The Great Abdication

Danielle

DiMartino

Booth

Where Art Thou, Uncle Sam?

Price Discovery

Obfuscate:

Defined as:

To hide, to render unintelligible confuse, muddle…

Latin root:

Obfuscatio to darken over

The Great Moderation, Part II?

$ tn

%

Wealth Recaptures Record Level

Household Net Worth (LHS)

Net Worth as % of Disposable Income (RHS)

Change in Household Net Worth

90

700

Q4 ‘02 – Q3 ’07:

$24 Trillion

80

650

Q1 ‘09 – Q1 ’15:

$29 Trillion

70

60

600

50

550

40

30

500

20

450

10

0

400

Q3-1980

Q1-1982

Q3-1983

Q1-1985

Q3-1986

Q1-1988

Q3-1989

Q1-1991

Q3-1992

Q1-1994

Q3-1995

Q1-1997

Q3-1998

Q1-2000

Q3-2001

Q1-2003

Q3-2004

Q1-2006

Q3-2007

Q1-2009

Q3-2010

Q1-2012

Q3-2013

Q1-2015

May-2010

May-2000

May-1980

May-1970

May-1960

May-1990

Nov-2002

Nov-1962

Nov-1992

Nov-1982

Nov-1972

Nov-2012

Nov-1967

Nov-1977

Nov-1997

Nov-1987

Nov-2007

May-2015

May-2005

May-1965

May-1995

May-1985

May-1975

Income Stagnates

Real Disposable Personal Income per Capita (SAAR, Chn.2009$)

45

40

35

30

25

20

15

10

5

0

$ (000's)

Source: Haver Analytics, Bureau of Economic Analysis

$ tn

Rebuilding Household Debt

14

Households: Liabilities: Consumer Credit (NSA, Bil.$)

Households: Liabilities: Home Mortgages (NSA, Bil.$)

12

10

8

6

4

2

0

Source: Haver Analytics, Flow of Funds

Q3-1980

Q1-1982

Q3-1983

Q1-1985

Q3-1986

Q1-1988

Q3-1989

Q1-1991

Q3-1992

Q1-1994

Q3-1995

Q1-1997

Q3-1998

Q1-2000

Q3-2001

Q1-2003

Q3-2004

Q1-2006

Q3-2007

Q1-2009

Q3-2010

Q1-2012

Q3-2013

Q1-2015

Student Loan Debt

%

$

Total Student Loan Debt Outstanding

Proportion with Student Loans

(lhs)

1.4

50

Average Student Loan Balance

(rhs)

25,000

1.2

40

20,000

1

30

15,000

0.8

0.6

20

10,000

0.4

10

5,000

0.2

0

0

0

(Trillion)

2007

2008

2009

2010

2011

2012

2013

2014

2015

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Let Them Drive Cars!

Single Family Home Sales: US (SAAR, Thous) (LHS)

8,000

20

Vehicle Sales (SAAR, Mil.Units) (RHS)

18

7,000

16

6,000

14

5,000

12

4,000

10

8

3,000

6

2,000

4

1,000

2

0

0

Source: Bureau of Economic Analysis/Haver Analytics; HN1US: Census Bureau HX1US: National Association of Realtors

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Malinvestment

In Austrian business cycle theory, malinvestments are badly allocated business investments made due to the artificially low cost of credit. Central banks are often blamed for causing malinvestments.

Malinvestment occurs when artificially low interest rates mislead relative price signals which eventually necessitates a corrective contraction. A boom followed by a bust.

Falling Reward for Bond Risk

2

1.5

1

0.5

0

-0.5

US 10-Year Term Premium %

2012

2013

2014

2015

Source: Federal Reserve Bank of New York

U.S. Equity Market Dwarfs GDP

NYSE Market Cap: % of GDP

NYSE + NASDAQ Market Cap: %of GDP

200%

Q2 '00:

174 %

180%

Q2 '15:

160%

149%

140%

120%

100%

80%

60%

40%

20%

0%

Q4-1947

Q2-1955

Q4-1962

Q2-1970

Q4-1977

Q2-1985

Q4-1992

Q2-2000

Q4-2007

Q2-2015

Source: Haver Analytics, World Federation of Exchanges, Bureau of Economic Analysis

S&P 500 Buybacks vs Domestic Equity Mutual Fund + Domestic Equity ETF Flows

S&P 500 Buybacks (bil. $)

