The GreatAbdication

DanielleDiMartinoBooth

Where Art Thou, Uncle Sam?

Price Discovery

Obfuscate:Defined as:

To hide, to render unintelligibleconfuse, muddle…

Latin root:Obfuscatio – “to darken over”

The Great Moderation, Part II?

Wealth Recaptures Record Level

Change in Household Net Worth

Q4 ‘02 – Q3 ’07: $24 Trillion

Q1 ‘09 – Q1 ’15: $29 Trillion

400

450

500

550

600

650

700

0

10

20

30

40

50

60

70

80

90

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

%$ tn

Household Net Worth (LHS) Net Worth as % of Disposable Income (RHS)

Income Stagnates

Source: Haver Analytics, Bureau of Economic Analysis

0

5

10

15

20

25

30

35

40

45M

ay-1

960

Nov

-196

2

May

-196

5

Nov

-196

7

May

-197

0

Nov

-197

2

May

-197

5

Nov

-197

7

May

-198

0

Nov

-198

2

May

-198

5

Nov

-198

7

May

-199

0

Nov

-199

2

May

-199

5

Nov

-199

7

May

-200

0

Nov

-200

2

May

-200

5

Nov

-200

7

May

-201

0

Nov

-201

2

May

-201

5

$ (0

00's

)

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

Rebuilding Household Debt

Source: Haver Analytics, Flow of Funds

0

2

4

6

8

10

12

14Q

3-19

80

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

$ tn

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

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

Student Loan Debt

0

5,000

10,000

15,000

20,000

25,000

0

10

20

30

40

50

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

$% Proportion with Student Loans(lhs)Average Student Loan Balance(rhs)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2007

2008

2009

2010

2011

2012

2013

2014

2015

(Tri

llion

)

Total Student Loan Debt Outstanding

Let Them Drive Cars!

0

2

4

6

8

10

12

14

16

18

20

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,00019

75

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Single Family Home Sales: US (SAAR, Thous) (LHS)Vehicle Sales (SAAR, Mil.Units) (RHS)

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

Malinvestment

In Austrian business cycle theory, malinvestmentsare badly allocated business investments made dueto the artificially low cost of credit. Central banksare often blamed for causing malinvestments.

Malinvestment occurs when artificially low interestrates mislead relative price signals which eventuallynecessitates a corrective contraction. A boomfollowed by a bust.

Falling Reward for Bond Risk

Source: Federal Reserve Bank of New York

-0.5

0

0.5

1

1.5

2

2012

2013

2014

2015

US 10-Year Term Premium %

U.S. Equity Market Dwarfs GDP

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

Q2 '00:174 %

Q2 '15:149%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%Q

4-19

47

Q2-

1955

Q4-

1962

Q2-

1970

Q4-

1977

Q2-

1985

Q4-

1992

Q2-

2000

Q4-

2007

Q2-

2015

NYSE Market Cap: % of GDP NYSE + NASDAQ Market Cap: %of GDP

(100)

-

100

200

300

400

500

600

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Bill

ions

, US$

S&P 500 Buybacks (bil. $)

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

S&P 500 Buybacks vs Domestic Equity MutualFund + Domestic Equity ETF Flows

Source: Haver Analytics and Citi Research US Equity Strategy

Commercial Real Estate Recovery Outpaces Housing

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

90

110

130

150

170

190

210

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

S&P/Case-Shiller CPPI(Indexed Price 2002=100)

Peak-to-TroughHousing: -35%Commercial: -40%

Recovered:Housing: 59%Commercial: 128%

Trump Towers

Source: Haver Analytics, Census Bureau

Feb '06:573%

Oct '09:821%

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%Ju

n-19

91

Dec

-199

2

Jun-

1994

Dec

-199

5

Jun-

1997

Dec

-199

8

Jun-

2000

Dec

-200

1

Jun-

2003

Dec

-200

4

Jun-

2006

Dec

-200

7

Jun-

2009

Dec

-201

0

Jun-

2012

Dec

-201

3

Jun-

2015

Single Family Starts/Multi Family Starts: Ratio

Jun '15140%

Investors Throwing in the Towel

Source: NAR

Mar '11:35%

June '15:22%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0%

10%

20%

30%

40%

50%

60%Se

p-09

Dec

-09

Mar

-10

Jun-

10Se

p-10

Dec

-10

Mar

-11

Jun-

11Se

p-11

Dec

-11

Mar

-12

Jun-

12Se

p-12

Dec

-12

Mar

-13

Jun-

13Se

p-13

Dec

-13

Mar

-14

Jun-

14Se

p-14

Dec

-14

Mar

-15

Jun-

15

First Time Buyers(LHS) All Cash Purchases (RHS)

