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TM
WHAT, ME WORRY?
Deficit
1.70 1.60 1.50 1.40 1.30 1.20 1.10
1.00
55 0.90
58
61
64
67
70
73
76
79
82
85
88
91
94
97
00
03
06
09
12
Surplus
0.80
Note: Shaded bar and represents the OMB estimate Source: Office of Management and Budget, U.S. Treasury
2006
Note: Source: Haver Analytics
2007
2008
2009
2010
2011
2012
6
8.2%
8% 7% 6% 5%
1.7%
7.6%
6.3%
1.7%
4%
1.4%
3% 2% 1%
0%
61 Q1
70 Q4
75 Q1
82 Q4
91 Q1
01 Q4
Avg.
Current
61 Q1
70 Q4
75 Q1
82 Q4
91 Q1
01 Q4
Avg.
Current
20.0
16.0
12.0
150.0
140.0 130.0 120.0 110.0 100.0
Note: Source: Robert Shiller, Federal Reserve Board, Haver Analytics
Down 43%!
8.0
4.0
0.0
Debt deleveraging
-4.0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
58 63 68 73 78 83 88 93 98 03 08
10
20
19 18 17 16 15 14 13 12 11 '72 '77 '82 '87 '92 '97 '02 '07 '12
Note: Source: Federal Reserve Board Pre-bubble average
80
Pre-bubble average
13
14
Unemployment Rate
8.5
8.3 8.0 8.0
8.0
3.5
3.5
7.5
7.5
7.0
7.0
6.5
6.3
6.0
5.0
2012 2013 2014
15
The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.
Cicero - 55 BC
16
95
91
85 74 74 74 73 75
80
76
75 69 64
70
72
73
75
70
70
72
73
65
55 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
17 Notes: Shaded bars represent OECD estimates Source: OECD
18
60% 50% 40% 30% 20% 10% 0% '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
19
100 0
Note: Source: Haver Analytics * Q1 data are not available, using the last available data
20
20
19.2
15
10
8.7
5.8
5.0
1.3 Germany
22
0 Greece
Notes: Source: Bloomberg
Portugal
Spain
Ireland
Italy
Belgium
France
Netherlands
20
15.2 15
14.7
10.5 10
9.6
0 Spain Greece* Portugal Ireland Italy France Finland Belgium Germany Netherland
23 Note: Source: Haver Analytics * Q2 data is not available, using the last available data
1
0 -1 -2 -3 -4 -5 -6 -7
-0.3
-0.6 -1.3
-2.6
-3.2
-6.3 Germany France Finland Belgium Netherland Spain Italy Portugal Greece
24
Real GDP
4 3 2 1 0
Employment level
2.0 1.5 1.0 0.5 0.0
-1
-0.5
-2 -3 -4 -5 -6
'07 '08 '09 '10 '11 '12
-1.0 -1.5 -2.0 -2.5 '07 '08 '09 '10 '11 '12
25
-2
-4
-6 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
26 Note: Source: OECD, Haver Analytics
THERE IS NO DECOUPLING
Real GDP Growth
(year-over-year percent change)
6.0
r = 0.84
4.0
2.0
European Union (Euro)
0.0
-2.0
-4.0
-6.0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
27 Note: Source: Eurostat, BEA, Haver Analytics
China
60 50 40 30 20
Korea
50 40 30 20 10
28
7.5
55
0.0
50
-7.5
45
-15.0
Exports growth (lagged by four months)
ISM New Export Orders Index
40
-22.5 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
35
29
I think its important to say that if no action were to be taken by the fiscal authorities, the size of the fiscal cliff is such that there is, I think, absolutely no chance that the Federal Reserve could or would have any ability whatsoever to offset that effect on the economy.
30
Record Drag!
