Encima Global - 2013 Outlook - Beyond QE4

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					        2013 Outlook –
   Beyond QE4 and Fiscal Cliff
                      December 4, 2012

                              David Malpass
                     dmalpass@encimaglobal.com


                                  212.876.4400



Please read the important disclosure information in the Addendum section of this presentation.
                          2013 Outlook
•   The U.S. and Europe won’t make progress on structural reforms,
    leaving growth slow or negative.
•   Fed policy is increasingly contractionary, adding to the downward
    pressure.
•   The flash points will be in emerging markets and southern Europe.
•   The U.S. situation is less bad than the outlook for Europe and Japan,
    but that still leaves immense pressure on emerging markets and
    commodities as global growth sags.
•   China will add stimulus, but probably not fast enough to get ahead of
    the global slowdown.
•   The fiscal cliff outcome won’t resolve or improve the outlook. The U.S.
    won’t develop a process to improve the tax code, reduce the
    uncertainty or allocate government spending better.
•   This leaves U.S. growth relatively weak in 2013 even though housing
    and autos are in recovery. We expect 1.5% growth in the fourth
    quarter and a slide into negative territory in Q1 as new taxes kick in
    and business investment remains weak.


                                      -2-
                                                                                               Growth


                                       ISM Manufacturing
                                             (last obs. December 2012, 49.5)


                                               ISM has fallen below 50, showing weakness in
                                                              manufacturing.
        65

        60

        55
Index




        50

        45
        40

        35
        30
             Jul- Jul- Jul-     Jul- Jul- Jul- Jul- Jul- Jul- Jul- Jul- Jul- Jul-   Jul- Jul- Jul-
              97 98 99           00 01 02 03 04 05 06 07 08 09                      10 11 12
         Source: Institute for Supply Management; Encima Global


                                                                  -3-
                                                                                                                              Growth


                                                                       Auto Sales
                                                     (last obs. November 2012, 15.5 million annual rate)


                                                                                    Auto sales are a bright spot.
                          18

                          17

                          16
millions of Units, SAAR




                          15

                          14

                          13

                          12

                          11

                          10

                          9

                          8
                          Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12


                               Source: Bureau of Economic Analysis; Encima Global


                                                                                     -4-
                                                                                                                                     Growth



                                      Construction Put in Place
                                                       (last obs. October 2012, 1.4% overall)
                                                                                                       Housing is in a material
                                                                                                   recovery, but from a low base.
                 750
                                                                                                      Remodeling activity is also
                                                                                                     adding. October residential
                 650                                                   Residential Construction       construction gained 3.0%
                                                                                                     month-over-month and is up
                 550                                                                                    21% year-over-year.
$ billions, SA




                 450



                 350

                            Private Nonresidential
                 250             Construction
                                                                         Public Nonresidential
                                                                             Construction
                 150
                   Jan-02    Jan-03    Jan-04        Jan-05   Jan-06     Jan-07    Jan-08        Jan-09   Jan-10   Jan-11   Jan-12



                       Source: Census Bureau; Encima Global


                                                                            -5-
                                                                                                  Consumer and Savings


                                 Moderate Housing Recovery
                                            (last obs. October 2012, 368,000)

                                                                   New single-family home sales for October
                  450                                             came in below expectations. The last three
                                                                    months have seen downward revisions, a
                                                                     reversal of the upward revisions and
                  430

                  410                                                  momentum seen earlier in 2012.
thousands, SAAR




                  390
                                                                               current actual
                  370

                  350

                  330                                                                              at first report

                  310

                  290

                  270

                  250
                        Dec-08



                                   Jun-09



                                            Dec-09



                                                         Jun-10



                                                                     Dec-10




                                                                              Jun-11



                                                                                         Dec-11



                                                                                                       Jun-12



                                                                                                                     Dec-12
                  Source: Census Bureau; Encima Global


                                                                   -6-
                                                                                                        Growth


                               Capital Goods Orders Down
                                  (last obs. October 2012, orders 1.7% m/m, shipments -0.4% m/m)
                       Capital goods orders (non-defense capital goods) peaked in December,
                         2011 at $67B and have fallen to $61B in October, an 8.5% drop.
                 72

                 69
                                                                 Orders
                 66

                 63
billions $, SA




                 60
                                                                      Shipments
                 57

                 54                                                                                Orders below
                                                                                                     shipments
                 51                                                                                usually signals
                 48                                                                                  recession.
                 45
                   Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
                    98   99   00   01   02   03   04   05   06   07   08   09   10   11   12

                       Source: Census Bureau; Encima Global


                                                               -7-
                                                                                                                                           Consumer and Savings


                                                    Per Capita Income Weak
                               (last obs. October 2012, real DPI $32,579, real wage & salary income $18,748)

Real per capita disposable personal income has been weak since 2008 despite large transfers.
   Real per capita wage and salary income is below 2000 and has fallen for three months.

