David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.

com

August 14, 2013 Special Report

SPECIAL REPORT

From Inflation To Deflation … And Back!
I have been laying out the groundwork for the next phase of this cycle, which is good news for Main Street even if not that great for Wall Street or my long-held belief in the longevity of this secular disinflationary cycle … which I think is now in its mature stage. I think the people that write off the prospect of cost-push inflation are taking on a very myopic view. Inflation is a process, and it takes a long while to build. There is evidence that the consumer deleveraging cycle is largely over. Subprime auto credit is up 30% from a year ago. We are up to a 20% share of mortgages being originated with downpayments of less than 10%. CLO (collateralized loan obligation) issuance is back to 2007 levels. In the corporate space, fully one-third of high-yield debt issues this year have been centred in firms with the weakest balance sheets. At some point, money velocity and the money multiplier will stop falling. No doubt fiscal drag will take a chunk out of GDP growth in the near-term, but this too shall pass and the reality is that the aggregate supply curve (and this is true globally) has become increasingly inelastic. The pool of available skilled labour is shrinking rapidly and after five years of the weakest growth in the private sector capital stock, we are starting to see the lagged ill-effects on productivity growth. Potential non-inflationary growth had already been pared, in my estimates, to 1.7%. And the only way we could have experienced a drop in the unemployment rate in the past year from 8.2% to 7.4% in the face of sub-2% economic growth strongly suggests that we are now on our way to a potential non-inflationary speed limit of just 1%. Very European indeed. I am not very bullish on the outlook for aggregate demand growth. But the shape of the aggregate supply curve is now so inelastic that it doesn’t take much in the way of growth in spending to generate higher inflation over time. I realize that is not evident just yet to the naked eye and this is a process that will be akin to watching grass grow. That is always the case. This is the big risk — margin compression affects the ‘E’, while inflation, insofar as the tight historical relationship with final prices holds, even if to a smaller degree this time around, affects the P/E. Once again, this becomes a strategy of adding some inflation hedges to the S.I.R.P. portfolio — exposure to tangibles or hard assets, and in some cases like resources and TIPS/RRBS (real return bonds), they have cheapened up very nicely of late. Within the equity universe, dividend coverage/payouts are augmented by screening of sectors and companies that have high-fixed costs and low variable costs, that have high capital/labour ratios and also high demand inelasticities (a.k.a. Get a FREE 7 DAY TRIAL By going to www.gluskinsheff.com/research And subscribing with promo code: BWDGSATRIAL

SUMMARY

Inflation is a process, and it takes a long while to build. There is evidence that the consumer deleveraging cycle is largely over The shape of the aggregate supply curve is now so inelastic that it doesn’t take much in the way of growth in spending to generate higher inflation over time The prospect that we are sitting at over 3% on the 10-year T-note yield a year from now and north of 4% by 2017 is hardly trivial If you are an investor, don’t spend too long debating whether you should be starting to hedge your portfolio against the prospect of a rising long-term interest rate environment

Page 1 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

‘pricing power’). Stay tuned as this theme becomes more fully fleshed out in the near future. Better to be prepared for shifts in the landscape than to be surprised. I keep emphasizing that it took Paul Volcker a good three years to kill inflation for good and it is taking longer for Bernanke to dispel deflation concerns even if the U.S. economy in terms of consumer prices has never deflated once in the past six decades, but he will ultimately be successful and my call for higher long-term rates is a secular view that does not dismiss out of hand the prospect that near-term cyclical pressures and the aggressive buying by the Fed does not lead to a test of the yield lows in coming months. It’s just a rally I would be glad to face as it probably is the last gasp in this three-decade old bond bull phase. Unless you do believe in deflation, it is going to be difficult to hold every maturity to the 10-year T-note negative in real terms (adjusted for the core CPI trend) and negative relative to nominal GDP across the entire curve indefinitely — that last part is only sustainable in a period of negative real growth rates which is hardly the case today and remains an elusive forecast for many a pundit. Have a look at Ben Bernanke’s analytical piece called Long-Term Interest Rates back on March 1st and assess the balance of risks — visibly one-sided even if the timing is up for debate. The prospect that we are sitting at over 3% on the 10-year T-note yield a year from now and north of 4% by 2017 is hardly trivial. I’ve been in the deflation camp for two decades … but strongly feel it is time to move on. It is a crowded trade. I used to say in the 1990s and 2000s that we had a generation of market pundits and players who only know higher interest rates and inflation. Today, we have a group of twenty, thirty and even forty-somethings who know little about bond selloffs, inflation or even what a normal Fed tightening cycle looks like. The new paradigm has shifted in the opposite direction and today’s ever-more consensus forecast of 1% yields on 10-year T-notes and 2% on the long bond based on deflation reminds me of the bold calls for 30% bond yields back in the early 1980s based on runaway inflation. Rosie’s Rule #4: “Fall in love with your partner, not your forecast”. A recent McKinsey study found that only 43% of employers surveyed in nine countries believed they had a sufficient pool of skilled entry-level workers to choose from. Not only that, but mid-sized firms (between 50 and 500 employees) had an average of 13 entry-level positions sitting vacant. In other words, this is far more a skills mis-match story than one related to aging (though not aged) baby boomers. The reality is that employment has risen some three million since mid-2009 but for some reason, nine million adult Americans dropped out of the labour market altogether over this time frame. The demand is there with job openings rising 81% from the cycle lows and layoffs down 41%. The problem is that new hires are stagnating at best, and this is why the workweek is The reality is that employment has risen some three million since mid2009 but for some reason, nine million adult Americans dropped out of the labour market altogether over this time frame I keep emphasizing that it took Paul Volcker a good three years to kill inflation for good and it is taking longer for Bernanke to dispel deflation concerns even if the U.S. economy in terms of consumer prices has never deflated once in the past six decades

