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Trade Credit & Political Risk LA RIMS Meeting
www.hubinternational.com
http://www.rims.org/
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HUB INTERNATIONAL
• Corporate headquarters in Chicago, IL
• Privately held company with partners that include Hellman & Friedman LLC
• Specialize in middle-market and large corporate clients
• Fastest growing broker in US
• Top 10 US/global broker, $1.25B Rev in 2013
• One of the largest Management Liability Practices in CA
• Dedicated Trade Credit and Political Risk Specialists in CA
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WHAT IS TRADE CREDIT & POLITICAL RISK
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WHAT IS TRADE CREDIT INSURANCE?
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WHAT IS TRADE CREDIT INSURANCE?
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WHAT IS POLITICAL RISK INSURANCE?
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WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
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WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
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WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
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WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
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WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
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WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
Shareholder #1
Shareholder #2
Shareholder
#4
Shareholder #3 Shareholder
#5 Shareholder
Shareholder
Shareholder
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WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
Trade Credit & Political Risk Insurance
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TRADE CREDIT & POLITICAL RISK 101
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WHY PURCHASE TRADE CREDIT / POLITICAL
RISK INSURANCE?
Top reasons for purchasing Trade Credit and/or Political Risk Insurance:
• Expand sales domestic/export to new and existing customers
• Foreign investment and business income protection • Balance sheet protection / stabilize cash flow • Concerns about economic & political changes • Concerned about customer concentration • Obtain attractive bank financing or borrow against trade
receivables • Interested in replacing letters of credit (L/C’s) • Reduce bad debt reserves • Supplement credit risk management
Claims
HUB Trade Credit Specialists
Vanessa De La Cruz Damion Walker Steven Knartzer
Office: 310-568-7618
Office: 949-623-1030
Office: 949-623-1043
Mobile: 626-376-7540
Mobile: 213-219-1991
Mobile: 714-724-9592
[email protected] [email protected] [email protected]
TRADE CREDIT INSURANCE
HUB Trade Credit Specialists Vanessa De La Cruz
Damion Walker
Office: 310-568-7618
Office: 949-623-1030
Mobile: 626-376-7540
Mobile: 213-219-1991
[email protected] [email protected]
n today’s rapidly changing world, where companies are looking for growth beyond domestic boarders and
return on investment is paramount to the business’ survival, a growing organization cannot afford a major loss
in cash flow due to default of one or more of its customers. Trade Credit Insurance provides protection for
companies that sell goods or services on credit terms against the risk of non-payment due to a customer’s
insolvency, protracted default, political risks or acts of war that prevent contract performance and failure to
perform obligations under contract. Covered perils include:
IInnssoollvveennccyy For the United States: Chapter 7, 11 Filing Foreign bankruptcy per country of buyer’s domicile
PPrroottrraacctteedd DDeeffaauulltt Simple non-payment, usually verified by third party Continued delinquency / non-payment
PPoolliittiiccaall RRiisskk Confiscation, Expropriation, Nationalization Currency Inconvertibility / Transfer Risk Political Violence
The HUB Trade Credit Insurance team provides a team of dedicated specialist brokers to each client ensuring a
superior experience in terms of program design, analytical support and coverage negotiation capabilities, daily
program management, coverage certainty in insurance documents and proactive, experienced claims management
to ensure your claims are paid quickly and accurately. Fully integrated within HUB International, HUB’s Trade
Credit team has the scale and flexibility to service any organization from small start-ups to the largest multinational.
HUB is a member of the Worldwide Broker Network which provides boots on the ground in more than 75
countries worldwide with unmatched flexibility to service our clients where and when they need us most.
TToopp rreeaassoonnss ffoorr PPuurrcchhaassiinngg TTrraaddee CCrreeddiitt//PPoolliittiiccaall RRiisskk IInnssuurraannccee::
Concerns about economic & political changes Expand sales domestic/export to new and existing customers
Concerned about customer concentration Obtain attractive bank financing or borrow against trade receivables
Interested in replacing letters of credit (L/C’s) Balance sheet protection / stabilize cash flow Reduce bad debt reserves Supplement credit risk management
Whether you want to grow your business in domestic or international markets or simply protect your cash flow
from a catastrophic customer event, HUB has the tools, resources and most importantly the people to support
your firm’s risk management needs. We provide your business with market leading credit insurance solutions that
are tailored to fit your organization.
I
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WHAT IS TRADE CREDIT INSURANCE?
