Where Did Prosperity Go and How Do We Bring it Back? by Lacy H. - - PowerPoint PPT Presentation

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Where Did Prosperity Go and How Do We Bring it Back? by Lacy H. - - PowerPoint PPT Presentation

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Where Did Prosperity Go and How Do We Bring it Back? by Lacy H. Hunt, Ph.D., Chief Economist Hoisington Investment Management Co. SIC 2016 May 24-27, 2016 6836 Bee Caves Road Building 2, Suite 100 Austin, Texas 78746 512-327-7200 Fax

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6836 Bee Caves Road ● Building 2, Suite 100 Austin, Texas 78746 512-327-7200 Fax 512-327-8646 www.Hoisington.com

Where Did Prosperity Go and How Do We Bring it Back?

by Lacy H. Hunt, Ph.D., Chief Economist Hoisington Investment Management Co. SIC 2016 May 24-27, 2016

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page 1

Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015.

52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 100% 125% 150% 175% 200% 225% 250% 275% 100% 125% 150% 175% 200% 225% 250% 275%

Total Nonfinancial Debt as a % of GDP

(Excluding Off Balance Sheet Liabilities)

year ending levels

  • Avg. 167.5%

Q4 2009 = 245.5% Q4 2015 = 248.6% Change in Debt per $ of GDP: 1952-1999 $1.7 2000-2015 $3.3 2015 $3.5 2015 Debt: +1.9 tril. GDP: +.5 tril.

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page 2

Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015.

52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 20% 30% 40% 50% 60% 70% 80% 20% 30% 40% 50% 60% 70% 80%

Business Debt as a % of GDP

(Excluding Off Balance Sheet Liabilities)

quarterly

  • Avg. = 51.7

Q4 2007 = 68.7% Q4 2015 = 70.3% Q4 2014 = 68.1% Q4 2008 = 73.42% 2015 Debt: +793 bil. Investment: +93 bil.

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page 3

Source: Federal Reserve Board, Bureau of Economic Analysis. Through Q4 2015.

52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110%

Gross Federal Debt as a % of GDP

(Excluding Off Balance Sheet Liabilities)

quarterly

  • Avg. = 55.2%

Q1 2016: Debt = 19.3 tril. GDP = 18.2 tril. Debt/GDP ratio 106% Net present value of unfunded liabilities = $60 trillion in excess of Social Security and other trust funds.

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page 4

Total Private and Public Debt as a % of GDP Major Countries

annual

Source: Bank of Japan, Cabinet Office, Statistics Canada, Federal Reserve, Bureau of Economic Analysis, Office for National Statistics of U.K., Statistical Office of the European Communities, Reserve Bank of Australia. Haver Analytics. Through Q3 2015. Australia through Q1. U.S. Through 2015.

1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

0% 100% 200% 300% 400% 500% 600% 700%

0% 100% 200% 300% 400% 500% 600% 700%

Japan U.S. Australia Eurozone U.K. Canada

250% -275%

China

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SLIDE 6

page 5

  • 1. Transitory spurts in economic growth, inflation and high-grade bond yields cannot be

sustained because debt constrains economic activity.

  • 2. Due to debt repayment obligations, economies are subject to structural downturns

without the cyclical excesses of rising interest rates and inflation.

  • 3. Due to the start and stop economy, productivity growth deteriorates but this is not

inflationary, just another symptom of the controlling debt influence.

  • 4. Monetary policy is asymmetric - can restrain but not stimulate growth.
  • 5. Fiscal policy options exist provided that they do not increase aggregate indebtedness.

Historically, debt overhangs in major economies have only been cured by a significant multi-year rise in saving.

  • 6. Inflation falls dramatically, increasing the risk of deflation.
  • 7. Treasury bond yields fall to extremely low levels and remain depressed for a extended

period since the Fisher equation (1867-1947) states that the long risk-free yield is equal to the real yield plus expected inflation.

  • 8. When multiple major economies are simultaneously over-indebted the world lacks an

engine of growth.

