E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
6
6
5
5
When fear rules …
4
4
3-month dollar-based Libor
3
3
3-month overnight indexed swap rate (OIS)
2
2
1
1
0
0
Jan 07
Apr 07
Jun 07
Sep 07
Dec 07
Mar 08
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
Jun 08
Sep 08
Dec 08
1
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
In defense of policy activism …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
2
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Market economies cycle …
US real GDP (percent change from four quarters earlier)
25
25
20
20
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
Average historical growth = 3.75% annually
-20
1852 1862 1872 1882 1892 1902 1912 1922 1932 1942 1952 1962 1972 1982 1992 2002
Source: NBER recession bars; US Department of Commerce; various academic sources
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
3
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
… when demand falters, yes … when supply shifts, no
US real GDP (chained 2000 dollars)
13,000
13,000
12,000
12,000
11,000
11,000
10,000
10,000
9,000
9,000
8,000
8,000
Potential real GDP (maximum
sustainable output)
7,000
7,000
6,000
6,000
5,000
5,000
4,000
4,000
3,000
3,000
Actual real GDP
2,000
2,000
60
65
70
75
80
85
90
95
00
05
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
4
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Three hurdles, two cleared …
(1) Inflated housing values
(2) Oil’s convulsion
(3) Irrational fears
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
5
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
A view about 2009 … nothing wrong that isn’t fixed
US real GDP (percent change from four quarters earlier)
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: JPMorgan Chase & Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
6
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
(1) Ground Zero … inflated valuations are history
Nominal income per household and house prices (ratio to 1970 Q1 level)
10
9
8
Existing house prices (Case-Shiller national index)
FHFA (previously Ofheo) purchase only index
Gross nominal income per household
2001 Q2
7
10
9
8
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Sources: Standard & Poor’s; US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
7
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
(2) Oil’s speculative (?) convulsion …
Global oil demand (millions of barrels daily)
90
86
82
78
74
70
66
62
58
54
50
46
42
38
34
30
Petroleum, WTI (dollars per barrel)
Global petroleum demand (left)
Petroleum price (right)
140
120
100
80
60
40
20
0
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Source: American Petroleum Institute
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
8
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
… was a headwind, now a tailwind …
Contribution to real GDP growth (contribution to percent change from four quarters earlier)
1.5
1.5
Oil price assumption
1.0
1.0
2008 Q4 = $50 per barrel
2009 Q4 = $55 per barrel
0.5 2010 Q4 = $60 per barrel
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
2008 Q4
-1.5
2002
-1.5
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: US Department of Commerce; JPMorgan Chase &Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
9
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
… that reached/reaches all corners of Planet Earth
Real GDP in selected regions (percent change from four quarters earlier)
10
9
10
Emerging economies in Asia, Eastern Europe and Latin America (orange)
9
8
8
7
7
6
6
US (blue-gray)
EU-11 (black)
Japan (red)
5
4
5
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: JPMorgan Chase & Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
10
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
(3) Fear … irrational, if you ask me
Market value of all publicly traded stocks (Wilshire 5000 index)
18,000
18,000
16,000
16,000
14,000
14,000
12,000
12,000
10,000
10,000
8,000
8,000
6,000
6,000
4,000
4,000
2,000
2,000
0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Dow Jones
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
11
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Two red herrings/myths …
(1) The housing ATM story
(2) Household debt
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
12
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
What the 2000s taught us about consumers
Real consumer spending and income (annual percent change over period shown)
5
4
4.1
3.6
3.7
3.5
4
3
consumption (orange)
income(indigo)
3.2
3.2
2.9
2.8
3
2.6
2.2
1.9
1.7
2
2
1
1
0
1980-84
1985-89
1990-94
1995-99
2000-04
2005-08
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
13
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Debt … if you bought in the 80s/90s, you know the story
Mortgage rates (percent)
20
Household debt (ratio to income)
1.4
30-year mortgage commitment rate (left)
1.3
18
16
1.2
1.1
14
1.0
0.9
12
Ratio of mortgage debt
to disposable personal
income (right)
10
0.8
0.7
0.6
8
0.5
6
0.4
4
0.3
2
0.2
Ratio of non-mortgage debt to disposable personal income (right)
0.1
0
1960
0.0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
14