June 15:30%

Will the Rental Revolution Continue?

Source: Haver Analytics, Census Bureau

Q1'15:-1.2 M-4

-2

0

2

4

6

8

10

12

14

10 Y

r C

hang

e: M

illio

ns

Owners Renters

Q1 '15:8.6 M

Source: CollegeBoard

Tuition and Fees + Room and Board

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,00019

73

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Public Four-Year Private Nonprofit Four-Year

Year Tuition andFees

Tuition and Fees +Room and Board

2000 $15,518 $21,475

2015 $31,231 $42,419

Not Saving One Thin Dime

36%

38%

40%

42%

44%

46%

48%

50%

1992 1995 1998 2001 2004 2007 2010 2013

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

Source: Employee Benefit Research Institute, Survey of Consumer Finances

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

1992

1995

1998

2001

2004

2007

2010

2013

Median Housing Debt for Families With Heads Age 65-74

Retirement Anyone?

The GreatAbdication

DanielleDiMartinoBooth

Hitting the Basement

Source: Haver Analytics, Census Bureau

0.0

0.5

1.0

1.5

2.0

2.5

3.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar

-196

5

Sep-

1967

Mar

-197

0

Sep-

1972

Mar

-197

5

Sep-

1977

Mar

-198

0

Sep-

1982

Mar

-198

5

Sep-

1987

Mar

-199

0

Sep-

1992

Mar

-199

5

Sep-

1997

Mar

-200

0

Sep-

2002

Mar

-200

5

Sep-

2007

Mar

-201

0

Sep-

2012

Mar

-201

5

Uni

ts (

Mill

ions

)

Uni

ts:

Mill

ions

: 12

Mo.

Rol

ling

Sum

Net Household Formation (Thous) Total Housing Starts: Units (RHS)

Cash at Fifteen-Year Low

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

Q1 ‘1534.6%

20%

25%

30%

35%

40%

45%

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

Non-Financial Corporate Cash/Non-Financial Bonds Outstanding

Buy High, Sell Low! (On Margin)

Source: Haver Analytics, Bloomberg

0.0

0.5

1.0

1.5

2.0

2.5

3.0

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

%

Margin Debt/GDP

Q1: '00:2.8% Q2: '07:

2.6%

Q2: ‘15:2.9%

Landlords Raise the Roof

Source: Bank of America Merrill Lynch

2013:$5881

2013:$4560

0

1000

2000

3000

4000

5000

6000

7000

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

$/Y

r

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

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

Fishing for the Truth

Melrose Displaced

Source: Haver Analytics

6

7

8

9

10

11

12

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Rental Vacancy Rate: United States (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

'85 '92 '99 '06 '13

Highest IncomeQuintile

4th IncomeQuintile

3rd IncomeQuintile

2nd IncomeQuintile

Lowest IncomeQuintile

Buy Low, Fly High

Corporate Headquarter Relocations to Texas2010-Present

Energy:Outsized Role in non-Residential Structures

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

Inflation Persists Even as Energy Plummets

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

25002600270028002900300031003200330034003500

Dec

-201

3

Jan-

2014

Feb-

2014

Mar

-201

4

Apr

-201

4

May

-201

4

Jun-

2014

Jul-

2014

Aug

-201

4

Sep-

2014

Oct

-201

4

Nov

-201

4

Dec

-201

4

CRB Commodities Index Annual Services Inflation

Source: Haver Analytics

Location, Location, Location…

-5

0

5

10

15

20

25

30

35

40

Richmond Philly NY Kansas Texas

2014 Average January 2015

Is Real Estate Next?

