a look beyond the crisis - perry piazza
DESCRIPTION
summitconf.orgTRANSCRIPT
![Page 1: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/1.jpg)
Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser
Contango Capital Advisors | 111 Sutter St. Suite 975, CA 94104 | www.contangoadvisors.com
Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser CCA #1210-0150
A Look Beyond the Crisis
Perry PiazzaDirector of Investment StrategyContango Capital Advisors, Inc.
December 2, 2010
![Page 2: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/2.jpg)
Part 1: Crisis Review, Deleveraging Update & Economic Forecast
Part 2: Our Fiscal Mess – Is There Hope?
Part 3: How to Invest in 2011
2
![Page 3: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/3.jpg)
Setting the Scene
A debt bubble began to form in the mid 1990s and continued into the last decade. It was exacerbated by:
– Abnormally low interest rates.– A strong rally in the price of an easily leveragable asset – housing– A fundamental switch, from cash-flow based underwriting standards to asset-
based underwriting standards.– Fast growth in computer power and the ensuing ability to securitize all manner of
assets.– A miscalculation of risk by the ratings agencies.– Abdication of regulatory responsibility.
The debt bubble began to burst in 2007 when housing prices cracked and finally gave way fully in 2008 when Lehman Brothers failed.
3
![Page 4: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/4.jpg)
The Debt Bubble in Hundred-Year Perspective
4
Quarterly Data 12/31/1922 - 6/30/2010 (Log Scale)
(E501A)
375.44
6/30/2010 Debt = $52.054 Trillion6/30/2010 GDP = $14.575 Trillion
= 357.1%
Annual interpolated GDP (including estimates prior to 1929) used prior to 1946. Domestic Nonfinancial Debt used prior to 1946. As of December, 1946 Domestic Nonfinancial Debt represented 99.4% of Total Credit Market Debt. 130
135 140 145 150 155 160 165 170 175 180 185 190 195 200 205 210 215 220 225 230 235 240 245 250 255 260 265 270 275 280 285 290 295 300 305 310 315 320 325 330 335 340 345 350 355 360 365 370 375
130 135 140 145 150 155 160 165 170 175 180 185 190 195 200 205 210 215 220 225 230 235 240 245 250 255 260 265 270 275 280 285 290 295 300 305 310 315 320 325 330 335 340 345 350 355 360 365 370 375
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Total Credit Market Debt as a % of GDP
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
TOTAL DEBT AS A PERCENTAGE OF GDP IN THE USA
Includes Government + Household + Corporate Debt
Source: Ned Davis Research
A large debt bubble burst in the 30s …
… and probably again in 2008
![Page 5: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/5.jpg)
What Happens After a Debt Bubble Bursts?
Typical aftermath: Deeper than normal recession and a muted recovery Deleveraging by the biggest culprits (consumers, in this case) Austerity & reduced confidence to spend and invest A flirt with deflation Untested policy responses & political “tide-shifting” Large fiscal response Asset market(s) most affected (e.g., housing)
usually fall for years A shifting of relative economic strength to less indebted
countries. A transfer of risk from the private sector to the public sector Periodic “aftershock” crises..
2007 – 2009 was the first severe credit recession since the 30s.
Recommended Reading
5
![Page 6: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/6.jpg)
Deeper Than Normal Recession
6
QUARTERLY GDP GROWTH IN THE UNITED STATES
The amplitude of economic activity has moderated greatly in recent decades
Source: Bloomberg, LP
![Page 7: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/7.jpg)
Muted & Well-Below-Par Recovery
7
Corp. E
arnings
Shipmen
ts
Housing S
tarts
Retail S
ales
New Homes
Existi
ng Home S
ales
Industrial
Prod.
Non-Res. Constr
uction
Real G
DP
Orders
Nonfarm Pay
rolls
-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0 What’s Normal
Average increase in above economic variables, 34 Months after the start of a recession
(includes last 8 recessions with the exception of the truncated 1980 recession)
Source: Ned Davis Research
Real G
DP
Retail S
ales
Nonfarm Pay
rolls
Industrial
Prod.