             33,000                                                                               Real disposable personal
                                                                                                     income per capita
             30,000

             27,000
   2005 $




             24,000

             21,000

             18,000
                                                                                                                           Wages & Salaries per capita
             15,000

             12,000
                      Jan-80

                                  Jan-82

                                           Jan-84

                                                     Jan-86

                                                              Jan-88

                                                                       Jan-90

                                                                                Jan-92

                                                                                         Jan-94

                                                                                                    Jan-96

                                                                                                             Jan-98

                                                                                                                      Jan-00

                                                                                                                               Jan-02

                                                                                                                                        Jan-04

                                                                                                                                                 Jan-06

                                                                                                                                                          Jan-08

                                                                                                                                                                   Jan-10

                                                                                                                                                                            Jan-12
            Source: Bureau of Economic Analysis; Encima Global


                                                                                                  -8-
    Superficial Positives, Deeper Negatives
•   We expect superficial positives in coming weeks including
    deal-talk in Washington, a disbursement to Greece, a Spanish
    request for European aid, Fed movement toward QE4, and
    movement in China toward monetary easing and infrastructure
    spending.
•   The market likes can-kicking and is attractively valued relative
    to 0% interest rates. However, the underlying problems are
    getting worse.
•   Weighing on U.S. investment, we note a bad tax code, higher
    taxes starting January 1, massive regulatory and litigation
    burdens, and the contractionary Fed policy.
•   We expect the marginal tax rate on capital gains and dividends
    to rise substantially on January 1, increasing the cost of equity
    capital and further reducing capital investments.


                                   -9-
                                                                                                               Credit


                                     Debt, Debt Limit and GDP
                                                                (last obs. Q3 2012)
                      The public debt topped $16.37 trillion in Treasury’s November data,
                    heading toward the $16.394 trillion statutory limit. We expect another
                    contentious political battle early in 2013 in order to raise the limit. Our
                                                                                                Debt
              18      view is that the debt limit law should be rewritten so that it doesn’t
                                                                                                Limit
                         risk a government shutdown or default but instead forces extra
              16     spending restraint when debt is above a glidepath debt-to-GDP limit.
              14                                                                      GDP
                                                                                                        Debt
              12
$ trillions




              10

              8
              6

              4
                                                                                        Publicly Held
              2                                                                             Debt

              0
               Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar-
                80 82     84   86 88     90   92   94 96     98   00 02     04   06 08     10   12
               Source: Bureau of Economic Analysis; U.S. Treasury; Encima Global


                                                                           - 10 -
                                                                                                       Government



   Federal Government Outlays and Receipts
                                          (last obs. November 2012, receipts $2.5T; outlays $3.6T)


                         4.0          The gap between receipts and outlays
                                   remains large. There is no plan to close it.
                         3.5
                                                                                      Outlays

                         3.0
$ trillions, 12-mo sum




                         2.5

                         2.0                                                           Receipts

                         1.5

                         1.0
                           Sep-90 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12

                               Source: U.S. Treasury; Encima Global


                                                                      - 11 -
                                                                                                                        Government


                                       Baseline Budget Fanciful
                                                   (last obs. 2011, estimates for 2012 to 2022)
                                       To keep baseline deficit from exploding, defense and ‘all other
                                 spending’ are assumed to grow much slower than GDP, highly unlikely.
           10.0                                                                                                         If all other spending
            9.0
                                                                                                                      were to be maintained
                                                                All other spending
                                                                                                                          as a percentage of
            8.0
                                                                                              All other spending     GDP (the dotted line in
            7.0
                                                                                                at GDP growth
                                                                                                                         the graph), federal
            6.0
                                                                                                                           spending would be
                                                                                                          Social Security three percentage
% of GDP




                                                                                                          Medicare points of GDP higher in
            5.0

            4.0                                                                                                            2022 than in the
            3.0
                                                                                                                            baseline and the
                                                                                                           Defense
                                                                                                                           deficit/GDP ratio
                                                                                                                           three percentage
            2.0                                                                                           Interest


