Est. 1964Est. 1964
Outlook 2008/09 –Life In the Aftermath of theGreat Global Credit Crisis
Outlook 2008/09Outlook 2008/09 ––Life In the Aftermath of theLife In the Aftermath of theGreat Global Credit CrisisGreat Global Credit Crisis
Presented by:
Patricia Croft, Vice President & Chief EconomistPhillips, Hager & North Investment Management Limited
May 8th, 2008May 8th, 2008
Rare Events Have Become the NormRare Events Have Become the Norm
Worst U.S. housing marketrecession since the 1930s
U.S. dollar at record low
Record oil, gold, rice prices
Global credit crisis – run onbanks in U.S. and U.K.
U.S. T-bill yields fell to 1950levels – unprecedented responseby the Fed
What’s next??
The Greatest Credit Bubble ofAll Time
The Greatest Credit Bubble ofAll Time
1. Liquidity – too much and too cheap
2. Trend to deregulation
By 2006 an estimated 75% of lending in the U.S. was outsidethe jurisdiction of regulators*
3. Boom in securitization
Democratized credit provision but disconnected lender andborrower
4. Overconfidence in financial models
Rating agencies, banks and others put too much faith infinancial models that cratered when faced with fat tails
* Source: The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great CreditCrash – by Charles R. Morris
Double BubbleBubble in Housing and Securitization
Double BubbleDouble BubbleBubble in Housing and SecuritizationBubble in Housing and Securitization
Securitized Residential MortgagesOutstanding
Quarterly change at annual rates
-300
-200
-100
0
100
200
300
400
500
600
90 92 94 96 98 00 02 04 06 08
U.S
.$b
illio
ns
Source: Federal Reserve, NBF Financial
S&P/Case-Shiller U.S. Home Price Index
-15
-10
-5
0
5
10
15
20
25
87 89 91 93 95 97 99 01 03 05 07
%ch
an
ge
year-
over-
year
Source: MacroMarkets LLC
Source: Federal Deposit Insurance Corp., The Mortgage Lender Implode-O-Meter.com
U.S. Bank and Thrift Failures
0
100
200
300
400
500
600
1934 1942 1950 1958 1966 1974 1982 1990 1998 2006
GreatDepression
S&L Crisis
Third Banking Crisis Since 1930sThird Banking Crisis Since 1930s
Today
Are We There Yet?Are We There Yet?
“ More than seven months on, the end is not insight, although it is safe to say that we havereached the end of the beginning of the turmoil.”
Mark Carney, Governor of the Bank of CanadaMarch 13th 2008
SUBPRIME
Subprime’s Tangled WebSubprime’s Tangled Web
Housing/Economy
HedgeFunds
RatingAgencies
PrivateEquity
CommercialPaper
Market
Banks
Regulators
Bond Insurers
U.S. in Recession – Now What?U.S. in Recession – Now What?
1. How long and how deep?
2. What will the recovery look like?
3. What are the consequences for the restof the world?
US Housing Affordability Index
40
60
80
100
120
140
160
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
Ind
ex
Source: US National Association of Realtors
US Unsold New Housing Inventory(months' supply at current selling rates)
3.0
4.05.06.07.08.09.0
10.011.012.013.0
19
63
19
68
19
73
19
78
19
83
19
88
19
93
19
98
20
03
20
08
Mo
nth
s's
up
ply
Source: US Census Bureau
LR average
S&P/Case-Shiller US Home Price Index
-20
-15
-10
-5
0
5
10
15
20
25
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
%c
ha
ng
eye
ar-
ove
r-ye
ar
Source: MacroMarkets LLC
US Consumer Confidence
40
50
60
70
80
90
100
110
120
1980 1985 1990 1995 2000 2005
Ind
ex
Source: University of Michigan
Single Biggest Risk Still HousingSingle Biggest Risk Still Housing
Monetary Policy:
Federal Reserve hasresponded to economicrisks
Market pricing in Fedtightening later this year
Inflation figures vastlydifferent
Aggressive Federal Reserve ActionAggressive Federal Reserve Action
Central bank policy interest rates
Bank of Canada
U.S. Federal Reserve
0
1
2
3
4
5
6
2003 2004 2005 2006 2007 2008
(%)
Banks Tightening Lending Standards
-30
-10
10
30
50
70
90
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Dif
fus
ion
Ind
ex
Commercial & Industrial LoansMortgages*Credit card loansAll other consumer loansCommercial real estate loans
Source: Federal Reserve Senior Loan Officer Opinion Survey*2007 Q2 onward calculated by PH&N
Shaded areas indicate U.S. recessions
Not Your Average Credit CycleNot Your Average Credit Cycle
US Owner's Equity, % of Household Real Estate
45
50
55
60
65
70
75
80
85
90
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
%
Source: Federal Reserve Flow of Funds
Banks & lenders own more of the averageAmerican house than owner does!
