A economia pós-estímulo

O ano de 2012 marca uma transição de abandono do estímulo monetário e fscal extremo em nível global, conforme ilustrado
pelo pôr do sol. Em sua maior parte, a recuperação do setor privado terá de acontecer por conta própria a partir daqui. As
notícias são melhores nos EUA do que na Europa ou no Japão. A Ásia está em expansão, mas o aperto nas taxas de juros está
trazendo o crescimento de volta a patamares mais realistas. A altura de cada árvore mostra a recuperação em cada variável
relativa a sua queda durante a recessão. Mais informações no interior da publicação.
A economia pós-estímulo
O ano de 2012 marca uma transição de abandono do estímulo monetário e fscal extremo em nível global, conforme ilustrado
pelo pôr do sol. Em sua maior parte, a recuperação do setor privado terá de acontecer por conta própria a partir daqui. As
notícias são melhores nos EUA do que na Europa ou no Japão. A Ásia está em expansão, mas o aperto nas taxas de juros está
trazendo o crescimento de volta a patamares mais realistas. A altura de cada árvore mostra a recuperação em cada variável
relativa a sua queda durante a recessão. Mais informações no interior da publicação.

The post-stimulus economy
2012 marks a transition away from extreme global monetary and fscal stimulus, as illustrated by the setting sun. The
private sector recovery will mostly have to make it on its own from here. The news is better in the US than in Europe
or Japan. Asia is expanding, but tighter policy rates are bringing growth back to earth. The height of each tree shows
the recovery in each variable relative to its decline during the recession. See inside cover for more details.
EYE ON THE MARKET
OUTLOOK 2012
J.P. Morgan Private Bank
In the wake of the recession, a lot of stimulus was added to the global economy. The level of global policy
rates and fscal defcits defnes the trajectory of the sun. Fiscal tightening is scheduled almost everywhere
for 2012. On monetary policy, while infation appears to be cresting, this more often prevents planned policy
rate increases, rather than ushering in another period of substantial easing. More monetary policy responses
in Europe are likely, but they are mostly intended to prevent a collapse of the Monetary Union as banks and
governments de-lever.
The height of each tree shows how much each variable has recovered, relative to its prior decline. For example,
S&P profts, high-end retail and German GDP have now recovered almost all of what they lost during the
recession, while US home prices and European peripheral employment are still close to their post-recession
lows. The three comparison points for computing the recovery are the pre-cycle peak; the lowest level of the last
four years; and the current value. One exception: US household balance sheet repair is computed as the decline
in real per household debt from the peak.
Commodity countries like Canada, Brazil and Australia, whose GDP in aggregate is much larger than Southern
Europe, recovered rapidly. The speedboat is Asia, whose production and output sufered only minor declines,
and which have long since eclipsed pre-recession levels. However, credit and policy rate tightening have caused
a slowdown to the Asian speedboat and the rest of the emerging world, compared to the booming growth rates
of 2010. The defated volleyball is the European Economic and Monetary Union. See sources and defnitions at
the end of this publication.
How do you summarize a year that was in many respects indefnable? On one
hand, the European sovereign debt crisis, contracting housing markets and high
unemployment weighed heavy on all of our minds. But at the same time, record
corporate profts and strong emerging markets growth left reason for optimism.
So rather than look back, we’d like to look ahead. Because if there’s one thing that
we’ve learned from the past few years, it’s that while we can’t predict the future,
we can certainly help you prepare for it.
To help guide you in the coming year, our Chief Investment Ofcer Michael
Cembalest has spent the past several months working with our investment
leadership across Asset Management worldwide to build a comprehensive view
of the macroeconomic landscape. In doing so, we’ve uncovered some potentially
exciting investment opportunities, as well as some areas where we see reason to
proceed with caution.
Sharing these perspectives and opportunities is part of our deep commitment to
you and what we focus on each and every day. We are grateful for your continued
trust and confdence, and look forward to working with you in 2011.
Most sincerely,
MARY CALLAHAN ERDOES
Chief Executive Ofcer
J.P. Morgan Asset Management
As we turn the page and head into a new year, it is important for us to refect
on the current landscape, and to give you our best thinking on where the world
is heading.
The past twelve months were flled with unprecedented events. We witnessed
Arab Spring uprisings and subsequent governmental changes, a devastating
earthquake and tsunami in Japan, the frst ever downgrade of U.S. debt, a
continuously evolving European sovereign debt crisis, and the formal conclusion
of a near decade-long confict in Iraq.
Amidst such transformational events around the world, we recognize that our job
of sifting through all of this and fnding appropriate investment opportunities
for the future is even more important. Our Chief Investment Ofcer Michael
Cembalest, in partnership with our investment teams across the world, has
created an insightful framework for understanding and assessing the global
opportunities and risks that we can expect in the coming year.
I hope you enjoy the clever cover picture Michael commissioned to capture
on one page the progress that has been made (or lack thereof) since the global
recession of 2008–2009.
We wish you a healthy and happy new year. And most importantly, we thank you
for your continued trust and confdence in J.P. Morgan.
Most sincerely,
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
1
2012 Outlook
1
January J, 20J2
The Post-Stimulus Economy isn’t all bad (there are as many tall trees on the cover as short ones), but its risks and uncertainties
have not declined that much from a year ago. One historical frame of reference we have been using is shown in the first chart: a
prior period of monetary and fiscal uncertainty during which markets were volatile, and sideways. The bull market began in
1982 when there was a clear path forward, even though a lot of the prior mess hadn’t been completely dealt with. Where are we
this time in terms of monetary and fiscal uncertainty? While fiscal deficits are being reined in and household balance sheets are
healing, the long-term debt questions of the West remain mostly unanswered as of December 2011 (c2, c3).
With fiscal stimulus coming to an end and with only modest monetary policy easing in the pipeline (see inside cover for more
details), the private sector will increasingly have to make it on its own. The US is showing some resilience (c4), while
Europe and Asia are showing more signs of a slowdown. The big issue for 2012 will be how deep the European recession turns
out to be. Prior sovereign debt crises were almost always solved by a combination of currency devaluation, higher growth and
aggressive monetary easing (c5). In contrast, Europe is taking the path of most resistance: no growth, no devaluation, lots of
austerity and the decision to turn the ECB into a Bad Bank repository.
Equity markets are aware of this, priced as cheaply as they have been in decades (c6). Even assuming a 15% earnings
decline*, the S&P 500 would still be priced at the cheap end of history. Factoring in valuation, volatility and the risks (both
known and unknown), our equity weightings are modestly lower than normal; the US is our largest regional position, and we
remain very underweight Europe. In this document, we walk through our views on Europe, the US and Asia, and our
investment priorities for 2012. It’s a narrative in pictures; when many things are at their widest extremes in decades (equity
valuations, government debt, central bank balance sheets, depressed labor incomes, housing inventory, etc.), pictures are better
than words. In the appendix, some thoughts on Iran, and a history of European austerity and its connection to social unrest.
On the December EU summit. The European debt bubble will be unwound more slowly given the decision by the ECB and
member central banks to finance just about every asset held by EU banks. Bilateral lending facilities for sovereigns may also be
expanded if necessary. The risk of a 2012 Europe meltdown may have melted, but what remains is a slow burn from a
recession, a credit contraction and investors possibly selling all they’ve got to the ECB and other non-economic buyers.
Michael Cembalest
Chief Investment Officer
* In Q4 2011, the percent of negative S&P 500 earnings pre-announcements matched its 2001 and 2008 peak. Another sign:
companies reporting before Alcoa beat consensus earnings for the last 9 quarters, while in Q4, they trailed estimates by 2%.
300
400
500
600
700
800
20
40
60
80
100
120
140
160
180
1972 1974 1976 1978 1980 1982
(c1) 1970s post-recovery equity
market wilderness
S&P 500 level Germany DAX level
Period of extreme
monetary and fiscal
uncertainty
Bull market
begins
30%
40%
50%
60%
70%
80%
90%
100%
110%
1970 1976 1982 1988 1994 2000 2006 2012
(c2) OECD debt levels
Percent of GDP, gross
30%
32%
34%
36%
38%
40%
42%
44%
46%
1970 1976 1982 1988 1994 2000 2006 2012
(c3) OECD budget deficits
Percent of GDP
Public revenues
Public expenditure
30
35
40
45
50
55
60
65
2007 2008 2009 2010 2011
(c4) Global manufacturing surveys
Purchasing Managers Index, sa
Euro area
US
Asia
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
5% 35% 65% 95%
Currency Devaluation, %
G
D
P

G
r
o
w
t
h
,
%
(c5) Fiscal adjustments, then & now
Prior
European
and Latin
adjustments
1975-2000
Europe
today
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1956 1965 1974 1983 1992 2001 2010
(c6) Real S&P 500 earnings yield
Trailing earnings yield less core CPI
As of
12/16/11
Assuming a 15%
decline in earnings
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
2012 Outlook
2
January J, 20J2
EUROPE: soul-searching into a recession
A year ago, we noted that Jacques Delors (a principal architect of the Euro) said that Europe needed “to find its soul”. As of the
time of this writing, they are still looking for it. In Delors’ latest interview, he conceded that the Euro was flawed from the start.
One of our most frequently used charts (c7) shows how: look at the gap in industrial production between Germany and Italy,
which began like clockwork with the European Monetary Union. In prior notes, we highlighted how European North-South
disparities in growth and employment have never been larger than they are now, even during the era of frequent devaluation and
inflation in Southern Europe. A project designed to foster integration has ended up jeopardizing it.
I will avoid the endless diagnoses of the problems, and skip to the endgame: a mid-flight redesign of the Euro since markets
have lost confidence in it (c8). While Greece, Ireland and Portugal are wards of the state, 2012 borrowing needs of larger
countries are in question as well (c9). In Q1 2012 alone, Italy must issue 112 billion in bills and bonds. The ECB balance sheet
(c10) may have to grow by 1 trillion to support sovereigns (c11) and under-capitalized, under-reserved banks (c12, c13), despite
opposition from Germany
1
. This is not just a sovereign/banking crisis, as noted by the rise in corporate debt, particularly in
Spain and Portugal (c14). Chart c5 shows that external devaluation is the road typically taken. Europe is taking the internal
devaluation route, but so far, Ireland is the only country that has made progress (c15). As for Ireland, we’d be more optimistic if
it weren’t for a crippling 140% debt to GNP ratio, a consequence of its decision to bail out EU depositors in Irish banks.

