Post on 03-Jan-2016
Dr. Richebacher’s Revenge:Dr. Richebacher’s Revenge:After the Great Moderation, After the Great Moderation,
The Great DisruptionThe Great Disruption
Agora Financial Vancouver Agora Financial Vancouver ConferenceConference
Robert W. Parenteau, CFARobert W. Parenteau, CFAMacroStrategy EdgeMacroStrategy Edge
July 23, 2009July 23, 2009
2008 Vancouver 2008 Vancouver ConclusionsConclusions• We were already in a recessionWe were already in a recession
• Fed easing would not be enoughFed easing would not be enough
• Breaking through the “corridor of Breaking through the “corridor of stability” in markets for durable assets stability” in markets for durable assets
• Fed would be forced to go Fed would be forced to go unconventionalunconventional
• Deflation would present the greater riskDeflation would present the greater risk
Key 2009 Macro QuestionsKey 2009 Macro Questions
• What happened to the Great What happened to the Great Moderation? Moderation?
• What is so different about a balance What is so different about a balance sheet recession?sheet recession?
• Where does the massive policy Where does the massive policy response leave us?response leave us?
What Ever Happened to What Ever Happened to the Great Moderation?the Great Moderation? • Central bankers and Wall Street praised:Central bankers and Wall Street praised:
– lower inflation ratelower inflation rate– longer economic expansions longer economic expansions – lower volatility of growth and inflationlower volatility of growth and inflation
• That was only part of the storyThat was only part of the story• Household, business, and financial sector Household, business, and financial sector
leverage all built up at the same timeleverage all built up at the same time• Asset prices and profits became more volatileAsset prices and profits became more volatile• Job and capital stock growth became Job and capital stock growth became
shallowershallower
Household Debt/Income Household Debt/Income RatioRatio
Ratio of Total Household Liabilities to After Tax Income
( in %)
0500959085807570
Source: Haver Analytics
140
120
100
80
60
140
120
100
80
60
Nonfinancial Business Sector Nonfinancial Business Sector Debt/Income RatioDebt/Income Ratio
Nonfinancial Corporate Business Debt/Gross Value Added
( in %)
0500959085807570656055
Source: Haver Analytics
120
100
80
60
40
120
100
80
60
40
Financial Sector Debt/Income Financial Sector Debt/Income RatioRatio
Financial Sector Debt to Gross Value Added
( in %)
0500959085807570656055
Source: Haver Analytics
600
500
400
300
200
100
0
600
500
400
300
200
100
0
The Great Roller Coast Ride The Great Roller Coast Ride II
Household Net Worth to After Tax Income Ratio
( in %)
0500959085807570656055
Source: Haver Analytics
640
600
560
520
480
440
400
640
600
560
520
480
440
400
The Great Roller Coast Ride The Great Roller Coast Ride IIII
US Corporate Profit Margin
(Pre Tax, Quality Adjusted, in %)
050095908580757065605550
Source: Haver Analytics
18
16
14
12
10
8
18
16
14
12
10
8
The Great Moderation I: The Great Moderation I: Job GrowthJob Growth
All Employees: Total Private
120-month %Change-ann SA, Thous
0500959085807570656055
Source: Bureau of Labor Statistics /Haver Analytics
3. 75
3. 00
2. 25
1. 50
0. 75
0. 00
3. 75
3. 00
2. 25
1. 50
0. 75
0. 00
The Great Moderation II: The Great Moderation II: Productive Capital Stock Productive Capital Stock GrowthGrowth
Net Stock: Pvt Nonres Eqpt & Software: Nonfarm Nonmanufacturing 10-year avg %Change Bil. $
Net Stock: Private Fixed Assets: Manufacturing 10-year avg %Change Bil. $
0500959085807570656055
Source: Bureau of Economic Analysis /Haver Analytics
14
12
10
8
6
4
2
14
12
10
8
6
4
2
After the Great Moderation:After the Great Moderation:The Great Disruption The Great Disruption
• Private sector deleveragingPrivate sector deleveraging
• Private sector income deflationPrivate sector income deflation
• Price deflationPrice deflation
• Massive policy response to contain Massive policy response to contain debt deflation spiraldebt deflation spiral
Sharpest Recession Since Sharpest Recession Since WWIIWWII
Capacity Utilization: Manufacturing [SIC]
SA, % of Capacity
050095908580757065605550
Source: Federal Reserve Board /Haver Analytics
97. 5
90. 0
82. 5
75. 0
67. 5
60. 0
97. 5
90. 0
82. 5
75. 0
67. 5
60. 0
Sharpest Recession Since Sharpest Recession Since WWIIWWII
Final Sales to Domestic Purchasers 2-qtr Change SAAR, Bil. $
Gross Domestic Product 2-qtr Change SAAR, Bil. $
0500959085807570656055
Source: Bureau of Economic Analysis /Haver Analytics
750
500
250
0
-250
-500
-750
750
500
250
0
-250