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WHAT IS POLITICAL RISK INSURANCE?
Political Risk Insurance: Political risk insurance (PRI) is a tool for businesses to mitigate and manage risks arising from the adverse actions or inactions of governments. As a risk-mitigation tool, PRI helps provide a more stable environment for investments into developing countries, and to unlock better access to finance.
- Political violence, such as revolution, insurrection, civil unrest, terrorism or war;
- Governmental expropriation or confiscation of assets;
- Governmental frustration or repudiation of contracts;
- Wrongful calling of letters of credit or similar on-demand guarantees;
- Business Interruption
- Inconvertibility of foreign currency or the inability to repatriate funds
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In Millions of USD Project BS
Cash & Equivalents 300.00 Short Term Investments - Accounts Receivable - Trade, Net 1,000.00 Receivables - Other - Total Inventory 600.00 Prepaid Expenses -
Other Current Assets, Total 10.00
Total Current Assets 1910.00
Property/Plant/Equipment, Total - Net 900.00
Goodwill, Net 750.00 Intangibles, Net 100.00 Long Term Investments -
Other Long Term Assets, Total 5.00
Total Assets 3665.00
NOT INSURED
PARTIALLY INSURED (PROP)
PARTIALLY INSURED (PROP)
INSURED In USA
Projected Foreign Operations Balance Sheet
NOT INSURED
WHAT IS TRADE CREDIT & POLITICAL RISK INSURANCE?
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ECONOMIC OVERVIEW
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DAN NORTH EULER HERMES
Dan North Chief Economist, Euler Hermes North America Dan North has been with Euler Hermes North America since 1996, using macroeconomic and quantitative analyses to help manage Euler’s risk portfolio of more than $120 billion in annual U.S. trade transactions. As an economist he has appeared on CNBC, Fox Business News, France 24, and Bloomberg Radio and Television. He has been quoted by Barron’s, Business Week, Paris Le Monde, Tokyo Nikkei, the New York Times and the Wall Street Journal. After having predicted the 2008/2009 recession and its implications accurately, he was ranked 4th on Bloomberg’s list of the 65 top economic forecasters in 2010. Mr. North holds an MBA from the Wharton School of Business.
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Euler Hermes Economics / Dan North & HUB International / Damion Walker
RIMS, Los Angeles, CA August 20th, 2014
The Outlook for the U.S. Economy
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Euler Hermes: Global Leader in Trade Credit Insurance Founded in 1893 AA- S&P Rating and A+ AM Best Rating Offices in 52 countries providing coverage in over 200 foreign markets Backed by blue-chip ownership of the Allianz Group Insure over $120 Billion in US sales and over $1 Trillion globally. International Risk Database monitors over 45 million companies worldwide
Credit Insurance: Protection against bankruptcy and slow payment losses Safer sales growth in the US or overseas Knowledge to better manage risk Improved borrowing options Credit function support Reduce bad debt reserves Get paid for what you sell
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The Outlook August, 2014
• Cautious optimism, still weak growth, lots of risks • Global growth 2.8% in 2014, vs 2.4% in 2013, most
coming from emerging markets (4.3% vs 4.2%), China (7.5% vs 7.7%) and India (5.6% vs 5.0%)
• Eurozone (1.0% vs -0.4%) • U.S. growth a modest 2.1% in 2014, vs. 2.2% in 2013, due
to our debt crisis and structural unemployment • Forces and measures • Government responses
• Conclusions
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The four forces which started and ended the recession can help forecast the outlook: • Oil • Fed policies • Fear in financial markets • Housing
Gross Domestic Product (GDP): Everything produced by the economy. It’s the “size” of the economy; $17T, ave. growth 3.3%. Broadest measure of economic health. Use it to measure the “size” of other big numbers like budget deficit/debt..