Characteristics of Extremely Over-Indebted Economies

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SLIDE 7

page 6

Nominal GDP, Y

year over year % change, quarterly

48 55 62 69 76 83 90 97 '04 '11

0% 5% 10% 15% 20% 25%

  • 5%
  • 10%

0% 5% 10% 15% 20% 25%

  • 5%
  • 10%

Source: Bureau of Economic Analysis. Through Q1 2016.

Q4 to Q4 % change 2013 2014 2015 (A) (B) (C) (D) 1. Nominal GDP 4.1% 3.9% 3.1% 2. Real GDP 2.5% 2.5% 2.0%

Y = P(price level)*Q(Real GDP) Y = M*V

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page 7

1935 1945 1955 1965 1975 1985 1995 2005 2015 0% 5% 10% 15%

  • 5%
  • 10%
  • 15%
  • 20%
  • 25%

0% 5% 10% 15%

  • 5%
  • 10%
  • 15%
  • 20%
  • 25%

Eight Decades of the Wicksell Effect, WE

WE = (BAA Corporate Bond Yield(Rm) less year over year Percent Change in Nominal GDP(Y)) annual

Sources: Federal Reserve Board, Bureau of Economic Analysis. Through 2015.

  • Avg. = -.25%

2015 BAA yield = 5.0% Nominal GDP = 3.1% BAA - GDP = 1.9% WE = market rate of interest

  • % change in GDP

WE = Rm-% change Y WE = Rm-% change (M*V)

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page 8

GDP Implicit Price Deflator, P

percent change in annual average

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0% 4% 8% 12% 16% 20% 24%

  • 4%
  • 8%
  • 12%
  • 16%

0% 4% 8% 12% 16% 20% 24%

  • 4%
  • 8%
  • 12%
  • 16%

Sources: Federal Reserve Board, Bureau of Economic Analysis, N.S. Balke & R.J. Gordon, C.D. Romer. Through 2015. P = Y/Q P = (M*V)/Q

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page 9

Real Per Capita GDP Growth, Selected Periods

average annual growth

1790-1999 2000-2015 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget, N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through 2015.

1.9% 1.0%

1930 1940 1950 1960 1970 1980 1990 2000 0% 1% 2% 3% 4% 5% 0% 1% 2% 3% 4% 5%

Real Per Capita GDP 1930-2015 decade average growth

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page 10

Real Per Capita GDP Growth, Current Expansion vs. Prior Expansions

average annual growth

1790-2008 2009-2015 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Sources: Bureau of Economic Analysis, Congressional Budget Office, Office of Management and Budget, N.S. Balke & R.J. Gordon, C.D. Romer, Measuring Worth. Through 2015.

2.7% 1.3%

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page 11

Source: Bureau of Economic Analysis. Through Q4 2015.

'10 '11 '12 '13 '14 '15 '16 $1,200 $1,300 $1,400 $1,500 $1,600 $1,700

billions

$1,200 $1,300 $1,400 $1,500 $1,600 $1,700

billions

Corporate Profits: After Tax with IVA & CCAdj

Lowest since Q1 2011

49 56 63 70 77 84 91 98 '05 '12 0% 5% 10% 15% 20% 25% 30% 35% 40%

  • 5%
  • 10%
  • 15%
  • 20%

0% 5% 10% 15% 20% 25% 30% 35% 40%

  • 5%
  • 10%
  • 15%
  • 20%

Corporate Profits: After Tax with IVA & CCAdj 8 quarter % change, a.r.

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page 12

Source: Bureau of Labor Statistics. Includes all civilian workers. Through Q1 2016.

90 92 94 96 98 '00 '02 '04 '06 '08 '10 '12 '14 '16 1% 2% 3% 4% 5% 6% 1% 2% 3% 4% 5% 6%

Employment Cost Index: Compensation

year-over-year percent change, quarterly

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page 13

Sources: Census Bureau. Bureau of Labor Statistics. Through Q1 2016. Real Median HH Income through 2014. 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 '00 '03 '06 '09 '12 '15 0% 1% 2% 3% 4% 5%

  • 1%

0% 1% 2% 3% 4% 5%

  • 1%

Nonfarm Business Sector: Productivity

4 year % change a.r., quarterly

Avg.

