economic update october 2011 recession and eu crisis daryl montgomery november 3, 2011 copyright...
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Economic Update October 2011Recession and EU Crisis
Daryl MontgomeryNovember 3, 2011
Copyright 2011, All Rights Reserved
The contents of this presentation are not intended as a recommendation to buy or sell any security.
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Summary• Two biggest issues are whether developed countries
are in recession and how EU debt crisis will continue to unfold.
• U.S. Q3 GDP does not indicate U.S. avoided recession.
• EU banks are not going to be made solvent by recent bailout decisions.
• Even with 50% selective default, Greece is still not fixed. Deal in question.
• Portugal, Ireland, Spain, Italy still in trouble.
• Centrals banks pumping money into system.
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Fiscal State of U.S. – National Debt Clock• National Debt: $14.9 trillion
State and Local Debt $3.0 trillionUnfunded liabilities $116 trillion.
• Debt to GDP ratio 99.6% (actually much higher).• Doesn’t include Federal Reserve or Fannie Mae,
Freddie Mac and FHA obligations. • Debt Ceiling at $16.4 trillion (up to election). • Budget Deficit for 2011 was $1.3 trillion. • Estimated Deficit for 2012 is $1.1 trillion.• 2011 Trade Deficit estimated at $538 billion
(dependent on price of oil).
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U.S. Monetary Base
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Growth in Monetary Base
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Recent Growth in M1 Money Supply
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Historical Growth of M1
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Q3 GDP
• Up 2.5% vs. up 2.9% in Q4 2007.
• Lower inflation rate, 3.3% in Q2 vs. 2.0% in Q3 explains better results by itself.
• Consumer spending up 2.4% vs. 0.7% in Q2 even though consumer confidence back to credit crisis levels.
• Business spending on equipment up 17.4%, on structures 13.3%. Indicates big boom.
• Expect several downward revisions in next few years, just like other GDP reports.
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This Year’s GDP Revisions Compared to Last Year
Blue line original numbers. Red line revised numbers.
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GDP Has Been Inflated by Fed Money Printing
• Fed’s balance sheet has increased by $2+ trillion since end of 2007.
• GDP after revisions was just over $13.2 trillion (2005 chained dollars). Up about $600 billion from bottom.
• Without money printing would GDP be $11.2 trillion or 16% lower (compared to $13.3 trillion in Q4 2007)?
• Current dollar GDP is $15.004 trillion. Without money printing would it be $13.0 trillion?
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Other Economic Indicators
• October Manufacturing PMI U.S. 50.8, China 50.4, UK 47.4, EU 47.1, Brazil 46.5
• U.S. Unemployment rate 9.1%.
• Consumer credit decreasing at 4.5% annually.
• Consumer confidence at 39.8, worst since March 2009.
• Retail sales up 8.8% yr over yr, unadjusted for inflation.
• Official CPI inflation 3.9% yr over yr (Shadow Stats around 11%).
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Shadowstats.com and Reported U.S. CPI
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Nominal Retail Sales
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Inflation Adjusted Retail Sales
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Problems in the EU Not Resolved
• Greek bailout timeline supposed solutions:May 2010 - €110 billionJuly 2011- €109 billion, plus 21% bondholder lossOctober 2011 - €130 billion, plus 50% bond loss for creditor other than EU/IMF
• Referendum crisis arises only 4 days later.
• One-year interest rates in Greece before Oct plan as high as 193%, fell to 154%, then rose to 206%.
• Hard default would be around 75% or more.
• Would be bigger than Russian default in 1998.
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• EFSF (European Financial Stability Fund) is to be leveraged from €440 billion to one trillion euros. This is borrowed/printed money.
• EFSF to be used to buy debt from PIIGS and for bank recapitalization (ie. bailouts)
• Banks are to raise capital other ways first. This will lead to tighter credit in EU.
• Dexia Bank already failed, more to come.
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Who Owns Greek Debt?
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Greek One-Year Bond Yields
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Greek 10-Year Bond Yields
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Portuguese 10-Year Bond Yields
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Italian 10-Year Bond Yields
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