2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Opportunity trumps fear …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
1
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Agenda …
1. The shrill over policy activism
2. Essential features of the outlook
3. The gates of hell, circa fall 2008
4. Why “tomorrow’s a better day”
5. Misplaced inflation worries
6. Back to the future
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
2
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The Curious Case of Benjamin Button …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
3
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The idea clock seems to be running in reverse …
Rehashing long-settled arguments …
-------
Policy response to demand shocks … what’s the issue?
Anxiety about the Fed’s balance sheet expansion?
Inflation, fiscal policy, and the Fed’s “printing machine”
Fed policy and “character”
The epiphany about counterparty risk
Round up the usual suspects, “global imbalances”
Collective amnesia …
-- Oil shocks
-- “Political will” is never willing when it comes to financial crises
-- There’s something about real estate
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
4
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Back to Jim Lehrer, it’s about the cost of inaction
US potential and actual real GDP scenarios (chained dollars)
Estimated potential
real GDP
(consistent with 5%
unemployment)
16,000
15,000
Current forecast
14,000
13,000
12,000
Return on ARRA
"investment" =
$3.7 trillion
Counterfactual forecast
(estimated real GDP path
without the American Recovery
and Reinvestment Act of 2009)
11,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sources: US Department of Commerce; Congressional Budget Office; Joint Tax Committee
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
5
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Key themes in the outlook …
[… the Fed’s “dual mandate” … don’t leave home without it]
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
6
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Reason and opportunity eventually trump “fear” …
US real GDP (annualized percent change)
8
8
7
7
6
6
5
3.7
4
2.2
3
5
3.1
3.5
2.7
1.9
2.4
2.3
0.8
1
4
3
2
0.2
2
-0.8
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
2001
2002
Quarter-toquarter real
GDP growth
1
0
2000
Forecast of
quarter-toquarter real
GDP growth
2003
2004
2005
2006
2007
2008
2009
2010
Annual
growth of
real GDP
(Q4 to Q4)
Change in
real GDP
from four
quarters
earlier
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
7
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… but the damage will take a decade to repair
US real GDP (chained 2000 dollars)
14,000
13,000
14,000
13,000
Estimated potential level of real GDP (GDP
level when unemployment is 4½%
12,000
12,000
11,000
11,000
If the
economy
grows
3.5%
annually
in
recovery
10,000
9,000
8,000
7,000
10,000
9,000
8,000
7,000
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Sources: US Department of Commerce; Macroeconomic Advisers LLC
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
8
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
“Maximum sustainable output” is a real concept
US unemployment rate (percent of the labor force)
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
The Fed's view
about the
sustainable
unemployment level*
2
1
0
1960
3
2
1
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
* Range of FOMC members’ views
Sources: NBER recession bars; US Department of Labor; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
9
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Inflation … R.I.P.
Selected US consumer inflation indexes (percent change from 12 months earlier)
16
16
14
14
12
The Federal
Reserve's
long-run
inflation
target (for
chain PCE
price
indexes)*
10
8
6
12
10
8
6
CPI
4
4
2
2
Chain PCE
0
0
-2
-2
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
* Range of FOMC members’ views
Sources: NBER recession bars; US Department of Commerce; US Department of Labor
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
10
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The Gates of Hell …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
11
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
All the things that did this … froze businesses everywhere
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
12
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The day we lost it …
Selected rates in the term funding markets (percent)
6
6
5
5
4
4
3
3
2
3-month dollar-based Libor
2
3-month overnight indexed swap rate (OIS)
1
1
0
0
Jan 07
Apr 07
Jun 07
Sep 07 Dec 07 Mar 08
Jun 08 Sep 08 Dec 08 Mar 09
Sources: BBA; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
13
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The weakest link … what project could meet this hurdle?
Selected interest rates (percent)
22
22
10-year noninvestment grade debt
20
20
18
18
16
16
14
14
BBB-rated corporate debt
Jumbo mortgage rate
30-year conventional mortgage rate
12
12
10
10
8
8
6
6
4
4
10-year Treasury yield
Federal funds rate target
2
2
0
2002
0
2003
2004
2005
2006
2007
2008
2009
Sources: Federal Reserve Board; JPMorgan Chase & Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
14
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The vehicle industry is in the credit crunch’s crosshairs
US vehicles sales and domestic production (millions of units at an annual rate)
22
20
Total vehicle sales
□□□□□□ Average monthly sales from October 1998 through September 2005
22
20
18
18
16
16
14
14
12
12
10
10
Domestic vehicle output
8
8
6
1993
6
1995
1997
1999
2001
2003
2005
2007
2009
Sources: Federal Reserve Board; US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
15
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
“The sun will come out tomorrow …”
(1) Passing storms … hints in the consumer news
(2) Unlocking credit flows can re-charge
(3) Self-correcting actions: inventories, prices
(4) Appropriately bold policy actions
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
16
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
(1) Oil headwinds now a tailwind, for everyone …
Real GDP in selected regions (percent change from four quarters earlier)
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
2000
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
Emerging economies in Asia, Eastern Europe and Latin America (orange)
US (blue-gray)
EU-11 (black)
Japan (red)
Global (blue-shaded region)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: JPMorgan Chase & Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
17
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
A $2.5 trillion dislocation … a sequel we know well
Global oil demand (millions of barrels daily)
90
86
82
78
74
70
66
62
58
54
50
46
42
38
34
30
West Texas Intermediate (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
Sources: American Petroleum Institute; US Department of Energy
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
18
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The oil “tax”
Contribution of oil swings to real GDP growth (contribution to four-quarter percent change)
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
Source: JPMorgan Chase &Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
19
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
[It’s already a help … what else could possibly explain this?]
