THE U.S.

TWENTY
BUSINESS INSIDER
Photo: Frank Kovalchek/Flickr

1. THE END OF THE BIG BOX RETAILER
•  Retailers have finally emerged from the doldrums of the 2008 recession, but look surprisingly different then they did just years earlier •  Luxury department stores like Saks, electronics retailers like Best Buy, and mass specialty chains like Abercrombie and Fitch are shuttering mainline stores (just last week A&F said it would also slow international expansion)

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To boost margins and sales, retailers are focusing on online channels
•  Retailers have mostly embraced the digital shift, rolling out online and mobile sales sites. Consumer pickup has been noticeable, with Urban Outfitters, American Eagle Outfitters, and J.Crew all reporting more than 10 percent of sales driven through direct-to-consumer channels.

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The End Of The Big Box Retailer

Flash sales, the trunk show for the modern age, will shift online sales further
•  Department stores like Nordstrom, Saks, and Nieman Marcus are just beginning to see new online competition from flash sale sites •  Business Insider Intelligence projects flash sales could hit $6 billion by 2015, fueled by HauteLook, Rue La La, and Gilt Groupe.

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The End Of The Big Box Retailer

Online shopping is increasingly dependent on mobile apps
•  Apps for tablets and smartphones are driving sales and engagement •  Gilt generates 20 percent of its sales from mobile apps, with 40 percent of that revenue generated from the iPad

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The End Of The Big Box Retailer

2. AMERICA IS AGING
•  The U.S. is getting older and a sea of baby boomers are setting their sights on retirement. That is presenting a host of problems that the country will have to face over the next decade, including the everincreasing life expectancy rates' impact on healthcare costs and social security funding.

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The share of older Americans as a percent of the total population is increasing…
•  In a report out at the end of last year, the U.S. Census Bureau announced that "people 90 and older now comprise 4.7 percent of the older population (age 65 and older), as compared with only 2.8 percent in 1980. By 2050, this share is likely to reach 10 percent.” •  Here are some key numbers:

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America Is Aging

42.1
The projected median working age In America, up from 35.4 in 1986

45%
Of Americans believe they will have to retire later than expected

59%
Of Americans aged 55+ have less than $100K saved for retirement
Source: UNC Institute on Aging, AARP, Merrill Lynch, Gallup, Rutgers University

75%
Of Americans expect to have to work after retiring

…and they’re not prepared for retirement

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America Is Aging

Source: UNC Institute on Aging

Adding to concerns of senior preparedness are Social Security and Medicare funding issues
“The aging of the baby-boom generation portends a significant and sustained increase in the share of the population receiving benefits from Social Security and Medicare…Without significant changes in government policy, those factors will boost federal outlays relative to GDP well above their average of the past several decades—a conclusion that holds under any plausible assumptions about future trends in demographics, economic conditions, and health care costs.”

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– 2012 Long-Term Budget Outlook

Social Security Spending (% of GDP)

Spending Reductions Needed To Balance Budget (% of GDP)

Source: CBO

3. THE MOBILE REVOLUTION
•  Mobile phones have become the most ubiquitous personal-computing technology in the world — surpassing the personal computer — as cellular devices have penetrated previously unreachable landline geographies. •  And the "dumbphone conversion cycle” — the replacement of regular cell phones with smartphones — is about halfway done in the U.S.

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There are now 110 million smartphone users in the U.S.
•  And consumers tend to choose between two operating systems: Apple’s iOS and Google’s Android. The two now command 84 percent of the U.S. OS pie — that's up from roughly 40 percent two years ago.

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The Mobile Revolution

Over the past several years, the top five U.S. manufacturers have shifted considerably
•  Although Samsung continues to lead the U.S. market, with 25.7 percent of total sales in May, the second through fifth largest OEMs are in a tight race. LG and Apple follow closely, while Nokia and RIM have been pushed out.

