Download
state of the u s consumer n.
Skip this Video
Loading SlideShow in 5 Seconds..
State of the U.S. Consumer PowerPoint Presentation
Download Presentation
State of the U.S. Consumer

State of the U.S. Consumer

123 Vues Download Presentation
Télécharger la présentation

State of the U.S. Consumer

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. State of the U.S. Consumer August 2011 Prepared by: James Fayal

  2. Growth of the Asset Bubble • Table of Contents Presentation Objective This presentation outlines the current state of the American consumer by analyzing the causes, effects and aftermath of the recession. In this analysis we will look at consumers and markets as a whole, as well as specific subsets of each. Once we have established the current state of the consumer and the wider economy, this presentation will attempt to predict what fundamental shifts the economy has experienced as a result of the recession and what effects those shifts may have going forward. In addition, this presentation concludes with a short supplement on the changing landscape of consumer payment preferences. The Recession and Aftermath Looking Forward & the "New Normal" Supplement: Consume Payment Preferences State of the U.S. Consumer 11Aug11

  3. Growth of the Asset Bubble State of the U.S. Consumer 11Aug11

  4. Federal Policy For two decades the Federal Reserve and its chairman promoted financial deregulation and cheap credit. Annualized Quarterly GDP Change (%) • Source: FederalReserve.gov, BEA.gov, New York Times October 2008 article “Greenspan Concedes Error on Regulation”. • Growth of the Asset Bubble Federal Funds Rate (%) In a 2008 congressional testimony, Greenspan admitted: “Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity — myself especially — are in a state of shocked disbelief.“ When asked if it was fair to say his “view of the world, [his] ideology, was not right, [was] not working”, he responded “Absolutely, precisely.” State of the U.S. Consumer 11Aug11

  5. National Debt In the early and mid 2000s national debt grew substantially, even when compared to the growing GDP. Total Debt (% of GDP): 290% • Between 2000 and 2008, financial institutions were responsible for a relatively small amount of debt accumulation. • The housing market and the government were the only sectors that increased their proportional levels of debt. • Broker-dealers were a pocket of high debt growth within the financial industry. By 2007, major broker-dealers were leveraged an average of 31:1 compared to 20:1 for the financial system as a whole and 12:1 for banks. • Growth of the Asset Bubble • 1 Gross leverage = (assets/equity). • 2 Includes Morgan Stanley, Goldman Sachs, Merrill Lynch, Bear Stearns, Lehman Brothers . • Source: McKinsey Jan. 2010 report “Debt and Deleveraging”. Household: 96% of GDP 33% of Total Debt Total Debt (% of GDP): 227% 72% of GDP 32% of Total Debt Non-Financial Institutions: 78% of GDP 27% of Total Debt Change in Gross Leverage1 of Financial Institutions 2002-2007 67% of GDP 30% of Total Debt Government: 60% of GDP 21% of Total Debt 45% of GDP 20% of Total Debt Financial Institutions: 56% of GDP 19% of Total Debt 43% of GDP 19% of Total Debt 2 State of the U.S. Consumer 11Aug11

  6. Consumer Debt Household debt accumulated at a faster rate than any other sector. • Household debt increased from 96% of GDP in 2000 to 128% of GDP in 2008. • The middle and upper middle classes accumulated the most debt in the buildup to the recession. • Middle and upper middle households tend to deleverage by reducing consumption rather than defaulting, which avoids major credit losses, but severely hampers economic growth. • Prior to the recession, a commonly used metric of leverage was household debt to assets, which masked the excessive debt with inflated asset values. Personal Savings Rate • Growth of the Asset Bubble • Source: McKinsey Jan. 2010 Report “Debt and Deleveraging”, BLS.gov. % Disposable Income Debt Growth by Income Percentile +6% Growth in Bank Lending by Sector +57% 134% % GDP +8% +51% 99% +25% +49% +27% +44% % Disposable Income State of the U.S. Consumer 11Aug11

  7. International Debt The United States was not the only country with excessive national debt. Debt by Sector (% of GDP) • 12000-20008 growth rates in local currency. • 2Skewed up because the U.K. is an international financial hub. • Source: McKinsey 2010 report “Debt and Deleveraging”, First Annapolis Analysis. • Growth of the Asset Bubble Offset by high GDP growth 2 Compound Annual Growth Rate of Debt1 Household Leverage (% of Disposable Income) % Change State of the U.S. Consumer 11Aug11

