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Encima Global - Global Policy Issues for 2013

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					   Global Policy Issues for 2013
                    December 20, 2012


                              David Malpass
                     dmalpass@encimaglobal.com


                                  212.876.4400



Please read the important disclosure information in the Addendum section of this presentation.
                               Outlook
•   The U.S. is facing a continual set of fiscal problems on both the
    spending and tax side. Most December and January deal scenarios
    leave the core problems unresolved, weighing on business investment
    and jobs into 2013. Debt limit problems will start early in 2013.
•   We think the U.S. will slow toward recession in the first quarter as tax
    increases and uncertainty take effect. Fed policy is increasingly
    contractionary. Japan is in recession, with Germany on the brink.
•   This isn’t an end-of-the-world scenario, just very slow growth that puts
    a lot of pressure on Europe’s weak links – Spain, Italy and France. We
    expect tax receipts there to underperform, straining German and ECB
    tolerance during Merkel’s campaign.
•   There’s no magic U.S. fix or grand compromise likely, though smaller
    deals are still possible. While the market would love a big deal that
    covers lots of areas, we think it’s more likely that the deal is limited
    and will be unsatisfying to the markets and to the growth outlook.
•   China will add stimulus, but probably not fast enough to get ahead of
    the global slowdown. The flash points will be in emerging markets and
    southern Europe.



                                      -2-
                                                                                                                                                        Growth


                                  Real Private Business Investment
                                                    (last obs. Q3 2012, $1.5 trillion, nominal $1.6T)



                        1,600

                        1,500

                        1,400
2005 $ billions, SAAR




                        1,300

                        1,200


                                                          Business investment (structures, equipment,
                        1,100

                        1,000                              software) remains well below 2008 peak,
                                                         explaining the weak GDP growth. Consumption,
                                                        retail sales and GDP are all above the 08 peak.
                          900

                          800
                           97

                                   98

                                           99

                                                   00

                                                           01

                                                                   02

                                                                           03

                                                                                   04

                                                                                           05

                                                                                                   06

                                                                                                           07

                                                                                                                   08

                                                                                                                           09

                                                                                                                                   10

                                                                                                                                           11

                                                                                                                                                   12
                            -

                                    -

                                            -

                                                    -

                                                            -

                                                                    -

                                                                            -

                                                                                    -

                                                                                            -

                                                                                                    -

                                                                                                            -

                                                                                                                    -

                                                                                                                            -

                                                                                                                                    -

                                                                                                                                            -

                                                                                                                                                    -
                         ar

                                 ar

                                         ar

                                                 ar

                                                         ar

                                                                 ar

                                                                         ar

                                                                                 ar

                                                                                         ar

                                                                                                 ar

                                                                                                         ar

                                                                                                                 ar

                                                                                                                         ar

                                                                                                                                 ar

                                                                                                                                         ar

                                                                                                                                                 ar
                        M

                                M

                                        M

                                                M

                                                        M

                                                                M

                                                                        M

                                                                                M

                                                                                        M

                                                                                                M

                                                                                                        M

                                                                                                                M

                                                                                                                        M

                                                                                                                                M

                                                                                                                                        M

                                                                                                                                                M
                          Source: Bureau of Economic Analysis; Encima Global


                                                                                        -3-
                                                                                                                                           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


                                                                                                  -4-
    Superficial Positives, Deeper Negatives
•   We note superficial positives in recent weeks: deal-talk in
    Washington, a disbursement to Greece, QE4, European
    agreement on the first step in banking union. We expect a
    Spanish request for European aid 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.


                                   -5-
                                                                                                                                               Credit



                                     Fed Assets and Excess Reserve
                                                (last obs. December 5, 2012, projected to June 2013)
                            We expect QE4 to accelerate the
                             Fed’s balance sheet expansion,
              3.5           pushing Fed assets and liabilities
                            above $3 trillion in March 2013.
              3.0

                                                                      Total Fed Assets
              2.5                                                                                                                            QE4
                                                                                                                 Sw ap             QE3
              2.0                                                                                 QE2             lines
trillions $




              1.5


              1.0                                                                                              Excess Reserves

              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    Jan-13

                             Source: Federal Reserve; Encima Global


                                                                                  -6-
                                                                                                                                Credit



                                                                          M2 / Total Reserves
                                                                                       (last obs. November 2012)

