Edward D. Goard, CFA Chief Investment Officer, Fixed Income

Size: px

Start display at page:

Download "Edward D. Goard, CFA Chief Investment Officer, Fixed Income"

Virgil Griffin
6 years ago
Views:

1 Edward D. Goard, CFA Chief Investment Officer, Fixed Income

2 What s Different This Time? Last recession not supply side driven, inventory correction Demand side recession caused by deleveraging: Consumers Corporations Governments What is the Fed s Challenge? Conventional Monetary Policy: Inject Liquidity in Order to Stimulate Demand Not working because it s not supply side driven Buy Rates Down Talk Rates Down Problem: Is there an Interest Rate Low Enough to Spur Demand? Prevent A Liquidity Trap Recession: Two Consecutive Quarters of Negative GDP Growth Depression: Two or More Consecutive Recessions Based on the Same Fundamental Factor o Factor: Leverage of Consumers, Companies and Governments (e.g. Europe)

3 Loan Demand Metrics: Household Debt Growth: The World Levered Up for the Last 50 years! Household Debt Actually Grew Through the Last 11 Recessions Household Debt Growth 5 6/ 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 29/ / 29/ / 29/ / 28/ / 31/ / 29/ / 29/ / 29/ / 29/ / 31/ / 29/ / 29/ / 29/ / 28/ / 31/ / 29/ / 29/ / 29/ / 28/ / 31/ / 29/ / 29/ / 29/ / 28/ / 31/ / 29/ / 29/ / 29/ / 29/ / 31/ / 29/ / 29/ / 29/ / 28/ / 31/ / 29/ / 29/ / 31/ 2012 This was the First Recession Since the Great Depression Where Household Debt Growth was Below Zero (We ve been Below Zero Since 06/2008) Information is historical and not indicative of future results

4 Loan Demand Metrics: Household Debt Service: Current DSR: 10.88% 1944 Level: 2% Conclusions: Past Recessions were Supply Shocks once Prices and Rates came down Demand Returned This is a Demand Shock: Interest Rates are at Historic Lows, yet Household Loan Demand is Decreasing Household Debt Service Demand Shock plus Return of Tighter Lending Practices = Liquidity Trap / 1/ / 1/ / 29/ / 29/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 29/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 31/ 2012 Information is historical and not indicative of future results.

5 What About The Boogieman Of Higher Interest Rates?

6 Bond Bubble In Perspective Interest rates aren t at unprecedented levels the Federal Reserve Discount Rate remained at or below 1.50% Federal Reserve Discount Rate / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 02/ / 14/ 2012 Source: Ned Davis Research Group Information is historical and not indicative of future results

7 Interest Rates: Nowhere But Up? Japanese 10 year yields have been below 2% since Interest Rates / 1/ / 1/ / 1/ / 29/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 29/ / 30/ 2012 Information is historical and not indicative of future results.

8 What to watch for if you re concerned about inflation: Consumer Demand and Retail Sales Unemployment Wage Inflation Housing Fed Steps of Not Easing

9 Consumer Confidence: Still Indicative of Below Trend Line Growth Expectations Readings Above 80 Would be Indicative of Consumers Willing 100 to Stop Deferring Purchases Growth Expectations Growth Below Trend Growth 11/ 30/ / 29/ / 1/ / 1/ / 29/ / 28/ / 31/ / 31/ / 31/ / 31/ / 30/ / 28/ / 31/ / 29/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 31/ 2012 Information is historical and does not guarantee future results. Recession 65.90

10 Retail Sales: YOY growth in retail sales peaked in Q4 last year and has slowed dramatically to just under 4% Retail Sales Remember, consumption is approximately 70% of GDP in the U. S. Economy / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 30/ 2012 Information is historical and does not guarantee future results.

11 U6 Unemployment: U6 Captures: Discouraged Workers (i.e. People Leaving the Labor Force), Underemployed and Part-Time Workers U6 Unemployment Conclusions: Persistent Skill Mismatch and Structural Unemployment Remain High (Builders and Big Box Retail) Keep in mind: Average Recession: 500k Jobs Lost Great Recession: 5.5 Million Jobs Lost 6 2/ 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 31/ 2012 Information is historical and not indicative of future results.

12 Wage Inflation: Employment Cost Index: High structural unemployment and skills mismatches could lead to wage inflation for workers with skills in high demand Wage Inflation 6/ 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ / 1/ 2012 So far, wage inflation is muted. Information is historical and not indicative of future results. 1.70

13 Housing Metrics: FHFA Index: Currently at about 2003 home price levels. Case Shiller has seen a pickup in prices recently Housing Metrics / 1/ / 1/ / 29/ / 28/ / 31/ / 31/ / 30/ / 29/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 29/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 31/ 2012 Information is historical and not indicative of future results.

14 Housing Metrics: Mortgage Delinquency Rates: 25% Above 1980 S&L Crisis Levels 50 to 75% Above Normal Levels Housing Metrics Conclusions: Hard to see much upside given shadow inventory, moderate purchase demand and elevated delinquencies (mortgages still going through the foreclosure processes) Housing Represented 14% of GDP, now only 10% of GDP. Hard to get above Trend Line GDP Growth Until Housing Recovers Caveat: Real Estate is Local and Hardest Hit Areas Like Michigan are Showing Some Signs of Life / 1/ / 1/ / 29/ / 28/ / 31/ / 31/ / 30/ / 29/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 28/ / 31/ / 31/ / 30/ / 29/ / 31/ / 31/ / 30/ / 30/ 2012 Information is historical and not indicative of future results.

15 Other Risks: 2013 Fiscal Cliff: CBO Estimate: 1.5 to 2.3% Drag on GDP (1Q2012 GDP 1.9%) Deflationary not Inflationary for U.S. European Issues: Exports to Europe Represent 1.4% of GDP (Negligible Impact) Real Concern is a Lehman Like Event Italy: 3rd Largest Global Bond Market Deflationary not Inflationary for U.S. China and Developing Market Slow-Down China and Australia Lowering Interest Rates Regulation: Dodd-Frank: o Further Banking Regulations o JP Morgan Issue not Helping Basel III: Estimates are only projections and not guarantees.

16 The Mechanics of Not Easing The Fed will start with Not Easing The Fed needs to start signaling not easing before the fed funds target rate is actually increased: Stop Operation Twist (December 2012) Signal QE no longer an option Stop Mortgage Reinvestment Shorten Maturity of Portfolio (Untwist) Stop All Portfolio Reinvestment Sell MBS Sell UST they are overweight Raise Target Rate It s doubtful they would do more than a couple of these bullet points in a single meeting, meaning this process will take a very long time. Source: FTN: Economic Analysis Team

17 Conclusions: The Fed Doesn t Seem to be able to Stimulate Consumer Demand Too Many Economic Headwinds for Above Trend Growth Inflation? - More likely Muted Inflation or possibly Deflation Lower Rates for Longer Than Anyone Expects

b. Financial innovation and/or financial liberalization (the elimination of restrictions on financial markets) can cause financial firms to go on a

b. Financial innovation and/or financial liberalization (the elimination of restrictions on financial markets) can cause financial firms to go on a Financial Crises This lecture begins by examining the features of a financial crisis. It then describes the causes and consequences of the 2008 financial crisis and the resulting changes in financial regulations.