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2010 and Beyond –
Navigating the New Economy
FPPA Presentation
February 23, 2010
1
Disclaimers
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Discussions of past performance do not imply a guarantee of future results.
2
What happened?
The Panic of 1907
by Robert F. Bruner and Sean D. Carr
1.
2.
3.
4.
5.
6.
7.
System Complexity – interconnectivity
Buoyant Growth – insatiable demand for capital and
liquidity
Inadequate Safety Buffers – capital and regulatory
Adverse Leadership – conflicting goals
Cognitive Bias – that can’t happen
Real Economic Shock – asset devaluation
Failure of Collective Action
“History may not repeat itself, but it rhymes.”
-Mark Twain
3
Where are we?
5.
Increased
Leverage
Asset Inflation
Asset Deflation
1. Rising
Asset Prices
1.
Declining
Asset Prices



Low Core Inflation
Strong Growth
Low Unemployment
4. Greater
Risk
Taking
2. Declining
Risk
Premium
2. Increasing
Risk
Premium
3. Reach
for More
Yield



Large Write Downs
Declining Growth
Higher
Unemployment
3. Need for
Liquidity
5. Reduced
Leverage
4. Flight to
Safety
Federal Funds Rate
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Jan. '03
Source: Bloomberg.
Jul. '03
Jan. '04
Jul. '04
Jan. '05
Jul. '05
Jan. '06
Jul. '06
Jan. '07
Jul. '07
Jan. '08
Jul. '08
Jan. '09
4
Who’s to blame?
5
Who’s to blame?
• Chronic Budget Shortfalls
–
46 of the last 50 years
• Freddie Mac / FNMA
–
Affordable Housing
• Regulators
–
SarbOx, SEC, FDIC
• Wall Street / Banks
–
–
Uncontrolled Greed or Political Scapegoats
Rating Agencies
• Consumers – over-leveraged
–
Why not part of the discussion?
6
Who’s to blame?
U.S. Household Debt as a Percent of GDP
100%
?
80%
60%
40%
20%
0%
1918
The Great
Depression
1923
1928
1933
1938
1943
1948
1953
1958
Household debt / GDP
1963
1968
1973
1978
1983
1988
1993
1998
2003
2008
Non-corporate Net Private Debt to GDP
Source: U.S. Census, U.S. Federal Reserve Flow of Funds. Please note non-corporate net private debt is used as a proxy for household debt (going back to 1918) as the Federal Reserve did not begin
7
tracking U.S. household debt until 1950
Who’s to blame?
 The 2009 Gross Federal Debt is $11.9 trillion, which represents a 29.9% increase since
2007
 $40,000 per person - $5,000 increase this fiscal year
Gross ~7.5%
Federal Debt
of Total
U.S. Gross Federal Debt ($ billions)
$25,000
$20,000
$20,639
$19,097
$17,456
$15,000
$15,856
$14,341
$11,876
$10,000
$5,000
$5,696
$5,883
$6,947
$8,115
$9,145
~85%
of Total
$0
1999
2001
2003
2005
2007
2009P
2011P
2013P
2015P
2017P
2019P
Source: Congressional Budget Office; U.S. Department of the Treasury. These figures represent federal debt that is subject to limitations only.
8
Government’s role?
1. Financial System “Bailout”: if we all agree
financial system stability is the goal, did
we market the solution effectively and did
we take the correct steps?
• Bear Stearns / Washington Mutual / AIG /
Lehman / Money Markets / Merrill Lynch /
Fannie Mae and Freddie Mac / Wachovia
9
Government’s role?
2.
But did the government’s role in preserving the
financial system give them the “opportunity” to
take a larger role in the economy?
•
Stimulus I and II
•
Additional Regulation – FDIC Bankruptcy
•
Chrysler, General Motors, GMAC, AIG2
•
Federal Reserve involvement in the debt markets
•
Tax Policy – Job Creation
10
What lies ahead – is September 2007 a policy initiative?
Are we bucking reality – has the world economy
changed and our efforts to date are pretending
that change did not occur?
11
What lies ahead – is September 2007 a policy initiative?
 The Bureau of Labor Statistics reported an unemployment rate of 10.2% for October 2009
– how did jobs get lost and the unemployment rate go down?
 The total number of unemployed was approximately 15.7 million.
 Over $20 million people received unemployment benefits in 2009.
10.0%
16.0
9.0%
14.0
8.0%
12.0
7.0%
10.0
6.0%
8.0
5.0%
6.0
4.0%
4.0
3.0%
2.0
2.0%
1990
0.0