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Two structural “challenges” …
(1) End of an era for consumers
(2) Financial deleveraging
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
15
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
(1) End of an era for consumers/retailers
Consumer spending (percent of GDP)
0.75
0.75
0.70
0.70
0.65
0.65
0.60
0.60
0.55
0.55
47
52
57
62
67
72
77
82
87
92
97
02
07
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
16
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
The Luckiest Generation … we hope …
Saving (% of income)
Net worth (ratio to income)
16
6.4
Ratio of net worth to income (right)
6.2
6.0
12
5.8
5.6
5.4
8
5.2
Saving rate, the line (left)
5.0
4
4.8
4.6
4.4
0
4.2
4.0
-4
1960
3.8
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Sources: US Department of Commerce; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
17
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
… about equities (the economy), not real estate
Saving (% of income)
Net worth (ratio to income)
20
6.5
Ratio of net worth to income (right)
6.0
Saving rate, the line (left)
5.5
16
5.0
4.5
12
4.0
3.5
8
3.0
2.5
4
2.0
1.5
0
1.0
Real estate net worth (right)
0.5
-4
1960
0.0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Sources: US Department of Commerce; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
18
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
(2) Securitized finance … the end of shadow banking
Assets held at financial intermediaries (share of all assets held at financial intermediaries)
100
Life Insurance Companies
90
Pension Funds
80
70
Brokers and Dealers, Finance,
Mortgage, and Other Insurance
Companies, and Funding
Corporations
60
Money Market Mutual Funds
50
40
Mutual Funds, Closed-End Funds,
Exchange-Traded Funds, and REITs
30
Government-Sponsored Enterprises,
Federally Related Mortgage Pools,
and Issuers of Asset-Backed
Securities
20
10
Banks, Savings Institutions, and
Credit Unions
0
50
53
56
59
62
65
68
71
74
77
80
83
86
89
92
95
98
01
04
07
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
19
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Inflation … R.I.P.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
20
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Markets sign the articles of surrender
10-year inflation expectations (percent)
3.00
3.00
2.75
2.75
2.50
2.50
2.25
2.25
2.00
2.00
1.75
1.75
1.50
1.50
1.25
1.25
1.00
1.00
0.75
0.75
0.50
0.50
0.25
0.25
0.00
0.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Sources: Bloomberg; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
21
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Inflation doesn’t do well when the economy chills
Unemployment rate (percent of the labor force)
12
12
10
10
8
8
6
6
4
4
2
2
0
0
60
65
70
75
80
85
90
95
00
05
10
Sources: NBER recession bars; US Department of Labor
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
22
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
The Fed’s 30-year price stability battle … final days
10-year inflation expectations (percent)
12
12
10
The
10
FOMC's
forecast
for core
8
PCE chain
8
price
inflation
6
6
Chain PCE
price index
4
4
2
2
Core chain PCE price index
0
1960
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Sources: Bloomberg; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
23
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
… the stuff of opportunity
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
24
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Markets value the future at fire sale prices? I don’t think so
US real GDP (percent change from four quarters earlier)
26
18,000
24
16,000
22
Price-earnings ratio (left scale)
20
Wilshire 5000 (right scale)
18
14,000
12,000
10,000
16
8,000
14
6,000
12
10
4,000
8
2,000
6
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Sources: US Department of Commerce; Dow Jones
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
25
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
The world is not flat …
circa 1980
Less than $5,000 per capita GDP
$5,000 - $10,000 per capita GDP
Over $10,000 per capita GDP
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
26
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
… but others want to make it so …
circa 2005
Less than $5,000 GDP per person
$5,000 - $15,000 GDP per person
Over $15,000 GDP per person
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
27
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Appendix I. Threats to our way
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
28
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
Anxiety about America’s living standard … it’s about us
Labor compensation trends (percentage of nominal GDP)
0.64
0.64
0.60
0.60
0.56
0.56
Compensation
0.52
0.52
0.48
0.48
0.44
Wages and salaries (including average hourly earnings)
0.40
0.44
0.40
69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
29
E C O N O M I C O U T L O O K I S S U E S, N E E N G L A N D B O A R D O F E D U C A T I O N, B O S T O N, D E C E M B E R 5, 2 0 0 8
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Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
30