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-5%
0%
5%
10%
-200%
-100%
0%
100%
200%
300%
400%19
7119
7319
7519
7719
7919
8119
8319
8519
8719
8919
9119
9319
9519
9719
9920
0120
0320
0520
0720
0920
1120
13
Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks often contribute to recessions
Oil Price Shocks and the Economy
290%
140%
56%38%21% 28% 36%
-36%
28%
32%
-
25
-5%
0%
5%
10%
-200%
-100%
0%
100%
200%
300%
400%19
7119
7319
7519
7719
7919
8119
8319
8519
8719
8919
9119
9319
9519
9719
9920
0120
0320
0520
0720
0920
1120
13
Real Crude Prices (average of Brent,Dubai, WTI spot prices), Y/Y% growthReal GDP, Y/Y% growth
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks often contribute to recessions
Oil Price Shocks and the Economy
290%
140%
56%38%21% 28% 36%
-36%
28%
32%
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks often contribute to recessions
Oil Price Shocks and the Economy
290%
140%
56%38%21% 28% 36%
-36%
28%
32%
1%
-1%
Source: Dept. of Commerce, Dept. of Labor, World Bank, EHACI
oil price shocks often contribute to recessions
Oil Price Shocks and the Economy
290%
140%
56%38%21% 28% 36%
-36%
28%
32%
1%
-1%
…with a lag…
2014 ytd falling; tailwind in ’14 yld
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-300
-200
-100
0
100
200
300
400
500
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
source: Federal Reserve, BEA
Yield spread:10yr-3 mo Treasuries (bps)
The Treasury Yield Spread (Curve) vs. GDPFed Policy
yld
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-300
-200
-100
0
100
200
300
400
500
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
source: Federal Reserve, BEA
Yield spread:10yr-3 mo Treasuries (bps)
Real GDP Growth,Y/Y % Change
The Treasury Yield Spread (Curve) vs. GDPFed Policy
CI
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Fear in the Credit Markets
hsng
7%
8%
9%
10%
11%
12%2Q
742Q
762Q
782Q
802Q
822Q
842Q
862Q
882Q
902Q
922Q
942Q
962Q
982Q
002Q
022Q
042Q
062Q
082Q
102Q
122Q
14
Commercial & Industrial Loans Outstanding as a % of GDP
source: Federal Reserve
improving but still not
recovered
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Housing
fund
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
U.S. Housing Market
sources: S&P Case Shiller, Census
Real GDP growth (left axis)
Case-Shiller Home Price Index(right axis) bubble bursts 2006,
leads recession... ...but recovers in 2009, helping us out...
...then slowed us down again...
...recovery
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Housing
recp
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
0
500
1,000
1,500
2,000
2,500Ju
l-04
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Jul-1
3
Jul-1
4
U.S. Housing MarketFundamental Measures, Seasonally Adjusted Annualized Rates
sources: National Association of Realtors, Census
Existing Sales;-3% y/y, -30% from peak (rhs)
New Sales;-12%, -71%
Starts;+22%, -53%
Permits;+8%,-54%
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Recap • Four forces caused/ended recession • Oil prices slight tailwind • Yield spread positive • Lending good • Housing recovering (but sporadically) • So things are looking up, but…
recp
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Recap • Four forces caused/ended recession • Oil prices slight tailwind • Yield spread positive • Lending good • Housing recovering (but sporadically) • So things are looking up, but…
• Headwinds: • GDP, income, confidence weak • Labor market with structural problems • Fiscal policy with drag of taxes and debt • Monetary policy with long term inflation risk • Uncertainty of Dodd-Frank, true costs of Obamacare,
2014 elections
• Those are the forces… what do the measures say? gdp
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GDP very weak
pce
-10%-8%-6%-4%-2%0%2%4%6%8%
10%Real Gross Domestic Product (GDP)
annualized quarterly growth rate
source: BEA
still < 4.6% recovery ave
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The Consumer... The Ability to Spend, Income
conf
-4%-3%-2%-1%0%1%2%3%4%5%6%7%
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
Jun-
13
Dec
-13
Jun-
14
source: BEA
Real Personal Consumption Expenditures (PCE) & Disposable Personal Income (DPI) y/y % growth rate
consumptiontepid
long-term average
taxes hurt DPI
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brupt
Confidence… The Willingness to Spend
80
90
100
110
20
40
60
80
100
120Ju
l-07
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Jul-1
3
Jul-1
4
Consumer and Small Business Confidence
Small Bus.Optimism100 = 1986
Consumer confidence (left)>100 economy strong>90 stable
source:Conference Board, NFIB
95.7
90.9
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Business bankruptcies still falling
mfr
0
5,000
10,000
15,000
20,000
25,000
30,0004Q
82
4Q84
4Q86
4Q88
4Q90
4Q92
4Q94
4Q96
4Q98
4Q00
4Q02
4Q04
4Q06
4Q08
4Q10
4Q12
4Q14
U.S. Business Bankruptcy Filings