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

Thousands

40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

Thousands

Real Median Household Income annual

1996 levels

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page 14

Source: Federal Reserve Board. Through May 11, 2016.

90 93 96 99 '02 '05 '08 '11 '14 250 500 750 1000 1250 1500 1750 2000 2250 2500 2750 3000 3250 3500 3750 4000 4250 4500

bil.

250 500 750 1000 1250 1500 1750 2000 2250 2500 2750 3000 3250 3500 3750 4000 4250 4500

bil.

The Monetary Base vs. Excess Reserves of U.S. Depository Institutions

monthly level

Excess Reserves: red line Monetary Base:

  • range line
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page 15

Source: Federal Reserve. Through May 2, 2016.

'06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26%

  • 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26%

  • 2%

M2 Money Stock

3 and 6 month % change, a.r. and y-o-y % change

6 mo y-o-y 3 mo

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0% 5% 10% 15% 20% 25% 30%

  • 5%
  • 10%
  • 15%
  • 20%

0% 5% 10% 15% 20% 25% 30%

  • 5%
  • 10%
  • 15%
  • 20%

M2 Money Stock annual % change

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page 16

Velocity of Money 1900-2016

Equation of Exchange: GDP(Y) = M*V

annual

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 1.00 1.25 1.50 1.75 2.00 2.25 1.00 1.25 1.50 1.75 2.00 2.25

Sources: Federal Reserve Board; Bureau of Economic Analysis; Bureau of the Census; The Amercian Business Cycle, Gordon, Balke and Romer. Through Q1 2016. Q1 2016; V = GDP/M, GDP = 18.1 tril, M2 = 12.5 tril, V = 1.46

  • avg. 1900

to present = 1.74 1918 = 2.0 1946 = 1.2 1997 = 2.2

1.46

GDP = MB*m*V V = Y/M Lowest since 1950

  • avg. 1953 to 1983 = 1.75
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page 17

'01 '03 '05 '07 '09 '11 '13 '15 90 100 110 120 130 90 100 110 120 130

Nominal Broad Trade Weighted Dollar Index

monthly

Source: Federal Reserve. Through May 6, 2016. highest since 11/02

QE3 starts Taper announcement QE2 starts QE1 starts

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page 18

GDP Composite Growth for China, U.S., Japan and Europe

annual % change

1998 2003 2008 2013 0% 2% 4% 6% 8% 10%

  • 2%

0% 2% 4% 6% 8% 10%

  • 2%

Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau

  • f Statistics, Haver Analytics, World Bank, U.S.D.A. Through Q4 2015.
  • Avg. = 4.7%
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page 19

M2 Composite Growth for China, U.S., Japan and Europe

annual % change

1998 2003 2008 2013 4% 6% 8% 10% 12% 4% 6% 8% 10% 12%

Sources: Bureau of Economic Analysis, European Central Bank, Bank of Japan, China National Bureau

  • f Statistics, Haver Analytics, World Bank, U.S.D.A. Through Q4 2015.
  • Avg. = 7.6%
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page 20

M2 Velocity

annual

1998 2001 2004 2007 2010 2013 2016 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4

Sources: Bureau of Economic Analysis, Federal Reserve, European Central Bank, Bank of Japan, China National Bureau of Statistics, People's Bank of China, Haver Analytics. Through Q4 2015.

China Japan Euro U.S.

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page 21

Long-Term Government Bond Yields Starting with Historic Panic Years: Japan 1989, U.S. 1873 and 1929

annual average

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 1% 2% 3% 4% 5% 6% 7% 1% 2% 3% 4% 5% 6% 7%

Sources: Federal Reserve Board, Homer & Sylla. Bank of Japan.

U.S. 1929 U.S. 1873 Japan 1989 U.S. panic year 1873 = year 1 U.S. panic year 1929 = year 1 Japan panic year 1989 = year 1 U.S. 2008

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page 22

  • 1. Additional federal funds rate increases
  • 2. Negative short interest rates
  • 3. Q.E. 4
  • 4. Helicopter
  • 5. Forward guidance

Possible Federal Reserve Actions

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page 23

Personal Saving Rate 1900-2015

annual average

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

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

  • 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

  • 2%

Sources: Bureau of Economic Analysis, Martha L. Olney University of California. Through 2015.

