Post-Bubble Global Trends

AAPA Webinar

February 18, 2009

Dr. Walter Kemmsies, Chief Economist Moffatt & Nichol Commercial Analysis Group

Takeaways

♦ The world economy is circling the drain— World is wealthier but too much capital often pursues the

same growth expectations— Low cost of capital and too much leverage produced the twin

bubbles— Poor policymaker judgment turned a bad situation into a

catastrophe— The whole world is de-leveraging, which directly affects

global trade

♦ Global New Deal Revival— At best consumer spending is on hold while wealth is rebuilt— Resource rich countries are suffering from falling income— Debt-Deflation cycle is a substantial risk given inventory

overhang— Government spending is the near term engine of recovery— Global bank bailouts are a threat to global trade

♦ No “all clear” until 2012— Central banks will have to withdraw money pumped into the

global economy— 2009 Economic Recovery Act may not have long term effects— Globalization is unlikely to reverse - long term drivers of trade

growth remain intact through the next decade— US non-service export growth should be more aligned with

import growth

Source: Federal Reserve of St Louis, US Department of Commerce

The Cost of Capital Declined Substantially

Nominal And Inflation-Adjusted 10-year US Treasury Bond Yields

Source: Federal Reserve of St Louis, US Department of Labor, Moffatt & Nichol

� Since 2001 US and European interest rates have been at their lowest levels in four decades, driven down by Asian purchases of debt to peg exchange rates

� Japanese interest rates have been even lower since the late 1990s

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10-Year Treasury Bond Yield Inflation Adjusted

Stock Market Bubble Pops

China becomes largest buyer of US Treasury Debt

The Twin Bubbles: Commodities and Real Estate

Real Estate and Commodity Price Trends

Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Moffatt & Nichol

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House Price Index CRB Metals Index Crude Oil Price

� Mistrust of equities and a low cost of capital spawned speculation in “alternative asset” classes

� China’s growth was priced in too soon… Olympics created a deadline

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Unusual Coincidence Of Policy Errors

Source: Federal Reserve, National Bureau of Economic Analysis, Moffatt & Nichol

Federal Reserve Policy Interest Rate Target for Federal Funds

� Letting Lehman fail in September shredded what little confidence remained� FDIC Commissioner Sheila Bair’s solution was ignored in favor of handing money to banks� European Central Bank was raising its policy rate target… while the EU economy was

already in recession� The first stimulus in Q2 2008 was too little, too late

Small Banks Have Been Doing The Heavy-lifting

Commercial and Industrial Loans

� Despite lower the Fed Funds rate, lending stagnated as large banks wrote down assets

� State and regional banks, savings & loans and credit unions propped the economy up and may have to continue to do so

� Foreign trade finance remains mostly unsupported by large banks

Source: St Louis Federal Reserve, Moffatt & Nichol

The Fed Is Making A Dramatic Effort Now

♦ 0% Fed Funds interest rate target and a doubling of the Fed’s balance sheet have not reversed downward momentum in the economy

♦ We are in a “liquidity trap”

Adjusted Monetary Base

Source: St Louis Federal Reserve, Moffatt & Nichol

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Global Oil Production Has Exceeded Consumption

Source: International Energy Agency, Commodity Futures Trading Commission, Moffatt & Nichol

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Oil Prices Deviated From The Global Supply/Demand Balance

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Oil Speculation Ahead of Oil Price Trends Since 2004 � World oil consumption has grown despite declining in industrialized nations.

� Globally oil production has exceeded consumption since 2004.

� High oil prices are more likely driven by financial capital flows than supply/demand fundamentals

� Oil prices are expected to remain in the $50-$80 per barrel range over the next 10 years

US Auto Sales At A 24-year Low

Sales Of Passenger Cars And Light Trucks

Source: Wards Automotive, Department of Commerce, NBER, Moffatt & Nichol

♦ 2001-2007 was the first economic expansion period where auto sales declined♦ Vehicle sales declined despite manufacturer rebates and 0% financing♦ Wars and subsequent speculative bubble in oil prices are to blame♦ Outlook is more uncertain than when the Chrysler Loan Guarantee Act of 1980 was

passed

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Recession US Vehicle Sales US Vehicle Sales (12 MMA)

Substantial rebates and 0% financing kept auto sales high during the 2001 recession, similar to the house market

Inventories Are Declining While The Inventories-Sales Ratio Rises

Inventory Growth Rates

Source: US Department of Commerce, Moffatt & Nichol

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Unemployment Is Driving The Economy Towards Deflation

Unemployment Claims

♦ Consumers are struggling to pay their debts which is impacting retail sales♦ Lower sales means falling prices and falling profits and layoffs, while China export-

dependent China struggles♦ The burden of debt gets worse creating a vicious debt-deflation cycle

Source: Bureau of Labor Statistics, Moffatt & Nichol

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Recession Real GDP %YOY

Look For “All Clear” In 2012

Source: Department of Commerce, Moffatt & Nichol

Real GDP Growth and Recessions

� Assuming the second stimulus begins to be deployed in Q2, expect recession to end in 2009-H1 but without the usual substantial recovery spike