Corp. E
arnings
Shipmen
ts
Existi
ng Home S
ales
Orders
Non-Res. Constr
uction
Housing S
tarts
New Homes
-60.0
-50.0
-40.0
-30.0
-20.0
-10.0
0.0What’s Not
Current “Recovery”
(E0026)
Monthly Data 6/30/2007 - 10/31/2011
*Dates used for determining economic expansionsare those designated by the National Bureau ofEconomic Research. The data has been adjustedfor ease of comparison with the current cycle.Expansion starting dates used: November 1970, March 1975, July 1980, November 1982, March 1991, and November 2001.
Recession ended in June 2009.
Current Expansion ( )
Average of Last Six Post World War II Expansions*
( )
100.0 100.2 100.4 100.6 100.8 101.0 101.2 101.4 101.6 101.8 102.0 102.2 102.4 102.6 102.8 103.0 103.2 103.4 103.6 103.8 104.0 104.2 104.4 104.6 104.8 105.0 105.2 105.4 105.6 105.8 106.0 106.2 106.4 106.6 106.8 107.0 107.2 107.4 107.6 107.8
100.0 100.2 100.4 100.6 100.8 101.0 101.2 101.4 101.6 101.8 102.0 102.2 102.4 102.6 102.8 103.0 103.2 103.4 103.6 103.8 104.0 104.2 104.4 104.6 104.8 105.0 105.2 105.4 105.6 105.8 106.0 106.2 106.4 106.6 106.8 107.0 107.2 107.4 107.6 107.8
S D 2008
M J S D 2009
M J S D 2010
M J S D 2011
M J S
Performance of Coincident Indicators vs Average of Last Six Expansions
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Performance of Coincident Indicators vs. Average of Last Six Expansions
![Page 8: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/8.jpg)
Consumer Deleveraging
(E516)
Quarterly Data 3/31/1952 - 6/30/2010 (Log Scale)
Index of Coincident Economic Indicators
Source: The Conference Board
Shaded areas representNational Bureau of
Economic Research recessions. 262932364146515764728090
101
262932364146515764728090
101
Falling = Consumers Decreasing Debt Rising = Consumers Increasing Debt
Household Debt as a % of Disposable Personal Income
Household Debt Includes: Home Mortgage Consumer Credit
6/30/2010 = 118.7%
66.6 68.4
83.2
130.2
58.563.3
81.8
Data Subject To Revisions By The Federal Reserve Board
58.5 -Year Mean = 75.1%
40
50
60
70
80
90
100
110
120
130
40
50
60
70
80
90
100
110
120
130
Household Debtas a % of Disposable Personal Income
(Year-to-Year Point Change)
6/30/2010 = -5.3% -6-5-4-3-2-10 1 2 3 4 5 6 7
-6-5-4-3-2-10 1 2 3 4 5 6 7
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Household Debt as a % of Disposable Personal Income
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
8
HOUSEHOLD DEBT / DISPOSABLE INCOME
Source: Ned Davis Research
![Page 9: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/9.jpg)
Austerity
To repair their net worth, individuals (representing 70% of our economy) save more and spend less. Confidence is eroded, leading to fewer purchases of “big ticket items (homes & cars, for example).
Source: Bloomberg
1
2
3
4
5
6
7
8
9
10
11
123 Decades of the U.S. Personal Savings Rate
?
19851987
19891990
19921994
19951997
19992000
20022004
20052007
200910,000
20,000
30,000
40,000
50,000
60,000
70,000Cumulative Net Worth in Trillions of All US Households
Individuals Feel Poorer So they save more
Compounding the problem, the baby boomers are now quickly approaching retirement.
