government belt tightening - war room slides
TRANSCRIPT
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War Room 26 April 2012
Government Spending:
Belt Tightening Coming?
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War Room
•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
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Government Spending: Belt Tightening Coming?
•Market Snapshot
•Trends + Policy Projections
•Outlook + Scenarios
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Market Update
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GOVERNMENT SPENDING:TRENDS + POLICY PROJECTIONS
HiddenLevers
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US Deficit: Historical Context
Source: Bloomberg
Spending has spiked since the financial crisis, andrevenue has collapsed, exacerbating deficit trends
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US Government Budget, 2011 Breakdown
Source: Budget of the United States, HiddenLevers Research
31% ($1118B):All Other Spending
25% ($905B):Defense
24% ($855B):Health Care
20% ($725B):Social Security
36% ($1300B):Borrowing / Deficit
64% ($2303B):Tax Revenue
The Big 3 now account for 70% of all government spending.
All other spending could be eliminated, and US would still be in deficit.
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Defense Spending Historical Trends
Defense spending rose faster than any other category over the last decade, including Social Security and health care.
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Social Security
Defense spending peaked with Iran and Afghan wars
Budgets proposals call for flat spending going forward
Social Security, Medicare, Medicaid grow while defense shrinks over time
Source: WSJ, White House OMB
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Social Security vs Health Care, Forecast
Source: CBO 2010 Analysis
Long term, Social Security growth slows while health care costs explode.
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Healthcare Inflation vs CPI
Healthcare inflation has consistently exceeded CPI over the last 50 years, though recent trends might be showing improvement.
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Healthcare Costs: Long Term Trend
Health care = 1/3 of the economy in 25 years
Government pays 50% of health care costs today
At current rate, health care takes 100% of federal budget by 2035!
Source: President's Council of Economic Advisors
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Healthcare eating up Defense Spending2011Veterans benefits = 1/6 of defense spending
Cost of Veterans health careUp 300% in past decade
2015$63.9 billion projected
Source: US Department of Defense, HiddenLevers Research
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Health Care Costs Increases Wasteful
Obvious:Medicare + Medicaid will be unsustainable
Not so obvious:
80% of projected increases come from excessive cost growth.
Excessive cost growthcost of treatment growing faster than growth in per capita GDP and CPI
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GOVERNMENT SPENDING:SCENARIOS
HiddenLevers
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Lots of Noise from the Top
Even Top Brass not on same page
Who’s right?
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U.S. Fiscal Reform – How will it go down?
No Policy Alteration
Rising Interest Rates and InflationDeflationary Spiral
Fiscal Reform Succeeds
Fiscal ReformFails
Fiscal Reform
Cost Cuts InevitableDefense Spending + Health Care
Weimar
Japan Zimbabwe
USA ?government
choices
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No Policy Alteration = Status Quo
No Policy Alteration
Rising Interest Rates and InflationDeflationary Spiral
Weimar
Japan Zimbabwe
USA ?
Covered in March 2012 War RoomFixed Income Outlook
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Consequences - Chaos:
1. Akin to debt ceiling aftermath
2. Equities crushed, along with faith in government
3. Bonds likely strong, yields come in – not intuitive
4. Lack of confidence hits business + personal spending
Fiscal Reform – Inevitabilities + Market Reaction
Consequences - Confidence
1. Confidence up as perceptions of govt improve
2. Equities – winners and losers, but broad rally
3. At risk – healthcare, defense, physical metals
4. Gold – investment demand decreases
5. Lowered expectations of future inflation
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Conclusion
Fiscal Reform must zero in on Health Care Costs
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