bx view on 2011 - wein oct 2010

8/8/2019 BX view on 2011 - Wein Oct 2010

1/60

2011: Better, Worse or More of the SameByron R. Wien

Vice Chairman, Blackstone Advisory Partners L.P.

Tel: 212.583.5055Email: [email protected]

Byrons monthly essays are broadly recognized for their insight and perspective. If you

would like to receive future monthly market commentary publications by Byron Wien,please email byronwien'[email protected].


2/60

The Ten Surprises of 2010

1. The United States economy grows at a stronger than expected5% real rate during the year and the unemployment level dropsbelow 9%. Exports, inventory building and technology spendinglead the way. Standard & Poors 500 operating earnings come in

above $80

2. The Federal Reserve decides the economy is strong enough for

them to move away from zero interest rate policy. In a series ofsuccessive hikes beginning in the second quarter the Federalfunds rate reaches 2% by year-end


3/60

The Ten Surprises of 2010 (Contd)

3. Heavy borrowing by the U.S. Treasury and some reluctance byforeign central banks to keep buying notes and bonds drives theyield on the 10-year Treasury above 5.5%. Banks loan more tocorporations and individuals and pull away from the carry trade,thereby reducing demand for Treasuries. Obama says, The

suits are finally listening

4. In a roller coaster year the Standard & Poors 500 rallies to 1300in the first half and then runs out of steam and declines to 1000,ending where it started at 1115.10. Even though the economy isstrong and earnings exceed expectations, rising interest rates

and full valuations present a problem. Concern about longerterm growth and obligations to reduce leverage at both thepublic and private level unsettle investors


4/60


5. Because it is significantly undervalued on a purchasing powerparity basis, the dollar rallies against the yen and the euro. Itexceeds 100 on the yen and the euro drops below $1.30 as thelong slide of the greenback is interrupted. Longer-termprospects remain uncertain

6. Japan stands out as the best-performing major industrialized

market in the world as its currency weakens and its exportsimprove. Investors focus on the attractive valuations of dozensof medium-sized companies in a market selling at one quarter ofits 1989 high. The Nikkei 225 rises above 12,000


5/60


7. Believing he must be a leader in climate control initiatives,President Obama endorses legislation favorable for nuclearpower development. Arguing that going nuclear is essential forthe environment, will create jobs and reduce costs, Congresspasses bills providing loans and subsidies for new plants, thefirst since 1979. Coal accounts for about 50% of electrical power

generation, and Obama wants to reduce that to 25% by 20208. The improvement in the U.S. economy energizes the Obama

administration. The White House undergoes somereorganization and regains its momentum. In the November

Congressional election the Democrats only lose 20 seats, muchless than expected


6/60


9. When it finally passes, financial service legislation, like the health carebill, proves to be softer on the industry than originally feared. There isgreater consumer protection, more transparency, tighter restriction ofleverage and increased scrutiny of derivatives, but the regulatorychanges for investment bankers and hedge funds are not onerous.Trading volume and merger activity increases; financial service stocksbecome exceptional performers in the U.S. market

10. Civil unrest in Iran reaches a crescendo. Ayatollah Khamenei pushesout Mahmoud Ahmadinejad in favor of a more public relations adeptleader. Economic improvement becomes the key issue and anti-Israelrhetoric subsides. Talks with the U.S. and Europe begin but the

country remains a nuclear threat. Pakistan becomes the hotspot inthe region because of the weak government there, antiAmericansentiment, active terrorist groups and concerns about the security ofthe countrys nuclear arsenal


7/60

Crowd Sentiment Poll

____________________________________________

Source: Ned Davis Research.


8/60

S&P 500 Cyclical Bull Markets within Secular Bear Markets

____________________________________________

Source: Ned Davis Research.(1) 4/26/2010 represents the current cyclical high date.