1
The boy stamping his feet in the ECB chart is from Die Geschichte vom Suppen-Kaspar (Struwwelpeter).
70
80
90
100
110
120
130
140
1982 1986 1990 1994 1998 2002 2006 2010
(c7) Death in Venice
Industrial Production Index, 1998 = 100, sa
Italy
Germany
Euro exchange
rate fixed
2.5%
3.5%
4.5%
5.5%
6.5%
7.5%
Jan-10 Jun-10 Nov-10 Apr-11 Sep-11
(c8) Sovereign 10-year yields
Percent
Belgium
Spain
Italy
France
0%
5%
10%
15%
20%
25%
30%
France Italy Spain
Maturing debt and interest
Primary deficit
(c9) Maturing debt, interest due and
primary deficits in 2012, Percent of GDP
€355bn
€327bn
€203bn
5%
10%
15%
20%
25%
30%
35%
2007 2008 2009 2010 2011
(c10) Central bank balance sheets
Percent of GDP
US
ECB
UK
Japan
ECB plus €1 trillion
20%
40%
60%
80%
100%
120%
140%
160%
1861 1886 1911 1936 1961 1986 2011
(c11) Italian debt/GDP, Total gross
general government debt/GDP, percent
WW I
WW II
0x
1x
2x
3x
4x
5x
6x
7x
U
S
P
O
L
I
T
G
R
G
E
R
B
E
F
R
S
P
A
T
D
K
U
K
I
R
L
(c12) Europe: bigger banks, bigger
problems, Liabilities, multiple of GDP
Foreign banks
Domestic banks
0%
1%
2%
3%
4%
5%
USbanks EUbanks
(c13) Loan loss provisions on
performing credit loans, Percent
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
S
P
B
E
P
R
T
U
K
F
R
I
T
D
K
N
O F
I
A
T
G
R
U
S
G
E
R
A
U
S
W
E
C
A
J
P
N
N
L
(c14) Change in non-financial corp.
debt from 2000-2010, Percent of GDP
90
95
100
105
110
115
120
125
130
135
140
2000 2002 2004 2006 2009 2011
(c15) Long road to convergence
Unit labor cost, index, Q1 2000 = 100, sa
Spain
Italy
Germany
France
Ireland
2
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
3
2012 Outlook
3
January J, 20J2
The irony of Italy in the eye of the storm is that since 1991, its primary budget has been in surplus (c16). However, Italy has no
choice given its debt burden of 1.9 trillion Euros (c11), a by-product of its 1980’s fiscal crises. Italy has paid a price for this
austerity (and its low productivity), generating almost the lowest growth rate in the OECD over the last 20 years, ahead of only
Japan (c17). It’s going to take a lot of work to convince markets that Italy is solvent, and that its debt is declining. We don’t
think it is: c18 shows an optimistic and pessimistic case, although neither represents possible extremes. We assume near-term
funding costs of ~6%, which as Italian debt matures, bring its overall average cost of debt from 3.9% to 4.4% by 2014.
Will Maastricht 2.0 “work”, promising deficit limits that turn Italy and Spain into a Mediterranean Germany?
• Germany’s long-term plan appears to be: a heavy dose of austerity to reduce sovereign debt trajectories; commitments to run
German fiscal policy; a Franco-German governance framework to enforce it; after all of that, a lot more help from the ECB; a
lower Euro; and then, eventually, some kind of federalism (Eurobonds or other quasi-permanent transfers).
• It’s a risky strategy given the risk of a prolonged recession, superimposed on a region with 20 trillion in sovereign and
financial sector debt outstanding (c19). Spain’s economy, for example, is in free fall. See Appendix A for charts on how bad
things are in Spain, and a history of austerity and unrest in Europe over the last century.
• It’s not clear that the only difference between Germany and Italy/Spain is a slate of structural reforms. Even if reforms are
put in motion, they have a short-term growth cost, particularly when applied to labor markets (c20). So far, Italy’s proposed
adjustment is based more on higher taxes than lower spending; there has been less of a focus on addressing Italy’s yawning
productivity gaps vs. Germany, which are also noticeable in France (c21). On the matter of France, it is difficult to believe that it
will live by a 0.5% structural budget deficit limit; as shown a couple of weeks ago, it flies in the face of French budgetary history.
• Investors are unconvinced: in 2011, US money market funds cut exposure to EU banks in half, and dollar bond issuance by EU
banks fell by 70%. Stress tests applied to EU banks, whose gross leverage is 26:1, are seen by many investors as unrealistic (e.g.,
the latest round stressed sovereign debt, but not household or corporate debt). As the EFSF, the IMF and other non-economic
buyers increase exposure, private investors may see this as an opportunity to exit (see Appendix C for some history).
• Europe will try to finance budget deficits through the use of bilateral and ECB facilities. But they don’t address the region’s large
current account deficits which finance domestic consumption, particularly in France, Italy and Spain.
• A lot of master plans look good on paper; so did Maastricht 1.0. Our sense is that Germany and other AAA countries will not
be able or willing to bear the ultimate cost
2
. If so, Mr. Delors will have to look for Europe’s soul someplace other than Berlin.

2
Debt to GDP levels in France (85%) and Germany (81%) are already elevated. Based on estimates of growth and gov’t deficits, the
German ratio is projected to decline, while the French one peaks at 87% in 2014. After including pro rata shares of existing and future
bilateral guarantees, assumed guarantees of Central Bank SMP purchases and risk of deficit slippage, both ratios rise well over 90%.
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
1970 1977 1984 1991 1998 2005 2012
(c16) Italian primary balance
Surplus/deficit before interest, % of GDP
Cyclically
adjusted
As reported
0%
1%
2%
3%
4%
5%
6%
7%
S
G
P
K
O
R
T
W
I
R
L
H
K
A
U
N
Z
C
A
U
S
N
O
I
C
E
F
I
S
P
S
W
E
N
L
U
K
A
T
G
R
B
E
D
K
P
R
T
F
R
S
W
Z
G
E
R
I
T
J
P
N
(c17) 20-year growth rates, 1991-2011
Percent
Italy
116%
119%
122%
125%
128%
131%
134%
2009 2010 2011 2012 2013 2014
(c18) Can Italy's debt stabilize?
Government debt, percent of GDP
0pt|m|st|c case:
Rea| C0P of 0.57|0.57
Pr|mary ba|ance: 2.ô7|4.17
Pess|m|st|c case:
Rea| C0P of -1.57|-0.57
Pr|mary ba|ance:
1.37|2.27
5.0
6.5
8.0
9.5
11.0
12.5
14.0
2001 2003 2005 2007 2009 2011
(c19) Outstanding debt in Euro Area
Trillions, EUR
Financial
corporations
General
government
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
0 3 6 9 12
(c20) Growth response to structural
reforms, Cumulative percent change in
real GDP per capita
Tax Reform
Labor Reform
Financial
Reform
Trade Reform
Years
39%
44%
49%
54%
59%
64%
1970 1978 1986 1994 2002 2010
(c21) Vive la difference!
Real exports, France as a percent of Germany
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
2012 Outlook
4
January J, 20J2
UNITED STATES: some decoupling from Europe and Asia, and the kindness of strangers
The US has generated better than expected news recently, including surveys of manufacturing (c22), light truck sales, consumer
spending, etc. Household balance sheets continue to heal, noted by the decline in credit card delinquency rates (c23). But the
strong spending data is a bit of a mystery. Some of it can be explained by the decline in debt service (rather than debt levels;
c24). But housing isn’t contributing much of a boost, given negative pricing trends and massive shadow inventory (c25).
There’s also the question of how much spending can rise when disposable income is weak (c26); the income measure below
includes government transfers, and would look much weaker without them (c57 vs. c58). Perhaps the fact that the wealthiest
10% account for 30%-40% of spending explains its resilience. It looks like parts of the labor market are recovering (c27); if job
losses in construction, government and finance stop getting worse, the jobs picture would look much better. Labor incomes are
at multi-decade lows relative to corporate sales and GDP, but prospects for the large number of unemployed may be getting
better on the margin, based on jobless claims, manpower surveys, the household survey, and a survey of small business (NFIB).
This year’s 8% jump in capital spending (c28) was not a surprise. Since 2009 was the first year since 1932 in which the net
capital stock declined (c29), the rise was catch-up for a period of underinvestment. We have seen conflicting surveys regarding
capex intentions for 2012, with some higher (Citi) and some lower (ISM). We expect a positive contribution from the business
sector in 2012, and an economy-wide growth rate of ~2.25%. Commercial and industrial loan growth has been rising (c30),
offsetting continued weakness in residential loan demand, which supports some optimism on business spending for next year.
20
30
40
50
60
70
2001 2003 2005 2007 2009 2011
(c22) Some better news from
manufacturing surveys, Index, sa
New orders
Total
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2006 2007 2008 2009 2010 2011
(c23) Credit card delinquencies
Percent, 90+ days delinquent
10.5%
11.0%
11.5%
12.0%
12.5%
13.0%
13.5%
14.0%
60%
70%
80%
90%
100%
110%
120%
130%
140%
1980 1990 2000 2010
(c24) Household debt and debt
service, Percent of disposable income
Household
debt (LHS)
Debt service
(RHS)
0
1
2
3
4
5
6
7
8
9
2003 2005 2007 2009 2011
(c25) Shadow housing inventory
Millions of units
90+days
delinquent
Foreclosed
Bank-ownedreal estate
Existing
Current but underwater
-10%
-6%
-2%
2%
6%
10%
1990 1994 1998 2002 2006 2010
(c26) Spending vs. income
Percent change, QoQ, real, annualized, sa
Disposable income,
including govt. transfers
Consumption
91
92
93
94
95
96
97
98
99
100
33
34
35
36
37
38
39
1998 2001 2004 2007 2010
(c27) Bipolar labor market
Millions
Construction +
government +
finance (LHS)
Total excluding construction +
government + finance (RHS)
8
9
10
11
12
2003 2005 2007 2009 2011
(c28) Capital spending recovery
Billions of 2005 USD
-2%
0%
2%
4%
6%
8%
10%
'50 '60 '70 '80 '90 '00 '10
(c29) Capital stock
Percent change, YoY
Estimate for 2011
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2007 2008 2009 2010 2011
(c30) C&I loan growth
Percent change, YoY
4
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
5
2012 Outlook
5
January J, 20J2
The elephant in the room: US government debt
The failure of the Super Committee to agree to a deficit reduction plan cannot be dismissed by saying, “at least they will have
mandatory sequestered cuts instead”. The Super Committee was supposed to be the beginning of a process, not the end. If it
ends here, the government debt burden is not stabilized (c31), and another $5 trillion in deficit reduction over 10 years would
still be needed to reach the sustainable debt levels projected in the latest CBO estimate. The problem: almost all government
revenues are already spoken for through mandatory programs or interest (c32), and the 2012 budget deficit is still projected at
6%-8%. As a result, there is not that much “fiscal democracy” left, as described by Eugene Steuerle of Brookings, leaving most
members of Congress with little to do but fight over the scraps that remain. US gross debt to GDP passed 100% for only the
second time in its history last month (c33). The last time this happened, the US was fighting a two-front war and preparing a
land invasion of Japan (“Operation Downfall”). As Walt Kelly’s Pogo once said, “We have met the enemy, and he is us”.
An extension of the payroll tax cut that is not fully funded reduces the austerity burden next year (c34), and leaves the Federal
debt issue to be dealt with in the future. So far, the US Treasury has survived based on the kindness of strangers: foreign
central banks increasing their holdings (c35), and purchases by the Fed (c36). It pays to be the world’s reserve currency (c37),
which is helping prevent the kind of market revolt that sent European debt markets reeling. However, with the backdrop below,
I am reminded of the following remark from late MIT economist Rudiger Dornbusch: “Crisis takes a much longer time coming
than you think, and then it happens much faster than you would have thought.”

