Where Did Prosperity Go and How Do We Bring it Back? by Lacy H. - PowerPoint PPT Presentation

Where Did Prosperity Go and How Do We Bring it Back? by Lacy H. Hunt, Ph.D., Chief Economist Hoisington Investment Management Co. SIC 2016 May 24-27, 2016 6836 Bee Caves Road ● Building 2, Suite 100 Austin, Texas 78746 512-327-7200 Fax 512-327-8646 www.Hoisington.com

Total Nonfinancial Debt as a % of GDP (Excluding Off Balance Sheet Liabilities) year ending levels 275% 275% Q4 2015 Change in Debt per $ of GDP: = 248.6% 1952-1999 $1.7 250% 250% Q4 2009 2000-2015 $3.3 = 245.5% 2015 $3.5 225% 225% 200% 200% 175% 175% Avg. 167.5% 150% 150% 2015 Debt: +1.9 tril. 125% 125% GDP: +.5 tril. 100% 100% 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015. page 1

Business Debt as a % of GDP (Excluding Off Balance Sheet Liabilities) quarterly 80% 80% Q4 2008 Q4 2015 = 73.42% = 70.3% Q4 2007 70% 70% = 68.7% Q4 2014 60% 60% = 68.1% Avg. = 51.7 50% 50% 40% 40% 2015 30% 30% Debt: +793 bil. Investment: +93 bil. 20% 20% 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015. page 2

Gross Federal Debt as a % of GDP (Excluding Off Balance Sheet Liabilities) quarterly 110% 110% Q1 2016: 100% Debt = 19.3 tril. 100% GDP = 18.2 tril. Debt/GDP ratio 106% 90% 90% 80% 80% 70% 70% 60% 60% Avg. = 55.2% 50% 50% 40% 40% Net present value of unfunded liabilities = $60 trillion in excess of Social Security and other trust 30% 30% funds. 20% 20% 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015. page 3

Total Private and Public Debt as a % of GDP Major Countries annual 700% 700% Japan 600% 600% U.K. 500% 500% Eurozone 400% 400% U.S. Australia 300% 300% 250% -275% Canada 200% 200% 100% 100% China 0% 0% 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 Source: Bank of Japan, Cabinet Office, Statistics Canada, Federal Reserve, Bureau of Economic Analysis, Office for National Statistics of U.K., Statistical Office of the European Communities, Reserve Bank of Australia. Haver Analytics. Through Q3 2015. Australia through Q1. U.S. Through 2015. page 4

Characteristics of Extremely Over-Indebted Economies 1. Transitory spurts in economic growth, inflation and high-grade bond yields cannot be sustained because debt constrains economic activity. 2. Due to debt repayment obligations, economies are subject to structural downturns without the cyclical excesses of rising interest rates and inflation. 3. Due to the start and stop economy, productivity growth deteriorates but this is not inflationary, just another symptom of the controlling debt influence. 4. Monetary policy is asymmetric - can restrain but not stimulate growth. 5. Fiscal policy options exist provided that they do not increase aggregate indebtedness. Historically, debt overhangs in major economies have only been cured by a significant multi-year rise in saving. 6. Inflation falls dramatically, increasing the risk of deflation. 7. Treasury bond yields fall to extremely low levels and remain depressed for a extended period since the Fisher equation (1867-1947) states that the long risk-free yield is equal to the real yield plus expected inflation. 8. When multiple major economies are simultaneously over-indebted the world lacks an engine of growth. page 5

Nominal GDP, Y year over year % change, quarterly 25% 25% Q4 to Q4 2013 2014 2015 % change 20% 20% (A) (B) (C) (D) Nominal 15% 1. 4.1% 3.9% 3.1% 15% GDP 2. Real GDP 2.5% 2.5% 2.0% 10% 10% 5% 5% 0% 0% -5% -5% Y = P(price level)*Q(Real GDP) Y = M*V -10% -10% 48 55 62 69 76 83 90 97 '04 '11 Source: Bureau of Economic Analysis. Through Q1 2016. page 6

Eight Decades of the Wicksell Effect, WE WE = (BAA Corporate Bond Yield(Rm) less year over year Percent Change in Nominal GDP(Y)) annual 15% 15% WE = Rm-% change Y WE = Rm-% change (M*V) 10% 10% 5% 5% 0% 0% Avg. = -.25% -5% -5% -10% -10% -15% -15% 2015 WE = market rate of interest BAA yield = 5.0% - % change in GDP Nominal GDP = 3.1% -20% -20% BAA - GDP = 1.9% -25% -25% 1935 1945 1955 1965 1975 1985 1995 2005 2015 Sources: Federal Reserve Board, Bureau of Economic Analysis. Through 2015. page 7

GDP Implicit Price Deflator, P percent change in annual average 24% 24% P = Y/Q 20% 20% P = (M*V)/Q 16% 16% 12% 12% 8% 8% 4% 4% 0% 0% -4% -4% -8% -8% -12% -12% -16% -16% 1870 1890 1910 1930 1950 1970 1990 2010 1880 1900 1920 1940 1960 1980 2000 Sources: Federal Reserve Board, Bureau of Economic Analysis, N.S. Balke & R.J. Gordon, C.D. Romer. Through 2015. page 8

