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Citigroup — Economic Outlook and Regulatory Reform webinar (September 2010)
62 slides from Citigroup's conference presentation, Sep 16, 2010
Slide 1: Economic Outlook and Regulatory Reform
Economic Outlook and Regulatory g y Reform Implications of the Dodd-Frank Act to Corporations Citi Global Transaction Services September 16th, 2010
Slide 2: Today's Agenda
Today’s Agenda y Economic Outlook Robert V. DiClemente y Overview of the Dodd-Frank Act Michael Berkowitz y Dodd-Frank Act Implications: Transaction Banking Michael Berkowitz y Dodd-Frank Act Implications: Derivatives William Hartnett y Conclusion and Q&A All 1
Slide 3: Economic Outlook
E Economic i OOutlook tl k
Slide 4: The Outlook For Advanced Economies
The Outlook For Advanced Economies Annual Change in GDP for Globe and Advanced Nations, 2000-11F 6% 6 6% 6 5 F 5 4 4 3 3 2 2 1 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 00 01 02 03 04 05 06 07 08 09 10 11 Global Advanced 2 Note: Based on GEOs June 23, 2010. 4 rd1460 Sources: International Monetary Fund and Citi
Slide 5: Sustained But Slow U.S. Recovery With Two-Sided Risk
Sustained But Slow U.S. Recovery With Two-Sided Two Sided Risk Real GDP Cumulative Change from End of Recession ¾ The base case expects growth slowly recovering to trend, benign 18 18% 18 inflation and reenergized Fed 18% 18% accommodation, with low rates through 16 16 all of 2011. 14 14 ¾ Risks app
Slide 6: Outlook Highlights
Outlook Highlights U.S. Economic Outlook Highlights ¾ We anticipate uninterrupted but subpar growth. (Annualized Percent Change Unless Notes), 2010-2011F GDP is expected to expand by 2.1% this year and 2 7% iin 2011 2.7% 2011. U Unemployment l t remains i att or above b 2010 2011 9% over the forecas
Slide 7: Securing Financial Stability Key to Moderate Expansion
Securing Financial Stability Key to Moderate Expansion Real Final Sales to Domestic Purchasers and Citi Financial Conditions Index (Standard Deviations), 1988-Aug 10 σ 33 88% 2 6 1 4 0 2 -1 0 -2 -2 -3 -4 -4 -5 -6 88 90 92 94 96 98 00 02 04 06 08 10 FCI (Left) Final Sales (Right) Note: Final sales ar
Slide 8: Europe's Debt Woes Threaten Financial Stability
Europe’s Europe s Debt Woes Threaten Financial Stability Ten-Year Government Bond Yields, 2010-8 Sep 10 Citi Financial Conditions Index and the VIX, 2005-8 Sep 10 12 12% 12 12% 22σ 00% 10 1 10 10 20 0 30 8 8 -1 40 -22 50 6 6 60 -3 70 4 4 -44 80 2 2 -5 90 Jan Feb Mar Apr May Jun Jul Aug Sep 05 06 07
Slide 9: Long Leaders Do Not Point to a Broad Decline in Activity
United States Long Leaders Do Not Point to a Broad Decline in Activity • The sharp setbacks in financial markets and housing activity have raised concerns about a “double dip” recession. • Near-term growth is likely to slow from 2¾% first half pace but real income appears to be holding up and an alr
Slide 10: Labor-Driven Income Was Supporting Recovery Ahead of Financial Setback
Labor-Driven Labor Driven Income Was Supporting Recovery Ahead of Financial Setback Citi Financial Conditions Index and Real Indexes of Real Disposable Income and Discretionary Consumer Spending (3-Month Consumption (Dec 2007 = 100), 2007-Jul 10 Moving Average of Year-to-Year Percent Change), 2003-A
Slide 11: Productivity Points To Stronger Household Income
Productivityy Points To Stronger g Household Income Productivity and Real Compensation Per Hour Total Earnings Proxy (Annualized Pct Chg) and (Two-Year Annualized percent Change), 1988-2Q 10 Private Domestic Demand (Year-to-Year Pct Chg) 4% 4 5% 10 5 10% 8%8 8 6 3 4 6 4 4 2 3 2 2 0 0 1 2 -2 -2 -4 0
Slide 12: Overspending Gives Way to Saving and Deleveraging
Overspending Gives Way to Saving and Deleveraging Personal Savings Rate (Percent) and Net Worth as a Debt to Disposable Income Percent of Disposable Income, 1960-2Q 10 1980-4Q 11F 14% 14 350% 350 140% 140 140% 140 130 130 12 400 120 120 100 450 110 110 8 500 100 100 6 90 90 550 4 80 80 600 2 70 70 0
