HIGHER FOR LONGER MUCH HIGHER FOR MUCH LONGER THE GREAT SAVINGS SQUEEZE OF 2018 INTL FCStone Financial Inc. Member FINRA/MSRB/SIPC Broker Dealer Division Vincent Deluard, CFA Global Macro Strategist
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Understanding Interest Rates The interest rate is the price that clears the market for savings From GDP accounting: X-M = S-I Current account balances determines net savings In global capital markets, the equilibrium interest rate is set so that: I=S=X=M If too many countries chase trade surpluses at the same time, excess savings will push interest rates down
Current Account Deficit / Surplus in $ Billion The Triple Savings Glut of the 2000s-2010s China, Germany, Russia and KSA accumulated $8 trillion in excess savings since 1999 1,600 Chinese Surplus German Surplus Saudi + Russia All Deficit Countries Borrowing Needs 1,200 800 400 0-400 What happened in 1999? Source: OECD, IMF 1990 1994 1998 2002 2006 2010 2014
What Happened in 1999? The Triple Shock of 1999 January : the euro was launched, the Deutsche Mark is retired World s largest exporter blessed with a weak currency August: Putin becomes Prime Minister as Brent prices recover from a secular low of $9.6 OPEC and Russia s oil revenues explode November: U.S.. China sign WTO agreement China starts building $4 trillion reserve hoard
$ billion The Petrodollar Glut: $2.1 Trillion Russia and Saudi Arabia accumulated surpluses worth $2.1 trillion since 1999 2,400 2,100 Holdings of U.S. Treasuries Estimated oil revenues Cumulative current account balance 1,800 1,500 1,200 900 600 300 Source: OECD, IMF 0-300 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
The German Glut: $2.8 Trillion Home Ownership Rate by Country Germany Japan U.K. U.S. France Canada Netherlands Italy Greece Spain Poland Singapore 52% Germans hate mortgage debt! 62% 64% 65% 65% 68% 68% 73% 74% 78% 84% 91% 40% 50% 60% 70% 80% 90% 100% Source: World Bank
The Chinese Glut: $3.1 Trillion The day China decided to build a $4 trillion reserve stash The IMF s public shaming of Suharto, Jan 15 1998
The Great Savings Squeeze of 2018: OPEC The U.S. Has Become the World s Top Producer of Oil in 2018
The Great Savings Squeeze of 2018: Germany Auf Wiedersehen Balanced Budgets, Hallo Pension Shock
The Great Savings Squeeze of 2018: China The Chinese Surplus Has Already Melted China is no longer investing its currency reserves in U.S. treasuries
The Great Savings Squeeze of 2018: Chindia India's growth will permanently overtake China's in 2018 16% 14% China India 12% 10% 8% 6% 4% 2% Source: OECD, IMF 0% 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 2028 2032 2036 2040 2044 2048
The Great Savings Squeeze of 2018: World 4.0% Projected World Growth Rates Based on OECD Long-Term Forecasts Deficit Countries GDP Growth Surplus Countries GDP Growth 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Global savings glut turns into a squeeze Source: OECD, IMF 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058
The Great Savings Squeeze of 2018: World A Financial Perspective on Life Net Savings Over Time Peak earnings + empty nest College First job First house + kids Retirement & medical expenses Childhood Household formation Accumulation Decumulation 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86
Thousands The Great Savings Squeeze of 2018: U.S. 14,000 Change in US Population by Age Group, 2020-2030 Census Bureau Estimates 12,000 10,000 8,000 6,000 Millennials Boomers 4,000 Millennials' kids 2,000 0-2,000-4,000-6,000 Under 25 25 to 35 35 to 44 45 to 54 55 to 64 65 to 74 75 and over
The Great Savings Squeeze of 2018: U.S. CBO s Budget Outlook 2019 to 2029 The presenting member estimated borrowing needs to exceed $12 trillion without factoring in the possibility of a recession which would pose a unique challenge for Treasury over the coming decade. Additionally, given stagnation in international reserves, there is likely an increased need for this debt to be financed domestically. This blue-sky discussion, in the context of the optimal debt model, focused on the need to expand demand, while preserving the key tenets of regular and predictable issuance at the lowest cost to taxpayers over time. A number of possible new products were reviewed including CPI subcomponent linked TIPS, ultra-long dated issuance, zerocoupon issuances and an expanded FRN program. Treasury Borrowing Advisory Committee Letter to the U.S. Treasury, January 29, 2019
$ Million The Great Savings Squeeze of 2018: U.S. Financial Assets of U.S. Households* Cumulative Purchase of Securities by Private DB Plans 70% 60% Cash Allocation Equity Allocation Bond Allocation Household can only buy more bonds if they sell equities... 8,000 7,000 All Securities Debt Treasury Debt Private pension plans have bought treasuries in 2018...... but they are in a secular downtrend 6,000 50% 5,000 40% 4,000 30% 3,000 20% 2,000 10% *Includes mutual fund assets split by asset classs according to their objective Source: Fed Flow of Funds 1,000 Source: Federal Reserve 0% 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 0 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
Conclusions 1. The savings glut is turning into a savings squeeze: rates will go higher for longer, much higher for much longer 2. This forecast is based on supply and demand, not economic fundamentals 3. Higher inflation, higher deficits, or a politicized Fed would worsen the outlook Shorten duration, raise cash: cash is an asset class again! Short-term treasuries and variable rate bonds are safe place to hide The massive rotation into U.S. treasuries will create volatility, with possibly counter-intuitive feedback loops (Q4 2018)
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