permanent?
Programs
Primary Sponsor
Impact
Home Buyer Tax Credit
Congress
$11 billion in Tax Credits due to the extension
Increase in Conforming Balance Limits
Congress
Expands pool of borrowers eligible for GSE mortgages and reduces strain
on jumbo non-conforming mortgage market
TARP funded HAMP modifications
Treasury
Monthly payment reductions and incentive payments will provide aprox
$70 billion to borrowers over the next 5 years.
Agency Conduit Initiative
FHFA
Facilitate greater mortgage creation by smaller banks and non-bank loan
originators
Easing of tax consequences
relating to CMBS loan models
IRS
Makes it easier for operators of troubled properties to lower debt service
payments
Easing of capital treatment
related to bank CRE loan models
Regulators
Allows banks to refinance high LTV borrowers who can stay current on
payments without a capital charge
CMBS TALF new issue
Federal Reserve
Lowers spreads on existing qualifying CMBS, helps channel money for
new securitized Commercial Real Estate deals.
Support of State Housing Authorities
Treasury/ FHFA
Provides $35 billion of financing to State Housing Authorities
Expansion of FHA mortgage book
(via GNMA)
HUD
GNMA now provides 45% of new net issuance and over 50% of mortgages
for new home purchasers
Expanded Tax Loss Carry Forward
Congress
$33 billion in cash tax refunds
Bridgewater Daily Observations 11/24/2009
Marco Consulting Group
58
2010 First Half Year in Review
GDP Increased 2.7% in the 1st Quarter of 2010
Real GDP Growth
10.0
8.0
Percent Change from Prior Quarter
6.0
4.0
2.7%
2.0
0.0
-2.0
-4.0
-6.0
-8.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: BEA, annualized seasonally-adjusted quarter-to-quarter growth rates. Data through 3/31/2010.
Marco Consulting Group
60
Consumer Price Index
 Core inflation is well below the Fed’s comfort zone of 1.5-2.0%. Some economists are concerned
about the threat of disinflation or deflation, a result of declining prices and spending.
Consumer Price Index (y/y change)
Headline CPI
Core CPI
6
5.5
5
4.5
4
Inflation Rate
3.5
3
2.5
2
Fed comfort zone
(core)
1.5 to 2.0%
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
Jan-00
Nov-00
Sep-01
Jul-02
May-03
Mar-04
Jan-05
Nov-05
Sep-06
Jul-07
May-08
Mar-09
Jan-10 Jun-10
Source: Bureau of Labor Statistics. Data through 6/30/2010.
Marco Consulting Group
61
Consumer Confidence
 Despite the index reaching 63.3 in May, it quickly relapsed to 52.9 in June.
 A reading over 90 indicates that the economy is on solid footing. Above 100 signals strong growth.
Consumer Confidence Index
140
120
100
80
60
52.9
40
20
Ju
n10
Ju
n09
Ju
n08
Ju
n07
Ju
n06
Ju
n05
Ju
n04
Ju
n03
Ju
n02
Ju
n01
0
Source: The Conference Board. Consumer Confidence Index through 6/30/2010.
Marco Consulting Group
62
Marco Consulting Group
-100
6%
-300
4%
-500
-700
2%
-900
0%
Source: Bureau of Labor Statistics. Data through 6/30/2010.
63
Unemployment Rate
300
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Change in Nonfarm Payrolls
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
700
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Monthly Change in Nonfarm Payrolls (000s)
Unemployment
Unemployment Rate
12%
500
10%
9.5%
100
8%
Direction of Home Prices Remains Uncertain
 Although there has been a slight uptick in home prices we have yet to see a
strong, consistent price rebound
NAR Median Home Price
Case-Shiller Home Price Index
250
Median Price
$200,000
$150,000
200
Index Level
$164,800
$250,000
$179,600
$228,600
$300,000
150
100
$100,000
50
$50,000
Source: National Association of Realtors, data through May 2010.
