HARD TIMES A Macroeconomic Analysis Presented To: The Financial Advisor Symposium April 16, 2008 1250 S. Capital of Texas Highway Building 3, Suite 600 Austin, Texas 78746-6443 512-327-7200 Fax 512-327-8646 www.hoisingtonmgt.com
1 9% 7% U.S. Treasury Yields annual 1 9% 7% 5% 30 year 5% 3% 1% Average 2 year = 5.2 30 year = 6.4 2 year 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Sources: Federal Reserve Board. Through 2007. Red line is April 9, 2008 level. 3% 1% page
9.5% 9. 8.5% 8. 7.5% 7. 6.5% 6. 5.5% 5. 4.5% 4. 3.5% 3. Long Term U.S. Treasury Yield monthly 230 bps 120 bps 200 bps 85 bps 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 Source: Federal Reserve. Through April 9th, 2007. 120 bps 100 bps 9.5% 9. 8.5% 8. 7.5% 7. 6.5% 6. 5.5% 5. 4.5% 4. 3.5% 3. page
Consumer Price Index: Total and Core y-o-y percent change, monthly 1 1 1 1 1 1 1 1 Core CPI: thick line CPI: thin line 58 62 66 70 74 78 82 86 90 94 98 '02 '06 Source: Bureau of Labor Statistics. Through February 2008. page
1 Long-term U.S. Treasury Rates and Inflation 1 1 1 1 1 1 1 Bond Yield Inflation (deflator) 60 64 68 72 76 80 84 88 92 96 '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 Q4 2007. page
Long Term Bond Yields End of Recession Level at End of Recession Level of Low Yield Number of months After Recession to Low Yield 1. 2. 3. 4. 1. 1940's - 1950's 2. 2. 1 2. 1960's - 1970's 5. 5. 12 3. 1980's - 2000's 8. 5.9% 31 4. Average 5. 4.5% 15 Source: Federal Reserve, NBER. page
1 1 Long Term Treasury Rate 1871-2007 yearly average 1871-1930 Avg Yield = 2.9% Avg. Inflation rate = -. Avg. Real rate = 3.1% Fall of Berlin Wall 1 1 1 1949-1988 Avg Yield = 6. Avg. Inflation rate = 3.9% Avg. Real rate = 2.1% Onset of Iron and Bamboo Curtains 1 1871-2007 Avg. Inflation rate = 2.1% Avg. Real rate = 2.1% Long term avg. = 4. Global market Transition period Restricted market Global market 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 Sources: Federal Reserve Board, Homer & Sylla. Through 2007. Initial global market period interrupted by WWI. page
2 2 1 1 1 1 1 - - - Nominal GDP two quarter percent change, annual rate 54 61 68 75 82 89 96 '03 Source: Bureau of Economic Analysis. Through Q1 2008. (Q1 estimated to grow at 3% ann. rate.) 2 2 1 1 1 1 1 - - - page
1 1 - - -1 Leading Economic Index and Ratio of Coincident to Lagging Economic Index y-o-y percent change, quarterly Leading Coincident/Lagging Ratio 1 1 - - -1-1 53 57 61 65 69 73 77 81 85 89 93 97 '01 '05 Source: Conference Board. Commerce Department 1953-1958. Through February 2008. (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
150 Consumer Confidence monthly index 150 120 Michigan Consumer Expectations monthly index 120 140 130 120 110 140 130 120 110 110 100 90 110 100 90 100 100 80 80 90 80 70 60 90 80 70 60 70 60 50 70 60 50 50 50 40 40 40 78 80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08 Source: Conference Board. Through March 2008. 40 30 78 82 86 90 94 98 '02 '06 Source: University of Michigan. Through March 2008. 30 80 75 70 CEO Business Confidence quarterly index 80 75 70 120 National Federation of Independent Business Small Business Optimism monthly index 120 65 60 65 60 115 115 55 50 55 50 110 110 45 40 45 40 105 105 35 30 35 30 100 100 25 76 81 86 91 96 '01 '06 Source: Conference Board. Through Q4 2007. 25 95 86 90 94 98 '02 '06 Source: National Federation of Independent Business. Through April 2008. 95 page