9
![Page 10: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/10.jpg)
10
Performance of Private Nonfarm Payrolls
Reduced Business Confidence + Structural Problems = Weak Hiring
Source: Ned Davis Research
Why? Outsourcing Machines
replacing people Failures of
education system
1991 “Jobless
Recove
ry”Average of L
ast 6 Expansio
ns
2001 “Jobless Recovery”
Mill
ions
of E
mpl
oyed
Am
eric
ans
![Page 11: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/11.jpg)
Flirt with Deflation
(E707B)
Monthly Data 1/31/1960 - 9/30/2010
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Core Personal Consumption Expenditures Price Index
9/30/2010 = 1.2%( )
Inflation Too Low
Inflation Too High
Fed's Preferred Range 1995 thru 2007
0.9
1.2
1.5
1.8
2.1
2.4
2.7
3.0
3.3
3.6
3.9
4.2
4.5
4.8
5.1
5.4
5.7
6.0
6.3
6.6
6.9
7.2
7.5
7.8
8.1
8.4
8.7
9.0
9.3
9.6
9.9
10.2
0.9
1.2
1.5
1.8
2.1
2.4
2.7
3.0
3.3
3.6
3.9
4.2
4.5
4.8
5.1
5.4
5.7
6.0
6.3
6.6
6.9
7.2
7.5
7.8
8.1
8.4
8.7
9.0
9.3
9.6
9.9
10.2
Core PCE Price Index (Year-to-Year Change)
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
11
Inflation (core personal consumption expenditure “PCE” y/y change)
Source: Ned Davis Research
Fed’s Target Range 1995 thru 2007
![Page 12: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/12.jpg)
Untested Policy Response
12
![Page 13: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/13.jpg)
As a Result of Unconventional Monetary Policy, Fed’s Balance Sheet Has Increased Substantially
13
Weekly Data 1/05/2007 - 10/29/2010 (Log Scale)
(E0595C)
$ BillionsTotal Reserve Bank Credit
10/29/2010 = 2282.7 ( )
865 913 963
1016107211321194126013301403148115621649174018361937204421572276
865 913 963
1016107211321194126013301403148115621649174018361937204421572276
Securities Held Outright ( ) 2043. 9 Mortgage-Backed Securities ( ) 1059. 4 Treasury Securities ( ) 834. 3 Agency Securities ( ) 150. 2
In $ Billions QE IBegins
QE IExpanded
End Tsy Buys
End ofQE I
100 200 300 400 500 600 700 800 900
10001100120013001400150016001700180019002000
100 200 300 400 500 600 700 800 900
10001100120013001400150016001700180019002000
F M A M J J A S O N D J 2008
F M A M J J A S O N D J 2009
F M A M J J A S O N D J 2010
F M A M J J A S O
Federal Reserve Bank Credit
Securities Held By The Federal Reserve
Data reflects Wednesday posting
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Federal Reserve Balance Sheet
Black Dotted Line = GSE (Fannie & Freddie) Debt
Red Dotted Line = MBS
Blue Line = Treasuries
Green Line = Total Securities Held
QE1 Begins
QE1 Expanded
End Treasury
Buys
End QE1
QE2 Begins
QE2
Securities Held by the Fed
Source: Ned Davis Research
![Page 14: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/14.jpg)
The Fed’s Actions Have Effectively Engineered Lower Rates
14
30-Year Fixed Mortgage Rate 2-Year New Car Loan Rate
Sources: Haver Analytics and Gluskin Sheff & Associates
![Page 15: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/15.jpg)
But Demand Hasn’t Significantly Picked Up for Housing
15
Mortgage Bankers Association: Mortgage Loan Application for Purchase (seasonally adjusted)
Conference Board: Consumer Confidence Survey: Plan to Buy a Home Within Six Months
Sources: Gluskin Sheff & Associates, Mortgage Bankers Association, Conference Board
![Page 16: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/16.jpg)
And Prices Keep Falling
16