Page 2 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

being lengthened and overtime hours being expanded. And the working class is beginning to notice that it is starting to have some bargaining power as the number of voluntary quits has risen 35% so far this cycle and are flirting near 4½-year highs. While gross hirings are anemic, to be sure, companies are trying to hang onto their staff and as such, layoff rates have come down a long way. There may well be 90 million American adults outside of the labour market and another 12 million in the jobless ranks looking for a job but can’t find one because they don’t have the right skills, but rest assured that the 144 million who are gainfully employed are becoming ever more confident in their own prospects, and that is, again, underscored by a “voluntary quit’ rate that has also risen to a cycle high. No matter the reason, the reality is that capacity is being taken out of the jobs market (much like it has in the airline sector which is one area that now has pricing power as a result), and as such, less competition for available jobs will likely result in rising wage rates unless the laws of supply and demand have managed to bypass the labour market. Much of this “capacity reduction” may reflect the fact that an ever-rising number of the “99%” are actually getting paid not to work. So I would say this may be more about the incentive system than demographics. For example, a record 23 million households are now on food stamps — up over 735,000 from a year ago and now this is representing close to 30% of the total number of adults who now reside outside the confines of the labour force. There are also nearly nine million Americans on disability and I do not want to at all disparage those who are truly physically hurt, but my only point is that the SSDI program (Social Security Disability Insurance) is bursting at the seams, having jumped by one million workers in just the past three years and 300,000 of these in just the past three months — an annual expense (to the taxpayer and it is non-wage income to the recipient) of $165 billion. It will not be a straight line up, and in fact, I see the prospect of a stilloversold bond market seeing lower yield activity over the near-term, but don’t confuse the small and big picture here. The big picture is that the lows in Treasury yields were turned in a year ago when a three-decade secular bull market came to an end, and a secular bear market was in its infancy. You want more evidence? Go to the Bernanke piece he penned on March 1st titled “Long-Term Interest Rates” and you will see firsthand that the architect of today’s super-low interest rates himself sees 10-year T-note yields moving from today’s 2.5%-ish level to something closer to 4% or even higher in coming years. So if you are an issuer, the time for refinancing is now, not later. And if you are an investor, don’t spend too long debating whether you should be starting to hedge your portfolio against the prospect of a rising longPage 3 of 38

While gross hirings are anemic, to be sure, companies are trying to hang onto their staff and as such, layoff rates have come down a long way

The big picture is that the lows in Treasury yields were turned in a year ago when a three-decade secular bull market came to an end, and a secular bear market was in its infancy

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

term interest rate environment, even as central banks continue to keep short-term policy yields at the floor. From the perspective of an economist at a wealth management firm, this means embarking on strategies that over time will effectively hedge out interest rate risk, for example with exposure to hard assets, credit arbitrage, and screening in the equity market for companies with high fixed costs and low variable costs, high ratios of capital to labour, and firms with a proven history of being able to pass on cost increases to protect profit margins.
CHART 1: ROSIE’S BAKER’S DOZEN OF (ECONOMISTS’) RULES
1 2 3 4 5 6 7 8 9 10 11 12 13 In order for an economic forecast to be relevant, it must be combined with a market call Never be a slave to the data — they are no substitute for astute observation of the big picture The consensus rarely gets it right and almost always errs on the side of optimism — except at the bottom Fall in love with your partner, not your forecast No two cycles are ever the same Never hide behind your model Always seek out corroborating evidence Have respect for what the markets are telling you Be constantly aware with your forecast horizon — many clients live in the short run Of all the market forecasters, Mr. Bond gets it right most often Highlight the risks to your forecasts Get the U.S. consumer right and everything else will take care of itself Expansions are more fun than recessions (straight from Bob Farrell’s quiver!)

Source: Gluskin Sheff

Page 4 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 2: DEFLATION HAS BECOME THE CONSENSUS VIEW

Source: Barron’s (April 22, 2013)

CHART 3: DEFLATION HAS BECOME THE CONSENSUS VIEW

Page 5 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 4: THE WIZARD IS A HERO!

CHART 5: UNPRECEDENTED MONETARY EXPANSION
United States
Fed Funds Rate
(percent)
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 05 06 07 08 09 10 11 12
0.5 05 06 07 08 09 10 11 12 1.0 1.5 2.0 2.5

Fed Balance Sheet – Total Assets
($ trillion)
3.0

Source: Haver Analytics, Gluskin Sheff

Page 6 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 6: NINE TRILLION IN CASH … EARNING 0%
United States (quarter-over-quarter percent change, annual rate)
Household Cash Assets
($ trillions)
9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 0 1 3 4 5

3-Month Treasury Bill Yield
(percent)
6

2

2001

2003

2005

2007

2009

2011

201

2001

2003

2005

2007

2009

2011

2013

Source: Haver Analytics, Gluskin Sheff

CHART 7: HE SAID WHAT??
“We do think that these policies can bring interest rates down, not just treasury rates but a whole range of rates including mortgage rates and rates for corporate bonds and other types of important interest rates. It also affects stock prices. It affects other prices, home prices, for example. So looking at all the different channels of effect, we think it does have an impact on the economy. It will have impact on the labor market but again, the way I would describe it is a meaningful effect, a significant effect, but not a panacea, not a solution for the whole issue.” Ben Bernanke the Post-FOMC Meeting Press Conference September 13, 2012.