            1.0                                       Medicaid, CHIP, and
                                                                                                                       points higher plus the
                                                      exchange subsidies                                                 interest expense on
            0.0
                  1971   1976   1981   1986    1991      1996     2001     2006      2011   2016 2021
                                                                                                                        the borrowed funds.
                            Source: CBO; Encima Global


                                                                               - 12 -
         Tax Deal Harder than in 2010
•   The House majority is now Republican, was Democratic in 2010;
    members more polarized.
•   The national debt is much bigger.
•   Extending current rates is more costly than in 2010; Under the
    current baseline, tax improvements are difficult because they
    scores badly – there’s no acknowledgement of the growth impact;
    it’s expensive to make permanent the current tax rates; expensive
    to fix or repeal the AMT; and expensive to extend credits like
    research and experimentation.
•   Many tax rates are likely to go up at year-end, with most of the
    increases becoming permanent. A limited lameduck deal could
    address some of the problems, but the tax code is likely to stay in
    chaos. The procedural obstacles to reversing January 1 increases
    are huge as are the obstacles to tax reform.




                                   - 13 -
                                                                                                                          Credit



Maturity of Fed Treasury Security Holdings
                                                   (last obs. November 21, 2012)

                        The Fed wants to undertake QE4 to
                        maintain the pace of bond purchases
             1200      established under Operation Twist. In                                       over 5 yrs

                       that operation, which is scheduled to
             1000      expire at year-end, the Fed has been
                        increasing its Treasury bond holdings
              800         at the rate of approximately $45
$ billions




                       billion per month, paying for them by
                                                                                                            1 to 5 yrs
              600
                           selling shorter-term Treasuries.
              400


              200                                                                                        less than 1 yr

                0
                Jan-      Jul-    Jan-     Jul-    Jan-      Jul-   Jan-     Jul-   Jan-   Jul-   Jan-    Jul-
                 07       07       08      08       09        09     10      10      11    11      12     12


                    Source: Federal Reserve; Encima Global


                                                                    - 14 -
                                                                                                                                          Credit



                                      Fed Assets and Excess Reserve
                                                            (last obs. November 28, 2012)
                            We expect QE4 to accelerate the
                             Fed’s balance sheet expansion,
              3.0
                            pushing Fed assets and liabilities
                            above $3 trillion in March 2013.
              2.5
                                                                               Total Fed Assets
                                                                                                              Sw ap lines
                                                                                                                                          QE3
              2.0
                                                                                                      QE2
trillions $




              1.5
                                                                                                                     Excess Reserves
              1.0



              0.5



               -
                   Jan-07    Jul-07    Jan-08   Jul-08    Jan-09      Jul-09     Jan-10   Jul-10   Jan-11   Jul-11      Jan-12   Jul-12


                             Source: Federal Reserve; Encima Global


                                                                                - 15 -
                                                                                                       Credit



                     Bank Cash and Excess Reserves
                                                   (last obs. October 2012)


             2,000

             1,800

             1,600                                                            Bank Cash

             1,400

             1,200                                                                           Excess
$ billions




                                                                                            Reserves
             1,000

              800

              600

              400

              200

                0
                Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

                Source: Federal Reserve; Encima Global


                                                              - 16 -
                                                                                              Credit


 Growth in Bank Assets Funding Cash and Gov’t
                                        (October 2009 to October 2012)




                        Total Real Estate                Gov't
                       Assets &Cons Loans            Securities C&I Loans        Cash    All Other

Oct 2012 ($ trill)      $12.83              $4.63         $1.97          $1.48   $1.59      $3.15

 3 yr chg ($ bill)      $1,106                 $54         $369          $158     $376       $149

      3 yr %chg           9.4%               1.2%        23.0%       12.0%       30.9%       5.0%




          Source: Federal Reserve; Encima Global


                                                       - 17 -
                                                                                                                                                                                                                     Credit



          M2/M0 Money Multiplier Collapsed
                                                                              (last obs. October 29, 2012)


          14


          12


          10


          8
M2 / M0




                            The Fed is not “printing money” or expanding
          6                private sector credit. It borrows from banks,
                            distorting capital allocation. Bank regulators
          4               ration the banks’ use of excess reserves, so the
                           money multiplier is low. We don’t expect QE4
          2                  to be stimulative or add to inflation or M2
                                  growth (up 7.1% year-over-year).
          0
               Jan-70

                        Jan-72
                                 Jan-74

                                          Jan-76
                                                   Jan-78

                                                            Jan-80

                                                                     Jan-82
                                                                              Jan-84

                                                                                       Jan-86

                                                                                                Jan-88
                                                                                                         Jan-90

