BX view on 2011 - Wein Oct 2010
Transcript of BX view on 2011 - Wein Oct 2010
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2011: Better, Worse or More of the SameByron R. Wien
Vice Chairman, Blackstone Advisory Partners L.P.
Tel: 212.583.5055Email: [email protected]
Byrons monthly essays are broadly recognized for their insight and perspective. If you
would like to receive future monthly market commentary publications by Byron Wien,please email byronwien'[email protected].
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The Ten Surprises of 2010
1. The United States economy grows at a stronger than expected5% real rate during the year and the unemployment level dropsbelow 9%. Exports, inventory building and technology spendinglead the way. Standard & Poors 500 operating earnings come in
above $80
2. The Federal Reserve decides the economy is strong enough for
them to move away from zero interest rate policy. In a series ofsuccessive hikes beginning in the second quarter the Federalfunds rate reaches 2% by year-end
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The Ten Surprises of 2010 (Contd)
3. Heavy borrowing by the U.S. Treasury and some reluctance byforeign central banks to keep buying notes and bonds drives theyield on the 10-year Treasury above 5.5%. Banks loan more tocorporations and individuals and pull away from the carry trade,thereby reducing demand for Treasuries. Obama says, The
suits are finally listening
4. In a roller coaster year the Standard & Poors 500 rallies to 1300in the first half and then runs out of steam and declines to 1000,ending where it started at 1115.10. Even though the economy isstrong and earnings exceed expectations, rising interest rates
and full valuations present a problem. Concern about longerterm growth and obligations to reduce leverage at both thepublic and private level unsettle investors
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The Ten Surprises of 2010 (Contd)
5. Because it is significantly undervalued on a purchasing powerparity basis, the dollar rallies against the yen and the euro. Itexceeds 100 on the yen and the euro drops below $1.30 as thelong slide of the greenback is interrupted. Longer-termprospects remain uncertain
6. Japan stands out as the best-performing major industrialized
market in the world as its currency weakens and its exportsimprove. Investors focus on the attractive valuations of dozensof medium-sized companies in a market selling at one quarter ofits 1989 high. The Nikkei 225 rises above 12,000
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The Ten Surprises of 2010 (Contd)
7. Believing he must be a leader in climate control initiatives,President Obama endorses legislation favorable for nuclearpower development. Arguing that going nuclear is essential forthe environment, will create jobs and reduce costs, Congresspasses bills providing loans and subsidies for new plants, thefirst since 1979. Coal accounts for about 50% of electrical power
generation, and Obama wants to reduce that to 25% by 20208. The improvement in the U.S. economy energizes the Obama
administration. The White House undergoes somereorganization and regains its momentum. In the November
Congressional election the Democrats only lose 20 seats, muchless than expected
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The Ten Surprises of 2010 (Contd)
9. When it finally passes, financial service legislation, like the health carebill, proves to be softer on the industry than originally feared. There isgreater consumer protection, more transparency, tighter restriction ofleverage and increased scrutiny of derivatives, but the regulatorychanges for investment bankers and hedge funds are not onerous.Trading volume and merger activity increases; financial service stocksbecome exceptional performers in the U.S. market
10. Civil unrest in Iran reaches a crescendo. Ayatollah Khamenei pushesout Mahmoud Ahmadinejad in favor of a more public relations adeptleader. Economic improvement becomes the key issue and anti-Israelrhetoric subsides. Talks with the U.S. and Europe begin but the
country remains a nuclear threat. Pakistan becomes the hotspot inthe region because of the weak government there, antiAmericansentiment, active terrorist groups and concerns about the security ofthe countrys nuclear arsenal
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Crowd Sentiment Poll
____________________________________________
Source: Ned Davis Research.
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S&P 500 Cyclical Bull Markets within Secular Bear Markets
____________________________________________
Source: Ned Davis Research.(1) 4/26/2010 represents the current cyclical high date.
