global economic trends & processes
DESCRIPTION
Global Economic Trends & Processes. Dr. Jacob A. Frenkel Vice Chairman AIG, Chairman G30. DRAFT -. The 8 th Herzliya Conference January 20-23 2008. Global Equity Markets. U.S. Equity Markets Global Equity Indices: U.S. S&P 500 Index U.K. FTSE 100 Index Germany DAX Index - PowerPoint PPT PresentationTRANSCRIPT
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
1
Global Economic Trends Global Economic Trends & Processes& Processes
Dr. Jacob A. Frenkel Dr. Jacob A. Frenkel Vice Chairman AIG, Chairman G30Vice Chairman AIG, Chairman G30
DRAFT -
The 8th Herzliya Conference
January 20-23 2008
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/200822
Global Equity MarketsGlobal Equity Markets
• U.S. Equity MarketsU.S. Equity Markets
• Global Equity Indices: Global Equity Indices: U.S. S&P 500 IndexU.S. S&P 500 Index
U.K. FTSE 100 IndexU.K. FTSE 100 Index
Germany DAX IndexGermany DAX Index
Japan NikkeiJapan Nikkei
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/200833
2006 20079,000
10,000
11,000
12,000
13,000
14,000
1,100
1,200
1,300
1,400
1,500
1,600
S&P 500
DowJones
(close - price)
Standard & Poors 500 Composite Index (Right) Dow Jones Industrial Average Index (Left)
Source: Bloomberg, Market Data, Last Observation 17 Jan 2008
Global Equity MarketsGlobal Equity Markets
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/200844
Source: Bloomberg, Market Data, Last Observation 17 Jan 2008
10/06 1/07 4/07 7/07 10/07 1/081,200
1,250
1,300
1,350
1,400
1,450
1,500
1,550
US S&P 500 Index
10/06 1/07 4/07 7/07 10/07 1/085,600
5,800
6,000
6,200
6,400
6,600
6,800United Kingdom FTSE 100 Index
Global Equity MarketsGlobal Equity Markets
Year-end 2006 Value
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/200855
Economic GrowthEconomic Growth
• Industrial CountriesIndustrial Countries
• Developing CountriesDeveloping Countries
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/200866
Source: IMF, av. annual growth rates, Asian NICs (Hong Kong, Korea, Singapore, Taiwan), last update 10/2007 (2007, 2008 forecast)
2000 2001 2002 2003 2004 2005 2006 2007 2008
0
2
4
6
8 (% from a year ago)
US Eurozone Japan Asian NIC
Asian NICs4.4%
Eurozone 2.1%
U.S. 1.9%
Japan 1.7%
Real GDP Growth (%) Industrial CountriesReal GDP Growth (%) Industrial Countries
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20087
Real GDP Growth (%) Developing CountriesReal GDP Growth (%) Developing Countries
Source: IMF, av. annual growth rates, last update 10/2007 WEO (2007, 2008 forecast)
2000 2001 2002 2003 2004 2005 2006 2007 2008
0
2
4
6
8
10
(% from a year ago)
Russia Developing Asia Africa Central & Eastern Europe Latin America
Developing Asia 8.8%
Russia 6.5%
Africa 6.5%
Central & East. Europe
5.2%
Latin America 4.3%
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/200888
InflationInflation
• Headline InflationHeadline Inflation
• Oil-Price InflationOil-Price Inflation
• Gold-Price InflationGold-Price Inflation
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/200899
2000 2001 2002 2003 2004 2005 2006 2007
-2
-1
0
1
2
3
4
5
©FactSet Research Systems
(%)
Eurozone U.S. Japan
Headline CPI Inflation (%)Headline CPI Inflation (%)
Source: U.S. Dept. of Labor, Eurostat, Japan MIC, quarterly averages, last observation 12/2007, Japan 11/07
Eurozone3.1%
U.S. 4.1%
Japan0.6%
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081010
1999 2000 2001 2002 2003 2004 2005 2006 2007
10
20
30
40
50
60
70
80
90
100
©FactSet Research Systems
(US$/Bb)
2005 av. $59.8
14 Jan ‘08 $90.5
2003 av. $30.8
2006 av. $65.9
2001 av. $24
2004 av. $39.6
