3qstronger economy and market in the second half v10 on24
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Stronger Economy and Marketin the Second Half
Byron R. WienVice Chairman, Blackstone Advisory Partners L.P.
Tel: 212.583.5055Email: wien@blackstone.com
If you would like to receive future monthly market commentary publications by Byron Wien,please email byronwienscommentary@blackstone.com.
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The Ten Surprises of 2011
1. The continuation of the Bush tax cuts coupled with
the extension of unemployment benefits has putall working Americans in a better mood. Real
Gross Domestic Product rises close to 5% in 2011
driven by improved trade and capital spending inaddition to stronger retail sales. Unemployment
drops below 9%
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The Ten Surprises of 2011
2. The prospect of increasing Federal budget deficits
and rising government debt finally begins to weighon the bond market. The yield on the 10-year U.S.
Treasury approaches 5% as foreign investors
become more demanding. Spreads with corporatefixed income securities narrow
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The Ten Surprises of 2011 (Contd)
3. Encouraged by renewed economic momentum the
Standard & Poors 500 rises close to its old high of1500. A broad range of sectors participate, but
telecommunications and utilities lag. With
earnings improving, valuations seem low andindividual investors return to equities for the first
time since the financial crisis. Merger and
acquisition activity becomes intense and the
market reaches a blow-off euphoria. Stocks correctin the second half as interest rates rise
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The Ten Surprises of 2011 (Contd)
4. Although inflation remains benign, the price of
gold rises above $1600 as investors across theworld place more of their assets in something they
consider real. Sovereign wealth funds of
countries with significant dollar reserves alsobecome big buyers. Hedge funds keep thinking the
price rise is becoming parabolic and sell their
positions and some even short the metal but gold
keeps climbing and they scramble back in
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The Ten Surprises of 2011 (Contd)
5. Worried about inflation and excessive growth, the
Chinese decide to use their currency as a policytool. They manage the value of the renminbi
aggressively to keep the growth of the economy
below 10% and to prevent consumer prices fromincreasing above the 4%5% range. The move is
viewed as a precursor to the world-wide adoption
of a basket including the renminbi as an alternative
to the use of the dollar as the principalreserve currency
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The Ten Surprises of 2011 (Contd)
6. Rising standards of living in the developing world
seriously increase the demand for agriculturalcommodities. The price of corn rises to $8.00,
wheat to $10.00 and soybeans to $16.00.
Commodities become a component of more
institutional portfolios
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The Ten Surprises of 2011 (Contd)
7. The housing situation improves. Although the
inventory of unsold homes remains high, theoversupply is drawn down substantially,
contrasting with an increase in 2010. The Case-
Shiller gradually heads higher and housing starts
exceed 600,000
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The Ten Surprises of 2011 (Contd)
8. Continuing demand from the developing world and
a failure to bring onstream new supply causes theprice of oil to rise to $115 per barrel. The higher
price at the pump fails to discourage driving,
increase sales of hybrid vehicles or cause Congress
to initiate conservation measures
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The Ten Surprises of 2011 (Contd)
9. Frustrated by the lack of progress against the
Taliban and the corruption of the Karzaigovernment, President Obama concludes that
whenever American troops return home,
Afghanistan will once again become a tribal state
ruled by warlords. He accelerates the withdrawal
of most military personnel to the end of 2011.
Coupled with the pullout of forces in Iraq, this will
leave the Middle East without a major Westernpresence in the face of rising fears of terrorism
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The Ten Surprises of 2011 (Contd)
10. Under duress Angela Merkel leads the way in European
financial reform. The weaker countries, having pledgedto cut their budget deficits in half by 2014, are provided
additional transitional aid by the European Union (with
Germanys backing) and the International Monetary
Fund as long as they implement their austerityprograms, increase some taxes and still show modest
growth. The European financial crisis becomes less of a
concern. The policies put in place prove psychologically
satisfying to the financial markets but harmful in thelonger term because they are palliative and do not
represent solutions
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Radical Asset Allocation
Asset Class % Reasoning
High quality multinational growth
stocks
10% Ten to fifteen times earnings 2.5% yield. Reasonable growthEmerging markets equities
Brazil, China, India, etc.
