January 23, 2014

It’s All Relative: Finance, Economics, and Uncle Sam

Agenda

2013 In Review

It’s All Relative

Finance and Money

Economics and Culture

What Happens Next

1/24/2014

2013 In Review

1/24/2014

Potential Positives

1/24/2014

Private Job Growth

1/24/2014

104000

106000

108000

110000

112000

114000

116000

118000

2009 2010 2011 2012 2013

Tho

usa

nd

s o

f P

erso

ns

Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED

Retail Sales

1/24/2014

150000

155000

160000

165000

170000

175000

180000

185000

2009 2010 2011 2012 2013

Mill

ion

s o

f D

olla

rs

Source: Federal Reserve Bank of St. Louis/FRED

Corporate Profits

1/24/2014

6%

7%

8%

9%

10%

11%

12%

13%

2009 2010 2011 2012 2013

Source: St. Louis Fed

Auto Sales

1/24/2014

8

9

10

11

12

13

14

15

16

17

18

2009 2010 2011 2012 2013

Mill

ion

s o

f U

nit

s

Source: U.S. Department of Commerce: Bureau of Economic Analysis/FRED

C&I Loans

1/24/2014

1100

1200

1300

1400

1500

1600

1700

2009 2010 2011 2013

Bill

ion

s o

f D

olla

rs

Source: Board of Governors of the Federal Reserve System/FRED

Home Prices

1/24/2014

100

110

120

130

140

150

160

170

2009 2010 2011 2012 2013

Ind

ex J

anu

ary

20

00

= 1

00

Source: S&P Dow Jones Indices LLC/FRED

Existing Home Sales

1/24/2014

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

2009 2010 2011 2012 2013

Nu

mb

er o

f U

nit

s

Source: National Association of Realtors/FRED

Housing Starts

1/24/2014

400

500

600

700

800

900

1000

1100

1200

2009 2010 2011 2012 2013

Tho

usa

nd

s o

f U

nit

s

Source: U.S. Department of Commerce: Census Bureau/FRED

Friction: Q3 2012

1/24/2014

Friction: Q1 2013

1/24/2014 Source: CoreLogic

Friction: Q3 2013

1/24/2014 Source: CoreLogic

Potential Negatives

1/24/2014

Federal Debt

1/24/2014

7000000

9000000

11000000

13000000

15000000

17000000

19000000

2009 2010 2011 2012 2013

Mill

ion

s o

f D

olla

rs

Source: U.S. Department of the Treasury: Financial Management Service/FRED

Federal Deficit

1/24/2014

-1600000

-1400000

-1200000

-1000000

-800000

-600000

-400000

-200000

0

200000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Mill

ion

s o

f D

olla

rs

Source: The White House: Office of Management and Budget/FRED

Federal Expenditures

1/24/2014

2000

2200

2400

2600

2800

3000

3200

3400

3600

3800

4000

2004 2006 2009 2012

Bill

ion

s o

f D

olla

rs

Source: U.S. Department of Commerce: Bureau of Economic Analysis/FRED

2013 Market Review

1/24/2014

2013 Performance

1/24/2014

-20% -10% 0% 10% 20% 30% 40% 50%

US Treasuries

Alternative Investments

Emerging Market Stocks

High Yield Bonds

International Bonds

Investment Grade Bonds

International Stocks

Small Cap Domestic Stocks

Large Cap Domestic Stocks

Source: Morningstar

Relative Finance

1/24/2014

Perspective

1/24/2014

Things to Invest In

1/24/2014

Real Estate

Building Permit Fees $ 3,107.00 Electrical Wiring $ 8,034.00

Impact Fee $ 2,850.00 Lighting Fixtures $ 2,193.00

Water and Sewer Inspection $ 2,952.00 HVAC $ 8,760.00

Excavation, Foundation, and Backfill $ 17,034.00 Insulation $ 3,399.00

Steel $ 1,012.00 Drywall $ 8,125.00

Framing and Trusses $ 24,904.00 Painting $ 6,005.00

Sheathing $ 2,142.00 Cabinets and Countertops $ 10,395.00

Windows $ 6,148.00 Appliances $ 3,619.00

Exterior Doors $ 2,150.00 Tiles and Carpet $ 8,363.00

Interior Doors and Hardware $ 2,883.00 Trim Material $ 3,736.00

Stairs $ 1,052.00 Landscaping and Sodding $ 6,491.00

Roof Shingles $ 5,256.00 Wood Deck or Patio $ 1,918.00

Siding $ 8,739.00 Asphalt Driveway $ 2,729.00

Gutters and Downspouts $ 870.00 Other $ 19,487.00

Plumbing $ 10,990.00 Total $ 185,343.00

1/24/2014 Source: National Association of Home Builders

