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Current Economic and Capital Market Trends
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  1. Current Economic andCapital Market Trends SURFA 44th Financial Forum – Discussion Panel 1

  2. Overview and Introductions SURFA Financial Forum

  3. Macroeconomic Trends • Start by considering the big picture • Key trends and issues affecting the formation and availability of capital for the utility sector • Factors critical in determining the terms and conditions associated with raising that capital • Invited a representative from the Federal Reserve System, without success • FOMC meeting April 24-25 • Unavailability of appropriate speakers • I will outline some of the trends and issues I would have liked the Fed to have addressed SURFA Financial Forum

  4. Rate of Economic Recovery • Nature and intensity of the Great Recession • Tepid and atypical recovery pattern • Unemployment rate • Real estate sector impact on: • Labor mobility • Personal consumption • Risk aversion in deploying savings • Corporate investment • Financial sector • Public sector • European economic crisis SURFA Financial Forum

  5. Formation of Capital • De-leveraging of U.S. households • Averting risk, yet desperately seeking yield • Banks • Insurance • Rebuilding retirement funds • Discount rates remain low +Δ PV(Liabilities) • Equity and debt portfolio valuations both hit • Corporate capital expenditure trends • Taxation of capital gains and dividend income • The allure of investing in BRICs and other foreign alternatives SURFA Financial Forum

  6. Banking Sector Health • The 2007–2008 crisis – a long structural tail • Resulting financial sector concentrations • Funding trends • Loan quality trends • Stress tests (capital adequacy) • Regulatory initiatives and their impacts • Dodd Frank Act • The Volcker Rule • Basle III • Exposure to European credit risk SURFA Financial Forum

  7. Insurance Sector Health • Solvency risks • Capital adequacy risks • Re-insurance limitations • Unpredictably volatile casualty risks • Demand for insurance – muted recovery • Increasingly price-inelastic demand for cover • Political backlash in some jurisdictions for certain lines of insurance • Unprofitable acquisitions of corporate defined benefit pension fund liabilities SURFA Financial Forum

  8. Inflation • Demand-pull: • Tepid economic recovery • Stubborn unemployment • Cost-push: • Commodity prices • Geopolitical risk • Fiscal deficit: • Overhang effect +Δ volatility inflation risk • Foreign holders of U.S. Treasury obligations • Sterilizing QE programs: the ability to buy and hold U.S. Treasury debt will act as a limit SURFA Financial Forum

  9. Monetary Policy • Accommodative economic policy • Economic prospects • Electoral cycle • Normalization of bank funding • Ensuring banks can secure adequate funding • Remaining credit crisis risks • Coordination required with other central banks and monetary authorities • Assisting any U.S. banks directly or indirectly impacted by any new banking crisis (Europe?) • Inflationary risk: balancing the dual mandates SURFA Financial Forum

  10. Fiscal Policy • Economic justification of the current level of Federal debt outstanding • Federal deficit level • Borrowing to cover the deficit • How and when to rein it in • Increasingly polarized positions in the debate • Mismanagement of the Federal debt limit • State and local government budgets • Impact on the various debt capital markets • Taxable debt • Tax-exempt debt SURFA Financial Forum

  11. U.S. Treasury Securities Market • Demand • Credit and headline risk aversion • Regulatory incentives - financial institutions • Liquidity preferences • Reserve currency function – central bank and other official holdings • Supply • Macroeconomic pump priming • Funding various financial rescues • Monetary policy • Funding Federal deficits SURFA Financial Forum

  12. Reserve Currency Status of the Dollar • U.S. Dollar has no serious competition as the international reserve currency of choice • A foreigner’s perspective: • Nearly half of current U.S. Treasury debt holders are not U.S. based • Risks foreigner face by holding U.S. Treasury securities • Signs of increasing resistance to the Dollar’s reserve currency status • Dynamics and implications of decreasing the Dollar’s reserve currency status SURFA Financial Forum

  13. Impact on Raising Capital for Utilities • Equity • Interest in the sector as a defensive holding • Interest in dividend-paying stocks • Debt • Long-Term Debt • UST benchmarks and corporate credit spreads • Risk-on / Risk-off: volatility and headline risks • Short-Term Debt • Commercial paper: breadth, depth, tenor contraction • Bank credit availability, tenors and pricing • Preferred Stock SURFA Financial Forum