US real consumer spending (annualized percentage point change from the previous quarter)
5
2009 Q1 estimate
4
3
2
1
0
-1
-2
-3
-4
-5
2005
2006
2007
2008
2009
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
20
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
(2) Ground Zero … housing valuations are back to normal …
Nominal gross income per household and house prices (ratio to 1970 Q1 level)
10
9
8
7
Existing house prices (Case-Shiller national index)
FHFA (previously Ofheo) purchase only index
Gross nominal income per household
2001 Q2
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; FHFA; US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
21
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The building crash that slowed growth … almost history
Contribution of new home building to real GDP growth (percentage points, annualized)
1.25
1.25
Contribution to real GDP growth over the most
recent four quarters
1.00
1.00
0.75
0.75
0.50
0.50
0.25
0.25
0.00
0.00
-0.25
-0.25
-0.50
-0.50
-0.75
-1.00
-0.75
Bars are the contribution of
new home building to
quarterly real GDP growth
-1.00
-1.25
-1.25
-1.50
-1.50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
22
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
(3) Inventory de-stockings leave no lasting footprints …
US demand versus US output (chained 2000 dollars)
11,800
11,800
11,700
11,700
11,600
11,600
11,500
11,500
Gross Domestic Product
11,400
11,400
11,300
11,300
11,200
Q1
11,200
11,100
11,100
11,000
11,000
10,900
10,900
10,800
10,800
Final sales of domestic product
10,700
10,700
10,600
10,600
2004
2005
2006
2007
2008
2009
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
23
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Everything clears at the right price …
Sales of existing houses in selected regions (ratio to June 2005 level)
1.1
1.0
1.1
Northeast
Midwest
South
West
1.0
0.9
0.9
0.8
0.8
0.7
0.7
0.6
0.6
Gold shading area denotes total existing house sales
0.5
2000
0.5
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: National Association of Realtors
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
24
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… it’s why we always bounce back
US GDP gap (actual less potential real GDP as a percent of potential real GDP)
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
-25
-25
-30
-30
1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Sources: NBER; US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
25
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
(4) The policy team’s got it right … ZIRP …
The Fed’s target overnight rate and 10-year Treasury yield (percent)
20
20
18
18
16
16
14
14
Federal funds rate
10-year Treasury yield
12
12
10
10
8
8
6
6
4
4
2
2
0
0
1960
1970
1980
1990
2000
Sources: NBER; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
26
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… seeing we can’t, never could, count on “political will” …
President Andrew Jackson and the banks, 1832
Source: Wikimedia Commons
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
27
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
C-E policy … a weapon of mass construction
Federal Reserve assets (billions of dollars outstanding)
2,500
2,500
Other Fed credit, Gold stock, SDRs, and Treausry currency
TALF
2,250
2,000
2,250
All factors supplying Federal Reserve
reserves
Credit extended to AIG, Inc.
2,000
Central bank liquidity swaps
1,750
1,750
Loans ex. AIG credit and TALF
1,500
1,500
Term auction credit
1,250
1,250
1,000
1,000
RPs
MBS
GSE debt
750
750
500
500
250
250
Securities loaned to dealers through the term facility (TSLF
program)
0
Securities loaned to dealers through the overnight facility
0
08/01/07
12/01/07
04/01/08
08/01/08
12/01/08
04/02/09
Securities committed to reverse repurchase agreements with
foreign official and international accounts
Securities committed to reverse repurchase agreements with
dealers
Unencumbered Treasuries and agencies
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
28
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
C-E, not Q-E, because the “printed money” sits in the vault
Federal Reserve liabilities (billions of dollars outstanding)
2,500
2,500
2,250
2,250
All factors absorbing
reserves
2,000
2,000
1,750
1,750
Deposits at the Fed other than those of depository institutions,
including the Treasury's supplementary financing account
Reverse RPs, Treasury cash, and other liabilities and capital
1,500
1,500
1,250
1,250
1,000
1,000
750
750
500
500
250
250
0
08/01/07
Excess reserves
Required reserves (includes vault cash used to satisfy reserve
requirements)
Currency in circulation excluding surplus vault cash held by
depository institutions
0
12/01/07
04/01/08
08/01/08
12/01/08
04/02/09
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
29
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Fiscal policy, it’s not like we’ve never thought of it before
Fiscal impact on the high-employment budget (percent of high-employment GDP)
Kennedy-Johnson Tax Cut (1964)
Vietnam War Buildup (1962 - 1967)
Nixon (1970)
Carter (1977)
Reagan (1981)
Clinton (1993)
Bush (2001-03)
Tax cut (2001)
Discretionary spending
Mandatory spending (prescription drug program)
Bush (2008)
Obama (2009)
-0.5
-1.7
-0.6
-0.5
-1.7
-0.1
-5.0
-1.6
-2.3
-1.1
-1.5
-5.5
