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The Great Abdication Danielle DiMartino Booth

The Great Abdication

Danielle

DiMartino

Booth

Where Art Thou, Uncle Sam?

Where Art Thou, Uncle Sam?

Price Discovery

Price Discovery

Obfuscate:

Obfuscate: Defined as: To hide, to render unintelligible confuse, muddle… Latin root: Obfuscatio to darken over

Defined as:

To hide, to render unintelligible confuse, muddle…

Latin root:

Obfuscatio to darken over

The Great Moderation, Part II?

The Great Moderation, Part II?

$ tn

%

Wealth Recaptures Record Level Household Net Worth (LHS) Net Worth as % of Disposable Income
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

May-1965 May-1995 May-1985 May-1975 Income Stagnates Real Disposable Personal Income per Capita (SAAR, Chn.2009$)

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

45 40 35 30 25 20 15 10 5 0 $ (000's)
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
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
%
$
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)
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
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
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. $)vs Domestic Equity Mutual Fund + Domestic Equity ETF Flows Domestic Equity Mutual Fund + Domestic

Domestic Equity Mutual Fund + Domestic ETF Flows ($ billions) 600 500 400 300 200
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
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
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%

Investors Throwing in the Towel 60% 50% 40% 30% 20% 10% 0% First Time Buyers(LHS) All

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%
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
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 +
$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
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
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

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

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 (%)

Mar-01 Mar-11 Mar-91 Melrose Displaced 12 11 10 9 8 7 6 Rental Vacancy Rate: United

Source: Haver Analytics

Buy Low, Fly High

100% 90% 80% 70% Highest Income Quintile 60% 4th Income 50% Quintile 40% 3rd Income
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

Corporate Headquarter Relocations to Texas 2010-Present

Energy:

Outsized Role in non-Residential Structures

Energy: Outsized Role in non-Residential Structures Source: Bank of America, Merrill Lynch Global Research, Bureau of

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
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
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
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 ($Bn) NCREIF Price Index (right) 450 3,500 400 3,000 350 2,500 300
4,000
CRE Debt ($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
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%
15.3%
-0.02%
3.8%
2.9%
3.4%
-3.0%
9.4%
0.80%
2.5%
3.9%

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
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
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
2%
4% 3%
4%
5%
61%
21%
Source: Morgan Stanley

TexasGas Tenants 2% 4% 3% 4% 5% 61% 21% Source: Morgan Stanley Colorado California Oklahoma Pennsylvania

Coloradoand Gas Tenants 2% 4% 3% 4% 5% 61% 21% Source: Morgan Stanley Texas California Oklahoma

Californiaand Gas Tenants 2% 4% 3% 4% 5% 61% 21% Source: Morgan Stanley Texas Colorado Oklahoma

Oklahomaand Gas Tenants 2% 4% 3% 4% 5% 61% 21% Source: Morgan Stanley Texas Colorado California

PennsylvaniaOil and Gas Tenants 2% 4% 3% 4% 5% 61% 21% Source: Morgan Stanley Texas Colorado

Louisianaand Gas Tenants 2% 4% 3% 4% 5% 61% 21% Source: Morgan Stanley Texas Colorado California

OtherGas Tenants 2% 4% 3% 4% 5% 61% 21% Source: Morgan Stanley Texas Colorado California Oklahoma

Exposure to Eagle Ford & Permian Basin

5% 9% 43% 16% 27% Source: Morgan Stanley
5%
9%
43%
16%
27%
Source: Morgan Stanley

Midland, TXFord & Permian Basin 5% 9% 43% 16% 27% Source: Morgan Stanley Williston, ND Odessa, TX

Williston, NDFord & Permian Basin 5% 9% 43% 16% 27% Source: Morgan Stanley Midland, TX Odessa, TX

Odessa, TXFord & Permian Basin 5% 9% 43% 16% 27% Source: Morgan Stanley Midland, TX Williston, ND

Dickinson, NDFord & Permian Basin 5% 9% 43% 16% 27% Source: Morgan Stanley Midland, TX Williston, ND

Laredo TXFord & Permian Basin 5% 9% 43% 16% 27% Source: Morgan Stanley Midland, TX Williston, ND

Companies with $1B+ Market Cap

48% 52% Dallas
48%
52%
Dallas

Companies $250M- $1B Market Cap

30% 70%
30%
70%
15% 85% Houston
15%
85%
Houston
52% 48%
52%
48%
Companies with $1B+ Market Cap 48% 52% Dallas Companies $250M- $1B Market Cap 30% 70% 15%

