2018 MACRO OVERVIEW. More of the Same, Yet Less of the Same. March 9, 2018

Transcription

1 2018 MACRO OVERVIEW More of the Same, Yet Less of the Same March 9, 2018 RICHARD FARR MERION CAPITAL GROUP

2 Jan-04 Oct-04 Jul-05 Apr-06 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16 Jul-17 in Billions $USD MORE OF THE SAME, CB S CONTINUE TO PRINT MONEY: 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Central Bank Total Assets Source: Bloomberg ECB BOJ US Fed 1

3 LESS OF THE SAME, TAPERING ACCELERATES AT CB S: January 9, 2018 BOJ announces tapering (cut its year bond purchases and its year bond purchases by 10 billion each to 190 billion yen and 80 billion yen respectively). October 26, 2017 ECB announces tapering (cuts purchases in half from 60 billion to 30 billion until September 2018, with further staged tapering expected thereafter). September 20, 2017 FOMC announces tapering 2.0 (cuts another $10 billion / month starting October 2017 and will gradually cut purchases by $50 billion / month starting October 2018). December 18, 2013 FOMC first tests tapering, by cutting purchases by $10 billion / month to $75 billion. 2

4 SOME CENTRAL BANKS ALREADY HAWKISH: GLOBAL CENTRAL BANK SCORECARD Country/Region Rate Last Action Date Action Current Policy Leaning: Tighter U.S. Fed bps 12/13/17 Raised rates for the 4th time since June U.K. BOE bps 11/02/17 Raised rates for the first time in a decade on BREXIT/Inflation pressure ECB/Euro Area - -5bps 03/10/16 Haven't touched interest rates, but will taper asset purchases through Sept 2018 Canada bps 01/17/18 Raised rates for the third time in the past year. China bps 10/23/15 Benchmark rate steady for 2 years, but other lending facilities / oversight tightening. Czech Republic bps 02/01/18 Raised rates for only the third time since Mexico bps 02/08/18 Raised rates for the 12th time since December Turkey bps 11/24/16 Although Benchmark Rate unchanged, Late Liquidity Window increased by 50 bps Current Policy Leaning: Neutral Denmark (0.65) +10bps 01/08/16 Raised rates slightly but still negative. Current Policy Leaning: Accomodative Switzerland (0.75) -50bps 01/15/15 Cut rates additional -50bps and removed minimum exchange for the euro Sweden (0.50) -15bps 03/18/15 Cut rates further into negative territory Japan bps 12/19/08 BOJ has started to trim purchases. Israel bps 02/23/15 Cut rates -15bps, first cut in 7 months. Norway bps 03/18/16 Cut rates another -25bps South Korea bps 06/09/16 Cut rates for the first time in a year. Australia bps 08/02/16 Cut rates another -25 bps to record low New Zealand bps 11/10/16 Cut rates for 6th time in the past year Indonesia bps 09/22/17 Cut rates for the seventh time in past two years India bps 08/03/17 Cut rates for the seventh time in past two years South Africa bps 07/20/17 Cut rates for first time since Brazil bps 02/07/18 Cut rates for the 11th time since October Russia bps 02/09/18 Cut rates for the 14th time in two years. Turkey bps 02/24/15 Cut rates -25 bps after significant decrease in January 3

5 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 OUR MODEL SEES GDP ACCELERATION BUT WILL GDP HIT A WALL IN MID 2019?: 6% 5% Y/Y Change in Real GDP vs. Our Model Sources: Bureau of Economic Analysis, Merion Capital Group 4% 3% 2% 1% Official 2018 Forecast = +3.0% 0% -1% -2% -3% Y/Y Change Predicted Y/Y -4% -5% 4

6 Dec-12 Mar-13 Jun-13 Sep-13 Mar-14 Jun-14 Sep-14 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 U.S. ECONOMY HITTING ON ALL CYLINDERS: 65 ISM Services Index Source: Institute for Supply Management NFIB Small Business Optimism Index Source: National Federation of Independent Business NMI Index New Orders 85.0 Recession 40 Employment Backlogs 80.0 Optimism Index 5

