Bumpy Journey to a New Normal

Transcription

1 Bumpy Journey to a New Normal MACPA Presentation Presented by: John B. Jung, Jr., Senior Managing Director, BB&T Capital Markets 1 September 22, 2011 Important Disclaimers BB&T Capital Markets is a division of Scott & Stringfellow, LLC. Member NYSE/FINRA/SIPC. Scott & Stringfellow, LLC, is a wholly-owned, nonbank subsidiary of BB&T Corporation. Securities and insurance products or annuities sold, offered or recommended are not a deposit, not FDIC insured, not bank guaranteed, not insured by any federal government agency and may lose value. The information contained herein, while not guaranteed by BB&T Capital Markets, has been obtained from sources which we believe to be reliable and accurate. This material is not to be considered an offer or solicitation regarding the sale of any security. Discussions of past performance do not imply a guarantee of future results. Comments regarding tax implications are informational only. Scott & Stringfellow and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences. 2 1

2 Never make predictions, especially about the future. - Casey Stengel 3 Improving Sign: Consumer Spending Consumer spending continues to trend upward though recent pullbacks have spooked the markets In a recent survey only 11% of consumers were worried about the level of debt in their household U.S. Consumer Spending Growth Source: FactSet, data as of April 2011 /Source: Reuters, 4 2

3 Improving Sign: Manufacturing Manufacturing has shown a similar trend the recovery has been even stronger than consumer spending though again the latest numbers spooked the market ISM Manufacturing New Orders Index Source: ISM, BBTCM Research 5 Positive Sign: Long-Term Trend in GDP Growth Long-Term Real Growth in U.S. GDP Per Capita ( ) Source: VisualizingEconomics; MorningWorth 6 3

4 Why doesn t the recovery feel better? The most recent recession is technically behind us - it was only slightly above average in terms of duration Length of U.S. Recessions (1900-Present) Average length of recession Source: National Bureau of Economic Research 7 And Why Do the Effects Continue To Be Felt? The recovery has been much slower and less pronounced than the recovery periods from all recessions since 1950 Percentage Change in Economic Indicators Following Recession What is normal What we are dealing with Average, 33 Months After The Start of Recession (1) Current Cycle (from the end of 2007) (2) (1) Covers eight recession cycles going back to 1950 (does not include the truncated 1980 recession) (2) As of July 2011 Source: Haver Analytics, Gluskin Sheff, U.S. Census, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, U.S. Treasury 8 4

5 What Drove The Great Recession? 70% to 80% of GDP is tied to consumer spending is the consumer spent out? U.S. Household Debt as a Percent of GDP? The Great Recession? The Great Depression 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 tracking U.S. household debt until The Great Economic Expansion Economy Leveraged Economy ( ) 1. Rising Asset Prices 5. Increased Leverage Low Core Inflation Strong Growth Low Unemployment Consumer Spending 2. Declining Risk Premium 4. Greater Risk Taking 3. Reach for More Yield 10 5

6 The New Normal Economy? De-Leveraged Economy (2007 -?) 1. Declining Asset Prices 5. Reduced Leverage Large Write Downs Limited Growth Higher Unemployment Lower Consumer Spending 2. Increasing Risk Premium 4. Flight to Safety 3. Need for Liquidity 11 New Normal Characteristics Muted economic growth Persistently high unemployment and growing underemployment Continued asset re-pricing / Continued de-leveraging Globally Competitive Marketplace Large public deficits and debt Regulatory uncertainty / Greater government role in the economy / increasingly political tone This country had a huge, huge wound It takes time for wounds to heal, regardless of how good the care is. -Warren Buffet 12 6

7 New Normal Characteristics - Employment The total number of unemployed is approximately 13.9 million and 6.2 million have been unemployed for six months or more (chronic unemployment) There are over 25 million people unemployed, disillusioned (1.1 million Americans have given up looking), or underemployed. The average length of time a person is unemployed is 40.4 weeks the longest period ever. Policy measures aimed at encouraging companies to hire more people have had little or no effect. U.S. Unemployment Rate and Number of Workers Employed Number of Workers Unemployed Source: U.S. Department of Labor; Bureau of Labor Statistics; FactSet, Associated Press 13 New Normal Characteristics Long-Term Unemployed 6.2 million Americans have been out of work for longer than six months. Long-Term Unemployment Source: Bureau of Labor Statistics 14 7

8 New Normal Characteristics - Productivity Although the U.S. has lost nearly 8 million factory jobs since manufacturing employment peaked in mid-1979, U.S. manufacturers have placed near the top of the world rankings in productivity gains over the past three decades The U.S. remains the No. 1 manufacturing country in the world, out-producing No. 2 China by a staggering 25% Is increased investment (and increased productivity) the other side of the employment coin? Will this lead to increasing on-shoring of manufacturing? U.S. Labor Productivity Source: U.S. Department of Labor; Bureau of Labor Statistics; FactSet, Associated Press 15 New Normal Characteristics Housing Prices U.S. Real Wage Growth Home Price Indices 5.5 million U.S. Households are tied to mortgages 20% or more above value 1 of 8 mortgages were 30 days or longer past due or in the foreclosure process at the end of the second quarter, representing 6.3 million households Home price declines are accelerating according to a WSJ report. Real estate experts now believe it will take 20 years to recoup the $6 trillion worth of housing value destruction seen in the last five years after adjusting for inflation, values will never catch up Will GSE restructuring and a change in the mortgage interest deduction affect home prices? Source: U.S. Census Bureau, National Association of Realtors, BBTCM Research, FactSet, Standard & Poor s, Financial Times, NY Times 16 8