Dates % Gain Days

11/13/192904/17/1930 45.8% 155

07/08/193209/07/1932 111.1% 61

02/27/193302/05/1934 113.6% 343

07/26/193403/10/1937 123.3% 958

03/31/193811/12/1938 62.1% 226

04/08/193909/12/1939 29.4% 157

10/07/196612/03/1968 47.6% 788

05/26/197004/28/1971 51.2% 337

11/23/197101/11/1973 33.4% 415

12/06/197409/21/1976 65.9% 655

02/28/197809/08/1978 22.7% 192

04/21/198004/27/1981 35.8% 371

09/21/200103/19/2002 21.2% 179

10/09/200210/09/2007 101.5% 1,82603/09/200904/26/2010

(1) 79.2% 413

Mean 62.3% 465Median 51.2% 337


9/60

S&P 500 Cycle Composite for 2010

____________________________________________


-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan Feb Mar Apr Ma Jun Jul Aug Sep Oct Nov Dec

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

Current S&P 500 (Actual 2010) S&P 500 Cycle (Composite for 2010)


10/60

S&P 500 Over-/Undervaluation Versus Ben Graham Intrinsic Value Model

____________________________________________

Source: Leuthold Group, LLC.

-100

-50

0

50

100

150

200

12/31/1875 11/30/1902 10/31/1929 9/29/1956 8/31/1983 7/30/2010


11/60

Stocks Attractive vs. Bonds

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

12/31/1963 3/5/1969 5/10/1974 7/15/1979 9/18/1984 11/23/1989 1/28/1995 4/3/2000 6/8/2005 8/13/2010

Dow Jones Industrial Dividend Yield U.S. 10-YR Treasury Yield

________________________________________________

Source: Strategas Research.


12/60

Total Notational Derivatives

$0

$25

$50

$75

$100$125

$150

$175

$200

$225

1990 1991 1993 1994 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009

____________________________________________


12/31/2009 = $212.81 trillion

(Total notional amount of derivatives contracts at all U.S. commercial banks)

($ in trillions)


13/60

Where is the Economic Rebound?

The Deeper the Recession, the Faster

the RecoveryGDP Recoveries vs Recessions

When a Financial Crisis Accompanies

a Recession, the Spike in UnemploymentIs Higher and Longer

-1%

0%

1%

2%

3%

4%

-1 0 1 2 3 4 5 6 7 8 9 10

Years after the Beginning

of the Crisis (or Recession)

PercentagePointsChange

fromY

earbeforeth

eCrisi

Recessions without a Crisis Crisis with a Recession

____________________________________________

Source: ISI Group.

Regression

Y = 1.9 - 1.6 * X

R2 = 45%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

0% -1% -2% -3% -4% -5%

Decline in Real GDP during Recession

IncreaseinRealGDPdu

ring

FirstYearofRecovery

2001

1969

1990

1960

1980

1953

1981

1973

1957

2008E

____________________________________________

Source: ISI Group.


14/60

Global Growth

____________________________________________

Source: ISI Group.

1995 Nominal GDP

2008 Nominal GDP

United States

23.7%

Germany

6.0%

Other Developed

15.2%

Brazil

2.6%

Russia

2.8%

Other Developing

11.5%

Japan

8.1%

United Kingdom

4.4%

Saudi Arabia

0.6%

Poland

0.7%

Taiwan

0.9%Turkey

0.8%

Indonesia

0.8%

Mexico

1.8%

Korea

2.0%

Iran

0.6%

Italy

3.8%France

4.7%

India

2.0%

EmergingEconomies

34.1%

China

7.1%

Developing

Economies

21.7%

Other Developing

7.9%

United Kingdom3.9%

France

5.3%

Taiwan

0.9%Mexico 1.0%

Korea

1.8%

Indonesia

0.8%

Turkey

0.6%

China

2.5%

India1.2% Russia1.1%

Japan

17.9%

United States

25.1%

South Africa0.5%

Other Developed

13.8%

Italy

3.8%

Germany

8.6%

Saudi Arabia

0.5%

Brazil

2.6%

Poland

0.5%


15/60

Public Debt as % of GDP

0%

20%

40%

60%

80%

100%

120%

'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Developed Countries Developing Countries

108% est.

33% est.

Developed vs. Developing Economies

____________________________________________

Source: Strategas Research Partners, LLC.


16/60

Total Credit Market Debt as a % of GDP

12/31/192212/31/2009

100%

150%

200%

250%

300%

350%

400%

1922 1927 1931 1936 1940 1944 1949 1953 1957 1962 1966 1970 1975 1979 1983 1988 1992 1996 2001 2005 2009

12/31/2009 Debt = $52.417 trillion

12/31/2009 GDP = $14.462 trillion= 362.5%

Annual interpolated GDP (including estimates prior to 1929) used prior to 1946.

Domestic Nonfinancial Debt used prior to 1946.