Quarterly Data 3/31/1970 - 9/30/2010 (Log Scale)
(E534E)
9/30/2010 = 87.4
FHFA Purchase-Only House Price Index
Prior to Q1 1991, Freddie Mac Conventional Mortgage Home Price Index For Purchase Transactions
Trendline Growth = 0.5% per annum ( )
+16.4%+19.4%
+50.5%
-17.5%
-7.5%
64.566.468.570.672.775.077.379.682.184.687.289.892.695.498.3
101.4 104.5 107.7 111.0
64.566.468.570.672.775.077.379.682.184.687.289.892.695.498.3
101.4 104.5 107.7 111.0
Real Home Prices Rising
Real Home Prices Falling
9/30/2010 = -4.3% Source: Federal Housing Finance Agency-12 -11 -10
-9-8-7-6-5-4-3-2-10 1 2 3 4 5 6 7
-12 -11 -10
-9-8-7-6-5-4-3-2-10 1 2 3 4 5 6 7
1970 1975 1980 1985 1990 1995 2000 2005 2010
Real FHFA House Prices
Real FHFA House Prices (Year-to-Year Changes) Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
FHFA HOUSE PRICE INDEX
Source: Ned Davis Research
![Page 17: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/17.jpg)
We’ve Also Had a Big Fiscal Response
I’m Back
17
![Page 18: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/18.jpg)
With Spending Far Exceeding Tax Receipts
Monthly Data 12/31/1964 - 10/31/2010 (Log Scale)
(E0300)
Federal Outlays 10/31/2010 = 3430.7
( )
Federal Receipts10/31/2010 = 2172.4
( )
$ Billions
144
225
324
441
576
729
900
1089
1296
1521
1764
2025
2304
2601
2916
3249
144
225
324
441
576
729
900
1089
1296
1521
1764
2025
2304
2601
2916
3249
Federal Outlays 10/31/2010 = -2.3%
( )
Federal Receipts10/31/2010 = 4.7%
( )
-15 -12
-9-6-30 3 6 9
12151821242730333639
-15 -12
-9-6-30 3 6 9
12151821242730333639
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Federal Outlays and Receipts (12-Month Totals)
Federal Outlays and Receipts (Year-to-Year Changes) Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
18
Federal OutlaysFederal Receipts
Source: Ned Davis Research
During massive stimulus programs (like the New Deal), outlays widely outstrip receipts. ‘Ammunition’ for the next battle becomes dangerously low.
![Page 19: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/19.jpg)
And Federal Debt Rises
19
Quarterly Data 3/31/1952 - 6/30/2010 (Log Scale)
(E0507A)
Debt Measure Ratio
Gross Federal + State&Local + GSE* Debt ( ) 156. 8%Gross Federal + GSE Debt ( ) 136. 0%Gross Federal Debt ( ) 90. 6%Publicly Held Federal Debt ( ) 59. 7%
*GSE = Government Sponsored Enterprises e.g. Fannie Mae, Freddie Mac**Q1 2010 spike due to FAS 166/167
24
26
28
30
33
36
39
43
47
51
56
61
66
72
78
85
93
101
110
120
131
143
156
24
26
28
30
33
36
39
43
47
51
56
61
66
72
78
85
93
101
110
120
131
143
156
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Government Debt (Federal, State, Local) + GSE Debt as a % of GDP
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
U.S. Government Debt as a Percentage of Our GDP (post war period)
State and Local Government Debt
GSE (Fannie & Freddie) Debt
Treasury Bonds Outstanding
Treasury Bonds Held by the Public
American Recovery and Reinvestment Act of 2009
Source: Ned Davis Research
![Page 20: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/20.jpg)
So We’re Getting Some Political Tide-Shifting
20
![Page 21: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/21.jpg)
Economic Strength Is Shifting
21
BRICs - Brazil, Russia, India, China – (in billions of dollars)
Point: Emerging economies are growing and becoming more and more important
Sources: JP Morgan & Emerging Markets Management, Inc.