7 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 WILL WAGES BE THE FACTOR FOR INFLATION TO OVERSHOOT? 4.0% Average Weekly Pay (Hours x Earnings) Source: Bureau of Labor Statistics 7.0 Unemployed Persons Per Job Opening Source: Bureau of Labor Statistics 3.5% % % % % % - 6

8 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 WAGES IN RISING TREND IN PERSONAL INC DATA: 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Y/Y Chg in Wage & Salary Disbursements Source: Bureau of Economic Analysis Total Wage & Salaries Private Industry Wages Government Wages 7

9 JOBS GET TIGHTER - OLDER WORKERS PARTICIPATING MORE, AND THE MILLENNIALS ARE ABANDONING THEIR XBOXES: 86 Civilian Workforce Participation (25-54) Source: BLS Household Survey 70 Civilian Workforce Participation (55+) Source: BLS Household Survey Ages Ages Ages Ages Ages Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 8

10 DEMOGRAPHIC TAILWIND REMAINS FOR HOUSING (IF ONLY THEY GET JOBS)! Population Estimates Population by Age Total 321,418, ,969, ,800, ,036, ,493,715 Under 35 years 149,002, ,348, ,160, ,350, ,864, to 44 years 40,589,783 41,535,536 43,930,139 46,436,693 49,983, to 54 years 43,188,161 43,262,744 42,464,731 42,254,319 43,479, to 64 years 40,877,819 40,778,858 40,702,844 40,590,014 40,703, and Older 47,760,852 49,043,315 50,541,781 55,404,564 62,462,268 Y/Y Growth: 0.77% 0.48% 0.57% 0.65% 0.59% Death Rate/1000: Birth Rate/1000: Average Age (Yrs): Estimated Births: 3,977,745 4,017,735 4,037,117 4,111,203 4,243,561 Immigration Est: 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 # in Group Homes: 8,110,167 8,150,718 8,191,472 8,314,959 8,524,922 Occupied Households: 125,819, ,834, ,904, ,403, ,187,517 Household Formation: 1,222,000 1,015,784 1,069,246 1,190,190 1,186,562 People / Household: Sources: U.S. Census Bureau, Bloomberg, Social Security Administration * Group Homes is the estimated total in correctional facilities, nursing homes, colleges, and military housing. * Adjustment given that current actuarial tables used by the IRS, Social Security Adminstration, and the Society of Actuaries appear to overstate current death rates. 9

11 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 HOUSING S MAIN PROBLEM-LACK OF INVENTORY: HOUSING INVENTORY (MONTHS SUPPLY) Sources: National Assoc. of Realtors, Census Bureau Existing Homes New Homes 3 10

12 THEY BETTER FIND JOBS BECAUSE SOMEONE IS GOING TO NEED TO PAY FOR THE ENTITLEMENTS: IS THE SAVINGS RATE REAL? Sources: Bureau of Economic Analysis, Merion Capital Group Jan-18 PERSONAL INCOME (in Billions $, SAAR): $ 16,784 LESS: PERSONAL OUTLAYS (PCE + INT EXP + FEES/FINES) $ 14,266 LESS: TAXES $ 2,053 EQUALS: "SAVINGS" $ 464 Reported Savings Rate: 3.15% But what if the gov't couldn t pay for entitlements via debt? Personal Income $ 16,784 Plus: Personal Contributions for Gov't Social Insur. $ 1,350 Less: Employer Contributions for Gov't Social Insur. $ 626 Less: Social Security Benefits (Tax Adjusted) $ 815 Less: Medicare Benefits $ 684 Less: Medicaid Benefits $ 602 Equals Adjusted Personal Income: $ 15,405 TRUE SAVINGS: $ (914) True Savings Rate: -6.85% 11

13 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Unemployment Rates Youth Unemployment EUROPE ALSO HITTING ON ALL CYLINDERS: MARKIT EUROZONE PMI INDICES Sources: Markit, Bloomberg 13.0 EUROPEAN UNION UNEMPLOYMENT RATES Source: Eurostat EA 19 EU 28 EU 28 Youth (<25 yrs) Services PMI Manufacturing PMI