Source: EcoWin, WTI Light Crude, USD/barrel, Last observation 17 Jan 2008
Oil Price per BarrelOil Price per Barrel
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081111
Source: EcoWin, WTI Light Crude, USD/barrel, Gold, USD/troy oz, Last observation 17 Jan 2008
Gold Price and Oil Price per BarrelGold Price and Oil Price per Barrel
1999 2000 2001 2002 2003 2004 2005 2006 2007200
300
400
500
600
700
800
900
10
20
30
40
50
60
70
80
90
100
©FactSet Research Systems
($/troy oz) ($/Barrel)
Oil: 17 Jan $90.5
Gold: 17 Jan $894.5
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081212
Labor MarketLabor Market
• UnemploymentUnemployment
• Unit Labor CostUnit Labor Cost
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081313
2000 2001 2002 2003 2004 2005 2006 2007
4
5
6
7
8
9
(%)
U.S. Eurozone Japan
Eurozone7.2%
Japan3.8%
U.S. 5.0%
Source: National Statistical Institutes, quarterly end of period values, last observation US 12/2007, Eurozone & Japan 11/2007
Unemployment Rate (%)Unemployment Rate (%)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081414
2002 2003 2004 2005 2006 200760
70
80
90
100
110
120
130(Index)
France Italy U.S. Germany
Relative Unit Labor Cost (Manuf. Sector) Relative Unit Labor Cost (Manuf. Sector)
Source: OECD, last observation Q4/2007 (2007 estimate)
Italy +31.0%
since 2002
Germany -5.05% since 2002
France +9.86%
since 2002
U.S. -31.61% since 2002
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081515
Current Account ImbalanceCurrent Account Imbalance
• International ImbalancesInternational Imbalances
• The Role Of AsiaThe Role Of Asia
• The Role of ChinaThe Role of China
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081616
($B)
-900
-600
-300
0
300
600
2000 2001 2002 2003 2004 2005 2006 2007 2008
Current Account of Balance of PaymentsCurrent Account of Balance of Payments
Eurozone -$51B
Asia$736B
U.S. - $788B
ME Oil Exp. plus Russia
$296B
Asia & Oil Exporters SaveAsia & Oil Exporters Save
Europe BalancesEurope Balances
US SpendsUS Spends
Source: IMF, av. annual growth , last update 10/2007 WEO Forecast (2007, 2008 forecast)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081717
$824
$98
$294
$21$59
0
100
200
300
400
500
600
700
800
900
China Japan Russia Taiwan South Korea
($B)
$260$266
$436
$930
$1,455
0
200
400
600
800
1,000
1,200
1,400
1,600
China Japan Russia Taiwan South Korea
($B)
Source: Nat. Statistical Institutes, last update 10/2007, Foreign-Exchange Reserves excluding gold.
StockStock(September 2007)(September 2007)
StockStock(September 2007)(September 2007)
FlowFlow(2005 – Q3 2007)(2005 – Q3 2007)
FlowFlow(2005 – Q3 2007)(2005 – Q3 2007)
Accumulation of Foreign Exchange Reserves ($B)Accumulation of Foreign Exchange Reserves ($B)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081818
U.S.U.S.&&
EUEU
People’sPeople’sRepublic ofRepublic of
ChinaChina
ExportsExports
ImportsImports
$500 $500 billionbillion
$185 billion$185 billion
AsiaAsia ImportsImports
ExportsExports
$644 billion$644 billion
$588 billion$588 billion
Source: National Bureau of Statistics of China, 12-months through October 2007
China’s Role in Global TradeChina’s Role in Global Trade
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20081919
Labor Cost ComparisonLabor Cost ComparisonUnit Labor cost comparisons for manufacturing workers, 2002
(U.S. = 100)
ChinaChina $21.3$21.3
IndiaIndia $19.7$19.7
EU-15EU-15 $99.0$99.0
U.S.U.S. $100.00$100.00
JapanJapan $120.40$120.40Source: The Conference Board published 2006
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082020
% of income
53.2
32.830.2
28.4
22.0
10.3
0
10
20
30
40
50
60
CHINA INDIA KOREA, REP.OF
JAPAN EURO AREA(AGG.)
