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Transcript of enterpriseSeattle 2011 Forecast - Mike Dueker
39th Annual Economic Forecast
Conference
2011 FORECAST: A LOOK AHEAD Moderator:
Emory Thomas Jr., Puget Sound Business Journal
Panelists:
- Ken Goldstein, The Conference Board
- Mike Dueker, Russell Investments
- Dick Conway, Puget Sound Economic Forecaster
www.enterpriseSeattle.org
V308
3
2011 Economic Outlook: Making the World Safe for Mediocrity
January 13, 2011
Mike Dueker, Head Economist, North America
V308
4
Important Information and Disclosures
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
No model or group of models can offer a precise estimate of future returns available from capital markets.
These views are subject to change at any time based upon market or other conditions and are current as of the date of first use. The opinions expressed in this material are not necessarily those held by Russell Investment Group, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Diversification does not assure a profit and does not protect against loss in declining markets.
Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
Source for MSCI data: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the MSCI Parties.) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
Copyright© Russell Investments 2011. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
First used January 2011. CORP-6476
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Outline
Business Cycle Index and forecasts
Scenarios that might drive asset returns in 2011
The mess in Europe
Quantitative easing
5
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Economic Outlook
Little or no above-trend, snap-back growth
A long, flat spot in U.S. unemployment
A previous 2 ½ year flat spot occurred in U.S. unemployment between May 1984 and November 1986. But this was with unemployment between 7 ½ and 7 percent.
Nevertheless, real GDP grew at an average rate of 2.7 percent through the flat spot in the 1980s, so the unemployment outlook does not doom the economy to 1 to 2 percent GDP growth next year.
The flat spot in the 1980s broke the back of oil prices. Are some commodity prices ready to break this time?
6
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Forecasts of business cycle index show end of stumble, return to square-root path
-3
-2
-1
0
1
2
3
Business cycle index as of Dec. 2010 data
sam
ple
st.
dev
s. f
rom
zer
o
YELLOW BARS INDICATE PERIODS OF RECESSION
Out of sample forecasts were calculated by simulating the time-series model into the future.The value shown is the median of the simulated value for the month.Source: Recession data from National Bureau of Economic Research
7
Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.asp
Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
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The projected plateau in 2011 jobs gains is disappointing
May
'08
Aug '0
8
Nov '0
8
Feb '0
9
May
'09
Aug '0
9
Nov '0
9
Feb '1
0
May
'10
Aug '1
0
Nov '1
0
Feb '1
1
May
'11
Aug '1
1
Nov '1
1
Feb '1
2
May
'12
Aug '1
2
Nov '1
2
Feb '1
3
May
'13
-800
-600
-400
-200
0
200
400
Forecasts of nonfarm payroll employment changes as of Dec. 2010 data
tho
usa
nd
s o
f jo
bs
Source: Actual employment data from St. Louis Fed's FRED database
8
Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.asp
Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
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Where are the months with jobs gains of 300 thousand? This is where the economy is disappointing us as we head into 2011
Jul-0
8
Sep-0
8
Nov-0
8
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-0
9
Nov-0
9
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-1
0
Nov-1
0
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep-1
1
Nov-1
1
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep-1
2-800
-600
-400
-200
0
200
400
Nonfarm payroll employment changes (in thousands of jobs): Data and forecasts as of Dec. 2008 and actual data and forecasts as of Dec. 2010
Forecast Dec 08Data Dec 08Data Dec 10Forecast Dec 10
Source: Actual employment data from St. Louis Fed's FRED database
9
Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.asp
Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
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Forecasts of GDP growth: Blue Chip consensus and Russell’s forecast
2010
Q4
2011
Q1
2011
Q2
2011
Q3
2011
Q4
2012
Q1
2012
Q2
2012
Q3
2012
Q40
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Blue Chip Russell
An
nu
ali
zed
gro
wth
(%
)
10
Source: January 2011 issue of Blue Chip Economic Indicators
Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
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Eurozone and U.S.Reversion to the mean from above and from below
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12-3
-2
-1
0
1
2
Eurozone and U.S. Business Cycle Indices
Euro Series2 US
Sam
ple
Sta
nd
ard
Dev
iati
on
s
11
Start of out ofsample forecasts
Source: Russell’s Economic Outlook and Market Expectations as of October 2010
Indexes are unmanaged and cannot be invested in directly. Historical data is not indicative of future results. Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment. There is no guarantee that the stated results will occur.
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Eurozone CrisisFrom liquidity concerns to solvency to breakup and default?
The Euro was structurally flawed from the beginning The “Euro-TARP” deals with liquidity, not solvency Solvency in some of the peripheral countries is still a concern Even if Greek debt, for example, is restructured, will the Greek
economy be competitive at the fixed exchange rate? Is default and devaluation the necessary elixir?
12
Euro-TARP = The European Financial Stability FacilityThere is no guarantee that any stated expectations will occur.
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Eurozone CrisisFrom liquidity concerns to solvency to breakup?
10 Year Government Bond Spreads vs. Bunds
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
%
Portugal Italy Ireland Greece Spain
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SOURCE: Bloomberg as of 06 December 10
Data is historical and is not indicative of future results.
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Quantitative easing
QE means that the central bank is injecting more than the minimum reserves into the banking system to enforce a zero short-term interest rate
The Bank of Japan had a zero interest-rate target for several years before it realized that it might want to inject more than the minimum reserves needed to achieve a zero rate.
The Fed got this point right away in January 2009 when it began QE – it always injected more than the minimum and thereby precluded a deflationary equilibrium
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What’s new in QE2?
It’s working!
What the Fed buys is not as important as the fact that the Fed shows determination to inject enough reserves to make a 2 percent inflation expectations make sense to people.
Data-dependent asset purchases
Tree-chopping analogy
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Global Currencies No war, just tension
All the majors (USD, GBP, EUR, JPY) have downward biases when viewed in isolation.
Yet dollar is least ugly, cheapest
CNY would appreciate if it could – held by capital controls and intervention
Commodity currencies are dear, commodity outlook is lackluster; they are expected to depreciate, but are supported by carry trade
Is a new global policy arrangement at hand? Unlikely
16
USD = US Dollar; GBP = British Pound; EUR = Euro; JPY = Japanese YenThere is no guarantee that any stated expectations will occur.
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Emerging MarketsBelieve the hype, but with caution
Structural story intact through medium term
EM countries no longer have their traditional vulnerabilities to sudden stops and are the darlings of the investment landscape
Relative EM valuations are about on par with developed
We agree that domestic demand is rising, but domestic sectors are very expensive
Inflation due to undervalued real exchange rates, rising food prices, capital inflows, rising domestic demand
17
EMGs = Emerging Markets GroupsThere is no guarantee that any stated expectations will occur.
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www.russell.com