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April 2010
US Vital Statistics is provided as a public service. The report cuts through the unbearable daily economic noise and focuses on the critical
data to illustrate economic trends.
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed
to be accurate and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before
making any investing or business decisions.
Important disclaimer
Important Disclosure:
The reader hereby agrees that Plan B Economics and its authors are not responsible for any damages, direct or indirect, that arise out of the use of this
report.
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intended as specific advice for any person or entity. This report is provided, for informational purposes only and does not constitute an offer or solicitation to
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account the investment objectives, financial situation or specific needs of any particular person or entity. Before making an investment decision on the basis
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needs, objectives and financial circumstances. Plan B Economics suggests that, prior to acting on any information contained herein, you contact a
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offering tax advice; as with any transaction having potential tax implications, persons or entities should consult with their own tax advisors. Past
performance is not a guarantee of future results.
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ⓒ2010 Plan B Economics. All rights reserved. Unauthorized use, distribution, duplication or disclosure without the prior written permission of Plan B
Economics is prohibited by law and may result in prosecution.
2
USA is indebted to the world
- we owe more than we own -
Conventional wisdom suggests:
growing reliance on foreign capital = higher cost of capital (or even a funding crisis)
$500,000
$-
-$500,000
-$1,000,000
Millions
-$1,500,000
-$2,000,000
-$2,500,000
-$3,000,000
-$3,500,000
2006r
2007r
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2008p
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 3
Yet foreign income exceeds foreign payments
- the exorbitant privilege of reserve currency status -
Reserve status keeps US risk and liquidity premia low, reducing cost of capital relative to foreign entities.
How long can this imbalance last?
$400,000
$200,000
Millions
$-
-$200,000
-$400,000
-$600,000
-$800,000
-$1,000,000
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 4
Is a US sovereign debt crisis inevitable?
- again, reserve currency status alters the odds -
• All things equal, any entity that must borrow to spend will eventually hit a funding crisis. As
lenders disappear, a country is forced to borrow at higher yields and/or print money to
finance expenditures.
• As the world’s favoured trading and reserve currency (because the US is the world’s biggest
consumer, has the world’s deepest/most liquid risk-free asset market and has the world’s
strongest military) the US may be an exceptional case. Consequently, the US can theoretically
manage bigger deficits than other country.
• While the direction of US public debt and deficits is worrisome, and the probability of a US
debt crisis is rising, the probability of a US debt crisis is not yet 100%.
• The following historical illustration demonstrates how actual events can often defy
conventional logic.
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 5
1930-1945: Chapters of a debt crisis?
- economic output / recovery increasingly reliant on debt…sounds familiar? -
$300,000
120%
$250,000
1930 1945 100% 1930 1945
$200,000
80%
(Millions)
(Millions)
$150,000
60%
$100,000
40%
$50,000 20%
$- 0%
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 6
1930-1945 was actually, a Treasury bull market
- bond yields declined !?! conventional wisdom be damned -
6%
5%
4%
3%
2%
1%
0%
01/31/1921
11/30/1921
09/30/1922
07/31/1923
05/31/1924
03/31/1925
01/31/1926
11/30/1926
09/30/1927
07/31/1928
05/31/1929
03/31/1930
01/31/1931
11/30/1931
09/30/1932
07/31/1933
05/31/1934
03/31/1935
01/31/1936
11/30/1936
09/30/1937
07/31/1938
05/31/1939
03/31/1940
01/31/1941
11/30/1941
09/30/1942
07/31/1943
05/31/1944
03/31/1945
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 7
1945: What came next?
- After the Depression and War, an era of new stability seemed improbable -
Conventional wisdom fails yet again as the US enters an new era of prosperity,
despite millions of unemployed soldiers and massive government debt.
Again, 1945 is not the same as today…but never underestimate the unexpected.
60%
50%
40%
Consistent Dividend Growth
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
71
77
83
89
95
01
07
13
19
25
31
37
43
49
55
61
67
73
79
85
91
97
03
09
18
18
18
18
18
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 8
What does 60yrs of stability get you?
