HARD TIMES A Macroeconomic Analysis Presented To: The Financial Advisor Symposium

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1 HARD TIMES A Macroeconomic Analysis Presented To: The Financial Advisor Symposium April 16, S. Capital of Texas Highway Building 3, Suite 600 Austin, Texas Fax

2 1 9% 7% U.S. Treasury Yields annual 1 9% 7% 5% 30 year 5% 3% 1% Average 2 year = year = year Sources: Federal Reserve Board. Through Red line is April 9, 2008 level. 3% 1% page

3 9.5% % % % % % % 3. Long Term U.S. Treasury Yield monthly 230 bps 120 bps 200 bps 85 bps '00 '01 '02 '03 '04 '05 '06 '07 '08 Source: Federal Reserve. Through April 9th, bps 100 bps 9.5% % % % % % % 3. page

4 Consumer Price Index: Total and Core y-o-y percent change, monthly Core CPI: thick line CPI: thin line '02 '06 Source: Bureau of Labor Statistics. Through February page

5 1 Long-term U.S. Treasury Rates and Inflation Bond Yield Inflation (deflator) '00 '04 '08 Quarterly averages of long term U.S. Treasury rates. Inflation: annual percent change in GDP deflator, annual percent change in Core PCE deflator from 1996 through 1999, market based Core PCE deflator from 2000 to present. Through Q page

6 Long Term Bond Yields End of Recession Level at End of Recession Level of Low Yield Number of months After Recession to Low Yield 's 's 's 's 's 's % Average % 15 Source: Federal Reserve, NBER. page

7 1 1 Long Term Treasury Rate yearly average Avg Yield = 2.9% Avg. Inflation rate = -. Avg. Real rate = 3.1% Fall of Berlin Wall Avg Yield = 6. Avg. Inflation rate = 3.9% Avg. Real rate = 2.1% Onset of Iron and Bamboo Curtains Avg. Inflation rate = 2.1% Avg. Real rate = 2.1% Long term avg. = 4. Global market Transition period Restricted market Global market Sources: Federal Reserve Board, Homer & Sylla. Through Initial global market period interrupted by WWI. page

8 Nominal GDP two quarter percent change, annual rate '03 Source: Bureau of Economic Analysis. Through Q (Q1 estimated to grow at 3% ann. rate.) page

9 Leading Economic Index and Ratio of Coincident to Lagging Economic Index y-o-y percent change, quarterly Leading Coincident/Lagging Ratio '01 '05 Source: Conference Board. Commerce Department Through February (Last plot 3 months ending Feb. vs. same period a year ago.) (Components: workweek, jobless claims, stock prices, interest rate spread, building permits, vendor performance, consumer expectations, new orders, money supply, consumer goods orders.) -1 page

10 150 Consumer Confidence monthly index Michigan Consumer Expectations monthly index '00 '02 '04 '06 '08 Source: Conference Board. Through March '02 '06 Source: University of Michigan. Through March CEO Business Confidence quarterly index National Federation of Independent Business Small Business Optimism monthly index '01 '06 Source: Conference Board. Through Q '02 '06 Source: National Federation of Independent Business. Through April page

11 1 Real Personal Consumption Expenditures year-over-year percent change, quarterly Avg. = 4. Avg. = 3. Avg. = 3.1% '04 Source: Bureau of Economic Analysis. Through Q (Q1 estimated to grow at.5% ann. rate.) - page 10

12 1 Real Wage and Salary Income y-o-y % change, monthly 1 Avg. = 3.3% Avg. = 3. Avg. = 1..23% 's 2000's Consumption % Wage and Salary Income '01 '04 '07 Source: Bureau of Economic Analysis. Through February page 11

13 Total Private Nonfarm Payroll Employment year over year % change, monthly Nonfarm Payrolls average annual % change during economic expansions 2Q61-3 Q69 2Q75-4Q79 1Q71-3Q73 1Q83-2Q '01 '05 4. bill Source: Bureau of Labor Statistics. Through March % % % % %. 2Q91-4Q00 4Q01 - Present % % % % page 12

14 Home Equity Extraction (billions of dollars) and Real Home Equity Extraction as a % of Real Personal Consumption Expenditures (percent) 3% Cash Outs % of PCE left scale thick line Avg. Cash outs = $51.5 %PCE = 2. bil % Avg. Cash Outs = $5.8 %PCE =. Cash Outs $bil.: right scale thin line '02 '05 '08 Source: Bureau of Economic Analysis. Freddie Mac page 13