Real Per Capita GDP Growth, Selected Periods average annual growth 2.5% 2.5% 5% 5% Real Per Capita GDP 1930-2015 decade average growth 4% 4% 2.0% 3% 3% 2.0% 1.9% 2% 2% 1% 1% 1.5% 1.5% 0% 0% 1930 1940 1950 1960 1970 1980 1990 2000 1.0% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% 1790-1999 2000-2015 Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget, N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through 2015. page 9

Real Per Capita GDP Growth, Current Expansion vs. Prior Expansions average annual growth 3.0% 3.0% 2.7% 2.5% 2.5% 2.0% 2.0% 1.5% 1.5% 1.3% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% 1790-2008 2009-2015 Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget, N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through 2015. page 10

Corporate Profits: After Tax with IVA & CCAdj billions billions $1,700 $1,700 $1,600 $1,600 $1,500 $1,500 $1,400 $1,400 Lowest since Q1 2011 Corporate Profits: After Tax with IVA & CCAdj 8 quarter % change, a.r. 40% 40% 35% 35% 30% 30% 25% 25% $1,300 $1,300 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% -20% -20% $1,200 49 56 63 70 77 84 91 98 '05 '12 $1,200 '10 '11 '12 '13 '14 '15 '16 Source: Bureau of Economic Analysis. Through Q4 2015. page 11

Employment Cost Index: Compensation year-over-year percent change, quarterly 6% 6% 5% 5% 4% 4% 3% 3% 2% 2% 1% 1% 90 92 94 96 98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Source: Bureau of Labor Statistics. Includes all civilian workers. Through Q1 2016. page 12

Nonfarm Business Sector: Productivity 4 year % change a.r., quarterly 5% 5% Thousands Thousands 58 58 57 57 56 56 55 55 54 54 53 53 52 1996 levels 52 51 51 50 50 49 49 4% 4% 48 48 47 47 46 46 Real Median Household Income 45 45 44 44 43 43 annual 42 42 41 41 40 40 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 3% 3% Avg. 2% 2% 1% 1% 0% 0% -1% -1% 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 Sources: Census Bureau. Bureau of Labor Statistics. Through Q1 2016. Real Median HH Income through 2014. page 13

The Monetary Base vs. Excess Reserves of U.S. Depository Institutions monthly level bil. bil. 4500 4500 Monetary Base: 4250 4250 orange line 4000 4000 3750 3750 3500 3500 3250 3250 3000 3000 2750 2750 2500 2500 2250 2250 2000 2000 1750 1750 1500 1500 1250 1250 1000 1000 Excess Reserves: 750 750 red line 500 500 250 250 0 0 90 93 96 99 '02 '05 '08 '11 '14 Source: Federal Reserve Board. Through May 11, 2016. page 14

M2 Money Stock 3 and 6 month % change, a.r. and y-o-y % change 26% 26% 30% 30% 24% 24% M2 Money Stock 25% 25% annual % change 20% 20% 22% 22% 15% 15% 20% 20% 10% 10% 5% 5% 18% 18% 0% 0% -5% -5% 16% 16% -10% -10% -15% -15% 14% 14% -20% -20% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 12% 12% 10% 10% 3 mo 8% 8% 6 mo 6% 6% y-o-y 4% 4% 2% 2% 0% 0% -2% -2% '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: Federal Reserve. Through May 2, 2016. page 15

Velocity of Money 1900-2016 Equation of Exchange: GDP(Y) = M*V annual 2.25 2.25 1997 = 2.2 V = Y/M 1918 = 2.0 2.00 2.00 avg. 1900 to present = 1.74 1.75 1.75 avg. 1953 to 1983 = 1.75 1.50 1.50 1.46 Lowest since 1950 1.25 1.25 1946 = 1.2 GDP = MB*m*V 1.00 1.00 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sources: Federal Reserve Board; Bureau of Economic Analysis; Bureau of the Census; The Amercian Business Cycle, Gordon, Balke and Romer. Through Q1 2016. Q1 2016; V = GDP/M, GDP = 18.1 tril, M2 = 12.5 tril, V = 1.46 page 16

Nominal Broad Trade Weighted Dollar Index monthly 130 130 QE1 starts Taper QE3 starts QE2 starts highest since 11/02 announcement 120 120 110 110 100 100 90 90 '01 '03 '05 '07 '09 '11 '13 '15 Source: Federal Reserve. Through May 6, 2016. page 17

GDP Composite Growth for China, U.S., Japan and Europe annual % change 10% 10% 8% 8% 6% 6% Avg. = 4.7% 4% 4% 2% 2% 0% 0% -2% -2% 1998 2003 2008 2013 Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau of Statistics, Haver Analytics, World Bank, U.S.D.A. Through Q4 2015. page 18