2%
-1%
-3%
-5%
Net Fiscal Stimulus
-7% 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
Notes: 2013 is based on CBO estimates of the fiscal balance Source: CBO, Haver Analytics 31
85
75 65
15
13 11 9 7 5 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
55
45 35
25
'70 '75 '80 '85 '90 '95 '00 '05 '10 '15 '20
Notes: Shaded bars and dotted lines represent estimates (interest payments/total revenue estimates by Gluskin Sheff and debt/GDP estimates by the OMB) Source: OECD, U.S. Office of Management and Budget (OMB)
32
CORE CAPEX ORDERS WAVE A RED FLAG; CORE RETAIL SALES ARE ON A DOWNWARD PATH
United States
Core Capex Orders*
(year-over-year percent change of the three-month average)
30 20 10 0
2
8
6 4
-10
0
-20 -30 -40 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
Note: * Nondefense capital goods ex aircraft **Retail sales ex auto, gasoline and building materials Shaded regions represent periods of U.S. recession Source: Census Bureau
33
34
Short-term View
800
Long-term View
2,800
750
2,400
700
2,000
650
1,600
600
1,200
550
800
500 Jan/10 Jul/10 Jan/11 Jul/11 Note: Source: Census Bureau, Haver Analytics
400
Jan/12
Jul/12
'59
'69
'79
'89
'99
'09
35
DITTO
United States: New Home Sales
(thousands)
Short-term View
380
Long-term View
1,400
360
1,200
340
1,000
320
800
300
600
280
400
260 Aug/10 Feb/11 Aug/11 Note: Source: Census Bureau, Haver Analytics
200
Feb/12
'62
'72
'82
'92
'02
'12
36
2 '47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12
Note: Shaded regions represent periods of U.S. recession Source: Bureau of Economic Analysis
37
2012
4.1 4.0
2013
4.5 4.2 4.0
3.5
3.9
3.8
3.9
3.9
3.3
3.5 3.3
2.8
2.7 2.5
2.7
3.0
3.0
2.9 2.75
2.3
2.2 1.85
2.5
2.5
1.8
Note: Source: Bloomberg
2.0
38
39
2.0
2.0
1.5 1.0
1.5
1.0
0.5
0.0 05 06 07 08 09 10 11 12
Note: Source: Federal Reserve Board
0.5 05 06 07 08 09 10 11 12
40
40%
39% 25%
Fed Policy
Note: Source: Haver Analytics
CPI Inflation
PPI Inflation
Budget Deficits
CRB Index
Oil Prices
42
20
18 16 14 12 10 8 6 10-year Treasury Note Yield r = 89% Fed Fund Rate
4
2 0 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10
43
A Year Ago
7.5
2.5 2.0 1.5 1.0 0.5 0.0 Fed Funds Rate 2Y 5Y 10Y 20Y
Today
7.0
+270bps
6.5
+160bps
Historical Avg
?
6.0
5.5
5.0
30Y
2Y
5Y
10Y
20Y
30Y
44
45
WHAT THE FED HAS DONE BEYOND INTEREST RATES MULTIPLE QEs
QE1 (December 2008 to March 2010):
$1.25 trillion of mortgage-backed securities $300 billion of long-term Treasuries $200 billion of Agency debt QE2 (November 2010 to June 2011): $600 billion of longer-term Treasury securities Operation Twist (September 2011 to present):
The Fed bought over $500 billion of long-term Treasury securities and sold an equal amount of short-term Treasury securities
QE3 (September 2012 to ??): The Fed will purchase additional Agency mortgage-backed securities at a pace of $40 billion per month, until it is satisfied with the economys progress.
Note: Source: Federal Reserve Board 46
HE SAID WHAT??
We do think that these policies can bring interest rates down, not just treasury rates but a whole range of rates including mortgage rates and rates for corporate bonds and other types of important interest rates. It also affects stock prices. It affects other prices, home prices, for example.
So looking at all the different channels of effect, we think it does have an impact on the economy. It will have impact on the labor market but again, the way I would describe it is a meaningful effect, a significant effect, but not a panacea, not a solution for the whole issue.
Ben Bernanke, at the Post-FOMC Meeting Press Conference, September 13, 2012.