30%
40%
50%
60%
70%
80%
90%
100%
110%
2004 2007 2010 2013 2016 2019
(c31) Long-term debt scenarios
Net debt to GDP, percent
CBOAugust Baseline
Budget Control Act Phases 1 & 2
CBO June Alternative case
$5 trillion
gap
-10%
0%
10%
20%
30%
40%
50%
60%
70%
1962 1971 1980 1989 1998 2007 2016
(c32) Percent of gov't. revenue not
committed to mandatory spending
0%
20%
40%
60%
80%
100%
120%
1900 1922 1944 1966 1988 2010
(c33) The US reaches its Pogo
moment, Gross debt to GDP, percent
100%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
1963 1971 1979 1987 1995 2003 2011
(c34) Fiscal adj. in 2012, Change in
cyclically-adjusted fiscal deficit, % of GDP
Fiscal tightening
Fiscal easing
Assuming payroll tax cuts
&unemployment insurance
benefits are extended
5%
10%
15%
20%
25%
30%
35%
1994 1998 2002 2006 2010
(c35) Foreign holdings of US debt
Percent of total net debt outstanding
Official sector
Private sector
6%
8%
10%
12%
14%
16%
18%
1994 1998 2002 2006 2010
(c36) Fed holdings of US debt
Percent of total net debt outstanding
1400 1575 1750 1925 2100
Portugal
Spain
Netherl
France
Britain
US
(c37) Reserve currency status does
not last forever
Year
-18
-14
-10
-6
-2
2
6
10
14
18
1999 2003 2007 2011
(c38) Quarterly state tax revenue
growth, Percent change, YoY
Some good news for municipal bond
buyers: state tax revenues have picked
up after some tax rate increases, and
states have also been shrinking their
payrolls and capex plans to balance
budgets. This has a broader economic
cost, but in isolation, supports the
credit risk of many state and local
issuers, particularly general obligation
and essential service revenue bonds.
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
2012 Outlook
6
January J, 20J2
ASIA: finding out what growth looks like without all the stimulus
2011 should have been a good year for Asian financial assets; after all, Asia generated the best combination of real GDP growth
and corporate profits growth of the three major regions (c39). We had positioned for this, but were not rewarded for it, as Asian
equities underperformed. The first problem: Asia over-stimulated, bringing policy rates net of headline inflation to zero. While
the recovery in GDP growth was V-shaped, it also brought with it much higher inflation (c40). Blunt policy measures were then
needed to rein it in. China is one illustrative example: money supply growth had to fall by more than half (from 30% to 13%) in
order to bring inflation under control (c41). The good news is that inflation is now in retreat, with the latest reading close to 4%.
The rate of Chinese RMB appreciation will probably slow, as it did from July 2008 to July 2010 when growth slowed down.
The second problem is European bank deleveraging, which runs the risk of a credit contraction in Asia, as the region was the
primary beneficiary of the expansion in EU and UK bank balance sheets (c42). While organic growth in Asia is real, in places
like China, growth has become more reliant on more and more credit (c43). The impact of monetary tightening, credit
tightening and slower growth in Europe can be seen in the decline in Chinese exports and manufacturing surveys (c44).
We are still optimistic on the region for the long haul. Consumer spending in China is growing at a rapid pace: pay attention to
growth rates in spending, rather than its share of GDP (c45). The region has been running current account surpluses for years,
reducing sensitivity to external shocks (c46). Reduced financing from Europe will be felt, but can be made up by domestic
sources given high saving rates. We expect 2012 to be an improvement over 2011, even at lower projected growth rates (c47).
0%
2%
4%
6%
8%
10%
12%
14%
16%
Real GDP Earnings
(c39) 2011 real GDP and earnings
growth, Percent change, YoY
US
Dev.
Europe
Asia ex.
Japan
0%
1%
2%
3%
4%
5%
6%
7%
8%
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
2001 2003 2005 2007 2009 2011
(c40) Asia over-stimulated
Percent change, YoY
Headline CPI
(RHS)
Real GDP
(LHS)
-2%
0%
2%
4%
6%
8%
10%
10%
15%
20%
25%
30%
1998 2000 2003 2006 2009 2011
(c41) Chinese inflation comes down as
money supply tightens
%, YoY, lagging 6 months %, YoY
M2
(LHS)
CPI
(RHS)
100
200
300
400
500
600
700
800
900
1,000
2005 2006 2007 2008 2009 2010 2011
(c42) Bankenstein's Monster
Billions, USD
European
bank claims
on Asia ex.
Japan
US bank claims on
Asia ex. Japan
100%
120%
140%
160%
180%
200%
220%
240%
2002 2003 2005 2006 2008 2009 2011
(c43) Heavy reliance on credit, China's
society-wide credit as % of nominal GDP
40
42
44
46
48
50
52
54
56
58
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
2005 2007 2009 2011
(c44) Chinese exports & manufacturing
survey, Percent change, YoY Index, sa
Exports
(LHS)
PMI
(RHS)
32%
35%
38%
41%
44%
47%
50%
1993 1996 1999 2002 2005 2008
1,300
3,300
5,300
7,300
9,300
11,300
13,300
(c45) Chinese consumer: watch the
level, not the share, % of GDP Yuan
Household
consumption/GDP
(LHS)
Annual retail
sales per capita
(RHS)
-2%
0%
2%
4%
6%
1990 1993 1996 1999 2002 2005 2008 2011
(c46) Asia's current account balance
Percent of GDP
Asia ex.
China/Japan
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
1994 1997 2000 2003 2005 2008 2011
(c47) Asia ex. Japan real GDP growth
rates, Percent change, YoY
Historical
Consensus
forecast
IMF
forecast
6
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
7
2012 Outlook
7
January J, 20J2
INVESTMENTS
Concerns about the world’s imbalances have resulted in more idle cash than I have seen in 25 years. The first 3 charts below
look at some of it, parked in US commercial bank retail deposit accounts, central bank and sovereign wealth funds, and
corporate balance sheets. A related example: $700 billion in unspent leveraged buyout, real estate and venture capital
commitments as of Q3 2011. Measures of short interest and market sentiment also show extreme levels of pessimism. Putting
some investment capital to work today seems reasonable; the investments described below are where we are focusing in 2012.
On a portfolio basis, our equity weightings are below normal, for all the reasons explained in the prior sections.
Multinational equities, technology and equity income funds
The grids below show characteristics of select global and European multinational stocks. These companies have dividend yields
of 3%-5%, valuations at 10-11x 2012 earnings, and international revenue exposure. There are a lot of ways to gain exposure to
these companies, which we think should comprise a large part of any 2012 equity portfolio. On technology, the sector no longer
trades at any premium to the broad market. While growth expectations have come down in a world of deleveraging, the pricing
of technology stocks might be one of the cheapest options on a better outcome (c53). Stock selection is critical: over the last 4
years, return differentials between individual stocks have been greater in technology than healthcare, materials and financials.

Another part of our equity portfolio includes equity income funds. Dividend stocks have to be chosen carefully, since their P/Es
are high relative to history, particularly in the US utility and consumer staples sectors. The scope for dividend increases is rising
given corporate cash balances (c54). One preferred strategy focuses on companies with high dividend yields, but low dividend
payout ratios (c55); these companies have outperformed, perhaps due to the ability to reinvest in their core businesses.
3
4
5
6
7
8
9
2000 2002 2004 2006 2008 2010
(c48) US commercial bank excess
deposits, Trillions, USD
Deposits
Loans
0
1
2
3
4
5
6
7
8
'70 '80 '90 '00 '10
(c49) Foreign exchange reserves
Trillions, USD
Japan
Emerging Markets
4%
6%
8%
10%
12%
14%
1952 1960 1968 1976 1984 1992 2000 2008
(c50) US corporate cash balances
Cash and equivalents / tangible assets
Market Cap ($bn) 131.5
Forward P/E 11.0x
Dividend Yield 3.2%
Historical P/E 13.7x
% from 52-Week High -13%
% of Revenue Exposure
outside Home Country
69%
(c51) Global Multinationals
Average characteristics
Market Cap ($bn) 93.3
Forward P/E 9.8x
Dividend Yield 4.8%
Return on Equity 29%
Net Debt to EBITDA 0.7
% of Revenue Exposure
outside Europe
51%
(c52) Oversold European Multinationals
Average characteristics
10
20
30
40
50
60
70
1995 1998 2001 2004 2007 2010
(c53) Forward P/E of S&P 500 and
S&P 500 Tech Index, Multiples
S&P 500 Tech Index
S&P 500
5%
6%
7%
8%
9%
10%
11%
12%
13%
20%
30%
40%
50%
60%
70%
1988 1992 1996 2000 2004 2008
(c54) Scope for dividend increases
Percent
Payout ratio (LHS)
Cash to tangible
assets (RHS)
-50%
50%
150%
250%
350%
1990 1994 1998 2002 2006 2010
(c55) Companies that can afford high
dividends outperform, Total return
High dividend yield,
high payout
High dividend
yield, low payout
S&P 500
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
2012 Outlook
8
January J, 20J2
Equity valuations: low and likely to stay that way in 2012
Valuation multiples have fallen sharply from their historical averages (c56), on both a price-to-book and price-to-earnings basis.
However, we are not optimistic about multiple expansion until the imbalances of this cycle are reduced. One example of why:
consider where profitability has come from in the US. In contrast to prior cycles (c57), current cycle profits have been boosted
by very low labor compensation (c58). Given the fiscal, social and political issues this creates, it’s hard to pay a very high
multiple for this kind of profits boom. A resolution of the US long-term budget deficit would be very bullish for P/E multiples.
Europe: no appetite yet for a contrarian call, and looking for bank loan sales instead
A warning to skeptics like us: markets are underweight Europe, valuations are low (particularly banks, c59), and the larger
toolkit announced at the EU summit will slow the rate of deleveraging. However, our view is that while buying equities and
credit in the middle of a recession has proved fruitful for forward-looking investors (see October 21, 2009 EoTM for more
details), investing at the beginning of a recession rarely is. Secondly, while European bank valuations are low, they are not that
different from levels reached in prior banking crises (c60). A contrarian call for 2012 would be an overweight to European
equities. This is not a call we are ready to make (yet), and remain underweight Europe, and overweight the US.
Here’s what we are focused on instead: purchases of loans from deleveraging European banks, which rely way more on volatile,
wholesale funding
3
than their counterparts in the US or Japan (c61). Here are some recent transactions from our managers:
• Spain: performing consumer loans at a discount of 50%
• Netherlands: 7,200 performing consumer loans at 64 cents on the Euro, sold by a failing bank
• 2 billion Euros in non-performing commercial mortgage loans in the UK, Germany and 6 other countries at a 58% discount
• UK: performing residential mortgage loans at a 36% discount to par
To be clear, we do not have a view on when/if the constituency of the Eurozone might change. It is not clear that
anyone would have enough inside knowledge of Germany’s real breaking point to know; or even if Germany itself has
figured this out. Nor do we have a very strong view on the bilateral $-Euro pair for 2012. Our concerns are focused on
European equities and sovereign credit, which we believe may suffer more underperformance vs. other regions.

