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∑ US Vital Statistics

April 2010

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US Vital Statistics is provided as a public service. The report cuts through the unbearable daily economic noise and focuses on the critical
data to illustrate economic trends.

Copyright 2010 Plan B Economics


www.planBeconomics.com

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed
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2
USA is indebted to the world
- we owe more than we own -
Conventional wisdom suggests:
growing reliance on foreign capital = higher cost of capital (or even a funding crisis)

USA: Indebted to the world


Net international investment position of the United States (Source: BEA)

$500,000

$-

-$500,000

-$1,000,000
Millions

-$1,500,000

-$2,000,000

-$2,500,000

-$3,000,000

-$3,500,000

2006r

2007r
1976

1977

1978
1979

1980

1981

1982
1983

1984

1985

1986

1987
1988

1989

1990

1991

1992

1993

1994

1995

1996
1997

1998

1999

2000

2001

2002

2003

2004

2005

2008p
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 3
Yet foreign income exceeds foreign payments
- the exorbitant privilege of reserve currency status -

Reserve status keeps US risk and liquidity premia low, reducing cost of capital relative to foreign entities.
How long can this imbalance last?

Annual Net Foreign Income Earned by US Entities


(from US Balance of Payments; Source BEA)
$1,000,000

$800,000 Income receipts


Income payments
$600,000

$400,000

$200,000
Millions

$-

-$200,000

-$400,000

-$600,000

-$800,000

-$1,000,000
1976
1977
1978
1979
1980
1981
1982
1983
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
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 4
Is a US sovereign debt crisis inevitable?
- again, reserve currency status alters the odds -

• All things equal, any entity that must borrow to spend will eventually hit a funding crisis. As
lenders disappear, a country is forced to borrow at higher yields and/or print money to
finance expenditures.
• As the world’s favoured trading and reserve currency (because the US is the world’s biggest
consumer, has the world’s deepest/most liquid risk-free asset market and has the world’s
strongest military) the US may be an exceptional case. Consequently, the US can theoretically
manage bigger deficits than other country.
• While the direction of US public debt and deficits is worrisome, and the probability of a US
debt crisis is rising, the probability of a US debt crisis is not yet 100%.
• The following historical illustration demonstrates how actual events can often defy
conventional logic.

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 5
1930-1945: Chapters of a debt crisis?
- economic output / recovery increasingly reliant on debt…sounds familiar? -

During the mid-1930s people were worried about deficits/debt.


Imagine how they felt as debt levels continued to skyrocket…
…and this was a time when the US dollar did not benefit from an exorbitant privilege.

Public Debt Up 1574% Public Debt to GDP Up 584%


US Government Debt US Government Debt as % of GDP

$300,000
120%

$250,000
1930 1945 100% 1930 1945

$200,000
80%

(Millions)
(Millions)

$150,000
60%

$100,000
40%

$50,000 20%

$- 0%

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 6
1930-1945 was actually, a Treasury bull market
- bond yields declined !?! conventional wisdom be damned -

The 1930-1945 situation is clearly not identical to today.


However, it illustrates how a widely-expected outcome can be quite distant from reality.

US 10yr Gov't Bond Yield

6%

5%

4%

3%

2%

1%

0%
01/31/1921
11/30/1921

09/30/1922

07/31/1923
05/31/1924
03/31/1925

01/31/1926
11/30/1926

09/30/1927
07/31/1928
05/31/1929

03/31/1930
01/31/1931

11/30/1931
09/30/1932

07/31/1933
05/31/1934

03/31/1935
01/31/1936
11/30/1936

09/30/1937
07/31/1938
05/31/1939
03/31/1940

01/31/1941
11/30/1941

09/30/1942
07/31/1943
05/31/1944

03/31/1945
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 7
1945: What came next?
- After the Depression and War, an era of new stability seemed improbable -
Conventional wisdom fails yet again as the US enters an new era of prosperity,
despite millions of unemployed soldiers and massive government debt.
Again, 1945 is not the same as today…but never underestimate the unexpected.

Manufactured Comfort: Post-War Dividend Stability


Rolling 12mth Growth in S&P 500 Dividends

60%

50%

40%
Consistent Dividend Growth
30%
20%

10%

0%

-10%
-20%
-30%

-40%

-50%
71
77
83
89
95
01
07
13
19
25
31
37
43
49
55
61
67
73
79
85
91
97
03
09
18
18
18
18
18
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 8
What does 60yrs of stability get you?
- massive build-up of systemic risk, all-asset bubble and a massive financial crisis -

Investment Bank Leverage Ratios

Morgan Stanley

Goldman Sachs 2007


Merrill Lynch
2003

Bear Stearns

Lehman Brothers

10% 15% 20% 25% 30% 35%

After 60+ years of relative stability, a financial collapse seemed improbable. So as developed economies
reached capacity and return on capital shrank, investors took more risk to enhance returns.

