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Outlook for the Economy & Financial Markets
Robert GenetskiWebsite: ClassicalPrinciples.com
312-565-0112
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Outline
I. Economic FrameworkII. US economic weaknessIII. Financial CrisisIV. Global Outlook: Europe, China, JapanV. Outlook for US Economy & MarketsVI. Take Away Points
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Outline
I. Economic FrameworkII. US economic weaknessIII. Financial CrisisIV. Global Outlook: Europe, China, JapanV. Outlook for Economy 2013 & MarketsVI. Take Away Points
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Outline
What causes booms and busts in the Economy?
1. Keynesian framework2. Classical framework
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Classical Economic Principles 1. Low tax rates & limited government 2. Free Markets 3. Protect individual property rights 4. Sound money
Freedom & Prosperity
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Least Free Third Second Most Free$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Economic Freedom and Per Capita Income: 2010
Economic Freedom Quartile
Source: Fraser Institute, Economic Freedom of the World: 2012 Annual Report
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Economic Freedom Quartile$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000Income of the Poorest 10%: 2010
Least Free Third second most free
Source: Fraser Institute, Economic Freedom of the World: 2012 Annual Report
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Outline
I. Economic FrameworkII. US economic weaknessIII. Financial CrisisIV. Govt. Spending & Debt: US, Europe, ILV. Outlook for Economy & MarketsVI. Take Away Points
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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
7.5
8.0
8.5
9.0
Economic Freedom: United States
score (10 = most freedom)
Source: Fraser Institute; Economic Freedom of the World, 2012 Annual Report; (5 year intervals until 2000)
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1
6
11
16
US Economic Freedom Ranking
score (10 = most freedom)
Source: Fraser Institute; Economic Freedom of the World, 2012 Annual Report; (5 year intervals until 2000)
1970 1975 1980 1985 1990 1995 2000 2005 2010
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1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
3.8
3.9
4.0
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Total Hours Worked: Actual & Potential(private nonfarm economy)natural log of the index
Source: Bureau of Labor Statistics, trend lines represent Census data for annual growth in working age population; calcu -lations by Robert Genetski, classicalprinciples.com.
Potential Hours Worked
Actual Hours Worked
1.7% trend: 1960-2000
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1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
3.4
3.6
3.8
4.0
4.2
4.4
4.6
4.8
5.0
Productivity Trends(annual rates of change; private nonfarm business)
natural log of the index
classicalprinciples.com: Trends are from similar levels of operating capacity to avoid cyclical bias.
Long-term trend: 2.2%
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Federal Spending & Private Spending with regs
2000-05 2005-10 2010-12 2010-12
Federal Govt. Spending: 38% 40% 2% 8%Private Spending 24% 9% 11% 8%
2000 2010 2012 2014 Annual Regulatory Compliance expenses: $1.0 $1.8 $2.0 $2.2(trillions of 2010 dollars)
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Outline
I. Economic FrameworkII. US economic weaknessIII. Financial CrisisIV. Govt. Spending & Debt: US, Europe, ILV. Outlook for Economy &MarketsVI. Take Away Points
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2001
2002
2003
2004
2005
2006
2007
2008
75
80
85
90
95
100
Adjusted Bank Reserves less Excess Reserve billions of dollars
Source: Federal Reserve Bank of St. Louis; classicalprinciples.com
(6-month average)
Not seasonally adjusted
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2005 2006 2007 2008 2009 2010 2011 2012 201390
100
110
120
130
140
150
160
Adjusted Bank Reserves less Excess Reserve billions of dollars
Source: Federal Reserve Bank of St. Louis; classicalprinciples.com ; April, 2013 is an estimate based on partial data.
