The Slowing Growth Future THINK POSITIVE Strategies for a Slowing Growth, Overvalued and Rising then...

The Slowing Growth Future

THINK POSITIVE Strategies

for a Slowing Growth, Overvalued and Rising then Collapsing Investment Demand

Future

www.SlowingGrowth.com

Presenter: Jim Moultrup, M.S., CFP® , President

Moultrup Financial, May 7, 2007589 Tahoe Keys Blvd, Suite E-8, South Lake Tahoe, CA 96150 – (800) 348-1899

Securities and Advisory Services offered through Wall Street Financial Group, Inc., Registered Investment Advisor, Member NASD/SIPC, 255 Woodcliff Drive, Fairport, NY 14450, (800) 836-4652

The Slowing Growth Future• Black Monday, 1987, Woody, What Should I do?

– Invest, growth in economy and prices will continue until after the turn of the century, it was a great feeling to be so aggressively bullish!

• Gretta Marshall, Incline Village, 1994– Discussions about slowing growth after 2000– Good, Hermansen & Meyer, Sell at PE=20 buy at PE<8, PE=22 DOW,

PE=19 S&P (2/15/07,CBSMarketwatch.com)

– Her observation stock prices need to drop more than historical norm. INCOME must RISE, assuming GROWTH returns will DROP! AMEN!

– Dividend Yield in 1994=3% (Ibbotson & Chin 2002); NORM 1926-2000= 4.25%; Today S&P=1.67% DOW=2.4%

– Dividend Payout Ratio 1994=40%, 2005=37%– If 100% of Earnings were paid out Dividend Yield = 4.5% based on 2005

PR=37% and current y=1.67% this is just above historical average of 4.25% when PR = 40% to 50% and less than 30 yr Treasury yield of 4.8% (2/15/07, CBSMarketwatch.com)

– Shilling Profits Historical High VS GDP may Drop

The Slowing Growth FutureDr. Be Happy, BS, MS, PhD

Grand Pappy, what’s this next to his name?Well Grand Pappy, you know what BS is, MS is just

more of the same, and PhD is piled higher and deeper! What is BS?

Speech “Markets are always Efficient”Conclusion “Don’t Worry - Be Happy!”

Source: Moneychimp.com

The Slowing Growth Future Jim Moultrup, BS, MS, CFP

Master Moultrup “Slowing Growth, Over Valuation and Rising then Collapsing Investment Demand” May Make “The Global Aging Problem” The “Perfect Economic and Investment Storms” – Mega Tsunamis hitting global markets

Irrational BS (blind speculation, etc.) may or may NOT Drive Markets until 2015, in my view it is When, not IF (Irrational Fear) will collapse the markets, the closer to the Baby Boom generation’s retirement, the more devastating the impacts

1994 Conclusion To Gretta “Put Your Money Under Your Mattress!” That is, consider investing more in Long-term Primarily Higher Quality Income Assets

Consider Hedging (Market Neutral) Strategies and Insurance for Growth

Speculators may look to shorting very over valued markets (emerging markets, etc.), very high risk if markets continue to rise!

Consider selling rental and speculative real estate that does not have a gross rental yield of 8-12%, consider putting it on the market at 5-10% below market prices to attract limited buyer attention, and to get attention of hungry realtors

Plan to invest much more for your retirement and/or live on much less due to the possibility of much lower returns on stocks, real estate, commodities and bonds

Consider paid up or limited pay insurance (LTC, life, estate, etc.) policies to lower risk of rates rising due to larger number in collection versus payment years soon

Plan for the needs of your children (retirement, medical, etc.) if you can!

Five Possible Future Scenarios Stock and Real Estate Prices Continue To Rise Dramatically, then

Collapse just before the retirement years of the Baby Boom Dent (2006), Dow 20,000 by 2009, 4,300 to 5,050 NASD Comp then a major

collapse in 2010-2014 and between 2018-2022 England (2002) and Kiyosaki (2002), rally until 2012 or 2015, then collapse

Stock, Real Estate, Commodity Prices Provide Historical Returns Rough Averages: 9% stocks and real estate, 6% bonds, 3% cash

Will returns regress to the mean? To a lower mean, given TSGF?

Returns flatten on Real Estate, Stocks, & Commodities Return on S&P 500 – Negative 7% from Jan 2000 high – Jan 6, 2007 How will Wall Street justify very high pay and bonuses?

Markets Collapse and Income from Assets Rise Will prices decline to where income again provides most of real return?

3 of 4 Scenarios, Long-term Income Assets and Hedging/Insurance for Growth Investments May be A Good Choice!


The Slowing Growth FutureSLOWING GROWTH

U.S.

Japan

European Union

Source: Dent, 1999

Source: Wallace, 2001 Organization of Economic Cooperation and Development (OECD,1998), Real GDP Growth drops

to 1.6% in US by 2011, and to under .5% in Europe and Asia, does not include:

Other Possible Slowing Growth Driving Forces– Larger numbers of lower income minorities in the younger generations – Possible collapse of the real estate, stock and commodity markets – Substantial down turn in home building industries (builders, mortgage lenders, etc.) even without a collapse in housing– Elimination of “Cash out Refinancings”– Possible impact of higher energy and commodity prices – Impact of layoffs in manufacturing and technology due to outsourcing and offshoring– Possible impact of outsourcing and offshoring driving down middle income wages– Possible impact of declining war and government deficits– Possible impact of cut backs on non-war spending – Lack of ongoing increases in spousal participation rates propping up real incomes


Why are Demographics so important to economic (GDP) growth? Growth (GDP) = C (consumer spending = 70%*) + I (investment spending = 16.7%*) + G

(government spending = 19.1%) + Net Exports (exports - imports = -5.8%) (*Source: BEA.gov, 2006)

Consumer spending is 70% of GDP, and the other three components are driven by CS Three variables will likely drive consumer spending growth to slow as OECD forecast in 1998:

The Baby Boom generation in entering their fifties in mass, they are likely to start spending much less annually, as can be seen by the top right figure

There are fewer number of younger people in the younger generations than in the baby boom generation (bottom right figure) and a much larger number of lower income minorities

Income growth for 90% of American families (Saez, 2007) has declined from 1980-2004 by over 15%, and may likely decline even more in the future due to the expected rise in offshoring

SLOWING GROWTH

U.S.

Japan

European Union

Source: Dent, 1999

Source: Wallace, 2001

The Slowing Growth Future Signs of Slowing Population Growth in Global Markets

The Flat To Declining Populations of Western Europe, Eastern Europe, Japan and the Republic of Korea (Source: Dent 1999)

The Slowing Growth Future Slowing Population Growth in Global Markets

Will International Growth Save The Day?