Slide 13: Refinancing Activity A Channel for Higher Saving
United States Refinancing Activity A Channel for Higher Saving Percentage of Refinancings Resulting in a Lower Loan Percent of Refinancings that Shorten Mortgage Amount, 1985-2Q 10 Term, 2002-2Q 10 40% 40 40 40% 60% 60 60 60% 35 35 50 50 30 30 40 40 25 25 20 20 30 30 15 15 20 20 10 10 10 10 5 5 0 0
Slide 14: Structural Damage to the Labor Market
Structural St uctu a Damage a age to tthe e Labor abo Market a et Total Employment by Demographic, Indexed to Dec Unemployed for 27 Weeks and Over as a Percent 2007, 2004-Aug 10 of Unemployed, 1950-Aug 10 110 110 50% 50 50 50% 45 45 105 105 40 40 100 100 35 35 95 95 30 30 90 90 25 25 20 20 85 85 15
Slide 15: Job Losses Are Narrowly Based
United States Job Losses Are Narrowly Based Change in Employment in Downsizing Sectors and Three-Month Private Employment Diffusion Index Change in All Other Sectors (Ex-Census), 2005-Aug 10 and Private Weekly Hours (Six-Month Smoothed, Annualized Percent Change), 2000-Aug 10 300K 300 300 300K 80 6
Slide 16: Near-Term Drag on Residential Investment
Near-Term Near Term Drag on Residential Investment… Total Home Sales (Monthly Percent Change) and Mortgage Loan Single Family Housing Permits and Construction Spending on New Applications for Purchase (March 1990=100), 2009-3 Sep 10 Single Family Homes (Year-to-Year Percent Change), 2005-Jul 10 60 6
Slide 17: Belies Much Progress in Redressing Key Imbalances
…Belies Much Progress in Redressing Key Imbalances… Index of Home Price to Disposable Income Per Household Index of House Price to Rental Price Ratio for Various (1987 = 100), 1976-Jun 10 Metro Areas, 1990-2Q 2010 150 150 240 220 200 125 125 180 160 140 100 100 120 100 80 75 75 90 92 94 96 98 00 02
Slide 18: But Financial Stresses Linger
…But Financial Stresses Linger… Household Perception of Credit Availability vs. Yr-to-Yr Pct. Mortgages 90+ Days Past Due and Foreclosures Chg. in Single Family Home Sales, 1987-Aug 10 Started (Percent), 1986-2Q 10 80 80% 25% 6 6% 6%6 Easier 70 20 5 5 60 10 50 4 4 40 0 30 3 3 g Tighter 20 -10 2 2 10
Slide 19: Amid Slow Progress in Working off Excess Supply
United States …Amid Slow Progress in Working off Excess Supply Selected House Price Indexes (Three-Month Estimated Excess Vacant Homes, 2006-1Q 10F Annualized Percent Change), 2000-Jun 10 1200 1200K 1200 1200K 25% 25 40 25% 20 1000 1000 30 15 20 800 800 10 10 5 600 600 0 0 400 400 -55 -10 -10 200 20
Slide 20: The Corporate Sector Is Outperforming Cyclical Norms
United States The e Co Corporate po a e Sec Sector o is s Ou Outperforming pe o g Cyc Cyclical ca Norms o s Profit Margins in Current and Past Unit Labor Cost in Current and Past Recessions Recessions 15% 15 15 9 9% 99% 15% 14 14 7 7 13 13 5 5 12 12 3 3 11 11 1 1 10 10 -1 -3 -1 9 9 8 8 -5 -3 -12 -10
Slide 21: A Mixed Picture For Business Investment
United States A Mixed Picture For Business Investment Real Nonresidential Fixed Investment (Contribution to Nominal Investment in Non-Residential Realestate (Year-to- Real GDP Change) and Credit Component of Citi Year Percent Change) and Tightening Lending Standards for Financial Conditions Index (S
Slide 22: Limited Scope For Net Exports
Limited Scope For Net Exports Chinese Manufacturing PMI and ISM New Export Orders, Manufacturing IP and Real Goods Imports (Fourth-Quarter to 2005-Aug 10 Fourth-Quarter Percent Change), 1980-4Q 09 30 30% 65 65 25 y= 1.6x+ 2.7 60 60 20 55 55 15 oods Im ports 10 50 50 Goo 5 45 45 0 -5 40 40 -10 35 35
Slide 23: Weak Links to Made in China
Weak Links to “Made Made in China” China U.S. Goods Imports from East Asia as a Share of Total U.S. Goods Exports to China (Annual Percent Goods Imports, 1990-Jun 10 Change) and Spot Exchange Rate, 2000-Aug 10 45% 45 45% 45 50% 50 6$ 6¥/ 40 40 40 35 35 30 30 30 7 25 25 20 20 20 15 15 10 8 10 10 0 5
Slide 24: Smaller Current Account More Dependent on Official Support
