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Article
“Persons pretending to forecast the future shall be considered
disorderly under subdivision 3, section 901 of the criminal code
and liable to a fine of $250 and/or six months in prison”
--Section 889, New York State Code of Criminal Procedure
1
The Real Problem: 57 Years of Increasing Leverage
Total Credit Market Debt as a Percentage of U.S. GDP
12/31/1922 - 3/31/2010
Quarterly Data 12/31/1922 - 3/31/2010 (Log Scale)
Total Credit Market Debt as a % of GDP
376.54
375
370
365
360
355
350
345
340
335
330
325
320
315
310
305
300
295
290
285
280
275
270
265
260
255
250
245
240
235
230
225
220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
(E501A)
3/31/2010
3/31/2010
Debt
GDP
=
=
$52.127
$14.446
Trillion
Trillion
=
360.8%
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.
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
375
370
365
360
355
350
345
340
335
330
325
320
315
310
305
300
295
290
285
280
275
270
265
260
255
250
245
240
235
230
225
220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
2010
©Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/
.
•  Massive build-up of corporate and consumer leverage supported by falling interest
rates, declining underwriting standards, and reduced regulatory oversight
•  How long will the deleveraging occur and what impact will it have?
Source: Ned Davis Research (www.ndr.com)
2
Total Credit Market Debt and Components
Total Credit Market Debt and Components
Debt as a % of GDP
1980
1990
2000
2008
1Q10
Total GDP
$2.8
$5.8
$9.8
$14.2
$14.3
Total credit market debt
$4.7
$13.8
$27.5
$52.5
Households
$1.4
$3.6
$7.2
Federal Government
% of total debt
$0.7
$2.5
$3.4
Agency/GSE mortgage pools
% of total debt
$0.1
$1.0
State and local government
% of total debt
$0.3
$1.1
ABS issuers
$0.0
$0.3
Non Financial business
% of total debt
$1.5
Other
$0.6
1980
1990
2000
2008
1Q10
Total Debt as % of GDP
169%
237%
280%
370%
365%
$52.1
Households
50%
63%
73%
97%
94%
$13.8
26%
$13.5
26%
Federal Government
26%
43%
34%
45%
58%
$6.4
12%
$8.3
16%
Agency/GSE mortgage pools
5%
18%
25%
35%
7%
State and Local government
26%
43%
13%
16%
17%
$2.5
$5.0
9%
$1.0
2%
ABS issuers
0%
5%
19%
29%
20%
$1.3
$2.2
4%
$2.4
5%
Non Financial business
53%
65%
66%
79%
76%
Other
22%
26%
49%
70%
45%
$1.8
$4.1
8%
$2.8
5%
$3.7
$6.5
$11.2
21%
$10.9
21%
$1.5
$4.8
$9.9
19%
$6.5
12%
% of total debt
% of total debt
% of total debt
($ Trillions)
•  Federal Government debt has increased 30% since 2008
•  For how long and by how much can it increase?
Source: Reinhart Partners, Inc. from Federal Reserve and U.S. Bureau of Economic Analysis (www.bea.gov)
3
Components of GDP:
Where Will Economic Growth Come From?
Components of GDP
($ Billions)
1980
% of GDP
1990
%of GDP
2000
% of GDP
2009
% of GDP
2Q10
% of GDP
Total GDP
$2,790
$5,803
$9,817
$14,256
$14,598
Personal consumption expenditures
-Durable goods
-Nondurable goods
-Services
$1,757
$214
$696
$847
63% $3,840
8%
$474
25% $1,250
30% $2,116
66% $6,739
8%
$863
22% $1,947
36% $3,929
69% $10,089
9% $1,035
20% $2,220
40% $6,834
71% $10,274
7% $1,076
16% $2,302
48% $6,896
70%
7%
16%
47%
Gross private investment
-Nonresidential
1.Structures
2.Equipment and software
-Residential
$479
$362
$136
$226
$123
17%
13%
5%
8%
4%
$861
$622
$203
$420
$224
15% $1,736
11% $1,232
3%
$313
7%
$919
4%
$447
18%
13%
3%
9%
5%
$1,629
$1,389
$480
$909
$361
11%
10%
3%
6%
3%
$1,849
$1,404
$388
$1,017
$359
13%
10%
3%
7%
2%
Net exports of goods and services
-Exports
-Imports
-$13
$281
$294
0%
10%
11%
-$78
$552
$630
-1%
-$380
10% $1,096
11% $1,476
-4%
11%
15%
-$392
$1,564
$1,957
-3%
11%
14%
-$518
$1,824
$2,342
-4%
12%
16%
Gov't consumption expenditures and gross investment
-Federal
1.National defense
2.Nondefense
-State and local
$566
$244
$168
$76
$322
20% $1,180
9%
$508
6%
$374
3%
$134
12%
$672
20% $1,722
9%
$579
6%
$370
2%
$209
12% $1,143
18%
6%
4%
2%
12%
$2,931
$1,145
$779
$366
$1,786
21%
8%
5%
3%
13%
$2,994
$1,207
$813
$394
$1,787
21%
8%
6%
3%
12%
Four Broad Categories for Economic Growth:
1.  Private Investment
2.  Net Exports
Which of these will drive growth?
