Rajeev dhawan to be posted

Will the Fed Hike Once This Year?

Longevity of the Current Expansion DR. RAJEEV DHAWAN DIRECTOR Presented at the Global Interdependence Center’s Central Banking Series meeting at Stationers’ Hall in London, U.K. • June 3, 2016

April 27, 2016

Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.

‘15 Q4

‘16 Q1

Real GDP

1.4%

0.5%

Consumption

2.4%

1.9%

Confidence

102.6 (Sept. ‘15)

92.6 (May‘16)

Sentiment

96.0 (July ‘15)

94.7 (May‘16)

Vehicle Sales

18.2 mil. (Nov. ‘15)

17.5 mil. (May ‘16)

240K

203K

‘15 Q4

‘16 Q1

Housing Starts

1.135 mil.

1.148 mil.

Nonres. Invest.

-2.1%

-5.9%

a. Structures

-5.1%

-10.7%

b. Equipment

-2.1%

-8.6%

c. IP Products

-0.2%

1.7%

-2.0%

-2.6%

Job Growth

A range of recent indicators, including strong job gains, points to additional strengthening of the labor market.

Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft.

Exports

Investment and its Components

Nonresidential Investment

(%, Y-O-Y) 15

(%) 10

Tech Equipment & Intellectual Property

10 5 5 0

0 -5 -10

2010

-5 2011

Total

2012

2013

Less Mining & Wells

2014

2015

2016

-10

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

What is the Definition of Investment?

Sometimes, investments that we might think of as capital spending get counted as operating expenditures.

Abby Joseph Cohen Goldman Sachs

…when Amazon.com decides to build its Amazon Prime business at a loss because it wants to attract new Amazon shoppers, is it really a loss, or a form of 21st century capital spending? Barron’s – January 18, 2016 Share of Total U.S. Apparel Sales by Retailer Wal-Mart

7.5%

Amazon

6.7%

Target

5.2%

Macy's

5.2%

TJX

4.9%

Gap

4.6%

Kohl's

4.5%

Ross Stores

4.5%

Nordstrom

2.7%

Source: The Wall Street Journal, May 13, 2016

The Case of Unicorns Biggest American Startups Worth More Than $1bn Company valuation, $bn*, July 2015

(2009) Taxi hailing

41

(2008) Accommodation for tourists and millennials

26

(2011) Ephemeral messaging app

16

(2004) Big data

15

(2002) Rocket Science

51

Funds raised, $bn

Revenue, $m, 2014 (estimate)

Employees, 000^

6

800

7.5

2.3

450

3.0

1.2

nil

0.4

1.1

600

12

1.1

825

(2009) Photo Sharing

11

1.3

15

0.7

(2007) Cloud-based file sharing

10

1.1

400

1.5

(2010) Office space provision

10

(2003) Diagnostics through blood sampling (2009) Mobile-payments system

9

20

0.1 1.0

0.6 6 Source: The Economist, 7/25/2015

900

1.5 3.0

145

0.4

45

0.2 1.4

The Case of Unicorns Biggest American Startups Worth More Than $1bn Company valuation, $bn*, July 2015

(2009) Taxi hailing

41

51

Turn

(2011) Ephemeral messaging Appirio 16 app Taboola.com Domo 15 20 Dropbox (2002) Rocket Science Delphix 12 23andMe MongoDB11 (2009) Photo Sharing Zenefits (2007) Cloud-based file AppNexus10 Nutanix sharing Oportun Finance 10 (2010) Office space provision Moderna Pronutria Biosciences (2003) Diagnostics through 9 Cloudflare blood sampling (2009) Mobile-payments Stemcentrx

system

6

Revenue, $m, 2014 (estimate)

800

“Unicorn� Markdowns by Fidelity in First Quarter 2016

(2008) Accommodation for 26 tourists and millennials Dataminr

(2004) Big data

Funds raised, $bn

-4.8% 450 -6.6% 1.2-6.8% nil -8.4% 1.1-8.7% 600 -10.3% -11.7% 825 1.1 -12.8% -13.4%15 1.3 -14.2% -15.6% 400 1.1 -16.9% -18.4% 145 0.1 -25.0% -28.9% 45 1.0-30.6% -37.7%

2.3

0.6 6 Source: The Economist, 7/25/2015

900

Employees, 000^ 7.5 3.0 0.4 1.5 3.0 0.7 1.5 0.4 0.2 1.4

March 16, 2016

However, global economic and financial developments continue to pose risks.

IndexPP erform ance Index erform ance 140 130

Oct. – Dec. ‘15 % change

YTD % Change

S&P 500

6.2%

1.9% [12.1% Since Feb11]

MSCI

4.7%

0.8% [11.9% Since Feb11]

KeyMetrics Metrics Key

120 120 110 10 10 00 90 80 80 60 70

JAN JAN 2016 2016

FEBFEB

MAR MAR

JapaneseYen Yenvs. vs.DD ollar Japanese ollar S&P500 500 S&P

APR APR

MAY MAY

old GG old WTI Oil B Price 10-Year ond Rate

JUN JUN

The Yellen Put in Action!