Smaller S a e CuCurrent e t Account ccou t More o e Dependent epe de t o on O Official c a Suppo Supportt Moving Four-Quarter Sum of Securities-Related U.S. Capital Inflows, Financing of U.S. Current Account 1981-1Q 10 600 $600B 600 10 10% 10% 10 $600B 9 400 400 8 8 200 200 7 6 0 0 6 -200 -200 5 4 -
Slide 25: Inflation Has Threatened to Fall Below Desired Levels
Inflation Has Threatened to Fall Below Desired Levels PCE 12-Month Inflation, Dallas Fed Trimmed-Mean Headline, 1960-Jul 10 12% 12 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 60 65 70 75 80 85 90 95 00 05 10 Dallas12-Month Trimmed-Mean Year-to-YearPercentChange rd1426 Note: Shaded region is Fed inflation tar
Slide 26: Flatter Phillips Curve
United States Flatter Phillips Curve – Will High Jobless Rate Pull Inflation Much Lower? The Gap Between NAIRU and Jobless Rate vs. Yr-to-Yr Diff in Two-Yr Inflation Rate, 1963 – Aug 10 6%6 66% 4 4 2 2 0 0 -2 -2 -4 -4 -6 -6 63 67 71 75 79 83 87 91 95 99 03 07 Change in Inflation Rate Unemployment Ga
Slide 27: Short-Term Unemployed May Be Better Gauge of Cost Pressure
United States Short-Term Short Term Unemployed May Be Better Gauge of Cost Pressure Share of Labor Force Unemployed for More than and Short-Term Unemployment Gap Versus Change in Less than Half a Year, 1970-Jun 10 Two-Year Inflation Rate, 1982-Jun 10 10% 10 10 10% 2%2 2% 2 1 1 8 8 0 0 6 6 -1 -1 -2 -
Slide 28: Falling Housing Costs Mask Broader Stability
Falling Housing Costs Mask Broader Stability Core CPI Services and Core Services Ex-Shelter Small Businesses Planning to Raise Prices (Percent) and (Six-Month Annualized Percent Change) Duke/CFO Expected Price Increases in Next 12-Months 6% 6 6% 6 40 40% 5 5% 35 5 5 4 30 4 4 25 3 20 3 3 2 15 2 2 10
Slide 29: Lingering Credit Restraint for Consumers, Small Firms
United States Lingering Credit Restraint for Consumers, Small Firms Net percentage of Small Business Borrowers Paying Selected Consumer Borrowing Rates, 2000-Jul 10 Higher Interest Rates than Three-Months Ago and Five-Year Treasury Yield, 2004-13 Aug 10 9. 9. 0 0% 16. 16. 5 5% 40 40% 5.5 5.5% 8.5 16
Slide 30: Policy Accommodation Has Not Fueled Rapid Money and Credit
Policy Accommodation Has Not Fueled Rapid Money and Credit Monetary Base Expansion Relative to GDP and Year-to-Year Percent Change in Bank Credit and Excess Reserves, 2003 – 25 Aug 10 Money Stock Measures, 2003 – Jul 10 7%7 1400 20 $1400 20% 20% 20 6 1200 15 15 5 1000 10 10 4 800 5 5 3 600 0 0 2 400
Slide 31: Slow Fuse on Rising Bond Yields
Slow Fuse on Rising Bond Yields Ten-Year Bond Yield and Model Estimate, 1997-2011F ¾ Long-term benchmark interest 7% 7 7% 7 rates remain anchored by elevated risk aversion, weak private credit demand and 6 6 expectations for extended Fed accommodation. 5 5 ¾ Recent sharp declines in yields reflected
Slide 32: Collapse in Private Credit Demand Has Eclipsed Rising Deficits
United States Collapse p in Private Credit Demand Has Eclipsed p Rising g Deficits Yr-to-Yr Chg in Domestic Nonfinancial Debt, 1984-1Q 10 (Dollars in Billions) $$3000B 2900 $$3000BB 2900 2400 2400 1900 1900 1400 1400 900 900 400 400 -100 -100 -600 -600 85 87 89 91 93 95 97 99 01 03 05 07 09 Public P
Slide 33: The Need for Fiscal Consolidation
The Need for Fiscal Consolidation Fiscal Tightening (% of GDP) Needed Between 2010 and 2020 to Achieve Public Debt Ratio of 60% of GDP by 2030 14 14% 14 14% BiggerFiscalConsolidation Needed 12 12 10 G-20 G 20Av Average 10 8 8 6 6 4 4 2 2 0 0 -2 -2 ortugal Norway ermany Italy Greece nmark France 'Lan
Slide 34: The Administration's 2011 Budget Plan
The Administration Administration’s s 2011 Budget Plan Revenues and Outlays of the Federal Government as a Percent of GDP 26% 26 26 26% 24 24 22 22 Avg. Obama Budget 20 20 18 18 Avg. 16 16 14 14 70 75 80 85 90 95 00 05 10 15 20 Revenues Outlays Sources: Congressional Budget Office and Office of Mana
Slide 35: Prospects For Rising Public Debt Burden