1929 level

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Appendix

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page A-1

94 96 98 '00 '02 '04 '06 '08 10 '12 '14 '16 0.0

  • 10.0
  • 20.0
  • 30.0
  • 40.0
  • 50.0
  • 60.0
  • 70.0
  • 80.0

bil.

0.0

  • 10.0
  • 20.0
  • 30.0
  • 40.0
  • 50.0
  • 60.0
  • 70.0
  • 80.0

bil.

Trade Deficit: Goods

billions chained 2009$, s.a., 3 month average

Source: Census Bureau. Through March 2016. non-petroleum trade deficit trade deficit

91 95 99 '03 '07 '11 '15 3 4 5 6 7 8 9 10 11 12 13 14 mil 3 4 5 6 7 8 9 10 11 12 13 14 mil

U.S. Net Petroleum Imports monthly, s.a, millions of barrels a day

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page A-2

83 86 89 92 95 98 '01 '04 '07 '10 '13 '16 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3 4 5 6 7 8 9 10

  • mil. BPD

Crude Oil Production and North American Rig Count

monthly

Source: Energy Information Administration, Baker Hughes Inc. Through May 6, 2016. Crude oil production: right scale thin line Rig count: left scale thick line

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SLIDE 28

page A-3

Real Inventory Investment as a % of Real GDP

quarterly, a.r.

Source: Bureau of Economic Analysis. Through Q1 2016.

48 55 62 69 76 83 90 97 '04 '11

0% 2% 4% 6% 8% 10%

  • 2%
  • 4%
  • 6%

0% 2% 4% 6% 8% 10%

  • 2%
  • 4%
  • 6%
  • Avg. Since

1990 = 1.1%

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SLIDE 29

page A-4

'01 '03 '05 '07 '09 '11 '13 '15 0% 2% 4% 6% 8% 10%

  • 2%
  • 4%
  • 6%
  • 8%
  • 10%
  • 12%
  • 14%
  • 16%
  • 18%
  • 20%
  • 22%
  • 24%

0% 2% 4% 6% 8% 10%

  • 2%
  • 4%
  • 6%
  • 8%
  • 10%
  • 12%
  • 14%
  • 16%
  • 18%
  • 20%
  • 22%
  • 24%

Industrial Production

year over year % change

Source: Federal Reserve. Through April 2016.

'01 '03 '05 '07 '09 '11 '13 '15 0% 2% 4% 6% 8% 10%

  • 2%
  • 4%
  • 6%
  • 8%
  • 10%
  • 12%
  • 14%
  • 16%
  • 18%
  • 20%

0% 2% 4% 6% 8% 10%

  • 2%
  • 4%
  • 6%
  • 8%
  • 10%
  • 12%
  • 14%
  • 16%
  • 18%
  • 20%

Industrial Production: ex Auto y-o-y % change Industrial sector Service sector % of employment 13%-15% 85%-87% % of S&P 500 earnings 65%-70% 30%-35% Gross value added as a % of GDP = 20%

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SLIDE 30

page A-5

Source: Federal Reserve Board. Through Q2 2016. Last plot 3 months ending April vs. same period a year ago.

50 57 64 71 78 85 92 99 '06 '13 0% 5% 10% 15% 20% 25% 30% 35% 40%

  • 5%
  • 10%
  • 15%
  • 20%

0% 5% 10% 15% 20% 25% 30% 35% 40%

  • 5%
  • 10%
  • 15%
  • 20%

Industrial Production

year over year % change

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SLIDE 31

page A-6

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 0% 10% 20%

  • 10%
  • 20%
  • 30%
  • 40%

0% 10% 20%

  • 10%
  • 20%
  • 30%
  • 40%

Nondefense Capital Goods ex Aircraft: Orders and Shipments

y-o-y % change, quarterly

Source: Census Bureau. Through Q1 2016.

