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FIXED ANNUITIES IN A VARIABLE WORLD Presented by: Professor Peter Navarro University of California-Irvine Presented by: Professor Peter Navarro University.

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Presentation on theme: "FIXED ANNUITIES IN A VARIABLE WORLD Presented by: Professor Peter Navarro University of California-Irvine Presented by: Professor Peter Navarro University."— Presentation transcript:

1 FIXED ANNUITIES IN A VARIABLE WORLD Presented by: Professor Peter Navarro University of California-Irvine Presented by: Professor Peter Navarro University of California-Irvine

2 The Next 90 Minutes How The World Economy Works How The World Economy Works How Economic Forecasting Works How Economic Forecasting Works A Forecaster’s Trip Around the World A Forecaster’s Trip Around the World Where are stock and bond prices headed?S Where are stock and bond prices headed?S Q&A Q&A

3 Team Assignment 1.Golfer 2.A “good walk spoiled” non-golfer

4 What’s Your Economic Forecast for GDP Growth in the Next 12 months? 1.Robust (3% or more) 2.Decent (2%) 3.Slow (1%) 4.Stagnant (0%) 5.Recession (Argh!)

5 What is your 30-year Treasury yield forecast over the next 24 months? 1.Rising in U.S. to 6% or higher 2.Rising slightly to the 4% to 5% range 3.Remaining steady around 3% 4.Falling to 2% or below http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

6 What is your forecast of stock prices over the next 24 months? 1.Sustained bullish uptrend 2.Sideways market 3.Sustained bearish downtrend

7 HOW THE WORLD ECONOMY WORKS

8 To forecast the U.S. economy, you also must forecast the global economy 1.True 2.False

9 A Consumer Parasite-Host Conundrum Consumer Europe (EU) Consumer U.S.A. Export- Dependent China Exports - $300 Billion - $200 Billion

10 The Commodity Nation Universe Factory Floor China Emerging Markets Australia & Canada BrazilRussia Coal Iron Ore Copper Lead Zinc Gold Natural gas Oil Palm Oil Rubber Tin

11 The New Butterfly Effect Recession Europe Slow Growth U.S.A. Export Dependent China China Dependent Commodity Countries Weak Demand For Chinese Exports Weak Demand for Commodity Imports

12 Black = U.S. Stock Market (SPY) Rust = Europe (VGK) Blue = Emerging Markets (EEM) Gold = China (FXI) Note Coupling Of These Economies!!! (Six month Chart)

13 HOW TO BE YOUR OWN ECONOMIC FORECASTER!

14 Why are economic forecasters so often wrong? 1.They don’t live in the real world 2.Flawed models 3.The Fed screws things up 4.Exogenous shocks happen 5.All of the above

15 Time Real GDP (% Change) Secular Growth Trend Expansionary Peak Recessionary Trough The Typical Business Cycle PUNCHLINE! Follow the four GDP drivers to forecast GDP movements!

16 GDP = C + I + G + (X – M) ECRI Leading Index Stock Market Yield Curve Spread Trade Report Global economy ISM Manufacturing Index Consumer Confidence Retail Sales Home Sales Budget Deficits Consumer Price Index Producer Price Index http://www.economy.com/dismal/navarro Forecasting Framework & Indicators U.S.S. Inflation Fighter????

17 THE U.S. ECONOMY

18 U.S. GDP Indicators

19 CONSUMPTION INDICATORS

20 Consumer Confidence & New Home Sales

21 INVESTMENT

22 ISM Manufacturing Index (10 Year)

23 GOVERNMENT SPENDING & NET EXPORTS

24 Budget Basics A Future of chronic deficits A Future of chronic deficits Share down from 4% to 3% of GDP Share down from 4% to 3% of GDP Defense spending a big loser Defense spending a big loser

25 What are the risks of chronic budget deficits? 1.Government bonds will “crowd out” corporate bonds 2.Interest payments erode government’s ability to provide services/infrastructure 3.Exposure to foreign coercion 4.All of the above

26 Net Exports Shows how slow growth in Europe and China can harm our GDP

27 China accounts for what percent of the U.S. trade deficit excluding oil? 1.15% 2.30% 3.45% 4.60% 5.75% If U.S. wants to cut its trade deficit and grow, it has to cut its trade deficit with China!

28 GDP Breakdown = C + I + G + (X-M) GDP DriversContribution to Growth Rate Consumption (C)1.7% Investment (I)1.8% Government Spending (G)0.8% Exports (X)0.8% Imports (M)-2.5% GDP Growth Rate Q3-102.6% Deficit a HUGE drag on GDP growth!