1 Real Personal Consumption Expenditures year-over-year percent change, quarterly 1 1 1 Avg. = 4. Avg. = 3. Avg. = 3.1% - - - 48 55 62 69 76 83 90 97 '04 Source: Bureau of Economic Analysis. Through Q1 2008. (Q1 estimated to grow at.5% ann. rate.) - page 10
1 Real Wage and Salary Income y-o-y % change, monthly 1 Avg. = 3.3% Avg. = 3. Avg. = 1..23% - - - 1990's 2000's Consumption 3. 3.1% Wage and Salary Income 3. 1. 65 68 71 74 77 80 83 86 89 92 95 98 '01 '04 '07 Source: Bureau of Economic Analysis. Through February 2008. - - - page 11
1 1 - - - - 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 1Q83-2Q90 49 53 57 61 65 69 73 77 81 85 89 93 97 '01 '05 4. bill Source: Bureau of Labor Statistics. Through March 2008. 3.5% 3. 2.5% 2. 1.5% 1. 0.5% 0. 2. 2.1%. 2Q91-4Q00 4Q01 - Present 4. 3.5% 3. 2.5% 2. 1.5% 1. 0.5% 0. 1 1 - - - - page 12
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. 100 90 80 70 60 50 1% Avg. Cash Outs = $5.8 %PCE =. Cash Outs $bil.: right scale thin line 93 96 99 '02 '05 '08 Source: Bureau of Economic Analysis. Freddie Mac. 40 30 20 10 0 page 13
U.S. Real Housing Price Index 1890-2007 annual, index 1890 = 100 210 200 190 180 170 160 150 140 130 120 110 100 3 25% 2 15% 1 5% -5% -1-15% -2 1894 = 123.9 S&P/Case-Shiller Home Price Index composite 20 3 month % change y-o-y % change -25% '00 '02 '04 '06 '08 1955 = 115.5 1979 = 122.1 average = 101.2 1989 = 124.2 90 80 70 60 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 3 25% 2 15% 1 5% -5% -1-15% -2-25% -3 from peak 210 200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 Sources: Robert Shiller, Yale University, Irrational Exuberance, 2nd Edition, Princeton: Princeton University Press, 2005. Through Q4. Composite 20 through November. page 14
14 13 12 11 10 9 8 7 6 5 4 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% 5. 4.5% 4. 3.5% 3. 2.5% 2. 1.5% 1. 0.5% 0. 2Q58-1Q60 4Q71-3Q73 Q482-2Q90 4Q01 - Present 1Q61-3Q69 1Q75-4Q79 1Q91-4Q00 Q3 59 = 54.7% * 6. 5.5% 5. 4.5% 4. 3.5% 3. 2.5% 2. 1.5% 1. 0.5% 0. Household Mortgage Q4 99 = 93.7% * * Q4 99 = 64.7% 133.7% 101. 14 13 12 11 10 9 8 7 6 5 4 3 2 * Q4 54 = 2 3 2 1 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2007. 1 page 15
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%. 52 59 66 73 80 87 94 '01 '08 Source: Federal Reserve. Through Q4 2008. 85% 8 75% 7 65% 6 55% 5 45% 4 35% 3 25% 2 15% page 16
Effects of Equity Cash Outs and Wealth on Real PCE 2002-2007 real dollars, % per annum Average 2002-2007 1. 2. 1. Real Equity Cash Outs / Real PCE 2. 2. Change in Real Wealth *.075 / Real PCE 2.5% Source: Freddie Mac, Bureau of Economic Analysis, Federal Reserve. page 17
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 11 10 2000 5% 5% 9 Vacant Units and Homes: left scale 8 1500 3% 72 79 86 93 '00 '07 3% 7 Avg. = 1157 Avg. = 5.1 6 1000 5 500 Existing Home: Months Supply right scale 71 76 81 86 91 96 '01 '06 Source: Bureau of Census. Through Q4 2007. Months supply of existing home sales through February 2008. 4 3 page 18
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 2010. $tril. 25 20 15 10 Total Homes 15 10 5 5 0 Equities 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 Source: Federal Reserve, Flow of Funds. Through Q4 2010 est. Deflated by PCE deflator. 0 page 19
