Heads I Win,
Tails You Lose
By Avery Shenfeld, Chief Economist & Managing Director
September 2012
The Circle Game
Markets
Get
Nervous
Confidence
& Outlook
Worsen
Policy Makers
Hint that
Stimulus Will End
Central Banks/
Governments
Intervene
Confidence
& Outlook
Improve
Markets
Improve
We are
probably here
|
2
Global Economy: Not the Best of Times,
Not the Worst of Times
6
Globa l GDP % chg
Avg = 5.0%
7 Le a n Ye a rs
5
Avg = 3.2%
4
3
2
1
0
-1
04
05
06
07
08
09
10
11
12F
13F
14F
|
3
Europe’s To-Do List: Progress, If a Bit Slow

Austerity “Lite”

Greece: A third deal or exit

Cyprus

Spanish bank funding from EFSF

Spanish government funding from EFSF/ECB

Increased ESM resources

ECB bond purchases (short end)

ECB quantitative easing (long, unsterilized)

Extended financing Portugal/Ireland

Banking pact

Fiscal Stimulus from strongest countries
|
4
Spain: Too Big to Fail, Too Big to Bail?
1000
Billions of €
EFSM
800
IMF
600
Spain Bank
Rescue
400
EFSF/ESM
200
Adverse Scenario:
Additional Spain Bank
Bailout
2nd
Portuguese
Bailout
Spain
Sovereign
Bailout
2nd Irish
Bailout
0
Resources
C osts
Source: EFSF, IMF, European Union, Bloomberg, CIBC
|
5
Japan’s Debt a Ticking Time Bomb (L),
Italy’s Recession Threatens Fiscal Resolve (R)
400
% of GDP
Real GDP to Q1 2008 to Q2 2012 *
350
US
300
PRT
GER
250
FRA
200
ITA
150
SPA
2012
2022
2025
Gov't Debt
Private Financial Assets
Source: Hoshi and Ito, 2012
-10
-5
0
IRE
%
5 chg
*Q1 2012 for Portugal, Ireland
|
6
Europe’s “Other” Problem: Credit
% Balance
Corporate Credit
10
% Balance
Mortgage Credit
60
50
5
Improving
40
Improving
30
0
20
10
-5
0
-10
Worsening
-10
-20
-15
Standards/
availability
US
Demand
UK
EZ
Worsening
Standards/
availability
US
UK
Demand
EZ
|
7
China Factory Activity Index Leads TSX Turns
65
16000
60
14000
55
12000
50
10000
45
C hina-PMI (L)
Jul-12
Sep-11
Nov-10
Jan-10
Mar-09
6000
May-08
35
Jul-07
8000
Sep-06
40
TSX C omposite (R)
Source: CFLP, S&P
|
8
China: From Tiger to Pussycat (L)
Means Weaker Resource Demand (R)
35
16
y/y % chg
30
14
25
12
20
10
15
8
10
6
5
0
Jan-10
C hina's C onsumption
y/y % chg
Projected
+3.6%+4.2%
4
*3-month moving average
2
Aug-10
Mar-11
Oct-11 May-12
Electricity Use* (R )
Railway Freight Volumes* (R )
0
09
10
C opper
11
12
Oil
Source: IEA, CRU, ICSG
|
9
Lower Inflation (L), Modest Debt (R):
Room for Chinese Monetary/Fiscal Boost
10
8
7.5
C urrent Inflation
Target
7.0
6
6.5
4
6.0
2
5.5
0
5.0
140
120
Gross govt* debt/GDP (%)
120%
100
80
60
49%
40
-2
Local
GovtDirect
4.5
20
-4
Jan-07
4.0
Jul-09
Jan-12
0
G-7
C PI, y/y % chg (L)
1-year best lending rate, % (R )
Source: Bloomberg, Moody’s CIBC, IMF
Local Govt
Financing
Vehicles
C hina
National
Govt
* national and sub-national
|
10
2% US Growth Retains Labour Market Slack
Keeps Fed On Hold As Far As Eye Can See
18
Forecast
%
16
14
12
10
8
6
4
2
0
Dec84
Arrows Mark Start of Fed Tightening
Jun87
Dec89
Jun92
Dec94
Unemplo yment Rate
Jun97
Dec99
Jun02
Dec04
Jun07
Dec09
Jun12
U6 Unemplo yment Rate
|
11
Lending Growth (L), Huge Reserves, and Low
Yields (R) Limit QE or Twist Utility