Source: Congressional Budget Office
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
30
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Inflation fears, Lost in Translation …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
31
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The swelling House of Fed has nothing to do with inflation …
Monetary base (billions of dollars)
M2 (billions of dollars)
1,800
15,000
1,600
12,000
1,400
1,200
9,000
1,000
Monetary base (left scale)
M2 (right scale)
800
6,000
600
400
3,000
200
0
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
32
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Federal deficits have nothing to do with inflation …
Fiscal balance (12-month moving tally, % of GDP) Chain PCE price index (% ch. from 12 months earlier)
0.04
14
Federal budget balance (left)
Consumer inflation (right)
0.02
12
0.00
10
-0.02
8
-0.04
6
-0.06
4
-0.08
2
-0.10
0
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Sources: Congressional Budget Office; US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
33
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Conclusion / Back to the Future
… the economic miracle that is lifting the world’s standard of
living (and, oh yes, the “global imbalances” that come with
that) … nothing to redo here
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
34
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Themes in the debate about economic recovery …
The character of modern (low-inflation era)
cycles
Two structural headwinds
(1) Consumers in transition
(2) A lower-leveraged financial system
Talking points for the future … rethinking the
optimal level of inflation
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
35
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Global dreams … work best when the US runs full bore …
US current account balance (percent of GDP)
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
-6
-6
-7
-7
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
36
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The real global imbalances (in living standards) …
Selected living standards (ratio of per capita real GDP in selected region to US level, dollars, PPP)
1.0
1.0
0.9
0.9
0.8
0.8
0.7
0.7
0.6
0.6
China
0.5
0.5
0.4
0.4
0.3
0.3
India
0.2
0.2
0.1
0.1
0.0
0.0
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
Sources: US Department of Commerce; JPMorgan Chase & Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
37
US real GDP per capita (chained 2000 dollars)
42000
1.0
35000
0.8
0.6
0.4
China's per capita real GDP
1.2
India's per capita real GDP
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… have been and will continue to drive globalization
0.2
28000
21000
14000
7000
0.0
0
1877 1887 1897 1907 1917 1927 1937 1947 1957 1967 1977 1987 1997 2007
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
38
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Appendix I. The Bad, the Ugly and the Good …
… the signs of the times
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
39
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The bad (lost opportunities) …
-- The Great Awakening put on hold
-- 8.5%
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
40
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The ugly (forgettable moments) …
-- Suspending GSE preferred equity dividends, altering a long-standing rule of the capitalraising game
-- The mixed message about the GSEs … need them / dismantle them
-- The madness of September 2008
-- The Libor trauma misread
-- The public’s fury over the $700 billion TARP “bailout”
-- The first question at the presidential debates
-- The WSJ editorial board’s rampage about character and the Fed’s rate cuts
-- Arguments about the potency of fiscal stimulus
-- The hysteria about the Fed’s printing machine and inflation
-- The conversation about nationalizing banks … or, how to make it impossible for banks to
raise capital in private markets
-- The AIG bonus issue and the sanctity of contracts
-- Blaming symptoms (and enablers) and not the genetic nature of collateralized real estate
lending
-- Blaming global imbalances and the Fed’s 1% policy rate for the financial crisis
-- The SEC’s, Ponzi schemes, and credibility
-- The rating agencies AAA debacle
-- M.E.W., household leverage, and Doomsday prophecies
-- What’s too big to fail? Bear. Not Lehman? Not AIG?
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
41
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The good (high points) …
-- The Fed’s ZIRP
-- Ben’s C-E Policy … the Fed’s weapon of mass construction
-- The acronym soup of government rescue programs (TARP, TSLF, TASLF, TALF, PPIP,
PPIF, Asset Guarantee Program, Capital Assistance Program, Capital Purchase Program,
EESA, Targeted Investment Program, SSFI, CPFF, MMIFF, AMLF, PDCF
-- A bold stroke from fiscal policy
-- The epiphany about counterparty risk (FDIC insurance of debt and borrowings)
-- Global attempts to sing from the same hymnal
-- Acknowledging the failure of “political will”
-- Losing the medieval “global imbalances” label
-- Correcting inflated house, oil, and other commodity prices
-- Correcting Private (and public) fixes for the financial system’s weak links
-- Credit default swaps fixes, including standardizing contracts and (by end 2009?)