- massive build-up of systemic risk, all-asset bubble and a massive financial crisis -
Morgan Stanley
Bear Stearns
Lehman Brothers
After 60+ years of relative stability, a financial collapse seemed improbable. So as developed economies
reached capacity and return on capital shrank, investors took more risk to enhance returns.
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 9
Real estate loans collapsed
- declining real estate prices led to implosion of levered entities -
14
Business loans
Consumer loans
12 Agricultural production loans
Single-family residential mortgages
Single-family residential mortgages
Commercial real estate loans (excluding farmland)
10
0
1987Q4
1988Q2
1988Q4
1989Q2
1989Q4
1990Q2
1990Q4
1991Q2
1991Q4
1992Q2
1992Q4
1993Q2
1993Q4
1994Q2
1994Q4
1995Q2
1995Q4
1996Q2
1996Q4
1997Q2
1997Q4
1998Q2
1998Q4
1999Q2
1999Q4
2000Q2
2000Q4
2001Q2
2001Q4
2002Q2
2002Q4
2003Q2
2003Q4
2004Q2
2004Q4
2005Q2
2005Q4
2006Q2
2006Q4
2007Q2
2007Q4
2008Q2
2008Q4
2009Q2
2009Q4
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 10
Saved by the Bernanke put
- MBS purchase program puts floor under housing market -
Fed MBS
purchases
Housing
starts
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 11
A new attitude: Consumer credit declines
- personal deleveraging reflects a new frugality -
Consumers
paying
down debt
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 12
US industry has stopped bleeding
- lower operating levels reflect consumer deleveraging -
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 13
Foreign demand stepping in for the US consumer?
-world trade back to 2006 levels -
170
150
130
110
90
70
50
30
91 1
92 8
92 3
93 0
93 5
94 2
95 7
95 2
96 9
96 4
97 1
98 6
98 1
99 8
99 3
00 0
00 5
01 2
02 7
02 2
03 9
03 4
04 1
05 6
05 1
06 8
06 3
07 0
07 5
08 2
09 7
09 2
09
19 m0
19 m0
19 m0
19 m1
19 m0
19 m1
19 m0
19 m0
19 m0
19 m0
19 m1
19 m0
19 m0
19 m0
19 m0
20 m1
20 m0
20 m1
20 m0
20 m0
20 m0
20 m0
20 m1
20 m0
20 m0
20 m0
20 m0
20 m1
20 m0
20 m1
20 m0
20 m0
m
91
19
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 14
…and global investors are hungry for US assets
- back to ‘normal’…US companies can affordably access capital markets -
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 15
So, US companies doing fairly well: strong profitability
- profits and inventories nearly back to pre-recession levels -
Unfortunately for many, businesses have learned to operate with fewer employees so hiring will be slow.
However, in the long-run this is good if unemployed are re-deployed to more productive industries.
Corporate
profits
Inventories
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 16
Dividends have troughed: Profit retention = giant cash-build
- eventually, dividend increases will confirm management belief in sustainable recovery -
Dividend increases are ‘sticky’ (i.e. management doesn’t like to cut dividends).
Therefore, dividend increases tend to be made when management is confident about the future.
* Confidence also makes managers more willing to re-hire workers *
Dividends
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 17
So what will companies do with cash?
- cash is king…for now -
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 18
Bottom Line: conventional wisdom suggests a funding crisis (which could seriously
damage the US economy) will be a consequence of today’s growing US public debt. This
logic is difficult to argue against, but history – specifically, the Great Depression -
suggests a US debt crisis is not a foregone conclusion.
{Note: Conventional wisdom also argued that a financial crisis was improbable.}
Meanwhile, the US economy appears to be in the midst of a full-blown jobless recovery.
Corporate profits have recovered off the backs of the unemployed. When corporate profits
will lead to employment gains is debatable. Realistically, hiring new staff will be the last
thing companies do with their cash hoards.
Alternatively, under-capacity in certain industries may offset overcapacity in others,
enabling a structural redeployment of workers. However, this may be a drudgingly slow
process.
{…or we could just jump headfirst into the next bubble.}
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not
guaranteed to be accurate and should not be relied upon. Investing involves risk and you could lose all your money. Consult a
professional advisor before making any investing or business decisions.