US bank credit (loans and
leases, bns of US$)
7500
5
Ope ra tion Tw ist
discusse d
%
4
7000
30-yr yie ld
3
6500
10-yr yie ld
End of QE2
2
6000
1
Jun-12
Feb-12
Oct-11
Jun-11
Feb-11
Oct-10
Sep-11
Jan-11
May-10
Sep-09
Jan-09
May-08
Sep-07
Jan-07
Jun-10
0
5500
|
12
Record Low Mortgage Rates (L)
Starting to See Results (R)
%
6.0
5.5
Mortgage Bankers
Association Refinancing
Index
8000
5.0
7000
4.5
6000
4.0
5000
US Mortgage Rates
3.5
4000
3.0
3000
2.5
2000
1000
Source: Fannie Mae, MBA, Bloomberg, CIBC
May-12
Jul-11
Sep-10
Nov-09
0
Jan-09
15-year fixed
30-year fixed
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
2.0
|
13
Housing Upturn to Support Employment (L)
and Consumer Spending (R)
Potential employment gains
(000's) from…
350
C ontribution from home
buying to retail sales growth
(%-pts)
0.6
300
0.4
250
200
0.2
150
0.0
100
-0.2
50
-0.4
0
Housing
starts
Renovation
activity
-0.6
2011
2012
Source: BEA, NAHB, CIBC
|
14
Credit Quality Improving
6
Consumer Loan
Delinquency Rate
Back to Normal
615
%
614
Average Credit Score of
Lowest Score Quartile
613
5
612
611
4
610
609
3
608
2
607
606
1
605
07
08
09
10
11
Source: CIBC, Federal Reserve Board
07
08
09
10
11
|
15
Let’s Get Fiscal:
Obama Has Been No Ronald Reagan
%-pts contribution to GDP from
spending
Reagan First Term
1.0
Obama
0.8
0.6
120
Index:
Q1 2011 = 100
Forecast
115
110
105
0.4
100
0.2
95
0.0
Forecast
-0.6
1
2
3
Years of Presidency
4
Q3-13
Q1-13
Q3-12
Q1-12
Q3-11
-0.4
Q1-11
-0.2
Q3-10
Q1-10
90
Re a l dura ble s consumption
Re a l re sid. construction
Re a l gov't spe nding
|
16
Fiscal Outlook Takes the Fun Out of 2013
2013 Fiscal drag %-pts
2013 US GDP growth forecasts
0
4.0
-0.5
3.5
3.0
-1
2.5
-1.5
2.0
-2
-2.5
-3
2012 forecast 2.2%
1.5
2012 -1.3%-pts
1.0
0.5
-3.5
0.0
-4
-0.5
Full drag
CIBC base
case
No fiscal
drag
C IBC
base
case
Full
fiscal
drag
CIBC base case assumes all planned spending cuts and tax increases are delayed except;
the expiration of payroll tax cut, expiration of high income tax reduction and
implementation of automatic spending cuts.
|
17
Business Investment:
Fiscal Fears Holding Back Activity
Average contribution from
business investment as a %
of GDP growth
Core ca pita l goods
orde rs
(non- de fe nse e x
a ircra ft)
10
30%
5
25%
0
20%
-5
15%
-10
10%
-15
5%
Apr-12
Jan-11
Present
Oct-09
1980's
Jul-08
1970's
Apr-07
0%
Jan-06
-20
Recoveries
|
18
Canadian Interest Rate Outlook: A Fine Line
0 .5%
0 .0 %
Output Gap
Bank of C anada April Forecast
(2.4%)
-0 .5%
-1.0 %
C IBC Apr Forecast and
Boc July Fcst (2.1%)
-1.5%
Q1
2013F
Q3
2012F
Q1
2012
Q3
2011
Q1
2011
Q3
2010
Q1
2010
-2 .0 %
|
19
Fiscal Performance Attracts Safe Haven Flows
Key to C$ Through Parity
35
C$bn (3M Sum)
US¢/C$
105
30
100
25
95
20
15
90
10
85
5
0
80
-5
-10
Dec-06
75
Dec-07
Dec-08
Dec-09
Net Purchases of C$ Bonds (L)
Dec-10
Dec-11
Canadian Dollar (R)
|
20
Growth Would Have Hit 3%
with Government Spending at 1997-07 Trend
4%
C anada: annual GDP growth
(as of Q1 2012)
3%
2%
BoC : 2012 Potential Growth
1%
0%
Actual
Estimate (gov't spending at
pre-crisis trend)
