Economic Update - Angus Watt Advisory GroupEconomic Update - Angus Watt Advisory Group“9 Steps to Economic Recovery”
An Update of Steps 7, 8 & 9: Market Update January 11, 2010As Bill Gross of PIMCO recently wrote: “if 2008 was the year of the financial crisis, 2009 the year of the healing via monetary and fiscal stimulus packages, then 2010 appears to be the year of the ‘exit strategies’. “ We would agree with this. The question that is top of everyone’s mind is what will the impact be? We have learned over the past two years that the central banks are now committed, whether they want to be or not, to their role as the back-stop of their economies. They understand that the game they are playing of reducing their over-whelming financial commitment, has to be done in an orderly fashion, so that they don’t destroy all the benefits of their support programs. 7) “Sugar High” (low rate = sugar) => DONE!- Our “sugar” continues to be low interest rates 8) “Hand-Off” to the US Consumer => End of 2009 – early Summer 2010 (US Consumers drive the ball down the field)- US banks finally provide liquidity to both business and consumers- US Government stimulus packages have an impact on the economy - Mergers and acquisitions are increasing. For example: Exxon’s $13.5 billion purchase of XTO, Heineken’s $7.3 billion purchase of FEMSA, Novartis acquiring Alcon from Nestle for $39.5 billion - China is still growing at over 7% per year (growth expectations range from 9% to 14%) - The Bank of Canada begins ‘Quantitative Easing’ in an effort to lower the value of the Canadian dollar - Higher demand, resulting in increased productivity, is starting; to date this has been a jobless recovery 9) “In the Red Zone” Governments Force Turnover => 2nd Half of 2010- All levels of governments will be looking for more revenue. As an example, Greece announced a 20% increase in tobacco and alcohol taxes, the State of Georgia is proposing a $200 surcharge on all speeding tickets, the State of Massachusetts is implementing a 5% tax on satellite TV.- Real Estate prices will be softer, rents will decline. This has started. In Q4, US apartment vacancy rates hit a new all-time high of 8%, forcing landlords to cut rents by 2.3% from a year ago. - The US consumer will be deleveraging and increasing their savings. The median age of the baby boomers is now 52, they have a focus on retirement and capital preservation - Unemployment will be higher than expected. In the month of December the US lost 85,000 jobs while expectations had been for a GAIN in employment. So far the US has lost over 7,200,000 jobs since the start of the recession in 2007 - US Federal Debt levels will be a major concern - Reregulation of central banks and financial institutions, as to who has the authority, power, and responsibility, both domestically and internationally
The challenge we have is forecasting what happens in the second half of 2010. Does the US government revisit the purchasing of mortgages to bring down interest rates, and might they use Fannie Mae and Freddie Mac to do so? Or, do they stand back and say that the country is on the road to recovery and interest rates have to go higher? Our belief today, with an election in November 2010, is that the US government will start repurchasing mortgages and bonds to bring down interest rates well before the election. This should be very positive news for the equity markets. In short, we expect the markets to go up, then down, then up. “9 Steps to Economic Recovery”A closer look into steps 7 & 8Market Update September 9, 2009Since we sent out steps 7, 8, and 9 of our “9 Steps to Economic Recovery” last week, we have experienced a number of questions. The following is a more descriptive look at steps 7 & 8, and we will provide more insight into step 9 in the weeks ahead. Currently we are in ‘Step 7 - Sugar High”. As we know, when children are on a sugar high, they are irrational and logic doesn’t seem to matter – the equity markets are behaving in much the same manner. In our case ‘sugar’ is the current low interest rates. Today, the low interest rates together with the government stimulus packages have investors focusing on the future, believing that central banks and governments are dedicated to keeping any corrections mild and are committed to an economic recovery. This has the effect of reducing the motivation of investors to sell, as they do not believe the downside risk is significant, and they do believe that there are better times ahead. Over the past 6 months, US inventories have been declining and we expect them to start rebuilding over the balance of this year in anticipation of future demand. The US dollar is providing a currency benefit for American manufacturers – due to the amount of money the US government needs to raise - which will provide a surprising, stronger than expected US economy. As we approach the end of 2009, ‘Step 8 – “Hand-Off” to the US Consumer’ will begin. The stimulus packages will start to have a more visible impact on the economy, providing confidence to both businesses and consumers. By then, the US banks should have completed their internal refinancing by the US Government, and will finally begin to provide increased liquidity to both businesses and consumers. In this part of the recovery cycle we always have increased activity in mergers and acquisitions; the big get bigger. At the same time, a weak US dollar will provide foreigners an extraordinary buying opportunity in land, pharmaceuticals, and information technology. The refilling of the shelves and increasing US consumer confidence will assist China in continuing to grow at a pace of over 7% per annum, which will, in turn, provide more demand for resources. Our challenge, in Canada, will be a strong loonie. At this time we look for The Bank of Canada to enter a period of “Quantitative Easing” (for example: buying bonds in order to lower our interest rates), in an effort to lower the value of the Canadian dollar. Overall in Step 7 and 8, we will see the development of an improving economy which will see limited job creation and increased productivity. It is most probable that our inflationary pressures will be limited as the consumer, themselves, will not be actively participating in this rebuilding and will effectively be behind the curve in their wealth development. J. Angus Watt
And Now 7, 8, & 9 Steps to Economic RecoveryMarket Update, September 3, 20097) “Sugar High”2nd Half of 2009As you know when you have children or grandchildren on a sugar high, they are irrational and nothing matters -“sugar” is low interest rates 8) “Hand-Off” to the US ConsumerEnd of 2009 - Summer 2010 - (US Consumers drive the ball down the field)- US Banks finally provide liquidity to both businesses and consumers 9) “In the Red Zone” Governments Force Turnover2nd Half of 2010- All levels of Government need cash, there will be tax and fee increases as well as reductions to tax credits and deductions J. Angus Watt The Summer Recipe for Success6 Steps to Economic RecoveryMarket Update, July 15, 2009As we have been saying since last September, we believe that there will be inflation in the second half of 2009, and we continue to believe that the turnaround will be slow. THIS SUMMER - We need 3 key ingredients to get a sustainable economic recovery: COMMODITIES AND REAL ESTATE Oil: - has pulled back from its recent high of $75, currently it is $61 US 10 Year Bonds: - Yields hit a high of 3.99% on June 10th, essentially grinding mortgage applications to a halt Risks - Wild Cards: - Drop in Rents - Apartment rents in the US have declined since January 2009, this adds pressure to the decline in house prices Where Do We go From Here? - Slow Growth: 35% Probability (down from 20% in May) March 26, 2009Given the unprecedented drop in market values globally in late 2008 it will take some time to recover. It is our view that there are 6 key components ("The 6 Steps") that will allow global markets to be well positioned for recovery. 1. A US Government Financial Rescue Plan. Information Updates Information Update as of March 26, 2009 click here Information Update as of March 19, 2009 click here Information Update as of February 12, 2009 click here Information Update as of January 08, 2009 click here |
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