Prospects p For Rising g Public Debt Burden Federal Debt Held by the Public as a Percent of GDP, 2009-20F 110 110 110 110 $14.6 $14 6TTrillion illi Extends Bush tax, AMT patch, appropriation grow at historical rates 90 90 $8.5-$9.8 $8 5 $9 8 T Trillion illi Extends some tax cuts, restrains AMT, Admi
Slide 36: Global Tax Competition in Reverse
Global G oba Tax a Competition Co pet t o in Reverse e e se Top Individual Income Tax Rates United States and OECD Average ¾ Average top OECD tax rate fell from 68%in 1980 to 48 48% 42% in 2008 2008. Prospective U.S. U S hikes would place it among high tax countries. N.B. one quarter of US tech star
Slide 37: Government Failure and The Culture of Spending
Government Failure and The Culture of Spending ¾ Programs in every Federal department suffer from fraud, Number of Federal Subsidy Programs 2,100 cost overruns, obsolescence or duplication, providing enormous scope for savings savings. Corporate welfare, welfare special interest earmarks largely unc
Slide 38: Overview of the Dodd-Frank Act
O Overview i off the th Dodd-Frank D dd F k Act A t
Slide 39: Dodd-Frank Act General Overview
Dodd-Frank Wall Street Reform and Consumer Protection Act G General l Overview O i y On July 21st, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama. y T Topics i Covered C dbby th the Bill Bill: – Regulation of Advisers to Hedge Funds
Slide 40: Dodd-Frank Act Implications: Transaction Accounts
D dd F k Act Dodd-Frank A t Implications I li ti Transaction Accounts
Slide 41: Where have clients been investing?
Where have clients been investing? From 2008 to 2010, there has been a continual shift in corporate investment behavior toward bank deposits, deposits with decreasing but still high usage of Money Market Funds Funds. Average Investment Maturity Average Investment Portfolio Composition 80% All Respon
Slide 42: Dodd-Frank Impact on Transaction Accounts
Dodd-Frank Wall Street Reform and Consumer Protection Act Impact on Transaction Accounts y Changes that will have an impact on corporations’ Transaction Accounts: – US Deposit Insurance: Permanent increase of depositp insurance to $250,000 , per p depositor p p per bank Provide unlimited FDIC in
Slide 43: Pros and Cons of the Dodd-Frank Act for Corporations
Pros and Cons of the Dodd-Frank Act for Corporations From a transaction account standpoint, the Dodd-Frank Act will provide additional FDIC protection and a greater choice of short short-term term investments. investments Transaction Accounts Pros Cons y Unlimited FDIC insurance for 2 years – y Pote
Slide 44: Implications for US Investment Options
Implications for US Investment Options The Dodd-Frank act allows banks to provide additional investment options and more secure investment alternatives lt ti in i th the US US. US Investment Option FDIC Coverage Yield Impact of Dodd-Frank Legislation (net of FDIC fees) NIB DDA w/ ECR Full FDIC Insur
Slide 45: Dodd-Frank Act Implications: Derivatives
D dd F Dodd Frank kAActt IImplications li ti Derivatives
Slide 46: U.S Financial Reform Legislation—Overview
U.S Financial Reform Legislation—Overview The Wall Street Reform and Consumer Protection Act demands changes that are far-reaching and will affect a wide range of market participants participants. The mechanics of implementation will be determined by the forthcoming rulemaking process, however, the
Slide 47: Title VII – Derivatives Overview
Title VII – Derivatives Overview y Regulatory Oversight – The regulatory bodies primarily responsible for oversight of the derivatives market going forward are the CFTC, the SEC, and the Federal Reserve Board. – Responsibility is divided by type of derivative, though much of the authority is either
Slide 48: Title VII – Swap Definition
Title VII – Swap Definition y Swap definition – The statute establishes broad coverage by defining a “swap” as any agreement, contract, or transaction that is, or in the future becomes, commonly known as a swap, followed by specific examples. – The statute also defines “security based swaps” as swap
