1. Stress Testing After the US Election
PRIMA
Stress Testing for
Financial Institutions
November 8, 2012
Presented by:
Angus Watt Advisory Group

2. Disclaimer Stress Testing After the US Election
National Bank Financial is an indirect wholly-owned subsidiary of National Bank of Canada. The National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX).
** The securities or sectors mentioned herein are not suitable for all types of investors. Please consult your investment advisor to verify whether the securities or sectors suit your investor’s profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors.
*** The information contained herein has been prepared by Angus Watt, an Investment Advisor with National Bank Financial; the opinions expressed do not necessarily reflect those of National Bank Financial.
**** While opinions expressed are based on analysis and interpretation of historical data believed to be accurate the underlying data is not necessarily guaranteed as to accuracy.
Stress Testing After the US Election

3. Messages over the Years
Dr. Allard Top 3 Principles when Investing in Real Estate. True in business as well.
We are “addicted” to oil
“We are addicted to growth”
Rex Tillerson,
Chairman & CEO, Exxon
Stress Testing After the US Election

4. Market Size Global debt markets $72 trillion
Global equity markets $47 trillion
Global commodity markets $ 2 trillion
US Housing market $10-$12 trillion
US Economy/GDP $14.5 trillion
US Government Debt (Nov/12) $16.2 trillion
Stress Testing After the US Election

5. United States of America
National Debt Since
Since
Year
Total National Debt
December, 2008
10.7 trillion
December, 2009
$12.3 trillion
December, 2010
$14.0 trillion
December, 2011
$15.2 trillion
December, 2012 Estimate
$16.4 trillion
2015 Estimate
$19.0 trillion
Stress Testing After the US Election

6. When Will Debt Ratios Peak?
NBFG Economy & Strategy (data via International Monetary Fund , July 2012)
Stress Testing After the US Election

7. Will there be effective Fiscal Policy?
Monetary Stimulus
Federal Reserve
European Central Bank
Keeping interest rates at historically low levels
Increasing the amount of money available through QE by increasing money supply
Effective lowers the value of $US, increasing potential for inflation
Maintaining liquidity and low interest rates
Buying bonds with maturity > 3 years
“Sterilizing”: purchasing bonds of one security while selling another for a net neutral position
Will there be effective Fiscal Policy?
Stress Testing After the US Election

8. Economic Probabilities
Inflation
Deflation
Stagflation
Stress Testing After the US Election

9. C&I Loans – USA Commercial Banks
1,640
1,600
1,560
1,520
1,480
1,440
1,400
1,360
1,320
1,280
1,240
1,200
1,160
NBFG Economy & Strategy
Stress Testing After the US Election

10. Profit Margins: Non-Financial Corporations
NBFG Economy & Strategy
Stress Testing After the US Election

11. Financial Stress in the USA
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
NBFG Economy & Strategy
Stress Testing After the US Election

12. Leading Indicator: USA
NBFG Economy & Strategy (data via ECRI)
Stress Testing After the US Election

13. USA: Jobs
NBFG Economy & Strategy
Stress Testing After the US Election

14. USA: Consumers have deleveraged%
Financial Obligation Ratio
NBFG Economy & Strategy (data via Federal Reserve)
Stress Testing After the US Election

15. USA: Inventory of Unsold Homes on Resale Market
NBFG Economy & Strategy
Stress Testing After the US Election

16. USA: Home Resales Stress Testing After the US Election
NBFG Economy & Strategy
Stress Testing After the US Election

17. USA: Home Prices on Resale Market
% (y/y)
NBFG Economy & Strategy
Stress Testing After the US Election

18. US Housing Starts (Annual Rate)
Source: Bureau of Census, US Commerce Department
Stress Testing After the US Election

19. US Housing Affordability
©2012 National Association of REALTORS®
Stress Testing After the US Election

20. US Demographics remain positive (Population 21-40 yrs)
US Housing
US Demographics remain positive (Population yrs)
4.6% between 2009 and 2015
0% between 2000 and 2008
Source: NBF Economy & Strategy (data via Census Bureau)
Stress Testing After the US Election

21. PIMCO – Near Term Home prices are gradually increasing again. . .
. . . but not as much as the headline numbers indicate
Delinquencies are dropping, and current loans are performing better
Credit is still very hard to get: many buyers are investors
New construction has been too low for years
Housing finance reform is difficult and will take a long time
Stress Testing After the US Election

22. Current to 30 Transition Rate by Vintage
PIMCO, CoreLogic: Sept 20/12
Stress Testing After the US Election

23. Key Themes: PIMCO
2-3 million foreclosures still need to take place; most are behind us
Recent originations are going delinquent at very low rates
Investors are buying more units and renting them out
Stress Testing After the US Election

24. Most Newly Forming Households: Rentals
Annual Change in Households
(thousands)
Homeownership Rate %
PIMCO, JCHS tabulations of US Census Bureau, Housing Vacancy Surveys
Stress Testing After the US Election

25. Canada: House Prices rose 5.4% in June on a YoY Basis
House Price Composite Index, Canada and USA seasonally adjusted
House price composite index Teranet-National Bank and S&P
Stress Testing After the US Election

26. Canadian Housing Affordability
* Based on 2012 Statistics Canada data, Median total income (all census families).
** National Bank of Canada 5 Year Fixed Mortgage Rate of 3.99%
*** Based on a 25% qualifying ratio for monthly housing expense to gross monthly income with a
20% down payment over 25 years.
Sources: Statistics Can 2012
CREA, July 2012
National Bank Financial Group 2012
Stress Testing After the US Election

27. USA: Auto Sales on the Rise
NBFG Economy & Strategy (data via Bureau of Economic Analysis)
Stress Testing After the US Election

28. USA: Vehicle Stock has Never Been as Old
Average Age (Years)
NBFG Economy & Strategy (data via Polk)
Stress Testing After the US Election

29. USA: Outlook calls for Relatively Stable Consumption
Total Energy Consumption: Actual and current EIA Forecast
NBFC Economy & Strategy (data via US Energy Information Administration {EIA})
Stress Testing After the US Election

30. USA: It was Supposed to be Much Stronger than that!
A comparison between the EIA’s 2008 forecast and current forecast
NBFG Economy & Strategy
Stress Testing After the US Election

31. USA: Where is the Production Coming From?
Primary Energy Production
NBFG Economy & Strategy (data via EIA)
Stress Testing After the US Election

32. USA: Key Imports are Falling
Imports of Natural Gas
(monthly data)
NBFG Economy & Strategy (data via EIA)
Stress Testing After the US Election

33. USA: Outlook for Energy Imports
A Comparison between EIA’s 2008 forecast and current forecast
NBFG Economy & Strategy (data via EIA)
Stress Testing After the US Election

34. World: A New World Order in 2012
Share of World GDP
NBFG Economy & Strategy (data via IMF)
Stress Testing After the US Election

35. World: Outlook for Energy Consumption
770
Total Energy Demand
NBFG Economy & Strategy (data via EIA)
Stress Testing After the US Election

36. Summary Audit Stress Testing Corporate Balance Sheets Green
US Housing Recovery Yellow
US Auto Industry Yellow
US Dollar Yellow
US Employment Yellow
Audit
US Currency Volatility
Interest Rates
Global Problems (Greece, France, Japan/China, Israel)
Stress Testing
Stress Testing After the US Election

37. 780 412-6644 james_angus.watt@nbf.ca anguswatt.com
Stress Testing After the US Election