![Page 22: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/22.jpg)
And Emerging Markets Have Outperformed
22
Source: MSCI
Performance of International Markets Since E/M Bottom
![Page 23: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/23.jpg)
E/M Strength Has Also Been Driving Up Commodity Prices
23
Source: Ned Davis Research
(E780)
Weekly Data 6/05/1981 - 11/19/2010 (Log Scale)
Reuters Continuous Commodity Index (CCI)(Equal-Weighted)
Scale Right
Source: Commodity Research Bureau, www.crbtrader.com
191 206 222 240 258 278 300 323 349 376 405 436 470 507 547 589
Reuters/Jefferies-CRB Index (Equal-Weighted)
Scale Left
Source: Thomson Reuters/Jefferies Financial Products, LLC
122 131 142 154 166 179 194 209 226 244 264 286 309 333 360 389 421 455
CRB Spot Raw Industrials Index (Equal-Weighted)
Scale Right
Source: Commodity Research Bureau, www.crbtrader.com 219 232 245 260 275 291 308 327 346 366 388 411 435 461 488 517 547
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
2009
2010
Commodity Indexes I (Reuters-CCI)
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
![Page 24: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/24.jpg)
A Bright Spot Has Been Large U.S. Corporations
24
Quarterly Data 9/30/1955 - 9/30/2010
(S0670)
Four-Quarter Total SalesYear-to-Year Change
9/30/2010 Est. = 7.7%
-12
-9-6
-30
3
6
9
12
15
18
-12
-9-6
-30
3
6
9
12
15
18
Four-Quarter Trailing Reported (GAAP) EarningsYear-to-Year Change
9/30/2010 Est. = 146.9%
Shaded areas representNational Bureau of
Economic Research recessions.
-40
-20
0
20
40
60
80
100
120
140
-40
-20
0
20
40
60
80
100
120
140
After Tax Profit Margin
9/30/2010 Est. = 7.6%
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Standard & Poor's Industrials Sales, Earnings, and Profit Margin
Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
S&P Sales Growth, Earnings Growth, & Profit Margins
Source: Ned Davis Research
![Page 25: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/25.jpg)
Why Are Large U.S. Corporations Doing So Well?
The “blue chips” are selling globally and have tapped into the best growth areas well. Have extracted huge productivity gains in recent years Labor outsourcing has helped improve margins; global supply chain reduces costs and improves
quality. They’re benefiting from ultra-low borrowing costs right now. They have captured market share from small business and failed competitors.
25
Apple Store - Beijing McDonalds - Shanghai
![Page 26: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/26.jpg)
Conclusions: Part 1 Consumer deleveraging is ongoing and will continue to crimp growth. The crisis has generated deflationary tendencies, which are being fought aggressively
with monetary and fiscal stimulus. Government demand has partially substituted for private demand, but the recovery
remains subpar by historical standards. With a super-high debt level, the government has few “bullets” left. In any case, the
Tea Party crowd will probably fight any new stimulus. Active policy cycle means policy mistakes are a key risk:
•Too easy too long = inflation and asset bubbles.•Not easy enough = deflation and a dragged out Japan-style purgatory•Too much fiscal response = possible Greek/Irish-style debt crisis
There are two bright spots: both blue chip corporations and most emerging market countries are posting very decent growth.
26
![Page 27: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/27.jpg)
Part 2: The Fiscal Mess: Can We Overcome our Debt Burden?