GDP(1) 1980-2000(3)

1994-2004 Gwth/Rank B (bottom)(1)

OECD(2) Low Growth by 2020

Harvard(3) 2000-2020 Avgerage /

Change Change

billions Growth B C Rank From From A D B to C B to D

1 United States 11,711.80 2.3 3.3 1.6 2012 1.6 / 60 -52% -52%

2 Japan 4,622.80 2.2 1.2 / B 16 0.6 4.3 / 4 -50% 258.30%3 Germany 2,740.60 1.5 / B 20 .7 2020 EU -53%4 UK 2,124.40 2.3 2.8 .7 2020 EU 1.8 / 52 -75% -35.70%5 France 2,046.60 1.8 2.3 / B 35 .7 2020 EU 1.9 / 46 -0.70% -17.40%6 China 1,931.70 8.4 9.1 / 5 5.9 / 1 -35.20%7 Italy 1,677.80 1.8 1.6 / B 23 .7 2020 EU 1.8 / 54 -56.30% 11.10%8 Spain 1,039.90 2.4 3.4 .7 2020 EU 2.3 / 24 -79.40% -32.40%9 Canada 978 1.8 3.4 2.0 / 39 -41.20%

10 India 691.2 3.4 6.1 / 20 2.1 / 34 -65.60%11 South Korea 697.7 6.2 4.9 / 38 4.9 / 2 012 Mexico 676.5 0.6 2.7 2.0 / 38 -25.90%13 Australia 637.3 2 3.7 1.5 / 70 -59.50%14 Brazil 604 0.4 2.4 / B 37 1.6 / 59 -33.30%15 Russia 581.4 2.816 Netherlands 579 1.9 2.4 / B 37 .7 2020 EU 1.9 / 47 -70.80% -20.80%17 Switzerland 357.5 0.9 1.4 / B 18 .7 2020 EU 1.7 / 56 -50.00% 21.40%18 Belgium 352.3 1.8 2.2 / B 32 .7 2020 EU 1.8 / 53 -68.20% -22.20%19 Sweden 346.4 1.6 2.8 .7 2020 EU 1.8 / 55 -75.00% -35.70%20 Taiwan 305.3 4.521 Turkey 302.8 2.3 4.1 2.8 / 12 -31.70%22 Austria 292.3 2 2.1 / B 26 .7 2020 EU 1.5 / 70 -66.70% -51.00%23 Indonesia 257.6 3 3 4.0 / 6 -33.30%24 Saudi Arabia 250.6 2.625 Norway 250.1 2.9 .7 2020 EU26 Poland 242.3 1.6 4.4 3.3 / 7 -25.00%27 Denmark 241.4 2.1 / B 26 .7 2020 EU -66.70%28 South Africa 212.8 0.5 3 2.2 / 27 -26.70%29 Greece 205.2 0.9 3.6 .7 2020 EU 2.6 / 19 -80.60% -27.80%30 Finland 185.9 1.8 3.6 .7 2020 EU 2.1 / 32 -80.60% -41.70%31 Ireland 181.6 4.3 7.9 / 8 .7 2020 EU 1.9 / 49 -91.10% -76.00%32 Portugal 167.7 2.8 2.5 .7 2020 EU 2.1 / 31 -72.00% -16.00%33 Iran 181.6 0.5 4.3 1.9 / 48 -55.80%34 Hong Kong 163 3.535 Thailand 161.7 4.3 3.2 4.3 / 5 34.40%

Sources: (1) The Economist, 2007; (2) OECD, 1998; and (3) Blooom, David, et al, "Does Age Structure Forecast Economic Growth? Harvard School of Public Health, January 2007, p. 36.

Biggest Economies

Most of the Biggest Economies of the world may all experience a major demographic slow down

The OECD (1998) and Harvard University (January 2007) forecast US growth to slow by 52% from the 1994-2004 average, significant declines in growth are also expected for other economies (right two columns)


Will Productivity Growth Save The Day?

High Current Rates of Productivity Growth - “The Productivity Miracle” - Leamer 2005

Productivity = GDP / Hours

GDP Growth is within trend “No Miracle” there

The difference is in the number of hours

Offshoring is resulting in laying-off of the least productive workers

Serious undercounting of hours

Short-term effects of Information Technology investments made at end of the nineties

Household jobs off the books

Ongoing Offshoring and Offshore Outsourcing may continue to provide one time gains in productivity as more and more jobs both lower and higher skilled are offshored, but at what cost?

Loss of both lower and higher skilled jobs?

Decreasing incomes of most workers?

Higher levels of underemployment?


What about Offshoring and Offshore Outsourcing?

Ongoing Offshoring and Offshore Outsourcing, what is it?

The transferring of manufacturing to countries like China, either by locating plants there (offshoring) or by outsourcing the work to companies based in these low cost countries (offshore outsourcing)

Can services be transferred there? Yes, Blinder (2006) argues that any service that can be provided from a distance with little if any decrease in quality is likely to be offshored to very low cost countries in the future. India, and other countries that have both low wages and speak English, are the most likely service providers

How big might it become?

Current estimates are that well under one million service jobs have been lost to date (Blinder), while one in six factory jobs, or a total of 3.2 million have been lost since 2000 (AP, 4/21/07)

Forrester Research estimates that 3.3 million US service jobs will move offshore by 2015, or around 300,000 per year

Blinder believes that in this third wave of the industrial revolution, the information age, that most service jobs that can be done offshore without a meaningful drop in quality (impersonal services) may potentially be offshored, this could represent as much as 14 million jobs

What should we do? Blinder recommends focusing education and training people in personal service sectors. The number of personal service jobs needed as a percent of the total population is not likely to expand sufficiently to take up impersonal service job loss. We also need to focus on educating and training the most highly skilled and creative work force that can compete with low cost markets.

The Slowing Growth FutureThe Investment ThemesOver Valuation Housing

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

P0-99 Average

P99-100 Average

5%6%7%8%9%

10%11%12%13%14%15%16%17%18%19%20%

1913191819231928193319381943194819531958196319681973197819831988199319982003

Share (in %), excluding capital gainsP90-95 P95-99 P99-100

Source: Saez, 2006

Source: Economist, 2005

Median Real Household Income (Census, 7/98, 1996$s)

19691996

Married w/children 41,453 51,950

Husband’s Income 36,226 36,786Wive’s Income 5,227 15,164

Primary Gain was in Wives Income Does not factor in that only top 1% of income

earners (Saez, below graphs) have seen incomes rise, bottom 90% have seen incomes fall by over 15% from 1980-2004!

The Slowing Growth FutureOver Supply and Over Valuation Housing

Based on the Middle population growth forecast by the Census of 332 Million people by 2020, the current excess inventory of vacant homes will not be needed until after 2020!

Harvard Housing Survey 2002, “Over the next twenty-years, the number of US households will likely increase by 22.6% to 129 million . Minorities will account for almost two-thirds of this growth, climbing 59% to 41 million households.” Based on our estimates 4.87 million of the 8.929 million units or 55% are for Hispanic and Black minority homes, adding in Asians the number is 6.044 or 68% of the demand is by minorities, just like the Harvard Study. Non-family households according to the Harvard study to rise by 9.4 million (28 percent).

