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Regional Banking Group - 1 October 2008 A Invisible Sun Michael Swanson Ph.D. Wells Fargo Economics.

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Presentation on theme: "Regional Banking Group - 1 October 2008 A Invisible Sun Michael Swanson Ph.D. Wells Fargo Economics."— Presentation transcript:

1 Regional Banking Group - 1 October 2008 A Invisible Sun Michael Swanson Ph.D. Wells Fargo Economics

2 Regional Banking Group - 2 Regional Bank 2 Everything is connected. We just can’t see it.

3 Regional Banking Group - 3 What you want to know n Are we in a recession? u Mostly yes and a little no (typical economist) u What’s a recession n What is holding the economy back u Fear of the unknown u De-leveraging n What is pulling the economy ahead u Productivity (technological and global) u Trade growth

4 Regional Banking Group - 4 GDP = 11,720 = 8, , , * GDP = 9,556 = C + I + G - (X-M) GDP = 9,556 = 71% + 14% + 18% - 3% GDP Breakout by Sector Source: BEA 3 rd Qtr – advance release (billions 2000 dollars) * Net exports bottomed out at ($638) or 5.7% in the 4 th quarter of 2005

5 Regional Banking Group - 5 It’s hard to put the economy into recession n Long-term GDP growth is 3% n Output grows with inputs and productivity  Larger labor pool 0.5%  More capital invested 1.1%  Productivity gains 1.4% n A recession temporarily reduces demand not supply capacity

6 Regional Banking Group - 6 What’s changed?

7 Regional Banking Group - 7 Cyclical still but different

8 Regional Banking Group - 8 Deleveraging: Is painful n Increased economic volatility u Price volatility u Demand volatility n Asset valuations u Cost of money u Predictability of cash flow n What does it mean to you?

9 Regional Banking Group - 9 Regional Bank 9 π = PQ – (WX) - FC Increased volatility Natural and regulatory volatility Timing issues

10 Regional Banking Group - 10 Regional Bank 10 What does money really cost? That depends of course.

11 Regional Banking Group - 11 What the Fed controls

12 Regional Banking Group - 12 It depends on who you are

13 Regional Banking Group - 13 Wild spreads

14 Regional Banking Group - 14 This will have an impact (sooner or later)

15 Regional Banking Group - 15 Regional Bank 15 How about long-term base rate and spreads.

16 Regional Banking Group - 16 The Treasury Curve: Collapsed

17 Regional Banking Group - 17 Spreads are elevated

18 Regional Banking Group - 18 Regional Bank 18 Currency volatility General and specific

19 Regional Banking Group - 19 A two edged sword

20 Regional Banking Group - 20 Wheat, beef, milk and wine

21 Regional Banking Group - 21 Soybeans, sugar/ethanol

22 Regional Banking Group - 22 Regional Bank 22 All models are wrong. Some are useful.

23 Regional Banking Group - 23 Accelerating global demand Economic growth Food Technology Productivity Feedback Energy + Other

24 Regional Banking Group - 24 Climbing up Maslow’s hierarchy

25 Regional Banking Group - 25 Will you bet against it?

26 Regional Banking Group - 26 (Un?)intended Consequence Agriculture Land Values Energy Input cost Output value Expected Profit Cost of food 30% 100% + Global economic growth

27 Regional Banking Group - 27 Convergence: Temporary or permanent?

28 Regional Banking Group - 28 Driven by energy

29 Regional Banking Group - 29 Competing with corn

30 Regional Banking Group - 30 The invisible hand?

31 Regional Banking Group - 31 The complicating factor

32 Regional Banking Group - 32 The ratios are locked in

33 Regional Banking Group - 33 A global commodity

34 Regional Banking Group - 34 What’s the cost? In bushels

35 Regional Banking Group - 35 Soybeans? In bushels

36 Regional Banking Group - 36 Compare and contrast

37 Regional Banking Group - 37 Take-aways n Volatility rising u Prices (inputs, outputs) u Possible weather volatility n Financial leverage adjustments n Understand your competitive structure u Differentiation: Practices or technology u Implementation


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