� Deflation through the first half of 2009, then inflation will begin to rise, forcing the Fed to start tightening again, unless infrastructure investment has an immediate and significant impact on productivity

� Expect low growth through 2011; a mild recession is possible in late 2010/early 2011;

� After that we could have 7-8 years of strong growth

China Is Also Slowing Down Significantly

China Real GDP and Electricity Production Growth

Source: Bloomberg, Moffatt & Nichol

� Some fundamental data on China’s economy is out of line with official macroeconomic statistics

� Like the US, Europe and Japan, China is also deploying a fiscal stimulus containing significant investment in infrastructure

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Electricity Real GDP

Economic Outlook for Major Trade Lanes

� Near term is weak and mostly due to US and Europe� Long term outlook is more robust due to Emerging Markets growing due to

increasingly self-financed investment� World trade patterns will change due to the changing relative size of emerging and

mature economies over the forecast horizon� Risks to this view:

� Bank bailouts produce a “Smoot-Hawley” effect on international capital movement� Stability of the euro� Emerging Markets policies focus on developing a middle class

US, Europe and Mediterranean Asia, Latin America and Caribbean

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N Asia S Asia SE Asia EC S Amer Caribbean Cent America

Source: International Monetary Fund, US Department of Commerce, Moffatt & Nichol

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Broad Dollar Index Major Currency Dollar Index Emerging Market Currency Index

Foreign Exchange� USD is approaching Fair Value against major currencies and is expected to stay there

� USD will lose value against emerging markets currencies over the next 10 years assuming they develop a middle class and inflation is controlled

US Dollar Indexes

Source: Federal Reserve, Moffatt & Nichol

Loaded TEU Forecast Summary - US

� Long term loaded container volume growth forecasts are more conservative than in 2007:

� Lower growth in 2008-2009 than previously expected

� Slower offshoring pace and trade agreement progress over the next four years

� US is pulling the global economy with it as it circles the drain

� There are more reasons why volume growth could overshoot than undershoot the forecasts, such as� Stronger growth in 2011 than anticipated due to further policy stimulus� Infrastructure investment generates strong productivity gains

Imports Exports Total Share Imports Exports Total Imports Exports TotalNorth Asia 11,542,916 4,355,308 15,898,225 55.1% 4.8% 7.5% 5.6% 6.8% 7.1% 6.9%SE Asia 1,600,483 788,903 2,389,386 8.3% 5.4% 7.0% 6.0% 7.4% 6.3% 7.1%South Asia 575,977 298,761 874,738 3.0% 7.6% 8.4% 7.9% 8.4% 8.3% 8.4%Europe 1,701,699 1,477,121 3,178,820 11.0% 2.9% 4.1% 3.5% 3.3% 3.2% 3.2%Mediterranean 852,215 687,011 1,539,226 5.3% 3.3% 7.9% 5.5% 4.5% 6.9% 5.6%Middle East 38,080 260,027 298,108 1.0% 4.3% 9.1% 8.5% 7.0% 7.3% 7.3%WC S America 282,773 206,014 488,787 1.7% 3.0% 7.8% 5.2% 4.1% 4.1% 4.1%EC S America 417,802 313,498 731,300 2.5% 3.6% 4.1% 3.8% 5.3% 3.9% 4.7%Cent Am/Carib 943,474 1,743,340 2,686,815 9.3% 2.7% 5.0% 4.2% 3.7% 4.4% 4.2%NAFTA 62,943 56,000 118,943 0.4% 3.2% 11.2% 7.3% 4.9% 10.7% 8.1%Australia/NZ 130,936 200,732 331,668 1.1% 3.6% 3.2% 3.4% 5.9% 3.1% 4.3%Africa 69,562 166,293 235,855 0.8% 3.3% 11.9% 9.7% 4.5% 11.6% 10.0%Other 30,951 62,598 93,549 0.3% 3.2% 1.9% 2.3% 5.3% 2.5% 3.5%Total 18,249,813 10,615,606 28,865,420 100.0% 4.6% 6.6% 5.3% 6.3% 6.1% 6.3%

2007 2007-2013 CAGR 2007-2020 CAGR

Source: PIERS, Moffatt & Nichol

Global Commodities Trade Has Lagged Manufactured Trade

Source: World Trade Organization, World Bank, Moffatt & Nichol

�Manufactured goods and non-agricultural products trade have grown faster than GDP.�Agricultural products trade has lagged GDP and other trade in other products.�The gap between manufactured goods and other products trade is expected to narrow.�The outlook for bulk commodities depends on expectations for manufactured goods trade.

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CAGRs Manufactured Agricultural Fuels and Mining RealPeriod Goods Products Products GDP

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World Trade and GDP Volume Indexes

Summary

♦ The world economy is circling the drain – policymakers failed to contain the damage after speculative bubbles

♦ Global New Deal Revival – government spending, not consumers, will drive growth

♦ In 2012, “All clear” for 8 Years – until then relatively low trade volume growth

Contact details:Walter KemmsiesPh: +1 212 768 7454wkemmsies@moffattnichol.com