As of December 1946, Domestic Nonfinancial Debt represented 99.4% of Total Credit Market Debt.

____________________________________________



17/60

The Mountain of U.S. Debt

$0

$2

$4

$6

$8

$10

$12

$14

1910 1930 1950 1970 1990 2001 2003 2005 2007 2009 2011 2013

0%10%

20%

30%

40%

50%

60%

70%

80%

90%

Public Debt Pct GDP

($ in trillions)

____________________________________________



18/60

Debt Service is the Critical Factor

Low U.S. Borrowing Rates Have KeptThings Manageable So Far The Expanding U.S. Interest Burden($ in billions)

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010E

2012E

2014E

2016E

2018E

2020E

Now

____________________________________________

Source: CBO and White House Estimates, Leuthold Group, LLC.

0%

1%

2%

3%

4%

5%

6%

7%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Now

Average Interest Rate on U.S. Government DebtExcludes TIPS (Treasury Inflation Protected Securities)

____________________________________________



19/60

U.S. Outstanding Sovereign Debt (by Maturity Timeline)

29.8%30.8%

21.3%

7.8%

10.4%

0%

5%

10%

15%

20%

25%

30%

35%

0-12 mos. 1-3 yrs. 4-7 yrs. 8-10 yrs. 10+ yrs.

____________________________________________



20/60

Total China Holdings of U.S. Treasuries

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

($ in billions)

____________________________________________



21/60

Taxes and Government Spending

________________________________________________


-10%

-8%

-6%

-4%-2%

0%

2%

4%

6%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

(59.8-year Average = -1.4% of GDP)

Deficit as a % of GDP

Surplus as a % of GDP 3/31/20 = -9.4%

(Quarterly Data, 3/31/473/31/10)

10%

15%

20%

25%

30%

3/31/47 11/29/53 7/30/60 3/31/67 11/29/73 7/30/80 3/31/87 11/29/93 7/30/00 3/31/07

Government Spending Taxes

Government Spending as a % of GDP

(59.8-year Average = 19.5% of GDP)

3/31/2010 = 25.3%

Taxes as a % of GDP

(59.8-year Average = 18.0% of GDP)

3/31/2010 = 15.9%


22/60

What Has to Be Cut

____________________________________________

Source: The New York Times, 2/7/10.

(1) Based on fiscal year 2010 appropriations and disclosure reports from members of Congress who received spending earmarks for special projects.

A huge deficit would remain

even if any one of these steps were taken in 2011

846

730

530

492

293

271

258

160

135

0.421

0.537

0.737

0.775

0.974

0.996

1.009

1.107

1.132

1.173

1.226

1.238

1.257

Deficit: $1.267 trillion

$94

Cut All National Security Spending

Stop Social Security Checks for Retiree s, the Disabled and Survivors

Cut All Domestic Programs Other than Entitlements

Stop Medicare Benefits

Double Corporate Income Taxes

Stop Medicaid Bene fits for Poor Patients and Nursing Home Residents

Stop the Rec overy Act' s Stimulus Spending and Tax Cuts

Withhold Mone y for War Operations

Allow Bush Tax Cuts to Expire for Everyone, Not J ust the Wealthie st

Shut Down the Department of Education

Cut Foreign Aid

Eliminate Welfare Payments

Disallow Congressional Earmarks

Close Down the National Endowment for the Arts

Remaining DeficitThe Deficit Would Be Reduced by This

Amount (in billions)

If the Budget Proposal Were to Implement One of

These Changes:

Deficit: $1.267 trillion

Projected Deficit in 2011, under President Obama's Budget

(About $4,100 a person)

(1)


23/60

Federal Spending on Medicare and Medicaid as Share of GDP

0%

5%

10%

15%

20%

1965 1985 2005 2025 2045 2065

Medicaid

Medicare

2005: M/caid = 1.5%

M/care = 2.4%

1985: M/caid = 0.6%

M/care = 1.6%1965: M/caid = 0.1%

M/care = 0.0%

2008: M/caid = 1.5%

M/care = 2.8%

2025: M/caid = 2.3%

M/care = 5.0%

2045: M/caid = 3.1%

M/care = 8.4%

2065: M/caid = 3.5%

M/care = 11.1%CBO Projections

____________________________________________

Source: ISI Group.


24/60

Presidential Approval and Unemployment Rate (Inverted)

____________________________________________

Source: ISI Group.