Page 7 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 8: THE STOCK MARKET NOW FOLLOWS THE FED’S BALANCE SHEET
United States S&P 500 (left axis, index) Federal Reserve Credit (right axis, $trillions)
1,800
4.00

Correlation ≈ 0%! from 2000 to 2008
1,600 1,400 1,200

Correlation ≈ 90%! from 2009 to 2013
3.50

3.00

2.50

1,000 800

S&P 500
2.00

1.50

600 400 200 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
1.00

0.50

Federal Reserve Credit
0.00

Source: Haver Analytics, Gluskin Sheff

CHART 9: THE POTEMKIN RALLY
United States
NYSE Stock Market Cap
($ billions)
18,000

NYSE Mkt Cap/Fed’s Total Assets
(ratio)
25

16,000

20

14,000

15
12,000

10
10,000

8,000

5

6,000

0
'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 8 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 10: THE POTEMKIN ECONOMIC RECOVERY
United States: 16 Quarters After A Recession Ends
Real GDP per capita
(annualized percent change)
5% 4% 4% 3% 3% 2% 2% 1% 2.0% 4.2% 3.9% 4.2%

Nominal GDP per capita
(annualized percent change)
12% 10.7% 10%
3.3%

8%

7.2% 6.5%

2.2%

6%

5.6% 4.3% 4.8%

1.4%

4% 3.0% 2%

1% 0% 61 Q1 75 Q1 82 Q4 91 Q1 01 Q4 Avg. Current Last Quarter of Recession

0% 61 Q1 75 Q1 82 Q4 91 Q1 01 Q4 Avg. Current Last Quarter of Recession

Source: Haver Analytics, Gluskin Sheff

CHART 11: SUPPLY CURVE SCLEROSIS
United States
Total Factor Productivity
(percent change from business-cycle peak)

“The report cites three estimates of the extent to which a lower trend rate explains the weak recovery. One, published in 2012 by James Stock of Harvard University (now a council member) and Mark Watson of Princeton University, derives America’s potential growth rate from the long-term average of variables such as employment and productivity. This approach concludes that 80% of the two-percentage-point shortfall in growth relative to other recoveries is caused by slower potential.”
The Economist, March 23, 2013

8
1990 & 2001 average

6

4 1973 & 1981 average Great recession

2

0

-2

-4

-6 -16 -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Quarters before/after business-cycle peak

Source: Federal Reserve Bank of San Francisco, The Economist, Gluskin Sheff

Page 9 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 12: SECULAR DECLINE IN “POTENTIAL” GDP GROWTH
United States: Productivity Growth + Labour Force Growth (five-year percent change at an annual rate)
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 85 86 86 87 88 89 90 91 91 92 93 94 95 96 96 97 98 99 00 01 01 02 03 04 05 06 06 07 08 09 10 11 11 12
Source: Haver Analytics, Gluskin Sheff
1.8%

CHART 13: SUPPLY CURVE BECOMING INELASTIC
1980-90’s Elastic Supply Curve Today’s Inelastic Supply Curve

Source: Gluskin Sheff

Page 10 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 14: YELLEN AND SCREAMIN’ OVER THE CAPEX SHORTFALL

“… the slow recovery has depressed the pace of capital accumulation, and it may also have hindered new business formation and innovation, developments that would have an adverse effect on structural productivity.”
Janet L. Yellen 2013 National Association for Business Economics Policy Conference Washington, D.C. March 4, 2013

CHART 15: WEAKEST GROWTH IN THE PRIVATE CAPITAL STOCK IN SIX DECADES
United States
Real Net Private Capital Stock
(five-year percent change at an annual rate)
4.5

Business Spending as a Share of GDP
(percent)
15

4.0

14

3.5

13

3.0

12

2.5

11

2.0

10

1.5

9
1.2%

1.0 50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10

8 67 72 77 82 87 92 97 02 07 12

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 11 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 16: GOVERNMENT REGULATION GETS IN THE WAY
United States: NFIB: Government Requirements as the Top Problem (percent of respondents)
26 24 22 20 18 16 14 12 10 8 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

We were here in 1994

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

CHART 17: YELLEN AND SCREAMIN’ OVER THE LABOUR MARKET
The large shortfall of employment relative to its maximum level has imposed huge burdens on all too many American households and represents a substantial social cost. In addition, prolonged economic weakness could harm the economy's productive potential for years to come. The longterm unemployed can see their skills erode, making these workers less attractive to employers. If these jobless workers were to become less employable, the natural rate of unemployment might rise or, to the extent that they leave the labor force, we could see a persistently lower rate of labor force participation.
Janet L. Yellen 2013 National Association for Business Economics Policy Conference Washington, D.C. March 4, 2013

Page 12 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 18: AVERAGE LENGTH OF UNEMPLOYMENT
United States (weeks)
45.0

40.0

35.0

30.0

25.0

20.0

15.0

10.0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

CHART 19: A RECORD NUMBER OF AMERICANS HAVE LEFT THE LABOUR FORCE
United States
People Not in Labor Force
Over 90 million!

