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The Outlook for the U.S.
and Global Economies
Dan North
Euler Hermes Chief
Economist, North America
MAY 2012
The Outlook May, 2012
• Overall Cautious Optimism
• Risks
• Debt uncertainty in Europe/U.S.
• A positive, but weak U.S. economy
• Forces and measures
• Government responses
• Conclusions
2012 | © Copyright Euler Hermes
2
ntshl
The Economic Outlook for 2012 in a nutshell
World growth should fall from 3.0% in 2011 to +2.7% for
2012, with emerging economies leading the way (Asia
ex-Japan, China, India, Latin America).
In the US, growth should be around 2% for 2012.
Recession in the Euro zone which will be severe for
several economies. Risk of disorderly default or exit
from the EMU is rising.
2012 | © Copyright Euler Hermes
3
Eur dbt
European Debt Crisis Uncertainty
•
•
•
•
•
•
•
•
•
•
•
This started over 2 yrs ago. Europe is burning while its leaders
fiddle.
What happens when Greece defaults again?
What happens if Italy, Spain, France need bailouts?
Latest plan: fiscal unity + ECB printing €’s. Had fiscal targets
before – ignored.
Will also need European Financial Stability Fund (EFSF) 500B €,
IMF, EU. China? U.S. Fed / taxpayer?
7 changes in government
9 downgrades
Dozens of meetings
17 countries, heads of state, finance ministers, central banks,
commercial banks, ECB/IMF/EU.
It’s visibility goes up and down
Problem is UNCERTAINTY!
2012 | © Copyright Euler Hermes
4
Afct us
European Debt Crisis Uncertainty
How Does It Affect Us?
•
Exports to Europe
<2% of our GDP
•
Financial contagion
Possibility that our banks are exposed to losses in
Europe - all debt markets are eventually linked
•
Confidence
Fear slows consumers
Financial markets weaken
• None of the three by themselves that much, but all three
together could be a significant drag
2012 | © Copyright Euler Hermes
5
US dbt
U.S. Debt Uncertainty
• U.S. debt problem is different. In contrast to
Europe, U.S. will never have to default because it
can do what no one else can – print U.S. dollars.
• U.S. problem is government has no plan to
reduce debt that’s so high it hurts the economy.
• Deficits continue and debt/GDP at 100% for next
10 years. No attempt to reform entitlements.
• Congress is stuck…fiscal cliff, debt ceiling, 2012
elections…uncertainty
• Uncertainty over taxes, regulation hurting
growth.
• But that’s just one aspect of the economy, let’s
look at the details…
2012 | © Copyright Euler Hermes
6
The four forces which started and
ended the recession can help
forecast the outlook:
•
•
•
•
Oil
Housing
Fed policies
Fear
(GDP: $15T, 3.3% ave. growth. It’s the “size” of the
economy. Use it to measure the “size” of other big
numbers like budget deficit/debt)
2012 | © Copyright Euler Hermes
7
Oil Price Shocks and the Economy
400%
10%
Real Crude Prices (average of Brent,
Dubai, WTI spot prices), Y/Y% growth
Real GDP, Y/Y% growth
290%
300%
200%
5%
140%
100%
21%
56%
38%
28%
36%
0%
0%
-36%
-100%
oil price shocks often
contribute to recessions
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
-5%
1972
-200%
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
2012 | © Copyright Euler Hermes
