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I.S.E.F. Global Economic Outlook: Q2 2017 Reshaping Economics….Democratizing Information

Institute For The Study of Global Economics

And Finance

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I.S.E.F.

1. Populism in the Driving Seat

2017 Outlook

2. The Return of Inflation

3. Fiscal Divergence to Drive Fixed Income

4. The End of Central Bank Accommodation

5. Return of China Macro/Asset Volatility

6. End of the EM Investment Recession

7. Rebalancing Oil Market Drives Uncertainty

8. Equity Value in a ‘Populist’ Universe

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I.S.E.F. Political Noise Drowns Out Growth Signals

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I.S.E.F. Dutch Electorate Tames Populism Geert Wilders’ populist Party for Freedom fell short of expectations

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I.S.E.F. Populism Has ‘Missile Lock’ on the EZ Big Beasts

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I.S.E.F. Commercial & Industrial and Consumer Loans Are Both Weakening

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I.S.E.F. 2017 Outlook

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I.S.E.F. Key Events and Critical Uncertainties

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I.S.E.F. Key Events and Critical Uncertainties

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I.S.E.F. Scenario Assumptions for 2017

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I.S.E.F. 2017 Scenarios and Heatmap for Major Asset Classes

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I.S.E.F. 2017 Scenarios and Heatmap for Major Asset Classes

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I.S.E.F. 2017 Scenarios and Heatmap for Major Asset Classes

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I.S.E.F. OECD Leading Indicators Pointing Up

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I.S.E.F. Headline Inflation

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I.S.E.F. Core Inflation

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I.S.E.F. Selected EM Headline Inflation

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I.S.E.F. End of the EM Investment Recession EM Investment Seems to Be Bottoming Out (% of GDP)

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I.S.E.F. Key Macro Views

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I.S.E.F. Key Policy Views

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I.S.E.F. Key Market Views

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I.S.E.F. Median Estimates of Year- End Fed Funds Target (number of ‘dots’ at each rate)

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I.S.E.F. Central Bank Balance Sheets (% of GDP)

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I.S.E.F. Assets Maturing in the Fed’s Portfolio, by Year (billions)

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I.S.E.F. Global Public and Private Debt $152 Tn…. 2/3 Held by Private Sector

I.S.E.F.

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I.S.E.F. Bankruptcy Cases in China

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I.S.E.F. Balance Sheet of U.S. Commercial Banks, With and Without Excess Reserves

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I.S.E.F. Credit to U.S. Non-Bank Private Sector; and Long-Term Bond Yields (shaded areas = QE)

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I.S.E.F. DM Equities: Headwinds for the U.S., High on Valuation Mountain (the cyclically adjusted price earnings ratio stands at 75% above median value)

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I.S.E.F. Equity Value in a ‘Populist’ Universe CAPE Epochs—Returns Getting More Expensive

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I.S.E.F. Into a Secular Bond Bear Market

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I.S.E.F. Technical Analysis Shows Opportunities Ahead To Position for Fundamental Correction

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I.S.E.F. Summary Views

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I.S.E.F. Peaks in Productivity Tend to Lead Peaks In Corporate Profits

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I.S.E.F. USD Since the U.S. Election

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I.S.E.F. Range-Bound During Q2 Consolidation Phase (a secular bond bear market has begun)

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I.S.E.F. Q2 Set to Extend Rally From Mid-2016

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I.S.E.F. Consolidation of Recent Gains

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I.S.E.F. Slower Population Growth Bodes Ill for Faster GDP Growth

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I.S.E.F. Most of Post-WWII History Says Weak Productivity Trend Is Temporary

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I.S.E.F. When Qualified Workers Become Scarce, Productivity Soon Picks Up

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I.S.E.F. Average Age of Public and Private Capital Stock

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I.S.E.F. United States: Solid Economy Faces Policy Puzzle

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I.S.E.F. China: Tilting Toward Tightening

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I.S.E.F. Eurozone: Inflation Rise Could Force ECB’s Hand

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I.S.E.F. Emerging EMEA: Finding Its Footing

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I.S.E.F.

Households With 401(k)s

Social Security: $35,080 401(k): $9,073 Pension: $26,500

Annual retirement income needed: $74,545

Gap: $30,392

Households with 401(k)s and pensions

Gap: $3,892

Based on a 2009 median income of $87,700 for households whose heads are 60 - 62 years old, and a median 2010 401(k) of $149,400 for that group. Assumes households need 85% of pre - retirement in come in retirement.

Sources : Center for Retirement Research at Boston College; Federal Reserve; New York Life Insurance Company

Retirement Shortfall

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I.S.E.F. Retirement: A Lifetime of Preparation!

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I.S.E.F.

),,(*)( SHR KKKfFTgP =P ≡ Prosperity g(.) ≡ Multiplier function of prosperity f(.) ≡ Capital function of prosperity FT ≡ Financial technologies KR ≡ Real capital: natural resources, lands, buildings, computers, cash, etc KH ≡ Human capital: knowledge, quality of human resources, etc KS ≡ Social capital: network of people, rule of law, social institutions, etc

Spiritual prosperity formula Joshua 1:8 Economic prosperity formula

“We desire to look at the multiplier affect of financial technology relative to real assets and to human capital and social capital …so were not only dealing with

finance alone…but were dealing with its multiplicative value and its impacts on economic growth.”