Domestic Equity Mutual Fund + Domestic ETF Flows ($ billions)

600

500

400

300

200

100

-

(100)

Billions, US$

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Haver Analytics and Citi Research US Equity Strategy

Commercial Real Estate Recovery Outpaces Housing

210

(Indexed Price 2002=100)

S&P/Case-Shiller

CPPI

Recovered:

190

Housing: 59%

Commercial: 128%

170

150

130

Peak-to-Trough

Housing: -35%

Commercial: -40%

110

90

Source: S&P/Case-Shiller, RCA, Morgan Stanley Research

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Trump Towers

Single Family Starts/Multi Family Starts: Ratio

1000%

900%

Oct '09:

821%

800%

700%

Feb '06:

573%

600%

500%

400%

300%

Jun '15

140%

200%

100%

0%

Jun-1991

Dec-1992

Jun-1994

Dec-1995

Jun-1997

Dec-1998

Jun-2000

Dec-2001

Jun-2003

Dec-2004

Jun-2006

Dec-2007

Jun-2009

Dec-2010

Jun-2012

Dec-2013

Jun-2015

Source: Haver Analytics, Census Bureau

Sep-10

Mar-10

Sep-12

Mar-12

Jun-10

Jun-12

Dec-10

Sep-14

Mar-14

Dec-12

Jun-14

Dec-14

Sep-09

Dec-09

Mar-15

Jun-15

Sep-13

Mar-13

Jun-13

Dec-13

Sep-11

Mar-11

Jun-11

Dec-11

Investors Throwing in the Towel

60%

50%

40%

30%

20%

10%

0%

First Time Buyers(LHS)

All Cash Purchases (RHS)

40%

35%

30%

25%

20%

15%

10%

5%

0%

Mar '11:

35%

June '15:

22%

June 15:

30%

Source: NAR

Will the Rental Revolution Continue?

Owners

Renters

14

12

Q1 '15:

10

8.6 M

8

6

4

2

0

-2

Q1'15:

-4

-1.2 M

10 Yr Change: Millions

Source: Haver Analytics, Census Bureau

Tuition and Fees + Room and Board

$45,000

Public Four-Year

Private Nonprofit Four-Year

$40,000

Year

Tuition and

Fees

Tuition and Fees +

Room and Board

$35,000

2000

$15,518

$21,475

2015

$31,231

$42,419

$30,000

$25,000

$20,000

$15,000

$10,000

$5,000

$0

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: CollegeBoard

Not Saving One Thin Dime

50%

48%

46%

44%

42%

40%

38%

36%

1992

1995

1998

2001

2004

2007

2010

2013

Source: FRB Survey of Consumer Finances, DB Global Markets Research

Retirement Anyone?

Median Housing Debt for Families With Heads Age 65-74

$90,000

$80,000

$70,000

$60,000

$50,000

$40,000

$30,000

$20,000

$10,000

$-

1992

1995

1998

2001

2004

2007

2010

2013

Source: Employee Benefit Research Institute, Survey of Consumer Finances

The Great Abdication

Danielle

DiMartino

Booth

Hitting the Basement

Net Household Formation (Thous)

Total Housing Starts: Units (RHS)

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

-0.5

0.0

Units: Millions: 12 Mo. Rolling Sum

Mar-1965

Sep-1967

Mar-1970

Sep-1972

Mar-1975

Sep-1977

Mar-1980

Sep-1982

Mar-1985

Sep-1987

Mar-1990

Sep-1992

Mar-1995

Sep-1997

Mar-2000

Sep-2002

Mar-2005

Sep-2007

Mar-2010

Sep-2012

Mar-2015

Units (Millions)

Source: Haver Analytics, Census Bureau

Cash at Fifteen-Year Low

Non-Financial Corporate Cash/Non-Financial Bonds Outstanding

45%

40%

Q1 ‘15

34.6%

35%

30%

25%

20%

Q1-1996

Q1-1997

Q1-1998

Q1-1999

Q1-2000

Q1-2001

Q1-2002

Q1-2003

Q1-2004

Q1-2005

Q1-2006

Q1-2007

Q1-2008

Q1-2009

Q1-2010

Q1-2011

Q1-2012

Q1-2013

Q1-2014

Q1-2015

Note: Cash defined as checkable deposits, money market funds, and Time and savings deposits

Buy High, Sell Low! (On Margin)

