Re-Priced Wealth is not Increased Wealth*
*An
observation by Kevin M. Murphy The University of Chicago
Stephen Sexauer Rocky Mountain Economic Summit Jackson Hole, WY 12 July 2013
QEs Circle the Globe 540
390 360 330
490
US Federal Reserve Bank
Bank of England
440
300
390
270
340
240
290
210 240
180 150
$3.02 tn as of 3/31/13
120 90 1/1/2007
1/1/2008
1/1/2009
1/1/2010
1/1/2011
1/1/2012
90 1/1/2007
1/1/2008
1/1/2009
1/1/2010
1/1/2011
1/1/2012
1/1/2013
150
European Central Bank
130
210
120
180
110
150
100
$3.47tn as of 3/31/13
120
1/1/2008
1/1/2009
1/1/2010
Bank of Japan
140
240
90 1/1/2007
$0.62 tn as of 3/31/13
140
1/1/2013
300 270
190
1/1/2011
1/1/2012
$1.66 tn as of 3/31/13
90 80 1/1/2007
1/1/2013
1/1/2008
1/1/2009
Source: Bloomberg and Cumberland Advisors.
2
1/1/2010
1/1/2011
1/1/2012
1/1/2013
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
Equity Returns in the age of QE All PE, Little E
2012 ∆ EPS
∆ P/E
Returns
EU
-7.1%
22.5%
13.8%
EM
0.6%
14.4%
15.1%
US
5.2%
7.8%
13.4%
3
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
They Rule the World. What Are They Thinking?
Bernanke:
Draghi:
… “make my day” … “whatever it takes” … “When we all look back at what OMT has produced, frankly when you look at the data, it’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent time” 4
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
But … Kevin Warsh: (Ex-Fed Governor):
The Federal Reserve is not a repair shop for broken fiscal, trade, or regulatory policies. (8 November 2010)
Alex Weber: “Central banks can buy time, but they cannot fix issues long-
term … there’s a perception that they are the only game in town.” (25 January 2013)
Charles Plosser: Over the long run, productivity growth is the primary
determinant of rising living standards (15 January 2013) ... preserving price stability is the most important function of a central bank. In a world of fiat money, monetary policy has the ultimate responsibility for preserving the purchasing power of a nation's currency (16 May 2013)
Bank for International Settlements (BIS): Stop the QE! (The central banker’s central bank. (Annual Report. 23June2013)
Typical Investor: “Ben’s got my back; so does Mario” 5
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
What Real Wealth Is. How We Measure it. Real Wealth
• Human Capital • Physical Capital • Technology/Knowledge
Growth in Real Wealth
• Size and quality of the labor force • Investment • Innovation
Measures
• Productivity: Growth in GDP per capita • Labor force: How many are working and how productively • Market values of assets and liabilities 6
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
The Remarkable US Productivity growth = 2.1% since 1950 Population growth = 1.1% since 1950 Real GDP growth = 3.2% since 1950
US Log of Real Per Capita GDP
11.8
US Productivity, 1880 to 2010: just under 2.0% per year Since 2009: 1.6% per year
11.3
The Becker Optimism
10.8 The Gordon Concern
10.3 9.8 9.3 8.8 8.3
1880
1905
1930
1955 7
1980
2005
2030
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
Japan: 23 years and 17 governments: Limited real growth Real growth since 1990: productivity 1.1% ‌ employment 0.0% Real GDP 1.1% per year ‌ Equity returns -2.4% per year Japan ln(GDP per person employed) 2012 base USD, PPP
12
1990 to 2012: Slope at 1.1% per year 11
11
10
1972 to 1989: Slope at 3.0% per year
1956 to 1972: Slope: 8.8% per year
10
9 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
80,000
Japan Employment
70,000 60,000 50,000 40,000 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
8
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
Stocks for the long term (growth) The Iron-Clad Rule of Equity Returns: ∆ EPS + ∆ PE + Dividends Growth and Returns. 2004.12 to 2012.12 GDP growth 3.6%
EPS growth 3.6%
equity return (price) 2.1%
Japan
-0.7%
-7.5%
-1.2%
Korea Italy Spain Germany
5.8% 1.4% 2.8% 2.3%
7.0% -5.2% 0.8% 5.4%
10.5% -7.7% -1.3% 7.5%
US
9
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
The US. Still the Best. A list of not-so-small positives • • • • • • • •
Healthy banks. Write offs > $1 trillion. Cleansed the system, unlike Japan and EU. Strong profits. US budget deficit approaching < 5% and shrinking. Housing. In recovery. A growing economy needs housing. Cheap US BTUs and large US manufacturing benefit (think chemical profits). Cheap US BTUs and energy export potential and balance of payments gains. Possible immigration reform. More people working & more output & more taxes. EM demand: Good fiscal positions and growing, even if slower growth than before.
Risks. There are always risks. • • • • • •
Possible fall in trend productivity Regulatory strangulation: energy, healthcare, banking … No immigration reform Income and wealth gap Fiscal recklessness returns A central bank mistake of a large magnitude 10
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
Around the World US Looks the best. Growing. Not cheap. Not expensive. Earnings risk. Fed risk. Interest rate risk. EU Recession (endless?) Broken banks (large role in economy). North-South gap. Cheap. Japan What real growth? Not cheap. Facing default. Abenomics: the mother of all expectations shocks. Asia-ex Japan Growing. Japan-Yen risk. China slowing risk. South China Sea risks. EM Best growth. Slowing. Facing a strong dollar and weakening China. Bonds Tight spreads on administered government prices/yields. The stated, and unstated, goal of central banks in the DM: Inflation. 11
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
A Question: How Long on the Fed’s Rope Team?
12
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
The Big Risk No one is bigger than the bond market Pictures: (1) Italian 1- year yields post Mario Draghi’s “make my day” …“do whatever it takes” and (2) the great and powerful OZ revealed (to be a mortal man) when Toto pulls the curtain back
Pictures: (1) Italian 1- year yields post Mario Draghi’s “make my day” …“do whatever it takes” and (2) the great and powerful OZ revealed (to be a mortal man) when Toto pulls the curtain back
13
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012
Stephen Sexauer Allianz Global Investors (AGI) (2003–2012) Mr. Sexauer is a Managing Director and Chief Investment Officer for Multi-Asset US at Allianz Global Investor US (previously the Chief Investment Officer of Allianz Global Investors Solutions LLC, which merged into Allianz Global Investors U.S. in January 2013). Prior to Allianz Global Investors US, Mr. Sexauer was a portfolio manager at Morgan Stanley Investment Management from July 1989-March 2002. Mr. Sexauer worked at Salomon Brothers from November 1986-June 1989. Mr. Sexauer previously worked in Economic Consulting at Merrill Lynch Economics and at Wharton Econometrics. Mr. Sexauer holds an MBA from the University of Chicago with concentrations in economics and statistics and a BS from the University of Illinois in economics.
Economic data in this presentation are derived from internal research, publicly available statistics published by Bloomberg, the US Federal Reserve, the US Department of Commerce, and the International Monetary Fund. The information herein is provided for informational purposes only and should not be construed as a recommendation of any security, strategy, or investment product, nor an offer or solicitation for the purchase or sale of any financial instrument. This material contains the current opinions of the author, which are subject to change without notice.
14
Stephen Sexauer Global Interdependence Center Rocky Mountain Economic Summit Jackson Hole, WY July 2012