Dates % Gain Days
11/13/192904/17/1930 45.8% 155
07/08/193209/07/1932 111.1% 61
02/27/193302/05/1934 113.6% 343
07/26/193403/10/1937 123.3% 958
03/31/193811/12/1938 62.1% 226
04/08/193909/12/1939 29.4% 157
10/07/196612/03/1968 47.6% 788
05/26/197004/28/1971 51.2% 337
11/23/197101/11/1973 33.4% 415
12/06/197409/21/1976 65.9% 655
02/28/197809/08/1978 22.7% 192
04/21/198004/27/1981 35.8% 371
09/21/200103/19/2002 21.2% 179
10/09/200210/09/2007 101.5% 1,82603/09/200904/26/2010
(1) 79.2% 413
Mean 62.3% 465Median 51.2% 337
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S&P 500 Cycle Composite for 2010
____________________________________________
Source: Ned Davis Research.
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan Feb Mar Apr Ma Jun Jul Aug Sep Oct Nov Dec
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
Current S&P 500 (Actual 2010) S&P 500 Cycle (Composite for 2010)
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S&P 500 Over-/Undervaluation Versus Ben Graham Intrinsic Value Model
____________________________________________
Source: Leuthold Group, LLC.
-100
-50
0
50
100
150
200
12/31/1875 11/30/1902 10/31/1929 9/29/1956 8/31/1983 7/30/2010
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Stocks Attractive vs. Bonds
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
12/31/1963 3/5/1969 5/10/1974 7/15/1979 9/18/1984 11/23/1989 1/28/1995 4/3/2000 6/8/2005 8/13/2010
Dow Jones Industrial Dividend Yield U.S. 10-YR Treasury Yield
________________________________________________
Source: Strategas Research.
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Total Notational Derivatives
$0
$25
$50
$75
$100$125
$150
$175
$200
$225
1990 1991 1993 1994 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009
____________________________________________
Source: Ned Davis Research.
12/31/2009 = $212.81 trillion
(Total notional amount of derivatives contracts at all U.S. commercial banks)
($ in trillions)
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Where is the Economic Rebound?
The Deeper the Recession, the Faster
the RecoveryGDP Recoveries vs Recessions
When a Financial Crisis Accompanies
a Recession, the Spike in UnemploymentIs Higher and Longer
-1%
0%
1%
2%
3%
4%
-1 0 1 2 3 4 5 6 7 8 9 10
Years after the Beginning
of the Crisis (or Recession)
PercentagePointsChange
fromY
earbeforeth
eCrisi
Recessions without a Crisis Crisis with a Recession
____________________________________________
Source: ISI Group.
Regression
Y = 1.9 - 1.6 * X
R2 = 45%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0% -1% -2% -3% -4% -5%
Decline in Real GDP during Recession
IncreaseinRealGDPdu
ring
FirstYearofRecovery
2001
1969
1990
1960
1980
1953
1981
1973
1957
2008E
____________________________________________
Source: ISI Group.
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Global Growth
____________________________________________
Source: ISI Group.
1995 Nominal GDP
2008 Nominal GDP
United States
23.7%
Germany
6.0%
Other Developed
15.2%
Brazil
2.6%
Russia
2.8%
Other Developing
11.5%
Japan
8.1%
United Kingdom
4.4%
Saudi Arabia
0.6%
Poland
0.7%
Taiwan
0.9%Turkey
0.8%
Indonesia
0.8%
Mexico
1.8%
Korea
2.0%
Iran
0.6%
Italy
3.8%France
4.7%
India
2.0%
EmergingEconomies
34.1%
China
7.1%
Developing
Economies
21.7%
Other Developing
7.9%
United Kingdom3.9%
France
5.3%
Taiwan
0.9%Mexico 1.0%
Korea
1.8%
Indonesia
0.8%
Turkey
0.6%
China
2.5%
India1.2% Russia1.1%
Japan
17.9%
United States
25.1%
South Africa0.5%
Other Developed
13.8%
Italy
3.8%
Germany
8.6%
Saudi Arabia
0.5%
Brazil
2.6%
Poland
0.5%
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Public Debt as % of GDP
0%
20%
40%
60%
80%
100%
120%
'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Developed Countries Developing Countries
108% est.
33% est.
Developed vs. Developing Economies
____________________________________________
Source: Strategas Research Partners, LLC.