Estimated Housing Unit Demand Growth by 2020 By Jim Moultrup, MS, CFP

Population Population Population Median Median1980 2000 2020 Pop Gwth Average # New Home Owner Occupied Percent Household Price Single

2000-2020 Per House Housing Ownership New Demand Of New Incomes Owner Housing

Millions 227 281 332 Millions Demand Rate Housing 2005 Census 2000 Census

Millions Demand 1999 Dollars 1999 Dollars

Hispanic 6.5% 12.6% 18.0%

14.755 35.406 59.76 24.354 3.52 6.919 49.0% 3.390 37.97% $35,967 $105,600

Black 11.6% 12.3% 12.9%

26.332 34.563 42.828 8.265 2.68 3.084 48.0% 1.480 16.58% $30,858 $80,600

Asian PI 1.5% 3.9% 5.0%

3.405 10.959 16.6 5.641 2.93 1.925 61.0% 1.174 13.15% $51,908 $199,300

White 79.9% 70.4% 62.5%

181.373 197.824 207.5 9.676 2.55 3.795 76.0% 2.884 32.30% $50,784 $123,400

Total Estimated Demand for New Owner Occupied Housing by 2020 8.929Current Number of Vacant Homes 5.8 Million - Amount Above 1960-1997 Average 2.22

Estimated Number of New Housing Units Needed from 2000 to 2020 6.709New Homes Built 2001 through 2006 8.924

Current Over Building of Homes needed through 2020 -2.22

The Slowing Growth FutureOver Supply and Over Valuation Housing

Even Based on the HIGH population growth forecast by the Census of 362 Million people by 2020, the new housing annual demand should only be roughly 25% of the annual new housing build rate of 1.466 million homes in 2006, or 366,000 units annually

The lowest birth years of Generation X with roughly 10 million fewer people than the BB peak birth years are now entering their peak home buying ages of 35 to 44 from 2007-2017!

Estimated Housing Unit Demand Growth by 2020 By Jim Moultrup, MS, CFPCensus High Population Growth Estimates for 2020

Population Population Population Median Median

1980 2000 2020 Pop Gwth Average # New Home Owner Occupied Percent Household Price Single

2000-2020 Per House Housing Ownership New Demand Of New Incomes Owner Housing

Millions 227 281 362 Millions Demand Rate Housing 2005 Census 2000 Census

Millions Demand 1999 Dollars 1999 Dollars

Hispanic 6.5% 12.6% 18.0%

14.755 35.406 65.16 29.754 3.52 8.453 49.0% 4.142 25.45% $35,967 $105,600

Black 11.6% 12.3% 12.9%

26.332 34.563 46.698 12.135 2.68 4.528 48.0% 2.173 13.36% $30,858 $80,600

Asian PI 1.5% 3.9% 5.0%

3.405 10.959 18.1 7.141 2.93 2.437 61.0% 1.487 9.14% $51,908 $199,300

White 79.9% 70.4% 62.5%

181.373 197.824 226.25 28.426 2.55 11.147 76.0% 8.472 52.06% $50,784 $123,400

Total Estimated Demand for New Owner Occupied Housing by 2020 16.274Current Number of Vacant Homes 5.8 Million - Amount Above 1960-1997 Average 2.22

Estimated Number of New Housing Units Needed from 2000 to 2020 14.054New Homes Built 2001 through 2006 8.924

Current Housing Need Through 2020 Based On High Population Estimate 5.13Average Number of New Housing Demand Trough 2020 Annually 0.366

One-family Units Built 2000-1.231; 2001-1.271; 2002-1.359; 2003-1.499; 2004-1.611: 2005-1.716; 2006- 1.466Average Estimated Annual Housing Demand as a Percent of Current Building Rate 25.00%

The Slowing Growth FutureOver Supply of High Priced Housing

To try to prove my view that the younger generation may not be able to afford all of the higher priced homes and that we are building more and more higher priced homes, consider the following. The percent of homes built under $200,000 has declined from 2002-2005 substantially, while the percent over $400,000 has risen significantly.

IncomeCateg Income 2005 3 P/I Ratio % of New Homes BuiltTop 1% $264,690 $794,070 4%Top 5% $130,543 $391,629 21%Top 10% $ 98,314 $294,942 38%99% Average $38,681 $116,043 8%Hispanics $35,967 $107,901 8% Hispanics & BlacksBlacks $30,858 $92,574 8% 55% of new homes

Based on a 3 times Home Price to Gross Income ratio, roughly only the top 1% of income earners (income thresholds by Saez, 2005) could afford the 4% of homes built in 2005 priced over $750,00 on their incomes alone; roughly only the top 5% of income earners could afford homes priced over $400,000, yet 21% of the homes built were above this price; roughly only 10% of income earners could afford homes priced over $300,000, yet 38% of homes were built in that price range. We are building roughly four times the number of higher priced homes than the younger generations may be able to afford based on their incomes alone!

Hispanics and Blacks represent roughly 55% of new housing demand. The average income in 2005 for 99% of Americans was only $38,681. Only 8% of homes built were priced under $125,000, which is a potentially maximum amount these large groups may be able to afford!

Percent Distribution of New One-Family Houses Sold By Sales Price (Census)

Under $125,000 to $149K to $199K to $249K to $299K to $399K to $499K to $749K over $750K

2002 15% 14% 23% 15% 11% 11% 5% 3% 1%

2003 13% 13% 24% 14% 11% 14% 5% 5% 2%

2004 11% 11% 20% 15% 11% 14% 8% 7% 3%

2005 8% 9% 18% 15% 12% 17% 9% 8% 4%

The Slowing Growth FutureOver Priced In Low and High Priced Housing Markets

The bottom line, average real incomes as we saw earlier based on Saez’s work dropped by nearly 15% from 1980-2004, while the average real home price increased by 126% over this similar period.

The 14 states above that showed total price gains of 350% or more since 1980, had an average gain of 451.9%, fully 306.1% above the 145.8% rise in inflation over this period. Although the income data is not state specific, roughly 90% of income earners saw real home prices rise by over 300% in the 14 highest house price increase states, while their real incomes dropped by nearly 15%.

State 1-Yr 5-Yr 5Yr Avg % Change in 2 yr Household Median Income99-00 less 98-99

Since 1980 Avg Since 1980

Massachusetts 10.81 71.89 11.4 2.5 452.2 8.08

New York 10.60 53.09 8.9 2.7 343.0 7.0

Rhode Island 15.72 58.27 9.6 0.0 296.1 6.46

New Jersey 11.79 51.22 8.6 -1.5 267.2 6.09

New Hampshire 11.02 68.17 11.0 1.6 264.5 6.06

California 11.46 67.04 10.8 4.1 254.7 5.92

Maine 9.08 48.08 8.2 5.1 250.0 5.86

Dist of Colombia 12.42 79.11 12.4 4.6 244.9 5.79

Connecticut 9.43 46.35 7.9 1.3 241.2 5.74

Delaware 8.52 36.00 6.3 7.0 229.5 5.57

Maryland 10.82 37.95 6.6 -1.0 202.8 5.16

Average 11.06 56.11 9.25 2.4 276.92 6.16

House Price Appreciation By State, Period Ending December 31, 2002 Highest Price Growth per Year Since 1980 (Source: Office of Federal Housing Enterprise Oversight, 4Q02, and Money Income in US: 2000, Census)

The Slowing Growth FutureOver Priced in Low and High Priced Housing Markets

Looking at this data, a number of findings appear, first is that average home price growth relative to incomes in both the top 11 states and bottom 11 states for home price growth over the period starting 1980, were quite similar. Home prices in the top 11 states rose at an annual average of 6.16% per year over this period, while incomes only rose at 2.4% during the later nineties, for a difference of 3.76% per year. In the bottom 11 states, incomes only increased at .56% annually, versus a 2.95% rise in home prices, homes out paced income growth by 2.39% annually. In both cases homes price increases out paced income growth, 3.76% per year in the highest price increase markets, versus 2.39% per year annually in the lowest price increase markets.