0%

20%

40%

60%

80%

100%

1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009

Approva

2%

4%

6%

8%

10%

12%

nemploymentRate(Inverted)

Approval Unemployment Rate (Inverted)

ReaganCarterFordNixon Bush I Clinton Bush II Obama


25/60

Employment vs. Fixed Investment (Year-to-Year Changes)

(Quarterly Data, 06/30/4809/30/10)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

6/30/48 3/21/55 12/9/61 8/30/68 5/21/75 2/8/82 10/30/88 7/21/95 4/10/02 12/30/08

Non-Far

Pa

yrolls

-30%

-25%

-20%

-15%

-10%

-5%

0%5%

10%

15%

20%

25%

30%

xed

Investment

Non-Farm Payrolls Fixed Investment

Nonfarm Payrolls

6/30/2010 = 0.5%

Fixed Investment

(Moved Ahead 1 Quarter)

9/30/2010 = 5.2%

________________________________________________


Correlation Coefficient = 0.79


26/60

U.S. Payroll Employment (%), U.S. Civilian Population

(Ages 18-69)

50%

55%

60%

65%

70%

75%

80%

1968 1974 1980 1986 1992 1998 2004 2010

________________________________________________

Source: ISI Group.

How Much Has Each of the Following Been Helped by the Governments


27/60

How Much Has Each of the Following Been Helped by the Government s

Economic Policies?

10%

11%

13%

15%

21%

54%

62%

14%

17%

20%

21%

21%

15%

14%

73%

65%

65%

61%

50%

22%

19%

3%

7%

2%

3%

8%

9%

5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

My Family / Myself

Small Businesses

Average Working Person

People Who Have Lost Jobs or Had Hours Cut

Manufacturing Firms

Wall Street Investment Companies

Large Banks

Helped a Lot / A Fair Amount Helped Just Some Helped Very Little / Not At All Not Sure

____________________________________________

Source: ISI Group.


28/60

I. The United States Economy


29/60

____________________________________________

Source: Grants Interest Rate Observer 2009, Federal Reserve & CBO Estimates, and Strategas Research Partners.

What Government Did, and Didnt Do

(From Grants Interest Rate Observer)

Stimulus as % of GDP

Cycle Peak Cycle Trough Monetary Fiscal Total

Aug. 29 Mar. 33 43 -27.0% 3.4% 4.9% 8.3%

May 37 Jun. 38 13 -3.4% 2.2% 2.2%

Nov. 48 Oct. 49 11 -1.7% -2.2% 5.5% 3.3%

Jul. 53 May 54 10 -2.7% -1.4% -1.4%

Aug. 57 Apr. 58 8 -3.2% 3.2% 3.2%

Apr. 60 Feb. 61 10 -1.0% 0.7% 1.0% 1.7%

Dec. 69 Nov. 70 11 -0.2% 0.3% 2.4% 2.7%

Nov. 73 Mar. 75 16 -3.1% 0.9% 3.1% 4.0%

Jan. 80 Jul. 80 6 -2.2% 0.4% 1.1% 1.5%

Jul. 81 Nov. 82 16 -2.6% 0.3% 3.5% 3.8%Jul. 90 Mar. 91 8 -1.3% 1.0% 1.8% 2.8%

Mar. 01 Nov. 01 8 -0.2% 1.3% 5.9% 7.2%

Dec. 07 -2.7% 18.0% 11.9% 29.9%

Length

(Months)

Decline in

Real GDP


30/60

Fed Balance Sheet

0

500

1,000

1,500

2,000

2,500

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

____________________________________________

Source: ISI Group.

($ in billions)


31/60

Its Not Hard to Get +3% Real GDP

____________________________________________

Source: ISI Group.

4Q 2010 Real GDP

Cont. to GDPConsumer Spending 1.0%

CapEx Eqp 0.8%

Housing

Inventories 0.5%Trade 1.0%

Federal Government 0.3%

State Government -0.1%CapEx Structures -0.6%

Real GDP 2.9%

Performance of Real Personal Income Less Transfer Payments vs Average


32/60

Performance of Real Personal Income Less Transfer Payments vs Average

of Last Six Expansions

96.0

98.0

100.0

102.0

104.0

106.0

108.0

110.0

6/30/07 12/12/07 5/26/08 11/8/08 4/23/09 10/5/09 3/20/10 9/2/10 2/15/11 7/31/11

Real Personal Income for Current Expansion Real Personal Income Average of Last Six Expansions


33/60

U.S. Housing Starts and Case-Shiller Month-over-Month

____________________________________________

Source: ISI Group.