  8. Deregulation Deregulation of the derivatives market helped fuel the market for subprime loans. % of All Mortgages Designated as Alt-A and Subprime • Source: Inside Mortgage Finance data. • Growth of the Asset Bubble Housing Price Index % of all mortgages • November 12th, 1999: The Gramm, Leach, Bliley Act was passed, which deregulated many aspects of the financial industry and the derivatives market. • December 21st, 2000: The Commodities Futures Modernization Act was passed, which further deregulated financial derivatives. • The newly deregulated derivatives allowed risk to be more freely traded among firms. As a result, banks took on riskier mortgages assuming that they could diversify and securitize the receivables. This model became known as “Originate to Distribute.” • The securitized receivables were called Mortgage Backed Securities (MBSs) and were sometimes re-bundled into Collateralized Debt Obligations (CDOs). State of the U.S. Consumer 11Aug11

  9. CDS Market The market for credit default swaps, nonexistent until the late 1990’s, grew exponentially in the early and mid 2000’s. Credit Default Swap Total Market Size ($B) • A Credit Default Swap (CDS) is essentially insurance on debt that is redeemable if the debt issuing entity defaults. The seller receives yearly premiums to compensate for taking on the risk. • A large part of the market was created to insure against defaults on consumer loans and consumer mortgages distributed by commercial banks. • The buyer of a CDS does not need to have any tangible interest in the underlying loans. As a result, most of the market (80%) is synthetically linked to actual assets. • The market for CDSs began in the late 1990’s and reached a total market size of $631.5b by 2001. • The market took off in the early and mid 2000s reaching a total size of $62.2 Trillion by 2007. • When the underlying loans and mortgages began defaulting, insurance companies, especially AIG, stopped selling CDSs and the market became extremely illiquid. • With no one selling insurance, banks were forced to record huge write downs on their receivable assets. • Source: International Swaps and Derivatives Association. • Growth of the Asset Bubble $62.2 Trillion $26.3 Trillion In 2008, the world’s equity market was valued at about $36.6 trillion, while the world’s derivatives market had a notional value of about $771 trillion. State of the U.S. Consumer 11Aug11

  10. Originate to Distribute Under the “Originate to Distribute” model, a disproportionate level of risk is transferred to the insurance companies issuing the CDSs. Banks: Issue loans and securitize the expected monthly receivables. In the first quarter of 2009, AIG’s exposure to the CDS market culminated in a net loss of $61.7B. • Source: Variety of sources, AIG 2009 annual report. • Growth of the Asset Bubble MBS Monthly Interest + Principle Payments Mortgage $ Monthly Premiums CDS Insurance (car, flood, life, etc) MBS Investors: buy the securitized receivables and collect on mortgages. Home Buyers: receive loans and pay back the principle and interest over time. Insurance Companies (AIG): sell credit default swaps to banks and investors. CDS Monthly Premiums Monthly Premiums Monthly Premiums CDS Group ReducingRisk Outside Investors (i.e. John Paulson): purchase CDSs and pay monthly premiums to the insurance companies Group Adding Risk State of the U.S. Consumer 11Aug11

  11. Trading on Margin Between 2002 and 2007, the value of margin positions in the U.S. stock market increased from $134b to $345b, a growth of over 157%. • Note: For normal investors the minimum margin ratio is usually 50%. • 1 This represents a simplified version of margin trading. • Source: St. Louis Federal Reserve, First Annapolis analysis. • Growth of the Asset Bubble After using all $85 to pay off debt, an additional $5 is owed out of pocket Small shifts in price cause large shifts in R.O.E. and position size State of the U.S. Consumer 11Aug11