State 1-Yr 5-Yr 5Yr Avg % Change in 2 yr Household Median Income99-00 less 98-99

Since 1980 Avg Since 1980

Oklahoma 3.21 24.45 4.47 -4.5 66.14 2.33

Alaska 5.64 19.91 3.7 -2.6 72.09 2.50

Wyoming 5.88 24.72 4.52 2.4 78.60 2.67

Louisiana 4.37 25.12 4.58 -4.9 82.78 2.78

Texas 3.45 30.82 5.52 2.7 84.20 2.82

North Dakota 4.43 19.95 3.71 5.1 84.24 2.82

West Virginia 4.22 24.09 4.41 1.5 91.35 2.99

Mississippi 2.83 22.54 4.15 1.2 105.4 3.33

Arkansas 3.77 20.42 3.79 1.8 107.20 3.37

Kansas 3.98 28.51 5.14 -1.3 107.20 3.37

Iowa 3.08 24.46 4.47 4.8 110.40 3.44

Average 4.08 24.09 4.41 0.56 89.96 2.95

House Price Appreciation By State, Period Ending December 31, 2002 Lowest Price Growth per Year Since 1980 (Source: Office of Federal Housing Enterprise Oversight, 4Q02, and Money Income in US: 2000, Census)

The Slowing Growth FutureThe Investment Themes Over Valuation Housing

As we saw from the work of Saez at UC Berkeley, while the top 1% of income earner units (tax unit, typically a family, 2005 dollars) incomes has risen from $331,473 in 1973, to $794,633 in 2000, to $812,497 in 2005; the bottom 99% of income earners have not realized any real gains in their incomes over this period of high growth in the US. In 1973, the bottom 99% average income per tax unit was $39,500, in 2000 it was $40,231, and has since fallen back down to $38,681 in 2005

The price to income ratio for average income earners ranged from 2.72 to 3.84 in 2000. To

see what that income ratio might be today, I took the average home price for January 2007 and adjusted it by the population Category’s average in 2000, the price to income ratios are now approximately 3.45 to 5.45. Based solely on the current average new home price, the ratio has jumped to 4.62 to 7.77. That is, the average new home price in January 2007 is 7.77 times the average household income of a Hispanic family in 2005! Hispanics are now the largest minority group in the US and there numbers are growing by far the fastest as we saw in the previous slide on projected population growth by the Census by 2020.

Comparison of Median Incomes to Median Home Values and Sales Prices, Price to Income Ratios, and Demand Versus Supply of New Houses

Price to Income Ratio2000 Census Income

Jan 2007 MedianSales Priceof $239,800

6.67

7.77

4.62

4.72

Comparison of Median Incomes to Median Home Values and Sales Prices, Price to Income Ratios, and Demand Versus Supply of New Houses

Median Median Median Ratio of Median Sales Price Price to Income

Household Price Single Price to Income Household 2000 Median of $239,800 for Ratio

Income Owner Housing Ratio Income Sales Price New Homes 1/07 2005 Census Income

2000 Census 2000 Census 2000 Census 2005 Census of $169,000 Adjusted By to 2007-1 Median

1999 Dollars 1999 Dollars to Category Category Percent Adjusted Sales Price

Hispanic $33,676 $105,600 3.14 $35,967 62.49% $149,840 4.17

Black $29,423 $80,600 2.74 $30,858 47.69% $114,366 3.71

Asian PI $51,908 $199,300 3.84 $51,908 117.93% $282,794 5.45

White $45,367 $123,400 2.72 $50,784 73.02% $175,097 3.45

The Slowing Growth FutureThe Investment Themes

Over Valuation / Supply Housing

Nine of the top home builders have seen their average revenues grow by 21.6% annually over the past ten years, from $13.01 billion, to $91.99 billion in 2006

These homebuilders are building primarily upper middle to upper income homes

In 2004, many of these home builders were building between 26,937 to 44,005 units annually

What will these builders do in a few years as the total demand for housing through 2020 is satisfied? Will they or can they all convert to building affordable low income housing?

Will they build there way into bankruptcy, and the country into housing collapse and a recession?

Home Builder Growth Rates During the Housing Boom (Billions)

Builder 1997 Revenue 2006 Revenue Ann % Inc 1997-2006CTX $3.78500 $14.39970 14.3%LEN $0.00000 $16.26670 nmDHI $0.83730 $15.05130 33.5%

HOV $0.78410 $6.14820 22.9%

KBH $1.87630 $11.00380 19.4%

TOL $0.97170 $6.12350 20.2%

PHM $2.52400 $14.27440 18.9%

SPF $0.58460 $3.96400 21.1%

RYL $1.64980 $4.75720 11.2%

Totals $13.01 $91.99 21.6


Source: Case/Shiller, 2007 Source: Shiller, 2005


Source: Leamer, 2005

Leamer: PE = Median House Price / Annual Rent of 1,500 sq ft apartment.

P/R (price to rent ratio) historically is 12% (1%/mth), less 5% expenses (taxes, insurance, upkeep, management, vacancy costs) equals 7% P/E (price to net earnings) ratio, prices keep pace with inflation of around 3%, equals an expected total return of 10%

P/E Leamer or P/R of 8.3 is equal to a Gross Rental Yield of 12%, P/R of 20 is GRY=5% less 5% Expenses = Net Rental Yield of 0%


Over Valuation Real Estate

Source: MIT Center for Real Estate, 2006

Retirement Properties a Non-Public REIT yield was 7.18% when purchased by public REIT in September 2006. The Public Health Care REIT share price was around $27 at time, the public REIT price high after the acquisition peaked at $41.88 (2/7/07, yahoo.com), and then dropped to $39.73 (2/15/07), where the yield dropped to 4.5%.


Over Valuation Real Estate


Largest REIT acquisition in history in 2007, according to CNBC spokesperson, CAP (expected rate of return on investment) rate on offer was less than 5%


Any solutions to housing and real estate over valuation other than a market collapse by 2020?

Real incomes have declined by over 15% for 90% of Americans from 1980-2004 Most people in the younger generation will have to afford the baby boom generation homes based on their incomes alone – baby boom has ridden up

the home price rally Fewer people and larger numbers of lower income minorities in younger generations Incomes may continue to decline due to offshoring and offshore outsourcing When the BB trys to sell (downtraders) to new home buyers prices may collapse by 2020

What if home prices move sideways as the stock market has since 2000? In 13 years, at a 3% inflation rate, home prices would be 32% lower than today; at a 2% inflation rate they would be 22% lower by 2020.