%

Margin Debt/GDP

Q2: ‘15:

Q1: '00:

3.0

2.9%

2.8%

Q2: '07:

2.6%

2.5

2.0

1.5

1.0

0.5

0.0

Source: Haver Analytics, Bloomberg

Q2-1981

Q2-1983

Q2-1985

Q2-1987

Q2-1989

Q2-1991

Q2-1993

Q2-1995

Q2-1997

Q2-1999

Q2-2001

Q2-2003

Q2-2005

Q2-2007

Q2-2009

Q2-2011

Q2-2013

Q2-2015

Landlords Raise the Roof

CES: 25-34 Years of Age: Rented Dwellings Expenditures ($)

CES: 25-34 Years of Age: Owned Dwellings Expenditures ($)

7000

2013:

$5881

6000

5000

2013:

4000

$4560

3000

2000

1000

0

$/Yr

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Bank of America Merrill Lynch

Fishing for the Truth

Mar-10

Mar-00

Mar-12

Mar-92

Mar-02

Mar-14

Mar-94

Mar-04

Mar-06

Mar-96

Mar-09

Mar-99

Mar-08

Mar-98

Mar-07

Mar-97

Mar-15

Mar-05

Mar-95

Mar-13

Mar-03

Mar-93

Mar-01

Mar-11

Mar-91

Melrose Displaced

12

11

10

9

8

7

6

Rental Vacancy Rate: United States (%)

Source: Haver Analytics

Buy Low, Fly High

100%

90%

80%

70%

Highest Income

Quintile

60%

4th Income

50%

Quintile

40%

3rd Income

Quintile

30%

2nd Income

20%

Quintile

10%

Lowest Income

0%

Quintile

'85

'92

'99

'06

'13

Corporate Headquarter Relocations to Texas

2010-Present

Energy:

Outsized Role in non-Residential Structures

Source: Bank of America, Merrill Lynch Global Research, Bureau of Economic Analysis

Feb-2014

Sep-2014

Jan-2014

Dec-2014

Nov-2014

Aug-2014

Apr-2014

May-2014

Jul-2014

Mar-2014

Oct-2014

Jun-2014

Dec-2013

Inflation Persists Even as Energy Plummets

CRB Commodities Index

Annual Services Inflation

3500

3.00%

3400

2.50%

3300

3200

2.00%

3100

3000

1.50%

2900

1.00%

2800

2700

0.50%

2600

2500

0.00%

Source: Haver Analytics

Location, Location, Location…

40

35

30

25

20

15

10

5

0

-5

2014 Average

January 2015

Richmond

Philly

NY

Kansas

Texas

Is Real Estate Next?

3,400

100

CRE Debt ($Bn)

Brent Crude ($/bbl, right)

90

2,900

80

70

2,400

60

1,900

50

40

1,400

30

20

900

10

400

0

Jan-84

Sep-86

Jun-89

Mar-92

Dec-94

Sep-97

Jun-00

Mar-03

Nov-05

CRE Prices Synchronous With Debt Financing

4,000

CRE Debt ($Bn)

NCREIF Price Index (right)

450

3,500

400

3,000

350

2,500

300

2,000

250

1,500

200

1,000

150

500

0

100

Jan-84

Jun-89

Dec-94

Jun-00

Nov-05

May-11

…And Then Oil Diverged Sharply

3,600

120

CRE Debt ($Bn)

Brent Crude ($/bbl, right)