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I.S.E.F. Equity Value in a ‘Populist’ Universe 1982-99—Now THAT Was a Real Bull Market

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I.S.E.F. Rising Global Current Account Surplus Points to Savings Glut

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I.S.E.F. Contribution to Global Growth From 1%-of-GDP Fiscal Stimulus (current $, millions)

Sources: IMF, Roubini Global Economics

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I.S.E.F. The Strange Puzzle of Negative Interest Rates

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I.S.E.F. China key exception to depreciation trend vs. USD

Global Currency Depreciation

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I.S.E.F. GDP declines in postwar recessions By year of GDP peak

Sources: Bureau of Economic Analysis, Global Insight.

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I.S.E.F. Worst Recession Post World War II

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I.S.E.F.

Calendar Year returns Civil War to present

22.99

14.79

34.56

18.50

(21.79)

25.77

57.25 57.10

47.66

33.92

(35.02)

20.33

(43.35)

(24.90)

(16.44)(18.47)

(26.45)

(22.10)

(37.00)

37.5737.21

52.62

43.37

53.97

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

18601865

18701875

18801885

18901895

19001905

19101915

19201925

19301935

19401945

19501955

19601965

19701975

19801985

19901995

20002005

1860-2008Average annual return 9.3%,

Standard deviation of 18%

The S & P 500 History

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I.S.E.F. Home prices don’t go up forever Change in home prices in 100-plus years

Sources: Robert Shiller

-20

-15

-10

-5

0

5

10

15

20

25

30

1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

WorldWar I

GreatDepression

WorldWar II

1970’sBoom

1980’sBoom

CurrentBoom

Average, 1890–June 2008: 3.6%

Percentage change in nominal home price, year ago

+/- one standard deviation

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I.S.E.F. Wage Premiums by Education Level, United States, 1975-2005

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I.S.E.F. Russia and the U.S. …“A Russian Perspective”

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I.S.E.F. Russian Landmass Dominates California

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I.S.E.F. Russia in GDP (2000)

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I.S.E.F. Russia in GDP (2012)

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I.S.E.F.

A Picture Tells a Thousand Words

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I.S.E.F. Funding: Internet/DARPA, GPS/Navistar Defense, Microchips/DARPA, Siri/DARPA, Touch Screen/Grants Funded CIA/NSA University of Delaware

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I.S.E.F. Your New Health Care System

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I.S.E.F. Financial Innovation: Last Thousand Year

1000 1100 1200 1300 1400 1500 1600 1700 1800 1900

1156:Foreign exchange contract 1160: Bill of Credit

3000 - 2000 BC: Development of Banking in Mesopotamia

806: Paper money

1401: Bank of Barcelona founded

1494 : Double entry book keeping 1498: Capital and foreign exchange markets

1609: The central bank founded

1633: Promissory notes 1640: Short sale for cash flow financing.

1681: First public note-issuing bank founded

1723: Notes secured by Mortgage

1751: Consols 1770: Clearing House 1772: Branch Banking 1775: Savings and Loans

1829: Deposit Insurance

1881: Post office notes

1200:Contracts promising future delivery (derivatives)

1868: Chicago board of trade; Mutual Fund Started

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I.S.E.F. Financial Innovation: Last 50+ Years

1995: Electronic Cash Card

1997: Bowie Bonds : Bond Backed By Copyrights

1990: First international computerized matching service for foreign exchange rates

1973: Black-Scholes formula

1951: First credit card issued

1970: Magnetized Credit Card

1977: First financial future contract traded

1974: Modern high-yield market started

1960s: Warrant and Convertibles Bonds

1967: First ATM machine

1970: First mortgage backed securities issued

2003: DRAM future contract launched

1994: First credit enhanced securitization of aircraft lease 1994: Catastrophe bond

1999: Italy Securitized delinquency social security receipts

1989: First securitization of non-performing loans

1997: Weather derivatives

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I.S.E.F. Most Wealth Was Created in Last 200 Years Can we continue this trend for another 200 years?

Population hits 1 billion

Population hits 6 billion

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

2000 BCE

1500 BCE

1000 BCE

500 BCE

0 500 1000 1500 1750 2000

Population hits 0.1 billion Population hits

0.3 billion

Egyptian Empire Holy Roman Empire

Nation States

Middle Ages (Feudalism)

Renaissance/ Enlightenment

Industrial Revolution

Bronze Age

Iron Age

Classical/ Roman Period

Population hits 0.5 billion

Population hits 3 billion

Real

Per

-Cap

ita O

utpu

t (in

U.S

. dol

lars

)

Time

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I.S.E.F. Wealth and Technology

Cotton Gin

Circuit Integrator

20

18

16

14

12

10

8

6

4

2

2000 BCE

1500 BCE

1000 BCE

500 BCE

0 500 1000 1500 1750 2000

Real

Per

-Cap

ita O

utpu

t in

thou

sand

U.S

. dol

lars

Time

Ceramics Metallurgy

Paper

Eyeglasses Printing Press

Telescope Telegraph Airplane

TV

CD Barcode

Hubble Telescope

WWW Stem Cell Research

Super Computer CAT Scanning

Computer Operating System Minicomputer

Commercial Satellite Penicillin Plastic

Gas-Powered Car Structural Steel Bridge

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I.S.E.F. U.S. GDP: Slow Motion Q1