1992
1994
1996
1998
2000
Unemployment Rate
Source: U.S. Department of Labor; Bureau of Labor Statistics
2002
2004
2006
Number Unemployed (millions)
Unemployment Rate
U.S. Unemployment Rate and Number of Workers Unemployed
2008
Number Unemployed
12
What lies ahead – is September 2007 a policy initiative?
Historical Index Performance
120%
120%
100%
100%
80%
80%
60%
60%
40%
09/2007
02/2008
08/2008
S&P 500
Russell 2000
02/2009
NASDAQ
08/2009
40%
02/2010
DJIA
% Appreciation Since 9/1/2007
Source: FactSet, data as of 2/15/10
Russell 2000
(23.0%)
DJIA
(24.4%)
NASDAQ
(15.9%)
S&P 500
(27.0%)
13
What lies ahead – is September 2007 a policy initiative?
Housing Prices
New – down 17.2% from March 2007 peak
Existing – down 25.6% from July 2006 peak
Median Price of Single-family Home Sales
$275,000
$250,000
$225,000
$200,000
$175,000
Existing Homes
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
$150,000
New Homes
YOY Change
30%
20%
10%
0%
-10%
Source: U.S. Census Bureau, National Association of Realtors
Dec-09
Jun-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Dec-05
Jun-05
Dec-04
-20%
14
Source: U.S. Census Bureau, National Association of Realtors
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Existing
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
YOY Change
Ja
n9
Ja 0
nJa 9 1
n9
Ja 2
nJa 9 3
n9
Ja 4
nJa 9 5
n9
Ja 6
nJa 9 7
nJa 9 8
n9
Ja 9
n0
Ja 0
nJa 0 1
nJa 0 2
n0
Ja 3
n0
Ja 4
nJa 0 5
nJa 0 6
n0
Ja 7
nJa 0 8
n0
Ja 9
n10
SAAR (M)
What lies ahead – is September 2007 a policy initiative?
Home Sales
New – down 74.4% from July 2005 peak
Existing – down 10.0% from June 2005 peak
Home Sales
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
New
75%
50%
25%
-25%
0%
-50%
-75%
15
What lies ahead – is September 2007 a policy initiative?
•$1.3 Trillion to be refinanced by 2012 – How?
•U.S. office vacancies rose to the highest level in four years in the second
quarter; 15.9 percent from 13.2 percent a year earlier. [Bloomberg – 7/7/2009]
Commercial Office Vacancy Rates & Office Asking Rents
25%
$35
$30
20%
Vacancy Rates % (gray line)
15%
$20
$15
10%
$10
Asking Rents $ (BB&T maroon line)
$25
5%
$5
Sources: REIS
2013E
2012E
2011E
2010E
2009E
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
$1990
0%
16
Ancillary musings
1.
Can we pay our bills – municipal, state, federal?
2.
Will any of our economy work in a deflationary
environment – who has the most to lose from
deflation?
3.
Have we put the fiscal stimulus in place to create
runaway inflation – who has the most to gain from
inflation?
4.
Have we saved the financial system or is there
work to be done?
17
Ancillary musings
5.
Can the government function as a profit center, and
if so how do they get out (and what about Freddie
and Fannie)?
6.
Can we long-term de-lever the economy, and do
we want to de-lever the economy?
7.
Can we structure and regulate the banking system
in a manner which minimizes risk but maximizes
growth and opportunity – or does it remain a
whipping boy?
18
Final thoughts
8. Course of Action
• This has happened before, and it will happen
again - if the financial system is sound and
the capitalist system is allowed to work we
will recover.
• We have to avoid the inclination to overregulate and to over-manage and to overtax – very hard for the politicians.
• The folks who react rationally to the new
circumstances are already the winners.
19
Final Thoughts
5.
Increased
Leverage



4. Greater
Risk
Taking
Asset Inflation
Asset Deflation
1. Rising
Asset Prices
1.
Declining
Asset Prices
Low Core Inflation
Strong Growth
Low Unemployment
2. Declining
Risk
Premium
3. Reach
for More
Yield
2. Increasing
Risk
Premium



Large Write Downs
Declining Growth
Higher
Unemployment
3. Need for
Liquidity
5. Reduced
Leverage
4. Flight to
Safety
1. Consumer Leverage / Government Leverage
2. Economic Growth – Tax Increases
3. Unemployment – Job Creation
Source: Bloomberg.
4. Asset Bubble – all assets or just stocks and
housing
20