Playing Ball in the Later Innings
Dr. Mark G. Dotzour
College Station, Texas
[email protected]
www.markdotzour.com
Since 1945,
there have been 11 economic cycles
•The average recession has been 11.1 months
•The average expansion has been 58.4 months
Source: National Bureau of Economic Research
Since 1945,
there have been 11 economic cycles
•The average recession has been 11.1 months
•The average expansion has been 58.4 months.
•As of February, the current expansion is 80
months.
Source: National Bureau of Economic Research
Since 1945
Longest U.S. Economic Expansions
•Mar 1991 to Mar 2001
•Feb 1961 to Dec 1969
•Nov 1982 to Jul 1990
•Jun 1938 to Feb 1945
•Nov 2001 to Dec 2007
120 months
106 months
92 months
80 months
73 months
Mythical Chimera
•Something that exists only in the imagination
and is not possible in reality.
Mark Dotzour’s Chimera:
Winning the Masters with an 18
Handicap
Japan’s Chimera:
Quantitative Easing in a “New Dimension”
On Apr 4, 2013 BOJ will buy
50 trillion in JGB and 10 trillion
in Nikkei ETFs
Plan to double the monetary
base from 135 trillion yen
to 270 in two years.
Government Pension
Investment Fund will cut
holdings of government bonds
from 60% to 35% to increase
demand for stocks.
“This is taking monetary easing
into an entirely new dimension.”
H. Kuroda, Governor BOJ
12,833
20,700
Japan Opens the Floodgates
The BOJ is purchasing ETFs linked to the Nikkei 225
and the TOPIX index and owns roughly half of the
market for ETFs in Japan. -Bloomberg 12/21/15
Promised not to sell stocks they have already
purchased until March, 2026.
The BOJ will purchase $656 billion in assets every
year “as long as needed.” Bloomberg 12/18/15
Japanese Bond Market Distorted
Beyond Recognition
2-year Japanese gov’t bond
5-year Japanese gov’t bond
10-year Japanese gov’t bond
-.173 %
-.158 %
.02 %
Chinese Chimera:
The Shanghai Stock Exchange
Plunged 30% in
three weeks in
June.
•You can buy, but
you can’t sell.
•Please borrow
money to buy
stocks.
European Chimera:
I can help countries
that are heavily in
debt by loaning
them even more
money.
“The Governing Council is willing and
able to act by using all the instruments
available within its mandate if
warranted in order to maintain an
appropriate degree of monetary
accommodation. “
Draghi, November 3, 2015
European Bond Market Distorted
Beyond Recognition
2-year German gov’t bond
5-year German gov’t bond
10-year German gov’t bond
30-year German gov’t bond
-.52 %
-.30 %
.26 %
.97 %
10- year Dutch gov’t bond
10-year Swiss gov’t bond
.41 %
-.34 %
Stock Buybacks Proliferating
The 449 companies listed in the SP500 from 2003
through 2012:
Used 54% of their earnings to buy back stock
Used 37% of their earnings to pay dividends
Leaves 9% to re-investment in growth for the future
and increase wages.
In 2012, the 500 highest-paid executives in US public
companies received on average $30.3 million each;
42% of their compensation came from stock options
and 41% from stock awards.
Source: William Lazonick, Profits Without Prosperity
Harvard Business Review, September 2014.
Stock Buybacks Proliferating
Source: FACTSET Buyback Quarterly December, 2015
Stock Buybacks Proliferating
Source: FACTSET Buyback Quarterly December, 2015
Stock Buybacks Proliferating
Source: FACTSET Buyback Quarterly December, 2015
Margin Debt
Debit Balances at Broker/Dealers
Debit Balances in Margin Accounts at Broker/Dealers
600,000
Jul 2007 Dow 14,021
Jul 2008 Dow 10,827
Jul 2009 Dow 8,087
500,000
300,000
200,000
100,000
Source: New York Stock Exchange
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
0
Jan-98
Millions
400,000
Mar 2000 Dow 11,234
Mar 2001 Dow 9,106
Mar 2002 Dow 7,415
Bad News Lifts US Stocks
Market Bets on Fed Miracle
The Dow jumped 322 points or 3% to 11,176 as a new round
of bleak economy data buoy investor hopes that Mr.