1 and 6-month end of period averages; annual growth rates in brackets Not seasonally adjusted
QE1
QE2
QE3
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2005 2006 2007 2008 2009 2010 2011 2012 2013-6
-4
-2
0
2
4
6
8
10
12
Commercial Bank Loans & Investments(year over year percent chang)
percent
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Outline
I. Economic FrameworkII. US economic weaknessIII. Financial CrisisIV. Global Outlook: Europe, China, JapanV. Outlook for Economy & MarketsVI. Take Away Points
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1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0
5
10
15
20
25
Total Output of Major Countries (Based on Purchasing Power Parity)
Japan
China
United States
India
France, UK
Germany
Brazil
Source: World Bank; IMF; classicalprinciples.com
trillions of constant US dollars
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World’s Largest EconomiesSource: IMF
Share of Global Output2013 2018
United States 18.6% 17.7%China 15.6 19.0India 5.8 6.5Japan 5.5 4.7Germany 3.7 3.2Russia 3.0 2.9Brazil 2.8 2.8UK 2.7 2.4France 2.6 2.3Mexico 2.1 2.0
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Government Spending as a % of Total Spending
2000 2013 2000-2013• France 52% 56% +4• Greece 47% 50% +3• Germany 45% 45% 0• UK 34% 44% +10• Spain 39% 42% +3• Japan 37% 41% +4• United States 34% 40% +6• Russia 33% 37% +4• India 25% 28% +3• China 17% 24% +7
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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
5.0
6.0
7.0
8.0
9.0
Economic Freedom: Europe
score (10 = most freedom)
United Kingdom
Germany
ItalyGreece
France
Spain
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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
3
4
5
6
7
Economic Freedom Score: China
score (10 = most freedom)
Source: Fraser Institute; Economic Freedom of the World, 2012 Annual Report; (5 year intervals until 2000)
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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
3
4
5
6
7
Economic Freedom: India & Russia
score (10 = most freedom)
India
Russia
China
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1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
6
7
8
9
10
Economic Freedom: Japan
score (10 = most freedom)
Japan
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Net Government Debt to GDP• Greece 176%• Japan 143%• Italy 104%• US 89%• France 86%• UK 86%• Spain 79%• Germany 56%• Mexico 38%• Brazil 34%(China, Russia, India have no net debt)Source: IMF, World Economic Outlook Database, October 2012
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Outline
I. Economic FrameworkII. US economic weaknessIII. Financial CrisisIV. Global Outlook: Europe, China, JapanV. Outlook for Economy & MarketsVI. Take Away Points
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Factors Boosting the US Economy 2013-2014
• Banking system has substantial reserves• Fiscal agreement provides more stable tax
environment• With tax hikes off the table, greater chance of
slowing federal spending
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Factors Restraining the US Economy 2013-2014
• higher tax burdens• regulatory burdens depressing productivity• regulatory burdens depressing job creation• regulatory pressure on banks to rebuild capital
and limit lending
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Outline
V. Outlook for US Economy & Marketsa. Spending pace: 4%-5%b. Inflation: 2%-3% vicinityc. Real growth: 2%-3% vicinityd. Housing pricese. Goldf. Oilg. Interest ratesh. Stocks
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Outline
V. Outlook for Economy & Marketsa. Spending pace: 4%-5%b. Inflation: 2%-3% vicinityc. Real growth: 2%-3% vicinityd. Housing pricese. Goldf. Oilg. Interest ratesh. Stocks
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1996 97 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13$80,000
$120,000
$160,000
$200,000
$240,000
Housing Prices: US
US Composite
Case-Shiller Index of Existing Home Prices adjusted to dollar values
Source: S&P; classicalprinciples.com; Case-Shiller housing price index adjusted for average price of existing homes.