3
A recent Bridgewater Associates report estimated that European banks own around $4 trillion in dollar-denominated assets, and that
90% of these assets are funded on a wholesale basis (compared to their domestic Euro-denominated assets, which are funded 30% with
wholesale money). While the Fed recently lowered the cost of a dollar liquidity facility made available to EU banks, eventually, many
of these assets will probably migrate to other private sector owners.
US
JPN
GER
SP
UK
KOR
AU
CHN
HK
FR
8x
10x
12x
14x
16x
0.8 1.3 1.8 2.3 2.8
(c56) The men who fell to earth
P/E and P/B ratios vs. long-term averages
LT average
Current
Price to book value
P
r
i
c
e

t
o

f
o
r
w
a
r
d

e
a
r
n
i
n
g
s
-100
100
300
500
700
900
0 1 2 3 4 5 6 7 8 9 10 11
(c57) Past 5 recoveries
Billions of 2005 USD
Sales
Labor
compensation
Profits
Quarters since trough
-300
-100
100
300
500
700
900
0 1 2 3 4 5 6 7 8 9 10 11
(c58) Current recovery
Billions of 2005 USD
Sales
Labor compensation
Profits
Quarters since trough
0.3
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2007 2008 2009 2010 2011
(c59) European banks
Price-to-book ratio, Eurostoxx Banks Index
0.0
0.2
0.4
0.6
0.8
1.0
K
o
r
e
a

'
9
7
S
w
e
d
e
n

'
9
1
T
h
a
i
l
a
n
d

'
9
7
F
i
n
l
a
n
d

'
9
1
E
u
r
o
p
e

'
0
9
A
v
e
r
a
g
e
U
S

'
0
9
M
a
l
a
y
s
i
a

'
9
7
N
o
r
w
a
y

'
8
7
U
S

'
8
9
(c60) How bad can banks get in a
crisis? Trough price to tangible book
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Western
Europe
US Japan
Median
Weighted average
(c61) G-3 banking sector loan to
deposit ratios
8
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
9
2012 Outlook
9
January J, 20J2
Private mezzanine debt, US high yield and leveraged loans
Investment grade and high yield spreads rallied sharply from 2009 to 2011. However, these spreads masked the reality that
many companies did not have the same kind of access they did before the credit bubble burst. As a result, some issuers have
had to look to private credit markets for financing, particularly newer issuers finding it more difficult to issue in public markets.
As shown below (c62), private credit lending through “mezzanine” (subordinated) debt may offer substantial yields, cash
coupons, substantial debt service coverage, call protection and equity beneath the mezzanine positions. However, these returns
come at a price: private lending portfolios are illiquid, can be concentrated by sector, and are usually less diversified (20-30
positions) than high yield mutual funds.
US high yield bond prices fell sharply in the wake of the US downgrade by S&P in August (c63). Current prices imply default
rates of around 40% over a 5-year period. These implied default rates are above the losses experienced during the prior two
recessions (c64), but lower than what was priced in during March 2009. We see value in the high yield market for unleveraged
investors who can ride out the volatility. Leveraged loans, currently priced at a spread of around 6.5% over 3-month Libor, are
another area of focus, given the implicit (and admittedly remote) inflation hedge.
Two caveats on credit. First, while the supply/demand dynamic in credit looks good for 2012 and 2013 (when credit demand
from portfolio buyers is expected to substantially exceed credit supply), maturities pick up substantially in 2014 and beyond
(c65). Second, credit volatility and bid/offer ratios are higher now, as dealer inventories have declined (c66), a function of
regulatory and other industry changes.
Commercial real estate
The search for yield resulted in a recovery in “core” real estate prices, shown above as “major properties in major markets”
(c67). As a result, we have seen better value in the distressed sector, assuming of course that it can be priced right, and
diversified. Usually, distressed transactions require motivated sellers, such as undercapitalized regional US banks; healthy
banks looking to sell foreclosed real estate; sub-investment grade companies looking to raise cash by selling wholly owned real
estate; and REITs looking to scale back their geographical or sector footprint. One example: a portfolio of 60 suburban office
properties sold at roughly $108 psf (a 40% discount to replacement cost), for a 9.3% cap rate based on 84% occupancy.
Another example of distress (not for the faint of heart): a neglected Boston-area office building that’s only 48% occupied, sold
at $176 psf; that’s around 50% of replacement cost. The benefit of acquiring buildings at steep discounts to replacement cost:
there’s limited risk of new supply, and property owners can bid aggressively to attract tenants from other buildings.
(c62) Private credit fund characteristics
Equal-weighted averages
Corporate Comm. R/E
Yield to call 15.2% - 18.8% 12.7%
Yield to maturity 13.1% - 14.2% 12.6%
Cash coupon 8.6% - 10.4% 10.1%
Years to maturity 4.7 - 6.5 yrs 4.9 yrs
Debt / EBITDA 5.0x - 6.1x n/a
Estimated equity
cushion
23% - 42% 33%
Debt service
coverage
2.3x - 2.5x 1.2x
96
98
100
102
104
106
108
110
112
Jan-11 Apr-11 Jul-11 Oct-11
(c63) High yield vs. US government
bonds, Total return index, Q4 2010 =100
US High Yield
5-7 year
Treasuries
0%
10%
20%
30%
40%
50%
60%
70%
80%
(c64) Market implied 5-year cumulative
default rates, Percent, assuming 30%
recovery and 0% break-even return
Worst default rate for
entire HY universe
(1989-94 and 1999-04)
March 2009 Current
0
50
100
150
200
250
300
'12 '13 '14 '15 '16 '17 '18 '19 '20+
(c65) High yield loan and bond
maturities, Billions, USD
High yield
bonds
Leveraged loans
50
100
150
200
250
2003 2005 2006 2008 2009 2011
(c66) Primary dealer corporate bond
positions, Billions, USD
-65%
-55%
-45%
-35%
-25%
-15%
-5%
5%
Oct-07 Jan-09 Apr-10 Jul-11
(c67) US commercial real estate
Percent of decline since peak
Major properties
in major markets
Overall
properties
Distressed
properties
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
2012 Outlook
10
January J, 20J2
Oil and Gas investments
In November, we wrote our annual Thanksgiving piece on the outlook for conventional and renewable energy sources, and
related investments. It’s worth a read if you are interested in the subject matter; it was based on a day we spent with Vaclav
Smil and his 2010 book, “Energy Myths and Realities”. One trend we noted towards the end of the piece is that projections for
global liquids production and US dry gas production both assume substantial contributions from non-conventional sources (c69,
c70). This creates opportunities across the entire value chain, including exploration and production, distribution and services.
On natural gas, new finds have been rewarding, even with natural gas prices at current low levels (c68), since large major oil
and gas companies aggregate proven reserves, and are willing to pay a premium for them given their long-term horizons. On
crude oil, many of our investments focus on so-called “renaissance” plays, which entail older, mostly depleted fields which
majors sell as they reshuffle their reserve mix to higher-growth assets. Service companies include firms providing enhanced oil
recovery, fracking and waste-water management. Other servicing investments are related to deep-sea fields recently discovered
off the coast of Brazil. We have discussed these projects before (EoTM September 2009). The sub-salt fields in Brazil lie 7
kilometers below the surface of the ocean, beneath a thick salt canopy in the Lower Tertiary region. Oil extraction can be quite
complicated due to the low permeability and porosity of the salt canopy, and tar pockets. Our investments in this region are
linked to providing services, rather than owning exploration and production assets themselves.
Gold, macro hedge funds and oil
Gold has been correlated to lots of things (c71): credit spreads on European sovereigns (directly); the yield on inflation
protected bonds (inversely) and the highly liquid money supply (directly). Gold markets are volatile, have attracted a lot of hot
money that needs to book profits from time to time, and are always at risk of Central Banks unloading supply. However, until
the variables mentioned (sovereign spreads, the monetary base and inflation fears) move back to where they started, we would
not sell gold here. Last year we wrote that we expected gold to be volatile in 2011, but end the year higher than it began. We
have the same view for 2012.
We generally use hedge funds as a
complement to underweight positions
in equities. One of the more successful
strategies involves macro hedge
funds. As shown (c72), individual
macro hedge funds generate a lot of
volatility. When grouped (even
randomly) into pods of 5 funds, low
correlation tends to reduce return, but
reduce volatility even more. That’s a
tradeoff we see as sensible. As for oil
markets, we are expecting below-trend
oil demand growth in 2012 given the
recession in Europe and slower GDP growth in Asia in the first half of the year, but still an increase in oil demand overall. As
inflation comes off the boil in Asia, we expect oil demand to pick up later in the year. Any supply increases from Libya and
Iraq might be offset by Gulf countries returning to pre-Libyan war production levels; since July 2010, Kuwait, Saudi Arabia and
the UAE increased production by 2 million barrels per day. The wild card for oil markets in 2012 is Iran and its continuing
quest to enrich uranium (see Appendix B). Bottom line: any 10%+ declines in oil prices would represent good value.
0
2
4
6
8
10
12
14
16
1999 2001 2003 2005 2007 2009 2011
(c68) Natural gas spot price
USD/mmBtu
0
20
40
60
80
100
120
1990 2000 2010 2020 2030
(c69) Global liquids production
Million barrels per day
OPEC
Conventional
Unconventional
Non-OPEC
Conventional
History Projections
0
5
10
15
20
25
30
1990 2000 2010 2020 2030
(c70) US dry gas production
Trillion cubic feet per year
History Projections
Shale gas
Net imports
Alaska
Associated with oil
Tight gas
Non-associated
offshore
Non-associated onshore
Coalbed methane
-20%
-10%
0%
10%
20%
30%
40%
0% 25% 50% 75%
(c72) Macro hedge funds require
diversification, 5-yr annualized return
Volatility
Indiv. funds
5 random funds
Jan-09 Dec-09 Nov-10 Oct-11
(c71) Gold is correlated to everything
Gold price
($ / ounce)
10y TIPS yield
(Inverted, %)
Western Europe
Sovereign 5y CDS
spread (Bps)
Highly liquid
money supply ($)
10
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
2012 Outlook
11
January J, 20J2
[Appendix A] The pain in Spain, and a history of European austerity and social unrest
Other than exports (c78), the news in Spain is very downbeat. If there are socioeconomic limits to how much austerity a country
can take in order to remain in a currency union, we are likely to find out in Spain, where unemployment is 23%, youth
unemployment is over 40%, and there are large budget deficit and current account deficit adjustments still to come.
Austerity and Unrest. Austerity sounds straightforward as a policy, until the consequences bite. It remains unclear that the road
Europe is taking is less costly in the long run, in economic, political and social terms. The history of Europe over the last 100
years shows that austerity can have severe consequences and outcomes. A paper from the Centre for Economic Policy Research
looks at the unrest that resulted from austerity in 32 European countries since 1919
4
. They found a very clear pattern of
rising demonstrations, riots and strikes (and worse) after expenditure cuts took place (c79). The authors tested to see if
results varied with ethnic fragmentation, inflation, penetration of mass media and the quality of government institutions; they
did not. Results are also consistent across time, covering interwar and postwar periods. The independent variable that did
result in more unrest: higher levels of government debt in the first place.
Compounding the problem is the way some decisions are
being taken, which may reinforce perceptions of a “democratic
deficit” at the EU level, an issue highlighted by Germany’s
Constitutional Court. It remains to be seen if Europe can
sustain cohesion around its path of most resistance. One sign
of rising tensions: the following (staggering) comment by the
head of the Bank of France: "A downgrade does not appear to
me to be justified when considering economic fundamentals,"
Noyer said. "Otherwise, they should start by downgrading
Britain which has more deficits, as much debt, more inflation,
less growth than us and where credit is slumping." At a time
of increasing budgetary pressures and declining growth, I
suppose there are limits to European solidarity.

