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