![Page 28: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/28.jpg)
Federal Debt to GDP at a New High
(E0501)
Quarterly Data 3/31/1952 - 6/30/2010 (Log Scale)
Gross Federal Debt______________GDP
= $13201.8 billion___________ $14575.0 billion
= 90.6%
35.1
67.0
31.6 31.6
55.6
32
35
38
41
44
48
52
56
61
66
71
77
84
91
32
35
38
41
44
48
52
56
61
66
71
77
84
91
27.2
49.0
23.124.5
32.0
Publicly Held Federal Debt___________________ GDP
= $8706.6 billion ___________ $14575.0 billion
= 59.7%
2426283032343638404244464850525456586062
2426283032343638404244464850525456586062
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Federal Debt as a % of GDP
Publicly Held Federal Debt as a % of GDP Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
28
US Treasury Debt Relative to GDP (postwar period)
Source: Ned Davis Research
Is it possible to crawl out from under such a debt burden?
![Page 29: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/29.jpg)
U.S.
U.K.
It Is Possible
29
US and U.K. Post War Debt Burdens (Debt to GDP)
Source: Niall Ferguson
But … Demographics were much more
favorable in the ‘50s– 16 workers per retiree in 1950– 3 workers per retiree today
We were in our China-like growth phase.
Fewer built-up entitlements. WW2 had destroyed the
competitiveness of much of the rest of world.
The UK did a lot of the work with inflation.
![Page 30: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/30.jpg)
High Debt Has Led to A Crisis in Europe
30
PIGS = PORTUGAL
IRELANDGREECESPAIN
Yield Spread Over Treasuries
Source: Bloomberg, LP
![Page 31: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/31.jpg)
But It’s Not That Much Worse in the PIGS?
31
Source: IMF
Government Debt to GDP (mid-2010)
Harvard economist Niall Ferguson has coined the phrase the PIGS ‘R US.
![Page 32: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/32.jpg)
Unlike Japan, We Don’t Buy Our Own Debt
32
Source: Fusion IQ
![Page 33: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/33.jpg)
33
Source: Fusion IQ
![Page 34: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/34.jpg)
We Can Do It if We … Change the tax system and expenditures to foster growth. Accept that you cannot have a universal provision of social benefits. Eliminate debt via some inflation. Encourage a rebalancing of the economy away from consumption and toward
investment.
34
![Page 35: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/35.jpg)
If We Don’t Get Smart
35
=
We’re Doomed to This Outcome
![Page 36: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/36.jpg)
Japan Has Been in a Slow-Motion Depression for 2 Decades
36
Source: Gluskin Sheff & Associates
![Page 37: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/37.jpg)
Similarities
37
Source: Gluskin Sheff & Associates
![Page 38: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/38.jpg)
Similarities
38
Source: Gluskin Sheff & Associates
![Page 39: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/39.jpg)
Similarities
39
Source: Gluskin Sheff & Associates
![Page 40: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/40.jpg)
Part 3: Contango’s Investment Themes for 2011
![Page 41: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/41.jpg)
How to Invest in 2011
In a slow-growth low-yield world, growth and income should carry a premium.– Invest in growing global franchises with cross-border brand appeal.– Invest in companies with strong free cash flow – especially ones that pay decent
and fair dividends.– Avoid companies with high commodity input costs.– Emerging market assets are OK for now but a bubble may be developing.
Some inflation is a goal of the Fed – keep a real asset allocation except at exuberant extremes (TIPS, commodities, real estate, infrastructure, MLPs)
Avoid long-duration fixed-income assets when inflation is a Fed goal. Push cash (zero-duration paper) into 2-year corporate paper – the Fed is on hold for at
least 18 months. Avoid the detritus of the last bubble (domestic real estate and financials) for 5-10
years (tech stocks are finally rallying after crashing 10 years ago and look good). Stock markets will grind higher but we’re past the best part of the rally and …
– Multiples (P/E ratios) remain in a bear market.– Sideways patterns last for 15 or 20 years.– In this environment be tactical – not a buy-and-hold investor.
Use valuation measures to avoid extreme bubbles but allow for some momentum.
41
![Page 42: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/42.jpg)
100 Years of the Dow Highlights a Few Secular Bear Markets
42
Dow Jones Industrial Average (log scale)
Secular bear markets last an average of 15 years.