What about the very low 2-6% gross rental yields on high demand rental housing and commercial real estate?

Interest rates drop 2% to 2.67%, this will make housing more affordable as mortgage rates may drop by a similar amount. Would this ignite another bubble boom and subsequently larger collapse? I believe so!

If house and commercial real estate prices drop by 35%, and the gross rental yield rises to 4.6-7.7% in high demand markets, net of a 5% cost of renting at least you are getting to a positive real expected return from income, still not a reasonable risk adjusted expected return, given price increases only keep pace with inflation.

The Slowing Growth FutureThe Investment ThemesOver Valuation Stocks

“By this measure, both stock prices and earnings have trended upward at a compound annual rate of 5.8 percent. The comparable rate for dividends is 5%.” (Good, Hermansen & Meyer, 1993, p. 170)

Given Earnings and Dividend Growth has followed Economic Growth of 7.1% from 1930-1992 (bls.gov) but at a slower rate, If OECD forecast that growth will slow by 60% in US, 78% in Western Europe and Japan based on basic demographic forces is correct, will Earnings and Dividend Yield Growth drop by a similar amount?


Rapid Growth Past Valuation Rules Strong Buy P/E<8 Strong Sell P/E>20 S&P P/E = 18.53 (2/15/2007, CBSMarketwatch.com)

DOW P/E=22.35Good, Hermansen & Meyer 1993


Source: Good, Hermansen & Meyer 1993

Rapid Growth Past Valuation Rules Strong Buy P/E<8 Strong Sell P/E>20 S&P P/E = 18.53 (2/15/2007, CBSMarketwatch.com)

DOW P/E=22.35Good, Hermansen & Meyer 1993


DOW P/E=22.35 (2/15/2007, CBSMarketwatch.com)

DOW Normalized P/E 1935-2006

Mean P/E = 14.18 Median P/E = 13.91

½ of all Years 10.53 <= PE >= 16.43 25% Years, 18 of 72 Years, P/E was 5 to 10 38.89% Years, 28 of 72 years, P/E was 10 to 15 23.61% Years, 17 of 72 years, P/E was 15 to 20 6.94% Years, 5 of 72 years, P/E was 20 to 25 4.17% Years, 3 of 72 years, P/E was 25 to 30 1.39% Years, 1 of 72, P/E was 30 to 35 (1/2/2007, seekingalpha.com)


Figure 3: Historical Earnings 1926-2000 and Forecasted Equity Returns

3.08% 3.08% 3.08%

2.05%

3.97%

1.75% 1.75%

1.25%

4.28%

4.28%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

3- Historical 3F-Earnings Forecast 3F(ERP)-Forecast ERP

INC

g(P/E)

CPI

g(EPS)

INC

CPI

g(E)

CPI

ERP

RRF

Source: Ibbotson and Associates, FAJ, J/F 2003

The Investment ThemesOver Valuation Stocks

Income Has Provided 71% of Real Return (4.28% of 6.03%) from Stocks– Current Dividend Yield is 1.67% (2/14/07, CBSMarketwatch.com) 61% Lower Than Average– Real Earnings Growth from Stocks Would have to be 149% Higher in TSGF to achieve same stock return– Earnings Growth follows Economic Growth, OECD forecasts a 60% drop US, 78% Europe, Japan If 4.83% Growth Return Drops 60% then ER = 1.93 plus 1.67/y = 3.6% in 2011– Discount back to present the rate of Earnings Growth Slow Down to determine Current Fair Value– At a 4.83% 10-yr Treasury Yield, Equity Risk Premium is negative 1.23 in 2011– Even if market dropped 50% yield would only be 3.34%

If 100% of earnings were paid out y=5.39% (1.67/.31 PR06) 30 Treasury=4.8% (2/20/07, yahoo finance.com, PR is the dividend payout ratio for 2005 S&P 500)


Figure 4: P/E Ratio 1926-2000

136.50 For Dec. 1932

10.22 1/1926

25.96

0

5

10

15

20

25

30

35

40

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Figure 5: Income Return (Dividend Yield) % 1926-2000

1.10

5.15

0

1

2

3

4

5

6

7

8

9

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Dividend Yield (%)

Source: Ibbotson and Associates, FAJ, J/F 2003

The Investment ThemesOver Valuation Stocks

Figure 14: Dividend Payout Ratio % 1926-2000

46.68

31.78

0

20

40

60

80

100

120

140

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Dividend Payout Ratio (%)

190.52% for Dec. 1931 929.12% for Dec. 1932

Current S&P Valuations just before“The Slowing Growth Future”

P/E = 18.53 Dividend Yield Y = 1.67% Dividend Payout Ratio PR = 31% (S&P 2006) (2/15/2007, CBSMarketwatch.com)


Profits Historical Highs Relative to GDP May Drop Very high Home Building Related Industry profits may collapse Historically high Energy and Commodity Industry profits may drop Very high Defense Industry profits may drop Demographic forces and other Slowing Growth driving forces may reduce profits Dropping profits may increase P/E, P/R and drop EPS & gwth, DIV & gwth Congressional Budget Office (1/18/06, finfacts.com) projects that profits as a percent of GDP will drop from 13% in 2006 to 9% by

2016, a 31% drop Profits may drop much more rapidly due to collapsing home building industry profits, declining commodity, energy and defense profits, and

slowing growth


How Over Valued are Stocks? DY PR 100% PRY RF RP

1926-2000 4.28% approx 50% 8.56% 5.13% 3.43% (Ibbotson and Chin, 2002)

Today 1.74% 2006 31% 5.69% 4.67% 1.02% (3/2/07, CBSMarketwatcn.com) (NYU, Stern)

At 100% Payout Ratio dividend yield (same as the earnings yield) stocks provide a 1.02% risk premium, not including an expected slowing growth appreciation of earnings, after February’s big drop!

Stocks would have to drop 31% to provide the historical expected risk premium to where the yield increases to 2.51%, at 100% PRY = 8.1%, RP = 3.43% This is assuming the same high growth rates in TSGF as in the rapid growth past!

PE Range PE Avg Current PE Drop to Average1940-1990 7 - 18 approx 12 18 33% (Ibbotson ands Chin, 2002) (3/2/07, CBSMarketwatcn.com)

DY = dividend yield; PR = payout ratio; 100%PRY = 100% payout ratio dividend yield; RF = risk-free yield; RP = risk premium


How Over Valued are Stocks? What if Profits as % of GDP Drop 31% (CBO) ?

DY PR 100% PRY RF RP

1926-2000 4.28% approx 50% 8.56% 5.13% 3.43% (Ibbotson and Chin, 2002)

Today 1.74% Adj 2006 44% 3.95% 4.67% (0.72)% (3/2/07, CBSMarketwatcn.com) (NYU, Stern)

Cyclically adjusting or normalizing the current payout ratio, given average profit margins over an economic cycle, is at about 44% of earnings

At 100% Payout Ratio dividend yield (same as the earnings yield) stocks provide a MINUS -0.72% risk premium, not including an expected slowing growth appreciation of earnings, after February’s big drop!