8
Oil Price Shocks and the Economy
400%
10%
Real Crude Prices (average of Brent,
Dubai, WTI spot prices), Y/Y% growth
Real GDP, Y/Y% growth
290%
300%
32%
200%
140%
5%
28%
100%
21%
56%
38%
28%
36%
0%
0%
-36%
-100%
oil price shocks often
contribute to recessions
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
-5%
1972
-200%
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
2012 | © Copyright Euler Hermes
9
Oil Price Shocks and the Economy
400%
10%
Real Crude Prices (average of Brent,
Dubai, WTI spot prices), Y/Y% growth
Real GDP, Y/Y% growth
290%
300%
32%
200%
140%
5%
28%
8%
100%
21%
56%
38%
28%
36%
0%
0%
-36%
-100%
oil price shocks often
contribute to recessions
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
-5%
1972
-200%
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
2012 | © Copyright Euler Hermes
10
Recent oil
Oil Prices, $/bbl: an extended $10 rise in oil
cuts 0.2% - 0.3% off U.S. GDP growth:
150
140
Year
2007
2008
2009
2010
2011
130
120
110
100
Brent Crude, $/bbl
Average Change GDP loss
$73
$98
$25
-0.50%
$62
-$36
0.72%
$80
$18
-0.36%
$111
$31
-0.63%
below the peaks,and
falling...slowing global
economy, easing fears
Brent
$107
WTI
90
$90
80
70
60
50
40
2012 | © Copyright Euler Hermes
May-2012
Feb-2012
Nov-2011
Aug-2011
May-2011
Feb-2011
Nov-2010
Aug-2010
May-2010
Feb-2010
Nov-2009
Aug-2009
May-2009
Feb-2009
Nov-2008
Aug-2008
May-2008
Feb-2008
Nov-2007
Aug-2007
source: World Bank
May-2007
30
11
gas
Oil Prices, $/bbl: an extended $10 rise in oil
cuts 0.2% - 0.3% off U.S. GDP growth:
150
140
Year
2007
2008
2009
2010
2011
130
120
110
100
Brent Crude, $/bbl
Average Change GDP loss
$73
$98
$25
-0.50%
$62
-$36
0.72%
$80
$18
-0.36%
$111
$31
-0.63%
below the peaks,and
falling...slowing global
economy, easing fears
Brent
$107
WTI
90
$90
80
70
Gasoline prices more closely related
to Brent – not enough pipeline to get
glut of WTI to refineries fast enough
60
50
40
2012 | © Copyright Euler Hermes
May-2012
Feb-2012
Nov-2011
Aug-2011
May-2011
Feb-2011
Nov-2010
Aug-2010
May-2010
Feb-2010
Nov-2009
Aug-2009
May-2009
Feb-2009
Nov-2008
Aug-2008
May-2008
Feb-2008
Nov-2007
Aug-2007
source: World Bank
May-2007
30
12
gas
U.S. Regular Gasoline Prices,$/gallon
4.5
7/7/08: 4.11
4/2/12: 3.94
4.0
$0.23 drop is great, but it's <6%...
3.5
5/14/12:
3.71
3.0
2.5
good: below the
peaks, and falling
2.0
source: EIA
1.5
2012 | © Copyright Euler Hermes
13
hsng
Housing
Case - Shiller Home Price Index, % Change
2.0%
20%
16%? How about 6%
1.5%
15%
1.0%
10%
0.5%
5%
0.0%
0%
-0.5%
-5%
-1.0%
-10%
-1.5%
-15%
M/M
-2.0%
-20%
Y/Y
-2.5%
-25%
S&P/Case-Shiller
2012 | © Copyright Euler Hermes
14
fndmntl
Housing
U.S. Housing Market
2,500 Fundamental Measures, Seasonally Adjusted Annualized Rates
7,000
6,000
2,000
Existing 1-Family Home Sales
(right scale), -35%
5,000
1,500
4,000
3,000
1,000
Starts, -68%
2,000
500
Permits, -68%
1,000
New 1-Family Home Sales, -75%
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Apr-05
Apr-04
Apr-03
0
Apr-02
0
sources: National Association of Realtors, Census
2012 | © Copyright Euler Hermes
15
Yld crv
The Treasury Yield Curve vs. GDP
10%
500
Yield Curve:
10yr-3 mo Treasuries (bps)