3.  Consumer
4.  Government
Source: U.S. Bureau of Economic Analysis (www.bea.gov)
4
Private Investment Unlikely:
Spare Capacity Remains High
• 
• 
Historic high levels of spare capacity
Will Private Investment occur when spare capacity is > 25%?
Source: FactSet Research Systems, August 2010
5
New and Existing Home Sales
6
S&P Case-Shiller Home Price Index
7
Loan Delinquency
8
Consumer Demand Challenged by Rising
Unemployment: Has It Peaked?
• 
• 
• 
• 
• 
• 
“U-6” data paints a worse picture than “U-3”: current unemployment is > 17.0%
Over 8.0 million jobs lost so far on a base of 154 million workforce
Part-time workers who want to work full time: 4.0 million jobs
Workers who have not looked for work in a month: 2.0 million jobs
Workforce population growth who need a job: 1.8 million per year: 3 years = 5.4 million
Conclusion: need to add 19-20 million jobs during next 3 years to return to official unemployment rate of 5.0%
*Where do these jobs come from?
Source: FactSet Research Systems, August 2010
9
Consumer Confidence
10
Cultural Change in Consumer Behavior:
U.S. Personal Savings Rate
16%
US Personal Savings Rate
16%
14%
14%
12%
12%
10%
10%
8%
8%
6.40
6%
6%
4%
4%
2%
2%
0%
0%
'59
'61
• 
• 
• 
'63
'65
'67
'69
'71
'73
'75
'77
'79
'81
'83
'85
'87
'89
'91
'93
'95
'97
'99
'01
'03
'05
'07
'09
Potential to return to long term average of 9-10%
Fell in August and October 2009 due to Cash for Clunkers and Home Buyer Credit programs
Will the consumer continue to save?
Source: FactSet Research Systems, August 2010
11
Lost U.S. Consumer Demand Not Easily
Replaced By Foreign Demand
2009 Relative GDP (in trillions of
USD): World GDP 58.1
18.00
16.00
16.2
14.4
14.00
12.00
10.3
10.00
8.6
8.00
5.1
6.00
4.8
3.3
4.00
1.1
2.00
0.00
United
States
United
States
Consumer
Japan
China
Germany
India
European
Union
Emerging
Markets
•  U.S. Consumer is more than 2.1 times the size of the Chinese economy
•  10% increase in U.S. consumer savings is equal to $1 trillion
  20% of Chinese economy
  94% of India’s economy
Footnotes:
* European Union includes Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and United Kingdom.
**Eastern Emerging Markets includes China, India, Indonesia, Malaysia, Morocco, Philippines, Thailand, and Turkey.
Source: Reinhart Partners, Inc. from Central Intelligence Agency – World Factbook (www.cia.gov)
12
U.S Government Net Debt as % of GDP
13
Who Owns Our Debt?
14
Federal Budget Deficit
15
Current Liabilities and Unfunded Promises
Of the United States Government
$80
$70
$61.9
($ trillions)
$60
$56.4
$50
$43.3
$40
$30
$63.2
$46.4
$50.1
$52.8
$30.1
$26.5
$20
$10
$0
$3.6
$3.9
$4.3
$4.6
$4.8
$5.0
$5.8
$7.8
$9.8
2002
2003
2004
2005
2006
2007
2008
2009
2010E
Publicly Held Debt
• 
• 
• 
• 
Current Liabilities and Unfunded Promises of the U.S. Government
Explicit guarantees are $12.2 trillion at the end of 2008
Major unfunded components are Medicare ($36.3 trillion) and Social Security ($6.6 trillion)
Medicare and Social Security are listed in net present value as of January, 2008
How will we solve this problem?
Source: Reinhart Partners, Inc. from Peter G. Foundation and U.S. Treasury Data (www.pgpf.org)
16
How Long Can the Federal Government
Fill the Consumer Demand Void?
Federal Debt Held by Public as a Percentage of U.S. Gross Domestic Product
Note: The extended-baseline scenario adheres closely to current law, following CBO’s 10-year baseline budget
projections through 2020 (with adjustments for the recently enacted health care legislation) and then extending the
baseline concept for the rest of the long term projection period. The alternative fiscal scenario incorporates several
changes to current law that are widely expected to occur or that would modify some provisions that might be difficult to
sustain for a long period.