Bernanke will step in with some sort of monetary stimulus.
WSJ August 24, 2011
Dow surges 217 points after signs of lackluster economic
data have reduced the odds of an interest-rate increase by
the Fed this year.
WSJ October 16, 2015
Dow soars more than 300 points because ECB Draghi says it
will do more QE if needed.
WSJ October 23, 2015
US Treasury Bond Rates
• Central banks in China, Russia, Brazil and
Taiwan are selling US government bonds at
the fastest pace on record.
• Foreign net treasury sales hit $123 billion in
the 12 months ended in July.
Source: WSJ 10/8/15
U.S. Treasury Notes
Sold with Zero Interest
The U.S. Treasury sold 3-month treasury notes
with zero interest for the first time on record.
WSJ October 6, 2015
The Investment World Today:
Globally
•Europe, Japan and China barely hanging on,
even with massive printing of money.
•Commodity prices in a four-year free fall is
hammering countries all over the world
Canada, Mexico, Brazil
Russia, Iran, Saudi Arabia
Australia
African oil exporting countries
The Investment World Today:
United States of America
•The US economy could be in the 7th or 8th
inning of this economic expansion.
•Car sales and retail sales are current drivers.
•Single-family home construction will
contribute to growth in 2016.
The Challenge for the FED
•They need to normalize rates before we have
the next recession.
•Declining 10-year treasury rate is signaling
global economic weakness ahead.
•Higher rates mean a stronger dollar means
less manufacturing
Our Fed is Not Out of Bullets
•Drop the Fed Funds rate to below zero
•Print money and purchase long bonds to
drive the mortgage rates down to 3%
•Set an artificial cap on Treasury rates to drive
mortgage rates down to 3%
•Print money and buy REITs to juice the CRE
market
•Print money and buy ETFs to elevate the
stock market
Effective Fed Funds Rate Moves
in Presidential Election Years
1956 2.50
1960 4.00
1964 3.50
1968 4.61
1972 3.51
1976 4.87
1980 13.8
1984 9.56
3.00
1.98
3.85
6.02
5.33
4.65
18.9
8.38
up 50 bps
down 202 bps
up 35 bps
up 141 bps
up 182 bps
down 22 bps
up 508 bps
down 118 bps
1988 6.83
1992 4.03
1996 5.56
2000 5.45
2004 1.00
2008 3.94
2012 0.08
8.76
2.92
5.29
6.40
2.16
0.16
0.16
up 193 bps
down 111 bps
down 27 bps
up 95 bps
up 116 bps
down 378 bps
up 8 bps
The Energy War Escalates
The Energy War Escalates
OPEC Breakeven Prices
to Balance Their Budgets
$107
$ 96
$ 93
$ 76
$ 70
$ 58
$ 52
Bahrain
Saudi Arabia
Algeria
Iraq
Iran
Qatar
Kuwait
Source: IMF and WSJ 1/20/16
Saudi Arabia
Saudi Arabia has announced it will raise domestic petrol prices by
more than 50 per cent for some products.
Prices will increase for electricity, water, diesel and kerosene, after
the country posted a deficit of $135 billion in 2015.
The 2015 deficit is the highest in the history of Saudi Arabia, which
relies on oil for 90 per cent of public revenues. Contemplating
selling a portion of ARAMCO to raise money.