Source: Bloomberg, LP
![Page 43: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/43.jpg)
Don’t “Buy and Hold” During Secular Bear Markets …
43
Offer Big Trading Ranges – Just Don’t Be a Buy-and-Hold Investor
Source: Bloomberg, LP
![Page 44: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/44.jpg)
Part 4: Conclusions
![Page 45: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/45.jpg)
In Review
The debt bubble had many causes and ultimately burst in late 2008. “Soggy” growth to continue in the U.S. on the back of an ongoing consumer
deleveraging cycle. Across the globe, the bursting of the debt bubble has shifted risk from the private to
the public sector. Bond investors have become vigilantes against the worst offenders and are picking off
the Euro peripherals. But the peripherals are not in that much worse shape than the reserve countries. The emerging world is growing at a good clip but asset prices are getting frothy. Corporations are doing well and have tapped into pockets of growth around the world. Equities have rebounded from their lows but remain in a secular bear market.
45
![Page 46: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/46.jpg)
Common Sense Advice for CEOs & Directors
Try and tap into rapid growth in the emerging world (especially the BRICs).– Establish overseas sales channels in the BRICs.– Look for and try and sell to companies that have “cracked the code” and are
doing well in the emerging markets.– Some employees should be bilingual (Chinese, Spanish, Korean are important
languages).– Work on developing your brand.– Everyone’s online now – improve your non-US-facing web presence if you’re
looking to sell to the emerging markets. Geo-economic risks have made the currency markets quite volatile. Keep an eye on
the foreign exchange markets. Commodities remain in a long-term bull market. If you manufacture, watch all of your
commodity markets closely and consider hedging. Government customers will be much more frugal than in the past. Consumers will look for price points on the value side of the spectrum.
46
![Page 47: A Look Beyond the Crisis - Perry Piazza](https://reader036.vdocuments.net/reader036/viewer/2022070315/554f614db4c9058a148b47c1/html5/thumbnails/47.jpg)
47
This presentation is based on assumptions and market conditions known to Contango at the time this presentation material was prepared. Unless otherwise noted, all examples provided herein are hypothetical and for illustrative purposes only. Assumptions and market conditions are subject to change, which may affect Contango’s final recommendation after an Investment Policy Statement has been developed with the client.
Unless the investment is a deposit of a bank and insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency, investments used in portfolios created by Contango are subject to losses.
Return information provided is hypothetical unless otherwise indicated. Additionally, return information represents the opinion of Contango. Information provided is not intended to provide specific advice, nor to be construed as a recommendation with regard to any particular investment or to provide any guarantee of results. The information contained herein employs proprietary projections of expected returns. Past performance is no guarantee of future results.
When constructing portfolios, Contango may use certain components that are subject to quarterly, semi-annual or annual redemption provisions. This may affect the liquidity of the portfolio and availability of funds.
Contango is not responsible for any clerical, computational or other errors that may occur as a result of using data from outside sources, such as pricing information obtained from standard quotation services.
All dividends and distributions are reinvested in the asset classes indicated for each portfolio consistent with the weighting for that asset class.
If included in this presentation, model results do not represent actual trading and may not reflect the impact that material economic and market factors might have if Contango were actually managing your portfolio.
If performance figures are provided, they are gross of Contango’s investment advisory fees and do not reflect costs and expenses associated with portfolio transactions or taxes. Actual portfolio returns would be reduced by Contango’s investment advisory fees and other expenses incurred in the management of its investment advisory account. For example, if Contango were to manage a $1 million portfolio from January 1, 2009 to December 31, 2009, an 8.00% annual return figure would be reduced by a management fee of approximately 1.38%. Contango's management fees differ according to size and nature of the specific investment portfolio. Please see Contango's Form ADV for full details.
Disclosures
IMPORTANT NOTE: Investment products and services offered through Contango Capital Advisors, Inc., a registered investment adviser and a nonbank subsidiary of Zions Bancorporation, are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of amount invested.