Market Value of Household Real Estate and Corporate Equities 2000-2007 ($ trillions) Year Homes Stocks Ratio of Homes to Stocks 1. 2. 3. 4. 1. 2000 11.01 9.17 1.2 2. 2007 20.22 5.84 3.5 Net Loss in Real Wealth From 2007 Peak ($tril) Effect on GDP per annum 2008-2010 Effect on PCE per annum 2008-2010 1. 2. 3. 1. -7.1-1.3% -1. Source: Federal Reserve. page 20
1 Saving Rate quarterly 1 1 1 1 Avg. = 8.3% 1 Avg. = 4. Avg. = 1.3% - 48 55 62 69 76 83 90 97 '04 Source: Bureau of Economic Analysis. Through Q4 2007. Latest =.3% - page 21
3 3 3 3 2 2 2 2 2 1 1 Ratio of Proxy for Imported Consumer Goods to Total Consumer Expenditures for Goods monthly 90 93 96 99 '02 '05 '08 Source: BEA. Through January 2008. 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. 3 3 3 3 2 2 2 2 2 1 1 page 22
1% -1% - -3% - -5% - -7% 2 1 1 - - Real Net Exports as % of Real GDP quarterly Real Imports y-o-y % change -1 95 98 '01 '04 '07 48 55 62 69 76 83 90 97 '04 Source: Bureau of Economic Analysis. Through Q4 2007. 2 1 1 - - -1 1% -1% - -3% - -5% - -7% page 23
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 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 2008 Source: Statistical Office of the European Communities (Eurostat), CANISM Statistics Canada, U.K. Office for National Statistics, Japan Cabinet Office, BEA : Through Q4 2007. U.S. Through Q1 (est.) 2008. -1% - page 24
Developing Asia - Contribution from Exports and Consumer Spending to Economic Growth % of GDP 1980 % of GDP 2007 1. 2. 3. 1. Exports 19% 4 2. Private Consumer Spending * 6 4 Source: Morgan Stanley. * all time record low page 25
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 3 1. 2. 3. 4. 1. U.S. Official Trade deficit with China $256.3 7.9% 15. 23.7% Source: China National Bureau of Statistics, U.S. Census Bureau. Through 2007. page 26
1 1 1 1 - - - - -1-1 OECD's World Leading Economic Index year-over-year % change 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 Source: Organization for Economic Cooperation and Development. Through January 2008. 1 1 1 1 - - - - -1-1 page 27
300 bill Federal Budget Fiscal Years bil 300 200 200 100 100 0 0-100 -100-200 -200-300 -300-400 -400-500 -600 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: Department of Treasury. Through 2008. est. -500-600 page 28
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% -1-1 -15% -15% - 90 93 96 99 '02 '05 '08-2 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Sources: Federal Reserve Board. Bureau of Labor Statistics; Monetary Statistics of the United States. Through March 24, 2008. (Last plot 12 months ending March vs. same period a year ago.) - -2 page 29
2 Real Money Stock: Neo-Austrian School Basis y-o-y percent change 2 15% 15% 1 1 5% 5% -5% -5% -1 60 63 66 69 72 75 78 81 84 87 90 93 96 99 '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 2008. -1 page 30
Total Reserves of Depository Institutions annual percent change 2 15% 1 5 45% 4 35% 3 25% 2 15% 1 5% -5% -1-15% -2-25% -3-35% -4 Total Reserves y-o-y % change, monthly Latest = 3. 90 92 94 96 98 '00 '02 '04 '06 '08 5 45% 4 35% 3 25% 2 15% 1 5% -5% -1-15% -2-25% -3-35% -4 2 15% 1 5% Avg. = 4.9% 5% -5% -5% -1 1945 1955 1965 1975 1985 1995 2005 Source: St. Louis Federal Reserve. (Adjusted for Y2K and 9/11 by St Louis Fed.) Through March 26, 2008. Last plot FRB 12 months ending March 2008 vs. same period a year ago. -1 page 31