0

10

20

30

40

50

60

70

80

90

100

400

900

1,400

1,900

2,400

2,900

3,400

Jan-84 Sep-86 Jun-89 Mar-92 Dec-94 Sep-97 Jun-00 Mar-03 Nov-05

CRE Debt ($Bn) Brent Crude ($/bbl, right)

CRE Prices Synchronous With Debt Financing

100

150

200

250

300

350

400

450

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jan-84 Jun-89 Dec-94 Jun-00 Nov-05 May-11

CRE Debt ($Bn)NCREIF Price Index (right)

…And Then Oil Diverged Sharply

40

50

60

70

80

90

100

110

120

2,400

2,600

2,800

3,000

3,200

3,400

3,600

Jan-11 Jul-11 Feb-12 Aug-12 Mar-13 Sep-13 Apr-14 Nov-14

CRE Debt ($Bn) Brent Crude ($/bbl, right)

Fastest Wage Growth Has Been in Oil Patch

2.5%

-3.0%

3.9%

9.4%

0.80%

2.9%

15.3%

3.8%

3.4%

-0.02%

US Wage Growth 2009-2014 -0.80%

Oil Futures Open Interest

250,000

1,250,000

2,250,000

3,250,000

03/0

1/19

95

03/0

1/20

00

03/0

1/20

05

03/0

1/20

10

03/0

1/20

15

Source: Bloomberg

S&P Earnings Estimate

$125

$123$122

$121$120

$119 $119

$117$116

$137$138

$136

$131

$121

$110

$115

$120

$125

$130

$135

$140

$110

$112

$114

$116

$118

$120

$122

$124

$126

Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15

S&P Annualized Quarterly Profit Estimate Full Year Estimate for 2015

Exposure to Office Properties with Oiland Gas Tenants

61%21%

5%4%

4%3%

2%

Texas

Colorado

California

Oklahoma

Pennsylvania

Louisiana

Other

Source: Morgan Stanley

Exposure to Eagle Ford & Permian Basin

43%

27%

16%

9%5%

Midland, TX

Williston, ND

Odessa, TX

Dickinson, ND

Laredo TX

Source: Morgan Stanley

Companies with $1B+ Market Cap Companies $250M- $1B Market Cap

48%52%

48%52%

30%

70%

Dal

las

Hou

ston

85%

15%

Private Fixed Assets

Source: Haver Analytics

-2

-1

0

1

2

3

4

5

0

20

40

60

80

100

120

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

Net Stock: Private Fixed Assets: Quantity Index (2009=100)Y/O/Y Growth (RHS)

%

Average Daily Demand for Paper Oil

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Jan 14 -Jun 14

2013 -Jun 14

2012 -Jun 14

2011 -Jun 14

2010 -Jun 14

2009-Jun 14

QE1 -Jun 14

Source: CFTC; Bloomberg; Paradarch Advisors, LLC

Percentage of Families With Debt

0%

10%

20%

30%

40%

50%

60%

70%

1992 1995 1998 2001 2004 2007 2010 2013

Age 65-75 Age 75+

Source: Employee Benefit Research Institute, Survey of Consumer Finances

0

500

1000

1500

2000

2500

0

500

1000

1500

2000

01/01/2009 02/01/2010 03/01/2011 04/01/2012 04/01/2013 05/01/2014 06/01/2015

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

Fiscal Cliff

Debt Ceiling

QE3 Worries

Sell Low, Buy High?