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Total Credit Market Debt as a % of GDP
12/31/192212/31/2009
100%
150%
200%
250%
300%
350%
400%
1922 1927 1931 1936 1940 1944 1949 1953 1957 1962 1966 1970 1975 1979 1983 1988 1992 1996 2001 2005 2009
12/31/2009 Debt = $52.417 trillion
12/31/2009 GDP = $14.462 trillion= 362.5%
Annual interpolated GDP (including estimates prior to 1929) used prior to 1946.
Domestic Nonfinancial Debt used prior to 1946.
As of December 1946, Domestic Nonfinancial Debt represented 99.4% of Total Credit Market Debt.
____________________________________________
Source: Ned Davis Research.
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The Mountain of U.S. Debt
$0
$2
$4
$6
$8
$10
$12
$14
1910 1930 1950 1970 1990 2001 2003 2005 2007 2009 2011 2013
0%10%
20%
30%
40%
50%
60%
70%
80%
90%
Public Debt Pct GDP
($ in trillions)
____________________________________________
Source: Leuthold Group, LLC.
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Debt Service is the Critical Factor
Low U.S. Borrowing Rates Have KeptThings Manageable So Far The Expanding U.S. Interest Burden($ in billions)
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010E
2012E
2014E
2016E
2018E
2020E
Now
____________________________________________
Source: CBO and White House Estimates, Leuthold Group, LLC.
0%
1%
2%
3%
4%
5%
6%
7%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Now
Average Interest Rate on U.S. Government DebtExcludes TIPS (Treasury Inflation Protected Securities)
____________________________________________
Source: Leuthold Group, LLC.
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U.S. Outstanding Sovereign Debt (by Maturity Timeline)
29.8%30.8%
21.3%
7.8%
10.4%
0%
5%
10%
15%
20%
25%
30%
35%
0-12 mos. 1-3 yrs. 4-7 yrs. 8-10 yrs. 10+ yrs.
____________________________________________
Source: Strategas Research Partners, LLC.
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Total China Holdings of U.S. Treasuries
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
($ in billions)
____________________________________________
Source: Strategas Research Partners, LLC.
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Taxes and Government Spending
________________________________________________
Source: Ned Davis Research.
-10%
-8%
-6%
-4%-2%
0%
2%
4%
6%
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
(59.8-year Average = -1.4% of GDP)
Deficit as a % of GDP
Surplus as a % of GDP 3/31/20 = -9.4%
(Quarterly Data, 3/31/473/31/10)
10%
15%
20%
25%
30%
3/31/47 11/29/53 7/30/60 3/31/67 11/29/73 7/30/80 3/31/87 11/29/93 7/30/00 3/31/07
Government Spending Taxes
Government Spending as a % of GDP
(59.8-year Average = 19.5% of GDP)
3/31/2010 = 25.3%
Taxes as a % of GDP
(59.8-year Average = 18.0% of GDP)
3/31/2010 = 15.9%
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What Has to Be Cut
____________________________________________
Source: The New York Times, 2/7/10.
(1) Based on fiscal year 2010 appropriations and disclosure reports from members of Congress who received spending earmarks for special projects.
A huge deficit would remain
even if any one of these steps were taken in 2011
846
730
530
492
293
271
258
160
135
0.421
0.537
0.737
0.775
0.974
0.996
1.009
1.107
1.132
1.173
1.226
1.238
1.257
Deficit: $1.267 trillion
$94
Cut All National Security Spending
Stop Social Security Checks for Retiree s, the Disabled and Survivors
Cut All Domestic Programs Other than Entitlements
Stop Medicare Benefits
Double Corporate Income Taxes
Stop Medicaid Bene fits for Poor Patients and Nursing Home Residents
Stop the Rec overy Act' s Stimulus Spending and Tax Cuts
Withhold Mone y for War Operations
Allow Bush Tax Cuts to Expire for Everyone, Not J ust the Wealthie st
Shut Down the Department of Education
Cut Foreign Aid
Eliminate Welfare Payments
Disallow Congressional Earmarks
Close Down the National Endowment for the Arts
Remaining DeficitThe Deficit Would Be Reduced by This
Amount (in billions)
If the Budget Proposal Were to Implement One of
These Changes:
Deficit: $1.267 trillion
Projected Deficit in 2011, under President Obama's Budget
(About $4,100 a person)
(1)
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Federal Spending on Medicare and Medicaid as Share of GDP
0%
5%
10%
15%
20%
1965 1985 2005 2025 2045 2065
Medicaid
Medicare
2005: M/caid = 1.5%
M/care = 2.4%
1985: M/caid = 0.6%
M/care = 1.6%1965: M/caid = 0.1%
M/care = 0.0%
2008: M/caid = 1.5%
M/care = 2.8%
2025: M/caid = 2.3%
M/care = 5.0%
2045: M/caid = 3.1%
M/care = 8.4%
2065: M/caid = 3.5%
M/care = 11.1%CBO Projections
____________________________________________
Source: ISI Group.