2.25 Velocity of Money 1900-2007 Equation of Exchange: GDP(nominal) = M*V annual 2.25 1997 = 2.12 2.00 1918 = 1.95 2.00 1.75 avg. 1900 to present = 1.67 1.75 1.50 avg. 1953 to 1980 = 1.675 1.50 1.25 1.25 1932 = 1.17 1946 = 1.15 1.00 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Sources: Federal Reserve Board; Bureau of Economic Analysis; Bureau of the Census; Monetary Statistics of the United States. Q4 2007; V = GDP/M, GDP = 14.08 tril, M2 = 7.4 tril, V = 1.90 1.00 page 32
2.2 Velocity of Money Equation of Exchange: GDP(nominal) = M*V quarterly 2.2 2.1 2.1 2.0 2.0 1.9 1.9 1.8 1.8 1.7 1.6 1.5 1900-2007 avg. = 1.67 59 65 71 77 83 89 95 '01 '07 Sources: Federal Reserve Board, Bureau of Economic Analysis, HIMCO. Q1 2008; V = GDP/M, GDP = 14.17 tril, M2 = 7.6 tril, V = 1.85 Velocity peaks either before or during recessions. 1.7 1.6 1.5 page 33
Falling Velocity Dominates M2 Acceleration 7 quarter % change, annual rate M2 Velocity GDP 1. 2. 3. 1. 2006 - Q2 4. 2. 6.5% 2. 2007 - Q4 6. -2.3% 4. Source: Bureau of Economic Analysis, Federal Reserve. page 34
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) 46 50 54 58 62 66 70 74 78 82 86 90 94 98 '02 '06 Source: Bureau of Economic Analysis. Through 2006. 7% 5% 3% 1% -1% - -3% - -5% - -7% page 35
15 trillions $ International Investment Position of the United States annual Foreign-owned assets in the United States trillions $ $16.3 18 16 14 10 25% of U.S. wealth 1 of Global wealth 109% of U.S. yearly income or GDP 12 10 8 5 6 4 2 0 1976 1980 1984 1988 1992 1996 2000 2004 Sources: Bureau of Economic Analysis. Through 2006. 0 page 36
18 16 trillions $ International Investment Position of the United States annual Foreign-owned assets in the United States trillions $ $16.3 18 16 14 $13.8 14 12 10 $2.5 trillion difference 2 of GDP 12 10 8 8 6 6 4 U.S.-owned assets abroad 4 2 2 0 1976 1980 1984 1988 1992 1996 2000 2004 2008 Sources: Bureau of Economic Analysis. Through 2006. 0 page 37
Yields on International Investment Positions annual 1 1 U.S. Foreign 4.7% 3.7% 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Sources: Bureau of Economic Analysis. Through 2006. page 38
3% Yield Differential on International Investment Positions vs. U.S. Dollar annual index 130 dollar: right axis 120 110 1% Income differential: left axis 100 90 R =.37 t Stat = 1.87 1976 1980 1984 1988 1992 1996 2000 2004 Sources: Bureau of Economic Analysis, Federal Reserve Board. (Real Broad trade weighted dollar index). Through 2006. 80 page 39
Foreign Holdings of U.S. Securities Long-Term securities Long Term Securities (col. 2) Equities Debt Corporate Long Term Debt (col. 4) U.S. Agency U.S. Treasury U.S. Treasury Securities ( col. 7 plus Treasury bills ) 5 years and less 5-10 years over 10 years 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. *Trillions ($) 7.2 2.4 4.7 2.0 1.0 1.7 1.4 0.4 0.1 2. 2006 10 3 6 2 1 2 7 21% 7% * may not sum due to rounding. Source: U.S Treasury Department page 40
6 Probability Distribution for GDP Average Quarterly Growth Rate, Two Year Projection 6 5 5 4 4 3 3 2 2 1 1 Source: HIMCO. Less than -1% -1% to 1% Greater than 1% page 41