8%
400
6%
300
4%
200
2%
100
0%
0
2012 | © Copyright Euler Hermes
1Q12
1Q10
1Q08
1Q06
1Q04
1Q02
1Q00
1Q98
1Q96
1Q94
1Q92
1Q90
1Q88
1Q86
1Q84
Source: Census Bureau, Federal Reserve
1Q82
-300
1Q80
-6%
1Q78
-200
1Q76
-4%
1Q74
-100
1Q72
-2%
16
Yld crv
The Treasury Yield Curve vs. GDP
10%
Real GDP Growth,
Y/Y % Change
8%
500
Yield Curve:
10yr-3 mo Treasuries (bps)
400
6%
300
4%
200
2%
100
0%
0
2012 | © Copyright Euler Hermes
1Q12
1Q10
1Q08
1Q06
1Q04
1Q02
1Q00
1Q98
1Q96
1Q94
1Q92
1Q90
1Q88
1Q86
1Q84
Source: Census Bureau, Federal Reserve
1Q82
-300
1Q80
-6%
1Q78
-200
1Q76
-4%
1Q74
-100
1Q72
-2%
17
Yld crv
Yield Curve Steepness: 10 yr-3 mo. yield (bps),
still positive, but has fallen
400
sovereign debt
worries
350
weak economic
data
300
250
Jck
Hole Sep
hint
200
2012 | © Copyright Euler Hermes
12
5/
12
2/
1
/1
12
1
/1
10
11
7/
11
5/
11
3/
0
/1
12
0
/1
10
10
8/
10
5/
10
Source: Federal Reserve
3/
1/
10
150
Nov mtg
go QE2!
18
Yld crv
Yield Curve Steepness: 10 yr-3 mo. yield (bps),
still positive, but has fallen
400
Arab
Spring
sovereign debt
worries
350
weak economic
data
Japan
oil
prices
300
250
Jck
Hole Sep
hint
200
weak
economic
data
12
5/
2/
1
/1
12
1
/1
10
11
7/
11
5/
11
3/
0
12
0
/1
10
10
8/
10
5/
10
/1
2012 | © Copyright Euler Hermes
12
euro worries
Source: Federal Reserve
3/
1/
10
150
Nov mtg
go QE2!
euro/US
worries
19
lendng
Banks are lending, fear receding
Commercial and Industrial Loans
quarterly annualized % change
40%
Finally! Lending
is resuming.
30%
20%
10%
0%
-10%
one reason this recovery
has taken so long
compared to others
-20%
5-12
5-10
5-08
5-06
5-04
5-02
5-00
5-98
5-96
5-94
5-92
5-90
6-88
6-86
6-84
6-82
6-80
6-78
6-76
6-74
-30%
source: Federal Reserve
2012 | © Copyright Euler Hermes
20
recap
Recap
•
•
•
•
•
Four forces caused/ended recession
Oil has been a drag, now improving
Housing flat
Yield curve positive but falling
Lending good
• So what do the measures of the
economy say?
2012 | © Copyright Euler Hermes
21
GDP recovering
Real Gross Domestic Product (GDP)
annualized quarterly growth rate
10%
8%
Whew!
6%
4%
2%
0%
-2%
(but still
< ave)
-4%
-6%
-8%
12
20
10
Q
1-
20
08
Q
1-
20
06
Q
1-
20
04
Q
1-
20
02
Q
1-
20
00
Q
1-
20
98
Q
1-
19
96
Q
1-
19
94
Q
1-
19
92
Q
1-
19
90
Q
1-
19
88
Q
1-
19
86
Q
1-
19
84
Q
1-
19
82
Q
1-
19
80
Q
1-
19
78
Q
1-
19
76
1-
19
Q
1Q
Q
1-
19
74
-10%
source: BEA
2012 | © Copyright Euler Hermes
22
Consumption: income fuels spending
Personal Consumption Expenditures (PCE) &
Disposable Personal Income (DPI)
10%
real % growth rate, 3 mos. annualized
consumption
OK, income not
5%
0%
Real PCE
Real DPI
-5%
2012 | © Copyright Euler Hermes
2
ar
-1
M
Se
p-
11
1
ar
-1
M
Se
p-
10
0
ar
-1
M
Se
p-
09
9
ar
-0
M
08
pSe
ar
-0
M
07
pSe
ar
-0
M
8
source: BEA
7
-10%
23
mfr
Manufacturing strong
Institute of Supply Management Manufacturing Indices
>50 means expansion
70
60
50
good: new
orders tend
to lead
40
2012 | © Copyright Euler Hermes
Apr-12
Apr-11
Apr-10
Apr-09
source: ISM
Apr-08
20
Monthly survey asks if conditions are same,
better, or worse for: new orders, production,
employment, supplier deliveries, inventories,
customer inventories, prices, backlogs, new
export orders, imports.