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Presidential Approval and Unemployment Rate (Inverted)
____________________________________________
Source: ISI Group.
0%
20%
40%
60%
80%
100%
1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009
Approva
2%
4%
6%
8%
10%
12%
nemploymentRate(Inverted)
Approval Unemployment Rate (Inverted)
ReaganCarterFordNixon Bush I Clinton Bush II Obama
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Employment vs. Fixed Investment (Year-to-Year Changes)
(Quarterly Data, 06/30/4809/30/10)
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
6/30/48 3/21/55 12/9/61 8/30/68 5/21/75 2/8/82 10/30/88 7/21/95 4/10/02 12/30/08
Non-Far
Pa
yrolls
-30%
-25%
-20%
-15%
-10%
-5%
0%5%
10%
15%
20%
25%
30%
xed
Investment
Non-Farm Payrolls Fixed Investment
Nonfarm Payrolls
6/30/2010 = 0.5%
Fixed Investment
(Moved Ahead 1 Quarter)
9/30/2010 = 5.2%
________________________________________________
Source: Ned Davis Research.
Correlation Coefficient = 0.79
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U.S. Payroll Employment (%), U.S. Civilian Population
(Ages 18-69)
50%
55%
60%
65%
70%
75%
80%
1968 1974 1980 1986 1992 1998 2004 2010
________________________________________________
Source: ISI Group.
How Much Has Each of the Following Been Helped by the Governments
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How Much Has Each of the Following Been Helped by the Government s
Economic Policies?
10%
11%
13%
15%
21%
54%
62%
14%
17%
20%
21%
21%
15%
14%
73%
65%
65%
61%
50%
22%
19%
3%
7%
2%
3%
8%
9%
5%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
My Family / Myself
Small Businesses
Average Working Person
People Who Have Lost Jobs or Had Hours Cut
Manufacturing Firms
Wall Street Investment Companies
Large Banks
Helped a Lot / A Fair Amount Helped Just Some Helped Very Little / Not At All Not Sure
____________________________________________
Source: ISI Group.
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I. The United States Economy
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____________________________________________
Source: Grants Interest Rate Observer 2009, Federal Reserve & CBO Estimates, and Strategas Research Partners.
What Government Did, and Didnt Do
(From Grants Interest Rate Observer)
Stimulus as % of GDP
Cycle Peak Cycle Trough Monetary Fiscal Total
Aug. 29 Mar. 33 43 -27.0% 3.4% 4.9% 8.3%
May 37 Jun. 38 13 -3.4% 2.2% 2.2%
Nov. 48 Oct. 49 11 -1.7% -2.2% 5.5% 3.3%
Jul. 53 May 54 10 -2.7% -1.4% -1.4%
Aug. 57 Apr. 58 8 -3.2% 3.2% 3.2%
Apr. 60 Feb. 61 10 -1.0% 0.7% 1.0% 1.7%
Dec. 69 Nov. 70 11 -0.2% 0.3% 2.4% 2.7%
Nov. 73 Mar. 75 16 -3.1% 0.9% 3.1% 4.0%
Jan. 80 Jul. 80 6 -2.2% 0.4% 1.1% 1.5%
Jul. 81 Nov. 82 16 -2.6% 0.3% 3.5% 3.8%Jul. 90 Mar. 91 8 -1.3% 1.0% 1.8% 2.8%
Mar. 01 Nov. 01 8 -0.2% 1.3% 5.9% 7.2%
Dec. 07 -2.7% 18.0% 11.9% 29.9%
Length
(Months)
Decline in
Real GDP
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Fed Balance Sheet
0
500
1,000
1,500
2,000
2,500
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
____________________________________________
Source: ISI Group.