20% Five to ten percent growth over the next five years.Reasonable valuations. Volatile
Hedge Funds all strategies 20% Satisfactory positive performance in good markets; lessdownside in bad markets
Private Equity 10% Strong return on capital over investment period
Real Estate 10% Limited new construction. Increasing value for existingproperties
Gold 5% Insurance against financial calamityOther commodities 5% Rising standard of living in the developing worldHigher yielding Fixed Income 20% Exceptional returns. Wide spread with Treasurys. Limited
downside if no recession occursU.S. Treasury Securities 0% Rapid monetary expansion, weak currency, heavy borrowing
should lead to higher rates
Cash 0% Above allocations can be trimmed to provide reserves
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What are the major issues facing investors today?
1. Growth in the United States
a. Housing overhang
b. High unemployment
c. Debt ceiling and budget deficits in the United States
2. Emerging market inflation
3. Recovery in Japan
4. European credit crisis5. Slowdown in China because of a housing bubble or
some other factor
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Why the Economy is Not as Bad as It Looks
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7th Quarter Following Recession End Y/Y% (Real)
________________________________________________
Source: ISI Group.
ResInvestment ConsumerSpending GovtSpending NonresInvestment
1976:4Q 25.8% 5.4% -1.4% 7.4%
1984:3Q 8.1% 4.7% 2.2% 19.2%
1992:4Q 13.1% 4.7% 1.9% 8.8%
2003:3Q 10.2% 3.2% 2.3% 2.6%Avg 14.3% 4.5% 1.3% 9.5%
2011:1Q -2.3% 2.7% 0.2% 9.5%
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____________________________________________
Source: Ned Davis Research.
NDR Crowd Sentiment Poll
S&P 500 Composite Index
600
800
1,000
1,200
1,400
1,600
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
NDR Crowd Sentiment Pool
51.8
63.2
45.5
38.337.4
57.0
38.9
57.1
71.364.970.3
50.1
51.0
62.9
66.558.5
66.367.3
60.2
69.1
55.0
69.6
47.7
59.667.8
53.0
61.3
35.538.4
46.3
62.9
45.7
60.4
55.7
52.8
57.952.8
49.6
55.0
57.1
68.9
68.7
0
20
40
60
80
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Extremes Generated when SentimentReading:Rises above 61.5% = Extreme OptimismDecline below 55.5% = Extreme Pessimism
Sentiment must revenue by 10percentage points to signal anextreme in addition to the aboveextreme levels being reached.
Arrows represent extremes in optimism andpessimism. They do not represent buy and sellsignals and can only be known for certain (andadded to the chart) in hindsight
Average Value Of Indicator At:Optimistic Extreme (down arrows)= 67.9Pessimistic Extreme (up arrows)= 46.5Average Spread Between Extremes= 21.4
S&P500 Gain / Annum When:12/01/1995 04/25/2011
Extreme Optimism (Bearish)
Extreme Pessimism (Bullish)
NDR Crowd
Sentiment Poll is:
Gain/
Annum% of Time
Above 61.5 1.2 38.2
Between 55.5 and 61.5 5.0 21.0
55.5 and Below 9.5 40.8
Daily Data 8/02/20007/05/2011
7/05/2011 = 59.5
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U.S. Consumer Sentiment (U of Mich)
________________________________________________
Source: ISI Group.
(May 74.3)
0
20
40
60
80
100
120
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
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Economy is Improving Slowly
________________________________________________
Source: Monticello Associates.
(1,000)
(800)
(600)
(400)
(200)
0
200
400
600
1990 1993 1996 1999 2002 2005 2008 2011
Nonfarmpayrolls3-monthaverage
0%
2%
4%
6%
8%
10%
12%
mployment
Nonfarm payrolls 3-month average Employment
U.S. EmploymentReal GDP QoQAnnual (%)
-7.5%
-5.0%
-2.5%
0.0%
2.5%
5.0%
7.5%
2002 2003 2005 2006 2008 2009 2011
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A Pick-Up in Job Openings, but probably not enough
____________________________________________
Source: Strategas Research Partners.