4
“Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2008”, Ponticelli and Voth, International Macroeconomics
and Economic History Initiative, CEPR, December 2011.
25
30
35
40
45
50
55
60
65
2000 2002 2004 2006 2008 2010
(c73) Spanish services activity survey
Purchasing Managers Index, sa
7%
10%
13%
16%
19%
22%
1983 1988 1993 1998 2003 2008
(c74) Spanish unemployment rate
Percent
70
75
80
85
90
95
100
105
2007 2008 2009 2010 2011
(c75) Spanish industrial production
Index, January 2007=100
15
20
25
30
35
40
45
50
55
60
1973 1978 1983 1988 1993 1998 2003 2008
(c76) Spanish cement consumption
Millions, tons
85
90
95
100
105
110
115
2003 2005 2007 2009 2011
(c77) Spanish retail sales
Index, January 2003 =100
-16%
-12%
-8%
-4%
0%
4%
8%
12%
16%
2000 2002 2004 2006 2008 2010
(c78) Spanish exports
Percent change, YoY
0
0.5
1
1.5
(c79) Austerity and unrest in Europe, 1919 - 2008
Number of incidents per country per year
Demonstrations Riots General strikes
Measures of instability
Expenditure increases
Expenditure reduction >1%
Expenditure reduction >2%
Expenditure reduction >3%
Expenditure reduction >5%
11
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
2012 Outlook
12
January J, 20J2
[Appendix B] Learning to live with a nuclear Iran
Investors have to factor in more than just finance and economics. As we head into 2012, oil markets are at risk from ongoing
issues surrounding Iran’s quest to enrich uranium. Here are a few things to keep in mind regarding this issue:
• The International Atomic Energy Agency now believes that Iran has undertaken most steps necessary to design,
manufacture, test and deliver a nuclear weapon, including the modification of a ballistic missile to accommodate a
nuclear payload, and computer modeling of the process to compress and detonate enriched uranium. Joschka Fischer,
Germany’s foreign minister and vice chancellor from 1998 to 2005, noted in a November article that Iran only has one
civilian nuclear reactor (fuel rods supplied by Russia), and that the Iranian technology being developed cannot be used in it.
• Iran may be motivated by what happened elsewhere in the Gulf. After the NATO intervention in Libya, Ayatollah
Khamenei gave a speech saying that Ghaddafi’s mistake was giving up his nuclear program, as it made him vulnerable to
outside intervention. This reduces the chances of a deal whereby Iran agrees to meaningful compromises.
• Nevertheless, the likelihood of a US military strike appears low. Last month, Secretary of Defense Panetta reiterated
the position of prior Defense Secretary Gates that an attack on Iran would be difficult, citing “unintended consequences”.
Capitol Hill has been more hawkish, but there appears to be considerable resistance in the intelligence and military
establishments against an Iranian attack. For more context around the Iran hawks and doves within the US political and
military establishment, and the history of National Intelligence Estimates which claim that Iran has not yet moved towards
weaponization, see “The domestic politics of America’s response to Iran’s nuclear programme”, Cambridge Review of
International Affairs, Ido Oren, December 2011. According to sources we spoke with, the world might only have a few
weeks to respond if Iran moves towards weaponization, a process that could be signaled by banning IAEA inspectors, or
changes in inventory levels of uranium enriched to 3.5% or 20% (90% is needed for weapons). The time required to enrich
uranium from 20% to 90% is much shorter than the time required to enrich uranium from 0% to 20%
5
; it is not linear.
• There have been some successes through unattributed covert operations to slow down Iran’s progress. David
Albright at the Institute for Science and International Security walked me through the nuances of the Stuxnet computer virus
that apparently wreaked havoc with vibration sensors, pressure gauges and frequency converters at one of Iran’s centrifuge
facilities. A more recent virus (Duqu) appears designed to gather intelligence, perhaps in preparation for a future operation.
However, there may be limits to what can be accomplished, as supply chains and security procedures are tightened.
• If there were circumstances that resulted in Iran deciding to cease oil exports to the OECD, some combination of
Libyan, Iraqi and other Gulf production might be able to take up the slack. However, given tight conditions in oil
markets, prices would probably spike. Here are some of the numbers. Rising Libyan and Iraqi production could provide
a supply cushion in case Iranian exports to the OECD were cut off (c80). There is also reason to believe that other Gulf
countries could increase production as well; over the last few months, Saudi, Kuwaiti and UAE production rose around
2 million barrels per day above prior estimates, as they responded to the situation in Libya (c81). However, oil markets
overall are pretty tight. OPEC countries are running at very high levels of production, and the IEA decision to release
strategic reserves during the Libya crisis is an indication that they see limits to OPEC production increases. As a result, we
believe that oil prices will remain well bid in 2012, despite declining expectations for global GDP growth. If a crisis
occurred in Iran, oil prices would likely head sharply higher.

5
See “The New IAEA Report: Beyond Weaponization”, U.S. Bipartisan Policy Center, November 10, 2011.
(c80) Possible offsets to an Iranian supply shock
Millions of barrels per day, as of October 2011
Production
Domestic
Consumption
Exports
YE2012
Exports
(Est.)
Change in
Exports
Iraq 2.7 0.8 1.9 2.6 0.7
Libya 0.3 0.1 0.2 1.1 0.9
Total: 1.6
Iranian Exports to OECD: 1.2
-0.2
0.2
0.6
1.0
1.4
1.8
2.2
Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11
Saudi Arabia
United Arab Emirates
Kuwait
(c81) Increased production vs. mid-2010 output
Millions of barrels per day
12
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
13
2012 Outlook
13
January J, 20J2
Hopes that Iranians will effect regime change appear overstated. There is conflicting evidence on conditions in Iran:
o IMF data on real per capita income growth show that Iran has the 2
nd
best results in the region since 1990, behind only
Qatar (which spreads its natural gas riches over 1.7 million people). Other factors that might contribute to cohesion:
“freedom shares”, handed out as part of a $100 bn privatization program; and the recognition of progress in human
development. Since 1990, of the 94 countries in the United Nations Human Development Report ranked as “high” or
“very high”, Iran recorded the single largest improvement, reflecting progress in life expectancy and education.
o On the other hand, a recent Gallup poll shows that 26% of Iranians are economically “suffering”, compared to 14% in
2008, in part a reflection of the removal of domestic energy subsidies. IMF data rely on official Iranian statistics, which
may understate actual inflation; there are reports that capital flight is rampant. Economists inside and outside of Iran,
and European governments, have questioned the accuracy of the IMF's data. According to Karim Sadjadpour at the
Carnegie Endowment for International Peace, Iran ranks higher than Egypt and Tunisia in terms of economic malaise
(inflation and unemployment) and corruption. Household incomes have fallen versus prior generations, and people
under the age of 30 now account for 70% of all unemployed persons; youth unemployment itself is around 23%. As for
sanctions, recent ones are aimed at Iran’s gas, oil and petrochemical industries (the US Government Accountability
Office reports that only 16 firms are currently active in Iran, down from 43 in 2010). Other sanctions are aimed at its
banks, and potentially at its Central Bank. The sanctions have impeded the modernization of its natural gas industry, led
to shortages in construction materials affecting small and medium sized businesses, and reduced available trade finance.
The bottom line is that it does not appear that regime change from within is something to be expected in Iran. Investors don’t
necessarily need another reason to hold gold, but this appears to be another issue with no resolution in 2012.
[Appendix C] Sovereign defaults, preferred creditors, and what “pari-passu” means (not that much)
6
Every sovereign default is like a snowflake, with a story all its own. But there are often common factors: high levels of
hard currency sovereign debt, a monetary anchor of some kind, and a balance of payments problem. Some Southern
European countries have aspects of all three. While EU 2011 debt levels are above those associated with most prior debt
crises (c82), the help these countries might get from outside lenders (and the ECB) is also larger; it’s premature to know
how deep those latter pockets are. When thinking about where we go from here, I remind our investors of the following:
1. In prior debt crises, IMF and other bilateral facilities did not prevent
a subsequent decline in securities prices (c83-c86)
2. The lack of a legal framework around sovereign debt restructurings
can increase the risks for bondholders when things go wrong
On the latter point, there have been thousands of pages of legalese
written on the topic. Here are some observations on sovereign
defaults, preferred creditors and risks to bondholders:
• Most sovereign bonds contain a clause referring to their pari-passu
(equal) treatment vs. other indebtedness of the same issuer. Such
clauses tend to work well in a corporate setting, where bankruptcy
courts in a given country enforce clauses across creditor classes.
• However, sovereign issuers are not subject to a bankruptcy
code, their own, or anyone else’s. They have the freedom to discriminate amongst creditors, and often do. Sovereign
entities in distress rarely pay all creditors on a “ratable” basis, where “ratable” signifies equal treatment in terms of
priority, magnitude and timing of payment.
• The pari-passu clause does not prevent issuers, as a matter of practice, from discriminating in favor of institutions such
as the IMF and World Bank. As a result, should an eventual writedown of debt be needed, it might have to be
absorbed by a smaller universe of private sector creditors. In this regard, increased commitments by official
sector lenders may not change the risk equation for bondholders in the long run
7
.