Apr-07
30
Manufacturing
Mfr new orders
24
cntnrs
Two last measures, Bankruptcies
U.S. Business Bankruptcy Filings, quarterly
30,000
25,000
down 11 consec Q's,
1st time ever
f'cast 2012
= -10%
20,000
40-50% annual growth
rates from 2008 - 2009
15,000
10,000
5,000
2012 | © Copyright Euler Hermes
Q4-2012
Q4-2010
Q4-2008
Q4-2006
Q4-2004
Q4-2002
Q4-2000
Q4-1998
Q4-1996
Q4-1994
Q4-1992
Q4-1990
Q4-1988
Q4-1986
Q4-1984
Q4-1982
0
Q4-1980
source: Administrative Office of the U.S. Courts, Euler Hermes
25
brpt
But perception of risk still very high:
Default Risk: Corporate Bond Spread Over Treasuries
sovereign
debt pt.1
Moody's seasoned Aaa - 10 year Treasury Note
280
Lehman
fails
260
240
Japan,
Arabia,
Europe,
US, oil
220
200
180
subprime
begins
160
140
120
100
80
still far
above
average
average since
1953 is 76 bps
60
40
20
2012 | © Copyright Euler Hermes
4/12
4/11
4/10
4/09
4/08
4/07
4/06
4/05
4/04
4/03
4/02
4/01
4/00
4/99
4/98
4/97
4/96
4/95
4/94
4/92
4/93
Source: Moody's, Federal Reserve
0
26
emply
Jobs Created and the Unemployment Rate
600
400
10%
Non-Farm Payroll Jobs
Created (000's) (left scale)
9%
200
8%
0
7%
-200
6%
-400
-600
Unemployment
Rate (right axis)
5%
2
A
pr
-1
1
A
pr
-1
0
A
pr
-1
9
A
pr
-0
8
A
pr
-0
7
A
pr
-0
6
A
pr
-0
A
pr
-0
A
pr
-0
A
pr
-0
A
pr
-0
5
3%
4
-1,000
3
4%
2
-800
source: Labor Department
2012 | © Copyright Euler Hermes
27
Jobs Created and the Unemployment Rate
600
400
10%
Non-Farm Payroll Jobs
Created (000's) (left scale)
9%
200
8%
0
7%
-200
6%
-400
-600
Unemployment
Rate (right axis)
5%
4 yrs later,
less than half
recovered
-800
4%
2
A
pr
-1
1
A
pr
-1
0
A
pr
-1
9
A
pr
-0
8
A
pr
-0
7
A
pr
-0
6
A
pr
-0
5
A
pr
-0
4
A
pr
-0
3
3%
A
pr
-0
A
pr
-0
2
-1,000
source: Labor Department
2012 | © Copyright Euler Hermes
28
recp
Recap
•
•
•
•
•
•
Four forces caused/ended recession
Oil has been a drag but improving
Housing flat
Yield curve positive but falling
Lending good
GDP, consumer weak, manufacturing
good
• Employment alarming
• To fix it, the government is causing two
big problems:
Debt & Potential Inflation
2012 | © Copyright Euler Hermes
29
fisc
FISCAL POLICY
Congress, Administration
Spending, taxing, borrowing
deficits/debt, budgets…
2012 | © Copyright Euler Hermes
30
math
Budget Math in Washington
• Year 1: spent $80
• Original budget for year 2: spend $110
• Final budget for year 2: spend $90
• In Washington, even though they’re
spending $10 more in year 2, this is what
they call a $20 “cut”.
