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The Truth About Lying: An Economic Analysis
1. The Truth About Lying: A Collection of
Made-Up Statistics that Aren’t HelpingMade-Up Statistics that Aren’t Helping
Joe Morgan
jmorgan@svb.com
@SVBJoeMorgan
3. Today’s Agenda
Lies:
Housing is Booming!
Employment market has recovered
Markets are stable
Damned Lies:
Austerity/Growth are the only options
Low Rates and QE will create a full recoveryLow Rates and QE will create a full recovery
Statistics:
The Euro must survive
Credit quality is defined by Moody’s/S&P/Fitch
Calling for another recession would be a lie too…
6. 0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
HomeSupply(months)
HomeSales(Millions)
Total Sales (new & existing) Existing Home Supply
The Housing Market Key Economic Driver
Home Sales & Supply
Housing Starts Home Prices – Indexed to 100
Housing was a main driver of economic growth in the
fourth quarter with residential fixed investment
increasing 17.6 percent.
Home sales, both new and existing, continued their
upward trend. Sales of existing homes hit a three-year
high at an annual pace of 4.98 million in February.
Greater housing demand combined with lower home
supply drove home values higher. As shown by the
S&P/Case-Shiller index of property values, prices
climbed over 8 percent on a year-over-year basis in
their 20-city composite – the largest gain since 2006.
Source: National Association of Home Builders (NAHB), Census.gov, S&P, and SVB Asset Management.
0.0
0.5
1.0
1.5
2.0
2.5
Millions
Housing Starts
90
110
130
150
170
190
210
230
250
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Case Schiller 20 City FHFA Purchase Median Home Price
Home Prices – Indexed to 100
6
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 14)
7. Housing Starts – Best Since 2008!
200.0
250.0
300.0
350.0
1.5
2.0
2.5
3.0
Millions
Millions
7
0.0
50.0
100.0
150.0
0.0
0.5
1.0
1.5
Millions
Millions
Housing Starts Population
Source: Census Bureau, SVB Asset Management
8. The Housing Market Key Economic Driver
Homeownership Rate Housing Affordability Composite Index
Home Foreclosures - % of Total Loans
62.0%
64.0%
66.0%
68.0%
70.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0.0
50.0
100.0
150.0
200.0
250.0
AffordabilityIndex
Housing Affordability 30 Year Fixed Mortgage Rates
Source: Census.gov, National Association of Realtors and SVB Asset Management.
Home Foreclosures - % of Total Loans
The homeownership rate hovered around 65.5 percent
last year, down from its peak of 69 percent in 2004, as
we saw a shift towards renting over the past few years.
Record low interest rates caused by easy monetary
policy and depressed home values prompted more
home buyers to enter the market last year.
Approximately a third of sales are cash buyers,
however, and investors compromised the majority of
these sales.
8
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 15)
12. -15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
-1,000.0
-800.0
-600.0
-400.0
-200.0
0.0
200.0
400.0
600.0
Thousands
Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)
Employment Acceleration Needed
Employment Landscape
0.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
104,000.0
106,000.0
108,000.0
110,000.0
112,000.0
114,000.0
116,000.0
118,000.0
120,000.0
122,000.0
124,000.0
Thousands
Thousands
Full Time Employment (LHS) Part Time for Economic Reasons (RHS)
Full-Time Employment
Long Term Unemployment
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
Recession Period Unemployed 27 Weeks and Over
Source: U.S. Bureau of Labor and Statistics (BLS), SVB Asset Management, National Bureau of Economic Research (NBER).
Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they
want and are available for a job and have looked for work sometime in the past 12 months.
Long Term Unemployment Unemployment rate in the U.S. decreased to 7.7 percent in February
2013 from 7.9 percent in January 2013, driving the rate down to its
lowest in over four years.
Total nonfarm payroll employment increased by 236,000 in February.
The main sectors that added jobs were professional and business
services, construction, and healthcare.
The number of long-term unemployed has not improved very much
and remained close to 4.8 million in February, almost 40.2 percent of
the unemployed are long-term .
Labor force participation continues to be low, as workers opt for early
retirement or stop searching entirely.