U.S. Housing Starts U.S. House Price Index (Case-Shiller)

Month-over-Month %

-250%

-200%

-150%

-100%

-50%

0%

50%

100%

150%

200%

2000 2002 2004 2006 2008 2010

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1947 1954 1961 1968 1975 1982 1989 1996 2003 2010


34/60

Shadow Inventory Doubles Potential Homes for Sale

(thousands)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1/1/

08

2/1/

08

3/1/

08

4/1/

08

5/1/

08

6/1/

08

7/1/

08

8/1/

08

9/1/

08

10/1/0

8

11/1/0

8

12/1/0

8

1/1/

09

2/1/

09

3/1/

09

4/1/

09

5/1/

09

6/1/

09

7/1/

09

8/1/

09

9/1/

09

10/1/0

9

11/1/0

9

12/1/0

9

1/1/

10

2/1/

10

3/1/

10

4/1/

10

5/1/

10

6/1/

10

Existing Inventory 90+ Days Delinquent Foreclosure Inventory

________________________________________________

Source: Strategas Research Partners.


35/60

Temporary Employment Survey

0

10

20

30

40

50

60

70

80

1996 1997 1999 2000 2002 2003 2004 2006 2007 2009 2010

____________________________________________

Source: ISI Group.


36/60

National Beveridge Curve

(December 2000 July 2010)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0

Unemployment Rate (%)

JobOpeningsR

ate(%

Apr '10

May '10Jul '10

Mar '10

________________________________________________



37/60

U.S. Workweek and U.S. Private Employment Month-over-Month Change

30

31

32

33

34

35

36

37

38

39

40

1964 1969 1974 1979 1984 1989 1995 2000 2005 2010

____________________________________________

Source: ISI Group.

U.S. Workweek U.S. Private Employment Month-over-

Month Change

(2,000)

(1,500)

(1,000)

(500)

0

500

1,000

1,500

1939 1948 1956 1965 1974 1983 1992 2001 2010


38/60

____________________________________________


Manufacturing Labor Costs

2007

Hourly Compensation Costs forAll Employees in Manufacturing

2002

Hourly Compensation Costs forAll Employees in Manufacturing

(In US$)

$0.90

$0.57

$2.98$3.07$3.27

$4.05$3.44

$4.60$5.05

$6.40

$6.84$9.80$10.12

$12.04$12.34

$13.77

$17.94$18.50$18.78

$19.69

$21.75$22.37$22.52$22.96

$23.07$23.81$24.15

$27.33$27.01

$28.05

$26.34

$31.59$32.29

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00

NorwayGermany

SwitzerlandDenmark

United StatesAustria

NetherlandsBelgium

FranceSwedenFinlandUnited

JapanIrelandCanada

Italy

AustraliaSpainIsrael

SingaporeNew Zealand

KoreaTaiwan

PortugalHungary

CzechPoland

MexicoSlovakia

BrazilArgentina

PhilippinesChina

$1.37

$0.94

$3.91

$7.13$7.69

$8.15$7.98

$8.49$9.67

$10.29

$10.49$15.43$15.92

$18.36$19.19

$24.00

$24.55$30.56

$31.91$32.19

$34.75$35.62

$36.66$37.68

$38.34$38.75$38.80

$43.17$39.74

$47.54

$39.47

$50.73$55.03

$0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00

NorwayGermanyDenmark

AustriaFinland

NetherlandsSwedenBelgium

SwitzerlandFrance

United KingdomIreland

AustraliaItaly

CanadaUnited States

SpainJapan

New ZealandKorea, Republic

IsraelSingapore

HungaryPortugal

Czech RepublicSlovakia

TaiwanArgentina

PolandBrazil

MexicoPhilippines

China

5th Highest

Only 16th

Highest


39/60

Personal Saving as Share of Disposable Personal Income

(4Q Moving Average)

____________________________________________

Source: ISI Group.

0%

2%

4%

6%

8%

10%

12%

14%

1959 1963 1967 1971 1976 1980 1984 1988 1993 1997 2001 2005 2010


40/60

U.S. Consumer Sentiment and U.S. Consumer Confidence

0

20

40

60

80

100

120

1978 1983 1988 1994 1999 2005 2010

____________________________________________

Source: ISI Group.