Orders Shipments

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SLIDE 32

page A-7

Nonfarm Manufacturing (A) (B) (C) 1. 2014 251 17 2. 2015 227 3 3. 2016 192

  • 6

Nonfarm Payroll Growth

average monthly change

Source: Bureau of Labor Statistics. Through April 2016.

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SLIDE 33

page A-8

77 81 85 89 93 97 '01 '05 '09 '13 10 20 30 40

  • 10
  • 20
  • 30
  • 40
  • 50

10 20 30 40

  • 10
  • 20
  • 30
  • 40
  • 50

Labor Market Conditions Index

index change

Source: Federal Reserve Board. Through April 2016.

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SLIDE 34

page A-9

68 72 76 80 84 88 92 96 '00 '04 '08 '12 '16 0% 5% 10% 15% 20% 25% 30% 35% 40%

  • 5%
  • 10%
  • 15%
  • 20%
  • 25%

0% 5% 10% 15% 20% 25% 30% 35% 40%

  • 5%
  • 10%
  • 15%
  • 20%
  • 25%

Merchant Wholesalers: Sales

year-over-year % change, monthly

Source: Census Bureau. Through March 2016.

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SLIDE 35

page A-10

Source: Bureau of Census. Through April 2016.

68 71 74 77 80 83 86 89 92 95 98 '01 '04 '07 '10 '13 '16 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600

thousands

200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 2600

thousands

Housing Starts

monthly level

Source: Bureau of Census. Through April 2016.

68 71 74 77 80 83 86 89 92 95 98 '01 '04 '07 '10 '13 '16 200 400 600 800 1000 1200 1400 1600 1800 2000

thousands

200 400 600 800 1000 1200 1400 1600 1800 2000

thousands

Housing Starts: Single Family

monthly level

Source: Bureau of Census. Through March 2016.

68 71 74 77 80 83 86 89 92 95 98 '01 '04 '07 '10 '13 '16 200 400 600 800 1000 1200 1400 1600 200 400 600 800 1000 1200 1400 1600

New Home Sales

monthly level (thousands)

65 69 73 77 81 85 89 93 97 '01 '05 '09 '13 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

  • 10%
  • 20%
  • 30%
  • 40%
  • 50%
  • 60%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

  • 10%
  • 20%
  • 30%
  • 40%
  • 50%
  • 60%

New Home Sales

year-over-year % change, monthly

Source: Bureau of Labor Statistics. Through March 2016.

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SLIDE 36

page A-11

Long-Term securities Equities Debt Corporates U.S. Agency U.S. Treasury 5 years and less 5 - 10 years

  • ver 10

years 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1.

2011 11.6 3.8 7.7 2.7 1.0 4.0 3.4 1.1 0.2

2.

2012 12.5 4.2 8.2 2.5 1.0 4.7 3.9 1.1 0.3

3.

2012 100% 34% 66% 20% 8% 38% 73% 21% 6%

4.

2013 13.5 5.1 8.5 2.7 0.9 4.9 4.2 1.2 0.2

5.

2013 100% 37% 63% 20% 6% 36% 75% 21% 4%

6.

2014 15.5 6.4 9.2 3.0 0.8 5.4 4.4 1.3 0.3

7.

2014 100% 41% 59% 19% 5% 35% 74% 21% 5%

Foreign Holdings of U.S. Securities

Source: U.S Treasury Department

U.S. Treasury Securities

( col. 7 plus Treasury bills )

Long Term Securities (col. 2)

* may not sum due to rounding.

Long Term Debt (col. 4)

* ($trillions) * ($trillions) * ($trillions) * ($trillions)

Privately held marketable interest-bearing public debt:

73% 18% 9%

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SLIDE 37

page A-12

98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 0% 1% 2% 3% 4% 5% 6% 7%

  • 1%

0% 1% 2% 3% 4% 5% 6% 7%

  • 1%

Interest Rates

monthly

Source: Federal Reserve. Through April 2016.