Standard & Poor’s Case Shiller Composite 10 Index, data through May 2010.
Marco Consulting Group
64
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
May-10
Jan-10
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
2006
Apr-06
0
$-
Direction of Home Sales Remains Uncertain
 Mortgage Bankers’ Association Purchase Index, which measures the volume of mortgage
loan applications, rose 34.5% during Q2
 Index rose despite the tax credit program expiring in April for the second time (the first
deadline was in October 2009)
7
MBA Purchase Index
2000
6
5
4
3
1800
2
1600
1
0
Sep-08
1400
Sep-09
Existing Home Sales
1200
1000
800
600
400
200
0
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: Bloomberg. Data through 6/30/2010.
Marco Consulting Group
65
Equity Market Volatility Peaks
 In May, the VIX, which shows the market’s expectation of 30-day volatility, rose to
heights not seen since the financial crisis.
VIX Volatility Index
90
Close
LT Average
Expected 30-day volatility - S&P 500
80
70
60
VIX spiked to 45.8
on May 20th
50
40
30
20
10
0
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Source: VIX Index, Data through 6/30/2010.
Marco Consulting Group
66
S&P Posts Worst Performance Since 4Q08
 After showing signs of recovery in 1Q10, stocks retreated in the 2nd quarter with
the S&P 500 falling 12%
 May performance was the worst drawdown since the depths of the financial crisis
S&P 500 Monthly Returns, January 2009 - June 2010
15%
10%
5%
0%
-5%
-10%
Jun-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
Nov-09
Oct-09
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
-15%
May-10
-8.0%
-10.7%
Source: Bloomberg, through 6/30/2010.
Marco Consulting Group
67
Returns Since the Peak, 10/9/07 – 6/30/10
 Equity market lost some of its gains from 1Q10 during the second quarter
Cumulative Returns 10/9/07- 6/30/10
0%
Returns Since 10/9/07
-10%
-20%
-30%
-40%
-50%
-60%
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09 Apr-09
Jul-09
Oct-09
Jan-10 Apr-10
Source: Bloomberg, through 6/30/2010.
Marco Consulting Group
68
Bond Spreads in 2Q10
 Spreads widened in the second quarter, particularly in high yield, reflecting
investors’ aversion to risky assets
2500
6/30/10
High Yield
Corporate
Agency
2000
713
209
4
Peak LT Avg
2182
656
42
654
181
14
1500
1000
500
0
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Source: Bloomberg (Monthly data). Data through 6/30/2010.
Marco Consulting Group
69
Real Estate in Q2
NCREIF ODCE
Income
Appreciation
9.00
Rate of Return (%)
4.00
-1.00
-6.00
-11.00
-16.00
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Source: NCREIF Open-End Diversified Core (ODCE). Data through 6/30/2010*.
*Q2 preliminary data
Marco Consulting Group
70
2010 What Lies Ahead
What is the “New Normal”?
De-Leveraging
De-Globalization
Re-Regulation
 The world is being transformed by “DDR”
– D: Old model for encouraging home ownership is dead
– D: Global leadership has changed with China growing faster than others
– R: The invisible hand of free enterprise is being replaced by government
Source: PIMCO – William Gross Investment Outlook September 2009
Marco Consulting Group
72
What is the “New Normal”?