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The Mobile Revolution

Carriers are markedly differentiating themselves from one another through new technology and pricing plans
•  Some examples: Sprint’s Unlimited Everything Plan & Verizon’s Share Everything Family Plan •  Below, updated subscriber counts for the top four American wireless carriers through the first quarter of 2012:

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The Mobile Revolution

109.8 M 55.7 M

103.9 M 33.3 M

4. A WEAKENING INFRASTRUCTURE
•  Underinvestment in major infrastructure projects has weakened the backbone of the U.S. — it’s interstate highway system. The World Economic Forum currently ranks the U.S. 16th in terms of infrastructure quality. •  Worse, spending is not anticipated to pick up over the next decade.

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The country’s highway system is highly strained
•  The latest transportation bill, which barely passed, keeps infrastructure spending at current levels of $105 billion over the next two years •  The Urban Land Institute estimates the U.S. will need to spend $2 trillion just to repair current systems

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A Weakening Foundation

Budget constraints have weighed on public construction spending, which has fallen 15% from its peak to $274 billion in 2012
Total Public Construction Spending in the United States

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A Weakening Foundation

Source: Eric Platt/Business Insider, Federal Reserve Bank of St. Louis

And yet two of the country’s largest infrastructure projects remain on track
•  A notable exception to this slowdown is New York City, which has seen its largest capital expansion in history under Mayor Michael Bloomberg. The city will spend upwards of $50 billion over the next 10 years on projects like the extension of the 7 train and the Second Avenue Subway. •  In contrast, New Jersey Governor Chris Christie nixed a planned $8.7 billion tunnel under the Hudson river that would have doubled the number of commuter trains entering the city, saying the state could not afford it.

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A Weakening Foundation

5. THE EPIC RISE OF STUDENT LOAN DEBT
•  Student loan debt recently topped $1 trillion, making it the largest category of consumer debt other than mortgages in the United States — topping credit card and auto loan debt. •  Private lenders are getting out of the game while the federal government steps in to fill the gap

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Total Student Loan Debt Outstanding in the United States

Source: Mitsubishi UFJ Morgan Stanley

Student loan credit conditions are rapidly deteriorating
•  While delinquencies in almost every other category of personal debt have declined since the 2008 financial crisis, student loan delinquencies have been on the rise

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Rise Of Student Loan Debt

New Delinquencies in U.S. Personal Loans (Loans 30+ Days Past Due)

Source: Mitsubishi UFJ Morgan Stanley

Young people aren’t the only demographic saddled with student loan debt
•  Those over the age of 30 comprise 60.4 percent of borrowers of student loan debt and 75 percent of the total dollar amount of student loan debt – long after they have graduated from college

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Rise Of Student Loan Debt

Breakdown of U.S. Student Loan Borrowing By Age

Source: Mitsubishi UFJ Morgan Stanley

Elevated consumer debt levels are likely to weigh on spending for some time
•  Mitsubishi UFJ Morgan Stanley economists opined in a recent report on student loan debt:

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Rise Of Student Loan Debt

“It will not be easy for those under the age of 40 to pay down debt given the concentration of student loan debt in this cohort. Many parents who took out student loans for their children will be unable to save enough for retirement, making it difficult for them to pay down debt after they retire. Further, if sluggish incomes lead to continued drawdowns of savings and credit card use, the household deleveraging process could drag on.”

– Masatoshi Moriyama and Nobuyuki Saji

6. THE U.S. ENERGY BOOM
•  Commodities garnered substantial attention this year after natural gas and coal prices collapsed amid an unusually warm winter, followed by retreating gas prices in the spring. But forecasts for future energy generation in the U.S. remain surprisingly robust. •  The U.S. Energy Information Administration projects that the country could halve its reliance on total energy imports under the best scenarios, and under higher consumption scenarios could lower imports from 24 percent today to 17 percent in 2035.

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Source: U.S. Energy Information Administration

The need to import energy is expected to decline over the next 20 years
•  The EIA estimates that most of the gains will come from increases in natural gas and renewable energy production as a portion of total energy generation. In fact, the EIA sees the U.S. becoming a net liquefied natural gas exporter in 2016 and an overall net exporter of natural gas in 2012. •  Liquid reliance, which depends heavily on auto use and miles driven, is also seen declining as consumption needs by U.S. consumers remain below pre-2008 crisis levels.