Art/Collectables

1/24/2014

$25

$50

$75

Commodities

1/24/2014

Mine Development $150

Mining and Prospecting $10

Refining $15

Bonds

1/24/2014

January 2014

$50

January 2016

$50

July 2015

$50

January 2015

$50

July 2014

$50

July 2016

$50

$1,000

Stocks

1/24/2014

January 2014

$50

January 2016

$55

October 2015

$52

July 2014

$54

April 2014

$53

April 2016

$57

$362.79

…

Valuation

1/24/2014

I'm Bored

I'm Excited

Greed Greed, Greed

My Favorite Blogger Says

So

Get out of my face with your negative vibes, dude

CNBC

Last time something

like this came up, I didn't get in on it

I wonder what's for lunch…

Bob is doing it!

Mary is doing it!

Wall St. Stupidity

Index

Revenue Picture

EPS Growth Projections

Cash Flow

Confidence in Management

Perception of Business Plan

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Elements of Valuation

Wall St. Stupidity Index

Valuation

1/24/2014

Value and Volatility

1/24/2014

Intrinsic Value Relative Value

Asset Class Valuations

1/24/2014

-3 -2 -1 0 1 2 3

US Equity

Global Equity

Emerging Market Equity

US Bonds

Global Bonds

High Yield Bonds

Emerging Market Bonds

Under Valued Over Valued

Standard Deviations from Fair Value

Source: UBS Global Asset Management

Data as of 10/31/13

Monetary Policy

1/24/2014

A World Without Currency

1/24/2014 Source: OneRedPaperclip

What is ‘Currency’?

1/24/2014

Bitcoin vs. Dollar

1/24/2014

0

200

400

600

800

1000

1200

Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Source: BlockChain/St. Louis Fed

Value of Money

1/24/2014

$0.052

$0.085

$0.092

$0.078

$0.127

$0.112

$0.024

-$60.2 Million

-$56.5 Million

Source: Federal Reserve Bank

$1.67

$2.03

$2.19

$2.39

$2.43

$2.57

$2.86

$2.90

$3.51

$4.25

$4.37

$4.88

$4.90

$5.39

$5.64

$7.12

$7.84

-80% -40% 0% 40% 80%

Norway

Switzerland

Brazil

Canada

Australia

Euro Area

United States

Britain

Japan

Mexico

Indonesia

China

Russia

Egypt

Hong Kong

South Africa

India

Purchasing Power Parity

1/24/2014

Source: The Economist

$473.77

$499.00

$501.52

$501.56

$506.66

$512.61

$557.18

$559.38

$591.62

$596.08

$602.52

$617.58

$618.34

$638.81

$655.92

$791.40

$1,094.11

-30% -10% 10% 30% 50% 70% 90% 110% 130%

Malaysia

United States

Hong Kong

Japan

Australia

India

Canada

South Africa

Mexico

Russia

China

Switzerland

Euro Area

Britain

Norway

Brazil

Argentina

Purchasing Power Parity

1/24/2014 Source: Business Insider

Quantitative Easing: FED Reserves

1/24/2014 Source: St. Louis Fed

0

0.5

1

1.5

2

2.5

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Bill

ion

s o

f D

olla

rs

Commercial Bank Reserves

1/24/2014

0

500

1000

1500

2000

2500

3000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: St. Louis Fed

Money Supply

1/24/2014

0

2000

4000

6000

8000

10000

12000

Jan-90 Jun-93 Nov-96 Apr-00 Sep-03 Feb-07 Aug-10

Source: Board of Governors of the Federal Reserve System/FRED

QE

M1

M2

Inflation Measures

1/24/2014

0

50

100

150

200

250

Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED

CPI

PPI

CPI Value

1/24/2014

706

445

419

272

258

234

231

224

223

127

112

53

5

0 100 200 300 400 500 600 700

College Tuition and Fees

Medical Care Services

Medical Care

Services

Energy

Food

All Items

Transportation

Housing

Apparel

Durables

Toys

Televisions

Source: Conversable Economist, Timothy Taylor

Relative Economy

1/24/2014

Job Losses in Recessions

1/24/2014

Employment Ratio vs. Participation Rate

1/24/2014

Gender Roles

1/24/2014

30

40

50

60

70

80

90

100

Jan-48 Jun-57 Nov-66 Apr-76 Sep-85 Feb-95 Jul-04

Per

cen

t

Source: U.S. Department of Labor: Bureau of Labor Statistics/FRED

Total Participation Rate

Women

Men

Who’s Working More?