Source: Statistics Canada, Bank of Canada, CIBC
|
21
BoC Looks Too Rosy on Gov’t Boost to 2013 GDP
0.4
Government contribution to 2013 GDP (%-pts)
0.3
0.2
0.1
0.0
-0.1
-0.2
-0.3
BoC Forecast
C IBC Forecast
Source: CIBC, Bank of Canada
|
22
No Pent-up Demand in Canadian Consumption;
US Consumers a Better Investment Target Now
15
10
Gap Between Actual C onsumption vs Fitted
(trend relative to population) as % of Real C onsumer
Spending
overshooting
5
0
-5
-10
81Q1
pent-up demand
86Q1
91Q1
96Q1
C anada
Source: US Department of Commerce, Statistics Canada, CIBC
01Q1
06Q1
11Q1
US
|
23
The Housing Market: Cooling Underway
Unit Sales
15
y/y % chg
3-mos moving avg
10
8
10
5
6
0
4
-5
-10
2
-15
0
-20
-2
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
-25
Source: CREA, CIBC
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
20
Av g House Price
y/y % chg
3-mos moving avg
|
24
Population Growth
Will Cushion Housing Correction
Propensity to Buy a
House in a Given Year
Age
3%
20-24
14%
25-34
35-44
6%
45-54
4%
3%
55-64
65-74
3%
75+
1%
-550
-50
450
950 1,450
'000s of people
Source: Statistics Canada, CMHC, Harris Decima, CIBC
|
25
TSX Rallies: % of Rise Due to Growth in
Forward Multiple, Rather Than Earnings
120
>100%
100
80
Avg, prev 5
≈ 20%
60
40
20
0
Negative since fwd PE actually fell
-20
-40
Oct87Oct89
Oct90Apr98
Oct98Sep00
Oct02Jun08
Mar09Apr11
Source: Bloomberg, CIBC, Thomson Reuters, S&P
May12Aug12
|
26
Same Story in US:
Forward Earnings Expectations Little Moved
112
S&P 500 EPS, 12-mon fwd
111
110
109
108
107
106
105
104
8/
22
/2
01
9/
1
22
/2
10
01
/2
1
2/
20
11
11
/2
2/
20
12
11
/2
2/
20
11
1/
22
/2
01
2/
2
22
/2
01
3/
2
22
/2
01
4/
2
22
/2
01
5/
2
22
/2
01
6/
2
22
/2
01
7/
2
22
/2
01
2
103
Source: Bloomberg, CITI
|
27
Aside From Dividend-Bond Yield Gap,
Stocks Look Close to “Fair Value”
30
25
Latest
20
Long Term
Historical Average
15
10
5
0
-5
PE
(on 12 mth
fwd
earnings)
Shiller
Trailing 10
yr PE
Price-toBook
Dividend 10 Yr Bond
Yield, %-pts
Source: Bloomberg, CIBC, Thomson Reuters, S&P
|
28
TSX Profit Margin Still Higher
Despite US Cost Cutting
1
Q
12
:
11
:Q
3
1
11
:
Q
3
Q
1
10
:
10
:Q
3
Q
1
09
:
Q
09
:
:Q
08
:Q
1
3
08
Q
07
:
07
:Q
1
16
14
12
10
8
6
4
2
0
3
operating margins, % of revenues,
non-financial firms
C anadian C orporate Universe (Stats C an)
TSX C omposite
S&P 500
|
29
Bond Yields Drift Higher in 2013,
But Still Very Low By Historic Standards
6
%
5
4
3
2
1
0
Ma r06
Ja n07
Nov07
2-Yr Ca na da s
Se p- Jul-09 Ma y- Ma r08
10
11
10-Yr Ca na da s
Ja n12
No v12
Se p13
10-Yr US Tre a surie s
|
30
CIBC Indicator A Picture of Corporate Health
Composit e Indicat or of Corporat e Canada's St rengt h
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
90Q2
93Q2
96Q2
99Q2
02Q2
Source: Bloomberg, CIBC
05Q2
08Q2
11Q2
|
31
Spreads Build in Huge Cushion for Default Climb
%, 12 mnth trailing
1000
16
bps
900
14
800
12
700
10
600
8
500
400
6
300
4
200
2
100
Source: CIBC Macro Strategy
0
Jan97
0
Apr98
Jul99
Oct00
Jan02
Apr03
HY Index Spread (left)
Jul04
Oct05
Jan07
Apr08
Jul09
Oct10
Jan12
Spec Grade Default Rate (right)
|
32