Percentage Change in Stock Indexes Experiencing a Bear Market or Correction or Recovery January to February 10, 2016

Since February 11

Nikkei Japan

-18.92%

Bovespa Brazil

24.5%

Shanghai Comp

-16.69%

DAX Germany

17.3%

DAX Germany

-14.89%

TSX Composite Canada

16.7%

Stoxx Europe 600

-14.85%

Sensex India

16.1%

CAC 40 France

-13.84%

CAC 40 France

15.6%

Hang Seng Hong Kong

-13.13%

Nasdaq

15.6%

Nasdaq

-12.98%

Stoxx Europe 600

15.1%

Sensex India

-10.43%

S&P 500

14.8%

FTSE 100 U.K.

-9.13%

DJIA

14.1%

S&P 500

-9.12%

FTSE 100 U.K.

13.1%

DJIA

-8.68%

Nikkei Japan

12.5%

ASX 200 Australia

-8.53%

ASX 200 Australia

12.1%

Bovespa Brazil

-6.70%

Hang Seng Hong Kong

11.1%

TSX Composite Canada

-6.50%

Shanghai Comp

Source: Yahoo Finance & EFC Calculations, May 27, 2016

2.7%

Understanding the Global Economy

“Jack Daniel’s sales were hurt by a 16% decline in the brand’s ready-todrink products like Jack & Cola and Jack & Ginger.

Those drinks are popular in

Australia…”

Source: The Wall Street Journal, August 27, 2015

Exports of Selected Countries to China (In percentage of their total exports)

1992

1997

2003

2008

2013

Korea

3.4%

9.4%

18.1%

21.7%

26.1%

Japan

3.5%

5.2%

12.2%

16.0%

18.1%

Singapore

1.8%

3.2%

6.3%

9.2%

11.8%

Vietnam

1.1%

3.4%

12.4%

19.8%

28.7%

Hong Kong

29.6%

34.9%

42.6%

48.5%

54.8%

USA

1.7%

1.9%

3.9%

5.5%

7.7%

Australia

3.2%

4.6%

8.4%

14.6%

36.1%

Germany

0.9%

1.2%

2.8%

3.5%

5.4%

Brazil

1.2%

2.0%

6.2%

8.3%

19.0%

Chile

2.2%

2.4%

8.8%

13.2%

24.9%

Saudi Arabia 0.1% Kazakhstan -

0.7%

5.5%

9.3%

13.9%

6.8%

13.4%

10.8%

23.4%

Angola

12.7% -

23.6%

32.8%

45.3%

2.4%

6.0%

32.0%

0.8% South Africa -

Source: Chinese Global Connectivity: A Decade of Rapid Change by Dhawan and Zilio (2014)

Is China the Factory-of-the-World?

China’s Trade With the World Exports

Imports

Trade Deficit / Surplus

1. Japan

136

143

(7)

2. South Korea

101

175

(74)

3. Taiwan

45

143

(98)

4. Germany

69

88

(19)

5. Australia

40

74

(34)

6. Malaysia

44

53

(9)

7. Brazil

27

44

(17)

8. Russia

35

33

2

9. U.S.

410

149

261

10. Europe

403

293

110

China’s exports and imports (mil. $) to:

Source: http://china-trade-research.hktdc.com/, April 13, 2016

A Tale of Two Stocks

Google Apple

The Macro ModelMacro Model NEW Investment

US Consumer DC Politics ECB

Federal Reserve

U.S. Stock Mkt & Bond Mkt Grexit

Europe Commodities

Emerging Markets

Russia

Japan Central Bank

China

Oil (OPEC)

Dropped Call DOW 30 and Apple’ Revenues (YOY % change)

35% DOW 30

25%

Apple

15% 5% -5% -13%

-15% 2012 2013 Q4 Q1

Q2

Q3

Q4

2014 Q1

Q2

Q3

Q4

2015 Q1

Q2

Q3

Q4

2016 Q1

Is the Fed a Political Animal?

I do not agree that they will try to take it up later in the year because it’s an election year, and a wild year.

Never forget that the Fed is a creature of Congress.

It has to keep Congress happy.

Dan Fuss Manager Loomis Sayles Bond Fund

If you’re the Fed, you can have the president get angry with you, but you cannot have Congress get mad at you and take action.

FOMC Dates

GDP Q1 ’16

GDP Q2 ‘16

GDP Q3 ‘16

June 14-15, 2016 July 26-27, 2016 September 20-21, 2016 November 1-2 December 13-14 January 2017

Data

No Data

Source: The Wall Street Journal, February 8, 2016

GDP Q4 ‘16

Is the Fed a Political Animal?