The IMF has warned Riyadh that failure to cut spending and
implement reforms will eat up the country's fiscal reserves in just
five years
Nationally
the Bullish Outlook Continues
U.S. Leading Index
of Economic Indicators
Baa Corporate Bond Spread
over 10-Year Treasury
Aug-00
Feb-01
Aug-01
Feb-02
Aug-02
Feb-03
Aug-03
Feb-04
Aug-04
Feb-05
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Feb-15
Aug-15
Consumer Confidence Index
150
140
130
120
110
100
90
80
70
60
50
40
30
Source: The Conference Board
The Business Sector
Corporate Profits
(With Inventory Valuation Adjustment &
Capital Consumption Adjustment)
Corporate Profits After Tax with Inventory Valuation
Adjustment (IVA) and Capital Consumption Adjustment
1,800
1,600
1,200
1,000
800
600
400
Jul-09
Oct-99
200
Jan-90
Billions of Dollars
1,400
Source: U.S.Dept. of Commerce: Bureau of Economic Analysis
Small Business Outlook
“Planning To Hire People In The Next Three
Months”
Planning to Hire People in the Next Three Months
25
20
10
5
0
-5
Source: National Federation of Independent Business
Apr-15
Jul-14
Oct-13
Jan-13
Apr-12
Jul-11
Oct-10
Jan-10
Apr-09
Jul-08
Oct-07
Jan-07
Apr-06
Jul-05
Oct-04
Jan-04
Apr-03
Jul-02
Oct-01
Jan-01
Apr-00
Jul-99
-10
Oct-98
Net % of Respondents
15
Outlook for Inflation and Interest Rates
Money Supply and Velocity:
Huge Monetary Base Could Fuel Inflation
St. Louis Adjusted Monetary Base
4,500
4,000
3,500
Billions of Dollars
3,000
2,500
2,000
1,500
1,000
500
0
Oct-85
Oct-90
Oct-95
Oct-00
Oct-05
Source: Federal Reserve Bank of St. Louis
Oct-10
Oct-15
Money Supply and Velocity:
Velocity at Historic Low Levels
Velocity of MZM Money Stock
4.0
3.5
Ratio
3.0
2.5
2.0
1.5
1.0
Jan-60
Jan-68
Jan-76
Jan-84
Jan-92
Source: Federal Reserve Bank of St. Louis
Jan-00
Jan-08
Money Supply and Velocity:
Actual Money Supply Barely Increasing
MZM Money Stock
40
35
Percent Chg. From Year Ago
30
25
20
15
10
5
0
-5
-10
Jan-60
Dec-67
Nov-75
Oct-83
Sep-91
Source: Federal Reserve Bank of St. Louis
Aug-99
Jul-07
Jun-15
The Consumer Price Index
Consumer Price Index for All Urban Consumers: All Items
30
25
Percent Chg. From Year Ago
20
15
10
5
0
-5
-10
-15
-20
Jan-20
Jul-34
Jan-49
Jul-63
Jan-78
Source: U.S. Dept. of Labor: Bureau of Labor Statistics
Jul-92
Jan-07
Investment Themes for 2016
• Europe, China and Japan printing money with little result
•
•
•
•
Emerging market countries experience inflation & recession
No American inflation until year after oil price bottoms
A couple of meaningless rate hikes by the Federal Reserve
GDP ambles along at a tepid 2% growth rate
Investment Themes for 2016
• Mortgage rates unlikely to increase above 4.5 percent
• Home price appreciation to continue in most markets
• Currency declines will reduce foreign purchases of US real
estate from Russian, Canada and Mexico.
• Anti-corruption policy in China could reduce Chinese
purchases of US real estate
• New federal transparency rules on cash purchases will
reduce foreign buying demand in the US
• Foreign pension funds have strong appetite for US CRE
• Japanese REITS have strong appetite for US CRE
Investment Themes for 2016
• US stock market could fall like October 1987, due to excess
margin debt
• Big stock market decline could reduce spending in the US
• Lack of liquidity in the bond market
• Third Avenue Focused Credit Fund blocked redemption and
began liquidating $789 million in assets in December.
• Stone Lion Capital Partners suspended redemption in one of its
funds in December
THE BLACK SWAN
Putin gets tired of $36 oil and blows up oil production
in Iraq and Libya