• Both sides do this
2012 | © Copyright Euler Hermes
31
defs
Spending, Deficits and Debt
Gov’t spends
$10
Gov’t gets tax revenue
$6
Deficit
$4
Treas. gets loan, issues $4 notes/bonds
How big is $4T? Don’t know - measure
against size of the economy - GDP
2012 | © Copyright Euler Hermes
32
debt
Accumulated deficits become debt…
120%
Federal Debt as a % of GDP (OMB)
110%
100%
90%
80%
70%
1991-2007
U.S.
63%
Italy
110%
Germ.
58%
UK
42%
60%
50%
40%
30%
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
20%
2012 | © Copyright Euler Hermes
33
Accumulated deficits become debt…
120%
Federal Debt as a % of GDP (OMB)
110%
100%
90%
80%
70%
1991-2007
U.S.
63%
Italy
110%
Germ.
58%
UK
42%
Debt>90% = -1% GDP
60%
50%
40%
30%
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
20%
2012 | © Copyright Euler Hermes
34
Def red com
The Simpson - Bowles Deficit Reduction
Commission finally said it out loud:
We must touch the “third rails” of
• Social Security
• Medicare
If we don’t we will never be able to balance
the budget - entitlements will become the
entire budget
The rest is whistling past the graveyard…
2012 | © Copyright Euler Hermes
35
Outlays, 2010 Budget, $3.5T
Discretionary,
11%
Health, 24%
Defense, 21%
Social Security,
21%
Interest, 5%
Income Security,
19%
2012 | © Copyright Euler Hermes
36
Outlays, 2010 Budget, $3.5T
Discretionary,
11%
Health, 24%
Defense, 21%
Social Security,
21%
Interest, 5%
Income Security,
19%
2012 | © Copyright Euler Hermes
37
entltmnts
Entitlements
Entitlement spending, particularly Medicare or
some other form of national healthcare, will be one
of the two most contentious and important social,
political and economic issue for several
generations, the other being energy (ex war).
One generation will not be getting the benefits
they think are owed them and another generation
will be taxed to exhaustion to try to provide them.
But it is not hopeless nor doomsday because the
math is simple, but right now politicians seem to
be incapable of mustering the political will to fix it.
2012 | © Copyright Euler Hermes
38
isunce
Net Issuance of U.S. Treasury Securities, $B
300
180
250
150
200
120
150
90
100
60
50
30
0
0
-50
2012 | © Copyright Euler Hermes
Apr-2012
Apr-2011
Apr-2010
Apr-2009
Apr-2008
-60
Apr-2007
Apr-2006
Apr-2005
Apr-2004
Apr-2002
Apr-2001
Apr-2000
Apr-1999
Apr-2003
monthly (left axis)
6 month ave. (right)
source: Bureau of Public Debt
Apr-1998
-100
-30
39
isunce
Net Issuance of U.S. Treasury Securities, $B
300
180
FYI, this week alone, the Treasury
is indebting you and your kids for:
$30B 4 wk. bills
$30B 3 mo. bills
$27B 6 mo. bills
$35B 2 yr. notes
$35B 5 yr. notes
$29B 7 yr. notes
250
200
150
100
150
120
90
60
50
30
0
0
-50
2012 | © Copyright Euler Hermes
Apr-2012
Apr-2011
Apr-2010
Apr-2009
Apr-2008
-60
Apr-2007
Apr-2006
Apr-2005
Apr-2004
Apr-2002
Apr-2001
Apr-2000
Apr-1999
Apr-2003
monthly (left axis)
6 month ave. (right)
source: Bureau of Public Debt
Apr-1998
-100
-30
40
Fisc rev
Fiscal Policy Review
We need CLARITY, CERTAINTY, a plan, instead we
have:
• No 2011 budget, no 2012 budget
• 2013 Admin. budget DOA – more debt and deficit
• 2013 Republican budget DOA
• Budget Control Act of 2011 (BCA) and its Super
Committee did nothing to reduce debt, did nothing
to reform Medicare and Social Security
• Four administration deficit reduction plans 2011
• Many others from Congress, Commissions,
candidates
• Borrowing more every day…
2012 | © Copyright Euler Hermes
41
stuck
FISCAL POLICY REVIEW
Congress stuck - What now?