(in thousands)
2,000
3,000
4,000
5,000
6,000
2000 2002 2004 2006 2008 2010
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________________________________________________
Source: Ned Davis Research.* Sale of property, tax benefits from stock options, exchange rate effect, extraordinary rate effect, extraordinary financing items, and combined financing and
investing activities.
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________________________________________________
Source: ISI Group.
U.S. Private Hours Worked(QoQ % A.R.)2011:2Q 3.8% e
U.S. Unemployment Rate(Unemployed for 27 Weeks or Longer)May: 4.0%
(12%)
(10%)
(8%)
(6%)
(4%)
(2%)
0%
2%
4%
6%
2006 2007 2008 2009 2010 2011
0
1
2
3
4
5
1970 1975 1980 1985 1990 1995 2001 2006 2011
A Really Dark Spot: Long-term unemployment is 2x the
average of its previous peaks, creating a pool of workers
who will have trouble ever finding another job.
A Bright Spot: The last time hours worked surged this much,
real GDP was +5.4%.
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Unemployment Rate for Various Education Levels
0
3
6
9
12
15
18
Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 May-11
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S&P 500 TTM P/E with Long-Term Average
5x
10x
15x
20x
25x
30x
'50 '60 '70 '80 '90 '00 '10
15.8x
14.4x
________________________________________________
Source: Strategas Research Partners LLC.
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P/Es of Stocks, Bonds, and Cash
____________________________________________
Source: Strategas Research Partners.
Average S&P 500 Trailing P/E byDecade
Average Bond P/E by Decade(100/10-year treasury yield)
Average House P/E by Decade(U.S. Median Home Price/Median Rent)
11.7x
19.5x20.1x
14.6x
12.5x
18.1x
0x
5x
10x
15x
20x
25x
60s 70s 80s 90s 00s Current
9.9x
15.5x
23.1x
33.7x
21.1x
13.6x
5x
10x
15x
20x
25x
30x
35x
60s 70s 80s 90s 00s Current
17.9x
18.7x
21.8x
16.2x
11.0x
15.2x
5x
10x
15x
20x
25x
60s 70s 80s 90s 00s Current
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15%
16%
17%
18%
19%
20%
21%
1998 1999 2001 2002 2004 2005 2006 2008 2009 2011
S&P 500 Profitability
Return on EquityOperating Margins
15%
17%
19%
21%
23%
25%
27%
29%
1998 1999 2001 2002 2004 2005 2006 2008 2009 2011________________________________________________
Source: Monticello Associates.
It doesnt get better than this
Comeback from here
Comeback from here
Probably unrealistic
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Private Equity Activity
____________________________________________
Source: Strategas Research Partners.
Total US corporate divestitures M&A Activity(In billions)
Carve-outs have outperformed in J.P. MorganLBO Composite(Multiple of invested capital as of 4Q 10)
% of
Total
Market 45% 39% 38% 30% 31% 40% 47% 41% 47% 53%
268 276
395416
552
784
590
408
541
219
0
100
200
300
400
500
600
700
800
900
2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q
'11
1.x
1.6x
0.0x
0.2x
0.4x
0.6x
0.8x
1.0x
1.2x
1.4x
1.6x
1.8x
Non-carve-outs Carve-outs
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Real Broad Trade-Weighted Exchange Value of the US$
____________________________________________
Source: Strategas Research Partners.
60
80
100
120
140
Jan-73 Apr-77 Jul-81 Oct-85 Jan-90 Apr-94 Jul-98 Oct-02 Jan-07 Apr-11
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(70)
(60)
(50)
(40)
(30)
(20)
(10)
0
Q4 1994 Q3 1997 Q2 2000 Q1 2003 Q4 2005 Q3 2008 Q2 2011
U.S. Real Trade Deficit 4 Qtr.Avg.
________________________________________________
Source: ISI Group.
(2011:1Q: -48.2)
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US Corporate Profits Sourced From the Rest of the World
____________________________________________
Source: Strategas Research Partners.
(% of GDP)
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1948 1955 1962 1969 1976 1983 1990 1997 2004 2011
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(2)
0
2
4
6
8
10
12
14
Q3
1949
Q1
1955
Q3
1960
Q1
1966
Q3
1971
Q1
1977
Q3
1982
Q1
1988
Q3
1993
Q1
1999
Q3
2004
Q1
2010
U.S. Productivity 10 Qtr. %
________________________________________________
Source: ISI Group.