Slide 49: Title VII – Regulatory Oversight
Title VII – Regulatory Oversight y The CFTC – Must adopt rules for registered swap dealers and major swap participants, except for rules imposing prudential requirements on swap dealers or major swap participants for which there is a prudential regulator. – Must adopt rules governing swap dealers' a
Slide 50: Title VII – Market Participants
Title VII – Market Participants y Swap Dealer is any person who – Holds themselves out as a dealer in swaps other than security-based swaps; – Makes a market in swaps; – Regularly enters into swaps with counterparties as an ordinary course of business for its own account; or – Engages in any activit
Slide 51: Title VII – Market Participants
Title VII – Market Participants y A person may be designated as a swap dealer or major swap participant for a single type or single class or category of swap or activities and not considered as such for other types, classes, or categories of swaps or activities. y Business Conduct Standards – Swap d
Slide 52: Title VII - Infrastructure
Title VII - Infrastructure y Execution Requirements – If a class of transactions is subject to clearing requirement, it must be traded on an Exchange, Designated Contract Market or Swap Execution Facility. – Trading requirement does not apply if no exchange or execution facility makes the product av
Slide 53: Title VII – Capital and Margin Requirements
Title VII – Capital and Margin Requirements y The prudential regulators in consultation with the CFTC and SEC, with respect to the swap dealers and major swap participants for which there is a "prudential regulator," and the CFTC, with respect to other swap dealers and major swap participants, must
Slide 54: Swaps Push-out, Volcker Rule and Time Lines
Swaps Push-out, Volcker Rule and Time Lines y Swaps Push-out Rule – Statute allows depository institutions to continue to trade those swaps related to traditional banking business, including interest rate swaps, foreign exchange swaps, cleared investment grade credit derivatives, and certain preciou
Slide 55: Conclusions
Conclusions ee citi
Slide 56: Takeaways
Takeaways y The Dodd-Frank Act widens the range of investment options available to corporations and brings opportunities that corporate cash managers might take advantage of y Ambiguities such as lack of clarity around the costs of the FDIC’s new programs exist; the Dodd-Frank Act left much of the r
Slide 57: Q&A
Q&A citi
Slide 58: Q&A
Q&A y Will clients still be able to earn soft-dollar interest (ECR) on balances via Account analysis? – Yes, clients will have the option to either hold their balances in an interest bearing DDA and earn hard dollar interest, or continue to hold balances in their NIB accounts and earn an Earnings Cr
Slide 59: Contacts
Contacts – Robert V. DiClemente – Managing Director, Citi US Chief Economist Tel: +1 (212) 816-7942 Email: robert.diclemente@citi.com – Michael Berkowitz - Head of North America Liquidity, Investments & Information Services Market Management Tel: +1 (212) 816-0981 Email: michael.n.berkowitz@citi.com
Slide 60: Disclosure Appendix
Disclosure Appendix I, Robert V. DiClemente, hereby certify that, with respect to the material contributed by me, all of the views expressed in this report accurately reflect my personal views about such subject securities, issuers, currencies, commodities, futures, options, economies or strategies.
Slide 61: © Citigroup Global Markets Inc., 2009. All rights reserved. Smith Barney is a division
AUSTRALIA: This report is made available in Australia to wholesale clients through Citigroup Global Markets Australia Pty Ltd. (ABN 64 003 114 832 and AFSL No. 240992) and to retail clients through Citigroup Wealth Advisors Pty Ltd. (ABN 19 009 145 555 and AFSL No. 240813), participants of the ASX G
Slide 62: IRS Circular Disclosure
IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have bee
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