15 U.S. Real Housing Price Index annual, index 1890 = % 2 15% 1 5% -5% -1-15% = S&P/Case-Shiller Home Price Index composite 20 3 month % change y-o-y % change -25% '00 '02 '04 '06 ' = = average = = % 2 15% 1 5% -5% -1-15% -2-25% -3 from peak Sources: Robert Shiller, Yale University, Irrational Exuberance, 2nd Edition, Princeton: Princeton University Press, Through Q4. Composite 20 through November. page 14

16 Household and Mortgage Debt to Disposable Personal Income quarterly Household Debt as % of Disposable Personal Income average annual percentage point increase, cycle by cycle 6. bill 5.5% % % % % % 0. 2Q58-1Q60 4Q71-3Q73 Q482-2Q90 4Q01 - Present 1Q61-3Q69 1Q75-4Q79 1Q91-4Q00 Q3 59 = 54.7% * % % % % % % 0. Household Mortgage Q4 99 = 93.7% * * Q4 99 = 64.7% 133.7% * Q4 54 = '00 '03 '06 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q page 15

17 85% 8 75% 7 65% 6 55% 5 45% 4 35% 3 25% 2 15% Homeowners' Equity vs. Lender Financing as a Percent of Total Home Values quarterly Homeowners Lenders 34. of households have 10 equity. Equity of homeowners with mortgages = 20.3% '01 '08 Source: Federal Reserve. Through Q % 8 75% 7 65% 6 55% 5 45% 4 35% 3 25% 2 15% page 16

18 Effects of Equity Cash Outs and Wealth on Real PCE real dollars, % per annum Average Real Equity Cash Outs / Real PCE Change in Real Wealth *.075 / Real PCE 2.5% Source: Freddie Mac, Bureau of Economic Analysis, Federal Reserve. page 17

19 2500 Vacant Housing Units for Sale Plus Unsold New Single-Family Homes Under Construction and Months Supply of Existing Home Sales thousands 7% U.S. Mortgage Delinquency Rate quarterly quarterly 7% months % 5% 9 Vacant Units and Homes: left scale % '00 '07 3% 7 Avg. = 1157 Avg. = Existing Home: Months Supply right scale '01 '06 Source: Bureau of Census. Through Q Months supply of existing home sales through February page 18

20 25 20 Real Household Wealth in Equities and Homes quarterly $tril. Home prices are assumed to decine 3 from peak while stock prices rise 1 from current levels and the inflation rate average per annum for 2008 through $tril Total Homes Equities '00 '03 '06 '09 Source: Federal Reserve, Flow of Funds. Through Q est. Deflated by PCE deflator. 0 page 19

21 Market Value of Household Real Estate and Corporate Equities ($ trillions) Year Homes Stocks Ratio of Homes to Stocks Net Loss in Real Wealth From 2007 Peak ($tril) Effect on GDP per annum Effect on PCE per annum % -1. Source: Federal Reserve. page 20

22 1 Saving Rate quarterly Avg. = 8.3% 1 Avg. = 4. Avg. = 1.3% '04 Source: Bureau of Economic Analysis. Through Q Latest =.3% - page 21

23 Ratio of Proxy for Imported Consumer Goods to Total Consumer Expenditures for Goods monthly '02 '05 '08 Source: BEA. Through January Numerator includes: Imports for petroleum, foods and beverages, computers, computer accessories, telecommunications equipment, nonfood consumer goods, automotive vehicles and parts. Proxy includes some overlap with business goods but sufficient detail is unavailable to exclude those items page 22

24 1% -1% - -3% - -5% - -7% Real Net Exports as % of Real GDP quarterly Real Imports y-o-y % change '01 '04 ' '04 Source: Bureau of Economic Analysis. Through Q % -1% - -3% - -5% - -7% page 23

25 7% 5% 3% 1% Real Domestic Demand in 15 Large Countries Outside the U.S. vs. U.S. y-o-y percent change, quarterly, weighted avg. domestic demand = gdp minus net exports U.S. 3 world gdp U.S. 7% 5% 3% 1% -1% - 15 large countries outside U.S. 15 Countries 4 world gdp '00 '01 '02 '03 '04 '05 '06 ' Source: Statistical Office of the European Communities (Eurostat), CANISM Statistics Canada, U.K. Office for National Statistics, Japan Cabinet Office, BEA : Through Q U.S. Through Q1 (est.) % - page 24

26 Developing Asia - Contribution from Exports and Consumer Spending to Economic Growth % of GDP 1980 % of GDP Exports 19% 4 2. Private Consumer Spending * 6 4 Source: Morgan Stanley. * all time record low page 25