                                                                                                                  Jan-92

                                                                                                                           Jan-94
                                                                                                                                    Jan-96

                                                                                                                                             Jan-98
                                                                                                                                                      Jan-00

                                                                                                                                                               Jan-02

                                                                                                                                                                        Jan-04
                                                                                                                                                                                 Jan-06

                                                                                                                                                                                          Jan-08

                                                                                                                                                                                                   Jan-10
                                                                                                                                                                                                            Jan-12
               Source: Federal Reserve; Encima Global


                                                                                                             - 18 -
                                                                                                                                                                                                                              Credit



               Govt Debt Exceeds Household Debt
                                                       (last obs. June 30, 2012, total U.S. debt $38.9 trillion)

              16
                            With private sector credit rationed by
              14            the regulatory process, only gov’t and                                                                                                                                                     Government

                            corporate debt are growing. Household                                                                                                    Household
              12             credit shrank and noncorporate debt
                             flattened. Credit is being channeled
                            to government and corporations, which
              10
$ trillions




                                                                                                                                                                                                                      Nonfinancial
              8
                                       is contractionary.                                                                                                                                                              Corporate
                                                                                                                                                                                                                       Business
              6

              4                                                                                                                                                                                                    Noncorporate
                                                                                                                                                                                                                    Business

              2

               -
                   Mar-70
                            Mar-72

                                     Mar-74
                                              Mar-76

                                                       Mar-78
                                                                Mar-80
                                                                         Mar-82
                                                                                  Mar-84
                                                                                           Mar-86
                                                                                                    Mar-88
                                                                                                             Mar-90

                                                                                                                        Mar-92
                                                                                                                                 Mar-94
                                                                                                                                          Mar-96
                                                                                                                                                   Mar-98
                                                                                                                                                            Mar-00
                                                                                                                                                                      Mar-02

                                                                                                                                                                               Mar-04
                                                                                                                                                                                        Mar-06

                                                                                                                                                                                                 Mar-08
                                                                                                                                                                                                          Mar-10
                                                                                                                                                                                                                   Mar-12
                   Source: Federal Reserve; Encima Global


                                                                                                                      - 19 -
                                                                                                                                                                 Growth



                                                               Eurozone GDP Y/Y
                                                                                 (last obs. Q3 2012, -0.6%)
 Eurozone GDP fell 0.1% in the third quarter (quarter-over-quarter non-annualized)
bringing the year-over-year decline to -0.6%. Fiscal deficits have been substantially
worse than expectations, a side-effect of the recessions that we think will broaden
           6.0
                              to Germany and France.

                                  4.0
      real gdp y/y % change




                                  2.0


                                  0.0


                              -2.0


                              -4.0


                              -6.0
                                   5

                                            6

                                                   7

                                                           8

                                                                  9

                                                                          0

                                                                                  1

                                                                                         2

                                                                                                 3

                                                                                                        4

                                                                                                                5

                                                                                                                       6

                                                                                                                               7

                                                                                                                                      8

                                                                                                                                              9

                                                                                                                                                     0

                                                                                                                                                             1
                                -9

                                          -9

                                                  -9

                                                         -9

                                                                 -9

                                                                        -0

                                                                                -0

                                                                                        -0

                                                                                               -0

                                                                                                       -0

                                                                                                              -0

                                                                                                                      -0

                                                                                                                             -0

                                                                                                                                     -0

                                                                                                                                            -0

                                                                                                                                                    -1

                                                                                                                                                           -1
                              ec

                                        ec

                                                ec

                                                       ec

                                                               ec

                                                                      ec

                                                                              ec

                                                                                      ec

                                                                                             ec

                                                                                                     ec

                                                                                                            ec

                                                                                                                    ec

                                                                                                                           ec

                                                                                                                                   ec

                                                                                                                                          ec

                                                                                                                                                  ec

                                                                                                                                                         ec
                              D

                                        D

                                               D

                                                       D

                                                              D

                                                                      D

                                                                             D

                                                                                     D

                                                                                             D

                                                                                                    D

                                                                                                            D

                                                                                                                   D

                                                                                                                           D

                                                                                                                                  D

                                                                                                                                          D

                                                                                                                                                 D

                                                                                                                                                         D
                                        Source: Bloomberg; Encima Global


                                                                                                 - 20 -
                                                                                                                                 Government



                                                              Eurozone Fiscal Deficits
                                                                               (% of GDP, last obs. 2011)