I do not agree that they will try to take it up later in the year because it’s an election year, and a wild year.

Fed Actions and Stock Market Performance U.S. Long and Short Treasury-Bond Rates Never forget that the Fed is a creature of Congress.

150 (% ) (% 1.10 It has to keep Congress happy.

2.60

140If you’re the Fed, you can have the president get angry with you, 1.00 but you cannot have Congress get mad at you and take action.

Dan Fuss 2.40 Source: The Wall Street Journal, February 8, 2016 Loomis Sayles Bond Fund 130 0.90

Probability of Fed Rate Hike

90% 80% 70%

0.80 120

May 5, 2016

60% 50% 40% 30% 20% 10% 0% Target Rate0.50%

0.70 110

0.60 100

Jun. 15, 2016

90%

Sep. 21, 2016

80%

Dec. 21, 2016

70%

Feb. 1, 2017

60%

2.20

Jun. 15, 2016

May 31, 2016

Sep. 21, 2016

0 Dec. 21,2.0 2016 Feb. 1, 2017

50%

1.80

40%

0.50 30% 90 I II III IV I II III IV I II I II III IV I II III IV 20% 1.60 0.40 2012 2013 2014 2015 2016 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 2015

0.75%

DowJones Index

10%

0% 1.00% 1.50% 10 Year 1.25% Bond (Right)

2016

2-Year0.75% Bond 1.00% (Left) 1.25%

Target Rate0.50%

Source: www.cmegroup.com

1.50%

Forecast in 140 Characters or Less!

Fed moves once in 2016 & then Resumes in March 2017 Feb’16 Forecast

Federal Funds Rate (%)

2016Q2 2016Q3 2016Q4

2017Q1 2017Q3 2017Q4 2017Q2 2018Q1 2018Q2 2018Q3 2018Q4 March Sept Dec

Lower Bound

0.25

0.50

0.50

0.75

0.75

1.00

1.25

1.25

1.50

1.50

1.75

Upper Bound

0.50

0.75

0.75

1.00

1.00

1.25

1.25

1.25

1.50

1.50

1.75

2013

History

2014

2015

2016

Forecast

2017

2018

Real GDP

1.5

2.4

2.4

1.8

2.6

2.4

Monthly Job Additions

184

213

241

205

183

180

Consumption

1.7

2.7

3.1

2.7

2.6

2.6

Auto Sales (Mil.)

15.5

16.4

17.3

16.8

16.5

16.3

Housing Starts (Mil.)

0.93

1.00

1.11

1.15

1.25

1.30

Inflation (CPI)

1.5

1.6

0.2

0.8

2.4

2.7

10 Yr. Rate

2.4

2.5

2.1

2.0

2.6

3.2

(‘000s)

How Many Times Will the FOMC Move in 2016?

FOMC’s Projected Path for Federal Funds Rate 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00

Will there be TWO rate hikes in 2016?

NO, Only 1

FOMC Fed Funds Range 2016 Dec. 2015 Projection March 2016 Projection EFC Forecast

2016

2017 Source: federalreserve.gov

2018

Longer Run

List of Suspects 1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

Aging expansion China slowdown EMs political crises NIRP and currency wars Brexit Ultra low oil prices Venezuela’s implosion Stock market malaise Consumer confidence jitters Populist’s election Capex spending woes Mideast politics & OPEC Fed’s inflation battle

So Who Killed the Recovery?

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

China’s stall lasts longer than expected Exacerbating Emerging Market’s political crises NIRP policies beget currency wars Oil prices stay too low for too long Venezuela implodes Mideast monarchy aka Saudi Riyal peg tumbles Europe gets the Brexit shock Stock markets then swoon badly Eroding consumer confidence Causing corporate capex spending to stall

11. Facilitating a Populist’s election that leads to trade wars 12. Fed gets paralyzed with QE fatigue leading to capex nosedive!

Is Corporate Worried About Trump Presidency?

That won’t be the main problem.

Warren Buffet

Chairman & CEO Berkshire Hathaway

U.S. businesses will continue to adapt and thrive.

We’ve operated under price controls, we’ve had 52% federal taxes applied to our earnings. But, in the end, business in this country has done extraordinarily well for a couple hundred years. It has adapted to society and society has adapted to business.

No presidential candidate or president is going to end that.

Source: AJC, May 1, 2016; The Wall Street Journal, May 2, 2016

Less Trade, Slower Growth Annual Percentage Growth in World Trade and World GDP, 1995 - 2015 World Trade

% change

World GDP

15 10

Projections

5 0

1995

1997

1999

2001

2003

2005

2007

2009

2011

-5

2013

2015

2017

-5%

-10 -15 Source: IMF World Economic Outlook (WEO) , January 2016

-16%

Betting Odds

Source: Iowa Electronic Markets

Special Thanks to the Center’s Executive Sponsors Carl R. Zwerner Chair of Family Owned Businesses

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