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War Room 11 Oct 2011 The Recession Strikes Back

War Room 11 Oct 2011 The Recession Strikes Back. War Room. Monthly macro discussion Using tools in context Feature for subscribers only Feedback - what should it to be?. The Recession Strikes Back. Europe Recap US exposure to Europe USA Macro Snapshot Why does it feel so bad?.

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War Room 11 Oct 2011 The Recession Strikes Back

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  1. War Room 11 Oct 2011 The Recession Strikes Back

  2. War Room • Monthly macro discussion • Using tools in context • Feature for subscribers only • Feedback - what should it to be?

  3. The Recession Strikes Back • Europe Recap • US exposure to Europe • USA Macro Snapshot • Why does it feel so bad?

  4. Europe – where are we right now? 2008 – toxic debts on bank balance sheets. 2011 – toxic debts now on public balance sheets. • Don’t get caught up in the noise: • Slovakia Vote • Politician PR Efforts • Oversold rallies • Protests Europe’s two big problems: Recapitalization of EU Banks Credible plan to preserve the stability sovereign debt of Spain + Italy LET THE DATA GUIDE YOU

  5. PIIGS debt (as % of GDP):Greece more than double Argie + Russia at default Argentina default: 65% Russia default: 57% Source: World Economic Outlook, April 2011, International Monetary Fund

  6. Preparing for Greek Default Euro Crisis Averted  Now impossible scenario • Greek Bailout package: • July Soft Restructuring – lower rates + extend maturity • 21% discount in bond restructuring established • Oct Hard Restructuring – principal reduction • 50-60% discount now needed • Sources: • Jean-Claude Juncker, Euro Group President • Standard + Poors • OttmarEssing, former ECB Chief Economist • Thomas Straubhaar, Director of World Economic Institute • Greek Default guaranteed • 1. Euro Zone Dismissal? • 2. Can fallout be contained?

  7. Currencies + Markets = basics Dollar + Euro – inverse correlation Dollar + S/P 500 – inverse correlation

  8. US Economy: exposure to Europe EU – double dip recession begun MarkitEurozone Purchasing Managers Index: 50.4 (Contraction is anything below 50)

  9. US Banks: exposure to EU defaults + EU bank counterparties Tim Geithner, U.S. Treasury Secretary “The direct exposure of the US financial system to the countries under the most pressure in Europe is very modest… very limited” Congressional Research Service 641 billion usdUS Banks exposure to PIIGS 1.2 trillion usd US Banks exposure to German + French Banks holdings – loans, derivative contracts, guarantees, credit commitments Geithner is wrong!!

  10. US + EU Contagion Euro Banks - Three banks nationalized in the last week - Dexia = 5.4 billion euros in exposure to Greek Debt 2008 Contagion as guide - Counterparty risk coming to fruition eliminates hedges - US govt kept AIG artificially alive to pay out other banks - Equity markets took SIX weeks to bottom post-Lehman Historical - 1931 Austrian bank Credit Anstalt led to contagion in US - 1931-33 period saw bank runs in Europe + US 2011 downside potential worse than 2008

  11. Can Greek Fallout Be Contained? Consequences: Greece likely exits Euro Drachmas already trading on “when issued” basis No carte blanche for other PIIGS Recapitalization plan works Consequences: Credit Crunch in lending to Italy + Spain Other PIIGS decide to leave the Euro EU deep recession Contagion spreads to US banks

  12. The Recession Strikes Back US Economy – October snapshot

  13. The VIX experienced its second highest spike ever in early August, indicating the extent to which fear has taken over the market. Why does it still feel like a recession? From a jobs perspective, we're still at a level of jobless claims consistent with the previous two US recessions (early 90's and early 2000's). While much of the rise in retail sales since 2009 can be explained by inflation, sales have held up this year and are still growing at 3% net of inflation.

  14. US Indicators: ISM, Oil, and BDI Dry shipping rates up, oil down: Two positive trends ISM Indexes both holding over 50 for now

  15. Total Employment Down, Down, Down Total US employment peaked at 138 million in 2007, and is still 6 million below that level, even as the US population has grown by 8 million.

  16. Employment Ratio: Down, Down, Down No comparable drop in employment ratio has occurred since the Great Depression.

  17. US GDP and Productivity in Context When GDP growth drops below the red line (population growth), it feels like a recession. Productivity rises tend to accompany layoffs – in this context, low current productivity growth isn't all bad.

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