Share of population not in Labour Force

90 88 86 84 82

36.5

35.5

34.5

33.5

80 78 Jan/08
32.5 2001

Jan/09

Jan/10

Jan/11

Jan/12

Jan/13

2004

2007

2010

2013

Source: Haver Analytics, Gluskin Sheff

Page 13 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 20: JOB OPENINGS ON THE RISE
United States: JOLTS: Job Openings (thousands)
5,000

4,500

4,000

3,500

3,000

2,500

2,000 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded region represents period of U.S. recession Source: Haver Analytics, Gluskin Sheff

CHART 21: HIRING INTENTIONS: CHOPPY BUT ON AN UPWARD TRAJECTORY
United States: NFIB: Firms Planning to Increase Employment (percent of respondents)
20

15

10

5

0

-5

-10 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 14 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 22: FIRMS WITH POSITIONS NOT ABLE TO FILL
United States: NFIB Survey (percent of respondents)
40

35

30

25

20

15

10

5 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

CHART 23: SKILL SHORTAGE IS MORE ACUTE
United States: NFIB: Businesses with Few or No Qualified Applicants for Job Openings (percent of respondents)
50

45

40

35

30

25

20 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded region represents period of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 15 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 24: HIRING IS LAGGING BEHIND
United States: JOLTS: Hires (thousands)
5,600 5,400 5,200 5,000 4,800 4,600 4,400 4,200 4,000 3,800 3,600 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded region represents period of U.S. recession Source: Haver Analytics, Gluskin Sheff

CHART 25: FIRINGS PLUNGE (LABOUR HOARDING?)
United States: JOLTS: Layoffs and Discharges (thousands)
2,750

2,500

2,250

2,000

1,750

1,500 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded region represents period of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 16 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 26: PINK SLIP ANNOUNCEMENTS AT CYCLE LOWS
United States: Job Cut Announcements (thousands)
250

200

150

100

50

0 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded region represents period of U.S. recession Source: Challenger, Gray & Christmas, Gluskin Sheff

CHART 27: NUMBER OF JOB QUITTERS ON THE RISE TOO
United States: JOLTS: Quits (thousands)
3,200

2,800

2,400

2,000

1,600 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded region represents period of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 17 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 28: EMPLOYERS RESORTING TO WORKWEEK EXTENSION
United States
Private Industry Workweek
(index, 2002=100)
110.0

Manufacturing Weekly Overtime
(hours)
3.5

107.5
Cycle high

3.3

105.0

3.0

102.5

2.8

100.0

2.5

97.5

2.3

95.0

2.0

2002

2004

2006

2008

2010

2012

2006 2007 2008 2009 2010 2011 2012 2013

Source: Haver Analytics, Gluskin Sheff

CHART 29: EARLY SIGNS OF A WAGE RESPONSE?
United States: Average Weekly Earnings (year-over-year percent change)
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Source: Haver Analytics, Gluskin Sheff

Page 18 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 30: PRODUCTIVITY GROWTH HEADING LOWER
United States: Productivity Growth* (line: year-over-year percent change, left axis) (bars: quarter-over-quarter percent change at an annual rate, right axis)
8 10.0

6

7.5

4

5.0

2

2.5

0

0.0

-2

-2.5

-4 00 01 02 03 04 05 06 07 08 09 10 11 12 13

-5.0

*Real output per hour of all persons in the nonfarm business sector Source: Haver Analytics, Gluskin Sheff

CHART 31: UNIT LABOUR COSTS REACCELERATE
United States: Unit Labour Costs (year-over-year percent change)
4 3 2 1 0 -1 -2 -3 -4 01 02 03 04 05 06 07 08 09 10 11 12 13

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 19 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 32: TIGHT HISTORICAL LINK BETWEEN UNIT LABOUR COSTS AND INFLATION
United States Overall CPI (dark green line, left axis, year-over-year percent change) Unit Labour Costs (light green line, right axis, year-over-year percent change)
16 16

correlation = 0.87
12 12

8

8

4

4

0

0

-4 60 64 68 72 76 80 84 88 92 96 00 04 08 12

-4

Source: Haver Analytics, Gluskin Sheff

CHART 33: DEFLATION — YESTERDAY’S STORY
United States: NFIB: Firms Planning to Raise Average Selling Prices (percent of respondents)
40

30

20

10

0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 20 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 34: BOB FARRELL’S 10 MARKET RULES TO REMEMBER
1 2 3 4 5 6 7 8 9 Markets tend to return to the mean over time Excesses in one direction will lead to an opposite excess in the other direction There are no new eras – excesses are never permanent Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways The public buys the most at the top and the least at the bottom Fear and greed are stronger than long-term resolve Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names Bear markets have three stages – i) sharp down, ii) reflexive rebound, and iii) a drawn-out fundamental downtrend When all the experts and forecasts agree, something else is going to happen

10 Bull markets are more fun than bear markets

CHART 35: LABOUR PAINS COME TO AN END?
United States: Labour Share of National Income (percent)
70.0

68.0

66.0

Long run average

64.0

62.0

60.0 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05

Trough?