Source: Reinhart Partners, Inc. from Congressional Budget Office (www.cbo.gov)
17
Possible Outcomes
1.  Increase GDP Growth Rate
2.  Lower Interest Rates on Government Debt
3.  Government Transfer Payment of Foreign Capital Transfer
4.  Increase Taxes or Cut Spending
•  Tax increase is on the way
•  Difficult to cut public spending
5.  Print Money
•  We are
6.  Default
•  Any non-compliance of original loan terms equates to a default
Source: DoubleLine Capital
18
Possible Solutions
Cut
•  Only Britain has successfully reduced debt burden through surplus, lower
rates, and economic growth (1815-1914)
Print
•  Only governments with monetary sovereignty, i.e. U.S., U.K.
•  Only governments with own-currency denominated debt
Default
•  Governments with limited monetary sovereignty
•  Governments with foreign-currency denominated debt
Source: DoubleLine Capital
19
Interest Rate Environment
10%
“A” Rated Industrial Bonds
9%
10 Year Treasury Bond
8%
Y
I
E
L
D
7%
6%
5%
4%
3%
2%
4%
“A” Rated Industrial Bonds vs. 10 Year Treasury Bond
S
P
R
E
A
D
3%
2%
1%
0%
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
  Interest rates have collapsed, and corporate bond spreads are at low levels.
  The cost of financing is near all-time lows.
Source: Bloomberg, August 2010
20
Interest Rates and Capital Flows
Capital Flows Into Bonds Have Been Historic
Bond Mutual Funds
January 2008 to June 2010:
Equity Mutual Funds
+$559 Billion
-$233 Billion
As a Result, Low Yields Are a Worldwide Realty
World Yields as of Sept. 2010
10-year U.S. Treasury yield
2.5%
10-year German Bund yield
2.3%
10-year U.K. Gilt yield
2.9%
10-year Japanese Government yield
1.0%
Equities Remain Out of Favor - But This Could Change
  Equity sentiment indicators continue to show more Bears than Bulls
  The dividend yield of the Dow Jones Industrials Index is actually higher than the 10-year treasury bond yield
  Free cash flow yields are especially attractive among mid-to-small cap stocks
% of Russell 2500 Universe
Sept. 2010
August 2008
FCF yield > 5%
45%
24%
FCF yield > 10%
24%
7%
FCF yield > 15
13%
3%
Source: Reinhart Partners, Inc.
21
Corporate Profits
22
Stock vs. Bond Valuation
23
Inflation - CPI
24
Consumer Savings
25
Emerging and Developed Markets Populations:
Ages 24-44
Percent Distribution of the Population Ages 24-44 for Emerging Countries: 2010,2020,2030
50%
2010
2020
40%
2030
30%
Percentage of
Population
20%
10%
0%
Brazil
Mexico
South Africa
Turkey
Malaysia
Vietnam
Philippines
Indonesia
India
China
South Korea
Country
Percent Distribution of the Population Ages 24-44 for Developed Countries: 2010,2020,2030
50%
2010
Source: U.S. Census Bureau - International Population Division (www.census.gov)
2020
40%
2030
30%
Percentage of
Population
20%
10%
0%
Canada
Source: U.S. Census Bureau - International Population Division (www.census.gov)
Source: U.S. Census Bureau - International Population Division (www.census.gov)
Japan
United States
Germany
Country
26
Emerging and Developed Markets Populations:
Ages 65 and Over
Percent Distribution of the Population 65 years and over for Emerging Countries: 2010, 2020, 2030
25%
2010
2020
20%
2030
15%
Percentage of
Population
10%
5%
0%
Brazil
Mexico
South Africa
Turkey
Malaysia
Vietnam
Philippines
Indonesia
India
China
South Korea
Country
Source: U.S. Census Bureau - International Population Division
Percent Distribution of the Population 65 years and over for Developed Countries: 2010, 2020, 2030
2010
50%
2020
2030
40%
Percentage of
Population
30%
20%
10%
0%
Canada
Source:
U.S.
Source: U.S. Census Bureau
- International
Population Division (www.census.gov)
Japan
United States
Country
Germany
27
World Market Returns by Region - USD
28
The Folly of Predictions…
“All attempts at artificial aviation are not only dangerous to human life, but foredoomed to failure from the
engineering standpoint.”
- American Astronomer Simon Newcomb, 1906 (three years after Kitty Hawk flight.)
“It certainly seems to be a reasonable conclusion that the possible maximum for automotive passenger cars can
not exceed one to every family.”
- Forbes Magazine, November 24, 1923.
“There is only enough natural gas for another 25 years or so…By the end of the century there will be practically
no tungsten, copper, lead, zinc, gold, silver, or platinum.”
- Teddy Goldsmith, Can Britain Survive?, 1971
In 1952, IBM forecasted the total global market for computers as 52 units. In 1982, IBM forecasted the total
global market for PC’s as 200,000 units. In 1966 RCA forecasted that there would be 220,000 computers in the
United States by the turn of the 21st Century.