But we eventually got our ‘Minsky moment’.

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 9
Real estate loans collapsed
- declining real estate prices led to implosion of levered entities -

US Bank Loan Delinquency Rates

14

Business loans
Consumer loans
12 Agricultural production loans
Single-family residential mortgages
Single-family residential mortgages
Commercial real estate loans (excluding farmland)
10

Commercial real estate loans


(excluding farmland)
8

0
1987Q4
1988Q2
1988Q4
1989Q2
1989Q4
1990Q2
1990Q4
1991Q2
1991Q4
1992Q2
1992Q4
1993Q2
1993Q4
1994Q2
1994Q4
1995Q2
1995Q4
1996Q2
1996Q4
1997Q2
1997Q4
1998Q2
1998Q4
1999Q2
1999Q4
2000Q2
2000Q4
2001Q2
2001Q4
2002Q2
2002Q4
2003Q2
2003Q4
2004Q2
2004Q4
2005Q2
2005Q4
2006Q2
2006Q4
2007Q2
2007Q4
2008Q2
2008Q4
2009Q2
2009Q4
This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 10
Saved by the Bernanke put
- MBS purchase program puts floor under housing market -

Fed MBS
purchases

Housing
starts

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 11
A new attitude: Consumer credit declines
- personal deleveraging reflects a new frugality -

Today’s consumption replaced by tomorrow’s savings.

Consumers
paying
down debt

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 12
US industry has stopped bleeding
- lower operating levels reflect consumer deleveraging -

US rail traffic stable but still in ICU.


Eventually, a stable consumer will prompt a more robust return to industrial activity

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 13
Foreign demand stepping in for the US consumer?
-world trade back to 2006 levels -

BRICs and commodity producers leading the charge

World trade Index


[2000 = 100] Source: Netherlands Bureau for Economic Policy Analysis

170

150

130

110

90

70

50

30
91 1
92 8
92 3
93 0
93 5
94 2
95 7
95 2
96 9
96 4
97 1
98 6
98 1
99 8
99 3
00 0
00 5
01 2
02 7
02 2
03 9
03 4
04 1
05 6
05 1
06 8
06 3
07 0
07 5
08 2
09 7
09 2
09
19 m0
19 m0
19 m0
19 m1
19 m0
19 m1
19 m0
19 m0
19 m0
19 m0
19 m1
19 m0
19 m0
19 m0
19 m0
20 m1
20 m0
20 m1
20 m0
20 m0
20 m0
20 m0
20 m1
20 m0
20 m0
20 m0
20 m0
20 m1
20 m0
20 m1
20 m0
20 m0
m
91
19

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 14
…and global investors are hungry for US assets
- back to ‘normal’…US companies can affordably access capital markets -

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 15
So, US companies doing fairly well: strong profitability
- profits and inventories nearly back to pre-recession levels -

Unfortunately for many, businesses have learned to operate with fewer employees so hiring will be slow.
However, in the long-run this is good if unemployed are re-deployed to more productive industries.

Corporate
profits

Inventories

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 16
Dividends have troughed: Profit retention = giant cash-build
- eventually, dividend increases will confirm management belief in sustainable recovery -

Dividend increases are ‘sticky’ (i.e. management doesn’t like to cut dividends).
Therefore, dividend increases tend to be made when management is confident about the future.
* Confidence also makes managers more willing to re-hire workers *

Dividends

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 17
So what will companies do with cash?
- cash is king…for now -

• Some may pay dividends


• Some may buy other companies
• Some may hoard cash
• Some may pay down debt
• Finally, some may hire workers

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate
and should not be relied upon. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing or
business decisions. 18
Bottom Line: conventional wisdom suggests a funding crisis (which could seriously
damage the US economy) will be a consequence of today’s growing US public debt. This
logic is difficult to argue against, but history – specifically, the Great Depression -
suggests a US debt crisis is not a foregone conclusion.
{Note: Conventional wisdom also argued that a financial crisis was improbable.}
Meanwhile, the US economy appears to be in the midst of a full-blown jobless recovery.
Corporate profits have recovered off the backs of the unemployed. When corporate profits
will lead to employment gains is debatable. Realistically, hiring new staff will be the last
thing companies do with their cash hoards.
Alternatively, under-capacity in certain industries may offset overcapacity in others,
enabling a structural redeployment of workers. However, this may be a drudgingly slow
process.
{…or we could just jump headfirst into the next bubble.}

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Copyright 2010 Plan B Economics


www.planBeconomics.com

This report is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not
guaranteed to be accurate and should not be relied upon. Investing involves risk and you could lose all your money. Consult a
professional advisor before making any investing or business decisions.