establishing a central clearinghouse for all CDS trades
-- Barney Frank’s comment that it is easy to create unintended consequences in
addressing financial reform
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
42
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Appendix II. Defense of policy activism …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
43
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Three principles …
1. A stitch in time saves nine
2. The cost of an underemployed economy—
the “opportunity cost”—mounts rapidly …
currently running $1 trillion annually and
counting
3. Lost global opportunities amplify the costs
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
44
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Bold is justified, when you can say “inflation, R.I.P.” …
Core chain PCE price index (percent change from 12 months earlier)
12
12
10
10
8
8
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
2015
Sources: US Department of Commerce; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
45
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and price competition will be stiff for a while
US unemployment rate (percent of the labor force)
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
The Fed's view
about the
sustainable
unemployment level*
2
1
0
1960
3
2
1
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
* Range of FOMC members’ views
Sources: NBER recession bars; US Department of Labor; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
46
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Wall Street isn’t putting money where pundits’ mouths are
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
47
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The Fed’s many options, short-term rates (ZIRP) …
The Fed’s target overnight rate and 10-year Treasury yield (percent)
20
20
18
18
16
16
14
14
Federal funds rate
10-year Treasury yield
12
12
10
10
8
8
6
6
4
4
2
2
0
0
1960
1970
1980
1990
2000
Sources: NBER; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
48
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Long-term interest rates …
(1) Communications policy
(2) Purchase program
(3) Peg rates in the extreme (World War II
experience)
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
49
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Credit easing (CE) policy
Federal Reserve assets (billions of dollars outstanding)
2,500
2,500
2,250
2,250
Other Fed credit, Gold stock, SDRs, and Treausry currency
TALF
All factors supplying Federal Reserve
reserves
Credit extended to AIG, Inc.
2,000
Central bank liquidity swaps
1,750
1,750
Loans ex. AIG credit and TALF
1,500
1,500
Term auction credit
1,250
1,250
1,000
1,000
2,000
RPs
MBS
GSE debt
750
750
500
500
250
250
Securities loaned to dealers through the term facility (TSLF
program)
0
Securities loaned to dealers through the overnight facility
0
08/01/07
12/01/07
04/01/08
08/01/08
12/01/08
04/02/09
Securities committed to reverse repurchase agreements with
foreign official and international accounts
Securities committed to reverse repurchase agreements with
dealers
Unencumbered Treasuries and agencies
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
50
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Fiscal policy’s long tradition
Fiscal impact on the high-employment budget (percent of high-employment GDP)
Kennedy-Johnson Tax Cut (1964)
-0.5
Vietnam War Buildup (1962 - 1967)
-1.7
Nixon (1970)
-0.6
Carter (1977)
-0.5
Reagan (1981)
-1.7
Clinton (1993)
-0.1
Bush (2001-03)
-5.0
Tax cut (2001)
Discretionary defense
Mandatory spending (prescription drug program)
Bush (2008)
-1.5
Obama (2009)
-5.5
-1.6
-2.3
-1.1
Source: Congressional Budget Office
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
51
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The absolute budget numbers … yes, horrific
US fiscal budget (balance over the most recent 12 months, billions of dollars)
400
400
200
200
0
0
-200
-200
-400
-400
-600
-600
-800
-800
-1,000
-1,000
-1,200
-1,200
-1,400
-1,400
1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Sources: NBER; US Department of Commerce; Congressional Budget Office
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
52
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Relative budget numbers … big but less scary
US fiscal budget (balance over the most recent 12 months, % of GDP)
0.05
0.05
0.00
0.00
-0.05
-0.05
-0.10
-0.10
-0.15
-0.15
-0.20
-0.20
-0.25
-0.25
-0.30
-0.30
1879 1889 1899 1909 1919 1929 1939 1949 1959 1969 1979 1989 1999 2009
Sources: NBER; Congressional Budget Office; JPMorgan Chase & Co.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
53
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
ARRA 2009
Fiscal stimulus provided by ARRA 2009 (billions of dollars, calendar year basis)
900
800
700
Lines:
Cumulative fiscal spending since 2009
State aid plus tax cuts
Tax cuts
900
800
700
600
600
500
500
400
400
300
300
Bars:
Direct federal spending
State aid
Tax cuts
200
100
200
100
0
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Sources: Congressional Budget Office; Joint Tax Committee
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
54
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Estimated impact on the level of GDP … a crank start
Estimated cumulative boost to GDP (cumulative change to level of GDP at point indicated of ARRA 2009)
600
500
400
300
200
100
0
-100
1
5
9
13
17
21
25
29
33
37
Quarters after the program was first put in place
Sources: Congressional Budget Office; Joint Tax Committee
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
55
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Estimated impact of ARRA on quarterly real GDP growth
Estimated impact on quarterly GDP growth (annualized percent change)
8
6
5
6
4
4
3
2
2
1
0
0
-1
-2
-2
-4
-3
-6
-4
1
5
9
13
17
21
25
29
33
37
Quarters after the program was first put in place
Sources: US Department of Commerce; other
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
56
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Thinking about fiscal initiatives and opportunity costs
US potential and actual real GDP scenarios (chained dollars)
Estimated potential
real GDP
(consistent with 5%
unemployment)
16,000
15,000
Current forecast
14,000
13,000
12,000
Return on ARRA
"investment" =
$3.7 trillion
Counterfactual forecast
(estimated real GDP path
without the American Recovery
and Reinvestment Act of 2009)
11,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sources: US Department of Commerce; Congressional Budget Office; Joint Tax Committee
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
57
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Two modern lessons …
(1) The Japanese response in the 1990s
(2) The US response in the 2000s
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
58
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
What’s better, the US/2000s or Japan/1990s?
