fixed annuities in a variable world presented by: professor peter navarro university of...

FIXED ANNUITIES IN A VARIABLE WORLD

Presented by:

Professor Peter Navarro

University of California-Irvine

The Next 90 Minutes

How The World Economy Works

How Economic Forecasting Works

A Forecaster’s Trip Around the World

Where are stock and bond prices headed?S

Q&A

Team Assignment

1. Golfer

2. A “good walk spoiled” non-golfer

Golfer

A “good w

alk spoile

d” n...

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What’s Your Economic Forecast for GDP Growth in the Next 12 months?

1. Robust (3% or more)

2. Decent (2%)

3. Slow (1%)

4. Stagnant (0%)

5. Recession (Argh!)

1. 2. 3. 4. 5.

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What is your 30-year Treasury yield forecast over the next 24 months?

1. Rising in U.S. to 6% or higher

2. Rising slightly to the 4% to 5% range

3. Remaining steady around 3%

4. Falling to 2% or below

Rising i

n U.S.

to 6% or h

i...

Rising s

lightly

to th

e 4%...

Remaining steady a

roun...

Fallin

g to 2% or b

elow

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http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

What is your forecast of stock prices over the next 24 months?

1. Sustained bullish uptrend

2. Sideways market

3. Sustained bearish downtrend

Sustained bullis

h uptrend

Sideways mark

et

Sustained bearis

h dow...

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HOW THE WORLD ECONOMY WORKS

To forecast the U.S. economy, you also must forecast the global economy

1. True

2. False

True

False

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A Consumer Parasite-Host Conundrum

ConsumerEurope (EU)

ConsumerU.S.A.

Export-Dependent

China

Exports

Exports

- $300 Billion

- $200 Billion

The Commodity Nation Universe

Factory FloorChina

EmergingMarkets

Australia & Canada

BrazilRussia

• Coal• Iron Ore• Copper

• Lead• Zinc

• Gold• Natural gas• Oil

• Palm Oil• Rubber• Tin

The New Butterfly Effect

RecessionEurope

Slow GrowthU.S.A.

ExportDependent

China

China DependentCommodity Countries

Weak Demand For Chinese Exports

Weak Demand for Commodity

Imports

Black = U.S. Stock Market (SPY)

Rust = Europe (VGK)

Blue = Emerging Markets (EEM)

Gold = China (FXI)

NoteCoupling

Of These

Economies!!!(Six month Chart)

HOW TO BE YOUR OWN ECONOMIC FORECASTER!

Why are economic forecasters so often wrong?

1. They don’t live in the real world

2. Flawed models

3. The Fed screws things up

4. Exogenous shocks happen

5. All of the above

They don’t l

ive in

the re

..

Flawed m

odels

The Fed scre

ws things u

p

Exoge

nous shock

s happen

All of t

he above

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Time

Real GDP(% Change) Secular

Growth Trend

Expansionary Peak

Recessionary Trough

The Typical Business Cycle

PUNCHLINE!Follow the four GDP drivers to forecast GDP movements!

GDP = C + I + G + (X – M)

• ECRI Leading Index• Stock Market• Yield Curve Spread

• Trade Report• Global economy

ISM Manufacturing

Index

• Consumer Confidence• Retail Sales• Home Sales

• Budget Deficits

• Consumer Price Index• Producer Price Index

http://www.economy.com/dismal/navarro

Forecasting Framework & Indicators

U.S.S. Inflation Fighter????

THE U.S. ECONOMY

U.S. GDP Indicators

CONSUMPTION INDICATORS

Consumer Confidence & New Home Sales

INVESTMENT

ISM Manufacturing Index (10 Year)

GOVERNMENT SPENDING & NET EXPORTS

Budget Basics

A Future of chronic deficits

Share down from 4% to 3% of GDP

Defense spending a big loser

What are the risks of chronic budget deficits?

1. Government bonds will “crowd out” corporate bonds

2. Interest payments erode government’s ability to provide services/infrastructure

3. Exposure to foreign coercion4. All of the above

Govern

ment bonds w

ill ...

Interest

payments ero

d...

Exposu

re to

fore

ign co

e...

All of t

he above

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Net Exports

Shows how slow growth in Europe and China can harm our GDP

China accounts for what percent of the U.S. trade deficit excluding oil?

1. 15%

2. 30%

3. 45%

4. 60%

5. 75%

1. 2. 3. 4. 5.

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If U.S. wants to cut its tradedeficit and grow, it has to cutits trade deficit with China!

GDP Breakdown = C + I + G + (X-M)

GDP Drivers Contribution to Growth Rate

Consumption (C) 1.7%

Investment (I) 1.8%

Government Spending (G) 0.8%

Exports (X) 0.8%

Imports (M) -2.5%

GDP Growth Rate Q3-10 2.6%

Deficit a HUGE drag on GDP growth!