Things could change at:
• 2012 Fiscal cliff (expiration of Bush and
payroll tax cuts, some jobless benefits,
sequestration, ceiling?)
• 2012 elections
• 2024 Medicare goes insolvent
• 2050 Social Security goes insolvent
• Do note that this is the current situation –
it can change
2012 | © Copyright Euler Hermes
42
mon
MONETARY POLICY
The Federal Reserve Bank,
Ben Bernanke
2012 | © Copyright Euler Hermes
43
ar
M 197
ar 2
M 197
ar 4
M 197
ar 6
M 197
ar 8
M 198
ar 0
M 198
ar 2
M 198
ar 4
M 198
ar 6
M 198
ar 8
M 199
ar 0
M 199
ar 2
M 199
ar 4
M 199
ar 6
M 199
ar 8
M 200
ar 0
M 200
ar 2
M 200
ar 4
M 200
ar 6
M 200
ar 8
M 201
ar 0
-2
01
2
M
20
Interest Rates
18
16
14
12
Mortgages
10
8
10-yr
6
4
2
source: Federal Reserve
Fed Funds
0
2012 | © Copyright Euler Hermes
44
Yld crv
The Treasury Yield Curve vs. GDP
10%
Real GDP Growth,
Y/Y % Change
8%
500
Yield Curve:
10yr-3 mo Treasuries (bps)
400
6%
300
4%
200
2%
100
0%
0
2012 | © Copyright Euler Hermes
1Q12
1Q10
1Q08
1Q06
1Q04
1Q02
1Q00
1Q98
1Q96
1Q94
1Q92
1Q90
1Q88
1Q86
1Q84
Source: Census Bureau, Federal Reserve
1Q82
-300
1Q80
-6%
1Q78
-200
1Q76
-4%
1Q74
-100
1Q72
-2%
45
txt
MONETARY POLICY
• Lowering the short term Fed Funds interest rate
usually works
2012 | © Copyright Euler Hermes
46
MONETARY POLICY
• Lowering the short term Fed Funds interest rate
usually works
• But this time needed an extra boost, lowering
long term interest rates.
• Quantitative easing:
• Fed prints new $ bills
• Buys Treasury bonds in open market
• Raises bond prices, lowering interest rates
(they move in opposite directions)
• Puts $ into financial system
• And creates inflationary pressures… QE3?
2012 | © Copyright Euler Hermes
47
Bal sht
Quantitative Easing (QE)
Federal Reserve Balance Sheet, $B
QE3?
3,000
QE2, 2010-11
2,500
Huge easing,
unprecedented increase
(3x) in liquidity
2,000
1,500
QE1, 2008
1,000
500
source: Federal Reserve
58
5- 9
9
5- 0
9
5- 1
9
5- 2
9
5- 3
94
595
59
5- 6
9
5- 7
9
5- 8
9
5- 9
0
5- 0
0
5- 1
02
503
504
50
5- 5
0
5- 6
0
5- 7
0
5- 8
0
5- 9
1
5- 0
1
5- 1
12
0
2012 | © Copyright Euler Hermes
48
10 yr work
Did QE2 work?
Yield on 10 year Treasury Note
4.0%
3.5%
3.0%
Sep
hint
QE2
Jackson
Hole
2.5%
hoped
for this:
2.0%
source: Federal Reserve
2012 | © Copyright Euler Hermes
5/1/12
3/1/12
12/31/11
10/31/11
8/31/11
7/1/11
5/1/11
3/1/11
12/30/10
10/30/10
8/30/10
6/30/10
4/30/10
1.5%
49
Did QE2 work?