($ in billions)
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Its Not Hard to Get +3% Real GDP
____________________________________________
Source: ISI Group.
4Q 2010 Real GDP
Cont. to GDPConsumer Spending 1.0%
CapEx Eqp 0.8%
Housing
Inventories 0.5%Trade 1.0%
Federal Government 0.3%
State Government -0.1%CapEx Structures -0.6%
Real GDP 2.9%
Performance of Real Personal Income Less Transfer Payments vs Average
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Performance of Real Personal Income Less Transfer Payments vs Average
of Last Six Expansions
96.0
98.0
100.0
102.0
104.0
106.0
108.0
110.0
6/30/07 12/12/07 5/26/08 11/8/08 4/23/09 10/5/09 3/20/10 9/2/10 2/15/11 7/31/11
Real Personal Income for Current Expansion Real Personal Income Average of Last Six Expansions
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U.S. Housing Starts and Case-Shiller Month-over-Month
____________________________________________
Source: ISI Group.
U.S. Housing Starts U.S. House Price Index (Case-Shiller)
Month-over-Month %
-250%
-200%
-150%
-100%
-50%
0%
50%
100%
150%
200%
2000 2002 2004 2006 2008 2010
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1947 1954 1961 1968 1975 1982 1989 1996 2003 2010
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Shadow Inventory Doubles Potential Homes for Sale
(thousands)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
1/1/
08
2/1/
08
3/1/
08
4/1/
08
5/1/
08
6/1/
08
7/1/
08
8/1/
08
9/1/
08
10/1/0
8
11/1/0
8
12/1/0
8
1/1/
09
2/1/
09
3/1/
09
4/1/
09
5/1/
09
6/1/
09
7/1/
09
8/1/
09
9/1/
09
10/1/0
9
11/1/0
9
12/1/0
9
1/1/
10
2/1/
10
3/1/
10
4/1/
10
5/1/
10
6/1/
10
Existing Inventory 90+ Days Delinquent Foreclosure Inventory
________________________________________________
Source: Strategas Research Partners.
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Temporary Employment Survey
0
10
20
30
40
50
60
70
80
1996 1997 1999 2000 2002 2003 2004 2006 2007 2009 2010
____________________________________________
Source: ISI Group.
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National Beveridge Curve
(December 2000 July 2010)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0
Unemployment Rate (%)
JobOpeningsR
ate(%
Apr '10
May '10Jul '10
Mar '10
________________________________________________
Source: Strategas Research Partners, LLC.
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U.S. Workweek and U.S. Private Employment Month-over-Month Change
30
31
32
33
34
35
36
37
38
39
40
1964 1969 1974 1979 1984 1989 1995 2000 2005 2010
____________________________________________
Source: ISI Group.
U.S. Workweek U.S. Private Employment Month-over-
Month Change
(2,000)
(1,500)
(1,000)
(500)
0
500
1,000
1,500
1939 1948 1956 1965 1974 1983 1992 2001 2010
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____________________________________________
Source: Leuthold Group, LLC.