30 year 10 year 5 year Fed Funds Short term trough in yields FOMC central tendency FOMC “Dots”

  • 84 bps

72bps

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SLIDE 38

page A-13

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 100% 120% 140% 160% 180% 200% 220% 240% 260% 280% 300% 320% 340% 360% 380% 400% 420% 100% 120% 140% 160% 180% 200% 220% 240% 260% 280% 300% 320% 340% 360% 380% 400% 420%

U.S. Private and Public Debt as a % of GDP

annual

Sources: Bureau of Economic Analysis, Federal Reserve, Congressional Budget Office. Census Bureau: Historical Statistics of the United States Colonial Times to 1970. Through Q4 2015.

Panic Year 2008 Panic Year 1873 Panic Year 1929

1870-1999 avg. = 171% 1870-2014 avg. = 189.4%

Current total debt = $67.2 trillion, GDP = 18.1 trillion Debt/GDP of 189.4% would require total debt of $34.3 trillion Debt/GDP of 171% would require total debt of $31.0 trillion

Real GDP avg. growth: 1999-2015 2.0% 1870-1999 3.8% Difference between 1870-1999 and 1999-2015 equals 1.8%

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SLIDE 39

page A-14

Real Yield, r

annual (nominal yield less annual change in GDP deflator)

Sources: Federal Reserve Board, Bureau of Economic Analysis, N.S. Balke & R.J. Gordon, C.D. Romer. Through 2015.

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 0% 5% 10% 15% 20% 25%

  • 5%
  • 10%
  • 15%
  • 20%
  • 25%

0% 5% 10% 15% 20% 25%

  • 5%
  • 10%
  • 15%
  • 20%
  • 25%

Long term avg.: Rates = 4.2% Inflation = 2.1% Real yield = 2.1%

r = Rtb - Pe Pe = (M*V)/Q

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SLIDE 40

page A-15

91 95 99 '03 '07 '11 '15 100 200 300 400 500 600 700 800 900 1000 40 80 120 160 200 240

S&P GSCI vs. Bloomberg Commodity Index

monthly level

Source: Standard and Poor’s, Haver Analytics. Through May 10, 2016. Bloomberg S&P GSCI

slide-41
SLIDE 41

page A-16

'11 '12 '13 '14 '15 '16 90 100 110 120 130 140 90 100 110 120 130 140

Nominal Broad Trade Weighted Dollar vs. Nonpetroleum Imports

monthly; indexed to July 2011

Source: Federal Reserve and Bureau of Labor Statistics. Through March 2016. Nominal Broad Trade Weighted Dollar Index: +28.4% Nonpetroleum Imports Price Index: -5.2%

slide-42
SLIDE 42

page A-17

Long Term Treasury Rate 1871-2015

annual average

1871 1891 1911 1931 1951 1971 1991 2011 0% 2% 4% 6% 8% 10% 12% 14% 0% 2% 4% 6% 8% 10% 12% 14%

Sources: Federal Reserve Board, Homer & Sylla, Wall Street Journal. Through 2015. Initial global market period interrupted by WWI.

  • avg. = 4.2%

Onset of Iron and Bamboo Curtains Fall of Berlin Wall Global market Restricted market Global market

Interest rate avg. = 2.8% Inflation rate avg. = 1.0% Interest rate avg. = 5.9% Inflation rate avg. = 3.9%

slide-43
SLIDE 43

page A-18

10 Year Yields Spread from U.S. 10 Year Yields 30 Year Yields Spread from U.S. 30 Year Yields

1. U.S. 1.75% 2.61% 2. Canada 1.32% 0.43% 1.98% 0.63% 3. Sweden 0.47% 1.28% 1.86% 0.75% 4. Netherlands 0.36% 1.39% 1.00% 1.61% 5. France 0.50% 1.25% 1.48% 1.13% 6. Austria 0.35% 1.40% 1.35% 1.26% 7. Germany 0.14% 1.61% 0.87% 1.74% 8. Taiwan 0.78% 0.97% 1.46% 1.15% 9. Switzerland

  • 0.34%

2.09% 0.18% 2.43% 10. Japan

  • 0.13%

1.88% 0.32% 2.29%

Through May 12, 2016. Source: Bloomberg.

Global Interest Rates