March - CI Investments

Sterling’sWorld ReportThat said, we would not be particularly concerned in thenear term about fiscal deficits “crowding out” private creditformation until private credit growth actually takes off in aself-sustaining fashion. And to the extent a resumption ofeconomic growth brings with it higher tax revenues and asharp decline in fiscal deficits, the crowding out process maynot be as painful as many investors currently fear. As we havediscussed in these reports before, the early stages of recoveryfrom a credit crisis are apt to occur as a “credit-less recovery.”What is required is not that banks start lending and businessesand consumers start borrowing aggressively again, but merelythat both sides of the credit market stop trying to reduce theircredit exposure as aggressively as before.A “credit-less recovery” could be surprisingly robustwe have been particularly impressed with the resilience ofU.S. retail sales and auto output in recent months. The datasuggest that U.S. GDP growth this year will get a significantboost from final consumer demand, as well as being supportedby inventory rebuilding.Naturally, to complete the story of a self-sustaining recoverywe will need to see meaningful job growth. That wouldpermit a “virtuous circle” of higher labour income leadingto stronger consumer spending, which in turn would leadto further job creation, and so on. We remain optimisticthat such a dynamic will be evident in coming months,particularly since one of the most pronounced features of theU.S. recession was the severity of the decline in jobs acrossmany sectors.Chart 3 illustrates this process with data from the FederalReserve’s Senior Loan Officer Survey, which has been areasonably good leading indicator of U.S. real GDP growth.According to the January survey results, which were releasedin February, bankers are no longer tightening credit standardson balance even though they have also not begun to ease theirstandards significantly. However, that is a huge improvementfrom a year ago, when bankers were tripping over themselvesto tighten standards. As shown in the chart, the improvementin the Fed survey speaks to a meaningful improvement inU.S. GDP growth over the next four quarters – but with noimplication that U.S. bankers are about to go on a lendingbinge.In our view, the improvement in financial conditions seenin this indicator, or in closely related indicators like theBloomberg Financial Conditions Index, continue to pointtoward surprisingly strong U.S. growth in coming quarters,with quarterly growth rates more likely in the range of 4% to5% rather than the 2.5% to 3.0% range currently expected byconsensus surveys. And even though severe winter weathermay have obscured some of that dynamic in the first quarter,Wall Street economist Ed Hyman has noted that U.S. payrollemployment fell by a remarkable 6.1% during the recessioneven though the historical relationship between real GDPand employment would have justified a cut in employmentThe Fed’s Loan Survey is a Good Leading IndicatorIt Speaks to Substantial GDP Gains in Coming QuartersPercent (%), 1-Quarter Lag,Inverted ScaleYOY % Change-40.0 10.0%-20.00.020.040.060.080.0 Semior Loan SurveyReal GDP YOY100.099 00 01 02 03 04 05 06 07 08 09 10Source: Haver AnalyticsChart 3: Aggressive quantitative easing by the Federal Reserve hasresulted in a major improvement in lending conditions in the U.S.,which should support firm GDP growth in coming quarters.8.0%6.0%4.0%2.0%0.0%-2.0%-4.0%PAGE 16 • SPRING 2010 PERSPECTIVE AS AT MARCH 31, 2010