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Home prices are undervalued
• 21% Based on Price to Income
• 8% Based on prices vs. rental costs
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1976 1978 198019811982 198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013$100
$400
$700
$1,000
$1,300
$1,600
$1,900
Gold Prices: Actual & Fundamental
Raw Industrial Commodity Prices(indexed to gold (1976-2006)
()
Gold Price
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1976 1978 198019811982 19841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201310
30
50
70
90
110
130Oil Prices: Actual & Fundamental
Oil Prices
Oil Price-based on average oil/commodity price (1976-2004)
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2000
2000
2000
2001
2001
2001
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
2007
2007
2007
2007
2008
2008
2008
2008
2009
2009
2009
2009
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012
2012
2013
2013
2013
2013
2014
2014
2014
2014
2015
2015
2015
2015
0
1
2
3
4
5
6
7
Fed Funds Interest Rate
Actual
Forecast
Fundamental
Fundamental uses 0.5% real after-tax rate; 1 year average core inflation; 30% tax premium)
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2000
2000
2000
2001
2001
2001
2002
2002
2002
2003
2003
2003
2003
2004
2004
2004
2004
2005
2005
2005
2005
2006
2006
2006
2006
2007
2007
2007
2007
2008
2008
2008
2008
2009
2009
2009
2009
2010
2010
2010
2010
2011
2011
2011
2011
2012
2012
2012
2012
2013
2013
2013
2013
2014
2014
2014
2014
2015
2015
2015
2015
1
2
3
4
5
6
7
10-Year Treasury Bond Rates: Actual & Fundamental
ActualForecast
Fundamental
(Fundamental is 1.4% real rate; 5-year inflation average cpi, gdp deflator; 25% marginal tax rate)
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1946194719481949195019511952195319541955195619571958195919601961196219631964196519661967196819691970197119721973197419751976197719781979198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015-2
-1
0
1
2
3
4
S&P 500 Profit Trend(quarterly profit data; 6.5% trend lines plus and minus 2
standard deviations)
natural log of profit per share
source: classicalprinciples.com (S&P earnings are through 3rd quar-ter of 2007; DJ earnings are through 2nd quarter.
n
S&P 500 Reported Earnings per share
source: classicalprinciples.com (S&P earnings are through 3rd quar-ter of 2007; DJ earnings are through 2nd quarter.
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1947194819491950195119521953195419551956195719581959196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420153
4
5
6
7
8
S&P 500: Actual & Price Based on Average PE & Average Earnings Growth
natural log of both series
Actual Price
Source: classicalprinciples.com, Haver Analytics Fundamental is; based on regression using a 6.5% trend earnings and applying average PE = 17.4 for the period from 1947-2010
Fundamental with one standard deviation limits
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19471948194919501951195253541955195619571958195919601961626319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420153
4
5
6
7
S&P 500: Actual & Model
Fundamental with one standard deviation limits
natural logs
S&P 500 actual
(model based on a regression analysis where inputs include average P/E with stable 6.5% earnings growth and AAA corporate bond rates)
Source: classicalprinciples.com, Haver Analytics; average P/E = 17.4 from 1947-2010 measured as current quarter stock price divided by earnings over the past year.
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19461947194819491950195119521953195419551956195719581959196019611962196319641965196619671968196919701971197219731974197519761977197819791980198119821983198419851986198719881989199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420150
2
4
6
8
10
12
14
16
Earnings/Price S&P 500 & Interest Rates
E/P S&P 500reported earn-ings(thin line)
Moody's AAA bond yield
(Stock prices are current quarter; earnings are reported after-tax for past 4 quarters; operating earnings are shown beginning in 1988)
source: S&P; classicalprinciples.com
percent
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Takeaway Points
• Odds are against economic collapse but… • US, Europe, Japan slow growth and decline in living
standards• Interest rates, inflation stock prices artificially low
– Avoid bonds– Consider price escalators in longer-term contracts
• Growth opportunities – areas promoting economic freedom – assist increase efficiencies for your clients– help individuals maintain living standards/save time
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Questions or Comments
Robert GenetskiWebsite: ClassicalPrinciples.com
312-565-0112
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More Information?Go to:
www.classicalprinciples.com
Follow me on Twitter: @EconBobG
Robert Genetski312-565-0112