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The U.S. Energy Boom

Source: U.S. Energy Information Administration

Green energy production has yet to ramp up as weak business conditions hold back growth
•  On the green front, state rules impacting electricity generation and federal laws on ethanol blending will have the greatest impact on the country's shift to renewable resources. •  However, the recent investment by the federal government in a number of green technologies has fallen under scrutiny; the failure at Solyndra and continued difficulty at First Solar have put the survivability of the U.S. solar industry into question.

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The U.S. Energy Boom

Structural Imbalance In The Solar Industry

Source: First Solar

7. CAR CULTURE ON THE DECLINE
•  Although the auto industry accounts for less than 3 percent of GDP, the business supports more than 3.6 million jobs, magnifying its importance. Currently, auto sales are on pace to top 14 million sales — the highest level since the financial crisis began in 2008.

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Source: Citi, JD Power

As consumers put off new car purchases, the country’s fleet has aged — meaning Americans will have to replace older vehicles soon
•  Cars on the road today are some of the oldest ever recorded, with the country’s fleet averaging more than 10 years old. Consumers are beginning to head back to dealerships again and purchase new vehicles.

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Car Culture On The Decline

Source: Citi

Over the next several years, auto sales will likely be range bound near 14 million, but there are huge headwinds that could push sales lower
“If the density ratio faces a decline each year solely because of the older generations’ tendency to de-stock, the void is left for the younger generations to pick up the slack … The name of the game here is to keep the density ratio as flat as possible (return to 1990s density ratio could equal 12-13mln SAAR for years, stable ratio 14-15mln overnight). In other words, the longer-term outlook for U.S. auto sales in many ways depends upon younger generations accumulating as many vehicles/household as their parents.”

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Car Culture On The Decline

— Citi’s Itay Michaeli

Source: Citi

And even as the U.S. population continues to increase, Americans are driving less
•  Part of that may be due to an increasing shift to urban living — but it’s also due to Americans staying home instead of vacationing as the weak economy persists.

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Car Culture On The Decline

Total U.S. Vehicle Miles Driven

Still, sales appear to be healthier than they were years ago, even as inventories jump
•  Incentives from U.S. automakers declined 4.1 percent to an average of $2,482 per vehicle in July, even as industry wide incentives increased •  General Motors has had issues with full size pickups, which it over produced this year to meet demand forecasts. The automaker currently has 136 days of inventory on hand, or 238,165 units on lots

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Car Culture On The Decline

8. THE PARTISAN DIVIDE GROWS
•  Over the past two administrations, there’s been a massive increase in political polarization. It’s an ongoing trend independent of demographic and migration shifts.

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The increasing partisanship of Congress has negatively impacted the country’s finances
•  Long term plans for deficit reduction have been deadlocked in Congress as a debate over added stimulus and cost cutting rages on. •  Congressional malaise led to a downgrade by Standard & Poor’s in 2011, stripping the U.S. of its ‘AAA’ rating. The ratings agency explicitly noted the difficult political backdrop as a reason for its downgrade.

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The Partisan Divide

Companies are already buckling under the Fiscal Cliff
•  Lockheed Martin claims it would have to cut as many as 10,000 jobs if defense spending is cut at the end of 2012.

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The Partisan Divide

Expected Spending Cuts if U.S. goes over Fiscal Cliff:

And routine federal appointments and programs are now hamstrung by partisan politics
•  Polarization has made appointments incredibly difficult. President Obama has had trouble appointing even moderate justices to the bench, and it took him years to fill open slots on the Federal Reserve’s Open Market Committee. •  And votes that used to be routine, like the aforementioned debt ceiling increase, have become fraught with debate as the Tea Party has leveraged its voice over the Right

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The Partisan Divide

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9. A NEW HEALTHCARE MANDATE
•  The Affordable Care Act attempted to do two things, expand healthcare coverage to most Americans and reduce rampantly growing costs. •  The ACA will not go into full effect until 2014 — meaning many of the effects on the country’s bottom line remain just estimates.