(2011:1Q 9.1%)
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Mfg Compensation per Hour in $ (BLS) U.S. and Germany
________________________________________________
Source: ISI Group.
$0
$10
$20
$30
$40
$50
$60
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mfg Compensation per Hour in $ (BLS) U.S. Mfg Compensation per Hour in $ (BLS) Germany
Germany 2011: $46.3e
US - 2011: $34.7e
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CAPEX Capital Spending-Led Recovery
________________________________________________
Source: ISI Group.
Rail Car Orders (RSI) S.A. by ISIRail Car Orders 2011: 1Q: 33795
U.S. Real Capex Eqp Y/Y%U.S. Real Capex Eqp & Software 2011: 1Q: 14.7%
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
Q1
1987
Q1
1991
Q1
1995
Q1
1999
Q1
2003
Q1
2007
Q1
2011
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
Q1
1987
Q1
1991
Q1
1995
Q1
1999
Q1
2003
Q1
2007
Q1
2011
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U.S. REAL AND NOMINAL CONSUMER SPENDING
________________________________________________
Source: ISI Group.
$8,000
$9,000
$10,000
$11,000
$12,000
2005 2006 2007 2008 2009 2010 2011
U.S. Real Consumer Spending U.S. Nominal Consumer Spending
Real Apr $9497.7 Nominal Apr $10773
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U.S. Banks' Willingness to Make Consumer Loans
________________________________________________
Source: ISI Group.
-$80
-$60
-$40
-$20
$0
$20
$40
$60
$80
Q3
1966
Q2
1969
Q1
1972
Q4
1974
Q3
1977
Q2
1980
Q1
1983
Q4
1985
Q3
1988
Q2
1991
Q1
1994
Q4
1996
Q3
1999
Q2
2002
Q1
2005
Q4
2007
Q3
2010
2011:2Q: 28.8%
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U.S. Consumer Net Worth
________________________________________________
Source: ISI Group.
$30
$40
$50
$60
$70
Mar-98 Jun-01 Sep-04 Dec-07 Mar-11
2011: 1Q $55.6 e
S&P 1300
S&P 1300
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U.S. Total Bank Loans plus Securities Held Outright at the Fed
________________________________________________
Source: ISI Group.
$7.0
$7.5
$8.0
$8.5
$9.0
$9.5
Jan-07 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11
May 18 $9.23
Growth Problem
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Fed Balance Sheet
____________________________________________
Source: Strategas Research Partners.
31% is mortgage backed securities
$2,856.4
$1,000
$1,500
$2,000
$2,500
$3,000
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Goldman Sachs Commodity Index
________________________________________________
Source: ISI Group.
0
100
200
300
400
500
600
700
800
900
1,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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U.S. CPI Y/Y%
________________________________________________
Source: ISI Group.
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Jan-
1992
Oct-
1993
Jul-
1995
Apr-
1997
Jan-
1999
Oct-
2000
Jul-
2002
Apr-
2004
Jan-
2006
Oct-
2007
Jul-
2009
Apr-
2011
(Apr 3.1%)
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0%
1%
2%
3%
4%
5%
Jan-92 Feb-94 Apr-96 Jun-98 Aug-00 Sep-02 Nov-04 Jan-07 Mar-09 Apr-11
Avg Hourly Earnings: Prod & Nonsupervisory Y/Y% Core CPI Y/Y%
Average Hourly Earnings vs. Core CPI
____________________________________________
Source: Strategas Research Partners.
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U.S. House Price Index (Case-Shiller)
(2.5%)
(2.0%)
(1.5%)
(1.0%)
(0.5%)
0.0%
0.5%
1.0%
1.5%
2.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(M/M % Jan: -0.2%)
________________________________________________
Source: ISI Group.
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Total Vacant Housing Units
(Units in thousands)
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Mar-85 Nov-87 Jun-90 Jan-93 Aug-95 Mar-98 Nov-00 Jun-03 Jan-06 Aug-08 Mar-11
____________________________________________
Source: Strategas Research Partners.
+4 million excess homes------------------
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Taxes and Government Spending
________________________________________________
Source: Ned Davis Research.