Stocks would have to drop 51% to provide the historical expected risk premium to where the yield increases to 3.564%, at 100% PRY = 8.1%, RP = 3.43% This is assuming the same high growth rates in TSGF as in the rapid growth past!

PE Range PE Avg Adj Current PE Drop to Average1940-1990 7 - 18 approx 12 26 54% (Ibbotson ands Chin, 2002) (3/2/07, CBSMarketwatcn.com)

DY = dividend yield; PR = payout ratio; 100%PRY = 100% payout ratio dividend yield; RF = risk-free yield; RP = risk premium


How Over Valued are Stocks? What if Profits as % of GDP Drop 31% (CBO) &GDP/Profit Growth Drops 60% by 2011 (OECD)?

Total Profit Growth from 1926 – 2000 was 4.83% (Ibbotson & Chin, 2002)

OECD (1998) forecast a 60% drop in GDP Growth by 2011 in the US (TSGF, Overview)

Total Profit Growth has followed but lagged total Economic Growth Real Return to Stocks 1926 – 2000 6.03% (4.28% DY, 1.75% R EPS GWTH, Ibbotson & Chinn, 2002)

Assume return from stocks following total profit growth drops by 60% to 1.93% The return from the dividend yield is 1.74% (CBSMarketwatch, 3/8/2007) , with a similar normalized dividend payout ratio,

and slower dividend growth prospects Total expected return is 1.93% from stocks following earnings growth, plus a 1.74% dividend yield, equals an

expected return at current valuations of 3.67% Historical equity risk premium on stocks has been 3.97% (Ibbotson & Chin, 2002) above the current 30-year Treasury

Yield of 4.67% (CBSMarketwatch, 3/6/2007) or 8.64% For a 3.67% expected total return to rise sufficiently to provide an expected return of 8.64%,

Stocks would have to experience a Total Drop of 57%


How Over Valued are Stocks? What if Profits as % of GDP Drop 31% (CBO) &

GDP/Profit Growth Drops 60% by 2011 (OECD) &The Risk-free Yield drops by 2% and

the Risk-premium drops by 1%? Dropping the risk-free yield from 4.67% on the 30-year Treasury down to 2.65%, and

dropping the expected risk premium on equities from 3.97% to 2.97%, for a total expected return on stocks to 5.64% as fair value would require a

Total Stock Market Drop of 35%

Can Wall Street pay enormous bonuses and salaries based on E (r) less estimated expenses Net E (r)

Money market 1% .3% to .7% .3% to .7% Gvt Bond funds 2.67% .7% to 1.25% 1.39% to 1.97% Stock funds 5.64% 1% to 2% 3.64% to 4.64%

Will investors continue to accept very low to negative returns on stocks and high bonuses and salaries by Wall Street, especially with most assets over priced?

Will stock prices drop by around 55% with the current risk premium and risk-free yield, or by only 35% with a lower risk premium and risk-free yield? What if growth slows much more dramatically than just to cyclical norms due to TSGF?


How Over Valued are Stocks?

Shiller (2007) has created a cyclically adjusted Price to Earnings Ratio (P/E ratio) or CAPE to adjust this ratio to economic cycles and inflation

Average P/E 1931-1990 was 15.12! Current P/E 2007:2 is 29.87!

Current P/E is nearly double the average during most of the rapid growth past, and we are heading into The Slowing Growth Future!

Real Price/Earnings Ratio 1881:1-2007:2

0

5

10

15

20

25

30

35

40

45

50

Real P/E Ratio


How Over Valued are Stocks?

The Cyclically Adjusted P/E (CAPE, Shiller 2007) and The Q Ratio. The Q ratio is the stock price divided by its replacement cost.

The above chart is in logarithmic scale. At zero, the US stock market is at fair value; when it is negative, the market is cheap. A score of 1 in logarithmic terms represents a score of 2.7 in non-logarithmic terms. Consequently, in 2000, the market was overvalued by 2.7 times its normal valuation. (Source: Smithers.co.uk and Shiller)

The stock market is still more over valued than in any other time in history based on Shiller’s Cyclically Adjusted P/E measure, except around the turn of the decade, and is still very over valued based on the Q ratio. These ratios are not adjusted for TSGF!


Over Valuation Emerging Markets

BLDRS Emerging Markets Index (Emerald Publications)

NASD Composite Index (Emerald Publications)

Emerging Markets may have been driven by two primary market forces Exports to US and other developed markets Oil, Energy and Commodity Bubbles

Will they drop if the US, Europe and Asia growth slows due to demographics? What about a developed market recession? Or more meaningful slowdown? How will dropping oil, energy and commodity prices affect these markets? Will Emerging Markets be like NASD Composite Index post the Tech bubble? Will they grow their Middle Class and Core Consumer Demand to sustain growth?


How Over Valued are Stocks? Any solutions to stock over valuation other than a market collapse

by 2020? Stocks move sideways as they have since January 2000

Stocks continue to move sideways 13 years, at a 3% inflation rate, stock price would be 32% lower than today; at a 2% inflation rate they would be 22% lower by

2020, Assuming fair value in the slowing growth future is at least 50% below the current market values, stocks would have to stay

flat for 23 more years at a 3% inflation rate, and 35 more years at 2% inflation to reach fair value

Interest rates drop to 1-2% on the long-term Treasury bond With the risk-free rate of return on Treasury notes and bonds at 1-2%, an estimated expected return on stocks of

3.67% from 2011 forward, assuming slowing earnings and dividend growth, stocks may be fairly valued at a risk premium of 1.67-2.67% over Treasury yields.

Can Wall Street function on these much lower expected returns, given the very high bonuses, salaries and fees on the street?

Interest rates drop 2%, risk-premium by 1% and the market by 35% as was discussed in the earlier slide. Are these

returns to low for Wall Street?


An Under Valued Bond Market?!

Source: Shiller 2007

Are Bonds Over Valued or possibly Under Valued? From 1880:1 to 1960:12 the average long-term interest rate was 3.39% - the current 30 Year bond yield is 4.7% (3/17/2007, CBSMarketwatch.com), 1.31% or 39% higher, while the 10-year yield is 4.55%, 1.16% or 34% higher than this long-term interest rate average

Demand for financial assets was very high, while supply relative to today was low

Will rising investment demand (supply of financial assets) coupled with decreasing demand for financial assets (Supply > Demand) drive interest rates lower?