6
This section draws on “The Pari-Passu Debt Clause in Sovereign Debt Instruments”, Buchheit and Pam, Emory Law Journal, 2004.
Lee Buchheit is with Cleary Gottlieb Steen & Hamilton, which represents many sovereign issuers in distress/default. I have a lot of
respect for Lee’s judgment and decades of experience, but also believe that such commentary should be considered in light of what
sovereign counsel normally does: seek maximum flexibility for sovereign issuers, sometimes at the expense of private creditors.
7
On a related matter, I wouldn’t put too much importance on the decision by EU governments to remove “private sector involvement”
language as a pre-condition for lending via the ESM (European Stability Mechanism). Just because they removed it from the ESM
doesn’t mean investors won’t be required to share the pain in the future.
0%
20%
40%
60%
80%
100%
120%
140%
G
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1
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1
1
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1
(c82) Sovereign debt levels in prior crises vs.
Europe 2011, Debt to GDP, percent, by country and year
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
14
2012 Outlook
14
January J, 20J2
• The IMF and World Bank are not the only ones given preferred treatment. In the proposed Greek debt exchange,
Greek Social Security Funds holding its sovereign debt were reportedly not scheduled to participate. And in prior
sovereign debt restructurings, t-bills were excluded, further concentrating losses on the remaining bondholders.
• In the world of corporate credit, lenders have a wide variety of remedies they can use when seeking to ensure equal
treatment: sharing clauses, the use of a trustee to distribute payments ratably, inter-creditor agreements among lenders
to share payments and losses equally, and subordination agreements. These remedies are generally not used by lenders
to governments, most likely because it would be difficult (if not impossible) to enforce them.
• A notable exception: in the year 2000, a hedge fund sought to block Peruvian payments on its Brady bonds, since Peru
didn’t pay interest on the fund’s Peruvian loans (the fund opted not to participate in the Brady bond exchange). The
hedge fund’s injunction was granted by a New York Federal Court and a Belgian Court of Appeals, and the hedge fund
was fully paid. As an investor, I have a lot of sympathy for creditors that are actually able to get their contracts
enforced. In recent years, other creditors have not been as successful in the wake of the Peru case in getting the phrase
“pari-passu” to mean what markets often assume it to mean
8
. The reality: it may mean very little, if anything.

All things considered, the history suggests that investors seek a very large potential reward before taking risk on
sovereign debt, once a crisis hits. Here are the charts referenced above on how official sector credit facilities did not
prevent further deterioration in securities markets of the countries involved. In Argentina and Russia these declines were
permanent. In Mexico and Indonesia, the declines were temporary; after 50%-70% currency devaluations eventually
re-established a more stable equilibrium, their sovereign bond prices recovered.