                                                              The Fed is not “printing money” or
                                                200          expanding private sector credit. It
                                                            borrows from banks, distorting capital
M2 / Total Reserves of Depsitory Institutions




                                                180         allocation. Bank regulators ration the
                                                160         banks’ use of excess reserves, so the
                                                               money multiplier is low. We don’t
                                                140        expect QE4 to be stimulative or add to
                                                           inflation or M2 growth (up 7.6% year-
                                                120                      over-year).
                                                100

                                                 80

                                                 60

                                                 40

                                                 20

                                                  0
                                                 Jan-60 Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10


                                                      Source: Federal Reserve; Encima Global


                                                                                                   -7-
                                                                                                         Credit



                   Govt Debt Exceeds Household Debt
                                 (last obs. September 30, 2012, total U.S. debt $39.2 trillion)
                    With private sector credit rationed by
                    the regulatory process, only gov’t and                                        Government
              14    corporate debt are growing. Household
                     credit shrank and noncorporate debt
                                                                                                     Household
              12     flattened. Credit is being channeled
                    to government and corporations, which
              10               is contractionary.
$ trillions




                                                                                                     Nonfinancial
               8
                                                                                                      Corporate
                                                                                                      Business
               6


               4                                                                                  Noncorporate
                                                                                                   Business
               2


               -
               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


                                                               -8-
            Taxes scheduled to rise on January 1:
•   income tax rates for all brackets, probably applied through withholding taxes starting in January;
•   the alternative minimum tax (big increase for middle and upper income taxpayers);
•   the employee portion of the payroll tax rate (which rises from 4.2% to 6.2% on the first $113,700 of income);
•   the estate tax and gift tax;
•   long-term capital gains rate (to 23.8% from 15%);
•   the tax on interest income (by the underlying increase in the income tax rate plus 3.8 percentage points through
    the extension of Medicare taxes to passive income);
•   and the dividend rate (to the ordinary income rate of up to 43.4% from the current 15% rate.)
•   In addition, there are numerous expiring provisions (special tax credits) scheduled to expire at year-end, all of
    which have strong constituencies. Absent the “doc fix”, Medicare payments to doctors decline sharply starting
    January 1 adding to the political pressure on Congress to act.
•   The top marginal income tax rate (which has the most growth impact and hits a high percentage of the income
    earned in small businesses) will rise to 39.6% plus the increase in the Medicare tax rate to 3.8% (current limit is
    35% plus 2.9% for Medicare). The total is a 43.4% top marginal rate, a 14.5% tax increase from the current 37.9%
    combined rate.
•   New York State charges 6.9% (8.8% for incomes over $2 million) and New York City charges another 3.9% plus
    the mass transit payroll tax and the unincorporated business tax. California’s state income tax rate will rise to
    13.3%.
•   The 12.4% combined employer/employee contribution to social security adds as much as $14,000 in taxes to the
    above but is not part of the top marginal rate because the tax doesn’t apply to incomes above $110,100 in 2012
    ($113,700 in 2013.)



                                                           -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 -
                            Japan Still Adrift
•   Japanese equities have enjoyed sharp gains in recent months on the weakening
    yen and the prospect of an LDP takeover. We don’t think incoming prime minister
    Shinzo Abe will bring enough change to get Japan’s economy going. Japan’s
    recession is deepening and its population is aging fast. We think this will cause
    the Japanese to go back to risk aversion (i.e. the yen) unless there’s a positive
    surprise – either stronger Abe policies or a global economic upturn.
•   To grow, Japan needs to: 1) stop yen appreciation by pledging unlimited yen
    selling; to be convincing enough to get investment started, Japan needs to
    establish a ceiling on the yen (like 85 per dollar), not the inflation and nominal
    growth targets Abe is proposing; 2) finding a resolution to the China disputes,
    which are hurting Japan’s economy; and 3) actual structural reforms in agriculture,
    banking, taxes and government downsizing.
•   Rather than fixing the strong yen problem, Abe is proposing QE, which isn’t the
    same thing. QE is contractionary and doesn’t add credit to the private sector so it
    won’t give Japanese businesses confidence that yen strength will stop or growth
    start up. Aiming QE at a higher inflation rate won’t help Japan grow.
•   We think the Japan outlook will be dominated by structural problems and a decline
    into a deeper recession. Abe will probably take office about December 26. We’ll
    watch his initial policy announcements to see if they go in a more positive direction
    toward structural reforms, a yen ceiling or a resolution with China.