12
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 8)
13. Employment Acceleration Needed
Fewer Workers Supporting Greater Population Will the Recent Spike in Earnings Hold Up?
Hires and Quits Remain Depressed
57.0%
59.0%
61.0%
63.0%
65.0%3.0%
5.0%
7.0%
9.0%
11.0%
Unemployment Rate (LHS)
Employment to Population Rate (RHS)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
62.0%
63.0%
64.0%
65.0%
66.0%
67.0%
68.0%
Labor Force Participation Rate (LHS)
Avg Hourly Earnings Growth (RHS)
Source: U.S. Bureau of Labor Statistics (BLS), SVB Asset Management.
Hires and Quits Remain Depressed
Workers as a percent of the total population remain
depressed even as the unemployment rate declines
due to people dropping out.
Average hourly earnings growth increased in recent
quarter, but total hirings have yet to turn upward.
Turnover, as measured by job hires and quits
remains depressed vs. recent growth trends.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
Job Hire Rate Job Quit Rate
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 9)
13
14. Employment – Payrolls Not Keeping Up With Population
290.0
300.0
310.0
320.0
330.0
140.0
150.0
160.0
170.0
180.0
14
250.0
260.0
270.0
280.0
110.0
120.0
130.0
140.0
Nonfarm Payrolls (lhs) Population (rhs)
Source: BLS, SVB Asset Management
15. Year Payrolls
2008 -3.6 mm
2009 -5.1 mm
2010 +1.0 mm
2011 +2.1 mm
2012 +2.2 mm
Job growth barely
outpacing natural labor
force growth of ~ 1mm
jobs per year
Employment Growth About 6mm Jobs Behind
2012 +2.2 mm
Gross -3.4 mm
5 Yrs Labor Force
Growth
-5 mm
To get back to 4.9%
Unemployment
Need 8.4 mm jobs
immediately
To reach 6.5%
unemployment
Need ~ 6 mm jobs
immediately
Source: Bloomberg, SVB Asset Management
Source: BLS, SVB Asset Management
15
17. The Markets – Yields Are Stable
10.0%
15.0%
20.0%
17
0.0%
5.0%
5-Yr UST 2-Yr UST BBB-Rated Bonds High Yield Bonds O/N Deposit Rate
Source: Bloomberg, SVB Asset Management
18. Bond Market Will the Momentum Continue?
Since 2008, bond markets have
produced four consecutive years
of positive total and excess
returns.
Bonds exhibited positive
performance led by Banking,
Insurance, and Financial Services
sectors. U.S. Treasuries had their
third worst return in the last 16
years at 2.16 percent, compared
to 2008,
which had the best return at 13.98
percent.
The biggest long-term risk is a
reversal in central bank policies.
At record low yields, total returns
would be significantly exposed to
any tightening policy. However, 5.4%
6.0%
6.5%
7.2%
7.3%
7.5%
9.6%
12.9%
13.1%
0.0%
1.6%
7.1%
8.9%
9.2%
9.9%
9.9%
10.2%
11.8%
15.3%
15.0%
2.2%
3.0%
Automotive
Services
Basic Industry
Media
Telecommunications
Energy
Financial Services
Insurance
Banking
US Treasury
US AgencyU.S.
U.S.
any tightening policy. However,
this should not be a concern for
2013.
1.3%
2.5%
7.8%
2.4%
4.2%
4.2%
4.5%
5.2%
2.6%
3.2%
9.1%
4.7%
6.7%
7.0%
7.1%
7.6%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%
MBS
ABS
CMBS
Technology & Electronics
Consumer Non-Cyclical
Consumer Cyclical
Healthcare
Capital Goods
Total Return % 12-mo Excess Return % 12-mo
Source: Bloomberg, BoAML and SVB Asset Management.
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 22)
18
25. The Markets – Defensive Sectors Leading the Way
Telecom
Utilities Cons Staples Healthcare
25
Source: Bloomberg, SVB Asset Management
Energy
Materials
Industrials Financials
Cons Discretionary
26. The Markets – Defensive Sectors Leading the Way
26
Source: WSJ, April 30, 2013
27. S&P 500 Companies Room to Accelerate
S&P 500 companies continue to
conserve cash, although the level of
growth in cash balances has
tapered off in recent quarters.