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Federal Spending on Major Health Programs (as a % of GDP)

Major Effects on the Budget In 2022 from ACA Ruling (Billions USD)

Source: Congressional Budget Office

But spending on healthcare remains exorbitantly high in the U.S.
•  The issue is the incredible premium Americans pay for medical services, and the fact that outcomes aren’t better than countries that pay much less. •  Many of those costs are attributable to the massive medical research and development undertaken in the U.S. — costs not shared with other countries when failed drugs or treatments don’t make it to market

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A New Health Care Mandate

Let’s take a look at what those differences actually amount to at the patient level ¡  Cost in America Coronary bypass: $67,583 Hip replacement: $38,017 Appendectomy: $13,003 Cost per hospital day: $3,949 Angiogram: $798 ¡  Cost in France

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A New Health Care Mandate

Coronary bypass: $16,140 Hip replacement: $11,353 Appendectomy: $3,164 Cost per hospital day: $655 Angiogram: $204

10. THE PENSION CRISIS
•  State pension plans are underfunded by more than $1 trillion with more than 34 states attributing to the shortfalls. •  The problem has been compounded by incredibly low interest rates, making the chase for yield increasingly difficult. Low rates are expected to continue through at least 2014.

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States will have to raise taxes to make up for the shortfalls, or significantly cut services
•  California, one of the worst pension offenders, has already had to make •  Worse, the state level austerity is acting as a drag on the economy as towns are forced to layoff workers.

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The Pension Crisis

Source: BEA

Already municipal governments have defaulted over pension costs
•  Two California cities, Stockton and San Bernadino, have cited overgenerous pension plans as part of the reason they are seeking bankruptcy protection. •  Larger cities including Los Angeles, San Jose, Long Beach, and San Diego also face massive pension liabilities.

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The Pension Crisis

11. HIGH FREQUENCY TRADING DOMINATION
•  Most orders in the stock market used to be “high touch” — i.e. facilitated by a broker. In 2005, more than 75 percent of orders were placed through a human. •  The chart below shows the rise of algorithmic trading and direct market access in the U.S. as institutional funds circumvent brokers for speed.

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Percentage of orders generated by algorithms in US stock markets

Source: Marco Avellaneda, NYU

The ‘Flash Crash’ of May 6, 2010 remains a vivid example of the dangers of high frequency trading
•  A widely circulated CFTC white paper concluded that high frequency traders “did not trigger the Flash Crash, but their responses to the unusually large selling pressure on that day exacerbated market volatility.”

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High Frequency Trading

Major U.S. Stock Indices on May 6, 2010

Source: Kirilenko, Kyle, Samadi and Tuzun (2011)

Investors have been fleeing equity markets for five years
•  The chart below shows money leaving long-only equity funds, which were steadily gaining market share in the equities markets until the downturn in 2007. •  Instead, investors have heavily shifted funds to fixed-income products like bonds as they chase higher guaranteed yields.

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High Frequency Trading

Participation in equity markets has decreased in recent years

Source: BofA Merrill Lynch

Lack of confidence in these algorithm trading systems may keep retail investors away from the market
“[The Knight Capital incident] is likely to further negatively impact the exchange industry. Investor confidence, especially within the retail segment, is already low due to the "Flash Crash", MF Global bankruptcy, and other such events. Meanwhile, the increasingly fragmented market structure also has long-term institutional investors frustrated. KCG’s problems simply add to the headwinds, and as a result we believe volumes will likely be negatively impacted further.”

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High Frequency Trading

– Daniel Fannon, Jefferies

12. THE HOUSING MARKET RECOVERS
•  Economists have started to shift meaningfully to the stance that the U.S. housing market has hit some bottom. •  New home sales are hovering near lows not seen since the 1980s.

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Source: Standard & Poor’s

Prices have stabilized and localized again —  meaning massive swings in one region are not necessarily impacting other areas of the U.S.
•  And … “Visible inventory has fallen sharply,” Liz Ann Sonders of Charles Schwab says. “In fact, the drop has brought this measure back down to its 30-year average. Caveat: there remains a multitude of homes in shadow inventory (homes in foreclosure pipeline or vacant but not-forsale).”