Long-term Interest Rates 1871:1-2007:2

0

2

4

6

8

10

12

14

16

Interest Rates

The Slowing Growth FutureAn Under Valued Bond Market?!Duration Opportunity and Risk

Assuming bonds are under valued, and that the potential rise in investment demand to fund the baby boom generation’s retirement, along with the enormous amount of global liquidity will drive bond prices higher and interest rates down by 1-3%, bond and interest bearing investments with a longer duration may prove sound options

Duration is a measure of the approximate amount the price of an investment will go up (down) with a 1% decrease (increase) in interest rates, it is a risk and opportunity

Longer-term non-callable zero coupon bonds typically have the longest duration equal to their maturity, then non-callable coupon bonds and long-term bond funds

Interest Rates %Price of Income Asset

1% Decrease in Rates

10 %

20 %

30 %

Figure 1: Duration Opportunity and Risk

Risk of Rates Rising

Rates Drop Opportunity

Duration Measure*

*Duration Measure overstates impact of drop in rates by the Convexity Measure

The Slowing Growth Future Rising Investment Demand

Source: SIA Briefing Book 2001

The Slowing Growth Future Rising Investment Demand

A Trillion Here A Trillion TherePretty Soon You Are Talking Real Money!

Rise in Oil Prices from below $11 per barrel in 1999 to $57.99 (2/15/07, CNBC)

Trillions of dollars transferred to Oil industry owners from purchasers globally Enormous amount of money to invest by OPEC and related companies

Similar but smaller transfer of wealth to Commodity owners from purchasers globally

Bush’s Tax Cuts, estimated cost over 10 years – $1.6 Trillion (CNN.com 2/5/07) China and India have had major trade surpluses that they need to invest

Estimated $1 trillion sitting on “side lines” waiting for more favorable valuations to invest

Trillions of hedge fund dollars and margin dollars to invest

Trillions of dollars from ballooning home equity to spend and invest, this is dropping rapidly

Trillions of dollars created by Derivatives

The Slowing Growth Future Will Irrational BS Drive Markets Higher

Blind Speculation If Stocks, Real Estate and Commodity Markets are over valued relative to the

rapid growth past, aren’t the very over valued assuming slowing growth? Aren’t investors actually speculating that they know when Blind Speculation will

turn to Irrational Fear? Dent (2005), Kiyosaki (2002) and England (2002)

Bonuses Salaries Trillions and Trillions of Dollars Vested in Selling Your Over Priced Assets Not only Wall Street, International Securities Industries, Banks, and related

Companies (CNBC, Bloomberg, Service and Product Suppliers to WS)

Big-time Special Interests Current Administration, Coming into State of Union President Bush had lowest

approval rating since Nixon (ABCNews.com 1/22/07)

Federal Reserve Board past Chairman, Alan Greenspan, some argue fueled the housing bubble by arguing from 2000-2005 that housing has never been a bubble and never can be a bubble market, while dropping interest rates to very low levels and allowing credit to be very lax. Some argue that they set up the housing bubble and deserve responsibility if it collapses

Many Hedge Funds and some Wealthy Investors (Soros) believe markets go to extremes, the key to making big money is to ride the bull as long as the Irrational BS keeps flowing, then short the market when not IF (Irrational Fear) may allow them to make extraordinary gains on the down side (post 9/11 sell-off)


Bonuses Salaries Trillions and Trillions of Dollars Vested in Selling Your Over Priced AssetsTable 1: New York City Securities Industry Bonuses

Wall St Bonuses Change Avg WS Bonuses Change– ($bil) (percent) ($000) (percent)

– 1993 5.8 18.1% 39.660 51.4%– 1994 4.9 -15.7% 32.190 -18.8%– 1995 6.2 26.8% 41.410 28.6%– 1996 9.8 59.3% 63.870 54.2%– 1997 11.2 14.5% 67.800 6.2%– 1998 9.1 -18.8% 53.040 -21.8%– 1999 13.5 48.5% 75.010 41.4%– 2000 19.5 44.3% 100.530 34.0%– 2001 13.0 -33.2% 74.140 -26.3%– 2002 9.8 -25.0% 60.900 -17.9%– 2003 15.8 61.3% 99.930 64.1%– 2004 18.6 17.7% 113.450 13.5%– 2005 20.5 10.1% 119.390 5.2%– 2006 Est 23.9 17.1% 137.580 15.2%– 2006 Actual 36 75.6%– 2006 London 16.7– 1. Wall Street bonuses are for the securities industry (NAICS 523)– 2. 2005 estimate has been revised from a year ago to reflect the growth inglobal operations.– 3. 2005 and 2006 bonus estimates are forecasts and not final numbers.– 4. 2006 actual and London numbers are from Bloomberg.com 11/6/06– Data Sources:– 1. Historical bonuses are OSDC estimates drawn from the NYS Dept of Labor's insured employment series.– 2. 2006 estimate was derived by OSDC from industry revenue and expense data.– Prepared By the Office of the State Deputy Comptroller, December 19, 2006


Bonuses Salaries Securities Industry Trends, Vol. XXXII, No. 2, 3/28/2006

Trillions and Trillions of Dollars Vested in Selling Your Over Priced Assets

The Slowing Growth Future House Prices May Drop Twice

First Drop Next Five Years (20% to 30%) Novice Speculators give on hopes for ongoing gains ARM and Option ARM Buyers may not be able to afford rising payments Builders May Build into a Collapse and Bankruptcy The lowest birth years of Gen X (1972-1982) will be entering their peak home buying years

of 35-44 over the next ten years, there are roughly 10 million fewer of these people than in the peak birth years of the baby boom generation

Based on the Middle population Census forecast our rough estimate is that the 2.22 million additional vacant homes are not needed until after 2020, when most baby boomers will be “down-traders” and there will substantially fewer “new home buyers” along with a larger number of lower income minorities

Based on the HIGH population Census forecast, I estimate that the theoretical demand is for only 25% of the numbers of homes built annually, versus the amount built in 2006


First Drop Next Five Years (20% to 30%) The drop has started, how far will it go?

Source: RealEstateABC.com


Second Drop – Retirement of Baby Boom 2015 - 2030 (20% to 30%) Downtraders Increase Rapidly relative to number of New Home Buyers Baby Boomers that could afford to hold on to over leveraged homes and/or second homes

may have to sell due to their much smaller retirement incomes

Wallace, Agequake, 2001

Downtraders (65+) and first-time buyers (20-34) as percent adult population UK

The Slowing Growth Future Commercial Real Estate Prices May Drop


Retirement Properties non-Public REIT, Yield 7.18% when purchased by public REIT in September 2006, Public Health Care REIT around $27 at time, now public HC REIT recent price high $41.88 (2/7/07, yahoo.com), $39.73 (2/15/07), y=4.5%

Largest REIT acquisition in history in 2007, according to CNBC spokesperson, CAP (expected rate of return on investment) rate on offer was less than 5%


IMF, 2002, Post Bubble Blues

The Investment Themes Real Stock Prices Drop By 50% by 2030

Yield would only increase to 3.52% given a 50% payout ratio, and 2% return from stocks following much slower earnings growth, 2-3% 30 yr. Treasury yield, market would be at fair value

Real Commodity Prices Drop By 50% to 80% As global growth slows, so will demand for commodities, speculative demand,

which I believe is fueling most of the price rise, may drop dramatically A Cliff-type Drop in economic growth either next five years or by 2020


The Investment Themes Deflation may replace Inflation as primary concern of Fed

International price competition, technology lead productivity growth and obsolescence, offshoring and offshore outsourcing, and demographically destined growth slow down are likely to increase deflationary prospects

Neither “Demand Pull” or “Cost Push” inflation were even factors during the housing, energy and commodity bubbles when Baby Boom was in their peak spending years, why would the by given the above?