40-50% annual growth rates from 2008 - 2009
source: Administrative Office of the U.S. Courts, Euler Hermes
full year forecast2014 -10%
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Manufacturing rebounding
job
-20%
-15%
-10%
-5%
0%
5%
10%Ju
l-04
Jul-0
5
Jul-0
6
Jul-0
7
Jul-0
8
Jul-0
9
Jul-1
0
Jul-1
1
Jul-1
2
Jul-1
3
Jul-1
4
Manufacturing Industrial Production, y/y
4.9%LT ave 3.5%
source: Federal Reserve
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But employment still worrisome
Cuml jbs
4%
5%
6%
7%
8%
9%
10%
-1,000
-800
-600
-400
-200
0
200
400
600Non-Farm Payroll Jobs Created (000's) (left scale)
Jobs Created and the Unemployment Rate
source: Labor Department
UnemploymentRate (right axis)
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But employment still worrisome
Cuml jbs
-10,000
-8,000
-6,000
-4,000
-2,000
0
2,000
0 6 12 18 24 30 36 42 48 54 60 66 72 78
'80 '74 '81 '90 '01
source: BLS, Euler Hermes
Cumulative Job Loss By Months of Recession, 000s
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But employment still worrisome
Cml jbs
-10,000
-8,000
-6,000
-4,000
-2,000
0
2,000
0 6 12 18 24 30 36 42 48 54 60 66 72 78
Cumulative Job Loss By Months of Recession, 000s
'80 '74 '81 '90 '01 '08
source: BLS, Euler Hermes
6+ years later, just breaking even...
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But employment still worrisome
unem
-10,000
-5,000
0
5,000
10,000
15,000
0 6 12 18 24 30 36 42 48 54 60 66 72 78
Cumulative Job Loss By Months of Recession, 000s
'80
'74'81'90
'01
'08
source: BLS, Euler Hermes
6+ years later, just breaking even...should have 5-10M more jobs
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But employment still worrisome
part
4%
5%
6%
7%
8%
9%
10%
-1,000
-800
-600
-400
-200
0
200
400
600Non-Farm Payroll Jobs Created (000's) (left scale)
Jobs Created and the Unemployment Rate
source: Labor Department
UnemploymentRate (right axis)
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Structural unemployment, not just cyclical
bev
58%
60%
62%
64%
66%
68%7/
50
7/54
7/58
7/62
7/66
7/70
7/74
7/78
7/82
7/86
7/90
7/94
7/98
7/02
7/06
7/10
7/14
Labor Force Participation Ratelabor force / population
source: BLS
recession starts
Structural unemployment: plungingparticipation rate - people give up, rely on incentives not to work, and Boomers aren't replaced fast enough
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Structural unemployment, not just cyclical
bev
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
3% 4% 5% 6% 7% 8% 9% 10% 11%unemployment rate
job
open
ing
rate
sourece: BLS
Job Opening Rate vs. Unemployment Rate
"normal" recovery
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Structural unemployment, not just cyclical
dur
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
3% 4% 5% 6% 7% 8% 9% 10% 11%unemployment rate
job
open
ing
rate
sourece: BLS
Job Opening Rate vs. Unemployment Rate
unemployment should be here
Structural unemployment: skills mismatch due in part to training / education and in part immobility / housing market
2009-'14 recovery
"normal" recovery
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Structural unemployment, not just cyclical
imped
05
10152025303540457/
507/
547/
587/
627/
667/
707/
747/
787/
827/
867/
907/
947/
987/
027/
067/
107/
14
Average Duration of Unemployment, Weeks
source: BLS
41Structural unemployment: those unemployed a very
long time become unemployable
32
21
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Structural Unemployment is a Major Impediment to Growth
• Plunging participation rate – incentives not to work,
Boomers not being replaced fast enough. • Change incentives (35 states pay > minimum wage
in welfare benefits, 13 pay > $15/hr, 6 states pay > starting computer programmer)
• More skilled legal immigration
• Skills mismatch due in part to education / training and in part to immobility from underwater houses. • Need more vocational education / training, housing
improving. • More skilled legal immigration
• Long time unemployed become unemployable. recap
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Recap
• Four forces caused/ended recession • Oil prices slight tailwind • Yield spread positive • Lending good • Housing recovering (sporadically) • Manufacturing rebounding • Headwinds: Weak income, confidence, structural
unemployment, uncertainty
• GDP, recovery still weak • Employment situation still terrible • To fix it, the government has been causing two big
long-term problems: Debt & Potential Inflation
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FISCAL POLICY
Congress, Administration Spending, taxing, borrowing
deficits/debt, budgets…
math
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• Year 1: spent $80 • Original budget for year 2: spend $110 • Final budget for year 2: spend $90
• In most places spending $10 more the second year would be an increase in spending.
