When Past Performance Is a Guide: Using History to Make Sense of the Post-Crisis World

Transcription

1 When Past Performance Is a Guide: Using History to Make Sense of the Post-Crisis World

2 Overview of past recessions in the U.S. Duration from peak to trough of the business cycle Month : 65 months : 18 months Note: Recessions are assumed to start at the peak of a business cycle and end at the trough. Source: NBER.

3 U.S. saw negative GDP growth for the first time in more than 70 years Percent : 26.5% : -2.8% Source: The White House - Office of Management and Budget. Note: Projections are shaded.

4 Stock market volatility has increased dramatically during the past decade Number of 3% daily S&P 500 moves More volatile days than in the previous 50 years combined Source: Natixis Global Asset Management..

5 Ten-year U.S. Treasury yield reached historical low Ten-year Treasury yield, percent Average since 1964: 6.7 percent Source: Federal Reserve Board.

6 Federal debt expected to continue increasing Gross federal debt as percent of GDP Percent of GDP : 121.7% Source: The White House - Office of Management and Budget. Note: Projections are shaded.

7 Central bank target interest rates remained low Policy interest rates, percent 6 United Kingdom United States Bank of Japan Eurozone Source: Bloomberg.

8 Public debt in advanced economies approached another record high Gross public debt as percent of GDP Percent of GDP : 117.8% : 104.8% Source: IMF WEO.

9 Household deleveraging process diverged across major countries Household gross debt (% of net disposable income) 160 Canada 140 Japan Euro area U.S Sources: OECD, Bloomberg.

10 Gold price at record high US$ per troy ounce 2,000 Aug 2011: $ ,800 1,600 1,400 1,200 1,000 Sep 1980: $ Jan-1970 Jan-1980 Jan-1990 Jan-2000 Jan-2010 Source: World Gold Council,

11 20-year annualized returns Percent REITs Oil S&P 500 Gold Bonds EAFE Inflation Homes Average investor Source: J.P. Morgan.

12 Returns of major asset classes over a century Percent World U.S. 0 Equities Bonds U.S. Bills Source: Credit Suisse.

13 A two speed recovery GDP growth Percent 10 Emerging market and developing economies 8 World Advanced economies Source: IMF WEO. Note: Projections are shaded.

14 Daniel Arbess

15 This Time is Different. Nonfarm Payroll Employment in Selected Recessions and Recoveries Index, NBER peak = recession recession recession 2001 recession recession GEC triggered the deepest and longest employment drawdown on record. Households lost $17 trillion of wealth in balance sheet recession ($10T stocks, $7T housing), leaving excess capacity and employment globally Quarters since NBER peak 92 Note: Payroll employment adjusted for Trend employment growth. Source: Yellen, Janet. A Painfully Slow Recovery for America s Workers: Causes, Implications, and The Federal Reserve s Response. A Trans-Atlantic Agenda for Shared Prosperity. February 11, 2013.

16 Fiscal Policy Could be a Headwind or a Tailwind. Really? Estimated Effect of Discretionary Fiscal Policy on the Economy during Recoveries Average contribution to GDP growth, percentage points (annual rate) 4 quarters since start of recovery (left bars) 8 quarters since start of recovery (center bars) 12 quarters since start of recovery (right bars) Household income losses offset when taxes are reduced or government spending increases. Opposite case when governments cut spending or raise taxes in response to recession Normal times, easy monetary policy can offset fiscal tightening. But not when economy is depressed and rates are already zero. Summers & DeLong Recovery from recession Recovery from 2001 recession Average recovery from postwar recessions Current recovery -0.4 No surprise then, higher payroll taxes and sequestration negatively impacting 13 GDP by 1.3%. Note: Average recovery from postwar recessions excludes recovery after recession; because of data limitations, average also excludes recovery after recession. Source: Yellen, Janet. A Painfully Slow Recovery for America s Workers: Causes, Implications, and The Federal Reserve s Response. A Trans-Atlantic Agenda for Shared Prosperity. February 11, 2013.

17 This Time Is Different But Not for the Reasons you Think. Monetary Policy to the Rescue: ZIRP and unprecedented $15T global CB balance sheet expansion have offset deflation and repaired balance sheets: Recovered $10T of lost equity wealth & $1.7T housing value. $5B in housing still to be recovered. Rich have benefitted most: Only top 13% saw their net worth gain between Even if Reinhart and Rogoff s math were correct: Are high debt levels a cause or consequence of slower growth? Is government debt as dangerous when funded by CBs? When nominal rates are < nominal GDP growth? Source: Bianco Research.