  12. The Recession and the Aftermath State of the U.S. Consumer 11Aug11

  13. Time Table Timeline of events: 2007 Annualized GDP % Change Dow Jones Index • Note: Quarterly GDP change is annualized. • Source: Federal Reserve, Mint.com, Finance.yahoo.com. • The Recession and the Aftermath Sep. 30th: UBS announces a $690mm loss in Q3 Feb. 8th: HSBC reveals huge losses in its U.S. mortgage arm as a result of defaulting sub-prime loans Apr. 2nd: New Century Financial, a leading subprime lender, files for bankruptcy Aug.: The “Credit Crunch” begins as more subprime loans are discovered in Bank’s Portfolios and the Fed injects $100b into the money supply Dec. 12th: Fed injects another $40b into the money supply Jul. 19th: Dow closes above 14,000 for first time in history Nov. 1st: Fed injects $41b into the money supply Aug. 6th: American Home Mortgage files for bankruptcy Dec.: The recession officially begins Aug. 16th: Countrywide Financial gets an $11b emergency loan from banks Aug. 31st: Ameriquest goes out of business State of the U.S. Consumer 11Aug11

  14. Time Table Timeline of Event: 1/2008 – 4/2009 Dow Jones Index Annualized GDP % Change • Note: Quarterly GDP change is annualized. • Source: Federal Reserve, Mint.com, Finance.yahoo.com. • The Recession and the Aftermath Sep. 7th: The government temporarily takes Fannie & Freddie Mac under government control Mar.11th: Central Banks inject $200b into the world economy Q4 2008: AIG announces a one quarter loss of $62b Oct. 3rd: $700b bailout approved by congress Jul. 30th: The Housing & Economic Recovery Act is passed Feb. 14th: Congress passes $787b stimulus, much of which goes to state governments Dec. 16th: U.S. central bank cuts its interest rate to 0-.25% - the lowest in the history of the Fed Sep. 15th: Lehman brothers, the fourth largest investment bank, files for bankruptcy after they are rejected any financial assistance Mar. 18th: JP Morgan Buys the collapsed Bear Sterns Sep. 16th: The next day, AIG receives an $85b loan from the U.S. treasury in exchange for 79.9% of the firms equity State of the U.S. Consumer 11Aug11

  15. Time Table The economic recovery in the U.S. has been sluggish at best. • Note: Quarterly GDP change is annualized. • Source: Federal Reserve & Finance.yahoo.com. • The Recession and the Aftermath Dow Jones Index Annualized GDP % Change June 2009: The recession “officially” ends, when GDP growth turns positive August 5, 2011: S& P Downgrades U.S. Debt State of the U.S. Consumer 11Aug11

  16. The Recession and the Aftermath:The Consumer State of the U.S. Consumer 11Aug11

  17. Consumer Sentiment The recession technically ended in June 2009, but consumer sentiment continues to hover at levels historically associated with recession. Index of Consumer Sentiment (1966=100) • Source: University of Michigan Index of Consumer Sentiment. • The Recession and the Aftermath Recession Index of Consumer Sentiment (1966=100) Recent improvements in the index were virtually wiped out in the early months of 2011. Increases in gas and food prices have been cited as prevalent factors. State of the U.S. Consumer 11Aug11

  18. Net Worth Consumer net worth is recovering, but much of the growth has been in the form of stock market equity appreciation. Change in National Net Worth from Previous Year ($B) Change in Value of Corporate Equities & Mutual Fund Shares ($B) • Source: Bureau of Labor Statistics and The Federal Reserve. • The Recession and the Aftermath 2008 Total U.S. GDP: $14.4 T Net Change since 2008: -$6,112 B Net Change since 2008: -$1,181 Net Change since 2009: $6,688 B Net Change since 2009: $3,881 State of the U.S. Consumer 11Aug11

  19. Housing Prices The continually deteriorating housing market has been the most prominent restraint on the U.S. recovery. • Source: FHFA.gov. • The Recession and the Aftermath • The FHFA’s Purchase-Only Index measures the growth in U.S. home prices using data from mortgages backed by or sold to Fannie and Freddie Mac. • After years of excessive growth, prices have been in continual decline since early 2007. • Total reduction in real estate values since 2007: $7.58 Trillion Housing Price Index 1991 – 2011 Change in Value of Real Estate Assets ($B) Purchase Only Index 1991 = 100 Equivalentto 27% of 2008 Total U.S. GDP State of the U.S. Consumer 11Aug11

