Benjamin Tal - Where in the world are we

WHERE IN THE WORLD ARE WE? Benjamin Tal Senior Economist June 2007 Economics & Strategy “The Committee remains concerned about the risk of a continuing gap between the growth of demand and potential supply at a time when the utilization of the pool of available workers remains at an unusually high level…… the Committee believes the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future” Fed’s FOMC Meeting October 13, 2000 Cutting Rates in the Face of Rising Inflation The 1989 Example 11 % y/y % chg The 2000-01 Example y/y % chg 3.0 % 10 2.5 2.0 Fed funds rate (L) C ore inflation (R) 01:12 01:9 01:6 01:3 00:12 00:9 00:6 1.5 00:3 99:12 90:10 90:7 90:4 90:1 89:10 89:7 89:4 89:1 Fed funds rate (L) C ore inflation (R) Subprime Shock Relatively Modest Bn $2007 6000 5000 5,000 *Estimate assumes eventual 30% default rate for subprime loans; 50% recovery ratio 4000 3000 2000 1000 270 100 Dot-Com Collapse S&L Crisis Subprime Meltdown (?) * Little Impact on US Corporate Spreads … spread to US Treasuries (bps) 900 800 LTCM Blowup Recession & 9/11 Telecom Airline Defaults Auto Downgrades 700 600 Subprime Meltdown 500 400 300 200 100 Dec-97 Apr-00 10-yr A Corporate Aug-02 Nov-04 Mar-07 10-yr BB/BB- Corporate Falling Prices Shut the Door on “Housing ATM” 1000 900 Home Equity Extraction $Mn, SAAR US Resale Housing Prices 14 12 800 10 700 600 500 300 -2 200 -4 100 -6 Ja n00 Ja n01 Ja n02 Ja n03 Ja n04 Ja n05 Ja n06 400 00:Q1 01:Q3 03:Q1 04:Q3 06:Q1 y/y % chg North America Is Slowing… Real GDP Growth % 2005A 2006F 2007F …But Strongest Global Growth in Decades World Real GDP avg 3-yr growth rate (%) 2004-06 5.0% 1971-73 5.6% 71 74 77 80 83 86 89 92 95 98 01 04 07 Source: IMF historical data & forecast Surging Domestic Demand Will Shield China from US Slowdown Exports to US Other 30 % chg vs 2005, YTD 25 8% 20 Fixed Investment Household Spending 15 10 Breakdown of 2005 GDP Fixed Asset Retail Investment Sales Commodity Currencies Have Led the Pack Jpn Yen Swiss Fr Br Pound Nrway Kr Euro A$ S Afr Rand Sw Kr C$ NZ $ -2 one-month % ch vs US$ US Water Index Easily Outperformed S&P500 300 Dividend Yield (Oct 06) Index Jan 1999=100 250 4.5 200 4.0 3.5 150 3.0 2.5 100 2.0 50 1.5 1.0 99 00 01 02 03 04 05 06 S&P 500 C omposite US Water Index Source: Bloomberg US Water Index, CIBCWM 0.5 0.0 S&P500 Water Index The Rise of the Infrastructure Deficit in Canada Falling Share of Infrastructure Spending in Total Gov't Spending 12 % Rising Funding Gap for Infrastructure Projects 70 10 $Bn 60 50 40 30 20 10 0 70 80 90 05 75 85 95 05 Sources: Statistics Canada, Infrastructure Canada, CCPPP, CIBCWM Investing in Infrastructure 250 Index Jun 2000=100 30 200 25 150 20 % Since Jan 2005 15 100 10 50 Jun-06 Jun-05 Jun-04 Jun-03 Jun-02 Jun-01 Jun-00 Global Infrastructure Global Equities Annual Dividends STDEV Return Global Infrastructure Global Equities Core Pressures in Services, Not Goods 3.5 % 3.0 C ore Services 2.5 C ore C PI 2.0 1.5 1.0 C ore Goods 0.5 0.0 Jan-05 May-05 Sep-05 Jan-06 May-06 Wal-Mart as a Country 350 300 GDP figures for 2002, in $ billions $290 $269 250 $252 $245 $238 $233 $231 $228 200 150 100 50 Source: CIA World Factbook Au str ia Wa lm ar t Ba ng lad es h Sw itz er la n d Sw ed en lom b ia Co bia Sa ud iA Eg yp t Cdn Dollar Becoming a Petro-Currency 80 WTI, US$/bbl US cents/C$ 95 70 90 60 85 80 50 40 Fcst 30 75 70 65 20 60 10 55 Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec- Dec99 00 01 02 03 04 05 06 07 Crude Oil Price (L) Cdn Dollar (R ) When The US Sneezes… GDP Growth y/y % chg 99 00 01 US C anada 02 Debt To Income Ratio Debt as a Share of Disposable Income Growth Since 2002 80 140 % % 70 130 60 120 50 110 40 100 30 90 20 80 10 70 95 97 99 01 03 05 C anada US Income US Debt C anada Share of Real Estate in Household Assets 36 % 32 28 24 20 16 12 95 96 97 98 99 00 01 02 03 04 05 06 C anada US S.Africa Ireland Britain Spain Australia France Sweden Belgium Denmark US Netherlands New Italy Canada Switzerland Japan Hong Kong House Prices 1997-2006 400 350 300 250 200 150 100 50 -50 % chg Source: The Economist Interest-Only Mortgages (US) 25 % of originations 20 15 10 C anada 1995 2000 2004 2005 2006 2006 Sub-Prime Share of Mortgage Originations 25 % 20 15 10 01 02 03 04 US Canada Sources: HHS 2006, MBA, Financial Monitor, CIBCWM 05 06 Fixed-Term GICs vs Prime Rate 15 y/y % change % 10 5 -5 03 04 05 Fixed-Term GIC s 06 Prime Rate Increase In Cash Not Evenly Distributed 80 Cumulative % Increase In Chequing & Demand Deposits 70 Annual Average Growth - By Income (2000-2005) 100K+ 60 70K100K 50 40 55K70K 30 20 35K55K 10