• Not in Washington. This is what they call a $20 “cut”; they wanted to spend $110 but only get to spend $90.
• Both sides do this every time.
Budget Math in Washington
def
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51
Gov’t spends $10
Gov’t gets tax revenue $8
Deficit $2
Treas. gets loan, issues $2 notes/bonds
Spending, Deficits and Debt
tax
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Spending, Deficits and Debt
Gov’t spends $10
Gov’t gets tax revenue $8
Deficit $2
Treas. gets loan, issues $2 notes/bonds
This $2 is a TAX our kids will have to pay (and we’re not paying enough tax?)
How big is $2T? Don’t know - measure against size of the economy - GDP
Dbt GDP
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1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%
Accumulated deficits become debt…
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%19
6419
6719
7019
7319
7619
7919
8219
8519
8819
9119
9419
9720
0020
0320
0620
0920
1220
1520
1820
2120
24
Federal Debt as a % of GDP
source: CBO, Euler Hermes
Dbt GDP
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1991-2007U.S. 63%Italy 110%Germ. 58%UK 42%
More debt = slower recovery
Accumulated deficits become debt…
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%19
6419
6719
7019
7319
7619
7919
8219
8519
8819
9119
9419
9720
0020
0320
0620
0920
1220
1520
1820
2120
24
Federal Debt as a % of GDP
source: CBO, Euler Hermes
pie
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2012 Outlays, $3.5T HUD, Labor, Edu. Ag., State, Justice, Trans. , Energy, Homeland Sec, Treasury, Commerce,
Interior, EPA
Health, 23%
Social Security, 22%
Income Security, 15%
Interest, 6%
Defense, 19%
Discretionary, 14%
def
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HUD, Labor, Edu. Ag., State, Justice, Trans. , Energy, Homeland Sec, Treasury, Commerce,
Interior, EPA
deficit Health, 23%
Social Security, 22%
Income Security, 15%
Interest, 6%
Defense, 19%
Discretionary, 14%
Even w/sequester, total outlays still rise: 2013 = 3.45, 2014 = 3.52, 2015 = 3.77
2012 Outlays, $3.5T
entl
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Entitlements • Entitlement spending, particularly Medicare or some
other form of national healthcare, will be the issue for our time.
• One generation will not be getting the benefits they think are owed.
• Another generation will be taxed to exhaustion to try to provide them.
• 2030 Medicare fund exhausted, can only pay 85% of claims.
• 2034 Social Security trust fund exhausted, can only pay 77% of benefits (Disability fund 2016).
• But it is not hopeless, the math is simple, legal immigration could help.
• No political will to fix it. revw
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Fiscal Policy Review
• There has been no plan, no budget for four years. • Latest agreement to keep government running? Spend
more and tax more. • No plan to reform entitlements. • Tax reform badly needed- world’s highest corporate
rate. • Still borrowing more every day… $billions this week
alone. • Debt is a drag and it is not coming down. • It’s not politics, it’s just bad policy to burden the next
generation with debt that’s not even theirs.
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MONETARY POLICY
The Federal Reserve Bank, Janet Yellen, Ben Bernanke
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60
MONETARY POLICY • Lowering the short term Fed Funds interest rate
usually works
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MONETARY POLICY • Lowering the short term Fed Funds interest rate
usually works • But this time needed an extra boost, lowering long
term interest rates - Quantitative Easing (QE): • Fed prints new $ bills • Buys Treasury/MBS bonds in open market • Raises bond prices, lowering interest rates (prices and
rates move in opposite directions) • Puts $ into financial system as excess reserves • And creates inflationary pressures
• Now tapering QE3-4 which likely had limited effect. • Bernanke: QE2 = 15 - 45bps, each round less effective • Rates near record lows, plenty of excess reserves –
banks don’t want to lend them and demand weak. QE wrk?
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62
Did QE2 work?
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4/
107/
109/
1011
/10
1/11
3/11
5/11
7/11
9/11
11/1
11/
124/
126/
128/
1210
/12
12/1
22/
134/
136/
138/
1310
/13
1/14
3/14
5/14
Yield on 10 year Treasury Note
source: Federal Reserve
QE2
hoped for this
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63
Did QE2 work?