                                            - 11 -
                                                                     Japan Real GDP y/y




                                                     -12%
                                                            -10%
                                                                   -8%
                                                                         -6%
                                                                               -4%
                                                                                     -2%
                                                                                           0%
                                                                                                2%
                                                                                                     4%
                                                                                                          6%
                                                                                                               8%
                                            Jun-95

                                            Jun-96

                                            Jun-97

                                            Jun-98

                                            Jun-99




         Source: Bloomberg; Encima Global
                                            Jun-00

                                            Jun-01

                                            Jun-02

                                            Jun-03




- 12 -
                                            Jun-04
                                                                                                                    (last obs. Q3 2012)




                                            Jun-05

                                            Jun-06
                                                                                                                                          Japan GDP Y/Y




                                            Jun-07

                                            Jun-08

                                            Jun-09

                                            Jun-10

                                            Jun-11

                                            Jun-12
                                                                                                                                                          Growth
                                                                                                                    Growth


                                   Japan Tankan Business Conditions
                                                     (Large Enterprise Manufacturing, last obs. Q4 2012)


                             60


                             40
Tankan Business Conditions




                             20


                              0


                             -20


                             -40


                             -60


                             -80
                               Mar-80         Mar-85         Mar-90     Mar-95        Mar-00      Mar-05   Mar-10


                                   Source: Bloomberg; Encima Global


                                                                             - 13 -
                                                                                                                     Growth


Japan Corporate Profits and Business Investment
                                                        (last obs. Q3 2012)



               75%                                                                                          30%

                            business fixed capital formation (rhs)
               50%                                                                                          20%

               25%                                                                                          10%




                                                                                                                  y/y change
  y/y change




               0%                                                                                           0%

           -25%                                                                                             -10%

           -50%                                                                                             -20%
                                                         corporate profits (lhs)
           -75%                                                                                             -30%
                 Q1-1990     Q1-1993     Q1-1996      Q1-1999     Q1-2002     Q1-2005   Q1-2008   Q1-2011


                Source: Ministry of Finance; Cabinet Office of Japan; Encima Global


                                                                   - 14 -
                                                                                              Prices and Markets


                                         Japan Price Measures
                                 (last obs. deflator Q3 2012; WPI November 2012; CPI October 2012)


               5%                                                                     WPI for consumer goods
               4%
               3%                                              CPI
               2%
y/y% change




               1%
               0%
              -1%
              -2%
              -3%
              -4%                                                    GDP deflator
              -5%
                    Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan- Jan-
                    1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


                         Source: Haver; Encima Global


                                                                - 15 -
                                                                                                       Credit


                           Bank of Japan Assets / GDP
                                 (last obs. Q3 2012, Q4 estimated: BOJ 156T yen; 474T yen)



                   35%


                   30%


                   25%
BOJ Assets / GDP




                   20%


                   15%


                   10%


                    5%


                    0%
                     Q1-1965 Q1-1970 Q1-1975 Q1-1980 Q1-1985 Q1-1990 Q1-1995 Q1-2000 Q1-2005 Q1-2010


                   Source: Bank of Japan; Cabinet Office of Japan; Encima Global


                                                                     - 16 -
                                                                                                                                            Credit


                               Federal Reserve Assets / GDP
                                      (last obs. Q3 2012, Q4 estimated: $2.9T Fed assets; $16T GDP)


                       20%
                       18%

                       16%
Federal Assets / GDP




                       14%
                       12%

                       10%
                       8%

                       6%

                       4%
                       2%

                       0%
                             Mar-89


                                      Mar-91


                                               Mar-93


                                                        Mar-95


                                                                 Mar-97


                                                                          Mar-99


                                                                                      Mar-01


                                                                                               Mar-03


                                                                                                        Mar-05


                                                                                                                 Mar-07


                                                                                                                          Mar-09


                                                                                                                                   Mar-11
                       Source: Federal Reserve; Bureau of Economic Analysis; Encima Global


                                                                                   - 17 -
                                                                                                                    Growth


                                           German DAX
                                                (last obs. December 14, 2012)
European equity markets have risen substantially in 2012, with Germany up 27%.
Several European markets reached new 2012 highs on December 6 and 7 despite
         8000   weakening GDP growth and growth expectations.

