ifbf economic summit june 27, 2016 - iowa farm bureau 2020-06-21 ·...

Our purpose: protect livelihoods and futures. Our values: IntegrityService Leadership Accountability Teamwork Passion Our purpose: protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfuturesOurvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurPurpose:Ourpurpose:protect livelihoodsandfutures.Ourvalues: IntegrityServiceLeadership AccountabilityTeamworkPassionOurpurpose:protect livelihoods and futures. Our values: IntegrityService Leadership Accountability Our purpose: protect livelihoods and futures. Our values:Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity ServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassion

Ch a r l es T. H ap p elC h i e f I nv e s t m e n t O f f i c e r

Market & Economic UpdateFBL Financial Group, Inc.IFBF Economic SummitJune 27, 2016

2

Economic Conditions & OutlookWhat’s really the problem?

Copyright 2016 Ned Davis Research

3

Economic Conditions & Outlook

How Does Growth Happen?

GDP = Labor + Productivity

4

Economic Conditions & Outlook

Change in Labor Force = Change in Working Age Population Change in Labor Force Participation Change in Hours Worked

60%

61%

62%

63%

64%

65%

66%

67%

68%

Participation Rate

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%Annualized Change in Working Age Population

Source: Bloomberg

How does growth happen?

5

Economic Conditions & OutlookHow does growth happen?

Change in Productivity function of: Capital Investment

Innovation and Entrepreneurship

$44,000

$49,000

$54,000

$59,000

$64,000

$69,000

$74,000

Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16

Capital Goods New Orders Non-Defense Ex Aircraft

Milli

ons

($)

11%

Source: Bloomberg

6

Economic Conditions & Outlook

What is holding us back?

Labor

Demographics

Immigration Policy

Taxes

Transfer Payments

Regulation– Minimum Wage– Licensing/Permitting

ACA – hire more part-time

Productivity (Cap Spending) Taxes

– Business and Personal

Regulations– 80,000 pages new and proposed in single year!– Licensing and permitting– ACA

Monetary Policy – ZIRP keeps zombies on life support

Litigation

Currency Fluctuations

Overall Policy Uncertainty

Debt

7

Economic Conditions & OutlookThe Killer D’s

Demographics, Debt, Deficits

% Change in Labor Force to 2025

Emerging Countries Developed Countries * Indonesia, Malaysia, Philippines, ThailandSource: Ned Davis Research

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

China India Mexico * MonsoonCountries

USA Europe Japan

8

Economic Conditions & OutlookWorld population growth rate 2005 - 2010.

Demographics are a headwind for our half of the world

Future global growth will be driven by MENA, Sub-Saharan Africa, India, and Mexico.

9

Economic Conditions & OutlookDebt vs GDP Growth (10-year labor force).

0%

2%

4%

6%

8%

10%

12%

14%

16%

0% 20% 40% 60% 80% 100% 120% 140% 160% 180%

Indonesia (15%)

Mexico (16%)

Germany (-4% )

China (1%)

US (6%)

Italy (1% ) Japan (-2%)

France (3% )

5yr A

nnua

lized

% N

omin

al G

DP

Private Domestic Debt as % 5yr Average GDP

India (15%)

Developed Countries

Emerging Countries

Source: Ned Davis Research

Debt is concentrated in regions with worst demographics.

10

$70

$80

$90

$100

$110

$120

$130

-0.20%

0.20%

0.60%

1.00%

1.40%

1.80%

2.20%Japan 10-year Gov’t Yield (Left)

Economic Conditions & OutlookJapan likely first to attempt monetization/helicopter money? Working-age population peaked in 1995. Growth has averaged <1% since 1990.

Japanese Yen Exchange Rate (Right)

Source: Bloomberg

The Developed Market Coal Mine Canary

—16 BP

11

Economic Conditions & OutlookGrowing at 2 percent is a home run with what we have to work with.

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Non-Farm Productivity

US Labor Force

Growth Potential

Real GDP – 5-year Average Growth Rates

Source: Bloomberg

Current potential growth rate < 1% (prod + labor)

12

Economic Conditions & OutlookMonetary policy providing liquidity during crisis (positive) while attempting to solve structural issues with massive monetary stimulus (negative).