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4/
107/
109/
1011
/10
1/11
3/11
5/11
7/11
9/11
11/1
11/
124/
126/
128/
1210
/12
12/1
22/
134/
136/
138/
1310
/13
1/14
3/14
5/14
Yield on 10 year Treasury Note
source: Federal Reserve
QE2
but got this: recordrate of increase
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64
Did QE2 work?
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4/
107/
109/
1011
/10
1/11
3/11
5/11
7/11
9/11
11/1
11/
124/
126/
128/
1210
/12
12/1
22/
134/
136/
138/
1310
/13
1/14
3/14
5/14
Yield on 10 year Treasury Note
source: Federal Reserve
Arab SpringJapan euro
worries
risk aversion
oil prices, weak data, US & euro worries
QE2 ends
QE2
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65
QE does not work, does not address problem… already record low rates and have huge excess reserves. Banks averse to lending them and demand weak.
Did QE2 work?
X res
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%4/
107/
109/
1011
/10
1/11
3/11
5/11
7/11
9/11
11/1
11/
124/
126/
128/
1210
/12
12/1
22/
134/
136/
138/
1310
/13
1/14
3/14
5/14
Yield on 10 year Treasury Note
source: Federal Reserve
Arab SpringJapan euro
worries
risk aversion
oil prices, weak data, US & euro worries
QE2 ends
QE3mrtgs +90 bps
QE4+130 bpsQE2
taper-50 bps
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66
QE created massive amounts of unused money
X res
0%
5%
10%
15%Ju
n-04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Excess Reserves as a %of GDP
source: Fed BEA
ave = 0.03%
-
67
QE created massive amounts of unused money
notes
15%, 580x ave
0%
5%
10%
15%Ju
n-04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Excess Reserves as a %of GDP
source: Fed BEA
ave = 0.03%
-
68
0%
5%
10%
15%Ju
n-04
Jun-
05
Jun-
06
Jun-
07
Jun-
08
Jun-
09
Jun-
10
Jun-
11
Jun-
12
Jun-
13
Jun-
14
Excess Reserves as a %of GDP
source: Fed BEA
ave = 0.03%
FF unchanged 68 mos; previous record, 18 mos. Real FF negative 57 mos; previous record 37 mos. Fed hasn’t tightened in ten years… …and growth is still weak.
The futility of monetary policy
Ast infl
15%, 580x ave
-
69
QE also meant to inflate assets, spur consumption.. didn’t work, big risk reversing it.
recap
7.8%
24.2%
3.7%3.8%
10.5%
3.0%
-1.1% -0.7% -1.1%-5%
0%
5%
10%
15%
20%
25%
30%
2012 2013 2014 ytd
StocksHousesConsumption
Performance Above/Below Long-Term Averagesreal y/y growth rates
sources: S&P, BEA
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70
RECAP • Monetary policy impotent w/big inflation risk.
Asset inflation here now. • Fiscal policy a mess but can be fixed in long
term. Significant debt load and uncertainty now. • Neither fixing structural unemployment caused
by mis-matched skills, incentives not to work, demographics.
• But despite those long-term risks, stable oil prices, positive yield curve, lending, rising confidence, falling bankruptcies indicate continued modest growth.
• And more good news, rebound in manufacturing!
ulc
-
71
Unit Labor Cost (ULC): labor cost to make one widget
U.S. Country X Hourly wage $20 $15 Hrs. to make one widget (productivity)
1 2
Unit labor cost
$20 $30
ulc
-
72
U.S. Manufacturing Very Competitive; low wage growth+high productivity=low ULC
china
50
100
150
200
U.S.
JapanKorea
Germany
Canada
Italy
Taiwan
Unit Labor Costs
source: BLS
-
73
The ULC Gap with China is Closing
$0
$5
$10
$15
$20
$25
$30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Effective Manufacturing Wage Gap
assumptions:wages and yuan grow at historical rate 2006-19U.S. worker 3.4x as productive
$17
$7
China
U.S.
Not nuf
-
74
$0
$5
$10
$15
$20
$25
$30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Effective Manufacturing Wage Gap
assumptions:wages and yuan grow at historical rate 2006-19U.S. worker 3.4x as productive
$17
$7
China
U.S.