9 New Normal Characteristics Housing Affordability Housing affordability below pre-recession levels the ratio of housing prices to annual household income has fallen from 2.3x during the peak of the bubble all the way back to 1.6x (well below the average of 1.9x). U.S. New Home Sales Source: U.S. Census Bureau, National Association of Realtors, BBTCM Research, FactSet, Wall Street Journal 17 New Normal Characteristics De-Leveraging The S&P 500 has been flat for the last decade; at the same time earnings have risen 75%; resulting in the price to earnings level being down 43% Historical Index Performance S&P 500 Price To Earnings Source: FactSet, data as of August 29,

10 New Normal Characteristics Global Marketplace Increased Economic Opportunity BRIC (Brazil, Russia, India & China) countries The fastest growing and largest emerging market economies in the world European Union PIIGS (Portugal, Italy, Ireland, Greece & Spain) countries owe the Big Three of Europe (Germany, France, and Great Britain) more than $2 trillion in debt Influence on the world economy is waning? Middle East Unrest World s oil supply Export Terrorism Global Disasters Japan Australia Source: Forbes, Wall Street Journal, The Economist 19 New Normal Characteristics Global Marketplace After-tax corporate profits were up 9.0% from July 2010 and are at a record high of 10.1% of GDP. How much of the performance is related to the global economy growth in international markets? Corporate Profits vs. Nominal GDP Source: Bureau of Economic Analysis 20 10

11 New Normal Characteristics Large Public Deficits and Debt Since the 1950 s we have borrowed on average 2% of GDP / in 2010 and 2011 we will average 10% of GDP What happens when interest rates start to rise at this time can we even let interest rates rise? What are the implications of keeping them low? U.S. Gross Federal Debt Source: Congressional Budget Office; US Department of the Treasury.; These figures represent federal debt that is subject to limitations only 21 New Normal Characteristics Large Public Deficits and Debt The gap between federal receipts and spending as a percentage of GDP continues to widen. Widening Federal Budget Gap Source: The Wall Street Journal 22 11

12 New Normal Characteristics Large Public Deficits and Debt Entitlement and net interest spending, on its current course, will eclipse government revenues in When do we hit the absolute debt ceiling have we already spent the money? U.S. Federal Budget as a Percentage of GDP Source: KPCB, Congressional Budget Office, The Economist 23 New Normal Characteristics Large Public Deficits and Debt President Obama s FY 2012 Budget proposes another $3.7 trillion dollars in federal outlays and expenditures. The U.S. federal budget is approximately 25% of U.S. GDP U.S. Federal Budget Detail Source: KPCB, Congressional Budget Office, The Economist 24 12

13 New Normal Characteristics Large Public Deficits and Debt Budget Alternatives: Raise Taxes From 1951 through 1963, the U.S. maintained extremely high marginal tax rates. The lowest rate of federal income tax was 20%, and the highest equaled 91%. The tax structure back then generated revenue equal to 7.7% of GDP. Marginal rates were lowest from 1988 through 1990, when the lowest rate was 15% and the highest rate was 28%. With that structure, federal income taxes brought in revenue equal to 8.1% of GDP. (WSJ) High marginal tax rates are a proven disincentive to invest Do wealthy people (Warren Buffett) pay taxes? Cut Expenditures In 2011 we will borrow 10% of GDP what are the effects of cutting 10% of GDP(assuming a balance budget)? What are the social consequences of cutting entitlements? What are the international consequences of cutting defense? Do the government have the ability to control the inevitable de-leveraging? Source: Forbes, Wall Street Journal, The Economist 25 Unusually Uncertain Outlook The future ain t what it used to be. -Yogi Berra Is the current regulatory environment undermining the recovery are regulatory costs an anchor around the neck of the economy? Should we support housing or let prices fall where they may if we support housing what are the short and long term consequences? Does government have a responsibility to create jobs are there effective policy measures or do we need to take a hands off approach? Even though there is no concrete evidence stimulus or quantitative easing worked in any form do we have to implement one or both just to show effort? Which is a bigger problem deflation (asset bubbles bursting inability to pay collective debt) or inflation (lower standard of living - the ability to pay back our collective debt)? 26 13

14 We can t solve problems by using the same kind of thinking we used when we created them - Albert Einstein 27 Government Response 1. Regulatory Overhaul By any measure the regulatory burden and cost to our economy is excessive. Many measures were well intentioned but the bureaucratic system has taken on a life of its own and the costs far outweigh the benefits. A top to bottom regulatory review is necessary to insure our global competiveness. 2. Tax Code Reform No matter how you feel about the level of taxes a complete reform (overhaul) of the tax code is needed. A cogent and coherent code will lead to a conviction of certainty which will allow capital to make informed decisions. Uncertainty about the present and future code is anathema to a healthy and growing economy. 3. Fiscal Restraint The current spending message out of Washington is on point invest in education and technology and infrastructure to spur growth but have we already spent the money? In order to drive the engine of growth two things have to happen; Everyone will get less and Everyone will pay more and that involves defense and entitlements 28 14

15 Collective Response If the financial system is sound and the capitalist system is allowed to work we will continue to recover and grow will we allow the process to work? Recovery will take time it took 60 years to lever-up; it will take more time than we think / hope to get re-balanced however, we need to deal with the issues now De-leveraging is going to occur we have to be prepared for the consequences The companies who reacted rationally to the new circumstances are already the winners rationalization (re-conceptualization) is a major positive from the great recession profitability the highest in four years 29 Unlocking Potential in Today s Environment Innovation is essential, especially if it s disciplined and focused on business outcomes Out-thinking the competition is useless unless you can out-execute This is no time for trial and error; winners get it right the first time 30 15

16 P. F. Flyer Approach Run Faster, Jump Higher Working Together 32 16