-500
-750
Evidence of Private Debt Evidence of Private Debt ReductionReduction
Nonfinancial Business: Liabilities: Credit Market Instruments
Difference - Period to Period NSA, Bil $
0500959085807570656055
Source: Federal Reserve Board /Haver Analytics
375
300
225
150
75
0
-75
375
300
225
150
75
0
-75
Evidence of Private Debt Evidence of Private Debt ReductionReduction
Households: Liabilities: Credit Market Debt
Difference - Period to Period NSA, Bil. $
0500959085807570656055
Source: Federal Reserve Board /Haver Analytics
400
300
200
100
0
-100
400
300
200
100
0
-100
Evidence of Income DeflationEvidence of Income Deflation
Personal Income ex Transfers
% Change - Year to Year
050095908580
Source: Haver Analytics
16
12
8
4
0
-4
16
12
8
4
0
-4
Evidence of Income DeflationEvidence of Income Deflation
Corporate Profits with IVA and CCAdj
% Change - Year to Year SAAR, Bil. $
050095908580
Source: Bureau of Economic Analysis /Haver Analytics
40
20
0
-20
-40
40
20
0
-20
-40
Evidence of Price DeflationEvidence of Price Deflation
Final Sales to Domestic Purchasers: Chain Price Index
1-qtr %Change-ann SA, 2000=100
050095908580757065605550
Source: Bureau of Economic Analysis /Haver Analytics
15
10
5
0
-5
15
10
5
0
-5
Evidence of Price DeflationEvidence of Price Deflation
CPI-U: All Items
% Change - Year to Year SA, 1982-84=100
050095908580757065605550
Source: Bureau of Labor Statistics /Haver Analytics
16
12
8
4
0
-4
16
12
8
4
0
-4
Massive Fiscal Policy ResponseMassive Fiscal Policy Response
Total Government Fiscal Balance as a Share of GDP
( in %)
0500959085807570656055
Source: Haver Analytics
4
2
0
-2
-4
-6
-8
4
2
0
-2
-4
-6
-8
Massive Monetary Policy Massive Monetary Policy ResponseResponse
Monetary Authority: Financial AssetsNSA, Bil. $
Security Brokers & Dealers: Financial AssetsNSA, Bil $
05009590
Source: Federal Reserve Board /Haver Analytics
3750
3000
2250
1500
750
0
3750
3000
2250
1500
750
0
The Oxymoron of a The Oxymoron of a Government Led RecoveryGovernment Led Recovery
• Automatic stabilizers will segue into an Automatic stabilizers will segue into an infrastructure ramp up in 2010 infrastructure ramp up in 2010
• Headwind of private deleveraging Headwind of private deleveraging remainsremains
• Q2 near zero, 2-2.5% growth into 2010Q2 near zero, 2-2.5% growth into 2010
• Jobless recovery, limited pricing powerJobless recovery, limited pricing power
• Equities, corporate bonds, inflation Equities, corporate bonds, inflation hedges outperform Treasurieshedges outperform Treasuries
Dealing with the Policy Residue Dealing with the Policy Residue
• The Hat Trick on Treasury issuanceThe Hat Trick on Treasury issuance
• May constrain the Fed mop up May constrain the Fed mop up operationoperation
• Liquidity on ice – Treasury rescue Liquidity on ice – Treasury rescue stash?stash?
• Super sponge for the Fed?Super sponge for the Fed?
Large Issuance, Lower Interest Large Issuance, Lower Interest Expense – Nice One!Expense – Nice One!
Federal Outlays: Interest
12-month MovingTotal Mil. $
05009590
Source: U. S. Treasury /Haver Analytics
260000
240000
220000
200000
180000
160000
140000
260000
240000
220000
200000
180000
160000
140000
Shortening the Fuse on Public Shortening the Fuse on Public DebtDebt
Share of Privately Held Marketable Treasury Debt < 1 Year to Maturity
( in %)
050095908580
Source: Haver Analytics
60
55
50
45
40
35
30
60
55
50
45
40
35
30
Large Issuance, Low Interest Large Issuance, Low Interest RateRate
Implied Average Interest Rate on Federal Government Debt
( in %)
0500959085807570656055
Source: Haver Analytics
14
12
10
8
6
4
2
14
12
10
8
6
4
2
Liquidity on Ice: Liquidity on Ice: Treasury Slush Fund?Treasury Slush Fund?
Treasury Securities as a Share of Commercial Bank Financial Assets( in %)
Cash plus Reserves as a Share of Commercial Bank Financial Assets( in %)
0500959085807570656055
Source: Haver Analytics
40
30
20
10
0
15. 0
12. 5
10. 0
7. 5
5. 0
2. 5
0. 0
After the Great DisruptionAfter the Great Disruption
• Private sector flow imbalances are Private sector flow imbalances are clearingclearing
• But at the price of enormous fiscal and But at the price of enormous fiscal and monetary policy interventionmonetary policy intervention
• The question of placing Treasuries The question of placing Treasuries
• The challenge of policy exit strategiesThe challenge of policy exit strategies
• Need a new global growth modelNeed a new global growth model
• Risk of dollar flight: use inflation hedgesRisk of dollar flight: use inflation hedges
Never Underestimate Never Underestimate InnovationInnovation
Adapt…or Die!Adapt…or Die!