The ULC Gap with China is Closing
The $7 benefit maybe not enough to offset: • Quality • Lower trans. cost • Lower inventory cost • Time to market • Keeping technology
ulc
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75
gas
-8%
-6%
-4%
-2%
0%
2%
4%
6%2Q
09
2Q10
2Q11
2Q12
2Q13
2Q14
All IndustriesManufacturing
-6.5%
+4.6%
Growth in Unit Labor Costs Since End of Recession
source: BLS
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76
Big Advantage, Cheap Energy
NG vh
02468
101214161820
7/07
7/08
7/09
7/10
7/11
7/12
7/13
7/14
Price of Natural Gas, $/MMBtu
U.S.
JapanKorea
China
U.K.Germ.
source; Energy Intelligence
-
77
Nat Gas cars represent huge potential. Only a few Nat Gas passenger cars available in US;
Honda Civic, Dodge, Chevy, Ford pickups
Source: NGV Journal, WSJ
CountryNatural Gas
Vehicles%of total
Iran 3,300,000 19%Pakistan 3,100,000 18%Argentina 2,183,487 13%Brazil 1,733,469 10%China 1,500,000 9%India 1,500,000 9%Italy 746,470 4%Others 2,875,326 17%U.S. 112,000 1%Total 17,050,752 100%
Heavy Duty Trucks: • of all sold, 1% nat gas in 2013, 5% in 2014 • Lowe’s 100% by ‘17 • P&G 7% to 20% in 2 yrs. • UPS buying 1,000 by end ‘14 • FedEx 30% in 10 yrs. Experiments underway in trains and planes
Auto sale
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78
8
9
10
11
12
10
12
14
16
18
2019
95
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
millions of units(left axis)
Auto Sales and Age of Fleet
source: Autodata, Bureau of Transportation Statistics, Consensus Forecasts
median age, years, US light vehicles
(right axis)
16.5
11.4
16.1 15.5
Manufacturing Indicators; Autos
concl
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79
Conclusions, Global
•Global growth 2.9% in 2014, vs 2.3% in 2013, most coming from; •Emerging markets (4.3% vs 4.1%) •China (7.5% vs 7.6%) and •India (5.3% vs 4.4%) •Europe (1.0% vs -0.4%)
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80
Conclusions, U.S. Positives
•Ultra loose monetary policy will eventually help •Yield spread positive •Stable oil prices •Bank lending •Housing market recovery •Confidence rising slowly •Bankruptcies falling •Manufacturing re-birth; cheap energy, U.S. workers highly productive, slow wage growth
Negatives •High structural unemployment •Weak confidence, consumption, income •Housing market small, risky •Debt, taxes •Future inflation risk •Uncertainty from WDC (2014 elections) •Geopolitical uncertainty
GDP growth a modest 2.1% in 2014, not terrible, not great…
-
Thank you for your attention.
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82
TRADE CREDIT & POLITICAL RISK SPECIALISTS
Damion Walker Senior Vice President Office: 949-623-1030 Mobile: 213-219-1991
Vanessa De La Cruz Senior Vice President Office: 310-568-7618 Mobile: 626-376-7540
THANK YOU
http://www.rims.org/http://www.rims.org/
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83
Disclaimer
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other forward-looking statements that are based on management’s current views and
assumptions and involve known and unknown risks and uncertainties that could
cause actual results, performance or events to differ materially from those expressed
or implied in such statements. In addition to statements which are forward-looking by
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"anticipates", "believes", "estimates", "predicts", "potential", or "continue" and similar
expressions identify forward-looking statements. Actual results, performance or
events may differ materially from those in such statements due to, without limitation,
(i) general economic conditions, including in particular economic conditions in the
Euler Hermes Group’s core business and core markets, (ii) performance of financial
markets, including emerging markets, and including market volatility, liquidity and
credit events (iii) the frequency and severity of insured loss events, including from
natural catastrophes and including the development of loss expenses, (iv)
persistency levels, (v) the extent of credit defaults, (vi) interest rate levels,
(vii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (viii)
changing levels of competition, (ix) changes in laws and regulations, including
monetary convergence and the European Monetary Union, (x) changes in the
policies of central banks and/or foreign governments, (xi) the impact of acquisitions,
including related integration issues, (xii) reorganization measures, and (xiii) general
competitive factors, in each case on a local, regional, national and/or global basis.
Many of these factors may be more likely to occur, or more pronounced, as a result
of terrorist activities and their consequences.
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information contained herein.