1/24/2014

Changing Life Cycle

1/24/2014

Age 5-15

Age 5-25

Age 15-65

Age 25-70

Age 65-75

Age 70-90

Historical New Age

Working

Years

Retirement

Schooling

Years

Childhood

The Shrinking Middle Class

1/24/2014

Median Household Income

Source: Pew Research Center

Shrinking Middle Class?

1/24/2014

33.1%

27.8%

59.7%

46.7%

7.2%

25.6%

0

10

20

30

40

50

60

70

1968 1973 1978 1983 1988 1993 1998 2003 2008

Lower Income Middle Income Upper Income

Source: US Census

Mean Household Income

1/24/2014 Source: BLS

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

20122002199219821972

What Does Love Have to Do With It?

1/24/2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Lowest Fifth Second Fifth Middle Fifth Fourth Fifth Highest Fifth

Married Couples

Single

Source: Mark Perry, AEIdeas: Explaining Income Inequality

Household Earners

1/24/2014

0

0.5

1

1.5

2

2.5

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

Lowest Fifth Second Fifth Middle Fifth Fourth Fifth Highest Fifth

Average Income

Mean Number of Earners Per Household

Source: Mark Perry, AEIdeas: Explaining Income Inequality

Wage Debate

1/24/2014

$7.25/hour

Source: Bureau of Labor Statistics

59.1%

5.6%

1.06%

Minimum Wage and

Employed Full Time

Minimum Wage Earners

Employees

Compensated Hourly

Who Will Benefit Most?

1/24/2014

Minimum Wage Earners by Age

0

10

20

30

40

50

60

16 to 24Years

25 to 34Years

35 to 44Years

45 to 54Years

55 to 64Years

65+ Years

1/24/2014

Source: Bureau of Labor Statistics

Percentage of Total Compensation

1/24/2014 Source: BLS

68.5%

69.0%

69.5%

70.0%

70.5%

71.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Benefits

Wages

Health Insurance Effect

1/24/2014

$2.60/Hour

7.00%

7.20%

7.40%

7.60%

7.80%

8.00%

8.20%

8.40%

8.60%

2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: BLS

Looking Forward

1/24/2014

Will We Get This?

By 2005 or so, it will become clear that the Internet’s impact on

the economy has been no greater than the fax machine’s

-- Paul Krugman

1/24/2014

Or This?

1. We are living in a time of astonishing progress

with digital technologies

2. Transformations brought about by these

technologies will be profoundly beneficial ones.

3. There will be some incredibly thorny challenges to

freedom and society.

1/24/2014

Game Changers

1/24/2014

Google Glass

1/24/2014

Bitcoin

1/24/2014

Fracking

1/24/2014

Bakken

1/24/2014

Texas

1/24/2014

3D Printing

1/24/2014

Game Changers

1/24/2014

Game Changers

1/24/2014

Capitalist Library?

1/24/2014

Home Control

1/24/2014

Corporate Profits

1/24/2014

6%

7%

8%

9%

10%

11%

12%

13%

2009 2010 2011 2012 2013

Source: St. Louis Fed

Emerging Markets

1/24/2014

Source: Investment Solutions presentation (As of March 2010)

Annual Market Returns

1/24/2014

0

1

2

3

4

5

6

7

8

-44

-42

-40

-38

-36

-34

-32

-30

-28

-26

-24

-22

-20

-18

-16

-14

-12

-10 -8 -6 -4 -2 0 2 4 6 8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

42

44

46

48

50

52

Source: Ibbotson Associates

Conclusion

Relative values will be more important (and more

volatile)

Current economic data may not be relative to actual

economic happenings

Technological innovations will continue to drive

growth and profits in ways we haven’t thought of yet

1/24/2014

Questions?

1/24/2014