110

3,400

100

3,200

90

3,000

80

70

2,800

60

2,600

50

2,400

40

Jan-11

Jul-11

Feb-12

Aug-12

Mar-13

Sep-13

Apr-14

Nov-14

Fastest Wage Growth Has Been in Oil Patch

15.3%

-0.02%

3.8%

2.9%

3.4%

-3.0%

9.4%

0.80%

2.5%

3.9%

US Wage Growth 2009-2014 -0.80%

Oil Futures Open Interest

3,250,000

2,250,000

1,250,000

250,000

Source: Bloomberg

03/01/19

95

03/01/20

00

03/01/20

05

03/01/20

10

03/01/20

15

S&P Earnings Estimate

$126

$124

$122

$120

$118

$116

$114

$112

$110

S&P Annualized Quarterly Profit Estimate

Full Year Estimate for 2015

$140

$138

$137

$136

$135

$131

$130

$125

$125

$121

$120

$115

$110

Q1 '13

Q2 '13

Q3 '13

Q4 '13

Q1 '14

Q2 '14

Q3 '14

Q4 '14

Q1 '15

Exposure to Office Properties with Oil and Gas Tenants

2%

4% 3%

4%

5%

61%

21%

Source: Morgan Stanley

Texas

Colorado

California

Oklahoma

Pennsylvania

Louisiana

Other

Exposure to Eagle Ford & Permian Basin

5%

9%

43%

16%

27%

Source: Morgan Stanley

Midland, TX

Williston, ND

Odessa, TX

Dickinson, ND

Laredo TX

Companies with $1B+ Market Cap

48%

52%

Dallas

Companies $250M- $1B Market Cap

30%

70%

15%

85%

Houston

52%

48%

Private Fixed Assets

120

100

80

60

40

20

0

Net Stock: Private Fixed Assets: Quantity Index (2009=100)

%

5

Y/O/Y Growth (RHS)

4

3

2

1

0

-1

-2

1926

1929

1932

1935

1938

1941

1944

1947

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

Source: Haver Analytics

Average Daily Demand for Paper Oil

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

-

Jan 14 -

Jun 14

2013 -

2012 -

2011 -

2010 -

2009-

QE1 -

Jun 14

Jun 14

Jun 14

Jun 14

Jun 14

Jun 14

Source: CFTC; Bloomberg; Paradarch Advisors, LLC

Percentage of Families With Debt

Age 65-75

Age 75+

70%

60%

50%

40%

30%

20%

10%

0%

1992

1995

1998

2001

2004

2007

2010

2013

Source: Employee Benefit Research Institute, Survey of Consumer Finances

Sell Low, Buy High?

S&P 500 Announced Stock Buybacks Cumulative Total in Billions (LHS) S&P Index (RHS)

2000

2500

2000

1500

QE3 Worries

1500

Debt Ceiling

1000

1000

Fiscal Cliff

500

500

0

0

01/01/2009

02/01/2010

03/01/2011

04/01/2012

04/01/2013

05/01/2014

06/01/2015

Source: Bloomberg

(trillions)

Consumer Credit (includes: auto loan, credit card, student loan)

Home Mortgages

14

12

10

8

6

4

2

0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Sub Prime Auto ABS Outstanding

40

35

30

25

20

15

10

5

0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Corporate Relocations into Texas 2004-Present

Corporate Relocations out of Texas 2004-Present

Owners of less expensive homes are three times more likely to be underwater than owners of expensive homes. In NY the ratio is five.

60

50

40

30

20

10

0

Bottom tier

Middle tier

Top tier

US

Atlanta

Chicago

Detroit

Los Angeles

New York

San

Francisco

Washington

Source: Zillow data as of 2014Q3, DB Global Markets Research

Mortgage Origination

% GSE/FHA

60%

50%

40%

30%

20%

2000

2002

2004

2006

2008

2010

2012

2014

Sources: BofA Merrill Lynch Global Research, Fannie Mae, Freddie Mac, Gannie Mae, Intex, Fed

Mortgage Origination

% GSE/FHA (Sec)

100%

90%

80%

70%

60%

50%

2000

2002

2004

2006

2008

2010

2012

2014

Sources: BofA Merrill Lynch Global Research, Fannie Mae, Freddie Mac, Gannie Mae, Intex, Fed

US Syndicated Loan Volume

Leveraged

I-Grade

Other

1200

1000

800

600

400

200

0

(in billions)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: Loan Connector