  20. Housing Prices Certain regions, especially the southern pacific states, were hit disproportionately hard by the housing crisis while the Midwest remained relatively unscathed. Q1 2011 % Decline From Peak Prices What pre-peak year are 2011 housing prices comparable to? • Source: FHFA.gov. • The Recession and the Aftermath States in the 2009-2011 category either hit their peak prices at the end of the recession or never reduced in price Nationally, housing prices are comparable to 2004 State of the U.S. Consumer 11Aug11

  21. Home Equity Fewer Americans own homes today, while those that do own have less equity in their properties. American Home Ownership (% owning home) Average U.S. Homeowners % Home Equity • Source: Federal Reserve, FHFA.gov, CoreLogic estimates. • The Recession and the Aftermath % of Houses with Negative Equity One benefit of having fewer homeowners is a mobile workforce. Negative home equity in the United States is estimated to total $751b. State of the U.S. Consumer 11Aug11

  22. Foreclosures Some states continue to struggle with high foreclosure rates, but national foreclosure sales now constitute a reduced percentage of total sales. States with Highest % of Sales in Foreclosure1 % of U.S. Home Sales in Foreclosure1 • 1Taken as a % of total houses for sale. • Source: Realtyrac.com, Census Bureau. • The Recession and the Aftermath Foreclosure sales put downward price pressure on surrounding properties, including those not in foreclosure. Total New Foreclosure Notices (per month) State of the U.S. Consumer 11Aug11

  23. Consumer Debt Since the recession there has been a trend of deleveraging among consumers. Makeup of consumer debt ($B) Household Financial Obligations Ratios2 % of disposable income • 2F.O.R. includes debt payments as well as other financial obligations like lease payments. • Source: FederalReserve.gov, UScourts.gov. • The Recession and the Aftermath CAGR 2008-2010: -9.1% Total Personal Bankruptcies 2007-2010 CAGR: 25.65% • The reduction in revolving debt balances indicates that Americans are becoming more fiscally responsible. Unfortunately, personal bankruptcies account for a significant portion of the declines. • At the end of 2010 there were over 1.6 million bankruptcies pending. State of the U.S. Consumer 11Aug11

  24. Unemployment Unemployment and underemployment reached levels not seen since the early 1980’s and since then have only marginally recovered. U.S. Unemployment and Underemployment Rates • Source: BLS.gov. • The Recession and the Aftermath • Many employable people have dropped out of the workforce completely and discontinued their job search. • This group is refereed to as “marginally attached to the work force” and is not counted in the classic unemployment index. • In October of 2009, unemployment peaked at 10.1%; slightly lower than the 10.8% peak of December, 1982. State of the U.S. Consumer 11Aug11

  25. Unemployment The negative effects of the recession were disproportionately spread among demographic segments. Unemployment % by Education Level Unemployment % by Sex • Source: Federal Reserve, Census Bureau and Bureau of Labor Statistics, July 2011 Pew Research study “Two Years of Economic Recovery: Women Lose Jobs, Men Find Them”. • The Recession and the Aftermath Manufacturing, finance and construction, historically male dominated industries, accounted for a significant portion of total job loses. A study by Pew Research found that since 2009 men have regained jobs faster than women in 15 out of 16 economic sectors, with the exception being state governments. Unemployment % by Race Total Job Losses and Gains by Sex (000’s) State of the U.S. Consumer 11Aug11

  26. Net Worth Inequality The U.S. Hispanic population is heavily concentrated in areas that were devastated by the recession. Median Net Worth by Race Median Home Equity • The Recession and the Aftermath • Source: Bureau of Labor Statistics, Pew Hispanic Center for Research. -16.2% -65.5% -53.2% States with Large Hispanic Populations % of Individuals with Negative Net Worth Arizona, California, Florida and Nevada, states with heavily deflated home prices, account for 42.1% of the U.S. Hispanic population. State of the U.S. Consumer 11Aug11

  27. Unemployment Teenage unemployment statistics, while high, mask the deeper problem of extremely low workforce participation rates. Teen Unemployment1 Teen Workforce Participation1 • 1Includes teenagers between 16 to 19 years old. • Source: Bureau of Labor Statistics, Business Insider “The Collapse of the Working Teen”. • The Recession and the Aftermath Age 20+ Unemployment: 8.5% State of the U.S. Consumer 11Aug11