U.S. Consumer Sentiment U.S. Consumer Confidence

0

20

40

60

80

100

120

140

160

1967 1972 1977 1983 1988 1994 1999 2005 2010


41/60

II. The Rest of the World


42/60

Global Growth

____________________________________________

Source: ISI Group.

Real GDP 2010 Estimate

Weight GDP Growth Contribution

Developed 65% 2.0% 1.0%

U.S. 24% 2.5% 1.0%

Eurozone 21% 0.0% 0.0%

Japan 9% 0.0% 0.0%

Other Developed 11% 2.0% 0.0%

Emerging 35% 7.0% 2.5%

Global 100% 3.5%


43/60

Institutions Underweighted in Emerging Markets

Price to book ratios, Developed vs

Emerging Markets

Portfolio allocations to Emerging Markets

Equities

(In US$)

____________________________________________

Source: JPMorgan Private Bank.

0%

5%

10%

15%

20%

25%

30%

35%

Market Cap

(MSCI)

Free Float

(MSCI)

GS Survey BoA ML

Survey

Pensions &

Investments

Morningstar

Institutional and Retail surveys

MSCI weights

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1999 2001 2002 2003 2004 2005 2007 2008 2009 2010

Developed Markets Emerging Markets


44/60

China Real GDP Y/Y%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1991

Q4

1994

Q1

1996

Q2

1998

Q3

2000

Q4

2003

Q1

2005

Q2

2007

Q3

2010

Q2

____________________________________________

Source: ISI Group.


45/60

Japan IP and Eurozone IP

0

20

40

60

80

100

120

1973 1978 1983 1989 1994 1999 2005 2010

____________________________________________

Source: ISI Group.

Japan IP Eurozone IP

0

20

40

60

80

100

120

1990 1994 1998 2002 2006 2010


46/60

Real Trade Deficit (U.S., Japan, and Germany) 4-Quarter Average

(70)

(60)

(50)

(40)

(30)

(20)

(10)

0

1994

Q4

1997

Q4

2000

Q4

2003

Q4

2006

Q4

2010

Q2

____________________________________________

Source: ISI Group.

U.S. Japan Germany

(5)

0

5

10

15

20

25

30

35

1980

Q4

1985

Q3

1990

Q2

1995

Q1

1999

Q4

2004

Q3

2010

Q2

(20)

(10)

0

10

20

30

40

50

1970

Q4

1977

Q2

1983

Q4

1990

Q2

1996

Q4

2003

Q2

2010

Q2

hi


47/60

China

% Global Nominal GDP, 2008

____________________________________________

Source: ISI Group.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 e

China % World Japan % World

8.7%

8.5%

Chi M2 Y Y %


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China M2 Year-over-Year %

0%

5%

10%

15%

20%

25%

30%

35%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

____________________________________________

Source: ISI Group.

Chi i Ti h i L di P i


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China is Tightening Lending Practices

____________________________________________

Source: ISI Group.

China Bank Loans

SA by ISI, Y-o-Y%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1998 2000 2002 2004 2006 2008 2010

Feb-2010:

27.3%

C S di % f GDP


50/60

66%

68%

70%

72%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Consumer Spending as % of GDP

____________________________________________


China U.S.

34%

36%

38%

40%

42%

44%

46%

48%

50%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

35%

71%

Ti li f E t


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Timeline of Events

14211423 The great Chinese navigator Admiral Zheng He circumnavigates the globe

and discovers America.

January 1431 The new Chinese emperor dispatches Zheng He and his enormous fleet tosail the globe and announce his reign.

1434 A delegation from the Chinese fleet arrives in Florence and meets with

Pope Eugenius IV. They leave behind a mass of knowledge, including maps,

astronomy, mathematics, arts, architecture, and printing.

1460s European adoption of Chinese astronomy and rejection of Aristotle andPtolemy.

1490 Leonardo da Vinci studies a series of amazing Florentine drawings of

machines and engineering that seem to have been copied from the Nung

Shu a Chinese treatise printed in 1313.

1492 Christopher Columbus reaches America. Eighteen years earlier he wasgiven a map of the Americas by Paolo Toscanelli, who admits to having

gleaned the most copious and good and true information from

distinguished men of great learning who came to Florence in 1434 from

China.