-10%
-8%
-6%-4%
-2%
0%
2%
4%
6%
1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
(60.0-year Average = -1.5% of GDP)
Deficit as a % of GDP
Surplus as a % of GDP3/31/11 = -8.6%
(Quarterly Data, 3/31/473/31/11)
10%
15%
20%
25%
30%
1947 1954 1961 1968 1975 1982 1989 1997 2004 2011
Government Spending as a % of GDP Taxes as a % of GDP
Government Spending as a % of GDP
(60.0-year Average = 19.6% of GDP)3/31/11 = 25.0%
Taxes as a % of GDP
(60.0-year Average = 18.0% of GDP)
3/31/2011 = 16.5%
Diminishing Returns from Debt-Financing by Decade
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g g y12/31/1949 3/31/2011
____________________________________________
Source: Ned Davis Research.
(1) Last 5.25 years using most recent data available.
($ in billions)
Date RangeDecade Change
inDebtDecade Change
in GDPDebt /GDP
12/31/1949 12/31/1959 $337.6 $248.0 1.36
12/31/1959 12/31/1969 $752.1 $491.3 1.53
12/31/1969 12/31/1979 $2,785.2 $1,654.9 1.68
12/31/1979 12/31/1989 $8,562.8 $2,922.3 2.93
12/31/1989 12/31/1999 $12,549.6 $4,026.0 3.12
12/31/1999 12/31/2009 $26,876.7 $4,669.6 5.76
12/31/2005 03/31/2011(1) $11,324.4 $2,094.7 5.41
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Would You Want Your Member of Congress to Vote for Raising the Debt Ceiling?
15%
46%
40%
33%
26%
40%
21%
70%
8%0%
20%
40%
60%
80%
Yes No Don't Know
GOP Indep Dems
(Gallup, 5/58)
________________________________________________
Source: Strategas Research Partners.
b h f
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Contribution To Change In Deficit Since 2007
Nondefense
Discretionary
Spending
Defense
Social
Security
Medicare
Medicaid
Economically
Sensitive
Entitlements
Non-
Economically
Sensitive
Entitlements
Revenue
____________________________________________
Source: CBO and ISI Group.
f d d i l bli i
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Unfunded Entitlement Obligations
____________________________________________
Source: Strategas Research Partners.
Vs. Public Debt in Europe(TN, as of 2004 / 2005)
Vs. Public Debt in U.S.($TN, as of 2004 / 2005)
1.4
9.19.3
7.7
5.1
2.6
2.0
0.40.30.7
1.1
1.5
0
2
4
6
8
10
France Germany U.K. Italy Netherlands Spain
Current Public Debt Future Entitlement Shortfalls (PV)
73.40
9.02
0
10
20
30
40
50
60
70
80
U.S.
Public Debt Future Entitlement Shortfalls (PV)
Previous Government Shutdowns were not Major Events for the
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Federal Debt Outstanding(Monthly, $TN)
7
9
11
13
15
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Debt Limit Total Public Debt Subject to Limit
Markets, but this one Might Be
Last Click 3/24:
$14.2 TN
Federal Reserve % Purchase of Treasury Debt Issuance, 4 Mo. Rolling
-15%
0%
15%
30%45%
60%
75%
'09 '10 '11
QE1: Fed purchased 40% of
Treasury debt at its peak
QE2: Fed purchased 70% of
Treasury debt since November
____________________________________________
Source: Strategas Research Partners.
M k QE2 L h d
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Markets QE2 Launched
____________________________________________
Source: ISI Group.
QE1
S&P increase before QE1 +15%
S&P 1 year later +47%
QE2
S&P increase before QE2 +17%
S&P 1 year later ???
was 24% on July 1st
M j F i H ld f U S T S iti
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Major Foreign Holders of U.S. Treasury Securities
________________________________________________
Source: Monticello Associates.
2%
23%
3%
20%
27%
7%
4%
3%
3%
3%
5%
China
1,145
Japan
908
U.K.
325
OPEC
222
Brazil
194
Taiwan
156
Russia
128
Hong Kong
122
Switzerland
112
All Others
1,013
Caribbean
155
Chi Th Bi Shift
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China The Big Shift
________________________________________________
Source: Monticello Associates.