                                     2

                                     1
Euro Area Overall Balance % of GDP




                                     0

                                     -1

                                     -2

                                     -3
                                                                                                              We doubt the eurozone will
                                     -4
                                                                                                             achieve these rosy forecasts
                                     -5                                                                    given the inability to reduce the
                                                                                                              size of government or sell
                                     -6
                                                                                                                  government assets.
                                     -7
                                          2006     2007      2008       2009   2010     2011        2012    2013   2014   2015   2016   2017


                                                 Source: IMF; Encima Global


                                                                                           - 21 -
                                                                                                                                                                                                                   Growth



                                                          Brazil GDP Y/Y
                                                                            (last obs. Q3 2012, 0.9%)

                                                                        Brazil grew fast after the
                 12                                                    2008 crisis in line with China
                                                                           and commodities, but
                 10
                                                                         investment policies have
                  8                                                      deteriorated along with
                                                                             external factors.
                  6
Brazil GDP Y/Y




                  4

                  2

                  0

                 -2

                 -4
                      Dec-91
                               Dec-92
                                        Dec-93
                                                 Dec-94
                                                          Dec-95
                                                                   Dec-96
                                                                            Dec-97
                                                                                     Dec-98
                                                                                              Dec-99
                                                                                                       Dec-00
                                                                                                                Dec-01
                                                                                                                         Dec-02
                                                                                                                                  Dec-03
                                                                                                                                           Dec-04
                                                                                                                                                    Dec-05
                                                                                                                                                             Dec-06
                                                                                                                                                                      Dec-07
                                                                                                                                                                               Dec-08
                                                                                                                                                                                        Dec-09
                                                                                                                                                                                                 Dec-10
                                                                                                                                                                                                          Dec-11
         Source: Bloomberg; Encima Global


                                                                                                       - 22 -
                                                                                                                                                                                                                        Growth


                                                                                          China GDP Y/Y
                                                                                                               (last obs. Q3 2012)

                                                                        On a year-over-year basis growth slowed to 7.4% in Q3.
                                                                        Last reduction in bank reserve requirement was in May to
                                        14                                                        20%.
China Constant Price GDP Y/Y % change




                                        13
                                        12
                                        11
                                        10
                                        9
                                        8
                                        7
                                        6
                                        5
                                        4
                                             Dec-93

                                                      Dec-94
                                                               Dec-95

                                                                        Dec-96

                                                                                 Dec-97

                                                                                          Dec-98
                                                                                                   Dec-99

                                                                                                            Dec-00
                                                                                                                     Dec-01

                                                                                                                              Dec-02
                                                                                                                                       Dec-03

                                                                                                                                                Dec-04
                                                                                                                                                         Dec-05

                                                                                                                                                                  Dec-06
                                                                                                                                                                           Dec-07

                                                                                                                                                                                    Dec-08
                                                                                                                                                                                             Dec-09

                                                                                                                                                                                                      Dec-10
                                                                                                                                                                                                               Dec-11
                                                Source: China National Bureau of Statistics; Encima Global


                                                                                                                                - 23 -
                                                                                                            Credit



                             China’s Bank Lending Y/Y
                                                  (last obs. October 2012, 15.9%)


                            Loan growth picked up only a little in
               40
                           2012. Now running 15.9% year-over-
               35           year for October, but well below the
                             open-spigot lending in the 2003 and
               30
                              2009 recovery pushes. We expect
                           faster loan growth once policy loosens.
y/y % change




               25

               20
                                                                 `
               15

               10

               5

               0
               Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

                    Source: Bloomberg; Encima Global


                                                                - 24 -
                                                                                                          Growth



                                  U.S. GDP as % of World GDP in $
                                                               (last obs. December 4, 2012)


                                43%



                                38%
US GDP as % of World GDP in $




                                33%


                                                                                                 IMF
                                28%                                                            forecast
                                                                                              assuming
                                                                                               stable $
                                23%



                                18%
                                  60

                                  63

                                  66

                                  69

                                  72

                                  75

                                  78

                                  81

                                  84

                                  87

                                  90

                                  93

                                  96

                                  99

                                  02

                                  05

                                  08

                                  11

                                  14
                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                19

                                20

                                20

                                20

                                20

                                20
                                  Source: IMF; Encima Global


                                                                            - 25 -
Note: This document is confidential and intended solely for the use of the individuals to whom it is
presented. Encima Global LLC does not accept liability for the content or for the consequences of any
actions taken on the basis of the information provided. The information is not necessarily complete, and we
make no warranty as to its accuracy.


                                                    - 26 -

				
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Description: Beyond QE4 and Fiscal Cliff