29 The New Energy Revolution Shale Gas PLUS Oil Sands & Artic Exploration Shale Gas PLUS Oil Sands & Artic Exploration Reducing trade deficit drag on GDP by a point or more Reducing trade deficit drag on GDP by a point or more Worth over a MILLION new jobs a year! Worth over a MILLION new jobs a year! A North American Energy Independence is Now Possible

30 THE CENTURY OF QUANTITATIVE EASING

31 Quantitative Easing Lowers: 1.Long term interest rates 2.Short term interest rates 3.Both

32 Quantitative Easing Tends to: 1.Lower stock and real estate prices 2.Raise stock and real estate prices 3.Lower stock prices and raise real prices 4.Raise stock prices and lower real estate prices QE: A HUGE boon for stock markets and real estate around the world!

33 QE Tends to: 1.Decrease the level of foreign investment in emerging markets 2.Increase the level of investment in emerging markets

34 QE Is Important As the U.S. is winding down QE…. As the U.S. is winding down QE…. Emerging markets are suffering Emerging markets are suffering BUT Europe is about to ramp up QE BUT Europe is about to ramp up QE

35 Europe GDP = C + I + G + (X – M) GDP = C + I + G + (X – M)

36 Europe (Low Growth, No Jobs)

37 : How the Fed & China Wounded Europe Flight to safety during European crisis Bernanke’s “beggar thy neighbor” easy money + China’s fixed peg a dagger through Europe’s heart

38

39 PUTIN’S GAMBIT

40 A GEOPOLITICAL MAP OF UKRAINE

41 Will economic sanctions be enough to deter Russia from taking eastern Ukraine? 1.Yes 2.No 3.Not Sure 4.I could care less

42 China GDP = C + I + G + (X – M) GDP = C + I + G + (X – M)

43 China (The 10% Train Derailed)

44 China’s Export-Led Model Vulnerable GDP downshifting GDP downshifting Massive real estate bubble Massive real estate bubble Rising labor costs Rising labor costs Far too export dependent Far too export dependent U.S. and Europe now too weak to sustain China’s historic 10% per year growth rate.

45

46 Who is this guy? 1.Mahatma Gandhi 2.Narendra Modi

47 India (Will Modi Save the Decade?)

48 THE ROLE OF EXTERNAL SHOCKS

49 Should The U.S. and NATO Provide the Ukraine With Military Support? 1.Yes 2.No 3.Not Sure 4.Here we go again

50 How might the situation in the Ukraine lead to a U.S. economic slowdown? 1.Energy price shocks to Europe. 2.“Hot war” disrupts global economy 3.Russian counter- sanctions against U.S. 4.All of the above

51 THE NORTH KOREAN WILD CARD

52

53 South Korea’s GDP is a little over $1 trillion annually. What’s North Korea’s? 1.$1 trillion 2.$500 billion 3.$250 billion 4.$15 billion

54 What percent of North Korea’s population has starved to death? 1.1% 2.2% 3.5% 4.10%

55 How might North Korea draw the U.S. and China into conflict? 1.Internal collapse 2.Provocation or invasion 3.Nuclear proliferation 4.Nuclear strike

56 THE MIDDLE EAST POWDER KEG

57 How does the current turmoil in Iraq affect the global economy? 1.Oil prices 2.Oil prices 3.Oil prices 4.All of the above

58 How many recessions since WWII have been preceded by an oil shock? 1.None 2.Some 3.Most 4.All

59 The New ISIS Sunni Caliphate?

60 Oil and Gas Under ISIS Control (Islamic State of Iraq and the Levant)

61 A Partitioned Iraq?

62 Should the U.S. send troops back into Iraq? 1.Yes 2.No 3.Never should have sent troops to begin with 4.Where’s Saddam when you need him?

63 CONTRETEMPS IN THE EAST CHINA SEA

64 Where World War III Begins?

65

66 Should America retain forward bases and aircraft carrier strike groups in Asia? 1.Yes 2.No 3.Hell no

67 If the U.S. withdraws from Asia, the probability of nuclear war would: 1.Fall 2.Rise 3.Remain the same 4.There is zero chance of nuclear war because of mutual assured destruction.

68 Why are China and Japan fighting over the Senkaku/Diayou Islands? 1.Oil and fish 2.National defense 3.Nationalism 4.All of the above

69 If China and Japan fight, should the U.S. come to Japan’s defense per their treaty? 1.Yes 2.No 3.How about we side with China?

70 If China controlled Asia militarily, America’s economy would : 1.Grow stronger 2.Grow weaker 3.Be unaffected

71 What’s Your Economic Forecast for GDP Growth in the Next 12 months? 1.Robust (3% or more) 2.Decent (2%) 3.Slow (1%) 4.Stagnant (0%) 5.Recession (Argh!)

72 TIME FOR QUESTIONS www.peternavarro.com


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