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Finance, Administration and HR Forum
“National Debt and Small Business” by Doug Haws, CFA
Tom Johnson Investment Management, LLC
July 31, 2011
Or from my perspective
“Eating Jell-O® with a fork”
TJIM Equity and fixed income portfolio management
for institutional clients and HNW individuals since 1983.
$560 AUM 28 Year investment performance track record In-depth analysis and team portfolio
constructionGCCA portfolio manager since February 2000
TJIM and GCCA Relationship
Analysts, Portfolio Managers and Investment Committee are one in the same
5 Team members, CFA Charter holders, Stanford Ph.D. and Wharton MBA
21 Years average investment management experience
Accountability to client, advisor and performance
TJIM Investment Team
Which proposed solution is bestPolitical commentaryBlame for why we are hereAny reference to kicking, cans, or
roads.
What you won’t hear, here.
Quick look at the current debt and budget situationInteractive discussion about how the
level of the national debt is relevant to your business Review of expected outcomes and
market and economic reactions
What I would like to accomplish…
Expected Federal Revenue-$2.2T Federal Spending- $3.6T
Deficit $1.4T
Where we are at
As proposed in February 2011
66% “untouchable”
2.2acres of $100 Bills Stacked 7 Feet High
What Does a Trillion Dollars look like?
Mr. banker, how do you feel about my capital expansion plans?
Projected Expenses- $36 MillionPossible Revenues - $22 Million
5 year NPV- (-$43Million)Tax rate- 25% Discount rate 7%
Small Business Perspective
You can mandate more revenue from your customers.
You have the authority to print the currency you use to pay me back.
Sure whatever you need if…
190E Copyright © 2011 CRANDALL, PIERCE & COMPANY • All rights reserved • 14047 West Petronella Drive • Libertyville, Illinois 60048 • 1-847-549-6015 • Internet: www.crandallpierce.com
Dashed line indicates projections.Sources: International Monetary Fund; Crandall, Pierce & Company • Copyright © 2011 Crandall, Pierce & Company • All rights reserved.
70%
100%
110%
120%
130%
70%
80%
120%
130%
Government Debt as a Percentage of GDPG7 Nations: 1992 - 2015
2011 2015
CCCIV
2005 2007 2009 2013200320011999199719951993
1992Country
Debt to GDP Rates
ItalyDebt Exceeds
Its GDP:105.2%
Total G7Debt to GDP
Rate:65.7%
90.2%39.7%42.1%
105.2%72.3%32.8%70.6%
CanadaFranceGermanyItalyJapanU.K.U.S.
JapanDebt Exceeds
Its GDP:100.3%
U.S.Debt Exceeds
Its GDP:102.9%
2012
1996
2015Country
Debt to GDP Rates
Total G7Debt to GDP
Rate:125.7%
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.This illustration is subject to the terms & conditions at www.crandallpierce.com/usage.pdf. Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission.
71.6%88.4%75.6%
118.8%249.2%83.9%
110.7%
CanadaFranceGermanyItalyJapanU.K.U.S.
G7 NationsDebt to GDP Rate
2009Country
Debt to GDP Rates81.6%78.1%73.5%
115.8%217.6%
68.5%84.3%
CanadaFranceGermanyItalyJapanU.K.U.S.
Total G7Debt Exceeds
Its GDP:105.4%
$14.5 Trillion total outstanding debt$4.5T held by foreign governments China $1.16TJapan $907BlnU.K. $333BlnOil Exporting $225Bln
What does the US owe?
Who holds the $14.5 Trillion?
What does the U.S. Debt look like?
$14.5 Trillion Dollar Debt
10.14 Million cubic feet of cold storage space
45-53% of total U.S. GDP 44% of total employment64% of net new jobs (last 15 years)44% of private payroll taxesProduce 13 times more patents per
employee than large firms
*less than 500 employees*Sources, SBA, BLS and Dept. of Commerce
Why Small business is important
Government Employment
Government Employment as % of Total Employment
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
Jan-48 Jan-53 Jan-58 Jan-63 Jan-68 Jan-73 Jan-78 Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08
15.5% employed by governments
Customer demandBalance sheetAccess to capitalNPV, DCF and cost benefit analysisRegulatory environmentCost of CapitalHuman Capital
What factors drive your capital decisions?
Level of the National Debt ??
UncertaintyCost of CapitalRegulatory environmentTaxationHuman CapitalConsumer SentimentInternational
Opportunity/CompetitionEconomy
Implications to your business
Or Twelve The Grand Bargain The Half Bargain The House Cuts The White-House Cuts The Stop Gap The Cut Cap and Balanced Budget The McConnell Option The Gang of Six The Hybrid McConnell The Boehner 1T The Reid 2.7T The Boehner 3T
Fortunately the government has a plan…
Some Combination / Dilution of
The Boehner $1TThe Reid $2.7TThe Boehner $3T
What appears to be sorting out
Current Discussions (7/26/11)
Source Wall Street Journal 7/26/11
• U.S. Treasury Default- Not Now!• AAA rating downgrade- Very Possible
• Social Security, Military Pay – Will continue
• Medicare and Medicaid-will not turn away the sick
• Government shut down- Partial
• Mass institutional selling of U.S. Treasury notes -Not Likely
What’s at Stake?
May 16th
Aug 2nd
Aug 10th ???
When does treasury run out of $$?
Tough Choices…
but not default
“We’ll we’re still at 50%, at least a 50% possibility of downgrade”- David Beers, S&P, July 27 AAA to AA – Market is pricing 25-50 basis point rise in yields
Ratings Downgrade
Copyright © 2011 CRANDALL, PIERCE & COMPANY • All rights reserved • 14047 West Petronella Drive • Libertyville, Illinois 60048 • 1-847-549-6015 • Internet: www.crandallpierce.com
Sources: Federal Reserve Board • Copyright © 2011 Crandall, Pierce & Company • All rights reserved.Shaded areas represent recessionary periods.
Short Term Interest Rates
0.09
5.39
19.100.09
Jun. '11
Jun. '81May. '11
0.04
4.79
16.300.03
Jun. '11
May. '81Dec. '08
Latest
Average
MaximumMinimum
Value Date Value DateFed Funds 91 Day T-Bills
Percent Percent
54 60 63 66 69 72 75 78 81 84 87 90 93 96 99 0257 05 08
Federal Funds Rate
91 Day Treasury Bill Rates
198A -CCCIV-
11-10123456789
1011121314151617181920
-10123456789
1011121314151617181920
The information presented herein was compiled from sources believed to be reliable. It is intended for illustrative purposes only, and is furnished without responsibility for completeness or accuracy. Past performance does not guarantee future results.This illustration is subject to the terms & conditions at www.crandallpierce.com/usage.pdf. Under no circumstances may this illustration be copied, reproduced or redistributed in whole or in part including the data contained herein, without prior written permission.
April 6, 2010- 3.96%
February 10, 2011- 3.71%
Can we afford AA?
10yr USTN 2.94%10yr AA 3.96%
Investment Policy StatementsMore Liquid, More stable, alternative?Flight to Quality
Institutional Sell-Off
Other ramifications
The bad:Higher capital costsIncreased Taxes Revenue ReformsInternational more competitiveSlower Economy- short termPolitical gridlock/rhetoric- Nov.
2012Little regulatory reform
Which Plan? When?- but similar results for small business
The good:Reduced uncertaintyAbundant human capitalFiscal AusterityEconomy relieved- long termInvestor ConfidencePolitical gridlock/rhetoric- Nov. 2012Little regulatory reform
Which Plan? When?- but similar results for small business