Manufacturing Labor Costs
2007
Hourly Compensation Costs forAll Employees in Manufacturing
2002
Hourly Compensation Costs forAll Employees in Manufacturing
(In US$)
$0.90
$0.57
$2.98$3.07$3.27
$4.05$3.44
$4.60$5.05
$6.40
$6.84$9.80$10.12
$12.04$12.34
$13.77
$17.94$18.50$18.78
$19.69
$21.75$22.37$22.52$22.96
$23.07$23.81$24.15
$27.33$27.01
$28.05
$26.34
$31.59$32.29
$0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00
NorwayGermany
SwitzerlandDenmark
United StatesAustria
NetherlandsBelgium
FranceSwedenFinlandUnited
JapanIrelandCanada
Italy
AustraliaSpainIsrael
SingaporeNew Zealand
KoreaTaiwan
PortugalHungary
CzechPoland
MexicoSlovakia
BrazilArgentina
PhilippinesChina
$1.37
$0.94
$3.91
$7.13$7.69
$8.15$7.98
$8.49$9.67
$10.29
$10.49$15.43$15.92
$18.36$19.19
$24.00
$24.55$30.56
$31.91$32.19
$34.75$35.62
$36.66$37.68
$38.34$38.75$38.80
$43.17$39.74
$47.54
$39.47
$50.73$55.03
$0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00
NorwayGermanyDenmark
AustriaFinland
NetherlandsSwedenBelgium
SwitzerlandFrance
United KingdomIreland
AustraliaItaly
CanadaUnited States
SpainJapan
New ZealandKorea, Republic
IsraelSingapore
HungaryPortugal
Czech RepublicSlovakia
TaiwanArgentina
PolandBrazil
MexicoPhilippines
China
5th Highest
Only 16th
Highest
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Personal Saving as Share of Disposable Personal Income
(4Q Moving Average)
____________________________________________
Source: ISI Group.
0%
2%
4%
6%
8%
10%
12%
14%
1959 1963 1967 1971 1976 1980 1984 1988 1993 1997 2001 2005 2010
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U.S. Consumer Sentiment and U.S. Consumer Confidence
0
20
40
60
80
100
120
1978 1983 1988 1994 1999 2005 2010
____________________________________________
Source: ISI Group.
U.S. Consumer Sentiment U.S. Consumer Confidence
0
20
40
60
80
100
120
140
160
1967 1972 1977 1983 1988 1994 1999 2005 2010
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II. The Rest of the World
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Global Growth
____________________________________________
Source: ISI Group.
Real GDP 2010 Estimate
Weight GDP Growth Contribution
Developed 65% 2.0% 1.0%
U.S. 24% 2.5% 1.0%
Eurozone 21% 0.0% 0.0%
Japan 9% 0.0% 0.0%
Other Developed 11% 2.0% 0.0%
Emerging 35% 7.0% 2.5%
Global 100% 3.5%
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Institutions Underweighted in Emerging Markets
Price to book ratios, Developed vs
Emerging Markets
Portfolio allocations to Emerging Markets
Equities
(In US$)
____________________________________________
Source: JPMorgan Private Bank.
0%
5%
10%
15%
20%
25%
30%
35%
Market Cap
(MSCI)
Free Float
(MSCI)
GS Survey BoA ML
Survey
Pensions &
Investments
Morningstar
Institutional and Retail surveys
MSCI weights
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
1999 2001 2002 2003 2004 2005 2007 2008 2009 2010
Developed Markets Emerging Markets
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China Real GDP Y/Y%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1991
Q4
1994
Q1
1996
Q2
1998
Q3
2000
Q4
2003
Q1
2005
Q2
2007
Q3
2010
Q2
____________________________________________
Source: ISI Group.
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Japan IP and Eurozone IP
0
20
40
60
80
100
120
1973 1978 1983 1989 1994 1999 2005 2010
____________________________________________
Source: ISI Group.
Japan IP Eurozone IP
0
20
40
60
80
100
120
1990 1994 1998 2002 2006 2010
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Real Trade Deficit (U.S., Japan, and Germany) 4-Quarter Average
(70)
(60)
(50)
(40)
(30)
(20)
(10)
0
1994
Q4
1997
Q4
2000
Q4
2003
Q4
2006
Q4
2010
Q2
____________________________________________
Source: ISI Group.
U.S. Japan Germany
(5)
0
5
10
15
20
25
30
35
1980
Q4
1985
Q3
1990
Q2
1995
Q1
1999
Q4
2004
Q3
2010
Q2
(20)
(10)
0
10
20
30
40
50
1970
Q4
1977
Q2
1983
Q4
1990
Q2
1996
Q4
2003
Q2
2010
Q2
hi
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China
% Global Nominal GDP, 2008
____________________________________________
Source: ISI Group.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 e
China % World Japan % World
8.7%
8.5%
Chi M2 Y Y %
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China M2 Year-over-Year %
0%
5%
10%
15%
20%
25%
30%
35%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
____________________________________________
Source: ISI Group.
