enterpriseSeattle Forecast 2012 - Michael Dueker
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Transcript of enterpriseSeattle Forecast 2012 - Michael Dueker
enterpriseSeattle’s 40th Economic Forecast Conference
Thursday, January 12, 2012Washington State Convention Center
[email protected] ▪ (206) 389-8650 ▪ www.enterpriseSeattle.org
2012 FORECAST: A LOOK AHEAD Moderator:
Jeff Marcell, enterpriseSeattle
Panelists:
- Dick Conway, Puget Sound Economic Forecaster
- Mike Dueker, Russell Investments
- Ken Goldstein, The Conference Board
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2012 Economic Outlook: A Decoupling of the U.S. and Eurozone Economies?
Michael Dueker, Chief Economist
January 12, 2012
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Important Information and Disclosures
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse purchase transaction risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage backed securities, especially mortgage backed securities with exposure to sub-prime mortgages.
Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.
Copyright© Russell Investments 2011. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.
The Russell logo is a trademark and service mark of Russell Investments.
Date of first use: July 2011
USI-10241-12-11
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This presentation was created for informational purposes only and is not meant for further distribution.
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Scenarios that are likely to shape asset returns in 2012 as a whole
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Source: Russell Investments research. There is no guarantee that any stated expectations will occur.
›Square-root-shaped recovery
›Inflation stays benign›Equity valuations rise modestly
›Bond markets in the core sell off mildly as U.S. growth is not derailed
Modest recovery proceeds with growth near 2 ½ pct.
Downside to growth---recession or stagnation
Strong growth take-off above 3 ¼ pct.
Smooth (5%)
› Risky assets rally across the board, bond yields rise modestly
Bumpy (5%)
› Inflation scare (as in 1994)
› Flat year for risky assets and bad year for fixed income
PROBABILITY ≈ 10%PROBABILITY ≈ 65%
PROBABILITY ≈ 25%
Recession contagion from Europe (20%)
› Bond yields go even lower; risky assets negative
Stagflation (5%)
› Longer-than-expected drought in jobs market
› Negative equity price environment
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BCI forecasts look consistent with a 7.5 percent unemployment rate in Oct. 2014
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Business cycle index as of November 2011 data
sam
ple
st.
dev
s. f
rom
zer
o
YELLOW BARS INDICATE PERIODS OF RECESSION
Out of sample forecasts were calculated by simulating the time-series model into the future.The value shown is the median of the simulated value for the month.Source: Recession data from National Bureau of Economic Research
Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
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Notwithstanding Europe’s recession and risks, the economy’s chief obstacle to rapid growth is the ongoing deleveraging
Source: http://www.econbrowser.com/archives/2012/01/a_call_for_acti.html
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BCI forecasts look consistent with a 7.5 percent (!) unemployment rate in Oct. 2014
40 50 60 70 80 90 100 110 120 130 1400
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1975-80
1982-90
1991-2001
2001-20072009-12
2009-14
Cyclical Oomph and Unemployment
Area under BCI during an economic expansion
Dec
lin
e in
un
emp
loym
ent
rate
Source: Bureau of Labor Statistics for data; Russell calculations and Russell forecasts for 2012-14
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Employment forecast shows a plateau at 180-190 thousand per month
May
'08
Aug '0
8
Nov '0
8
Feb '0
9
May
'09
Aug '0
9
Nov '0
9
Feb '1
0
May
'10
Aug '1
0
Nov '1
0
Feb '1
1
May
'11
Aug '1
1
Nov '1
1
Feb '1
2
May
'12
Aug '1
2
Nov '1
2
Feb '1
3
May
'13
-800
-600
-400
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0
200
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Forecasts of nonfarm payroll employment changes as of November 2011 data
tho
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f jo
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Source: Actual employment data from St. Louis Fed's FRED database
http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
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We are far below where we expected to be by now
Nonfarm payroll employment changes
Data and forecasts as of December 2008 and actual data through June 2011Source: Actual employment data from St. Louis Fed's FRED databaseThis analysis is not meant to serve as a direct prediction regarding the future results of any economic or financial market. Similarly, they are in no way intended to predict or guarantee future results of any sort. Other economic or financial market indictors not considered in this analysis may produce different results.