Falling Homeowners Equity = SkewedIncentives
Falling Homeowners Equity = SkewedIncentives
www.youwalkaway.com - Jingle Mail
Source: CIBC World Markets
Housing: A Tale of Two MarketsHousing: A Tale of Two MarketsHousing: A Tale of Two Markets
Size of Subprime Mortgage Lending Market
5%
22%
0%
5%
10%
15%
20%
25%
Canada United States
%o
fT
ota
lL
oan
s
Source: Can. Real Estate Assoc.,National Assoc. of Realtors
-10
-5
0
5
10
15
20
1995 1997 1999 2001 2003 2005 2007
An
nu
al
%ch
an
ge,3-m
thavg
Existing House Prices, Canada & U.S.
Canada’s Housing Market NotOvervaluedCanadaCanada’’s Housing Market Nots Housing Market NotOvervaluedOvervalued
-10
-5
0
5
10
15
20
25
30
35
Ire
lan
d
Ne
the
rla
nd
s
UK
Au
str
ali
a
Fra
nc
e
No
rwa
y
De
nm
ark
Be
lgiu
m
Sp
ain
Sw
ed
en
Ita
ly
Ja
pa
n
U.S
.
Fin
lan
d
Ge
rma
ny
Ca
na
da
Au
str
ia
Ho
us
ep
ric
eg
ap
(%)
Source: International Monetary Fund, National Bank Financial April 2008
A Tale of Two ConsumersA Tale of Two Consumers
Household Liabilities, % of Net Worth
15
16
17
18
19
20
21
22
23
24
25
1990 1994 1998 2002 2006
%
Source: Federal Reserve Flow of Funds, Statistics Canada National Balance Sheet Accounts
Household Net Worth, % of Disposable Income
400
450
500
550
600
650
700
1990 1994 1998 2002 2006
%
1. Venezuela 26.1
2. Canada 25.5
3. Mexico 23.8
4. China 10.9
5. Saudi Arabia 8.8
6. Chile 6.3
7. Korea 5.5
Country U.S. Exports(% of GDP)
Canada Tied to U.S. LikeCanada Tied to U.S. LikeMaple Syrup to PancakesMaple Syrup to Pancakes
8. Sweden 3.9
9. Switzerland 3.6
10. Belgium 3.5
11. Germany 3.0
12. Japan 3.0
13. Brazil 2.8
14. Argentina 2.5
Country U.S. Exports(% of GDP)
Source: Merrill Lynch, Sept. 2006
The Long and The Short of the C$
Net Long Non-Commercial C$ Positions
-100,000
-80,000
-60,000
-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
1993 1997 2001 2005 2007
Data to Jan 22 2008
Source: U.S. Commodity Futures Trading Commission Source: Bank of Canada, OECD
Canada- U.S. Exchange Rate
Actual
Purchasing Power Parity*
60
65
70
75
80
85
90
95
100
105
110
1970 1978 1986 1994 2002 2006
Cen
tsU
.S.
81.4
98.8
Gisele Wants to Be Paid In EurosGisele Wants to Be Paid In Euros
U.S. Dollar Trade-Weighted Index
60
70
80
90
100
110
120
130
140
150
1973 1979 1985 1991 1997 2003 2006
Ind
ex
Source: U.S. Federal Reserve
Major currency index
Broad index
Mixed Picture Outside of North AmericaMixed Picture Outside of North America
European economy slowing – ECB reluctant tocut rates
Bank of England weighing growth/inflation trade-off – house prices weakening
Japan’s economy fragile
India slowing somewhat
China challenged
Pace of Global Growth Set to Slow
World Real GDP Growth
0
1
2
3
4
5
6
7
8
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
%
Source: IMF World Economic Outlook
IMF Puts 25% Probability on WorldRecession
IMF Puts 25% Probability on WorldRecession
Recession
Strongest 4-year period in 30 years
Global Commodity Derivative TradingContract Turnover
0
100
200
300
400
500
600
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Nu
mb
er
of
Co
ntr
acts
Source: Bank for International Settlements
Commodities Detach From Near-Term Reality
Commodities Detach From Near-Term RealityGlobal Trade and Commodity Futures
-20
-10
0
10
20
30
40
50
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Perc
en
tyear-
over-
ye
ar
Global Trade (3 month avg.)
CRB Commodity Futures Index
Source: Commodity Research Bureau, IMF, Datastream
1. U.S. recession
2. Further fall out from sub prime crisis –contagion to commercial real estate, credit cardand auto loans, bank failures
3. Stagflation in Europe
4. China stumbles – global recession
5. Geopolitical factors/protectionism/U.S. election
6. Inflation led by soaring food prices
2008/09 – Risky Business2008/09 – Risky Business