The New Energy Revolution

Shale Gas PLUS Oil Sands & Artic Exploration

Reducing trade deficit drag on GDP by a point or more

Worth over a MILLION new jobs a year!

A North American Energy Independence is Now Possible

THE CENTURY OF QUANTITATIVE EASING

Quantitative Easing Lowers:

1. Long term interest rates

2. Short term interest rates

3. Both

Long te

rm in

terest

rates

Short term

inte

rest ra

tesBoth

33% 33%33%

Quantitative Easing Tends to:

1. Lower stock and real estate prices

2. Raise stock and real estate prices

3. Lower stock prices and raise real prices

4. Raise stock prices and lower real estate prices

Lower s

tock

and re

al est.

..

Raise st

ock and re

al esta

t...

Lower s

tock

prices a

nd ra...

Raise st

ock pric

es and lo

...

25% 25%25%25%

QE: A HUGE boon for stock markets and real estate around the world!

QE Tends to:

1. Decrease the level of foreign investment in emerging markets

2. Increase the level of investment in emerging markets

Decreas

e the le

vel of f

o...

Increase

the le

vel of in

...

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QE Is Important

As the U.S. is winding down QE….

Emerging markets are suffering

BUT Europe is about to ramp up QE

Europe

GDP = C + I + G + (X – M)

Europe (Low Growth, No Jobs)

:How the Fed & China Wounded Europe

Flight to safety during European crisis

Bernanke’s “beggar thy neighbor” easy money + China’s fixed peg a dagger through Europe’s

heart

PUTIN’S GAMBIT

A GEOPOLITICAL MAP OF UKRAINE

Will economic sanctions be enough to deter Russia from taking eastern Ukraine?

1. Yes2. No3. Not Sure4. I could care less

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nswer t

ext...

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China

GDP = C + I + G + (X – M)

China (The 10% Train Derailed)

China’s Export-Led Model Vulnerable

GDP downshifting

Massive real estate bubble

Rising labor costs

Far too export dependent

U.S. and Europe now too weak to sustain China’s historic 10% per year growth rate.

Who is this guy?

1. Mahatma Gandhi

2. Narendra Modi

Mahatm

a Gan

dhi

Narendra

Modi

50%50%

India (Will Modi Save the Decade?)

THE ROLE OF EXTERNAL SHOCKS

Should The U.S. and NATO Provide the Ukraine With Military Support?

1. Yes2. No3. Not Sure4. Here we go again

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How might the situation in the Ukraine lead to a U.S. economic slowdown?

1. Energy price shocks to Europe.

2. “Hot war” disrupts global economy

3. Russian counter- sanctions against U.S.

4. All of the above

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THE NORTH KOREAN WILD CARD

South Korea’s GDP is a little over $1 trillion annually. What’s North Korea’s?

1. $1 trillion2. $500 billion3. $250 billion4. $15 billion

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What percent of North Korea’s population has starved to death?

1. 1%2. 2%3. 5%4. 10%

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How might North Korea draw the U.S. and China into conflict?

1. Internal collapse2. Provocation or invasion3. Nuclear proliferation4. Nuclear strike

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THE MIDDLE EAST POWDER KEG

How does the current turmoil in Iraq affect the global economy?

1. Oil prices2. Oil prices3. Oil prices4. All of the above

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How many recessions since WWII have been preceded by an oil shock?

1. None

2. Some

3. Most

4. All

1. 2. 3. 4.

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The New ISIS Sunni Caliphate?

Oil and Gas Under ISIS Control(Islamic State of Iraq and the Levant)

A Partitioned Iraq?

Should the U.S. send troops back into Iraq?

1. Yes 2. No3. Never should have sent

troops to begin with4. Where’s Saddam when

you need him?

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CONTRETEMPS IN THE EAST CHINA SEA

Where World War III Begins?

Should America retain forward bases and aircraft carrier strike groups in Asia?

1. Yes2. No3. Hell no

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If the U.S. withdraws from Asia, the probability of nuclear war would:

1. Fall2. Rise3. Remain the same4. There is zero chance of

nuclear war because of mutual assured destruction.

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Why are China and Japan fighting over the Senkaku/Diayou Islands?

1. Oil and fish2. National defense3. Nationalism4. All of the above

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If China and Japan fight, should the U.S. come to Japan’s defense per their treaty?

1. Yes2. No3. How about we side

with China?

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If China controlled Asia militarily, America’s economy would :

1. Grow stronger2. Grow weaker3. Be unaffected

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What’s Your Economic Forecast for GDP Growth in the Next 12 months?

1. Robust (3% or more)

2. Decent (2%)

3. Slow (1%)

4. Stagnant (0%)

5. Recession (Argh!)

1. 2. 3. 4. 5.

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TIME FOR QUESTIONS

www.peternavarro.com