On the other hand, S&P 500
companies have greatly reduced
their leverage ratios, likely due to
limited capital and investment
opportunities.
Companies have plenty of dry
powder on their balance sheets,
both in cash and further leveraging
up, to take advantage of
Debt to Equity Ratio and Cash on Balance of S&P 500 Companies
$150.0
$200.0
$250.0
$300.0
$350.0
155.0%
175.0%
195.0%
215.0%
235.0%
Billions
up, to take advantage of
opportunities if global economies
improve.
Source: Bloomberg and SVB Asset Management.
$0.0
$50.0
$100.0
$150.0
75.0%
95.0%
115.0%
135.0%
Total Debt to Total Equity (LHS) Cash & Equivalents (RHS)
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 26)
27
28. Federal Reserve Top Gear
As the Federal Reserve embarks
on more quantitative easing, the
U.S. balance sheet continues to
grow.
At the current pace of $85 billion
dollars per month of combined
mortgage backed securities and
longer-term treasury purchases,
the Fed’s balance sheet will be
close to $4 trillion dollars by year
end. That is more than quadruple
where the balance sheet was at the
start of the financial crisis.
Recent Balance Sheet Trends
$1.5
$2.0
$2.5
$3.0
$3.5
Trillions
Other Fed Reserve Assets
Central Liquidity Swaps
Other
Aurora
Maiden Lane III
Maiden Lane II
Maiden Lane I
TALF
AIG
Seasonal Credit
Despite all the effort by the Federal
Reserve with monetary policy, the
U.S recovery is yet to pick up
speed.
Source: Federal Reserve and SVB Asset Management.
28
$0.0
$0.5
$1.0
$1.5
Secondary Credit
Primary Credit
Other Loans
Treasury Currency Outstanding
Special Drawing
Gold Stock
MBS
Federal Agency Debt Securities
U.S. Treasury Securities
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 17)
29. The Markets – Earnings Outlook Droops
29
Source: Census Bureau, SVB Asset Management
30. The Markets – Revenue Outlook Droops, Too!
30
Source: Census Bureau, SVB Asset Management
33. Austerity or Growth: Hauser’s Law
15%
20%
25%
30%
8,000.0
10,000.0
12,000.0
14,000.0
16,000.0
18,000.0
Millions
33
Source: US Treasury, SVB Asset Management
0%
5%
10%
-
2,000.0
4,000.0
6,000.0
8,000.0
Millions
US Government Expenditures (lhs) US GDP (lhs) As a % (rhs)
34. Austerity vs. Growth: Spending = Taxes
2000
2500
3000
3500
4000
34
Source: US Treasury, SVB Asset Management
0
500
1000
1500
Federal Revenue Federal Expenses
35. Austerity vs. Growth: Obama Gets No Revenue Growth
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Growth of Expenditures Growth of Revenues
35
Source: US Treasury, SVB Asset Management
0.0%
2.0%
4.0%
6.0%
Carter Reagan Bush 41 Clinton Bush 43 Obama
0.0%
2.0%
4.0%
6.0%
Carter Reagan Bush 41 Clinton Bush 43 Obama
36. Only when it becomes too costly NOT to work together
6.0%
7.0%
8.0%
9.0%
10.0%
10 Year Treasury
When Will Politicians Work Together?
Source: Bloomberg, SVB Asset Management
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
36
38. The Fed – Low Rates and QE Will Create a Full Recovery
4.0%
5.0%
6.0%
7.0%
Fed Funds Rate
38
Source: Bloomberg, SVB Asset Management
0.0%
1.0%
2.0%
3.0%
4.0%
39. 1.0
1.2
1.4
1.6
1.8
2.0
But Money Isn’t Moving Through the System
Source: Federal Reserve Bank of St. Louis, Bloomberg, SVB Asset Management
39
0.0
0.2
0.4
0.6
0.8
Money Multiplier
40. Federal Reserve Trying to Get on Track
The Fed has continued with its
QE3 program. As announced
in the December FOMC
meeting, the Committee will
continue with purchases of
mortgage backed securities at
the pace of $40 billion per
month and longer-term
treasury securities at the pace
of $45 billion a month.