Budget positions of selected central governments (fiscal balance in year shown as a percent of GDP)
4
4
Note: the clock is deliberately stopped in 2007,
a year when most are close to full employment
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Sources: US Department of Commerce; selected global statistical agencies
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
59
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Appendix III. Gone With the Wind …
[popular myths about the consumer, saving, and household
leverage]
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
60
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The luckiest generation …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
61
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
A rising consumer tide … for two and a half decades …
Consumer spending share of GDP (percentage 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
62
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and the flip side of that coin, falling saving
Selected measures of saving (percent of disposable personal income)
16
National Income and Product Accounts measure
12
8
4
Flow of Funds measure of the NIPA concept
0
-4
1960
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
63
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
And we borrowed more
Household debt (ratio to disposable personal income)
1.4
1.4
1.3
1.3
1.2
1.2
1.1
1.1
1.0
1.0
0.9
0.9
0.8
0.8
0.7
0.6
0.7
0.6
0.5
0.5
0.4
0.4
0.3
0.2
0.3
0.2
0.1
0.1
0.0
0.0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
64
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Two fundamental drivers …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
65
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
(1) Wealth windfalls …
Household net worth
(billions of dollars)
(ratio to disposable personal income)
70
6.5
Ratio of net worth to income (right)
60
6.0
50
Dollar magnitude of household net worth (left)
5.5
40
30
5.0
20
4.5
10
0
1960
4.0
1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
66
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
[mostly financial, a payoff from economic liberalization]
Household net worth (ratio to disposable personal income)
6.50
Ratio of net worth to income (right)
6.00
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
Value of real estate holdings (right)
1.00
Real estate net worth (right)
0.50
0.00
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
67
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and (2) a successful inflation battle
Inflation (% change from four quarters earlier) and interest rates (percent)
16
14
16
10-year Treasury note yield
14
12
12
10
10
8
8
6
6
4
4
2
0
1960
2
Core chain PCE prices, dashed line
Chain GDP prices
1965
1970
1975
1980
1985
0
1990
1995
2000
2005
2010
Sources: US Department of Commerce; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
68
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Two intertwined household reactions …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
69
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Saving fell, because savings rose …
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
70
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and because we borrowed more …
Saving (% of income)
Household debt (ratio to income)
16
1.4
1.3
Household debt (right)
Saving rate (left)
12
1.2
1.1
8
1.0
0.9
4
0.8
0.7
0
0.6
-4
1959
0.5
1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
Sources: US Department of Commerce; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
71
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… to tap gains (and adjust saving) …
Household net worth (ratio to income)
Household debt (ratio to income)
6.5
2.5
Household debt (right)
6.3
2.3
6.0
2.0
5.8
1.8
Household net worth (right)
5.5
1.5
5.3
1.3
5.0
1.0
4.8
0.8
4.5
0.5
4.3
0.3
4.0
0.0
1960
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
72
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and low rates liberated liquidity-trapped borrowers
Interest rates (percent)
20
Selected household debt measures (ratio to disposable income)
1.4
30-year mortgage commitment rate (left)
1.3
18
1.2
16
1.1
14
1.0
0.9
12
0.8
10
0.7
0.6
8
6
0.5
Ratio of mortgage debt to disposable
personal income (right)
0.4
0.3
0.2
4
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
73
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
No shoes to fall … just to wear longer
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
74
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The popular housing-ATM story doesn’t connect all dots …