  28. Unemployment Although far from pre recession norms, people are rapidly reentering the workforce and are finding employment in less time. • Source: Bureau of Labor Statistics, St. Louis Federal Reserve. • The Recession and the Aftermath Median Weeks Unemployed Weekly Jobless Claims 25.5 Week of March 28th, 2009: 659,000 Week of July 30th, 2011: 400,000 Discouraged Workers (000's) The flood of people reentering the workforce and the reduced number of jobless claims are good indicators that the job market is improving, albeit slowly. State of the U.S. Consumer 11Aug11

  29. Wages Since 2008, wages and total compensation have not kept up to pace with the rising cost of goods. Compensation without benefits vs. Consumer Price Index Compensation with benefits vs. Consumer Price Index • Note: Scale on right side refers to Compensation / CPI ratio. • Source: Bureau of Labor Statistics. • The Recession and the Aftermath Index 2000 = 100 Index 2000 = 100 The decline in purchasing power may seem minute in the long term, but it has had an exacerbated psychological effect during this already anemic recovery. State of the U.S. Consumer 11Aug11

  30. Retirement The recession has caused older Americans to be more pessimistic about their retirement prospects, but attitudes are steadily improving. Workers Expected Retirement Age by Year Reasons Why Americans Think They Will Retire Late • Source: Employee Benefit Research Institute 2011 survey. • The Recession and the Aftermath Workers Expecting to Retire Later than Planned (%) State of the U.S. Consumer 11Aug11

  31. Retirement There is a large discrepancy between what people want to save for retirement and what savings are actually being accumulated. Total Savings and Investments Reported by Retirees1 Amount of Savings Workers Believe They Need for Retirement • 1Not including primary residence. • Source: Employee Benefit Research Institute surveys. • The Recession and the Aftermath • 69% of current workers believe they need $250,000 or more in savings for retirement. In reality, only 17% of current retirees actually accumulated that amount. • 33% of workers believe Social Security will be a major part of their retirement income, while 68% of retirees say S.S. actually is a major contributor. State of the U.S. Consumer 11Aug11

  32. The Recession and the Aftermath:Corporate America State of the U.S. Consumer 11Aug11

  33. Credit Crunch Credit became hard to come by, even as the Fed pushed interest rates to historic lows. Total Business Bankruptcies Level of Commercial Loans and Cash Reserves vs. the Federal Funds Rate • Source: St. Louis Federal Reserve, UScourts.gov. • The Recession and the Aftermath 2007-2010 CAGR: 31.03% • When firms cannot access the credit markets they are forced to delay growth and cut costs. This often results in large layoffs and reduced future hiring. • When credit markets are uncertain, firms tend to hold more cash in case they need to absorb a financial shock. This has the effect of reducing M&A and R&D activity, which can exacerbate economic declines. • Since the beginning of 2009 corporate cash reserves have more than doubled. State of the U.S. Consumer 11Aug11

  34. Industry Recovery Production levels began dropping in late 2007, followed a year later by a decline in overall industrial capacity. Total Industrial Production, Capacity and Utilization Normalized Revenues of Hard Hit Industries • Source: Company 10-K filings. • The Recession and the Aftermath • The retail industry suffered severely during the recession. Clothing retailers, automobile dealers and jewelry stores all realized disproportionately large losses. • Capacity tends to drop in the years following a drop in production levels. Manufacturing plants can survive in the short term by cutting variable costs, but often become overburdened and shut down when long term fixed costs accumulate. State of the U.S. Consumer 11Aug11

  35. Industry Recovery Discount retailers fared well during and after the recession. This also applies to retailers with reputations for selling quality products at reduced prices. Normalized Revenues of Discount Retailers (Index: 2005 =100) Normalized Revenues of Quality at a Discount Retailers (Index 2005 = 100) • Source: Company 10-K filings. • The Recession and the Aftermath • By slimming margins, instead of transferring increased costs to customers, discount retailers have remained competitive. Whether the retail model will continue to prosper in favorable markets with increasing food and raw material prices has yet to be seen. • Costco has successfully expanded bulk buying, once relegated to low-end products, to affluent individuals looking for high-end merchandise. State of the U.S. Consumer 11Aug11