 De-Leveraging: Global interest rates will remain low for
extended periods of time
 De-Globalization: Asia and Asian-connected economies
(Australia, Brazil) will dominate future global growth
 Re-Regulation: Investors should continue to anticipate
government policies
Source: PIMCO – William Gross Investment Outlook September 2009
Marco Consulting Group
73
Summary of U.S. GDP Forecasts For 2010
Economist / Institution
Forecast
Goldman Sachs
2.7%
Blackstone
3%
Average Estimate
2.7%
JP Morgan
3.5%
IMF
1.5%
Mesirow Financial
2-4%
Schroeders
recovery of an “L” or “W” shape
Fed Governors Survey
2.5-3.5%
Average GDP growth following a recession: 6 - 8%
Marco Consulting Group
74
Key Themes to Watch in 2010
Unemployment
Housing
Consumer Spending
Credit Creation
Government Actions
Inflation
Marco Consulting Group
75
Unemployment: Some Improvement Expected
 Unemployment forecasts
– Federal Reserve
 2010: 9.3%-9.7%
 2011: 8.2%-8.6%
 2012: 6.8%-7.5%
 For a significant decline in unemployment rate, the U.S. needs real GDP
growth of over 5% in 2010
 While official unemployment is 10%, if you add the “underemployed” (part
time workers who would like to have full time jobs), the number is closer
to 17.5%
Sources: Okun’s Law; Blackstone
Marco Consulting Group
76
Consumer: Still Needs to De-Lever
25%
 Percentage of U.S. households that are underwater on their mortgages
– High debt levels and debt service payments, coupled with rising unemployment and the
legacy of the housing collapse, mean that a very large number of households are in no
condition to buy homes or to increase spending through borrowing
Source: American CoreLogic
Marco Consulting Group
77
Housing: Recovery Needs to Take Place
Homes
5.3 million
 Number of US households tied to mortgages that are at least 20% higher than
their home’s value
2011
 Year that JP Morgan expects US home prices to hit rock bottom
Source: American CoreLogic
Marco Consulting Group
78
Government Actions
 Fed to maintain low interest rates
Federal Funds Percentage
6%
5.0%
5.0%
5%
4%
3.2%
3%
1.9%
2%
1%
0.2%
0.2%
0.2%
0.2%
0.3%
0%
2005
2006
2007
2008
2009e
2010 Q1 2010 Q2 2010 Q3 2010 Q4
Source: Federal Reserve Board / Mesirow Financial Estimates
Marco Consulting Group
79
Credit Creation
 Access to credit is primary risk to
growth
– Lending by banks remains constrained
– Retailers are feeling the squeeze, as
regulators are curtailing their issuance of
“pre-approved” lines of credit at the cash
register
– Small business owners have had
difficulty in securing credit to run their
businesses
Marco Consulting Group
80
Inflation
Inflation Expectations
5y Breakeven
10y Breakeven
MI Survey
6
4
2
0
-2
-4
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
 Core Inflation Is Expected To Remain Muted In 2010
– High unemployment will likely hold nominal wages in check
– Overhang of vacant homes will keep rents from rising, which will hold the housing
component of the Consumer Price Index in check
– Inflation remains more of a medium-term (3-5 year) than near-term threat
Source: Federal Reserve
Marco Consulting Group
81
Summary
 Recovery has started
 Economy is on a path to growth: path is still uncertain
 Key factors to watch include:
De-Leveraging
De-Globalization
Marco Consulting Group
Re-Regulation
82
How Pension Funds Suffered After 2008
Results of the NCCMP 2009 Survey of the Funded Status of
Multiemployer Defined Benefit Plans
Marco Consulting Group
84
Results of the NCCMP 2009 Survey of the Funded Status of
Multiemployer Defined Benefit Plans
Zone Status
 Green: Healthy plans
100%
 Yellow: Endangered plans
 Red: Critical plans
20%
90%
80%
70%
2008
Over 75% of the plans that
responded to the survey reported
their 2008 PPA zone status as
green reflecting the relative health
of these plans and the
seriousness with which the
bargaining parties addressed the
funding disruption caused by the
first historic market contraction
which occurred from 2000 – 2002.
60%
76%
38%
2009
A striking decline in
green zone plans from
2008 to 2009, with only
20% of plans reporting
their 2009 zone status
as green, and more
than 40% of the plans
reporting their zone
status as red.
50%
40%
30%
20%
15%
42%
10%
9%
0%
2008
Marco Consulting Group
2009
85