Jul-0
8
Nov-0
8
Mar
-09
Jul-0
9
Nov-0
9
Mar
-10
Jul-1
0
Nov-1
0
Mar
-11
Jul-1
1
Nov-1
1
Mar
-12
Jul-1
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Nov-1
2
Mar
-13
Jul-1
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Nov-1
3-800
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Nonfarm payroll employment changes (in thousands of jobs): Data and forecasts as of Dec. 2008 and actual data
and forecasts as of Nov. 2011
Forecast Dec 08Data Dec 08Data Nov 11
Source: Actual employment data from St. Louis Fed's FRED database
http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
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A forecast of 2.5 pct GDP growth in 2012 makes us raging bulls? The consensus is moving towards us though
GDP growth forecast
Source: Russell Investments. Data as of 12/31/2011.The Blue Chip is a panel of approximately 50 top economic forecasters.Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 -
0.5
1.0
1.5
2.0
2.5
3.0
3.5
GDP growth forecast
Russell
Blue Chip
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Inflation expectations seem more entrenched in 2012
In early 2011, the 10-year break-even inflation rate between TIPS and conventional Treasury bonds reached 2.6 percent, as commodities prices were bid up.
This year we expect inflation expectations to remain more closely rooted near 2 percent.
Commodities should be less susceptible to speculative price increases in 2012 also, although some price rise is justified if global growth meets expectations.
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Inflation expectations seem more entrenched in 2012 than in 2011: break-even inflation rates
Source: http://www.econbrowser.com/archives/2012/01/a_call_for_acti.html
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Inflation never did concern us as an ongoing problem
Consumer Price Index (CPI) forecast
Source: Russell Investments. Data as of 12/312011.The Blue Chip is a panel of approximately 50 top economic forecasters.Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 -
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Consumer price inflation forecast
Russell
Blue Chip
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Eurozone is projected to have a recession; the U.S. is not
Eurozone and U.S. business cycle indices (2007-2012)
Values shown for the in-sample estimates and out-of-sample forecasts are the median of the simulated values for the quarter. Out-of-sample forecasts were calculated by simulating the time-series model into the future.Source: U.S. recession data from National Bureau of Economic Research. Europe recession data from the Centre for Economic Policy Research. Recession for Europe in 2002 is based on research completed by Mike Dueker, Ph.D., Russell Investments: http://research.stlouisfed.org/wp/more/2008-001 Data as of Sept. 30, 2011
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. There is no guarantee that the stated results will occur. Index performance is not indicative of the performance of any specific investment. Indexes are not managed and may not be invested in directly.
20072008
20092010
20112012
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-1
0
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2
3
Euro U.S. In-sample estimates | Out-of-sample forecast
Sa
mp
le s
tan
da
rd d
evi
atio
ns
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Fed policy and the possibility of additional easing
Ahead of the fact, a 10-year Treasury yield that lingered below 2 ¼ percent would be an obvious sign of ‘Japan Disease’ and cause for the Fed to undertake additional easing.
Fed policymakers have convinced themselves, however, that the low yields are a risk-off anomaly in the face of European turmoil and not a sign of expectations of deflationary stagnation.
This story might get old in 2012.
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A bridge too far: How much stimulus does the Fed ‘owe’
2007
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2007
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01
2007
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2007
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2008
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2008
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2008
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2008
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2011
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2011
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019.4
9.45
9.5
9.55
9.6
9.65
9.7
9.75
Implied gaps between target and actual nominal GDP following the Great Recession
Romer's proposed linear target path
Target path w/ rebasing
Actual path
No
min
al G
DP
(in
nat
ura
l lo
gar
ith
ms)
Source: Data from St. Louis Fed; rebased path from Russell calculations;Romer’s proposal from http://www.nytimes.com/2011/10/30/business/economy/ben-bernanke-needs-a-volcker-moment.html
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Fed transparency and communication
Each Fed policymaker will now provide multi-year forecasts of the federal funds rate under her/his view of what is ‘appropriate’ monetary policy
In the January meeting, this means that we will get a glimpse at when each policymaker envisions a first Fed rate hike
We need to pay attention to the accompanying explanation, however, to see whether the reported number is what that policymaker actually expects to happen, or what the policymaker thinks should happen. These could be two different things.
www.russell.com