Source: Bloomberg

0

2

4

6

8

10

12

14

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(tri

llion

s)

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

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Sub Prime Auto ABS Outstanding

Corporate Relocations into Texas 2004-Present

Corporate Relocations out of Texas 2004-Present

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

0

10

20

30

40

50

60

US Atlanta Chicago Detroit Los Angeles New York SanFrancisco

Washington

Bottom tier Middle tier Top tier

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

Mortgage Origination

20%

30%

40%

50%

60%

2000 2002 2004 2006 2008 2010 2012 2014

% GSE/FHA

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

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

Mortgage Origination

50%

60%

70%

80%

90%

100%

2000 2002 2004 2006 2008 2010 2012 2014

% GSE/FHA (Sec)

US Syndicated Loan Volume

0

200

400

600

800

1000

1200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

(in

billi

ons)

Leveraged I-Grade Other

Source: Loan Connector

-4

-3

-2

-1

0

1

2

3

4

5

2006 2007 2008 2009 2010 2011 2012 2013

Rea

l GD

P G

row

thShale Production States National Aggregate ex Shale

Source: Bureau of Economic Analysis

Source: Bureau of Labor Statistics

-1

0

1

2

3

4

5

6

2006 2007 2008 2009 2010 2011 2012 2013 2014

Une

mpl

oym

ent

Rat

e, C

hang

e si

nce

Jan

2006

Shale Production States National Aggregate ex Shale

Source: Bureau of Labor Statistics

4

5

6

7

8

9

10

11

2006 2007 2008 2009 2010 2011 2012 2013 2014

Une

mpl

oym

ent

Rat

eShale Production States National Aggregate ex Shale

-6

-4

-2

0

2

4

6

2006 2007 2008 2009 2010 2011 2012

Ele

ctri

city

Gen

erat

ion,

Ann

ualP

ctC

hang

eShale Production States National Aggregate ex Shale

Source: Department of Energy

-8

-6

-4

-2

0

2

4

6

8

2006 2007 2008 2009 2010 2011 2012 2013 2014

Hom

e Pr

ices

, Ann

ualP

ctC

hang

eShale Production States National Aggregate ex Shale and ex CA, AZ, FL, NV

Source: Zillow Home Prices

-8

-6

-4

-2

0

2

4

2006 2007 2008 2009 2010 2011 2012 2013

Non

farm

Pay

rolls

, Cha

nge

sinc

e Ja

n 20

06,m

nShale Production States National Aggregate ex Shale

Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics

-5

-4

-3

-2

-1

0

1

2

3

2007 2008 2009 2010 2011 2012 2013 2014

Non

farm

Pay

rolls

, Ann

ualP

ctC

hang

eShale Production States National Aggregate ex Shale

Source: Bureau of Labor Statistics

-2

-1

0

1

2

3

4

5

2007 2008 2009 2010 2011 2012 2013 2014

Hou

rly

Wag

es, I

nfla

tion-

adju

sted

, % C

hang

eShale Production States National Aggregate ex Shale

Forever Young(length of post-WW2 expansions, months)

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

62%

63%

64%

65%

66%

67%

68%

69%

70%

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Renting in Multifamily Structures

Source: Census Bureau

Source: National Bureau of Economic Research

14%

16%

18%

20%

22%

24%

26%

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

1947-presenthistoric average

120

140

160

180

200

220

24020

06

2007

2008

2009

2010

2011

2012

2013

2014

2015

PPI: Lumber (nsa) PPI: Lumber (sa)

Source: Bureau of Labor Statistics

Source: CollegeBoard

Tuition and Fees

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,00019

73

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Private Nonprofit Four-Year Public Four-Year

Year Tuition andFees

Tuition and Fees +Room and Board

2000 $15,518 $21,475

2015 $31,231 $42.419

Source: CollegeBoard

Tuition and Fees

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

One-Year % Change (private-four year)

One-Year % Change (public four-year)

Source: CollegeBoard

Tuition and Fees + Room and Board

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

One-Year % Change (private-four year)

One-Year % Change (public four-year)

Yields Down, Interest Expense Up?

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%Net Interest Paid as % GDP Baa Bond Yield

One Man’s Junk?