Net Purchases of U.S. Bonds and Hard Assets($ in billions)
$0
$20
$40
$60
$80
$100
2005 2006 2007 2008 2009 2010E
Net Purchases of U.S. Bonds Hard Assets
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A Look At The European Financial Crisis
S S i E l t P bl
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Severe Spain Employment Problem
____________________________________________
Source: ISI Group.
Youth Unemployment Rates 15-24 Years-Olds, 2009Q4
9.7
10.2
11.9
19.1
19.8
25.1
25.2
29.1
31.9
43.0
18.8
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0
Japan
Germany
Australia
OECD
USA
UK
Italy
France
Ireland
Slovak Rep.
Spain
Eurozone The Strong Have Lent to the Weak
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Eurozone The Strong Have Lent to the Weak
________________________________________________
Source: BIS. ISI Group.
Bank Foreign Public and Private Loans(% Nominal GDP (2010: 2Q)
Greece Ireland Italy Portugal Spain Total
France 2.0% 1.4% 14.6% 1.0% 5.3% 24.3%
Netherlands 0.5% 2.3% 5.4% 0.6% 9.1% 17.9%
Germany 1.0% 3.4% 4.7% 1.1% 5.3% 15.5%U.K. 0.6% 6.6% 2.9% 1.0% 4.8% 15.9%
U.S. 0.4% 0.2% 0.3% 1.0%
Germany Outperforming the Rest of Europe
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Germany Real GDPGermany Real GDP 2011: 1Q
Eurozone ex Germany Real GDPEurozone ex Germany Real GDP 2011: 1Q
Germany Outperforming the Rest of Europe
____________________________________________
Source: ISI Group.
$2,050
$2,100
$2,150
$2,200
$2,250
$2,300
$2,350
Q1 2005 Q3 2006 Q1 2008 Q3 2009 Q1 2011
$5,000
$5,100
$5,200
$5,300
$5,400
$5,500
$5,600
Q1 2005 Q3 2006 Q1 2008 Q3 2009 Q1 2011
+7.3%
+2.2%
Greece Structural Problems Make Recovery Even More Difficult
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Greece Structural Problems Make Recovery Even More Difficult
____________________________________________
Source: ISI Group.
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Q2
2002
Q4
2003
Q2
2005
Q4
2006
Q2
2008
Q4
2009
Q2
2011
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Greece Italy Eurozone
Portugal Germany Spain
Greece Nominal GDP Y/Y%2011:1Q: -4.5%
Government Debt % GDP
GermanyPortugal
Eurozone
Italy
Greece
Spain
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The Rest of the World
Global Growth
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Global Growth
EM Employment Now 83% of World Employment
________________________________________________
Source: ISI Group.
Population Billions
2011E
Emerging 6.0
India 1.2
China 1.4
Other Emerging 3.4
Developed 1.0
World 7.0
Global Growth
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Global Growth
________________________________________________
Source: ISI Group.
________________________________________________
Source: ISI Group.
Developing Economies Gaining Share of World GDP
17.9%
8.6%
1.1%
0.6%
0.9%
1.8%
2.5%
1.2%
2.6%
7.9%
13.8%5.3%3.8%
3.9%
25.1%
21.9%
0.5%
0.5%0.5%
1.0%
0.8%
Developing
Economies
U.S.
Japan
Germany
U.K.FranceItaly
Other
Developed
BrazilRussia
India
China
Korea
Mexico
Indonesia
Turkey Saudi Arabia
PolandSouth Africa
Other Developing
Taiwan
8.8%
5.8%
0.6%0.7%
0.7%
34.1%
24.6%
3.8%
3.7%4.6%
14.7%
10.8%
2.7%2.1%
8.5%
2.1%
0.7%0.7%
0.9%
2.1%
1.5%
Emerging
Economies
U.S.
Japan
Germany
U.K.
France
Italy
Other
Developed
BrazilRussia
India
China
KoreaMexico
Indonesia
TurkeySaudi Arabia
Poland
Iran
Other Developing
Taiwan2009 Nominal GDP
1995 Nominal GDP
Japan
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Japan MFG PMI May 51.3% Japan Nominal Retail Stores Sales IndexApr 97.1
Japan
____________________________________________
Source: ISI Group.