27 The Chinese Trade Surplus and Their Economy Annual Rate (billions) % of China GDP 2007 Share of GDP if Foreign Trade Multiplier is 2 Share of GDP if Foreign Trade Multiplier is U.S. Official Trade deficit with China $ % % Source: China National Bureau of Statistics, U.S. Census Bureau. Through page 26

28 OECD's World Leading Economic Index year-over-year % change '00 '03 '06 Source: Organization for Economic Cooperation and Development. Through January page 27

29 300 bill Federal Budget Fiscal Years bil Source: Department of Treasury. Through est page 28

30 3 25% 2 15% 1 M2 Money Stock annual % change 3 25% 2 15% 1 5% Avg. = 6. 5% -5% 1 1 M2 Money Supply 3 month % change 1 1-5% % -15% '02 '05 ' Sources: Federal Reserve Board. Bureau of Labor Statistics; Monetary Statistics of the United States. Through March 24, (Last plot 12 months ending March vs. same period a year ago.) - -2 page 29

31 2 Real Money Stock: Neo-Austrian School Basis y-o-y percent change 2 15% 15% 1 1 5% 5% -5% -5% '02 '05 '08 Source: Rothbard, Murray N. 1978, "Austrian Definitions of the Supply of Money"; Frank Shostak, "The Mystery of the Money Supply Definition". Federal Reserve Board, Bureau of Labor Statistics. Through February page 30

32 Total Reserves of Depository Institutions annual percent change 2 15% % 4 35% 3 25% 2 15% 1 5% -5% -1-15% -2-25% -3-35% -4 Total Reserves y-o-y % change, monthly Latest = '00 '02 '04 '06 ' % 4 35% 3 25% 2 15% 1 5% -5% -1-15% -2-25% -3-35% % 1 5% Avg. = 4.9% 5% -5% -5% Source: St. Louis Federal Reserve. (Adjusted for Y2K and 9/11 by St Louis Fed.) Through March 26, Last plot FRB 12 months ending March 2008 vs. same period a year ago. -1 page 31

33 2.25 Velocity of Money Equation of Exchange: GDP(nominal) = M*V annual = = avg to present = avg to 1980 = = = Sources: Federal Reserve Board; Bureau of Economic Analysis; Bureau of the Census; Monetary Statistics of the United States. Q4 2007; V = GDP/M, GDP = tril, M2 = 7.4 tril, V = page 32

34 2.2 Velocity of Money Equation of Exchange: GDP(nominal) = M*V quarterly avg. = '01 '07 Sources: Federal Reserve Board, Bureau of Economic Analysis, HIMCO. Q1 2008; V = GDP/M, GDP = tril, M2 = 7.6 tril, V = 1.85 Velocity peaks either before or during recessions page 33

35 Falling Velocity Dominates M2 Acceleration 7 quarter % change, annual rate M2 Velocity GDP Q % Q % 4. Source: Bureau of Economic Analysis, Federal Reserve. page 34

36 7% 5% 3% 1% -1% - -3% - -5% - -7% An Inverse Relationship: Net Exports of Goods and Services and Net Foreign Investment as % of GDP Net Foreign Investment (black) Net Exports of Goods and Services (gray) '02 '06 Source: Bureau of Economic Analysis. Through % 5% 3% 1% -1% - -3% - -5% - -7% page 35

37 15 trillions $ International Investment Position of the United States annual Foreign-owned assets in the United States trillions $ $ % of U.S. wealth 1 of Global wealth 109% of U.S. yearly income or GDP Sources: Bureau of Economic Analysis. Through page 36

38 18 16 trillions $ International Investment Position of the United States annual Foreign-owned assets in the United States trillions $ $ $ $2.5 trillion difference 2 of GDP U.S.-owned assets abroad Sources: Bureau of Economic Analysis. Through page 37

39 Yields on International Investment Positions annual 1 1 U.S. Foreign 4.7% 3.7% Sources: Bureau of Economic Analysis. Through page 38

40 3% Yield Differential on International Investment Positions vs. U.S. Dollar annual index 130 dollar: right axis % Income differential: left axis R =.37 t Stat = Sources: Bureau of Economic Analysis, Federal Reserve Board. (Real Broad trade weighted dollar index). Through page 39

41 Foreign Holdings of U.S. Securities Long-Term securities Long Term Securities (col. 2) Equities Debt Corporate Long Term Debt (col. 4) U.S. Agency U.S. Treasury U.S. Treasury Securities ( col. 7 plus Treasury bills ) 5 years and less 5-10 years over 10 years *Trillions ($) % 7% * may not sum due to rounding. Source: U.S Treasury Department page 40

42 6 Probability Distribution for GDP Average Quarterly Growth Rate, Two Year Projection Source: HIMCO. Less than -1% -1% to 1% Greater than 1% page 41

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