47
1.5
1.3
1.80 1.75
1.1
1.70
0.9
1.65 1.60
0.7 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
1.55 '03 '04 '05 '06 '07 '08 '09 '10 '11
48
Note: Source: Federal Reserve Bank of St. Louis, Macroeconomic Advisers, Federal Reserve Board
1300
1200 1100 1000 900 800 700
600
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Note: Source: Federal Reserve Board
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11
49
'60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '60 Note: * Nominal net worth deflated by the CPI index Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Board
50
QE 1
1,500 1,400 1,300 1,200
1,100
QE 2
Jan/09 Apr/09 Jul/09 Oct/09 Jan/10 Apr/10 Jul/10 Oct/10 Jan/11 Apr/11 Jul/11 Oct/11 Jan/12 Apr/12 Jul/12 Oct/12
Note: Source: Wall Street Journal, Haver Analytics 51
15.2% 10.3%
6.4%
6.9%
-2.9%
-4.7% -7.6%
-8.7%
-3.9%
-8.9%
-8.5%
-7.0%
-6.4%
-7.2%
-9.6% -9.9%
-18.8%
52
53
Corporate Profits*
70 60
50
40 30 20 10
-10
Note: * Corporate profits after tax with inventory valuation adjustment and capital consumption adjustment Source: Standard & Poors, Bureau of Economic Analysis, Gluskin Sheff
54
2.5
QE3 announced
2.0
1.5
QE2 announced
OT announced
1.0
0.5
QE1 announced
Oct/09 Apr/10 Oct/10 Apr/11 Oct/11 Apr/12
55
FED POLICY GEARED TOWARDS DOLLAR WEAKNESS AND HIGHER GOLD PRICE
United States
The DXY Dollar Index
(index)
84.5
Gold Price
($/troy oz)
1,780
83.5
1,740
82.5
1,700
81.5
1,660
80.5
1,620
79.5
1,580
Jun/12
Jul/12
Aug/12
Sep/12
1,540 Apr/12
May/12
Jun/12
Jul/12
Aug/12
Sep/12
56
5-year TIPS
4.0
10-year TIPS
3.5 3.0
3.0
2.5
2.0
2.0 1.5
1.0
1.0
0.0
0.5 0.0
-1.0
-0.5
-2.0
Jan/08 Jan/09 Jan/10 Note: Source: Bloomberg, Gluskin Sheff Jan/11 Jan/12
-1.0
Jan/08 Jan/09 Jan/10 Jan/11 Jan/12
57
Spread
(basis points)
400 Widest since 1958!
5
Five-year T-note Yield
200
4
-200
-400
2
S&P 500 Dividend Yield
-600
-800
-1,000
0
Jan/02 Jan/04 Jan/06 Jan/08 Jan/10 Jan/12 Note: Source: Standard & Poors, Federal Reserve Board, Haver Analytics
-1,200
'53
'58
'63
'68
'73
'78
'83
'88
'93
'98
'03
'08
58
Interest Income
1500.0
Dividend Income
850.0 800.0 750.0
1400.0
1300.0
700.0
1200.0
1100.0
Jan/07
Jan/08
Jan/09
Jan/10
Jan/11
Jan/12
Jan/07
Jan/08
Jan/09
Jan/10
Jan/11
Jan/12
59
60%
50%
40%
Historical average
30%
Record lows!
20% 1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
60
Note: Note: EPS based on GAAP up to 1977 and Pro forma from 1978- present Sources: : Bank of America Merrill Lynch, Standard & Poors, Cowles commission, Gluskin Sheff
CORPORATE BOND YIELDS LOW IN ABSOLUTE TERMS BUT HIGH IN RELATIVE TERMS
United States: BBB-rated Corporate Bond Yield and Spread off Treasury
Yield
(percent) 11
Spread
(basis points)
900 800 700 600 500
10
9 8 7
400
6 5 4 3
Pre-Bubble Average
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
Note: Source: Bank of America Merrill Lynch
'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
61
Historical Average
2.0%
0.0% Jan/95
Jan/97
Jan/99
Jan/01
Jan/03
Jan/05
Jan/07
Jan/09
Jan/11
Note: Shaded region represent periods of U.S. recession Source: Barclays Capital
62
75
45
40
70
65
35 30 25
55 60
20 15
50
'70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10
Note: Source: Federal Reserve Board
'70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10
63
64
4 20
25
27
24
55 46 32 33 26 27 44
47
42
Equities* Bonds** Cash and equivalents Other Note: *Include listed equity shares and equities held via mutual funds **Include government bonds, corporate bonds, commercial paper, agency- and GSE-backed securities, and municipal securities Source: Federal Reserve Board, Shiller S&P data set, McKinsey Global Institute
65
Hybrid Funds
50 Inflow 40
30
20
0
66
67
55 52
50 45 40 35 30 25
20 23
44
35
25
17
2001
2009
2012
Age 50-74
(percent)
Capital appreciation crowd
30%
26%
36% 35% 34% 25%
33% 21% 32% '80 '90 '00 '10 20% '80 '90 '00 '10
69
35%
30%
25%
20%
15%
10%
5%
0%
REITs
Dow utilities High dividend Invest. grade Muni bonds 10-year strip 30-year strip paying TSX corp bonds stocks
10-year Tnote
70
4. 5.
6. 7.
71
DISCLAIMER The information, opinions, and other materials contained in this presentation is the property of Gluskin Sheff + Associates Inc. and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by Gluskin Sheff + Associates Inc. based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.
72