Shale Production States

National Aggregate ex Shale

5

4

3

2

1

0

-1

-2

-3

-4

2006

2007

2008

2009

2010

2011

2012

2013

Real GDP Growth

Source: Bureau of Economic Analysis

Shale Production States

National Aggregate ex Shale

6

5

4

3

2

1

0

-1

2006

2007

2008

2009

2010

2011

2012

2013

2014

Unemployment Rate, Change since Jan 2006

Source: Bureau of Labor Statistics

Shale Production States

National Aggregate ex Shale

11

10

9

8

7

6

5

4

2006

2007

2008

2009

2010

2011

2012

2013

2014

Unemployment Rate

Source: Bureau of Labor Statistics

Shale Production States

National Aggregate ex Shale

6

4

2

0

-2

-4

-6

2006

2007

2008

2009

2010

2011

2012

Electricity Generation, Annual Pct Change

Source: Department of Energy

Shale Production States

National Aggregate ex Shale and ex CA, AZ, FL, NV

8

6

4

2

0

-2

-4

-6

-8

2006

2007

2008

2009

2010

2011

2012

2013

2014

Home Prices, Annual Pct Change

Source: Zillow Home Prices

Shale Production States

National Aggregate ex Shale

4

2

0

-2

-4

-6

-8

2006

2007

2008

2009

2010

2011

2012

2013

Nonfarm Payrolls, Change since Jan 2006, mn

Source: Bureau of Labor Statistics

Shale Production States

National Aggregate ex Shale

3

2

1

0

-1

-2

-3

-4

-5

2007

2008

2009

2010

2011

2012

2013

2014

Nonfarm Payrolls, Annual Pct Change

Source: Bureau of Labor Statistics

Shale Production States

National Aggregate ex Shale

5

4

3

2

1

0

-1

-2

2007

2008

2009

2010

2011

2012

2013

2014

Hourly Wages, Inflation-adjusted, % Change

Source: Bureau of Labor Statistics

Forever Young

(length of post-WW2 expansions, months)

Source: National Bureau of Economic Research, Bureau of Economic Analysis

Renting in Multifamily Structures

70%

69%

68%

67%

66%

65%

64%

63%

62%

1987 1989 1991

Source: Census Bureau

1993 1995 1997

1999 2001 2003 2005 2007

2009 2011 2013

26%

24%

1947-present

historic average

22%

20%

18%

16%

14%

1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1988 1992 1996 2000 2004 2008 2012

Source: National Bureau of Economic Research

240

PPI: Lumber (nsa)

PPI: Lumber (sa)

220

200

180

160

140

120

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Bureau of Labor Statistics

Tuition and Fees

$35,000

Private Nonprofit Four-Year

Public Four-Year

$30,000

Year

Tuition and

Fees

Tuition and Fees +

Room and Board

2000

$15,518

$21,475

$25,000

2015

$31,231

$42.419

$20,000

$15,000

$10,000

$5,000

$0

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: CollegeBoard

Tuition and Fees

16.0%

One-Year % Change (private-four year)

One-Year % Change (public four-year)

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: CollegeBoard

Tuition and Fees + Room and Board

10.0%

One-Year % Change (private-four year)

One-Year % Change (public four-year)

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: CollegeBoard

Yields Down, Interest Expense Up?

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

Net Interest Paid as % GDP

Baa Bond Yield

One Man’s Junk?

First Time Issuers: LTM Average Coupon (LHS)

First Time Issuers: LTM Average Rating (RHS)

12

16.0

11

15.5

10

15.0

9

14.5

8

14.0

7

13.5

6

13.0

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Dec-13

Apr-14

The Incredible Shrinking Float

Avg. S&P 500

Market cap since

2005:

$11.9 trillion

S&P Buybacks

since Q4 2005:

$3.7 trillion

S&P 500 Buyback Boost

$94.60

Buybacks:

$2.20

Organic: $1.50

$98.30

Q3 2011

Q1 2013

Hitting the Basement

Total Number of Households (Thous)

2000

1800

1600

1400

1200

1000

792

800

600

400

200

0

Annual Household Formation Δ:

(000's)

Source: Bank of America Merrill Lynch

$4.5 Trillion and Counting

18

12

Real GDP (LHS)

Fed Funds Target (RHS)

16

10

14

8

12

10

6

8

4

6

2

4

2

0

GDP (tn)

1983-Q3

1985-Q1

1986-Q3

1988-Q1

1989-Q3

1991-Q1

1992-Q3

1994-Q1

1995-Q3

1997-Q1

1998-Q3

2000-Q1

2001-Q3

2003-Q1

2004-Q3

2006-Q1

2007-Q3

2009-Q1

2010-Q3

2012-Q1

2013-Q3

2015-Q5

Fed Funds Target: %

Source: Haver Analytics

Malinvestment

In 1940, Ludwig von Mises wrote, "The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression.

People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers' stone to make it last."

Confidence in Eye of Holder

S&P 500 Index (LHS) Consumer Confidence: Household Income <15K (RHS) Consumer Confidence: Household Income 50K+ (RHS)

2500

160

140

2000

120

100

1500

80

1000

60

40

500

20

0

0

'00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

S&P 500 Index

Consumer Confidence Index

A Zero Sum Game?