The Fed is using the
unemployment rate and
inflation rate as thresholds to
monitor the need for monetary
Fed Inflation, Employment Thresholds Worry Two of the Fed Presidents
U.S. Unemployment Target 6.5%
Core PCE Threshold 2.5%
4.0%
6.0%
8.0%
10.0%
12.0%
1.0%
2.0%
3.0%
monitor the need for monetary
policy. The unemployment
target is set at 6.5 percent and
looser monetary policy will
continue as long as inflation
remains below 2.5 percent.
The U.S. economy has a ways
to go before reaching 6.5%
unemployment, estimates are
for another 2 years before
reaching the target. Meanwhile,
inflation remains muted.
Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS) and SVB Asset Management.
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 18)
40
U.S. Unemployment Target 6.5%
0.0%
2.0%
0.0%
Core PCE (LHS) Core PCE Threshold (LHS)
U.S. Unemployment Rate (RHS) U.S. Unemployment Target (RHS)
41. What Is the Purpose of QE?
2.0%
3.0%
4.0%
TIPs Inflation Estimate
41
Source: Bloomberg, SVB Asset Management
-1.0%
0.0%
1.0%
2.0%
1/5/2007 1/5/2008 1/5/2009 1/5/2010 1/5/2011 1/5/2012 1/5/2013
QE1
QE2
QEternity
42. 4.0
5.0
6.0
7.0
The Fed's Balance Sheet ($ Trillions)
Size of the Fed’s Balance Sheet
Source: The Federal Reserve, SVB Asset Management
0.0
1.0
2.0
3.0
4.0
42
44. The Fed – Low Rates and QE Will Create a Full Recovery
4.0%
5.0%
6.0%
7.0%
Fed Funds Rate
44
Source: Bloomberg, SVB Asset Management
0.0%
1.0%
2.0%
3.0%
4.0%
45. Europe – The Euro Must Survive
45
Source: Census Bureau, SVB Asset Management
46. -8.0%
-4.0%
0.0%
4.0%
8.0%
UK Germany France Italy Spain
Europe Could Use a Boost
GDP
The euro zone economy is poised to contract by 0.5 percent or
more in 2013, continuing the lackluster performance of the
previous two years. Even Germany appears to be in danger of
slipping into a recession.
Italy was downgraded by Fitch recently, while talk of a tax on
bank deposits in Cyprus caused a ripple effect across Europe in
mid-March. These types of occurrences illustrate the current
fragility of sentiment in Europe.
The ECB is resisting further rate cuts for now, but will cut later
this year.
What is needed by most struggling economies in Europe is
economic growth to boost tax revenues and slow soaring
unemployment . However, the deficit situation has handcuffed
fiscal spending and retail spending is unlikely to rise unless
confidence does.Consensus GDP Forecast
Source: Bloomberg and SVB Asset Management.
confidence does.
Growth forecasts for the major European economies are if
anything overly optimistic; it is hard to pinpoint a potential
catalyst for growth in this environment.
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
UK Germany France Italy Spain
Consensus GDP Forecast
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 32)
46
47. 1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.3
1.4
1.5
1.6
1.7
EUR/USD
GBP/USD
GBP EUR
Europe What Will Put the Brakes on the Euro?
Currency Performance
The EUR is poised to go lower, weighed down by concerns
about the debt crisis, a widening recession and continuing
political uncertainty.
The GBP registered gains against the EUR for several months,
but has begun to lose ground recently, as the economy
struggles to recover from the economic downturn.
A lower EUR is in Europe’s interest, despite occasional talk to
the contrary. It remains one of the few ways to stimulate growth,
using a weak currency to fuel export competitiveness.
The EUR does not require a break up of the euro zone to head
lower; economic and political uncertainty coupled with
continuing subpar growth is sufficient to cause a further fall.
10Y Sovereign Yields
Source: Bloomberg and SVB Asset Management.
Lower yields would normally help boost economic activity, but
sovereign spreads to Germany remain wide. As a result, the
countries that would really benefit from lower borrowing costs
don’t reap the benefit.