Real consumer spending and income (annual percent change over period shown)
4.5
4.0
4.1
3.6
4.0
3.7
3.5
3.5
3.0
4.5
Consumption (orange)
Disposable personal income (indigo)
3.5
3.2
3.2
2.9
2.8
2.5
3.0
2.6
2.5
2.2
2.0
2.0
1.6
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
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
75
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and that’s why M.E.W.’s demise isn’t crashing consumers
Mortgage equity withdrawal (billions annualized) Real consumer spending (chained 2000 dollars)
1,000
900
800
700
600
500
400
300
200
100
0
-100
-200
-300
-400
-500
Real consumer spending (right)
8,500
8,400
8,300
8,200
8,100
8,000
7,900
7,800
7,700
7,600
7,500
7,400
7,300
7,200
7,100
7,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: US Department of Commerce; Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
76
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Mortgage borrowing more than a rate response in the 00s
Debt service (% of income)
Household mortgage debt (ratio to income)
25
1.1
Household mortgage debt (right)
1.0
0.9
20
0.8
0.7
15
0.6
0.5
10
0.4
0.3
5
0.2
Homeowners' debt service on mortgage obligations (left)
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
77
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Consumer debt service for homeowners
Financial obligations of folks who rent (% of income) Non-mortgage debt level (ratio to income)
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
1960
0.4
Household non-mortgage debt (right)
0.3
0.2
0.1
Homeowners' debt service
on non-mortgage
obligations (left)
0.0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
78
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Consumer debt service for renters
Financial obligations of folks who rent (% of income) Non-mortgage debt level (ratio to income)
34
33
32
31
30
29
28
27
26
25
24
23
22
21
20
19
18
1960
0.4
Household non-mortgage debt (right)
0.3
0.2
Renters' debt service (left)
0.1
0.0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
79
Household Balance Sheets
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Billions of Dollars
1960
1965
1970
1975
1980
15
5.0
2,516
4.9
3,416
4.5
5,142
4.2
9,472 14,228 20,232 24,949 27,699 29,748 33,282 37,137 42,117 42,019 41,749 40,522 46,373 51,874 58,098 62,300 62,690 51,477
4.5
4.5
4.6
4.7
5.1
5.1
5.4
5.7
6.2
5.7
5.5
5.1
5.6
5.8
6.2
6.3
6.1
4.8
2,073
2,868
3,891
5,902 10,920 16,596 23,951 29,681 32,753 35,163 39,044 43,354 48,911 49,419 49,780 49,356 56,233 62,910 70,286 75,731 77,019 65,719
Tangible Assets
724
913
1,363
2,237
4,360
6,634
9,355 10,762 11,243 11,773 12,388 13,412 14,539 16,237 17,745 19,262 21,162 23,969 27,391 28,360 27,265 24,905
Real Estate
548
697
1,025
1,684
3,414
5,299
7,381
Net Worth
Memo: Ratio to Disposable Personal Income
Assets
1985
1990
1994
8,393
1995
8,767
1996
9,195
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
9,711 10,604 11,570 13,078 14,446 15,821 17,598 20,205 23,451 24,252 22,993 20,512
Memo:
Real Estate Equity Less Mortgage Debt
Net Real Estate Holdings as a Percentage of Assets
Equipment & Software
Consumer Durable Goods
Financial Assets
Cash (Deposits)
407
477
739 1,225 2,488 3,850 4,876 5,212 5,433 5,656 5,955 6,547 7,134 8,257 9,118 9,787 10,712 12,367 14,572 14,408 12,498 10,058
19.6% 16.6% 19.0% 20.8% 22.8% 23.2% 20.4% 17.6% 16.6% 16.1% 15.3% 15.1% 14.6% 16.7% 18.3% 19.8% 19.0% 19.7% 20.7% 19.0% 16.2% 15.3%
4
5
8
19
36
50
74
100
105
109
116
125
134
145
155
169
183
199
214
231
246
262
172
212
330
534
910
1,285
1,899
2,270
2,371
2,468
2,562
2,683
2,835
3,015
3,144
3,273
3,380
3,565
3,726
3,877
4,025
4,131
1,349
1,954
2,528
3,665
6,560
9,962 14,596 18,919 21,510 23,390 26,656 29,943 34,372 33,182 32,035 30,094 35,071 38,940 42,895 47,371 49,754 40,814
238
373
536
908
1,534
2,526
3,326
3,171
3,357
3,500
3,666
3,882
4,051
4,377
4,877
5,155
5,351
5,743
6,154
6,779
7,330
7,685
Memo:
Percentage of Assets
11.5%
13.0%
13.8%
15.4%
14.0%
15.2%
13.9%
10.7%
10.3%
10.0%
9.4%
9.0%
8.3%
8.9%
9.8%
10.4%
9.5%
9.1%
8.8%
9.0%
9.5%
11.7%
Percent of Financial Assets
17.6%
19.1%
21.2%
24.8%
23.4%
25.4%
22.8%
16.8%
15.6%
15.0%
13.8%
13.0%
11.8%
13.2%
15.2%
17.1%
15.3%
14.7%
14.3%
14.3%
14.7%
18.8%
Bonds (Credit Market Instruments)
Memo: Percentage of Assets
151
7.3%
170
5.9%
242
6.2%
321
5.4%
521
4.8%
971
5.9%
1,748
7.3%
2,213
7.5%
2,242
6.8%
2,424
6.9%
2,403
6.2%
2,456
5.7%
2,591
5.3%
2,481
5.0%
2,393
4.8%
Marketable Treasury Securities
27
25
31
44
101
206
382
695
649
707
617
553
628
400
Munis
31
37
47
67
130
395
648
594
533
493
498
499
528
531
Corporate Bonds
11
9
30
64
59
95
238
359
467
515
527
591
509
554
392
690
770
759
1,345
2,006
3,126
Stocks