14 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Unemployment Rate Participation Rate AND SAME WITH JAPAN: 6.0% Japan Employment Rates Source: Japan Statistics Bureau 65% 15% Japan Commercial Sales (Y/Y) Source: Ministry of Economy, Trade and Industry 5.5% 64% 10% 5.0% 63% 5% 4.5% 4.0% 3.5% 62% 61% 0% -5% 3.0% 60% -10% Retail Sales 2.5% 2.0% Unemployment Rate Participation Rate 59% 58% -15% -20% Total Commercial Sales Wholesale Sales 13

15 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Feb-18 CHINA PMI DATA STILL HOLDING UP: CHINA MFG PMI (Official vs. Caixin) Sources: Federation of Logistics & Purch., China NBS, Caixin/Markit CHINA SERVICES PMI (Official vs. Caixin) Sources: China NBS, Caixin/Markit, Bloomberg 'Official' PMI Caixin / Markit Services Official Mfg PMI 51 Caixin/Markit Mfg PMI

16 Jan-04 Nov-04 Sep-05 Jul-06 May-07 Mar-08 Jan-09 Nov-09 Sep-10 Jul-11 May-12 Mar-13 Jan-14 Nov-14 Sep-15 Jul-16 May-17 WILL TRADE REMAIN A DRIVER FOR CHINA S GROWTH? CHINA TRADE DATA (in Billions $) Sources: China Bureau of Statistics, Bloomberg Exports Imports

17 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 BRAZILIAN GDP TURNED POSITIVE IN 2017: 25.0% 20.0% BRAZIL GDP Y/Y % CHANGE Sources: IBGE, Bloomberg Agriculture Industry 60.0 MFG PMI BRAZIL PMI Sources: Markit, Bloomberg Services PMI 15.0% Services GDP % % 0.0% % % -15.0%

18 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun % 2.00% 0.00% -2.00% -4.00% AS BRAZIL DEBT CLIMBS, BUDGET DEFICIT IMPROVING: BRAZIL ANNUAL BUDGET (% of GDP) Sources: Brazil National Treasury BRAZIL DEBT AS % of GDP Sources: Brazil Central Bank, Bloomberg -6.00% Nominal Surplus/(Deficit) % % Primary Surplus/(Deficit) 30.0 Gross Debt Net Debt

19 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Mar-14 Jun-14 Sep-14 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 RUSSIA SEEMS FINE WITH $60 OIL: 60.0 RUSSIA PMI Sources: Markit, Bloomberg 60% RUSSIA TRADE (Y/Y) Sources: Central Bank of Russia, Bloomberg % 40% % % 10% % -10% % 48.0 Manufacturing PMI Services PMI -30% -40% Exports Y/Y Imports Y/Y % 18

20 Sep-13 Mar-14 Jun-14 Sep-14 Mar-15 Jun-15 Sep-15 Mar-16 Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 RUSSIA CENTRAL BANK STILL ACCOMMODATIVE: 19.0 BANK OF RUSSIA KEY RATE Sources: Central Bank of Russia and Bloomberg 100 EUR/RUB FX SPOT RATE Source: Bloomberg

21 EARNINGS SET TO RISE WITH TAX REFORM: S&P 500 OPERATING EARNINGS ESTIMATES Sources: S&P Index Services, Merion Capital Group Upside Risk: 3462 (20X Multiple on 2019 Street Operating EPS) Downside Risk: 2655 (17X Multiple on 2018 Operating EPS) Quarter Street Est. Y/Y % Our Est. Y/Y % 19X Fwd P/E FY 2010 $ % FY 2011 $ % FY 2012 $ % FY 2013 $ % FY 2014 $ % FY 2015 $ % FY 2016 $ % Mar-17 $ % $ % Jun-17 $ % $ % Sep-17 $ % $ % $ % $ % FY 2017 $ % $ % Mar-18 $ % $ % Jun-18 $ % $ % Sep-18 $ % $ % Dec-18 $ % $ % FY 2018 $ % $ % 3000 FY 2019 $ % $ % S&P all-in tax rate was 26.09% in For every 1% cut to EFFECTIVE corporate tax rates, add $2 to SPX earnings. 20