'10

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 21 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 36: A TRANSFER OF INCOME TO THE PERSONAL SECTOR MAY BE A GOOD THING
United States (percent)
Personal Savings Rate
12

Corporate Savings Rate*
45

10

40

8

35

6

30

4

25

2

20

0 82 87 92 97 02 07 12

15 85 90 95 00 05 10

* Non-financial net savings divided by total internal funds plus inventory valuation adjustment Source: Haver Analytics, Gluskin Sheff

CHART 37: FROM DELEVERAGING TO RELEVERAGING?
United States: Household Debt
HH Borrowing from Credit Market
($ billions, annual rate)
1,600

Total HH Debt
(year-over-year percent change)
20

1,200

15

800

10
400

5
0

0
-400

-800 '80 '84 '88 '92 '96 '00 '04 '08 '12

-5 '80 '84 '88 '92 '96 '00 '04 '08 '12

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 22 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 38
“One purpose of this support is to prompt a return to the productive risk-taking that is essential to robust growth and to getting the unemployed back to work.” -- Long-Term Interest Rates, 2013, Ben Bernanke

CHART 39: BERNANKE DUSTS OFF THE “PHILLIPS CURVE”
FOMC meeting – June 22, 2011 The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate for an extended period. FOMC meeting – August 9, 2011 The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. FOMC meeting – January 25, 2012 In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. FOMC meeting – September 13, 2012 In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. FOMC meeting – December 12, 2012 In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 61/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

Page 23 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 40: IF ASSUMPTIONS CHANGE, SO DO THE CONCLUSIONS
United States: United States: Unemployment Rate (percent)
11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0
Apr. 2014 Assuming: working-age population, employment and part rate change at an average pace so far this year Jun. 2014 Assuming: working-age population, employment and part rate change at an average pace in the last 12 months Jul. 2016 Assuming: - Working-age population and employment grows at a pace consistent with cycle avg. - Part rate constant at current level

2000

2002

2004

2006

2008

2010

2012

2014

2016

Dashed lines represent estimates Source: Haver Analytics, Gluskin Sheff

CHART 41: THE FED RESPONDS TO THE “OUTPUT GAP”
United States: Output Gap as Percent of Potential GDP (percent)
8 6 4 2 0 -2 -4 -6 -8 -10 -12 '49 '52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12
Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff
Excess supply Excess demand

Page 24 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 42: IS THE OUTPUT GAP REALLY 6%?
United States (percent)
Output Gap
4

Core CPI*
3.5 3.0 2.5 2.0

2

0

-2

1.5
-4

1.7%

1.0
-6
-6%

0.5 0.0

-8 Jan/80

Jan/85

Jan/90

Jan/95

Jan/00

Jan/05

Jan/10

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

*CPI ex food and energy, YoY Source: Haver Analytics, Gluskin Sheff

CHART 43: JAPAN HAS A 1% OUTPUT AND -0.3% CORE INFLATION
Japan (percent)
Output Gap
6

Core CPI*
0.5

4

0.0
-0.3%

2

-0.5
0

-1.0
-2
-1%

-4

-1.5

-6 Jan/90

-2.0
Jan/95 Jan/00 Jan/05 Jan/10

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

*CPI ex food and energy, YoY Source: Haver Analytics, Gluskin Sheff

Page 25 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 44: EQUILIBRIUM FED FUNDS RATE IS ALSO SENSITIVE TO OUTPUT ESTIMATES
United States: Fed Funds Rate and Taylor-rule Estimate (percent)
12 10 8 6 4 2 0 -2 -4 -6 -8 1990
If output gap =
-3% -4% -5% -5.9% (current)

Taylor Rule Estimate Actual Fed Funds Rate

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: Haver Analytics, Gluskin Sheff

CHART 45: FED PURSUING FINANCIAL INSTABILITY?
It follows that the FOMC will only be able to meet its objectives over that time frame by taking policy actions that ensure that the real interest rate remains unusually low. I then point out that low real interest rates can be expected to be associated with financial market phenomena that are seen as signifying instability. It follows that, for many years to come, the FOMC will only be able to achieve its congressionally mandated objectives by following policies that result in signs of financial market instability.

Narayana Kocherlakota President of FRB of Minneapolis “Low Real Interest Rates” April 18, 2013

Page 26 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 46: BURNS RETURNS!
United States: Real Fed Funds Rate* (percent)
12 10 8 6 4 2 0 -2 -4 -6 1971
Arthur Burns Paul Volcker Alan Greenspan Ben Bernanke

1976

1981

1986

1991

1996

2001

2006

2011

Source: Haver Analytics, Gluskin Sheff

CHART 47: THE FED’S EXPERIMENTS IN PROVIDING NEGATIVE REAL RATES …
United States: Three-month Treasury Yield minus CPI YoY (percent)
3.5 3.0 2.5 2.0 1.5
1.5

