7. Outline Business Cycle Index and forecasts Scenarios that might drive asset returns in 2011 The mess in Europe Quantitative easing 5
8. Economic Outlook Little or no above-trend, snap-back growth A long, flat spot in U.S. unemployment A previous 2 ½ year flat spot occurred in U.S. unemployment between May 1984 and November 1986. But this was with unemployment between 7 ½ and 7 percent. Nevertheless, real GDP grew at an average rate of 2.7 percent through the flat spot in the 1980s, so the unemployment outlook does not doom the economy to 1 to 2 percent GDP growth next year. The flat spot in the 1980s broke the back of oil prices. Are some commodity prices ready to break this time? 6
9. Forecasts of business cycle index show end of stumble, return to square-root path 7 Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.asp Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
10. The projected plateau in 2011 jobs gains is disappointing 8 Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.asp Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
11. Where are the months with jobs gains of 300 thousand? This is where the economy is disappointing us as we head into 2011 9 Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.asp Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
12. Forecasts of GDP growth: Blue Chip consensus and Russell’s forecast 10 Source: January 2011 issue of Blue Chip Economic Indicators Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
13. Eurozone and U.S.Reversion to the mean from above and from below 11 Start of out ofsample forecasts Source: Russell’s Economic Outlook and Market Expectations as of October 2010 Indexes are unmanaged and cannot be invested in directly. Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
14. Eurozone CrisisFrom liquidity concerns to solvency to breakup and default? The Euro was structurally flawed from the beginning The “Euro-TARP” deals with liquidity, not solvency Solvency in some of the peripheral countries is still a concern Even if Greek debt, for example, is restructured, will the Greek economy be competitive at the fixed exchange rate? Is default and devaluation the necessary elixir? 12 Euro-TARP = The European Financial Stability Facility There is no guarantee that any stated expectations will occur.
15. Eurozone CrisisFrom liquidity concerns to solvency to breakup? 13 SOURCE: Bloomberg as of 06 December 10 Data is historical and is not indicative of future results.
16. Quantitative easing QE means that the central bank is injecting more than the minimum reserves into the banking system to enforce a zero short-term interest rate The Bank of Japan had a zero interest-rate target for several years before it realized that it might want to inject more than the minimum reserves needed to achieve a zero rate. The Fed got this point right away in January 2009 when it began QE – it always injected more than the minimum and thereby precluded a deflationary equilibrium 14
17. What’s new in QE2? It’s working! What the Fed buys is not as important as the fact that the Fed shows determination to inject enough reserves to make a 2 percent inflation expectations make sense to people. Data-dependent asset purchases Tree-chopping analogy 15
18. Global Currencies No war, just tension All the majors (USD, GBP, EUR, JPY) have downward biases when viewed in isolation. Yet dollar is least ugly, cheapest CNY would appreciate if it could – held by capital controls and intervention Commodity currencies are dear, commodity outlook is lackluster; they are expected to depreciate, but are supported by carry trade Is a new global policy arrangement at hand? Unlikely 16 USD = US Dollar; GBP = British Pound; EUR = Euro; JPY = Japanese Yen There is no guarantee that any stated expectations will occur.
19. Emerging MarketsBelieve the hype, but with caution Structural story intact through medium term EM countries no longer have their traditional vulnerabilities to sudden stops and are the darlings of the investment landscape Relative EM valuations are about on par with developed We agree that domestic demand is rising, but domestic sectors are very expensive Inflation due to undervalued real exchange rates, rising food prices, capital inflows, rising domestic demand 17 EMGs = Emerging Markets Groups There is no guarantee that any stated expectations will occur.