____________________________________________

Source: Gavin Menzies.


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III. Some Thoughts about the Price of Oil

Oil S l / D d O tl k W ld P i E D d


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Oil Supply / Demand Outlook World Primary Energy Demand

____________________________________________

Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.

World energy demand expands by 40% between now and 2030 an average rate of

increase of 1.5% per year with coal accounting for more than a third of the overall rise

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1980 1990 2000 2010 2020 2030

Mtoe

Other Renewables

Biomass

Hydro

Nuclear

GasOil

Coal

WEO 2008 total

Peak Oil:

2015

Peak Oil: 2010

Oil Supply / Demand OutlookP C i A l Oil C i (A F i f E di E i )


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Per Capita Annual Oil Consumption (A Function of Expanding Economies)

____________________________________________


Even more important challenges involve the changing per capita consumption rates,

especially in the BRICs

22

13

9

7

4

21

17

10

89

54

2

0

5

10

15

20

25

U.S. Japan Europe Russia Brazil China India

BarrelsPerPersonP

e

rYear

2008 2030

Oil Supply / Demand OutlookBRIC d Middl E t D d O tl k


55/60

BRIC and Middle East Demand Outlook

____________________________________________


Conclusions:

Competition for oil supplies between emerging markets and mature countries

is potentially a problem

The world needs and will actively seek out demand Game Changers

2008Demand

2030Demand Increase

Brazil 2.0 2.8 +0.8

Russia 2.8 3.1 +0.3

India 3.0 6.9 +3.9

China 7.7 16.3 +8.6

Middle East 6.4 9.9 +3.5

Total 21.9 39.0 +17.1

(In Mmbl/d)

Predicting the Unpredictable!WTI C d Oil P i


56/60

WTI Crude Oil Prices

____________________________________________

Source: Bank of America Merrill Lynch, Bloomberg and BofAML Global Commodity Research.

The range of WTI crude oil prices will expand significantly after 2013 as OPEC utilization

is rising

($/bbl)

Forecast

$200

$180

$160

$140

$120

$100

$80

$60

$40

$20

$0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Disclaimer


57/60

Disclaimer

The views expressed in this commentary are the personal views of Byron Wien of Blackstone Advisory Partners L.P.(together with its affiliates, Blackstone) and do not necessarily reflect the views of Blackstone itself. The views

expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstoneundertakes to advise you of any changes in the views expressed herein.

Blackstone and others associated with it may have positions in and effect transactions in securities of companiesmentioned or indirectly referenced in this commentary and may also perform or seek to perform investmentbanking services for those companies. Blackstone and/or its employees have or may have a long or short positionor holding in the securities, options on securities, or other related investments of those companies.Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specificinvestment objectives and financial position. Where a referenced investment is denominated in a currency otherthan the investor's currency, changes in rates of exchange may have an adverse effect on the value or price of orincome derived from the investment.Tax considerations, margin requirements, commissions and other transaction costs may significantly affect theeconomic consequences of any transaction concepts referenced in this commentary and should be reviewedcarefully with one's investment and tax advisors. Certain assumptions may have been made in this commentary asa basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differingfacts from the assumptions may have a material impact on any indicated returns. Past performance is notnecessarily indicative of future performance. The price or value of investments to which this commentary relates,directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or thesolicitation of an offer to purchase any security.To recipients in the United Kingdom: this commentary has been issued by Blackstone Advisory Partners L.P. andapproved by The Blackstone Group International Partners LLP, which is authorized and regulated by the FinancialServices Authority. The Blackstone Group International Partners LLP and/or its affiliates may be providing or mayhave provided significant advice or investment services, including investment banking services, for any companymentioned or indirectly referenced in this commentary. The investment concepts referenced in this commentarymay be unsuitable for investors depending on their specific investment objectives and financial position.This commentary is disseminated in Japan by The Blackstone Group Japan KK and in Hong Kong by The Blackstone Group (HK)Limited.


58/60

Question & Answer Session


59/60

Closing Remarks


60/60

2011: Better, Worse or More of the SameByron R. Wien

Vice Chairman, Blackstone Advisory Partners L.P.Tel: 212.583.5055Email: [email protected]

Byrons monthly essays are broadly recognized for their insight and perspective. If youwould like to receive future monthly market commentary publications by Byron Wien,please email byronwien'[email protected].

bx view on 2011 - wein oct 2010

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