How are we attempting to deal with these issues? A: Buy Bonds!

Global Central Bank Balance Sheet Growth

Copyright 2016 Ned Davis Research

13

Economic Conditions & OutlookWhat is intent? Stimulate M2 growth Reduce savings in favor of spending Stimulate borrowing Asset inflation – wealth effect

– No empirical evidence to support wealth effect – only exacerbates income inequality– “The wealth effect is one of the most fraudulent concepts in economics” - Lacy Hunt

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%

M2

Monetary Base

Source: Bloomberg

14

Economic Conditions & OutlookWhat is intent? Stimulate growth by incenting risk taking.

15

Economic Conditions & OutlookAny chance this could end badly?

16

Economic Conditions & OutlookFed is caught in a loop and a victim of global circumstances.

Ground Hog Day at FOMC

Fed Talks Hawkish

Market Go Risk – Off:

F Dollar RalliesF Spreads WidenF Volatility RisesF Stocks Fall

Fed Talks DovishMarket Go Risk – On:

F Dollar DeclinesF Spreads TightenF Volatility FallsF Stocks Rally

17

Economic Conditions & Outlook

Shadow chair of FOMC

Shanghai Accord?

Number of times Janet Yellen used specific words in her economic outlook speeches:

-

5

10

15

20

25

May 22, 2015 July 10, 2015 December 2, 2015 March 29, 2016

"China"

"Dollar"

"Global"

18

Economic Conditions & OutlookWill we have NIRP?

Japan: -0.29%

Germany: -0.48%

Unintended consequences – Buying safes and hoarding currency – deflationary

May actually have reduced M2 growth rates

Negative to banks, insurers, pensions, and savers

Swiss: -0.97%

France: -0.20%

United States: 1.08%

Sovereign 5-year Bond Yields (June 15, 2016)

Chris Waller, St. Louis Fed – “Negative Interest Rates: A Tax in sheep’s clothing.”Capitalism cannot function when you grossly distort the price of capital.

19

Economic Conditions & OutlookHigh, long-term correlation between nominal GDP growth and 10-yr yield. Difficult to sustain rise in rates until deleveraging cycle completed and growth rises.

Long-term proxy for 10yr = nominal GDP

10-yr BCA FV=1.53%-2.01% 1-yr forward

With exception of WWII, 30-yr yields at lowest going back to 1790

-5%

0%

5%

10%

15%

20%

GDP

10yr UST

USD GDP Nominal Dollars (YoY)

Source: Bloomberg, Ned Davis Research

Total Nonfinancial Debt as % of GDP

250% as of Q1 2016

Deleveraging?

What does this all mean for interest rates?

20

Economic Conditions & OutlookWhat does this all mean for interest rates? US consumer long-term inflation expectations breaking to new historic lows. Fed is not winning hearts and minds.

Inflation Expectations Continue to Fall

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16

Europe

Japan

Source: Bloomberg

US

21

Economic Conditions & OutlookFed Forecasts

The Fed has consistently overestimated growth and inflation

Officials had expected Funds rate to “normalize” at 4% - recently revised to close to 3% and Janet Yellen said it might be 2%

Yellen finally has acknowledged structural headwinds of demographics and production growth

Pace of any future hikes will be SLOW

22

-2%

-1%

0%

1%

2%

3%

4%

Recessionary Periods

Economic Conditions & OutlookRecession?Treasury yield curve flattening but not yet signaling recession. Is the curve distorted?

Source: Bloomberg

10-Year Yield minus 2-Year Yield

23

Economic Conditions & OutlookWhen do rates rise?

Over varying degrees of time, structural tailwinds become headwinds for bonds:

Weak cap ex and productivity growth ultimately results in supply constraints (long way to go)

Aging demographics eventually leads to reduced savings rates (Japan first) Low commodity prices move from being a detriment to a positive for growth – tax

break for the consumer (could happen very soon) Actions taken to reduce income inequality may shift money to those with higher

propensity to consume (depends on election) Populist backlash supports increased fiscal stimulus and debt monetization (next

recession?)

When rates do begin to rise meaningfully, it may happen bigger and faster than is now widely expected.

Global Bond yields likely remain low for longer period since deleveraging cycle is far from complete. Ultimate low may not occur until next recession.

