F inanc ial Adviso r magazine pre se nts I n the Afte rmath: - PowerPoint PPT Presentation

F inanc ial Adviso r magazine pre se nts I n the Afte rmath: Navigating the S o ve re ign F isc al Crisis www.fa-mag.c o m

This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

U S e c o no mic re c o ve ry has be gun � • Q4 GDP growth was 5.7% � • Leading indicators have soared � • Job market appears to be stabilizing � • Inventory rebuild should be strong, particularly in tech capital goods This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

but the e c o no my fac e s massive he adwinds In our view— � • Consumer: must still reduce debt and save more; housing wealth unlikely to recover � • Commercial Real Estate: more pain as office and apartment vacancies likely keep rising � • Government Spending I: Federal stimulus peaks in 2010, then fades � • Government Spending II: state and local govt. spending must fall to help balance budgets � • Net Trade: benefits from lower dollar limited by oil, China, European demand weakness � • Demographics: potential GDP growth looks likely to slow � • Recoveries from debt/ banking crises typically are slow (‘80s UK, ‘90s Japan) This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

transitio n to sustainable gro wth and satisfac to ry re al yie ld lo o ks highly unc e rtain � • Fiscal Risks to Treasury returns from massive bond supply and policy gridlock � • Inflation Risks to all bonds from higher core inflation from excessive monetary stimulus if policy gridlock persists � • Growth Risks to equities � • Confidence Risks to all US dollar assets This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

adviso rs may want to c o nside r: dive rsify fixe d inc o me ho ldings by c urre nc y and quality GLOBAL BOND FUNDS HOLD: � • Non-US, high quality governments and supranationals (safety) � • Emerging market debt (performance) � • Corporate debt (performance) � • Non-dollar securities (safety and performance in a dollar bear market) This is for informational purposes only and should not be construed as investment advice. The information presented is based on our best judgments and we believe it is reliable, but we do not guarantee its accuracy . Any judgments and assumptions are as of this date and are subject to change at any time due to economic, market and other factors. Opinions expressed will evolve as future events unfold.

c o nsume r he adwind: pe rso nal saving rate may rise to re plac e lo st we alth Personal Saving as a Percent of Disposable Personal Income Percent History Forecast 13 12 11 10 9 8 7 6 5 4 3 2 1 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 Quarterly data; shaded areas denote NBE R-designated recessions. Source: Commerce Department; L oomis Sayles. History through Q32009; forecast through Q42011.

c o nsume r he adwind: re side ntial mo rtgage de linque nc y rate still rising Mortgage Delinquencies: All Loans, Total Past Due Percent 10 9 8 7 6 5 4 3 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Seasonally adjusted quarterly data; shaded areas denote NBE R-designated recessions. Source: Mortgage Bankers Association. History through Q32009.

inve stme nt he adwind: vac anc y rate s are still c limbing National Vacancy Rates: Industrial, Downtown & Suburban Office Space Percent 24 22 20 Suburban Office 18 16 14 12 Downtown Office 10 8 Industrial 6 4 2 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Quarterly data; shaded areas denote NBE R-designated recessions. Source: Commerce Department. History through Q32009.

inve stme nt he adwind � Credit Suisse: $1.4 trillion of US commercial real estate loans maturing in • the next four years � Foresight Analytics: almost 55% of these are currently "underwater“ (1/2010) • � $250 billion in CRE losses? Not good for regional banks, or for regional lending • Loan Delinquency Rate: Commercial Real Estate Loans: All Comml Banks S A, Percent 12.5 10.0 7.5 5.0 2.5 0.0 90 95 00 05 10 Source: Federal Reserve Board/ Haver Analytics, 1/ 13/ 2010.

fisc al he adwind: OMB pro je c ts fe de ral de fic its will re main huge Federal Government Surplus/Deficit $ (Billion) Percent of GDP 400 3.0 OMB Projections (left scale) OMB History (left scale) 200 1.5 0 0.0 -200 -1.5 -400 -3.0 -600 -4.5 -800 -6.0 % of GDP , History -1000 -7.5 (right scale) -1200 -9.0 Projections for % of GDP -1400 -10.5 (right scale) -1600 -12.0 -1800 -13.5 -2000 -15.0 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 11 14 17 20 Unified budget basis; fiscal years, annual data. Source: Office of Management and Budget; Commerce Department. Annual history/ forecast through FY 2019.

� OMB: net federal debt held by public, up $2.1 trillion in FY 2009 • � Up $9.6 trillion FY 2010 – FY 2019 • � Debt-GDP ratio rise to 76.5%, highest since 1950 • � May get worse in very long run • Federal Debt Held by Public as a Percentage of GDP 120 100 80 60 40 20 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 15 Source: Office of Management and Budget/ Haver Analytics, 8/ 26/ 2009.

go ve rnme nt de bt sto c ks are so aring Japan: General Government Gross Financial Liabilities as % of GDP United S tates: General Government Gross Financial Liabilities as % of GDP Germany: General Government Gross Financial Liabilities as % of GDP United Kingdom: General Government Gross Financial Liabilities as % of GDP 240 200 160 120 80 40 0 70 75 80 85 90 95 00 05 10 Source: OE CD/ Haver Analytics; 8/ 19/ 2009.

but G3 yie lds are little c hange d US: 10-Year Treasury Note Yield at Constant Maturity (Avg., % p.a.) Japan: 10-Year Government Bond Yield (% ) Germany: Central Government Securities- 9 to 10 Years (Avg., % p.a.) 8 6 4 2 0 00 01 02 03 04 05 06 07 08 09 Source: FRB, FT, Bbk/ Haver.

de mo graphic he adwind � US working age population to slow from aging, lower fertility & less immigration • � Potential real GDP growth estimated to slow from 2.9% in 2000s to 2.2% in 2010s • Real Potential Gross Domestic Product (CBO) 10-year % Change (Annual) Bil. Chn. 2000 $ 4.4 4.0 3.6 3.2 2.8 2.4 2.0 55 60 65 70 75 80 85 90 95 00 05 10 15 20 Source: Congressional Budget Office/ Haver Analytics, 1/ 14/ 2010.

trade he adwind: e uro zo ne GDP slo we d in Q4 Euro Area 11-16: GDP at 2000 Prices, Flash Estimate SWDA Q/Q % Change 1 0 -1 -2 -3 03 04 05 06 07 08 09 Source: Statistical Office of the E uropean Communities, Haver Analytics.

c hina’s impo rts are gro wing, e uro pe ’s are no t China: Merchandise Imports, CIF SA, Mil. US $ EA 16: Imports: Total SA/WDA, Mil. EUR 120000 150000 100000 125000 80000 100000 60000 40000 75000 20000 0 50000 99 00 01 02 03 04 05 06 07 08 09 Source: CC, E urostat/ Haver.

is c hina’s 39% M1 gro wth an inflatio n risk? China: Consumer Price Index (Y/Y % Change) China: Money Supply- M1 (Y/Y % Change) 40 30 20 10 0 -10 00 01 02 03 04 05 06 07 08 09 Source: CNBS, PBC/ Haver.

U S do llar re mains vulne rable to se ntime nt, c arry JP Morgan Broad Real Effective X Rates 2000 = 100 130 120 110 Dollar 100 US 90 80 70 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-79 Dec-82 Dec-85 Dec-88 Dec-91 Dec-94 Source: JP Morgan; monthly data ended 8/ 31/ 2009.