UNITEDSTATES
Source: EIU estimates, annual average rates, Last update 12/2007
National Savings Rate Comparison National Savings Rate Comparison Gross Domestic Savings: 2007 (% of GDP)Gross Domestic Savings: 2007 (% of GDP)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082121
U.S. Housing U.S. Housing
• Housing Prices, Sales and InventoriesHousing Prices, Sales and Inventories
• MortgagesMortgages
• Delinquencies and ForeclosuresDelinquencies and Foreclosures
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082222
1996 1998 2000 2002 2004 2006 2008-8
-4
0
4
8
12
16(% from year ago)
Changes in U.S. Home PricesChanges in U.S. Home Prices
Source: National Asc. of Realtors, Annual growth in median home prices, quarterly averages, last Observation 11/2007
Nov 2007 -4.9%
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082323
1990 1992 1994 1996 1998 2000 2002 2004 2006 200880
85
90
95
100
105
110
115(in % of household income)
U.S. Household Real Estate WealthU.S. Household Real Estate Wealth
Q3 2007 103.20%
Source: Federal Reserve, Owners’ Equity in Household Real Estate as % of Disposable Household Income, last observation Q3/2007
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082424
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0.4
0.6
0.8
1
1.2
0.8
1.2
1.6
2
(mill. units) (mill. units)
Housing Starts (Right) New Home Sales (Left)
Source: U.S. Dep. of Commerce, National Association of Realtors, quarterly averages, last observation Starts 12/2007, Sales 11/07
U.S. New Home Sales and Housing StartsU.S. New Home Sales and Housing Starts
New Home Sales: 0.68M
Housing Starts: 1.15M
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082525
2001 2002 2003 2004 2005 2006 20073
4
5
6
7
8
9
10
11(months)
Existing Home Inventories/Sales New Home Inventories/Sales
Source: U.S. Dep. of Commerce, National Association of Realtors, monthly values, last observation 11/2007
U.S. Home Inventory-to-Sale RatioU.S. Home Inventory-to-Sale Ratio
Existing Home: 10.1
New Home: 89.2
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082626
1999 2000 2001 2002 2003 2004 2005 2006 2007
4
5
6
7
8
9
6
8
10
12
14
16
(% of Total Loans)
Delinquencies, Subprime (Right) Delinquencies, Total (Left)
U.S. DelinquenciesU.S. Delinquencies
Source: Mortgage Bankers Association, last observation 9/30/2007
Q3 200716.31% (Right)
Q3 20075.59% (Left)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082727
'99 '00 '01 '02 '03 '04 '05 '06 '07
2
4
6
8
10(% of Total Loans)
Foreclosures - subprime Foreclosures - total
U.S. ForeclosuresU.S. Foreclosures
Source: Mortgage Bankers Association, last observation 9/30/2007
Q3 20076.89%
Q3 20071.69%
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082828
Subprime ARM, 10%
Subprime Fixed, 4%
Alt-A ARM, 7%
Alt-A Fixed, 4%
Prime ARM, 16%
Prime Fixed, 59%
U.S. Composition Mortgage MarketU.S. Composition Mortgage Market
Source: Mortgage Bankers Association, last observation 6/30/2007
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20082929
U.S. Financial Markets U.S. Financial Markets
• Asset-backed Commercial Papers (CP)Asset-backed Commercial Papers (CP)
• Financial Market Volatility Financial Market Volatility
• Credit Market SpreadsCredit Market Spreads
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083030
U.S. Composition of Asset-backed CP U.S. Composition of Asset-backed CP MarketMarket
Source: Federal Reserve, last update 17 Jan 2008
'01 '02 '03 '04 '05 '06 '07400
500
600
700
800
900
1,000
1,100
1,200
100
150
200
250
300
350
400($Bil.) ($Bil.)
Asset-backed CP (Left) Financial CP (Left) Corporate Non-Financial CP (Right)
Corporate non-financial
(right)
Asset-Backed (left)
Financials(left)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083131
Source: CBOE VIX, Monthly averages, last observation 17 Jan 2008
1990 1992 1994 1996 1998 2000 2002 2004 2006 200810
15
20
25
30
35
40(%, expected annualized change in the S&P500 in the next 30 days)
30 Sep ‘98 38.20%
30 Sep ‘02 37.65%
28 Sep ‘01 35.07%
17 Jan ‘08
22.25%
U.S. Stock Volatility IndexU.S. Stock Volatility Index
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083232
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1
2
3
4
5
6
©FactSet Research Systems
(percentage points) (percentage points)
Lehman High Yield Spreads vs TreasuriesLehman High Grade Yield Spreads vs Treasuries
Source: Market Rates, weekly averages, last update 10 Jan 2008
High Yield Spreads
High Grade Spreads
U.S. Credit Market SpreadsU.S. Credit Market Spreads
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083333
U.S. Recession?U.S. Recession?