Memo:
Percentage of Assets
Ratio to Disposable Personal Income
18.9%
Direct Holdings
360
Outright Holdings of Publicly-Traded Corporations
Mutual Funds
15
24.1%
616
30
19.8%
650
38
12.9%
585
30
12.3%
1,010
36
12.1%
1,230
99
13.0%
32
74
#N/A #N/A
Life Insurance Companies
Private Pension Funds
Defined Benefit Plans
Defined Contribution Plans
State and Local Govt. Retirement Funds
Other (Excludes Equity Held in Noncorporate Businesses)
Liabilities
Memo: DPI*
2,784
5.0%
3,102
4.9%
3,452
4.9%
3,626
4.8%
3,942
5.1%
3,876
5.9%
255
93
238
331
306
238
-5
79
581
678
704
742
821
874
907
960
717
1,056
971
1,145
1,304
1,564
1,842
1,601
9,033 11,143 12,403 15,112 17,703 21,531 20,050 18,316 15,656 19,684 22,378 25,227 28,363 29,079 19,675
30.4% 34.0% 35.3% 38.7% 40.8% 44.0% 40.6% 36.8% 31.7% 35.0% 35.6% 35.9% 37.5% 37.8% 29.9%
1.7
2.0
2.1
2.5
2.7
3.1
2.7
2.4
2.0
2.4
2.5
2.7
2.9
2.8
1.8
1,961
7,138
8,614
9,394 11,368 13,264 16,244 14,811 13,444 11,537 14,236 16,187 18,482 20,606 21,004 14,800
196
3,294
527
4,434
693
4,712
980
6,144
1,316
7,511
1,631
9,770
2,154
8,147
1,968
6,829
1,792
5,161
1,334
6,788
1,904
7,496
2,322
8,004
2,650
9,199
3,113
9,158
3,409
5,502
1,760
3,317
3,487
3,702
3,908
4,121
4,320
4,695
4,823
5,042
5,544
6,369
7,828
8,294
8,436
7,538
Equity in Noncorporate Businesses
Indirect Holdings
Bank Personal Trusts and Estates
2,552
5.2%
120
91
174
95
335
139
776
182
1,164
214
1,895
264
2,529
365
3,009
439
3,744
555
4,439
599
5,286
699
5,233
646
4,870
527
4,117
385
5,446
470
6,190 6,743
502 #N/A
7,778
0
8,299 #N/A
0
0
511
2,089
665
2,462
904
2,813
883
2,871
807
2,630
692
2,224
887
2,923
1,029
3,301
1,140
3,605
1,335
4,154
1,467
4,264
#N/A
17
0
41
4
68
9
110
18
237
33
521
58
622
200
1,146
275
1,505
373
1,724
13
33
51
80
167
339
344
579
727
821
927
1,058
1,154
1,248
1,185
1,031
1,300
1,453
1,568
1,815
1,948 #N/A
3
1
8
3
17
10
30
24
70
44
182
120
278
285
568
522
778
704
903
847
1,162
1,051
1,405
1,188
1,658
1,408
1,623
1,223
1,445
1,084
1,192
870
1,623
1,084
1,848
1,202
2,037
1,202
2,424
1,202
2,574
1,202
1,555
1,202
569
721
980
1,677
3,160
4,459
6,397
4,503
4,768
5,063
5,476
5,901
6,200
6,273
6,449
6,731
7,253
7,718
8,062
8,603
9,403
9,577
224
352
476
761
1,447
2,368
3,720
4,732
5,054
5,415
5,762
6,217
6,794
7,400
8,031
8,834
9,860 11,036 12,188 13,431 14,329 14,242
368
516
755
1,232
2,115
3,172
4,351
5,293
5,479
5,795
6,120
6,522
6,846
7,309
7,525
7,882
8,326
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
Sources: Federal Reserve Board (Flow of Funds) and JPMorgan Research.
989
2,455
80
8,935
9,309
9,825 10,352 10,652
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Appendix IV. The Day the Music Died …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
81
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
The rise of securitized finance …
Assets held at financial intermediaries (share of all assets held at financial intermediaries)
100
Lif e Ins ura nc e C o m pa nie s
90
P e ns io n F unds
80
70
60
B ro k e rs a nd D e a le rs , F ina nc e ,
M o rt ga ge , a nd O t he r Ins ura nc e
C o m pa nie s , a nd F unding
C o rpo ra t io ns
50
M o ne y M a rk e t M ut ua l F unds
40
30
M ut ua l F unds , C lo s e d- E nd F unds ,
E xc ha nge - T ra de d F unds , a nd
R E IT s
20
G o v e rnm e nt - S po ns o re d
E nt e rpris e s , F e de ra lly R e la t e d
M o rt ga ge P o o ls , a nd Is s ue rs o f
A s s e t - B a c k e d S e c urit ie s
10
0
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07
B a nk s , S a v ings Ins t it ut io ns , a nd
C re dit Unio ns
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
82
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and its many benefits
Assets held at financial intermediaries (billions of dollars)
70,000
Lif e Ins ura nc e C o m pa nie s
60,000
P e ns io n F unds
50,000
B ro k e rs a nd D e a le rs , F ina nc e ,
M o rt ga ge , a nd O t he r Ins ura nc e
C o m pa nie s , a nd F unding
C o rpo ra t io ns
40,000
M o ne y M a rk e t M ut ua l F unds
30,000
M ut ua l F unds , C lo s e d- E nd F unds ,
E xc ha nge - T ra de d F unds , a nd
R E IT s
20,000
10,000
G o v e rnm e nt - S po ns o re d
E nt e rpris e s , F e de ra lly R e la t e d
M o rt ga ge P o o ls , a nd Is s ue rs o f
A s s e t - B a c k e d S e c urit ie s
0
50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07
B a nk s , S a v ings Ins t it ut io ns , a nd
C re dit Unio ns
Source: Federal Reserve Board
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
83
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
A shrinking universe …
Market capitalization of selected financial companies on two dates (billions of dollars)
JPMorgan Chase & Co.