  36. Industry Recovery Some industries, like high-end retail, have recovered well from losses during the recession while others, like construction, continue to suffer. Normalized High End Retail Revenue (2005=100) Normalized Construction Company Revenue (2005=100) • Source: Company 10-K filings. • The Recession and the Aftermath • High-end retailers with a strong presence in Europe, such as Tiffany’s, have rebounded especially well. • Strong high-end retail sales indicate that the wealthy are spending again. • A hefty surplus of vacant homes and the continually declining property prices have left the construction industry in shambles. State of the U.S. Consumer 11Aug11

  37. Corporate Trust Citizens have less faith in Corporate America, especially so in firms receiving federal bailout funds. Percentage of Americans Who Trust Corporations by Industry • 1 Received bailout funds after 2001 terrorist attacks, but not during current recession. • 2 “Influential Americans” are a subset of consumers designated by GFKAmerica as being the 10% of society with the most impact on people and societal change. • Source: Harris Interactive survey, annual financial trust index study by Kellogg and Booth graduate schools, GFKAmerica consulting study. • The Recession and the Aftermath 1 64% of Americans find it harder to trust companies now compared to a few years ago and 55% believe it will be even harder in the future. State of the U.S. Consumer 11Aug11

  38. Looking Forward & the “New Normal” State of the U.S. Consumer 11Aug11

  39. Unemployment The job market has undergone a structural change, which will most likely result in higher “normal” unemployment. CBO’s Beveridge Curve: Job Vacancies vs. Unemployment • Source: Congressional Budget Office, The Federal Reserve. • Looking Forward & the “New Normal” • The Congressional Budget Office’s “Beveridge Curve” shows the current disconnect between job openings and unemployment. • The current level of job openings is consistent with an unemployment level of 6.5%. 4% Prior to 2010 2010 3.5% 4Q 2010 3% Private Job Vacancy Rate 2.5% 2% 1.5% -2% -1% 0% 1% 2% 3% 4% 5% 6% % Gap over “normal” unemployment of 5.2% State of the U.S. Consumer 11Aug11

  40. Economic Projections Over the past year economic projections of the recovery have become less optimistic. FOMC Unemployment Projections FOMC GDP growth Projections • Note: June 2010 and June 2011 refer to the dates when the projections were published. • Source: Federal Open Market Committee, Federal Reserve of San Francisco, Peterson Institute of International Economics, Congressional Budget Office. • Looking Forward & the “New Normal” Actual data from 1/2011 - 6/2011 State of the U.S. Consumer 11Aug11

  41. Tax Policy Recent changes in the tax code could shift funds away from the equity markets. • To be designated long term a capital gain must result from an investment of 12 months or longer. • Short-term capital gains are taxed as ordinary income. • Some fear that an increase in the capital gains tax will deter individuals from investing in public firms, making it more difficult for companies to access equity markets and hurting long term growth. • Stock dividends are currently taxed at the same rates as long term capital gains, but beginning in 2013 they will be taxed at the same rate as ordinary income. • 1Assumes a 2% management 20% carried interest model and does not include a profit benchmark. • 2Taxed as ordinary income. • Source: emlab.berkeley.edu, IRS.gov. • Looking Forward & the “New Normal” Profit: $100 Investor’s Return: $80 profit + $98 principle Taxation of an Investment Fund1 Management Fee2: $2 Principle Investment: $100 Amount Invested: $98 Principle Investment: $98 Carried Interest: $20.00 Taxed at 15% Allocated to general partners = State of the U.S. Consumer 11Aug11

  42. Wealth Inequality Public backlash against the level of wealth inequality in the U.S. could mean increased taxes for the highest income earners. Top and Bottom Tax Rates Increase in Average Inflation Adjusted Income: 1980-20061 • 1 2006 Dollars. • Source: emlab.berkeley.edu, IRS.gov, CBSnews.com, BLS.gov, Census.gov. • Looking Forward & the “New Normal” 1980: $30,374 2006: $30,446 Increase: $72 • In the past century, 1928 and 2007 were the only two years when the top 1% of earners accounted for over 23% of the nation’s income. • In 2008-the last year the census bureau produced the applicable statistics-the top 1% earned about 21% of the nation’s income. • In 2013 the Bush era tax cuts come to an end and unless they are renewed the top tax bracket will return to 39.6% from the current level of 35%. State of the U.S. Consumer 11Aug11