$25
$30
$35
$40
$45
$50
$55
$60
Jan-07 Feb-08 Mar-09 Apr-10 May-11
$92
$94
$96
$98
$100
$102
$104
Jan-07 Feb-08 Mar-09 Apr-10 May-11
Signs Brazil Slowing
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Signs Brazil Slowing
____________________________________________
Source: ISI Group.
Brazil Business Confidence (CNI)(2011: 1Q 60.0)
Brazil Consumer Confidence (GVF)(Apr 118.2)
90
100
110
120
130
Jan-
06
Jul-
06
Jan-
07
Jul-
07
Jan-
08
Jul-
08
Dec-
08
Jun-
09
Dec-
09
Jun-
10
Dec-
10
Jun-
11
40
50
60
70
80
Mar-
06
Sep-
06
Feb-
07
Aug-
07
Jan-
08
Jul-
08
Dec-
08
Jun-
09
Nov-
09
May-
10
Oct-
10
Mar-
11
EM Economy CPIs
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EM Economy CPIs
________________________________________________
Source: ISI Group.
Latest 3 Mo. % A.R.
Vietnam 33.2%
Russia 6.2%
China 4.4%
Brazil 7.9%
Hong Kong 7.0%
Korea 0.4%
Turkey 14.8%
Emerging Economies Short Rates
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Emerging Economies Short Rates
____________________________________________
Source: ISI Group.
4%
5%
6%
7%
8%
9%
10%
Jan-03 Dec-03 Oct-04 Aug-05 Jun-06 Apr-07 Feb-08 Dec-08 Oct-09 Aug-10 Jun-11
May 27 5.42%
India
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India
____________________________________________
Source: ISI Group.
0%
5%
10%
15%
20%
25%
Q1
1998
Q1
2000
Q1
2002
Q1
2004
Q1
2006
Q1
2008
Q1
2010
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2000 2003 2005 2008 2011
India Nominal GDP Y/Y% 2010:4Q: 17.4% India Repo Rate Apr 12: 6.75%
China Industrial Production
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China Industrial Production
____________________________________________
Source: ISI Group.
0
100
200
300
400
500
600
700
800
900
Jan-
1998
Mar-
1999
Jun-
2000
Aug-
2001
Nov-
2002
Jan-
2004
Apr-
2005
Jun-
2006
Sep-
2007
Nov-
2008
Feb-
2010
May-
2011
Apr: 822.7
China Consumption and Investment as Percentage of GDP
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China Consumption and Investment as Percentage of GDP
30%
40%
50%
60%
1978 1983 1988 1993 1998 2003 2008
Household Consumption Investment
________________________________________________
Source: Strategas Research Partners.
China Percent of World GDP
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China Percent of World GDP
24.89%28.97%
22.31%
32.96%
17.10%
11.06%
8.83%
4.59%
5.14%
5.24%
4.66%
4.63%
4.80%
5.20%6.95%
7.83% 11.15%
11.77% 15.16%
15.60%
16.16%
16.75%
16.81%
17.48%
22.68%2
5.45%
0%
5%
10%
15%
20%
25%
30%
35%
0001 1000 1500 1600 1700 1820 1870 1900 1913 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2003 2004 2005 2006 2007 2008
________________________________________________
Source: Strategas Research Partners.
Eye on Copper and China
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Eye on Copper and China
____________________________________________
Source: Strategas Research Partners.
Copper(US$/lb)
China Shanghai Index(1990 = 100)
250
300
350
400
450
500
Jan-
10
Feb-
10
Apr-
10
Jun-
10
Aug-
10
Sep-
10
Nov-
10
Jan-
11
Mar-
11
Apr-
11
Jun-
11
1,000
2,000
3,000
4,000
5,000
6,000
Nov-
06
Apr-
07
Sep-
07
Feb-
08
Jul-
08
Dec-
08
May-
09
Oct-
09
Mar-
10
Aug-
10
Jan-
11
Jun-
11
China represents 9.4% of the World Gross Domestic Product but:
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China represents 9.4% of the World Gross Domestic Product but:
53.2% Cement
47.7 Iron ore
46.9 Coal
45.4 Steel
46.4 Pork
37.2 Eggs
28.1 Rice
24.6 Soybeans
China Real GDP, Y/Y%
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China Real GDP, Y/Y%
____________________________________________
Source: ISI Group.