8
See “Debt Defaults and Lessons from a Decade of Crises”, Sturzenegger and Zettelmeyer, MIT Press, 2006, p. 71 and table 3.1.
20
30
40
50
60
70
80
90
100
110
120
Jan-98 Jul-99 Jan-01 Jul-02 Jan-04
(c83) Argentina
Sovereign debt price: 11
3/8
2017
Banks, the IMF, IADB and Spain
promise $40 bn in aid. “This
should improve the investment
climate, and together with
enhanced domestic and external
confidence, lay the ground for
sustained economic Argentine
growth” – IMF Managing
Director [12/00]
40
45
50
55
60
65
70
75
80
85
Dec-93 Mar-94 Jun-94 Sep-94 Dec-94 Mar-95
(c84) Mexico
Sovereign Brady Bond debt price: 6
1/4
2019
Creation of permanent
$6.7 bn line of credit for
Mexico from the United
States and Canada [4/94]
Creation of $20 bn
Exchange
Stabilization Fund
[2/95]
40
50
60
70
80
90
Jan-98 Feb-98 Apr-98 May-98 Jul-98
(c85) Russia
Sovereign debt price: GKO (T-Bill) 3/10/1999
"Up to this point, the optimists on Russia
have been more right than the pessimists.
There is good reason to believe the
optimists will continue to be right." Stanley
Fischer, IMF Managing Director [01/98]
Russia stocks and bonds soared after the
promise of $22.6 bn in loans led by the IMF
– Bloomberg [07/98]
The IMF Executive Board completed the review of the
Extended Fund Facility, and agreed to disburse a $700
million tranche, thus bringing the program back on track.
40
50
60
70
80
90
100
110
120
Jul-96 Jan-97 Jul-97 Jan-98 Jul-98
(c86) Indonesia
Sovereign debt price: 7
3/4
2006
IMF likely to resume lending
under $40 bn package [04/98]
“We’ve been very impressed
by the negotiations with the
new Cabinet” – IMF [04/98]
2012 Outlook
14
January 1, 2012
• The IMF and World Bank are not the only ones given preferred treatment. In the proposed Greek debt exchange,
Greek Social Security Funds holding its sovereign debt were reportedly not scheduled to participate. And in prior
sovereign debt restructurings, t-bills were excluded, further concentrating losses on the remaining bondholders.
• In the world of corporate credit, lenders have a wide variety of remedies they can use when seeking to ensure equal
treatment: sharing clauses, the use of a trustee to distribute payments ratably, inter-creditor agreements among lenders
to share payments and losses equally, and subordination agreements. These remedies are generally not used by lenders
to governments, most likely because it would be difficult (if not impossible) to enforce them.
• A notable exception: in the year 2000, a hedge fund sought to block Peruvian payments on its Brady bonds, since Peru
didn’t pay interest on the fund’s Peruvian loans (the fund opted not to participate in the Brady bond exchange). The
hedge fund’s injunction was granted by a New York Federal Court and a Belgian Court of Appeals, and the hedge fund
was fully paid. As an investor, I have a lot of sympathy for creditors that are actually able to get their contracts
enforced. In recent years, other creditors have not been as successful in the wake of the Peru case in getting the phrase
“pari-passu” to mean what markets often assume it to mean
8
. The reality: it may mean very little, if anything.
All things considered, the history suggests that investors seek a very large potential reward before taking risk on
sovereign debt, once a crisis hits. Here are the charts referenced above on how official sector credit facilities did not
prevent further deterioration in securities markets of the countries involved. In Argentina and Russia these declines were
permanent. In Mexico and Indonesia, the declines were temporary; after 50%-70% currency devaluations eventually re-
established a more stable equilibrium, their sovereign bond prices recovered.
8
See “Debt Defaults and Lessons from a Decade of Crises”, Sturzenegger and Zettelmeyer, MIT Press, 2006, p. 71 and table 3.1.
20
30
40
50
60
70
80
90
100
110
120
Jan-98 Jul-99 Jan-01 Jul-02 Jan-04
(c83) Argentina
Sovereign debt price: 11
3/8
2017
Banks, the IMF, IADB and Spain
promise $40 bn in aid. “This
should improve the investment
climate, and together with
enhanced domestic and external
confidence, lay the ground for
sustained economic Argentine
growth” – IMF Managing
Director [12/00]
40
45
50
55
60
65
70
75
80
85
Dec-93 Mar-94 Jun-94 Sep-94 Dec-94 Mar-95
(c84) Mexico
Sovereign Brady Bond debt price: 6
1/4
2019
Creation of permanent
$6.7 bn line of credit for
Mexico from the United
States and Canada [4/94]
Creation of $20 bn
Exchange
Stabilization Fund
[2/95]
40
50
60
70
80
90
Jan-98 Feb-98 Apr-98 May-98 Jul-98
(c85) Russia
Sovereign debt price: GKO (T-Bill) 3/10/1999
"Up to this point, the optimists on Russia
have been more right than the pessimists.
There is good reason to believe the
optimists will continue to be right." Stanley
Fischer, IMF Managing Director [01/98]
Russia stocks and bonds soared after the
promise of $22.6 bn in loans led by the IMF
– Bloomberg [07/98]
The IMF Executive Board completed the review of the
Extended Fund Facility, and agreed to disburse a $700
million tranche, thus bringing the program back on track.
40
50
60
70
80
90
100
110
120
Jul-96 Jan-97 Jul-97 Jan-98 Jul-98
(c86) Indonesia
Sovereign debt price: 7
3/4
2006
IMF likely to resume lending
under $40 bn package [04/98]
“We’ve been very impressed
by the negotiations with the
new Cabinet” – IMF [04/98]
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
15
2012 Outlook
15
January J, 20J2
Chart sources
(c1) Bloomberg, December 1983 (c44) China Customs, J.P. Morgan Securities LLC, Markit, November 2011
(c2) OECD, December 2011 (c45) IMF, China State Statistical Bureau, China National Bureau of
Statistics, Q4 2010
(c3) OECD, December 2011 (c46) IMF, Q4 2011
(c4) Markit, Institute for Supply Management, J.P. Morgan
Securities LLC, November 2011
(c47) IMF, Bloomberg, J.P. Morgan Private Bank, September 2011
(c5) IMF, OECD, Barclay's Capital, Bloomberg (c48) FRB, December 2011
(c6) Bloomberg, Bureau of Labor Statistics, Empirical Research
Partners, December 2011
(c49) Ministry of Finance Japan, IMF, J.P. Morgan Securities LLC, October
2011
(c7) Statistisches Bundesamt/Deutsche Bundesbank and Istituto
Nazionale di Statistica, October 2011
(c50) FRB, Q3 2011
(c8) Bloomberg, December 2011 (c51) J.P. Morgan Private Bank, Bloomberg, Company filings, December
2011
(c9) European Commission, Bloomberg, September 2011 (c52) J.P. Morgan Private Bank, Bloomberg, Company filings, December
2011
(c10) FRB, BEA, ECB, Eurostat, Bank of England, UK Office for
National Statistics, Bank of Japan, Japan Cabinet Office,
Heinrich Hoffmann, November 2011
(c53) Factset, December 2011
(c11) Reinhart, Carmen M. and Kenneth S. Rogoff, “From Financial
Crash to Debt Crisis,” NBER Working Paper 15795, March
2010
(c54) FRB, Standard & Poor’s, Q3 2011
(c12) FRB, ECB, J.P. Morgan Private Bank, Q4 2010 (c55) Credit Suisse quantitative equity research, November 2011
(c13) European Banking Authority, US 10-Ks, December 2010 (c56) J.P. Morgan Securities LLC, December 2011
(c14) OECD, Bank for International Settlements, "The real effects of
debt", Cecchetti, Mohanty and Zampolli, Sept. 2011
(c57) BEA, J.P. Morgan Private Bank, Q3 2011
(c15) OECD, Q1 2011 (c58) BEA, J.P. Morgan Private Bank, Q3 2011
(c16) OECD, December 2011 (c59) Bloomberg, December 2011
(c17) IMF, September 2011 (c60) Estimates based on Thomson Reuters, Credit Suisse HOLT,
Credit Suisse research, September 2011
(c18) IMF, National Inst. of Statistics, J.P. Morgan Private Bank, Q3
2011
(c61) J.P. Morgan Securities LLC, Bloomberg, November 2011
(c19) Statistical Office of the European Communities, Haver
Analytics, Q2 2011
(c62) J.P. Morgan Private Bank, November 2011
(c20) IMF, November 2011 (c63) Bloomberg, J.P. Morgan Securities LLC, Barclays Capital, iBoxx,
December 2011
(c21) OECD, Q2 2011 (c64) Bloomberg, J.P. Morgan Securities LLC, December 2011
(c22) Institute for Supply Management, November 2011 (c65) J.P. Morgan Securities LLC, December 2011
(c23) Bloomberg, November 2011 (c66) FRB, November 2011
(c24) FRB, BEA, Q3 2011 (c67) Moody’s Commercial Property Price Indices, August 2011
(c25) National Association of Realtors, J.P. Morgan Securities LLC,
Amherst Securities, Mortgage Bankers Association, Dec. 2011
(c68) Bloomberg, December 2011
(c26) BEA, Q3 2011 (c69) U.S. Energy Information Administration, December 2010
(c27) Bureau of Labor Statistics, November 2011 (c70) U.S. Energy Information Administration, September 2011
(c28) BEA, Q3 2011 (c71) Federal Reserve Bank of St. Louis, Markit, Bloomberg, J.P. Morgan
Securities LLC, December 2011
(c29) BEA, J.P. Morgan Private Bank, August 2011 (c72) Hedge Fund Research, J.P. Morgan Private Bank, September 2011
(c30) FRB, November 2011 (c73) Markit, J.P. Morgan Securities LLC, November 2011
(c31) CBO, J.P. Morgan Private Bank, December 2011 (c74) Eurostat, October 2011
(c32) CBO, J.P. Morgan Private Bank, August 2011 (c75) Instituto Nacional de Estadística, Haver Analytics, October 2011
(c33) US Treasury, BEA, December 2011 (c76) Oficemen, October 2011
(c34) J.P. Morgan Securities LLC, CBO, September 2011 (c77) Eurostat, J.P. Morgan Securities LLC, October 2011
(c35) FRB, US Treasury, November 2011 (c78) Instituto Nacional de Estadistica, Haver Analytics, Q3 2011
(c36) FRB, US Treasury, November 2011 (c79) Austerity and Anarchy: Budget Cuts and Social Unrest In Europe,
1919-2008, Jacopo Ponticelli and Hans-Joachim Voth, Centre for
Economic Policy Research, August 2011
(c37) Hong Kong Monetary Authority, December 2011 (c80) J.P. Morgan Securities LLC, Government Agencies, News
Reports, October 2011
(c38) Census Bureau, Bureau of Economic Analysis, Rockefeller
Institute, Q3 2011
(c81) J.P. Morgan Securities LLC, Government Agencies, News Reports,
October 2011
(c39) J.P. Morgan Securities LLC, December 2011 (c82) Gramercy Capital, OECD, December 2011
(c40) J.P. Morgan Securities LLC, October 2011 (c83) Bloomberg, December 2011
(c41) China National Bureau of Statistics, People’s Bank of China,
November 2011
(c84) Bloomberg, December 2011
(c42) Bank for International Settlements, Q2 2011 (c85) Bloomberg, IMF, December 2011
(c43) China National Bureau of Statistics, People’s Bank of China,
J.P. Morgan Private Bank, Q3 2011
(c86) Bloomberg, December 2011
Eye on the Market
|
OUTLOOK 2012 January 1, 2012
16
2012 Outlook
16
January J, 20J2
Cover art data sources
Banco de España, Bank for International Settlements, Bloomberg, Bureau of Economic Analysis, Bureau of Labor Statistics, Case-Shiller,
China National Bureau of Statistics, Dealogic, Deutsche Börse, Eurostat, Federal Reserve Board, G7 Governments, Gallup, Inc., Instituto
Nacional de Estadística, International Monetary Fund, Intervención General de la Administración del Estado, J.P. Morgan Private Bank,
J.P. Morgan Securities LLC, Ministère de l'Economie des Finances et de l'Industrie, Ministero dell'Economia e delle Finanze, MSCI, The
National Institute for Statistics of Italy, Organization for Economic Co-operation and Development, Standard & Poor’s, US Census Bureau,
US Treasury. Periphery includes Portugal, Ireland, Italy, Spain and Greece. High end retail proxied by the Deutsche Börse World Luxury
Index. Low end retail proxied by the S&P Department Stores Index. All data are the latest available as of November 30, 2011, except the
global policy rates and global fiscal deficits, which are as of June 30, 2011.
Acronyms
BEA Bureau of Economic Analysis
CBO Congressional Budget Office
CDS Credit Default Swaps
EBITDA Earnings before interest, taxes, depreciation, and amortization
ECB European Central Bank
EU European Union
EMU European Economic and Monetary Union
EBA European Banking Authority
EFSF European Financial Stability Facility
FRB Federal Reserve Board
GDP Gross Domestic Product
GNP Gross National Product
IAEA International Atomic Energy Agency
IEA International Energy Agency
IMF International Monetary Fund
ISM Institute for Supply Management
NATO North Atlantic Treaty Organization
NFIB National Federation of Independent Business
OECD Organization for Economic Co-operation and Development
OPEC Organization of Petroleum Exporting Countries
PMI Purchasing Managers Index
REIT Real Estate Investment Trust
RMB Renminbi
PSF Per square foot
SMP Securities Markets Program
TIPS Treasury Inflation Protected Securities
UAE United Arab Emirates
The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Michael Cembalest and may differ from those of other
J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may
differ from that contained in J.P. Morgan research reports.
The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. Past performance
is not a guarantee of future results. Investment products are not insured by the U.S. Federal Deposit Insurance Corporation; are not guaranteed by the bank or thrift affiliates;
and may lose value. Not all investment ideas referenced are suitable for all investors. These recommendations may not be suitable for all investors. Speak with your
J.P. Morgan representative concerning your personal situation.
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Private investments often engage in leveraging and other
speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to
investors and may involve complex tax structures and delays in distributing important tax information. Typically, such investment ideas can only be offered to suitable investors
through a confidential offering memorandum, which fully describes all terms, conditions and risks.

In the United Kingdom, this material is approved by J.P. Morgan International Bank Limited (JPMIB) with the registered office located at 125 London Wall EC2Y 5AJ,
registered in England No. 03838766 and is authorized and regulated by the Financial Services Authority. In addition, this material may be distributed by: JPMorgan Chase
Bank, N.A. (JPMCB) Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel and Autorité des Marchés Financiers; J.P. Morgan
(Suisse) SA, regulated by the Swiss Financial Market Supervisory Authority; JPMCB Bahrain branch, licensed as a conventional wholesale bank by the Central Bank of
Bahrain (for professional clients only); JPMCB Dubai branch, regulated by the Dubai Financial Services Authority. In Hong Kong, this material is distributed by JPMorgan
Chase Bank, N.A. (JPMCB) Hong Kong branch except to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment
Scheme (other than private funds such as private equity and hedge funds), in which case it is distributed by J.P. Morgan Securities (Asia Pacific) Limited (JPMSAPL). Both
JPMCB Hong Kong branch and JPMSAPL are regulated by the Hong Kong Monetary Authority. In Singapore, this material is distributed by JPMCB Singapore branch except
to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment Scheme (other than private funds such as a private
equity and hedge funds), in which case it is distributed by J.P. Morgan (S.E.A.) Limited (JPMSEAL). Both JPMCB Singapore branch and JPMSEAL are regulated by the
Monetary Authority of Singapore.
Cover illustration © Dan Williams, 2012
© 2012 JPMorgan Chase & Co. All rights reserved.
2012 Outlook
16
January J, 20J2
Cover art data sources
Banco de España, Bank for International Settlements, Bloomberg, Bureau of Economic Analysis, Bureau of Labor Statistics, Case-Shiller,
China National Bureau of Statistics, Dealogic, Deutsche Börse, Eurostat, Federal Reserve Board, G7 Governments, Gallup, Inc., Instituto
Nacional de Estadística, International Monetary Fund, Intervención General de la Administración del Estado, J.P. Morgan Private Bank,
J.P. Morgan Securities LLC, Ministère de l'Economie des Finances et de l'Industrie, Ministero dell'Economia e delle Finanze, MSCI, The
National Institute for Statistics of Italy, Organization for Economic Co-operation and Development, Standard & Poor’s, US Census Bureau,
US Treasury. Periphery includes Portugal, Ireland, Italy, Spain and Greece. High end retail proxied by the Deutsche Börse World Luxury
Index. Low end retail proxied by the S&P Department Stores Index. All data are the latest available as of November 30, 2011, except the
global policy rates and global fiscal deficits, which are as of June 30, 2011.
Acronyms
BEA Bureau of Economic Analysis
CBO Congressional Budget Office
CDS Credit Default Swaps
EBITDA Earnings before interest, taxes, depreciation, and amortization
ECB European Central Bank
EU European Union
EMU European Economic and Monetary Union
EBA European Banking Authority
EFSF European Financial Stability Facility
FRB Federal Reserve Board
GDP Gross Domestic Product
GNP Gross National Product
IAEA International Atomic Energy Agency
IEA International Energy Agency
IMF International Monetary Fund
ISM Institute for Supply Management
NATO North Atlantic Treaty Organization
NFIB National Federation of Independent Business
OECD Organization for Economic Co-operation and Development
OPEC Organization of Petroleum Exporting Countries
PMI Purchasing Managers Index
REIT Real Estate Investment Trust
RMB Renminbi
PSF Per square foot
SMP Securities Markets Program
TIPS Treasury Inflation Protected Securities
UAE United Arab Emirates
The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Michael Cembalest and may differ from those of other
J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may
differ from that contained in J.P. Morgan research reports.
The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness. Past performance
is not a guarantee of future results. Investment products are not insured by the U.S. Federal Deposit Insurance Corporation; are not guaranteed by the bank or thrift affiliates;
and may lose value. Not all investment ideas referenced are suitable for all investors. These recommendations may not be suitable for all investors. Speak with your
J.P. Morgan representative concerning your personal situation.
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Private investments often engage in leveraging and other
speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to
investors and may involve complex tax structures and delays in distributing important tax information. Typically, such investment ideas can only be offered to suitable investors
through a confidential offering memorandum, which fully describes all terms, conditions and risks.

