Economic Talk New Program

Slide 1: 

Park State Bank & Trust

Slide 2: 

Brad Spivey Park State Bank & Trust Vice President Chief Investment Officer

Is The Debt Crisis Over? : 

Is The Debt Crisis Over? Yes: in the sense that confidence came back to financial markets, headline growth improves - But full cost, in terms of higher unemployment, lost growth, lower incomes, still to be felt. No: long-standing, underlying problems from “super-sized finance” have actually worsened Far from being addressed by US anti-crisis strategy, we now face greater dangers. Real reform eventually likely, but immediate opportunity to act already missed: vast costs.

Two Views Of The Crisis : 

Two Views Of The Crisis Official (US government, G20): an unfortunate global financial accident occurred. Rare: once per century in global finance core breakdown. Need to counteract with massive policy response: Increase US debt/GDP from 41% to around 80%. Small changes to regulatory structure will suffice. Alternative: political and economic structure in the United States changed since 1980s, creating global vulnerability. The destabilizing power of financial sector, repeating historical patterns in US and elsewhere.

Slide 6: 

Remember, this is not a normal economic contraction. This is a debt crisis produced from over confidence which led to over investment and over speculation all with borrowed money. Over-investment and over-speculation are often important; but they would have far less serious results were they not conducted with borrowed money.

Slide 7: 

The reality is that the Federal Reserve is simply following the debt-deflation game plan and doing exactly what the vast majority of US central bankers have always insisted they would be doing if trying to prevent a full collapse into a deflationary depression; that is, try and reflate.

Slide 8: 

And so there you have all you need to know about the Federal Reserve's game plan for ending the unwinding of the debt bubble and avoiding a deflationary spiral. The answer is simple: reflate, reflate, reflate, by all means necessary reflate.

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So, the 14 Trillion dollar question is… Will it work.

Slide 11: 

Credit markets have stabilized. Equity markets have recovered from the crisis lows. Home prices have stabilized for a few months, although sales are slowing. Inventory rebuilding will provide economic growth for a few quarters. Job loss appears to be slowing. The Fed’s gambit to force investors out on the risk curve seems to be working.

Now the bad news : 

Now the bad news Unemployment is high and rising. Consumer confidence continues to suffer. Total debt is still high and rising. Record excess production capacity. Home foreclosures and delinquencies are still rising. Commercial loans delinquencies are rising fast. Commercial property values are collapsing rapidly. The dollar is being devalued to “reflate” assets. The deficit is at all-time highs and will most likely continue to rise for years to come.

Bank weakness continues : 

Bank weakness continues The FDIC Quarterly Banking Profile is one of the most important leading indicators for the US economy and the deterioration was worse in the third quarter than the second quarter, which warns that the recession hasn't ended and will continue at least through 2010. No double dip until the first dip ends.

Slide 14: 

The Third Quarter FDIC Quarterly Banking Profile shows a deteriorating economy. The Number of Problem Banks increased dramatically in the third quarter to 552 from 416. Forty-seven institutions were absorbed by mergers during the quarter, while 50 institutions failed. This is the largest number of failures in a quarter since the fourth quarter of 1992, when 55 insured institutions failed.

Slide 15: 

The Deposit Insurance Fund was in arrears by $8.2 billion at the end of the third quarter. This does not include $23 billion the FDIC set aside for reserves.

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Noncurrent loans continue to rise at a faster pace than Reserves for Losses.Reserves for Losses increased $9.2 billion in the third quarter, while Noncurrent Loans increased $34.7 billion. Year-over-year reserves are up 40.8% while noncurrent loans are up 95.7%. This puts significant stress on the banking system and extends “The Great Credit Crunch."

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Quarterly Decline in Loan Balances Is Largest on Record Total assets of insured institutions fell for a third consecutive quarter. Total loan and lease balances declined by $210.4 billion (2.8 percent) during the quarter. This is the largest percentage decline in loan balances in any quarter since insured institutions began reporting quarterly results in 1984.

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Keeping the whole picture in perspective, overall debt growth is stable. The increase in government borrowing was partially offset by a decline in private sector borrowing. Once the effects of the recession are over, the split between private and public debt will not be that important. Whoever’s name is on the debt, it will still be up to the private sector to provide the wherewithal to repay it.

Housing : 

Housing It remains to be seen if house price appreciation can survive when government support for the housing market is withdrawn. The two most important of these programs are the first-time homebuyer tax credit, which was just extended, and the Fed’s mortgage purchase program, which is already winding down and will end altogether at the end of March. For now, though, home prices have stabilized. Government guaranteed mortgages accounted for 98% of total mortgage-backed security issuance in the 2nd & 3rd quarters.

Slide 26: 

The Case/Shiller Home Price Index showed that the 20-City Index fell 9.4% year over year, but with a modest bump of 0.3% for September versus August.

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Problems for home prices are the fact that one in four mortgages in the United States are now underwater, and mortgage delinquencies continue to rise along with the unemployment rate.

Unemployment : 

Unemployment Unemployment is high and rising. But if the recession is over, won’t employment start to rise? We need to create 15 million jobs in the next five years to return to full employment.

Slide 34: 

The average work week grew to 33.2 hours in November from 33 hours, the biggest rise since March 2003.

Slide 51: 

Economic recoveries, much less forced reflating of economies and assets, tend to be marked by uneven growth. A couple of months of good news will be followed by a month of retrenchment. The urgency of the economy and financial markets spiraling out of control is past. As a result, the FOMC is moving much more slowly than it did earlier this year. There is an ongoing debate about how and when to remove stimulus.

Slide 52: 

the Compare this from September statement: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

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And the November statement: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Slide 54: 

The added detail makes clear the economic data to which the Fed will react when raising rates are not growth indicators but indicators of employment and inflation. This is as it should be, though I hope they are also on the alert for inflated asset values. There is intense debate within the Fed Board members whether monetary policy should be used to “lean against” potentially dangerous swings in asset prices.

Slide 55: 

Summary The Fed has told us (indirectly) what signs to look for as to when the current accommodative policy might end: Removal of liquidity programs. An ending to security purchases and possibly start selling. Stabilization of employment. Stabilization of prices.

Slide 56: 

The reflating of the economy has commenced. Balance sheet repair by institutions and households will restrain the pace of the recovery thru 2011. The unemployment rate is likely to continue rising, perhaps peaking in 2010 at a level over 10%. The sharp increase in Fed credit is not currently inflationary but has the potential to be if the Fed does not neutralize this credit at the appropriate time. The earliest the Fed is to begin “neutralizing“ the credit it has created is midyear 2010 and then slowly.

Slide 57: 

We have enormous excess capacity; about 68% utilization. Housing is likely to remain difficult for at least several years. We’re deleveraging. All of this is deflationary. Will the Fed print enough money to reflate the economy? The question still remains whether the early signs of recovery will spread outside of government stimulus.

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The value of the dollar is being deflated. There is increased regulation if not outright control of the private sector by government enterprises and policy control. The deficit is growing and will most likely continue to grow for years to come.

Conclusion : 

Conclusion The economy is in the process of bottoming. The year-over-year comparisons are getting easier. But it’s going to be a while before we get back to full employment. There is an unhealthy reliance on government for growth in our increasingly command driven economy. This results in the reality that monetary, fiscal and tax policy will continue to be the key determinant for economic recovery (reflation). While the numbers may say recovery, it’s not going to feel like one.

Slide 60: 

So, the 14 Trillion dollar question is… Will it work.