18 The Persistent Risk is Deflation, not Inflation. Balance sheet recession = demand recession. Money is at the Fed, not in the system. US Federal Reseve Balance Sheet OECD US Velocity of Money 3,500, ,000, ,500, ,000, ,500, ,000, , Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Sources: Bloomberg. OECD US Velocity of Money: Estimates the rate at which money changes hands. The multi-sector approach of MMT suggests that government demand can substitute for flagging private sector demand. No inflation risk unless and until increased monetary base moves into economy via credit acceleration & deposits. Fed can withdraw. Overt Monetary Finance (OMF) Helicopter Money: the Final Frontier? Bernanke to Japan 03: Cut taxes & fund shortfall with printed money. OMF dispenses with Treasury issuance: CB funds Treasury directly. Theory is fiscal spending expands activity, revenues, restores surplus. Fed can then withdraw by increasing reserve requirements. The Perfect Crime!

19 Ben Funnell

20 US 90/10 ratio median income of the 90 th percentile of income / 10 th percentile Source: US Census Bureau, Oriel Securities.

21 US share of total income by quintile (%) 4.4% 4.2% 4.3% 51.1% 52% 50% 4.0% 3.9% 48% 3.8% 46% 3.6% 43.6% 44% 3.4% 42.6% Lowest quintile (LHS) Top quintile (RHS) 42% 3.2% 3.2% 40% 3.0% 38% Source: US Census Bureau, Oriel Securities.

22 Debt Burden Disproportionately on the Lower Income Quintiles Debt payment / income % debt service > 40% st Quintile 2nd Quintile 3rd Quintile 4th Quintile 9th Decile 10th Decile Source: Federal Reserve Bulletin, June 2012, referencing the Survey of Consumer Finances 2010.

23 Jan-20 Jan-24 Jan-28 Jan-32 Jan-36 Jan-40 Jan-44 Jan-48 Jan-52 Jan-56 Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Moody's BBB Corporate Bond Yield (%), MOODCBAA Index Source: Moody's, Bloomberg, GLG Partners.

24 Mitchell Julis

25 Does Understanding History Help Us to Avoid Getting Left Behind? Source: 2010 Dan Regan

26 The Big Bang of Wealth Creation A Timeline Source: Eric D. Beinhocker, The Origin of Wealth

27 What Happened to Create This Explosion of Wealth at This Point in History? In The Origin of Wealth, Eric Beinhocker argues, wealth creation is the product of a simple, but profoundly powerful, three-step formula differentiate, select, and amplify the formula of evolution. The same process that led to an explosion of species diversity in the Cambrian period led to an explosion in SKU diversity during the Industrial Revolution. Source: Eric D. Beinhocker, The Origin of Wealth

28 A Basic Question on the Relevance of History: Is This Time Different? For example: Will Europe s history of conflict drive the fate of the Euro? Has monetary policy evolved into something without historical precedent? Are we in a unique political and policy gridlock bereft of great leaders or great events to break us free? What is the role of Big Data in understanding our past and our future and how does data gathering and analysis relate to the current Reinhart / Rogoff controversy over their findings?

29 History Drives the Euro According to Helmut Kohl "The evil spirits of the past have by no means been banished, they can always return. That means: Europe remains a question of war and peace and the desire for peace remains the driving force behind European integration," - Former German Chancellor Helmut Kohl (February 2012) Source: Bild, Helmut Kohl

30 What Is the Appropriate Framework to Understand History and its Relevance to the Economic Landscape of Today and the Future? Great People Great Ideas Great Institutions / Structures Great Forces of Nature

31 The Law of Unintended Consequences Source: Introduction to Systems Thinking by Jayendran Venkateswaran, Jan-Apr 2008

32 The Law of Unintended Consequences Source: Introduction to Systems Thinking by Jayendran Venkateswaran, Jan-Apr 2008

33 Niall Ferguson

34 Ratios of per capita GDP Source: Maddison

35 The U.S. stock market in Three Depressions Source: Economagic

36 Debt / GNP ratios Sources: Various

37 Real returns Sources: Global Financial Data

38 UK consumer price index Sources: Global Financial Data