              7500


              7000
      Index




              6500


              6000


              5500


              5000
                  Jan-   Apr-    Jul-    Oct-      Jan-   Apr-    Jul-    Oct-   Jan-   Apr-   Jul-   Oct-   Jan-
                   10     10      10      10        11     11     11       11     12     12     12     12     13

                Source: Bloomberg; Encima Global


                                                                 - 18 -
                                                                                                                                          Growth


                                                       Germany GDP Y/Y
                                                            (last obs. Q3 2012, ECB est. to Q4 2013)
      The Bundesbank lowered substantially its 2013 GDP forecast for
Germany, a tacit admission of a near- recession underway. It lowered its full
     year 2013 GDP forecast to 0.4% from its 1.6% June expectation.
      6%

                           4%
   real gdp y/y % change




                           2%

                           0%

                           -2%

                           -4%

                           -6%
                                 Dec-92


                                          Dec-94


                                                   Dec-96


                                                             Dec-98


                                                                      Dec-00


                                                                               Dec-02


                                                                                             Dec-04


                                                                                                      Dec-06


                                                                                                               Dec-08


                                                                                                                        Dec-10


                                                                                                                                 Dec-12
                                 Source: Bloomberg; Encima Global


                                                                                        - 19 -
                                                                                                                Government




Euro-zone Periphery Fiscal Deficits Getting Worse
                                           (IMF October and April estimates for 2012; last obs. October 2012)

                                         -4.0
      Net lending / borrowing % of GDP


                                         -4.5

                                         -5.0

                                         -5.5

                                         -6.0

                                         -6.5                                                          Spain

                                         -7.0

                                         -7.5
                                                                                                     Greece
                                         -8.0
                                                 Oct-10       Apr-11        Oct-11      Arpil 2012     Oct-12



    Source: IMF; Encima Global


                                                                           - 20 -
              China Moving Cautiously
•   China’s ongoing leadership transition is positive and will bring
    constructive longer-term changes. However, China’s near-
    term stimulus from fiscal, monetary and credit polices is
    moving more cautiously than we thought.
•   China’s new leaders are emphasizing the quality and efficiency
    of growth rather than a fast pace.
•   A December 4 Politiburo statement called for a moderate
    increase in bank lending and for stable policies that would
    adjust as needed. The leadership reaffirmed its expectation of
    a stable yuan. These are good for long-term growth but don’t
    signal a move back to the go-go days of hot money flooding
    into China and commodities.
•   On December 14, China took a constructive step for markets
    by loosening the rules on Qualified Foreign Institutional
    Investors.


                                  - 21 -
                                                                                                                                                                                                                         Growth


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

                                                                          China’s growth slowed to 7.4% in Q3 versus Q3 2011.
                                                                        The World Bank just raised its full-year 2013 forecast to
                                        14                                            8.4%, followed by 8% in 2014.
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


                                                                                                                                 - 22 -
                                                                                                            Credit



                             China’s Bank Lending Y/Y
                                                (last obs. November 2012, 15.7%)


                            Loan growth picked up only a little in
               40
                           2012. Now running 15.7% year-over-
               35          year for November, 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


                                                               - 23 -
                                                                                                                                                                                                                   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


                                                                                                       - 24 -
                                                                                                                                                             Growth


                           Corporate Profits vs. World GDP
                                                    (before taxes, last obs. Q3 2012)
   Corporate profits increased to $1.97 trillion in the third quarter (seasonally
adjusted annualized rate) from $1.92 trillion in the second quarter. Given weaker
global growth, we expect U.S. corporate profit growth to remain relatively weak.
   It tends to grow and shrink at double the rate of global dollar GDP growth.
                                                                                               Profit growth through
                        25%                                                                       Q3 2012 (rhs)        50%




                                                                                                                              y/y % change (4Q moving ave)
                        20%                                                                                            40%
                        15%                                                                                            30%
         y/y % change




                        10%                                                                                            20%
                         5%                                                                                            10%
                         0%                                                                                            0%
                        -5%                                                                                            -10%
                                                                                                      2012 World $
                        -10%                                                                          GDP estimate     -20%
                                                                                                         (lhs)
                        -15%                                                                                           -30%
                               1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
                                         World $ GDP (lhs)                   U.S. pre-tax corporate profits (rhs)
                    Source: Bureau of Economic Analysis; 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: Global Policy Issues for 2013