1990-92

4.0 3.5

1998-2000

1.0

2002-04

3.0

2009-now

0.5

2.0

3.0 2.5 2.0
0.0
1.0

0.0

-0.5
-1.0

1.0
1.0

-1.0
-2.0

0.5 0.0 -0.5 -1.0 Apr/90 Dec/90 Aug/91 Apr/92 Dec/92

0.5 0.0

-1.5

-3.0

-2.0

-0.5 -1.0 Feb/98 Oct/98 Jun/99 Feb/00 Oct/00
-2.5 Jan/02

-4.0

Jul/02

Jan/03

Jul/03

Jan/04

-5.0 Feb/09

Jan/10

Dec/10 Nov/11

Oct/12

Source: Haver Analytics, Gluskin Sheff

Page 27 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 48: … HAVE ALWAYS LED TO EXCESS
United States (quarter-over-quarter percent change, annual rate)
Bubble in T-notes
(10y T-note yield, percent, inverted)

Dot.com Bubble
(NASDAQ, index)

Housing Bubble
(S&P homebuilding stocks, index)

Bubble in Junk Bonds?
(BB-B rated corp bond yield, bps, inverted)

5.25

1300.0

5.0

4800.0
5.75

1200.0

5.5

4300.0
1100.0
6.0

6.25

3800.0

6.75

3300.0

1000.0

6.5

7.25

2800.0

900.0

7.0

2300.0
7.75

800.0

7.5

1800.0
8.25

700.0

8.0

1300.0 Jun/98 Jan/91 Jul/91 Jan/92 Jul/92 Jan/93 Jul/93

600.0

Dec/98

Jun/99

Dec/99

Jun/04 Sep/04 Dec/04 Mar/05 Jun/05

8.5 Oct/11 Jan/12 Apr/12 Jul/12 Oct/12 Jan/13 Apr/13

Source: Haver Analytics, Gluskin Sheff

CHART 49: RECALL WHAT LARRY MEYER SAID BACK IN 2000
So, is there a new economy? As I said, it depends. For my part, I accept the proposition that there has been a significant improvement in underlying productivity growth in the United States, that it is very closely tied to improvements in information and communications technology, and that it is likely to spread around the world. But I resist the new economy label because it seems to encourage a disrespect for the old rules that could seriously undermine our success in taking advantage of the new opportunities. The second insight--and enduring old economy wisdom--is that a proximate source of changes in inflation is an imbalance between the levels of aggregate supply and aggregate demand. This can be expressed as an imbalance between actual and potential output or as a divergence of the unemployment rate from the NAIRU. The imbalance between the growth rates of aggregate supply and demand is, of course, the source of changes in the balance between the levels of aggregate demand and supply. But inflation is related directly to the levels not to the growth imbalance. And, even in the new economy, excess aggregate demand ultimately drives up inflation. Thus the limits may have changed, but the consequences of overtaxing the limits remain the same.

Governor Laurence Meyer “The New Economy Meets Supply and Demand” June 6, 2000

Page 28 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 50: REMEMBER MISHKIN IN AUGUST 2007!
So far, I have discussed monetary transmission mechanisms working through the housing sector when the financial system is operating normally. However, exceptionally unfavorable conditions in the housing sector have the potential to create instability in the financial system—instability that could magnify problems for the overall economy. Two questions thus arise: Through what channels might the housing sector at times be a source of financial instability? And could such instability affect the operation of the transmission mechanism, affecting the ability of a central bank to stabilize the overall macroeconomy? A breakdown in financial stability occurs when shocks to the financial system cause disruptions to the credit intermediaries that are so severe that the system can no longer channel funds fluidly to creditworthy households and businesses with productive investment opportunities. Without access to financing, individuals and firms must cut their spending, which will have consequences for overall economic activity. The typical channel has been that sharp asset-price declines have seriously deteriorated the balance sheets of key financial institutions, inhibiting them from using their advantage of information capital to make loans to firms and individuals. …it bears asking whether the sharp slowing in U.S. home price appreciation, and in some areas of the country a turn to outright declines, has created a substantial risk of financial instability with adverse implications for macroeconomic performance. Because prices of homes, like other asset prices, are inherently forward looking, it is quite difficult to conclude firmly whether they are above their fundamental values, and researchers have come to conflicting conclusions. Nevertheless, an explosive rise in asset prices always generates concern that a bubble may be developing and that its bursting might lead to broad and deep economic distress.

Fed Governor Frederic S. Mishkin August 3, 2007

CHART 51: CREDIT BUBBLE? IF IT QUACKS LIKE A DUCK …
“The third factor that can lead to overheating is a change in the economic environment that alters the risk-taking incentives of agents making credit decisions. For example, a prolonged period of low interest rates, of the sort we are experiencing today, can create incentives for agents to take on greater duration or credit risks, or to employ additional financial leverage, in an effort to “reach for yield” … Putting it all together, my reading of the evidence is that we are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit. The question of how policymakers should respond to different manifestations of credit market overheating is a big and difficult one, and I won’t attempt to deliver a set of specific prescriptions here. To lend a little concreteness and urgency to this issue, imagine that it is 18 months from now, and that with interest rates still very low, each of the trends that I identified earlier has continued to build — to the point where we believe that there could be meaningful systemic implications. What, if any, policy measures should be contemplated?” .