  43. Housing Market Real estate investments are no longer viewed as safe or high returning. Normalized Median Housing Prices vs. DJI 1980 – Q1 2011 House Price: Rent Ratio 27.9 • 1CAGR is for 1980 - 4Q 2010. • Source: Finance.yahoo.com, FHFA.gov, The Wall Street Journal article “A Home is a lousy investment”. • Looking Forward & the “New Normal” Rent Housing CAGR1: 4.59% DJI CAGR1: 9.61% 1960 - 2000 Avg.: 19.1 Depends on the area Buy • Housing was never the exceptional investment it was made out to be, especially when compared to the Dow Jones. • A 1980 $100,000 investment in a fund tracking median home prices would be worth about $374,200 now, compared to about $1,568,900 if the same amount was invested in a fund tracking the Dow Jones Index ($457,100 & $1,768,500 in September 2007). • Housing prices are not as volatile as the stock market on a macro level, but local house prices tend to fluctuate with local job markets. • The rule of thumb states that it is better to rent when the ratio is above 20, better to own when it is below 15 and it depends on the area when it is between the two. • A market is considered healthy when buying and renting are on equal footing (between 15-20). • In many parts of California, Hawaii and New York the ratio remains well above 30:1. State of the U.S. Consumer 11Aug11

  44. Margin Trading People are trading on margin at pre-recession levels. The market must be kept in check to avoid another crash. S&P 500 Index and Margin Trading • Source: Morningstar.com. • Looking Forward & the “New Normal” Stock Margin Credit ($mm) State of the U.S. Consumer 11Aug11

  45. Supplement: Consumer Payment Preferences State of the U.S. Consumer 11Aug11

  46. Payment Preference When choosing a payment method, younger consumers tend to prefer convenience while older consumers are more concerned with financial control and security. Determining Factors When Choosing a Payment Method How Important Are Rewards When Determining a Payment Method • Source: BAI research/Hitachi consulting 2010 Study of Consumer Payment Preferences. • Supplement: Consumer Payment Preferences State of the U.S. Consumer 11Aug11

  47. Debit vs. Credit Debit cards have become the preferred payment choice in terms of total ownership and total number of transactions. In-Store Payment Choice Mix Debit& Credit Ownership by Age Unchanged • Source: BAI research/Hitachi consulting 2010 Study of Consumer Payment Preferences. • Supplement: Consumer Payment Preferences • Notice that the shift comes from a decline in credit market penetration, not an increase in debit ownership. • The data would suggest that people who already owned debit cards are using them more often. • The new Durbin Amendment, which caps interchange fees on debit transactions, will have substantial yet unknown effects on the payment mix. State of the U.S. Consumer 11Aug11

  48. Debit vs. Credit Although accounting for more transactions, debit continues to lag behind credit in terms of total dollar transactions, and remains a less popular choice for Internet purchases. • Source: BAI research/Hitachi consulting 2010 Study of Consumer Payment Preferences., First Annapolis data, Paypal Website. • Supplement: Consumer Payment Preferences Payment Option Used for an Internet Purchase Market Share by Total $ Value of Transactions In 2010, there were about 100 million Paypal accounts and total payment volume exceeded $90B (18% of global e-commerce). Average debit ticket: $37.52 - $39.00 Average credit ticket: about $85.00 Credit continues to be the payment method of choice for high ticket items. State of the U.S. Consumer 11Aug11

  49. Mobile Payments Mobile payments have managed to take a small share of the market, but consumers still harbor some fundamental concerns regarding the process. • 1 Within the past three (3) months. • Source: BAI research/Hitachi consulting 2010 Study of Consumer Payment Preferences. • Supplement: Consumer Payment Preferences % of Internet Purchases Made Using a Mobile Phone1 State of the U.S. Consumer 11Aug11

  50. Internet Penetration Internet payment penetration has plateaued, but online micropayment penetration continues to grow at a considerable rate. • Source: BAI research/Hitachi consulting 2010 Study of Consumer Payment Preferences. Micropayment firms’ websites. • Supplement: Consumer Payment Preferences Internet Purchase Penetration Internet Micropayment Penetration Companies in the Online Micropayment Space State of the U.S. Consumer 11Aug11