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Housing Market Recovery

Source: Standard & Poor’s

Defaults have started to trickle down — even as banks begin to foreclose on properties at higher rates again
•  Delinquencies on mortgages declined by 86 basis points year-on-year to 7.58 percent, new data out of the Mortgage Banker’s Association shows. •  Banks, which had paused initiating foreclosures as they dealt with the robo-signing debacle, are beginning to work through the shadow inventory that had built up.

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Housing Market Recovery

Source: Standard & Poor’s

13. THE U.S. MANUFACTURER ROARS BACK
•  U.S. manufacturers bled 5.9 million jobs between 2000 and 2010 — and not because of the financial crisis. •  Entire sectors, like the textile industry, have been outsourced to developing markets in Asia. Manufacturers in New York’s garment district, once a power house employing hundreds of thousands, now employs fewer than 9,000 men and women.

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Source: The New York Times, The Brookings Institute

Employment by U.S. manufacturers has grown by more than half a million people since 2010
•  U.S. manufacturers have added some 524,000 jobs since 2010. Gains are coming from improved competitiveness, which could bring as many as two to three million jobs back to the United States. U.S. unit labor costs declined 10.8 percent between 2002 and 2010, a decrease matched only by Taiwan.

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U.S. Goods Producers Return

Source: The Brookings Institute, Bloomberg

The real question is if the manufacturing recovery can be sustained
•  Economists are worried that the bounce in manufacturing jobs is attributable to the harsh cuts initiated in the previous ten years — and growth cannot be sustained. •  But Internal factors supporting a US manufacturing renaissance include increased productivity, reduced costs, and cheap domestic energy.

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U.S. Goods Producers Return

Change in labor costs by Country (2002-10)

U.S. companies citing cheap energy as a benefit to earnings

Source: PWC, BLS

14. A MUCH LESS PROFITABLE BANKING SECTOR
•  Over the next several years, the global banking industry faces major headwinds from regulatory reforms, including: Basel III capital requirements, new derivatives regulations forcing trade on centrallycleared platforms, and stripped proprietary speculation from investment banking activities through the Volcker Rule. •  These regulations will have a major impact on the banking sector’s bottom line.

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Timeline of Regulatory Reform Impact on Investment Banking

Source: Citi

Moving derivatives trades to central counterparty clearing systems will be costly
•  The table below shows estimates for the reduction in profitability of big banks like Goldman Sachs and Morgan Stanley from new regulations like derivatives clearing, Dodd-Frank, and Basel III capital requirements. •  Goldman Sachs may face a 9.7 percent decrease in return on equity while Morgan Stanley’s RoE may decline 6.9 percent.

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Less Profitable Banking

The Impact of Coming Regulation on Banking’s Bottom Line

Source: JPMorgan Chase

And banks will have to slash costs across operations to return to expected levels of profitability
•  Expect cuts in fixed income trading:

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Less Profitable Banking

“Given we expect the overall revenue pool to remain below normal levels due to the macro environment plus our expectation that regulatory headwinds will stiffen from 2013 through 2015, our analysis of top global investment banks shows fixed income trading ROEs are likely to remain in the mid to high single digits for sometime.” – Keith Horowitz and Craig Singer, Citi
•  …And investment banking:

“Our 7.0% [2013 estimate of] post regulatory RoE for the investment banks could fall to 6.6% post this regulation (excluding the impact of the latest market risk proposals). We estimate banks would need to cut staff by -19% on average and compensation by -9% in order to return to market acceptable 10% -13% RoEs.” – Kian Abouhossein and Nana Francois, JP Morgan

15. AGRICULTURE AND CLIMATE CHANGE
•  As the effects of climate change increase, they will likely have a major impact on investment decisions in the coming decades. Already, a major drought has depressed equities linked to farming and prices of key products like corn, soybeans, and hogs remain volatile •  Nicholas Stern, former U.K. Head of the Government Economic Service, described climate change in 2007 as “the greatest market failure the world has seen.”