Both Demand will slow as growth slows, and costs of energy, commodities and housing are likely to decline relative to 2000-2006

Interest Rates May drop by 2 – 3% by 2015, due to higher demand for interest bearing assets as the baby boom ages; concern about very high

prices for stocks, real estate and commodities; and due to slowing growth returns; and possibly, due to a collapse in the housing, stock and commodity markets

The more interest rates rise, the more likely a housing collapse, and the more that stocks and real estate have to drop for the income from these assets to provide near to the historical real return that they have during the rapid growth past

May rise from 2020 to 2030 as deficits from Social Security, Medicare and Medicaid balloon, while investment demand drops as assets are sold to fund the Baby Boom generation’s retirement income needs

Drop in Euro very likely due to their much higher “Aging Costs” and projected slower growth, Increasing Dollar is likely during a market collapse


The Investment Themes Assets Must return to prices where income provides a reasonable risk-adjusted expected real return, given the slowing

growth future. The more Markets Rise now, the farther they have to fall to get back to this level. The longer they rise, the more

devastating the economic impact. The closer the markets collapse to the retirement of the Baby Boom generation, the harder it may be on people and the economy.

People typically invest most of there retirement assets in their fifties, if the BB does so into inflated assets, and they then drop as this group enters retirement, it is likely to be more devastating.

If house prices do not drop until the BB enters retirement in mass, many BB may not invest nearly as much as they need to fund their retirement income needs. If houses prices and stocks drop as the BB retires, this may be a bigger hardship.

Four Emotional Stages of TSGF: Denial, Realization, Fear of how Bad it will get, and Acceptance. I believe the markets are currently in denial, but as growth slows, people will begin to realize that growth is slowing dramatically. Fear of how bad it will get is likely to occur in the next five years, but will peak as the BB enters retirement in mass. Acceptance that the worst may be over may occur from 2012 to 2017, but may not be finally achieved until after the bought of fear when the BB retires around 2030.

The Great Retirement Funding Shortfall is likely due to the BB achieving very low, to very negative returns on their assets; due to the likely implosion of the housing bubble; and due to deficits for Social Security and Medicare.

The Global Aging Problem is likely to be much more severe due to all of the above! Current estimate is Social Security Gap is $4.7 trillion, $20.5 trillion for Medicare, and $8.4 trillion for Medicaid (CRS 8/29/05)

Five Possible Future Scenarios 20% Stock and Real Estate Prices Continue To Rise Dramatically, then

Collapse just before the retirement years of the Baby Boom Dent (2006), Dow 20,000 by 2009, 4,300 to 5,050 NASD Comp then a major collapse in 2010-2014 and between 2018-2022 England (2002) and Kiyosaki (2002), rally until 2012 or 2015, then collapse

0% Stock, Real Estate, Commodity Prices Provide Historical Returns Rough Averages: 9% stocks and real estate, 6% bonds, 3% cash

Will returns regress to the mean? To a lower mean, given TSGF?

25% Returns flatten on Real Estate, Stocks, & Commodities Return on S&P 500 – Negative 7% from Jan 2000 high – Jan 6, 2007 How will Wall Street Justify very high Pay and Bonuses?

55% Markets Collapse and Income from Assets Rise Will prices decline to where income again provides most of real return?

3 of 4 Scenarios, Long-term Income Assets and Hedging/Insurance for Growth May be A Good Choice!


The Slowing Growth FutureDr. Be Happy, BS, MS, PhD

Grand Pappy, what’s this next to his name?Well Grand Pappy, you know what BS is, MS is just

more of the same, and PhD is piled higher and deeper! What is BS?

Speech “Markets are always Efficient”Conclusion “Don’t Worry - Be Happy!”

Source: Moneychimp.com

The Slowing Growth Future Jim Moultrup, BS, MS, CFP

Master Moultrup “Slowing Growth, Over Valuation and Rising then Collapsing Investment Demand” May Make “The Global Aging Problem” The “Perfect Economic and Investment Storms” – Mega Tsunamis hitting global markets

Irrational BS (blind speculation, etc.) may or may NOT Drive Markets until 2015, in my view it is When, not IF (Irrational Fear) will collapse the markets, the closer to the Baby Boom generation’s retirement, the more devastating the impacts

1994 Conclusion To Gretta “Put Your Money Under Your Mattress!” That is, consider investing more in Long-term Primarily Higher Quality Income Assets

Consider Hedging (Market Neutral) Strategies and Insurance for Growth

Speculators may look to shorting very over valued markets (emerging markets, etc.), very high risk if markets continue to rise!

Plan to invest much more for your retirement and/or live on much less due to the possibility of much lower returns on stocks, real estate, commodities and bonds

Consider selling rental and speculative real estate that does not have a gross rental yield of 8-12%, consider putting it on the market at 5-10% below market prices to attract limited buyer attention, and to get attention of hungry realtors

Consider paid up or limited pay insurance (LTC, life, estate, etc.) policies to lower risk of rates rising due to larger number in collection versus payment years soon

Plan for the needs of your children (retirement, medical, etc.) if you can!

The Slowing Growth Future Portfolio Ideas for the Slowing Growth Future

Conservative Moderate Aggressive Money Market 20% 10% 5%

Laddered Bonds 30%

Long-term Non Callable Bonds Coupon Bonds 30% 5% Zero Coupon Bonds 10% 25%

Closed End Fund Trusts Unleveraged 20% Leveraged 25%

20%

REIT 6-7% Net Rental Yield 25% 20%

Variable AnnuitiesAnd/Or 25% 25%

Hedging Strategies

Inverse Funds, emerging markets, etc. And/Or 5-

10% Leading Edge Technology Stocks

The Slowing Growth Future• Appreciate opportunity to present my ideas • Any Questions?• Would welcome opportunity to meet with every

one, no obligation or cost, to discuss their views, and financial planning needs

• Can be compensated on commission, fee, or flat rate basis, very reasonable, low cost approach

• Clear through National Financial Services• Thank you for your time!

Disclosures

• Wall Street Financial Group, Inc., did not assist in the preparation of this presentation and while it believes the material to be from a reliable source, its accuracy and completeness are not guaranteed. Information herein is for educational purposes only and does not constitute a solicitation for a sale. Wall Street Financial Group, Inc. and Moultrup Financial are separate entities, independently owned and operated. Wall Street Financial Group, Inc. does not offer insurance products, long term care or commodities.

• Whenever you invest, you are at risk of loss principal as the market does fluctuate. Past investments and performance are subject to suitability and are not indicative of future results. This requires a review of an investor’s objectives, risk tolerance, and time horizons.

The Slowing Growth Future THINK POSITIVE Strategies for a Slowing Growth, Overvalued and Rising then...

Documents

Transcript of The Slowing Growth Future THINK POSITIVE Strategies for a Slowing Growth, Overvalued and Rising then...