- Less than current weekly shipments.
“P.A.S. Franklin, Vice President of the International Mercantile Marine Company, said this morning that…
there was no cause for alarm regarding the safety of the passengers or the ship, as they regard the
Titanic as being practically unsinkable…The Titanic is well able to withstand almost any exterior damage
and could keep afloat indefinitely after being struck…Franklin was most emphatic in his assurances
regarding the safety of the passengers and the steamer.”
- Press release of April 15, 1912. (The ship had already sunk with 1,500 passengers.)
29
The Economic Tightrope
Positives
Negatives
+  Better Consumer Confidence
- 
Sticky Unemployment
+  ISM Manufacturing Activity
- 
Excess Manufacturing Capacity
+  Stimulative Interest Rates
- 
High Government Debt
+  Affordable Housing / Market
- 
Commercial Real Estate
- 
Higher Taxes Coming?
Bottom?
+  Political Shift to Pro-Business?
30
Economy Uncertainty = Volatility
  A low growth economy creates a “back-and-forth” situation for various economic outlooks.
  This economic tightrope leads to greater equity market volatility and uncertainty.
  This type of market environment is historically when stock selection matters most.
Source: FactSet Research Systems, September 2010
31
Corporate Cash = Dry Powder
  U.S. Companies are generating healthy levels of cash flow relative to fixed investment levels.
  Liquid assets on corporate balance sheets have jumped from 20% of debt to 26% in the last 18 months.
  Private equity firms still have an estimated $450 Billion on the sidelines to invest.
Source: Ned Davis Research (www.ndr.com)
32
Divergence in Business Sentiment
Competitive pressures are more severe and
long-lasting among smaller firms, as many fear
for survival in this environment and may be
willing to sell. But optimism among CEO’s at
larger companies may encourage acquisitions.
Source: Ned Davis Research (www.ndr.com)
33
Economic and Market Outlook for Next 3-7 Years
Currency & Commodity Returns:
•  US dollar will appreciate versus Euro and Yen; depreciate against Yuan and most Asian and Latin
• 
• 
• 
• 
American currencies
Commodities pricing volatility will increase
Oil will be range bound between $50-80/barrel
Natural gas will be between $3-5 mcf
Gold will peak in late 2010 or 2011
Real Estate Returns:
•  US real estate as a broad asset class will return -5% to +5%
•  Commercial real estate will experience numerous defaults
•  Targeted real estate investments will provide great opportunities
U.S. Political Policies:
•  US tax rates will increase
•  US entitlement programs will have needs based requirements and age restrictions
34
Investment Opportunities:
Dependent on Inflation / Deflation: Which is it?
Inflation: “The overall general upward price movement of goods and services in an economy”
Assets that do well during inflationary times: (fixed-rate productive debt)
1.  Precious metals: gold and silver
2.  Information technology, energy, and material stocks (as long as corporate profits are rising)
3.  Real estate
4.  Treasury Inflation Protected Securities (TIPS)
5.  Commodities
Assets to avoid: (variable rate consumptive and productive debt)
1.  Long duration US Treasury bonds
2.  Consumer and financial services stocks
Deflation: “Prices are declining” *Capital preservation is paramount*
Assets that do well during deflationary times:
1.  Long duration US Treasury bonds
2.  Cash
3.  High quality intermediate to long-term investment grade corporate bonds
4.  Stocks paying meaningful dividends that are supported by strong cash flows and low payout ratios
5.  Net lease back real estate (*dependent on tenants and lease terms)
Assets to avoid: (debt)
1.  Commodities
2.  Real estate
3.  High yield (low quality) bonds
4.  Stocks with high debt levels
35
Inflation / Deflation: Where Are We Today?
Low Bond Yields Are A Worldwide Reality
August 25, 2010
10 year US Treasury yield:
2.47% (Fell below Dow Jones Yield for first time since 1962!)
10 year German Bund yield:
2.12%
10 year UK Gilt yield:
2.84%
10 year Japanese Gov’t yield:
0.92%
Historical average spread between Federal Funds rate and 30 year Treasury Yield is 2.00%:
  August 25, 2010 Federal Funds Rate: 0.00%
  August 25, 2010 30 year Treasury Yield: 3.53%
Capital Flows Continue into Bonds
January 2008 to June 2010:
Bond Mutual Funds
Equity Mutual Funds
+$559 billion
+185.31 billion in 2010
($233 billion)
(33.2 billion) in 2010
Equities Remain Out of Favor
  Many high quality businesses have dividend yields greater than the 10 year US Treasury yield, low payout
ratios, low debt levels, and the dividends should grow!
*Let’s take a look at what opportunities exist!
36
Thank you.