Wells Fargo
Goldman Sachs
Bank of America
Credit Suisse
UBS
Morgan Stanley
Citi
Bear Stearns
Lehman Brothers
WaMu
January 1, 2007
March 24, 2009
Wachovia
National Citi Bank
Merrill Lynch
0
50
100
150
200
250
300
Source: Bloomberg
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
84
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… unfazed by the rescue efforts so far
Selected equity trends (ratio to December 31, 2006 level)
1.20
1.20
Wilshire 5000 index of all publicly traded stocks
1.00
1.00
0.80
0.80
0.60
0.60
0.40
Bank index
0.40
0.20
0.20
0.00
0.00
2007
2008
2009
Source: Bloomberg; BKX is a modified cap weighted index of 24 exchange listed and National Market System
stocks that represent national money center banks and leading regional institutions.
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
85
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Financial sector profits …
After-tax GDP profits of the financial sector (billions of dollars)
400
400
350
350
300
300
250
250
200
200
150
150
100
100
50
50
0
0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… double the historical ratio to GDP …
Pre-tax GDP profits of the financial sector (percent of nominal GDP)
4.0%
4.0%
3.5%
3.5%
3.0%
3.0%
2.5%
2.5%
2.0%
2.0%
1.5%
1.5%
1.0%
1.0%
0.5%
0.5%
0.0%
0.0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
87
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… double the historical ratio to financial profits
Pre-tax GDP profits of the financial sector (percent of all pre-tax GDP profits)
40%
40%
35%
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Source: US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
88
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Scale economies in operations …
Financial services employment
(thousands)
9,000
Employment in financial activities (left scale)
8,000
(percent)
0.08
0.08
7,000
0.07
6,000
0.07
5,000
0.06
4,000
0.06
3,000
2,000
Share of private employment (right scale)
0.05
1,000
0.05
0
0.04
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
Source: US Department of Labor
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
Appendix V. It Was A Wonderful Life …
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
90
2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
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
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2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… and the same is true versus rents
House prices versus rents (ratio of Case-Shiller house prices to CPI rents, 1982 = 1.0)
2.00
2.00
1.75
1.75
1.50
Ratio to residential rent
1.50
December 2000
1.25
1.25
1.00
1.00
0.75
0.75
Ratio to owners' rent
August 2001
0.50
0.50
0.25
0.25
0.00
0.00
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Sources: US Department of Labor; Standard & Poor’s
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
[P.S. the rampage by the few …
Actual house prices and national affordability limits (ratio to 2000 Q4 level)
275
275
250
250
225
225
200
200
Gross Income Per Household
DC
Colorado
Arizona
California
175
175
California
United States
Nev ada
150
150
Alabama
Arkansas
Tex as
125
125
100
100
75
75
2001
2002
2003
2004
2005
2006
2007
2008
Utah
Oklahoma
2009
Sources: FHFA; Standard & Poor’s; US Department of Commerce
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… ruined it for everyone]
Housing starts in selected states (ratio to 2000 Q4 starts level)
350
350
300
300
DC
Utah
Colorado
Arizona
250
250
Florida
Alabama
Oklahoma
Tex as
200
Arkansas
200
California
Nev ada
150
150
100
100
50
50
0
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Census Department
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… i.e. new (GDP) construction
House sales (ratio to June 2005 sales level)
1.3
1.3
1.2
1.2
1.1
Existing houses
1.1
1.0
1.0
0.9
0.9
0.8
0.8
0.7
0.7
0.6
0.6
0.5
0.5
0.4
New houses
0.3
0.4
0.3
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: National Association of Realtors; Census Department
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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Inventory levels are coming down …
Housing starts (thousands annualized)
Unsold inventory of new single family units (thousands)
2,400
600
2,200
500
2,000
Starts (left)
1,800
400
1,600
1,400
300
1,200
200
1,000
Unsold single family houses (right)
800
100
600
400
0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Census Department
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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2 0 0 9 O A C U B O A N N U A L M E E T I N G, M I A M I U N I V E R S I T Y M A R C U M C O N F E R E N C E C E N T E R, A P R I L 2 8, 2 0 0 9
… but not as quickly as you think
Housing starts (thousands annualized)
Unsold inventory of new single family houses (months’ supply)
2,400
12
2,200
11
Starts (left)
2,000
1,800
10
9
1,600
8
1,400
7
1,200
Unsold single family houses (right)
1,000
6
800
5
600
4
400
3
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Census Department
Jim Glassman, jglassman@jpmorgan.com, 212-270-0778
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