HorneInvst8 Dec 0506

Trans-Atlantic Market Relationships

Comments To

Global Interdependence Center GIC Abroad - Paris Investment Seminar J. Paul Horne Independent Market Economist

Paris – 8 Dec. 2006

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U.S. – Europe Correlations • • • • • • •

$ and € financial markets convergent GDP growth trends – to converge ?

Productivity trend: US ▼ Euro ▲ Inflation or ... disinflation ?

Interest rates – convergence ahead FX – symptom of basic disequilibria Equities in ’07: post-2002/3 bull tired 2

Equity market trends – 1994 - 2006 US lost lead

Post-2000 lows Think Tokyo dull ?

• Source: ECB Nov. Mthly. Bull. – mthly.3Avgs.

Equity markets since 2002/3 lows Tokyo top gainer since 2003

•

Source: MSCI, Bloomberg, Horne Economics – thru 2dec06 4

Intl. P/Es & volatility – 1988-2006 Convergence startling !

• Source: BIS Annual Report, Jun06 5

Equity & debt home bias (%)

Decline = int’l. diversification.

• Source: ECB November Monthly Bulletin.

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GDP growth rates since 1999 US potential GDP: 3%

EU Potential GDP: 2%+

• Source: ECB Nov. Monthly Bulletin – % a.r., 7 qrtly.

Euro-U.S. Corporate Profits Growth Trends

Long trend attracts capital to US; financing C/A; boosting our debt.

Source: ECB Monthly Bulletin, Sep06. 12 & 60-mo. forecasts Euro STOXX8& SPX.

OECD: synchronization in Sep06

US declined since Sep.

• Source: OECD, Composite Leading Indicators, Nov06 9

Productivity growth trends since 1992 235

170

2005 avg.

141

130

1992 = 100

195

176

150

157 1992 1992-2005 avg

110

90

70

50 UK

Germany

France

US

Sweden

• Sources: ECB, Eurostat, BLS – 2dec06.

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CPI trends 1999 - 2006

€ = 1.8% Nov06

• Source: ECB Nov. Mthly. Bull. - % a.r., 11 mthly.

Households net lending – 1997 - 2004 EU, JP, CH finance US over-spending

• Source: ECB Nov. Mthly. Bull. - % of12GDP.

ECB – Fed monetary policy 1999 - 2006 ECB to hike 25-50 bps

Fed succeeded.

Next move down.

•

Source: ECB November Monthly Bulletin. Official rate changes.

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3-mo. Money market rates – 1994 -2006

Convergence will increase

• Source: ECB Nov. Mthly. Bull. – a.r., mthly.

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10-yr. Govt. bond yields – 1994 - 2006

In parallel how long ?

• Source: ECB Nov. Mthly. Bull. – Mthly.15 Avgs.

Key FX rates – before $ plunge $1.333:€1 on 3dec06 $ lo: $1.365 on 30dec04

$ hi: $0.823

• Source: ECB Nov. Monthly Bulletin – 1Q99 16 = 100.

December 2005 Forecasts ...

• “... I serve up the following forecasts for 2006: $1.35 per euro and U.S. ten-year T-yields up to 5%, both by end-2006; stagnation of the U.S. housing market slows GDP growth to 2.5% by 4Q06; the S&P 500 drops 10 % in the year; oil and gold remain around today’s prices; and Europe’s economy sticks at 2.0%. U.S. Midterm elections will cost the administration seats but, unfortunately, not control of House and Senate.”

• Source: J.P. Horne Yearend letter, Dec. 2005 17

Conclusions - 2007 Forecasts • • • • • • •

US – Euro GDP growth to converge ▼ Inflation may slow ▼ = disinflation $ and € bond yields in parallel ▼ Euro equities to outperform – then ▼ Fed and ECB rates will converge - ▼ $ ▼ to $1.40/3 : € by Jun07; then ▲ Beware of financial black holes ....

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