• Retails Sales: Housing & Non-HousingRetails Sales: Housing & Non-Housing
• Construction SpendingConstruction Spending
• Corporate ProfitsCorporate Profits
• Investment: Business & Residential Investment: Business & Residential
• US Consumer Confidence and SpendingUS Consumer Confidence and Spending
• Exchange RatesExchange Rates
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083434
Source: The Census Bureau, Last Observation 11/2007
U.S. Change inU.S. Change in Retail SalesRetail Sales
'00 '01 '02 '03 '04 '05 '06 '07-4
0
4
8
12
16
Housing Related = Furniture + Household Furnishing + Building Material
(percentage points)
(% 1YR) Non-Housing Retail Sales(% 1YR) Housing Related Retail Sales (Furniture + HH Furnishing + Building Material)
Housing Related
Non-Housing
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083535
2003 2004 2005 2006 2007
-20
-10
0
10
20
(% change from a year ago)
Public Construction SpendingPrivate Nonresidential Construction Spending
Private Residential Construction Spendings
Source: U.S. Census Bureau, last observation 11/2007
Private Non-residential
Private Residential
Public
Res. Constr. Spending 2007-Q3 $519BNon-Res. Constr. Spending 2007-Q3 $356BPublic Constr. Spending 2007-Q3 $294B
U.S. Construction Spending By SectorU.S. Construction Spending By Sector
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083636
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-20
-15
-10
-5
0
5
10
15(Real, yoy%)
Residential Investment Business Investment
U.S. InvestmentU.S. Investment
Source: Bureau of Economic Analysis, Annual Rate, last observation 9/2007 (2007 estimate)
Business Investment
Residential Investment
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083737
1998 1999 2000 2001 2002 2003 2004 2005 2006 200725
26
27
28
29
30
31
32
33
34(Real, Annual Rate, SA)
Residential Investment as % of Total Investment
Residential Investment as a % Total Residential Investment as a % Total
Source: Bureau of Economic Analysis, Annual Rate, last observation 9/2007 (2007 estimate)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083838
1992 1994 1996 1998 2000 2002 2004 2006-1
0
1
2
3
4
5
6
7
60
80
100
120
140
(% from year ago) (Index)
Consumer Confidence Consumer Spending
Source: Conference Board, BEA, period averages; last observation 11/2007 Consumer Spending, 12/07 Consumer Confidence
U.S. Consumer Confidence and SpendingU.S. Consumer Confidence and Spending
Consumer Confidence (right)
Real Consumer Spending (left)
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20083939
1990 1992 1994 1996 1998 2000 2002 2004 2006 20085
6
7
8
(%)
U.S. Corporate Profits as % of GDPU.S. Corporate Profits as % of GDP
Q3 2007 8.24%
Source: U.S. Department of Commerce, last observation 9/2007
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084040
2000 2001 2002 2003 2004 2005 2006 200770
75
80
85
90
95
100
105
110
115(Index)
Source: Federal Reserve, 3/31/2000 = 100, end of quarter, last observation 17 Jan 2008.
17 Jan ‘0874.7
29 Mar ‘02112.46
Trade Weighted Value of U.S. Dollar Trade Weighted Value of U.S. Dollar
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084141
Long-term Demographic ChallengeLong-term Demographic Challenge
• Developed CountriesDeveloped Countries
• Developing CountriesDeveloping Countries
• U.S., Europe, Asia, AfricaU.S., Europe, Asia, Africa
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084242
Developed Countries Demographic ChallengeDeveloped Countries Demographic Challenge
Projected change in population 2005 - 2025:
+37.7M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084343
Developing Countries Demographic ChallengeDeveloping Countries Demographic Challenge
Projected change in population 2005 - 2025:
+1,402.8M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084444
U.S. Demographic ChallengeU.S. Demographic Challenge
Projected change in population 2005 - 2025:
+51.9M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084545
Europe Demographic ChallengeEurope Demographic Challenge
Projected change in population 2005 - 2025:
-21.2M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084646
Asia Demographic ChallengeAsia Demographic Challenge
Projected change in population 2005 - 2025:
+882.7M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084747
Japan Demographic ChallengeJapan Demographic Challenge
Projected change in population 2005 - 2025:
-3.3M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084848
China Demographic ChallengeChina Demographic Challenge
Projected change in population 2005 - 2025:
+125.6M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20084949
India Demographic ChallengeIndia Demographic Challenge
Projected change in population 2005 - 2025:
+292.1M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20085050
Africa Demographic ChallengeAfrica Demographic Challenge
Projected change in population 2005 - 2025:
+438.6M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20085151
Israel Demographic ChallengeIsrael Demographic Challenge
Projected change in population 2005 - 2025:
+2.0M
Source: United Nations Populations Division
AIGWORLD LEADERS ININSURANCE ANDFINANCIAL SERVICES
01/18/20085252
RisksRisks
1. Risk of U.S. Housing collapse spreading throughout the economy1. Risk of U.S. Housing collapse spreading throughout the economy
2. Risk of ‘sub prime crisis’ spreading throughout credit markets2. Risk of ‘sub prime crisis’ spreading throughout credit markets
3. Risk of Rising Budget Deficits 3. Risk of Rising Budget Deficits
4. Impact of a widening the U.S. Current Account deficit 4. Impact of a widening the U.S. Current Account deficit
5. Excessive Concentration in financing the US Current Account5. Excessive Concentration in financing the US Current Account
6. Risk of a dis-orderly adjustments of Exchange Rates6. Risk of a dis-orderly adjustments of Exchange Rates
7. Risk of Protectionism7. Risk of Protectionism
8. Impact of demographic trends on long term Public Finances 8. Impact of demographic trends on long term Public Finances
9. Risk of further increases in oil prices: Inflation & Growth.9. Risk of further increases in oil prices: Inflation & Growth.
10. Risk of Terrorism10. Risk of Terrorism