The Shape of the Expected Recovery from the Great Recession

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2009 represented the “Year of Repair”. Following the worst global banking and economic crisis in decades, the world embarked on a 12 month trek to rebuild the fiscal, monetary and economic infrastructures among the developed and developing world and much has yet to be done. The breadth of the market’s collapse, which began in the housing sector in mid-2007, resulted in a decline in U.S. household wealth in 4Q08 by a record $5.1 trillion. For all of 2008, wealth dropped $11.2 trillion, the largest decline since the government began keeping quarterly records in 1952.

The collapse of the market required an extraordinary level of support by the world’s governments as the various central banks poured trillions of dollars into the financial system coupled with fiscal policy initiatives the likes of which have not been seen since the Great Depression.

The impact on the U.S. Fed’s balance sheet from the various asset support programs caused a ballooning of the balance sheet to the tune of $2.239 trillion. Likewise, a combination of government spending, ($245 billion in emergency spending on the Wall Street bailout and the takeover of mortgage giants Fannie Mae and Freddie Mac, $200 billion in costs from the economic stimulus bill, as well as increases in unemployment benefits), and the significant negative impact on tax revenues tied to the recession resulted in the U.S. budget deficit hitting a record of $1.4 trillion, well in excess of the previous record deficit of $459 billion realized in 2008.

With the recession officially beginning in 4Q07 according to the NBER, the U.S. aggregate chain weighted GDP fell from $13.391 trillion at the end of 2007 to $12.901 trillion as of June 2009. By some indications the recession likely conclude...

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...n OAS of 620bps and 185bps, respectively, we would make the case the market is too tight for this point in the cycle. In fact, since the current levels of spreads are not too far away from where we think they will settle at the end of 2010, we believe 2010’s corporate bond market performance will be heavily influenced by yield instead of capital appreciation. Even the equity market, which trades at 24.5x trailing earnings and in excess of 18x next years earnings would seem rich. However, while we are not calling for a decline in 2010, performance potential should be muted relative to 2009.

This presentations steps through select economic data points and corporate bond market stats which illustrates were the market has traveled in 2009 and were we expect things are going. While not exhaustive in its content, it does provide a framework as to how we view the markets.
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