Yield on 10 year Treasury Note
4.0%
3.5%
3.0%
Sep
hint
Jackson
Hole
2.5%
but got this:
record rate of
increase,
QE2
inflationary
expectations
2.0%
source: Federal Reserve
2012 | © Copyright Euler Hermes
5/1/12
3/1/12
12/31/11
10/31/11
8/31/11
7/1/11
5/1/11
3/1/11
12/30/10
10/30/10
8/30/10
6/30/10
4/30/10
1.5%
50
Did QE2 work?
Yield on 10 year Treasury Note
4.0%
Arab Spring
Japan
3.5%
3.0%
Sep
hint
Jackson
Hole
2.5%
euro
worries
but got this:
record rate of
increase,
QE2
inflationary
expectations
oil prices,
weak data,
US worries
euro, US
worries
2.0%
risk
aversion
source: Federal Reserve
2012 | © Copyright Euler Hermes
5/1/12
3/1/12
12/31/11
10/31/11
8/31/11
7/1/11
5/1/11
3/1/11
12/30/10
10/30/10
8/30/10
6/30/10
4/30/10
1.5%
51
work?
Did QE2 work?
Yield on 10 year Treasury Note
4.0%
Arab Spring
Japan
3.5%
3.0%
euro
worries
QE2 ends...
did it work?
Sep
hint
QE2
Jackson
Hole
2.5%
oil prices,
weak data,
US worries
euro, US
worries
2.0%
risk
aversion
source: Federal Reserve
2012 | © Copyright Euler Hermes
5/1/12
3/1/12
12/31/11
10/31/11
8/31/11
7/1/11
5/1/11
3/1/11
12/30/10
10/30/10
8/30/10
6/30/10
4/30/10
1.5%
52
All same
QE2/3 = Printing money = Inflation = Dollar devaluation
They are all the same thing.
2012 | © Copyright Euler Hermes
53
QE2/3 = Printing money = Inflation = Dollar devaluation
They are all the same thing.
Example; suppose today there is
• one loaf of bread priced at $1, up for auction
• two hungry people, each with a printing press
• to out-bid the other, each runs his press as fast as
possible until one breaks
• by then, the price of the bread is $1M
2012 | © Copyright Euler Hermes
54
QE2/3 = Printing money = Inflation = Dollar devaluation
They are all the same thing.
Example; suppose today there is
• one loaf of bread priced at $1, up for auction
• two hungry people, each with a printing press
• to out-bid the other, each runs his press as fast as
possible until one breaks
• by then, the price of the bread is $1M
• printing money created inflation; price from $1 to $1M
• printing money devalued each $1 bill; each $1 bill
used to be worth one loaf of bread, but now is worth 1
millionth of a loaf of bread
• Money was printed (QE)
• Inflation was created
• The dollar was devalued
2012 | © Copyright Euler Hermes
55
$ fall
$ devalued, QE at work
5%
Value of the USD from June 1, 2010
0%
$C -3%
€ -4%
C¥ -7%
£ -7%
-5%
-10%
¥ -13%
-15%
$A -15%
SF-18%
-20%
-25%
$US weakening
-30%
source: Federal Reserve Bank of New York
-35%
2012 | © Copyright Euler Hermes
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Aug-11
Jun-11
Apr-11
Feb-11
Jan-11
Nov-10
Sep-10
Jul-10
Jun-10
-40%
56
why
So, remind me, why are we doing that again?