Chi i Ti h i L di P i
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China is Tightening Lending Practices
____________________________________________
Source: ISI Group.
China Bank Loans
SA by ISI, Y-o-Y%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1998 2000 2002 2004 2006 2008 2010
Feb-2010:
27.3%
C S di % f GDP
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66%
68%
70%
72%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Consumer Spending as % of GDP
____________________________________________
Source: Strategas Research Partners, LLC.
China U.S.
34%
36%
38%
40%
42%
44%
46%
48%
50%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
35%
71%
Ti li f E t
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Timeline of Events
14211423 The great Chinese navigator Admiral Zheng He circumnavigates the globe
and discovers America.
January 1431 The new Chinese emperor dispatches Zheng He and his enormous fleet tosail the globe and announce his reign.
1434 A delegation from the Chinese fleet arrives in Florence and meets with
Pope Eugenius IV. They leave behind a mass of knowledge, including maps,
astronomy, mathematics, arts, architecture, and printing.
1460s European adoption of Chinese astronomy and rejection of Aristotle andPtolemy.
1490 Leonardo da Vinci studies a series of amazing Florentine drawings of
machines and engineering that seem to have been copied from the Nung
Shu a Chinese treatise printed in 1313.
1492 Christopher Columbus reaches America. Eighteen years earlier he wasgiven a map of the Americas by Paolo Toscanelli, who admits to having
gleaned the most copious and good and true information from
distinguished men of great learning who came to Florence in 1434 from
China.
____________________________________________
Source: Gavin Menzies.
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III. Some Thoughts about the Price of Oil
Oil S l / D d O tl k W ld P i E D d
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Oil Supply / Demand Outlook World Primary Energy Demand
____________________________________________
Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.
World energy demand expands by 40% between now and 2030 an average rate of
increase of 1.5% per year with coal accounting for more than a third of the overall rise
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1980 1990 2000 2010 2020 2030
Mtoe
Other Renewables
Biomass
Hydro
Nuclear
GasOil
Coal
WEO 2008 total
Peak Oil:
2015
Peak Oil: 2010
Oil Supply / Demand OutlookP C i A l Oil C i (A F i f E di E i )
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Per Capita Annual Oil Consumption (A Function of Expanding Economies)
____________________________________________
Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.
Even more important challenges involve the changing per capita consumption rates,
especially in the BRICs
22
13
9
7
4
21
17
10
89
54
2
0
5
10
15
20
25
U.S. Japan Europe Russia Brazil China India
BarrelsPerPersonP
e
rYear
2008 2030
Oil Supply / Demand OutlookBRIC d Middl E t D d O tl k
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BRIC and Middle East Demand Outlook
____________________________________________
Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.
Conclusions:
Competition for oil supplies between emerging markets and mature countries
is potentially a problem
The world needs and will actively seek out demand Game Changers
2008Demand
2030Demand Increase
Brazil 2.0 2.8 +0.8
Russia 2.8 3.1 +0.3
India 3.0 6.9 +3.9
China 7.7 16.3 +8.6
Middle East 6.4 9.9 +3.5
Total 21.9 39.0 +17.1
(In Mmbl/d)
Predicting the Unpredictable!WTI C d Oil P i
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WTI Crude Oil Prices
____________________________________________
Source: Bank of America Merrill Lynch, Bloomberg and BofAML Global Commodity Research.
The range of WTI crude oil prices will expand significantly after 2013 as OPEC utilization
is rising
($/bbl)
Forecast
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Disclaimer
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Disclaimer
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 Blackstone Group (HK)Limited.
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Question & Answer Session
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Closing Remarks
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2011: Better, Worse or More of the SameByron R. Wien
Vice Chairman, Blackstone Advisory Partners L.P.Tel: 212.583.5055Email: [email protected]
Byrons monthly essays are broadly recognized for their insight and perspective. If youwould like to receive future monthly market commentary publications by Byron Wien,please email byronwien'[email protected].