Fed Governor Jeremy Stein “Overheating in Credit Markets: Origins, Measurement, and Policy Responses” February 7, 2013

Page 29 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 52

“If something cannot go on forever, it will stop.” — Herbert Stein’s Law

CHART 53: ROUND TRIP FOR BOND YIELDS
United States: 10-year T-note Yield (percent)
18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 '53 '58 '63 '68 '73 '78 '83 '88 '93 '98 '03 '08 '13 Inflation 2%; easy monetary policy: 3-month T-bill yield at 0.6% Inflation 15%; tight monetary policy: 3-month T-bill yield at 16%

Inflation 1%, easy monetary policy: 3-month T-bill yield at 0.1%

Source: Haver Analytics, Gluskin Sheff

Page 30 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 54: HAVE BOND BULLS READ BERNANKE’S PIECE?

Source: Federal Reserve Board

CHART 55: ARGUABLY THE MOST COMPELLING ARGUMENT FOR EQUITIES
United States: S&P 500 Dividend Yield and Five-year T-note Yield
Yield Levels
(percent)
6

Spread
(basis points)
400 Widest since the late 1950s!

5
Five-year T-note Yield

200

0

4
-200

3

-400

2
S&P 500 Dividend Yield

-600

-800

S&P 500 Dividend Yield Five-year Treasury Yield Spread

1

-1,000

0
Jan/02 Jan/04 Jan/06 Jan/08 Jan/10 Jan/12

-1,200

'53 '57 '61 '65 '69 '73 '77 '81 '85 '89 '93 '97 '01 '05 '09 '13

Source: Haver Analytics, Gluskin Sheff

Page 31 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 56: DIVIDENDS — GROWTH TRUMPS YIELD
United States
S&P 500 Dividend per Share
(year-over-year percent change)
30.0

Dividend Payout Ratio
(percent)
70%

20.0

60%

10.0

Historical average
50%

0.0

40%
-10.0

-20.0

30%

-30.0

20%

Record lows! 1960 1970 1980 1990 2000 2010

1995

2000

2005

2010

1950

Source: Bank of America Merrill Lynch, Haver Analytics, Gluskin Sheff

CHART 57: JUNK BONDS AT 5% YIELD?
United States: Corporate Bond Spread
BB-B Rated Corporate Bond Yield
(percent)
19.5 17.0 14.5 12.0 9.5 7.0 4.5 '96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12

BB-B Rated Spread off Treasury Master
(basis points)
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 '96'97'98'99'00'01'02'03'04'05'06'07'08'09'10'11'12

Shaded regions represent periods of U.S. recession Source: Haver Analytics, Gluskin Sheff

Page 32 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 58: CORPORATE DEFAULT RATES MATCH STRONG BALANCE SHEET FUNDAMENTALS
United States: High Yield Corporate Bond Default Rates (percent)
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Jan/96

Historical Average

Jan/98

Jan/00

Jan/02

Jan/04

Jan/06

Jan/08

Jan/10

Jan/12

Shaded regions represent periods of U.S. recession Source: Barclays Capital, Gluskin Sheff

CHART 59: CORPORATE SECTOR FINANCES IN GOOD SHAPE
United States: Nonfarm Nonfinancial Corporate Business (percent)
Liquid Assets to Short-term Debt Ratio
60 55 50 45 40

Long-term Debt to Credit Market Debt Ratio
80 75 70 65

35 30 25

60 55

20 15 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10

50 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10

Source: Haver Analytics, Gluskin Sheff

Page 33 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

CHART 60: NEXT STRATEGY SHIFT: FROM S.I.R.P. TO H.I.R.P. — HEDGED INFLATION RISK PROTECTION
• Real estate • TIPS • Art/collectibles • Gold/silver • Banks • Consumer staples • Energy • Metals • Agriculture • Credit arbitrage • Long-short strategies • Volatility • Loonie, Aussie, Kiwi
Source: Gluskin Sheff

CHART 61: EQUITY SECTOR SELECTION IN A COST-PUSH STAGFLATION ENVIRONMENT
• Consumer staples • Consumer Discretionary • Utilities • Telecom • Commercial banks • Cable/Media • Oil & Gas — Exploration & Production /Refining/Energy Equipment & Services • Industrial Conglomerates / Electrical Power • Road & Railroads • Machinery • Airlines • Basic materials • Precious metals • Specialty chemicals • Paper packaging
Source: Gluskin Sheff

Page 34 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

OVERVIEW OF THEMES AND STRATEGIES

THEME Redeployment of Capital Income Orientation

STRATEGY/IDEA Companies which have deployed or have capacity (and a track record) to deploy excess capital to generate risk-adjusted returns which exceeds their cost of capital. Focus on reliable dividend growth and dividend yield; Being and staying ahead of the robust demographic (babyboomers aging) shift towards income oriented investments. Safety and Income at a Reasonable Price (S.I.R.P.). A focus on companies whose business model would benefit from a rising interest rate environment over the longer term; A steeper yield curve would also benefit banks as well; Focus on those that are at or near Basel III compliance, trade below book and will see NIM expansion from rising rates.