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q1
1998
Q1
1999
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
2011: 1Q: 9.7%
China Yuan
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China Yuan
____________________________________________
Source: ISI Group.
6.4
6.5
6.6
6.7
6.8
6.9
7.0
Jan-
2009
Mar-
2009
Jun-
2009
Sep-
2009
Nov-
2009
Feb-
2010
May-
2010
Jul-
2010
Oct-
2010
Jan-
2011
Mar-
2011
Jun-
2011
May 30 6.483
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Some Thoughts about the Price of Oil
Oil Supply / Demand OutlookChange in Oil Demand by Region, 20082030
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Change in Oil Demand by Region, 2008 2030
____________________________________________
Source: ExxonMobils 2010 Energy Outlook; Bank of America Merrill Lynch.
All of the growth in global oil demand comes from non-OECD, with China contributing
42%, India contributing 19%, the Middle East 17% and other emerging Asian economies
most of the rest
Crude Oil Iran has 9% of Worlds Reserves 3% of Production
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________________________________________________
Source: BP Statistical Review. Strategas Research Partners LLC.
0%
5%
10%
15%
20%
25%
Saudi
Arabia
Iran Iraq Kuwait Venezuela UAE Russia Libya Kazakhstan Nigeria
%world reserves %World Production
Oil Supply / Demand OutlookChange in Oil Demand by Region, 20082030
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g y g ,
____________________________________________
Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.
All of the growth in global oil demand comes from non-OECD, with China contributing
42%, India contributing 19%, the Middle East 17% and other emerging Asian economies
most of the rest
8.6
3.9
3.5
1.8
1.3
0.8
0.7
-1
-1
-1.2
(2) 0 2 4 6 8 10
China
India
Middle East
Other Asia
Latin America
Africa
E. Europe / Eurasia
OECD North America
OECD Europe
OECD Pacific
Mmbl/d
Disclaimer
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The views expressed in this commentary are the personal views of Byron Wien of Blackstone Advisory Partners L.P.(together with its affiliates, Blackstone) and do not necessarily reflect the views of Blackstone itself. The views
expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstoneundertakes to advise you of any changes in the views expressed herein.
Blackstone and others associated with it may have positions in and effect transactions in securities of companiesmentioned or indirectly referenced in this commentary and may also perform or seek to perform investmentbanking services for those companies. Blackstone and/or its employees have or may have a long or short positionor holding in the securities, options on securities, or other related investments of those companies.Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specificinvestment objectives and financial position. Where a referenced investment is denominated in a currency otherthan the investor's currency, changes in rates of exchange may have an adverse effect on the value or price of orincome derived from the investment.
Tax considerations, margin requirements, commissions and other transaction costs may significantly affect theeconomic consequences of any transaction concepts referenced in this commentary and should be reviewedcarefully with one's investment and tax advisors. Certain assumptions may have been made in this commentary asa basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differingfacts from the assumptions may have a material impact on any indicated returns. Past performance is notnecessarily indicative of future performance. The price or value of investments to which this commentary relates,directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or thesolicitation of an offer to purchase any security.
To recipients in the United Kingdom: this commentary has been issued by Blackstone Advisory Partners L.P. andapproved by The Blackstone Group International Partners LLP, which is authorized and regulated by the FinancialServices Authority. The Blackstone Group International Partners LLP and/or its affiliates may be providing or mayhave provided significant advice or investment services, including investment banking services, for any companymentioned or indirectly referenced in this commentary. The investment concepts referenced in this commentarymay be unsuitable for investors depending on their specific investment objectives and financial position.This commentary is disseminated in Japan by The Blackstone Group Japan KK and in Hong Kong by The BlackstoneGroup (HK) Limited.
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Q&A
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Stronger Economy and Marketin the Second Half
Byron R. WienVice Chairman, Blackstone Advisory Partners L.P.
Tel: 212.583.5055Email: wien@blackstone.com
If you would like to receive future monthly market commentary publications by Byron Wien,please email byronwienscommentary@blackstone.com.
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