Longer term, the EUR could recover against the USD, assuming
the euro zone survives this crisis. Europe has a stronger
balance of payments position than the U.S. and a central bank
with a single mandate of controlling inflation, which should lead
to a less expansionary monetary policy. However, as John
Maynard Keynes famously said, “In the long run we are all
dead”.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
ES FR IT DE
10Y Sovereign Yields
SVB Asset Management | Quarterly Economic Report Q1 2013 (Page 33)
47
48. Mobility rates are about 1/10th of United States level.
20.0%
25.0%
30.0%
Unemployment Rates
Labor Immobility: People Will Not Move Across Borders
Source: “Geographic Mobility in the European Union” European Commission, SVB Asset Management
0.0%
5.0%
10.0%
15.0%
Nevada
N. Dakota
48
49. Capital is Immobile – By Regulatory Design!
Multiple banking regulators encourage safety within countries (ECB to
the rescue?)
Banks encouraged to buy debt issued by host country but avoid others
What About Capital?
Banks encouraged to buy debt issued by host country but avoid others
Banks encouraged to “sweep” cash out of risky countries within the
eurozone
49
50. A single monetary policy causes more harm than good
No adjustment across economies at varying stages
Negates half the tools government has to affect the economy
Acts like a “pegged” currency (All currencies eventually become
“unpegged”)
But What Is Really Wrong?
“unpegged”)
The euro is a fine political accomplishment, but a horrid economic
situation
50
51. Europe – The Euro Must Survive
51
Source: Census Bureau, SVB Asset Management
52. Credit Quality Is Defined By S&P, Moody’s and Fitch
52
Source: Census Bureau, SVB Asset Management
53. Considering investment grade alternatives…
“Old Normal” “New Normal”
Treasury AAA Highly Securitized AAA
AA Treasury AA
Treasury Downgrade Effectively Shifts Entire Scale
Corp A Corp A
BBB BBB
The Treasury curve is the “benchmark” for pricing and quality in the corporate bond market.
The flood of downgrades in ‘08 – ’11 was a “resetting” of the credit scale by the NRSROs.
54. Issuer Name Duration Limit S&P Long-term Moody's Long-term Fitch Long-term
AT&T Corp 1 Year A- A2 A
Rio Tinto Plc 1 Year A- A3 A-
Vodafone Group PLC 1 Year A- A3 A-
Lowe's Companies, Inc 1 Year A- A3 WD
Apache Corp 1 Year A- A3 BBB+
Campbell Soup Co. 1 Year BBB+ A2 A-
Bank of America N.A. 1 Year A A3 A
Sampling of A3/A- Issuers
Bank of America N.A. 1 Year A A3 A
Goldman Sachs Group Inc 1 Year A- A3 A
Morgan Stanley 1 Year A- Baa1 A
Citigroup Inc 1 Year A- Baa2 A
Anheuser-Busch InBev NV 2 Years A A3 A
American Express 2 Years A- A2 A+
Target Corporation 2 Years A+ A2 A-
JPM Subordinated Debt 2 Years A- A3 A
WFC Subordinated Debt 2 Years A A3 A+
55. Credit Quality Is Defined By S&P, Moody’s and Fitch
55
Source: Census Bureau, SVB Asset Management
57. Corporate Balance Sheets
Bank Balance Sheets
Consumer Balance Sheets
Excess Cushion Against Potential Hard Times
Energy Independence….?
Our Culture of Consumerism (GDP is 70% Consumption)
57
58. Disclosures
This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is
based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by
us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax,
investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and
specific professional advice before making any investment decision. Nothing relating to the material should be construed as a
solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial
Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank,
and may lose value.
All material presented, unless specifically indicated otherwise, is under copyright to SVB Asset Management and its affiliates and is for
informational purposes only. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or
distributed to any other party, without the prior express written permission of SVB Asset Management. All trademarks, service marks
and logos used in this material are trademarks or service marks or registered trademarks of SVB Financial Group or one of its affiliates
or other entities.
58
59. SVB Asset Management
Joe Morgan, CFA
Chief Investment Officer, SVB Asset Management
jmorgan@svb.com
@SVBJoeMorgan
Weekly news summary and commentary: www.svb.com/ciovantage
59