24

Economic Conditions & OutlookS&P 500 vs QE. Asset prices have responded to QE. Until recently, an earnings supported market as well.

0

500

1000

1500

2000

2500

June-07 June-08 June-09 June-10 June-11 June-12 June-13 June-14 June-15 June-16

QE 1 Expanded

QE 1 Ends

QE 2 Announced

QE 2 Ends

Operation Twist Announced

QE 3 Announced

QE 3 Expanded, Operation Twist Ends

QE 3 Taper Announced

QE 3 Taper Ends Fed Rate Hike

QE 1 Announced

Source: Bloomberg

Equity Markets (S&P 500)

25

Economic Conditions & OutlookUS fund flows since recession. An unloved bull market.

Copyright 2016 Ned Davis Research

The Great Rotation?

26

Economic Conditions & OutlookValuations are not compelling, but that is true for most assets. Debt issuance supporting M&A buybacks and dividends, not cap-ex.

Copyright 2016 Ned Davis Research

S&P 500 Median Price/Earnings Ratio

27

Economic Conditions & OutlookHistoric data (Reinhart Rogoff) indicates hangover from financial crisis recession lasts 5-10 years. We are at year 8. Also wage growth we are starting to see historically is consistent with stronger GDP growth.

Source: Bloomberg

1.0%

1.5%

2.0%

2.5%

3.0%

4%

5%

6%

7%

8% Unemployment Rate (Left)

3-month Rolling Avg. Hourly Earnings YoY (Right)

Turning Point?

28

Economic Conditions & OutlookIf dollar stabilizes, commodities and emerging markets likely perform better.

$70

$75

$80

$85

$90

$95

$100

$105

$250

$300

$350

$400

$450

$500

$550

$600

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

US Dollar (Right)

Commodity Price Index (Left)

Source: Bloomberg

Turning Point

29

Economic Conditions & OutlookRisk factors – just as things are starting to work.

So if things are starting to work, what could go wrong?

30

Economic Conditions & Outlook

What Could Go Wrong?

Both candidates seem intent on focusing on structural economic issues

– Intent on making them worse

Political risk is severe – populist backlash untimely and dangerous

Deleveraging cycle far from complete

Millennials support bigger government – wrong answer

31

Economic Conditions & Outlook

Richard Fisher – former President of Federal Reserve – Bank of Dallas, recently spoke at investment conference in Dallas.

Question: Could you describe the position of your personal portfolio?

So What Should You Be Doing?

32

Economic Conditions & Outlook

Answer: FETAL

“All of the smart people I know are holding substantial cash.”Richard Fisher

33

Economic Conditions & Outlook

What Should You Be Doing?

True global diversification – US equities likely should not be largest allocation

Do not invest with assumption that rates rise dramatically and soon

Safety is not inherent to any asset class but is a function of valuation

Gold is not an inflation hedge but a hedge against loss of confidence in central banks

Hold cash reserve for deployment during next phase of crisis

34

Economic Conditions & Outlook

Reasons to be long-term optimists.

The degree to which the NAFTA region is outperforming the remainder of the developed world is grossly understated

Generation after the millennials will be very different

Technology/Biotechnology will solve healthcare crisis (and education) if government gets out of the way (Remember the energy crisis?)

US is still the innovation leader of the world

Structural issues are worse in other parts of the developed world – hopefully, we can learn from their failures

35

Economic Conditions & Outlook

Our purpose: protect livelihoods and futures. Our values: IntegrityService Leadership Accountability Teamwork Passion Our purpose: protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfuturesOurvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurPurpose:Ourpurpose:protect livelihoodsandfutures.Ourvalues: IntegrityServiceLeadership AccountabilityTeamworkPassionOurpurpose:protect livelihoods and futures. Our values: IntegrityService Leadership Accountability Our purpose: protect livelihoods and futures. Our values:Integrity Service Leadership Accountability Teamwork Passion Our purpose: protect livelihoods and futures. Our values: Integrity ServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassionOurpurpose:protectlivelihoodsandfutures.Ourvalues:IntegrityServiceLeadershipAccountabilityTeamworkPassion

F B L F i n a n c i a l G r o u p , I n c .F a r m B u r e a u L i f e I n s u r a n c e C o m p a n y