QE = Printing money = Dollar devaluation = inflation
meant to stimulate the economy by lowering
interest rates
But dollar devaluation can also:
• Raise commodity prices – oil, metals
• Devalue the $14T in debt U.S. owes
• Boost exports
• Create asset bubbles - real estate
2012 | © Copyright Euler Hermes
57
commods
$ deval = higher commodities prices
Commodity & Oil Prices vs. $
70%
20%
S&P GS Commodity Index
Trade Wgtd $ (left scale)
S&P GS Commodity Index
Crude Oil, WTI
17%
60%
50%
14%
40%
11%
$ weakening
(left scale)
8%
30%
2012 | © Copyright Euler Hermes
Apr-12
Jan-12
-10%
Oct-11
-4%
Jul-11
0%
May-11
-1%
Feb-11
10%
Nov-10
2%
Aug-10
20%
Jun-10
5%
58
Debt dvl
Debt Devaluation
Simple example
Today: Lend $1 @10%. Loaf of Bread costs $1
Inflation goes to 20%
A Year later:
Creditor gets $1.10 back.
But now loaf of bread costs $1.20.
Creditors lose with inflation.
Debtors, like the U.S. government, win.
The U.S. government is ok with inflation.
The U.S. government is ok with a weaker dollar.
May be only way out of $14T in debt.
2012 | © Copyright Euler Hermes
59
Mon rvw
MONETARY POLICY REVIEW
• Controls short term Fed Funds rate
• But needed QE2, printed new money, pumped
it into global financial system
• Meant to lower long-term interest rates
• Also causes $ devaluation
• Raise commodities prices, devalue debt
(boost exports, asset bubbles)
• QE 3 possible
• Other recent extraordinary measures: press
conferences, inflation targets, forecasts,
blaming/asking Congress
2012 | © Copyright Euler Hermes
60
Fisc mon
Monetary & Fiscal Policy
Less debt, faster recovery. Debt kills.
# is
debt/GDP
10%
9%
line is central
bank rate
8%
Ind 45%
7%
Chn 20%
6%
Chl 20%
5%
Aus 15%
4%
S.K. 30%
3%
2%
0%
2012 | © Copyright Euler Hermes
J-12
O-11
J-11
A-11
J-11
O-10
J-10
A-10
J-10
O-09
J-09
A-09
J-09
O-08
J-08
A-08
J-08
O-07
J-07
A-07
J-07
source: central banks, national stat. offices
A-12
Eur 75%
UK 80%
US 100%
Jpn 200%
1%
61
Get it
Monetary & Fiscal Policy
Less debt, faster recovery. Debt kills.
10%
European politicians get it, but can’t fix it. U.S. politicians don’t even get it.
9%
# is
debt/GDP
line is central
bank rate
8%
Ind 45%
7%
Chn 20%
6%
Chl 20%
5%
Aus 15%
4%
S.K. 30%
3%
2%
0%
2012 | © Copyright Euler Hermes
J-12
O-11
J-11
A-11
J-11
O-10
J-10
A-10
J-10
O-09
J-09
A-09
J-09
O-08
J-08
A-08
J-08
O-07
J-07
A-07
J-07
source: central banks, national stat. offices
A-12
Eur 75%
UK 80%
US 100%
Jpn 200%
1%
62
Glbl cncl
Conclusions, Global
GDP growth 2012
• 2.7% global
• most coming from China, emerging mkts
• around 2% in the U.S.
• Europe:
• recession, severe in some countries
• risk of exits or disorderly defaults rising
• EMU probably holds, but will need:
• a lot of time
• fiscal unity, ECB, EFSF, IMF/others
2012 | © Copyright Euler Hermes
63
US cncl
Conclusions, U.S.
Positives
Negatives
•Falling oil prices
•Arab spring, Japan, weather,
oil, masked strength
•Super stimulative monetary
policy will eventually help
•Yield curve positive
•Bank lending
•OK consumer
•Strong Manufacturing
•Bankruptcies falling
•Dollar falling
•Global economy growing
•2012 GDP growth anemic 2%
•Uncertainty from WDC
•Debt drag
•Uncertainty from
Europe
•High oil prices
•Personal Income weak
•Housing market sick
•Yield curve fallen
•High unemployment
•Future Inflation
2012 | © Copyright Euler Hermes
64
Thank
you
for your
attention
2012 | © Copyright Euler Hermes
65