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
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
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
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
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)(trillions) Home Mortgages 14 12 10 8 6 4 2 0 1999 2000 2001 2002 2003

Home MortgagesCredit (includes: auto loan, credit card, student loan) 14 12 10 8 6 4 2 0

14

12

10

8

6

4

2

0

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
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

Sub Prime Auto ABS Outstanding

40 35 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008
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 into Texas 2004-Present

Corporate Relocations out of 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

homes. In NY the ratio is five. 60 50 40 30 20 10 0 Bottom tier

Bottom tier

In NY the ratio is five. 60 50 40 30 20 10 0 Bottom tier Middle

Middle tier

ratio is five. 60 50 40 30 20 10 0 Bottom tier Middle tier Top tier

Top tier

five. 60 50 40 30 20 10 0 Bottom tier Middle tier Top tier US Atlanta
five. 60 50 40 30 20 10 0 Bottom tier Middle tier Top tier US Atlanta
five. 60 50 40 30 20 10 0 Bottom tier Middle tier Top tier US Atlanta
five. 60 50 40 30 20 10 0 Bottom tier Middle tier Top tier US Atlanta
five. 60 50 40 30 20 10 0 Bottom tier Middle tier Top tier US Atlanta
five. 60 50 40 30 20 10 0 Bottom tier Middle tier Top tier US Atlanta

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
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
% 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
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
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
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
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
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 StatesNational Aggregate ex Shale and ex CA, AZ, FL, NV 8 6 4 2 0

Shale Production States National Aggregate ex Shale and ex CA, AZ, FL, NV 8 6 4

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
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
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
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
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)

Forever Young (length of post-WW2 expansions, months) Source: National Bureau of Economic Research, Bureau of Economic

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

Renting in Multifamily Structures

70% 69% 68% 67% 66% 65% 64% 63% 62%
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
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
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 +
$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%
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%
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

Yields Down, Interest Expense Up? 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Net

One Man’s Junk?

First Time Issuers: LTM Average Coupon (LHS) First Time Issuers: LTM Average Rating (RHS) 12
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
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

S&P 500 Buyback Boost $94.60 Buybacks: $2.20 Organic: $1.50 $98.30 Q3 2011 Q1 2013
$94.60 Buybacks: $2.20 Organic: $1.50 $98.30

$94.60

Buybacks: $2.20 Organic: $1.50

Buybacks:

$2.20

Organic: $1.50

$94.60 Buybacks: $2.20 Organic: $1.50 $98.30
$94.60 Buybacks: $2.20 Organic: $1.50 $98.30

$98.30

Q3 2011

Q1 2013

Hitting the Basement

Total Number of Households (Thous) 2000 1800 1600 1400 1200 1000 792 800 600 400
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
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
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
%
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
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

Is Risk Being Rewarded? % 80 70 60 50 40 30 20 10 0 5 Yr

5 Yr Cumulative Default Rate

% 80 70 60 50 40 30 20 10 0 5 Yr Cumulative Default Rate 11%
% 80 70 60 50 40 30 20 10 0 5 Yr Cumulative Default Rate 11%
% 80 70 60 50 40 30 20 10 0 5 Yr Cumulative Default Rate 11%
% 80 70 60 50 40 30 20 10 0 5 Yr Cumulative Default Rate 11%

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
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
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
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

Fixed Income Yields Relative to Pension Needs Junk Reative to Pension Need Investment-Grade Relative to Pension

Junk Reative to Pension Need

Relative to Pension Needs Junk Reative to Pension Need Investment-Grade Relative to Pension Need Fed Fund

Investment-Grade Relative to Pension Need

to Pension Need Investment-Grade Relative to Pension Need Fed Fund Target Relative to Pension Need 15

Fed Fund Target Relative to Pension Need

15 10 5 0 -5 -10 '00 '02 '04 '06 '08 '10 '12 '14
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
%
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
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

Inflation The Cost of Education Then…(1982) • Textbook: Principles of Economics by Greg Mankiw • Textbook

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

Mankiw • Textbook price: $250.00 • Minimum Wage: $7.14 • Number of hours worked to afford

Income by Decile

900 800 700 90-100th% 80-89th% 600 60-79th% 500 40-59th% 400 20-39th% 300 <20th% 200 100
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)