SECTOR/ASSET CLASS Special situations

Income-oriented stocks with the ability to sustain and grow dividends

Financials

Insurance companies

Banks

Canadian credit

Although Verizon is certainly a threat to the incumbent firms in Credit of Canadian telecom companies Canada, we think this is a bigger equity/earnings risk and still feel comfortable with these companies from a credit perspective; Even when the credit markets were strong and spreads were Canadian bank deposit notes moving materially tighter, deposit notes have been the major laggard in Canadian credit so far in 2013. There are mega-billions of dollars worth of projects awaiting approval in North America for the distribution of natural gas both for domestic consumption and export. The multi-year trend toward increasing gas consumption will benefit companies that have expertise in building natural gas infrastructure and liquefaction/gas-to-liquid technology. The profitability leverage for the likes of Ford and GM is considerable when the global automotive industry begins to improve. Engineering & Construction companies specialized in natural gas infrastructure

Energy Infrastructure

Auto Recovery

U.S. auto manufacturers Auto parts suppliers

European Domestic Demand Plays

The region is swinging back to positive growth for the first time in European Financials, Industrials, two years; Healthcare, Consumer Discretionary We favour western European Telecom names on the back of “less Western European Telecom Companies bad” results. Expectations remain extremely low for this group. Focus on those firms that benefit from the secular trend surrounding the portability of data and increased consumer usage of smartphones/tablets; Identify and invest in firms that benefit from cloud-based strategies that allow customers to be more efficient and realize cost savings. Focus on special situations that are not correlated with the economic cycle. Technology firms

Mobility/ Connectivity and IT Infrastructure

Cellular carriers/Tower companies

Non-Cyclical

Defense-aerospace Healthcare Dollar/Discount stores

Page 35 of 38

David A. Rosenberg Chief Economist & Strategist research@gluskinsheff.com

August 14, 2013 Special Report

Capital Preservation

Lock in high-quality corporate bond spreads in non-cyclical sectors; Minimize volatility via alternative strategies such as long/short equity strategies. Invest in hard “strategic” assets; Focus on burgeoning middle class in emerging markets.

Income-producing equities, preferreds and bonds Credit of Canadian Banks, Retailers, Insurance companies Commercial aerospace companies Emerging market consumer stocks

Other

Updated: August 14, 2013 Source: Gluskin Sheff

Page 36 of 38

Gluskin Sheff at a Glance
Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused on high net worth private clients and institutional investors, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest level of personalized client service.
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As of June 30, 2013, the Firm managed assets of $6.2 billion. The minimum investment required to establish a client relationship with the Firm is $3 million. Gluskin Sheff is a publicly traded corporation on the Toronto Stock Exchange (symbol: GS) and remains 46% owned by its senior management and employees. We have public company accountability and governance with a private company commitment to innovation and service.

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For Gluskin Sheff, delivering outstanding client service is as fundamental as delivering strong investment results. Our clients are unique, and so are their needs. This is why we offer customized investment plans to suit each client’s specific objectives and risk profile. Our success in developing lasting client relationships is founded on shared values, a thorough understanding of our clients’ goals and a keen desire to earn their trust and confidence.

Our investment interests are directly aligned with those of our clients, as Gluskin Sheff’s management and employees are collectively the largest client of the Firm’s investment portfolios.

LEADING
Our team is an exemplary group of investment professionals deep in talent, ideas and experience with the industry’s top leaders in risk management and client service – all with the objective of providing strong risk-adjusted returns and the highest level of personalized client service.

ALIGNED
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$1 million invested in our flagship GS+A Premium Income Portfolio in 2001 (its inception date) would have grown to approximately $4.5 million2 on June 30, 2013 versus $2.1 million for the S&P/TSX Total Return Index3 over the same period.

INNOVATIVE
Throughout our history we have been TM Stubbornly unconventional , consistently pursuing innovative approaches to wealth management for our clients. Today, we offer a diverse platform of investment strategies, including Canadian, U.S. and international equity strategies, alternative strategies and fixed income strategies.

PROVEN

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$1 million invested in our flagship GS+A Premium Income Portfolio in 2001 (its inception date) would have grown to 2 approximately $4.5 million on June 30, 2013 versus $2.1 million for the S&P/TSX 3 Total Return Index over the same period. Similarly, many of our other longstanding investment strategies have outperformed their relevant benchmarks.
For further information, please contact research@gluskinsheff.com

Notes:
1. Past returns are not necessarily indicative of future performance. Rates of return are those of the composite of segregated Premium Income portfolios and are presented net of fees and expenses and assume reinvestment of all income. Portfolios with significant client restrictions which would potentially achieve returns that are not reflective of the manager’s portfolio returns are excluded from the composite. Returns of the pooled fund versions of the GS+A Premium Income portfolio are not included in the composite. 2. Investment amounts are presented to reflect the actual return of the composite of segregated Premium Income portfolios and are presented net of fees and expenses. 3. The S&P/TSX Total Return Index calculation is based on the securities included in the S&P/TSX Composite and includes dividends and rights distributions. This index includes only Canadian securities.

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IMPORTANT DISCLOSURES
Copyright 2013 Gluskin Sheff + Associates Inc. (“Gluskin Sheff”). All rights reserved. This report may provide information, commentary and discussion of issues relating to the state of the economy and the capital markets. All opinions, projections and estimates constitute the judgment of the author as of the date of the report and are subject to change without notice. Gluskin Sheff is under no obligation to update this report and readers should therefore assume that Gluskin Sheff will not update any fact, circumstance or opinion contained in this report. The content of this report is provided for discussion purposes only. Any forward looking statements or forecasts included in the content are based on assumptions derived from historical results and trends. Actual results may vary from any such statements or forecasts. 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