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Weekly Market Commentary 5/6/2013

Weekly Market Commentary 5/6/2013

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Weekly Market Commentary 5/6/2013
Weekly Market Commentary 5/6/2013

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Published by: monarchadvisorygroup on May 07, 2013
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10/21/2013

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Member FINRA/SIPCPage 1 o 3
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
LPL FINANCIAL RESEARCH
Weekly Market Commentary
May 6, 2013
Borrowing for the Future
Highlights
Ater waging a war on debt or the past severalyears, it may be the war on debt itsel that maybe bad or growth.
A recently detected error in a study by Harvard economists Reinhart &Rogo has garnered much attention in the nancial press lately. The studyhad initially concluded that once a country exceeded a 90% debt-to-grossdomestic product (GDP) ratio, the pace o economic growth slowed sharply.The corrected data reveal that growth slows as debt-to-GDP rises, but ata pace not meaningully dierent than at other round numbers. The studyraised the issue o whether large amounts o debt are really bad. Aterwaging a war on debt or the past several years, it may be the war on debtitsel that may be bad or growth.Credit, or the ability to borrow, has earned the honor o being recognizedas the underlying orce or growth o the past 250 years. Industrialization isoten cited as the source o growth and massive improvement in GDP percapita since the mid-1700s. This is true, but what made industrializationpossible? The answer, o course, is the expansion o credit to businessesand individuals who employed it productively. European colonialism in the1600s and 1700s expanded international trade and ostered the creation onancial markets that then supported and enabled industrial growth in the1800s and 1900s. As credit became more plentiul, economies began togrow more rapidly, and living standards improved.
1
Unprecedented Gap Between Saving and Borrowing
Source: LPL Financial, Federal Reserve 05/06/13
201220112010200920082003 2004 2005 2006 2007 2013 10,0009,0008,0007,0006,0005,0004,000DepositsLoans
We may be shunning debt in thewrong places.
 
WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 2 o 3
It may seem odd to praise taking on debt in the current environment.Certainly, too much debt is a bad thing or anyone. But too little can beequally disastrous. Lack o spending and investment can become a sel-reinorcing downward spiral or an economy. Borrowing can be a goodindicator o growth. The pace o loan growth is oten a precursor tospending and hiring that drives growth and the markets. Where we seeborrowing, we see hope or a brighter uture.Unortunately, we may be shunning debt in the wrong places. Whilethe U.S. government continues to accumulate debt, corporations andconsumers have largely avoided borrowing. The preerence or savings overborrowing can be seen when looking at banks’ balance sheets. Banks arenot lending at the pace deposits are growing. There is an unprecedentedgap between bank deposits and loans, as you can see inFigure 1.While borrowing by individuals or home and auto purchases has started torevive over the past year as the Federal Reserve (Fed) has pushed downnancing rates to unprecedented levels, consumers have been hesitantto use their credit cards[Figure 2]. This has resulted in core consumerspending tracking the meager pace o income growth.Given their high cash balances, businesses have less need to borrow to spend;however, they are hesitant to even spend their cash. In total, U.S. businessesover the past 20 years have typically kept between $150 and $250 billion incash, or currency and checkable deposits, on hand. Currently, that total isdouble that average and continues to soar, as you can see inFigure 3.Importantly, research and development (R&D) spending is weak. Thereturn o U.S. R&D to pre-recession levels has not materialized. The 2013
R&D Funding Forecast 
created by
R&D Magazine 
using data rom the
National Science Foundation’s National Patterns of R&D Resources 
dataindicates that, even beore accounting or the looming sequester, total U.S.R&D investment in 2013 (most o which is conducted by businesses) isexpected to decline in real dollars, with growth o only 1.2% compared withan infation rate o 1.9%. Lack o investment can become a sel-reinorcingdownward orce on growth.We will be watching the March 2013 consumer credit report due to bereleased this week on Tuesday, May 7 or signs that borrowing may makea comeback and drive innovation and growth. I not, the pace o economicand earnings growth may remain weak or even weaken urther and imperilrecent gains.
n
06 07 08 09 10 11 12 1310501000950900850800U.S. Consumer Revolving Debt,
$ Billions
2
Consumer Credit Card Debt Growth Has Flatlined
Source: LPL Financial, Federal Reserve 05/06/13
‘13‘11‘09‘07‘05‘03‘01‘99‘97‘95‘93‘91 450400350300250200150100500Currency and Checkable Deposits,
$ Billions
3
U.S. Businesses Accumulating Cash RatherThan Spending It
Source: LPL Financial, Federal Reserve 05/06/13
The return o U.S. R&D to pre-recessionlevels has not materialized.Given their high cash balances,businesses have less need to borrowto spend; however, they are hesitant toeven spend their cash.

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