In the United Kingdom, this material is approved by J.P. Morgan International Bank Limited (JPMIB) with the registered office located at 125 London Wall EC2Y 5AJ,
registered in England No. 03838766 and is authorized and regulated by the Financial Services Authority. In addition, this material may be distributed by: JPMorgan Chase
Bank, N.A. (JPMCB) Paris branch, which is regulated by the French banking authorities Autorité de Contrôle Prudentiel and Autorité des Marchés Financiers; J.P. Morgan
(Suisse) SA, regulated by the Swiss Financial Market Supervisory Authority; JPMCB Bahrain branch, licensed as a conventional wholesale bank by the Central Bank of
Bahrain (for professional clients only); JPMCB Dubai branch, regulated by the Dubai Financial Services Authority. In Hong Kong, this material is distributed by JPMorgan
Chase Bank, N.A. (JPMCB) Hong Kong branch except to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment
Scheme (other than private funds such as private equity and hedge funds), in which case it is distributed by J.P. Morgan Securities (Asia Pacific) Limited (JPMSAPL). Both
JPMCB Hong Kong branch and JPMSAPL are regulated by the Hong Kong Monetary Authority. In Singapore, this material is distributed by JPMCB Singapore branch except
to recipients having an account at JPMCB Singapore branch and where this material relates to a Collective Investment Scheme (other than private funds such as a private
equity and hedge funds), in which case it is distributed by J.P. Morgan (S.E.A.) Limited (JPMSEAL). Both JPMCB Singapore branch and JPMSEAL are regulated by the
Monetary Authority of Singapore.
Cover illustration © Dan Williams, 2012
© 2012 JPMorgan Chase & Co. All rights reserved.
0811-294-02
17
MICHAEL CEMBALEST is Global Head of Investment Strategy for J.P. Morgan’s Asset Management
business. In that role, he leads Asset Management’s analyses of global markets for $1.8 trillion of client
assets worldwide. In addition, as Chief Investment Ofcer for global private banking at J.P. Morgan,
Mr. Cembalest is responsible for the day-to-day strategic and tactical asset allocation for $700 billion
in client assets.
Mr. Cembalest is also a member of the J.P. Morgan Asset Management Investment Committee and
a member of the Investment Committee for the J.P. Morgan Retirement Plan for the frm’s 240,000
employees.
Mr. Cembalest was formerly head of a fxed income division of J.P. Morgan Investment Management with
responsibility for high grade, high yield, emerging markets and municipal bonds.
Prior to joining Asset Management, Mr. Cembalest served as head strategist for Emerging Markets
Fixed Income at J.P. Morgan Securities. Mr. Cembalest joined J.P. Morgan in 1987 as a member of the frm’s
Corporate Finance division.
Mr. Cembalest earned an M.A. from the Columbia School of International and Public Afairs in 1986 and a
B.A. from Tufts University in 1984.
RICHARD MADIGAN is Managing Director, Chief Investment Ofcer and Head of the Investment
Team managing the Global Access Portfolios and Access Funds at J.P. Morgan. With over 20 years
of experience in portfolio management and international capital markets, he is a senior member of
the J.P. Morgan Private Bank Global Strategy Team, where he is responsible for the development of
investment strategy, including tactical and strategic asset allocation. He is also responsible for the
Private Bank’s Global Portfolio Construction efort. In addition, Mr. Madigan is Chairman of the Hedge
Fund Advisory Council and an ofcer of J.P. Morgan Private Investments, Inc. Prior to his current role
with J.P. Morgan, Mr. Madigan served as Managing Director, Head of Emerging Markets Investments
and Senior Portfolio Manager at Oftbank, a New-York-based wealth management boutique, where
he managed the frm’s emerging markets assets and investment team, including the frm’s fagship
emerging markets mutual fund. Mr. Madigan’s commentaries have appeared in the Financial Times,
The New York Times, The Wall Street Journal, Bloomberg and Reuters. He has been a guest speaker
on CNBC, CNN and Bloomberg News, as well as at various industry conferences. Mr. Madigan holds a
master’s degree from New York University, where he majored in Finance and International Business.
MICHAEL VAKNIN serves as Chief Economist for J.P. Morgan Private Bank. In this role, he is
responsible for the global, macroeconomic and market research that underpins the frm’s long-term
views and, by extension, how client portfolios are positioned. Mr. Vaknin is also a member of the
Private Bank Investment Team, which guides asset allocation and market strategy decision-making for
J.P. Morgan private clients across the globe.
Prior to joining J.P. Morgan, Mr. Vaknin was a Senior Global Markets Economist at Goldman
Sachs International in London, where he supported global economic research and macro-based
rates strategy and analysis. With extensive expertise in interest rates, credit, currencies and
macroeconomics, his views were published regularly in various communications.
Previous to Goldman, Mr. Vaknin worked as an economist at the Falk Institute for Economic Research
and lectured on international fnance and monetary economics at Columbia University. While earning
an M.A. and Ph.D. in Economics and Finance from Columbia University, he worked as a research
assistant to Nobel Laureates Joseph Stiglitz and Edmund Phelps as well as for Richard Clarida, former
Assistant Secretary of the U.S. Treasury.
I N V E S T M E N T S T R A T E G Y T E A M
18
IVAN LEUNG is a Managing Director and the Chief Investment Strategist for J.P. Morgan Private
Bank in Asia. Mr. Leung is responsible for setting the regional investment strategy as well as
managing the model portfolio that is implemented for discretionary portfolios. He is a member of the
Global Private Bank Investment Team and chairs the Asia Local Investment Committee.
Before joining J.P. Morgan in 2007, Mr. Leung served at UBS Wealth Management for six years and
was the regional head of portfolio specialists. There, he created and managed customized portfolio
solutions for ultra-high-net-worth and institutional clients. Prior to that, Mr. Leung worked for
Deutsche Bank and Dresdner Bank in portfolio manager roles.
Mr. Leung speaks frequently to the fnancial media. His articles and interviews have appeared in
newspapers and newswires, including the Financial Times, Business Times, The Edge Singapore and
Bloomberg. He holds a Bachelor of Applied Science degree from the University of Toronto and an
M.B.A. from the Schulich School of Business.
CÉSAR PÉREZ is Chief Investment Strategist for EMEA. He was most recently at Al Rajhi
Capital Bank in Riyadh, Saudi Arabia, where he was responsible for investment strategy, portfolio
construction and risk management. Mr. Pérez has worked in the investment management business
for the past 17 years, including two years at Credit Suisse Asset Management, where he was head
of equities, fve years at M&G Investments in London and nine years at J.P. Morgan Investment
Management in Madrid, London and New York. Throughout his career, Mr. Pérez has worked across
all asset classes and regions for both institutional and private clients, serving in roles ranging from
portfolio management to sales and relationship management.
PHIL GUARCO is Chief Investment Strategist for J.P. Morgan Private Bank, Latin America. He is part
of the team responsible for Global Investments and Portfolio Strategy for J.P. Morgan international
client relationships. Mr. Guarco began his career with Citibank as a fnancial institutions banker in New
York. He subsequently served as a corporate and investment banker for Citibank in Mexico between
1992 and 1995. Additionally, Mr. Guarco worked for Citicorp in New York in its political risk insurance
subsidiary as a Senior Underwriter. He was also a Senior Credit Ofcer for Latin American fnancial
institutions at Moody’s from 1997 to 2006. His commentaries have been frequently covered in the local
Latin American press, as well as in the international press, such as the Financial Times, The New York
Times, and The Wall Street Journal. He has also been a guest speaker on Bloomberg and Reuters News
and has been cited frequently in World Bank and IMF publications. Mr. Guarco obtained his B.A. degree
in Economics and Spanish from Grinnell College, and a master’s degree in International Afairs and
Economics from the Johns Hopkins School of Advanced International Studies.
ANTHONY CHAN currently serves as the Chief Economist for Private Wealth Management. His
responsibilities include economic analysis and research supporting J.P. Morgan’s Wealth Management
businesses and the Private Bank’s strategy group. Mr. Chan has also served on the Economic Advisory
Committee of the American Banker’s Association. After completing his doctoral studies, Mr. Chan was
a Professor of Economics at the University of Dayton after which he was an Economist at the Federal
Reserve Bank of New York and a Senior Economist at Barclays de Zoete Wedd Government Securities.
He has been quoted in many media outlets, including The Wall Street Journal, Barron’s, The New
York Times, The Washington Post, the Chicago Tribune, the Los Angeles Times and Investor’s Daily. He
periodically appears on CNBC, Bloomberg TV and public television’s Nightly Business Report. Mr. Chan
received his B.B.A. in Finance and Investments from Baruch College and his Masters and Ph.D. in
Economics from the University of Maryland.
E U R O P E
France
Germany
Italy
Spain
Switzerland
United Kingdom
A S I A
Hong Kong
Singapore
A ME R I C A S
United States
Brazil
Chile
Mexico
Peru
Venezuela
MI D D L E E A S T
Dubai
WO R L D H E A D Q U A R T E R S
270 Park Avenue
New York, NY 10017

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