13.0

13.5

14.0

14.5

15.0

15.5

16.0

6

7

8

9

10

11

12

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

First Time Issuers: LTM Average Coupon (LHS)

First Time Issuers: LTM Average Rating (RHS)

The Incredible Shrinking Float

Avg. S&P 500Market cap since

2005:

$11.9 trillion

S&P Buybackssince Q4 2005:

$3.7 trillion

S&P 500 Buyback Boost

$94.60 $98.30

Organic: $1.50

Buybacks:$2.20

Q3 2011 Q1 2013

Hitting the Basement

Source: Bank of America Merrill Lynch

792

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Ann

ual H

ouse

hold

For

mat

ion

Δ:(0

00's

)

Total Number of Households (Thous)

$4.5 Trillion and Counting

Source: Haver Analytics

0

2

4

6

8

10

12

2

4

6

8

10

12

14

16

18

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

Fun

ds T

arge

t: %

GD

P (t

n)

Real GDP (LHS) Fed Funds Target (RHS)

MalinvestmentIn 1940, Ludwig von Mises wrote, "The popularity of inflationand credit expansion, the ultimate source of the repeatedattempts to render people prosperous by credit expansion, andthus the cause of the cyclical fluctuations of business, manifestsitself clearly in the customary terminology. The boom is calledgood business, prosperity, and upswing. Its unavoidableaftermath, the readjustment of conditions to the real data of themarket, is called crisis, slump, bad business, depression.

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

Confidence in Eye of Holder

0

20

40

60

80

100

120

140

160

0

500

1000

1500

2000

2500

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Con

sum

er C

onfi

denc

e In

dex

S&P

500

Inde

x

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

A Zero Sum Game?

Source: Haver Analytics

0.0

1.0

2.0

3.0

4.0

5.0

Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

% Fed Funds Target

The Disappearing American Dream

30

40

50

60

70

80

90

100

'89 '92 '95 '98 '01 '04 '07 '10 '13

$ (0

00's

): C

hain

ed 2

013

Median income

Mean income

60% incomegap

90%incomegap

60

160

260

360

460

560

660

'89 '92 '95 '98 '01 '04 '07 '10 '13

$ (0

00's

): C

hain

ed 2

013

Median net worth

Mean net worth

400%wealthgap

660%wealthgap

Is Risk Being Rewarded?

11%25%

48%

75%

0

10

20

30

40

50

60

70

80

BB B CCC CC to C

% 5 Yr Cumulative Default Rate

Source: Alliance Bernstein, Barclays

Let Them Drive (Used) Cars!

-30

-20

-10

0

10

20

30

40

Nov-94 Nov-98 Nov-02 Nov-06 Nov-10 Nov-14

Used Motor VehiclesYear-on-year, % change

U.S. Nonfinancial Debt Scales Fresh Heights

Source: Haver Analytics, Federal Reserve Board

Q1 '15:43.6%

20

25

30

35

40

45

50

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

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

U.S. Nonfinancial Debt Scales Fresh Heights

Source: Haver Analytics, Federal Reserve Board

Q1 '15:43.6%

20

25

30

35

40

45

50

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

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

Fixed Income Yields Relative to Pension Needs

-10

-5

0

5

10

15

'00 '02 '04 '06 '08 '10 '12 '14

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

Source: IBM, Bloomberg, ML, CS

Insult Meets Injury

0

5

10

15

20

25

30

35

'10 '11 '12 '13 '14

% Proportion of Homes with Negative Equity

30

18

11

0

5

10

15

20

25

30

35

Zillow: Percent ofHomes with NegativeEquity - Bottom Tier

Zillow: Percent ofHomes with NegativeEquity - Middle Tier

Zillow: Percent ofHomes with Negative

Equity - Top Tier

%Majority of Homes withNegative Equity are inthe Bottom Tier

Stocks & Buybacks: A Happy Couple

Source: Standard and Poors

0

50

100

150

200

250

-400

100

600

1100

1600

2100

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

Inde

x

SPX (LHS) Share Buybacks + Div (RHS)

The Cost of EducationThen…(1982)

• Textbook: Principles ofEconomics by GregMankiw

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

to afford the book: 35hours

Now… (2015)• Textbook: Principles of

Economics by GregMankiw

• Textbook price: $20.00• Minimum Wage: $3.35• Number of hours

worked to afford thebook: 6 hours

Inflation

Income by Decile

0

100

200

300

400

500

600

700

800

900

'89 '92 '95 '98 '01 '04 '07 '10 '13

$ (0

00's

)

90-100th%

80-89th%

60-79th%

40-59th%

20-39th%

<20th%