%

Fed Funds Target

5.0

4.0

3.0

2.0

1.0

0.0

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Source: Haver Analytics

The Disappearing American Dream

Median income

Median net worth

660

100

Mean income

Mean net worth

560

90

80

460

90%

70

income

360

660%

gap

wealth

60

60% income

gap

260

400%

gap

wealth

50

gap

160

40

60

30

'89

'92

'95

'98

'01

'04

'07

'10

'13

'89

'92

'95

'98

'01

'04

'07

'10

'13

$ (000's): Chained 2013

$ (000's): Chained 2013

Is Risk Being Rewarded?

%

80

70

60

50

40

30

20

10

0

5 Yr Cumulative Default Rate

11%

BB

B

CCC

CC to C

Source: Alliance Bernstein, Barclays

Let Them Drive (Used) Cars!

Year-on-year, % change

Used Motor Vehicles

40

30

20

10

0

-10

-20

-30

Nov-94

Nov-98

Nov-02

Nov-06

Nov-10

Nov-14

U.S. Nonfinancial Debt Scales Fresh Heights

_%

US: Nonfinancial Corporations Debt Outstanding as a % of SAAR GDP (%)

50

Q1 '15:

45

43.6%

40

35

30

25

20

Source: Haver Analytics, Federal Reserve Board

Sep-52

Mar-55

Sep-57

Mar-60

Sep-62

Mar-65

Sep-67

Mar-70

Sep-72

Mar-75

Sep-77

Mar-80

Sep-82

Mar-85

Sep-87

Mar-90

Sep-92

Mar-95

Sep-97

Mar-00

Sep-02

Mar-05

Sep-07

Mar-10

Sep-12

Mar-15

U.S. Nonfinancial Debt Scales Fresh Heights

_%

US: Nonfinancial Corporations Debt Outstanding as a % of SAAR GDP (%)

50

Q1 '15:

45

43.6%

40

35

30

25

20

Source: Haver Analytics, Federal Reserve Board

Sep-52

Mar-55

Sep-57

Mar-60

Sep-62

Mar-65

Sep-67

Mar-70

Sep-72

Mar-75

Sep-77

Mar-80

Sep-82

Mar-85

Sep-87

Mar-90

Sep-92

Mar-95

Sep-97

Mar-00

Sep-02

Mar-05

Sep-07

Mar-10

Sep-12

Mar-15

Fixed Income Yields Relative to Pension Needs

Junk Reative to Pension Need

Investment-Grade Relative to Pension Need

Fed Fund Target Relative to Pension Need

15

10

5

0

-5

-10

'00

'02

'04

'06

'08

'10

'12

'14

Source: IBM, Bloomberg, ML, CS

Insult Meets Injury

%

Proportion of Homes with Negative Equity

%

Majority of Homes with

35

35

Negative Equity are in

the Bottom Tier

30

30

30

25

25

20

18

20

15

11

15

10

10

5

0

5

Zillow: Percent of

Homes with Negative

Equity - Bottom Tier

Zillow: Percent of

Homes with Negative

Equity - Middle Tier

Zillow: Percent of

Homes with Negative

Equity - Top Tier

0

'10

'11

'12

'13

'14

Stocks & Buybacks: A Happy Couple

SPX (LHS)

Share Buybacks + Div (RHS)

2100

250

1600

200

1100

150

600

100

100

50

-400

0

Index

Jun-98

Mar-99

Dec-99

Sep-00

Jun-01

Mar-02

Dec-02

Sep-03

Jun-04

Mar-05

Dec-05

Sep-06

Jun-07

Mar-08

Dec-08

Sep-09

Jun-10

Mar-11

Dec-11

Sep-12

Jun-13

Mar-14

Dec-14

$ bn

Source: Standard and Poors

Inflation The Cost of Education

Then…(1982)

• Textbook: Principles of Economics by Greg Mankiw

• Textbook price: $20.00

• Minimum Wage: $3.35

• Number of hours worked to afford the book: 6 hours

Now… (2015)

• Textbook: Principles of Economics by Greg Mankiw

• Textbook price: $250.00

• Minimum Wage: $7.14

• Number of hours worked to afford the book: 35 hours

Income by Decile

900

800

700

90-100th%

80-89th%

600

60-79th%

500

40-59th%

400

20-39th%

300

<20th%

200

100

0

'89

'92

'95

'98

'01

'04

'07

'10

'13

$ (000's)