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Percent Change in Crop Yield in 2020 (L) and 2050 (R) Under a Climate Breakdown

Source: Mercer

Climate movement presents a host of actions investors will be forced to contend with
1.  Regional divergence, in which certain countries like the EU and China take the lead while the U.S. and Japan continue to lag 2.  Delayed action, where there is no major policy response to excess emissions until 2020 3.  Stern action, named for Nicholas Stern and entailing a swift and immediate policy response to climate change 4.  Climate breakdown, in which climate change is never adequately addressed with policy and investors are left open to climate-related catastrophes

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Climate Change

Impact of Four Climate Scenarios on the Source of Investment Risks

Source: Mercer

But, the market for climate change-related technology investments could be a $5 trillion a year business by 2030
“Mercer estimates, based on International Energy Agency data, suggest that additional cumulative investment in efficiency improvements, renewable energy, biofuels, and nuclear and carbon capture and storage could expand in the range of $3 trillion to $5 trillion by 2030 across the mitigation scenarios examined in this study. This presents meaningful investment opportunities that are still in their infant stages.” – Climate Change Scenarios: Implications For Strategic Asset Allocation (2012)

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Climate Change

Source: Mercer

16. THE END OF THE POST OFFICE
•  The U.S. postal system has been under considerable strain over the past decade, as its costs remained roughly unchanged as revenues sagged. Through Q3 2012, the USPS lost $11.6 billion during the year. •  The country’s mail distributer plans to cut more than half of its processing facilities as it upgrades to new technologies and cuts back on deliveries (in the map below, stars indicate locations up for closure).

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Source: USPS 2011 Report to Congress

The country’s post office is deeply indebted and has already defaulted on some of its debt
•  In August, the U.S. post office failed to make a payment to make a $5.5 billion prefunding payment for retiree health benefits and will likely default on a second similar payment of $5.6 billion due in September. •  The agency says it will run out of cash in October of 2012. •  Nonetheless, there is little the agency can do alone because of Congressional mandates — including increasing service as new homes are added in the U.S. (the USPS says it services 700,000 new delivery points every year)

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End Of The Post Office

Source: USPS

A new Congressional bill hopes to revamp the Postal Service
•  The 21st Century Postal Services Act, a bill introduced by Democrat Tom Carper and Independent Joe Lieberman and co-sponsored by Senate Republicans Scott Brown and Susan Collins would slash costs at the USPS and revamp operations. •  Part of the cuts would come from taking funds from overpaid pension funds as well as a push to thin the companies payroll through early buyouts of as many as 100,000 employees.

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End Of The Post Office

21st Century Postal Services Act Expected Savings

Source: Office of Senator Tom Carper

17. AMERICAN CITIES AS ECONOMIC JUGGERNAUTS
•  Cities will continue to dominate domestic economics in the U.S. as they drive economic growth over the coming decades. The chart below shows the economic importance of urban areas in the U.S., which already account for 84 percent of the country’s GDP.

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Source: McKinsey Global Institute

The rise of smaller cities, like Boston and Washington D.C. will lead the country’s growth over the next decade

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Cities Powering Growth

“The true vigor of America’s urban economy comes from a broad base of dynamic middleweights and the relatively high per capita GDP they achieve. There are just over 255 middleweight cities in the United States, compared with just over 180 in Europe. And they generate more than 70 percent of US GDP today, compared with just over 59 percent in Western Europe. In fact, the top 28 US middleweights alone contribute more than 35 percent of US GDP. The dynamism of middleweights in the United States is a characteristic of today’s global urban expansion, making them an interesting group to understand for both US and global growth prospects.”
Source: McKinsey Global Institute

– Urban America: US cities in the global economy

18. IMMIGRANTS DRIVING PRODUCT INNOVATION
•  U.S. businesses are increasingly developing products to cater to new communities as the economy begins to pick up in the wake of the 2008 financial crisis. •  The chart below shows long term immigration trends in the U.S.:

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Source: SUSPS

News Corp. is investing heavily in a new broadcast network specifically aimed at the Hispanic market: MundoFox
•  MundoFox is a collaboration between News Corporation subsidiary Fox International Channels (FIC) and RCN Television. FIC CEO Hernan Lopez told Variety in April that “there is an increasing demand for quality Spanish-language content in the U.S. from both viewers and advertisers.” And they have reason. Below, Hispanic viewers as a part of major broadcast shows:

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Changing Demos

"Two and a Half Men" on CBS 611,000 Hispanic Viewers "Grey's Anatomy" on ABC 583,000 Hispanic Viewers "Glee" on Fox 518,000 Hispanic Viewers ”Modern Family" on ABC 798,000 Hispanic Viewers

"La Que No Podía Amar” on Univision 5.2 million viewers

Source: Wikimedia Commons, Nielsen, The New York Times

19. MILITARY SPENDING UNDER PRESSURE
•  Under President Obama’s proposed budget, spending on the military would remain historically high, but its growth rate would slow, topping $550 billion in 2016. •  Savings come primarily from a reduction in ground forces as the U.S. winds down the war in Afghanistan, and emphasizes drones and special operations.

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Under Republican proposals, defense spending could hit nearly $1 trillion by 2022
•  Should Mitt Romney become President, he has pledged to massively increase defense spending. Though his budget and tax plans lack detail, Romney says he plans on cutting taxes significantly. •  To meet deficit reduction targets and reach this level of military spending, Republicans would have to make significant cuts to non defense discretionary spending and entitlements.

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Military Spending Pressured

The Fiscal Cliff could cap spending more than $100 billion below both Democrat and Republican plans
•  The third option is that we hit the fiscal cliff full on. The caps mandated by the Budget Control Act would lead to significant cuts in Military spending to about $455 billion a year. •  However, spending would remain well above the post cold war average, and continue to significantly outspend China, our closest rival in defense spending.

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Military Spending Pressured

20. THE PHARMA PATENT CLIFF
•  Some of the largest blockbuster drugs saw patents expire over past couple of years — resulting in huge generic competition and sales declines. In the year following generic competition on Pfizer’s Lipitor, Q2 sales fell 41% to $1.39B. BMS’s Plavix saw sales fall 60% to $741M. Below, a look at big-pharmaceuticals reliance on the blockbuster drug

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• 

Revenue generated by drug in final 12 months preceding patent expiration

Companies are aggressively trying to cut costs as they find blockbuster drugs harder and harder to develop
•  High rates of attrition and high regulatory barriers make the discovery of new drugs incredibly expensive. •  That has led to a wave of acquisitions of smaller biotechnology companies by large firms seeking innovation, including GlaxoSmithKline’s recent $3.01 billion offer for Human Genome Sciences

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The Pharma Patent Cliff

R&D spending compared to number of approved drugs and therapies

Source: FDA CDER, PhRMA and PricewaterhouseCoopers analysis. Note. Data on R&D spending for non-PhRMA companies are not included.

Drug companies, understanding that billion dollar plus drugs are harder to come by, are shifting their strategy
•  Pharma companies are exploring treatments like personalized cancer therapies, specifically tailored to each patient’s cancer cells. Below, a look at new treatments and big themes in the sector:
Biosimilars:
• Drugs made from and similar to human antibodies.

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The Pharma Patent Cliff

Personalized medicine/ • The development of drugs targeted to a certain group of people coupled with a test companion diagnostics: for a mutation or disease variant.

Combination therapy:

• Developing drugs in concert to attack several parts of a disease.

Compliance technology: • Ways to make sure patients are taking their medicine.

Deep sequencing:

• The thousand dollar genome.

siRNA, microRNA, antisense: Industrialization of research:

• Delivering RNA to cells to prevent them from producing proteins.

• Bringing the time and cost for research down. Possible examples are scanners that can show if a treatment is reducing a tumor’s energy consumption, and greater use of genetically modified mice.

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To contact the reporters on this presentation please email Eric Platt at eplatt@businessinsider.com. Eric Platt, Matthew Boesler, Max Nisen for Business Insider
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