The Great

- ‘flation -
Debate
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 Quantitative Easing Explained
CONFIDENTIAL INFORMATION

Quantitative Easing Explained

 Borrowing & Binging
CONFIDENTIAL INFORMATION

HOUSEHOLD DEBT TO INCOME

Historic
Average

Source: Deutsche Bank

 Extended Deleveraging Process
CONFIDENTIAL INFORMATION

PRIVATE DEBT TO GDP

Potential for
deleveraging exceeds
U.S. experience during
the Great Depression

Source: Steve Keen’s Debtwatch

 A Composite of Crises
CONFIDENTIAL INFORMATION

This is
“normal”

This is
not

Source: NBER Working Paper 16334, After the Fall

 After The Fall
CONFIDENTIAL INFORMATION

 Leverage is an important driver of the cycle.

Credit declines after the surge.

 Real GDP growth is significantly lower during

the decade following a severe crisis.

 Unemployment remains significantly higher in

the years that follow the crisis.

 Housing prices remain lower in the ten-year

post-crisis period.

 Deleveraging is a delayed and lengthy process

Source: NBER Working Paper 16334, After the Fall
 Printing Our Way To Prosperity
CONFIDENTIAL INFORMATION

EXCESS RESERVES

Spike in reserves
means banks
aren’t lending

Source: St Louis Fed

 Something is Broken
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The Fed is
Pushing on a String

Source: St Louis Fed

 Hallmark of a Liquidity Trap
CONFIDENTIAL INFORMATION

Source: Van R. Hoisington, The Debt Deflation/Inflation Debate, October 2009

 Velocity Unlikely to Increase
CONFIDENTIAL INFORMATION

Source: Van R. Hoisington, The Debt Deflation/Inflation Debate, October 2009

 Lessons from Japan
CONFIDENTIAL INFORMATION

Source: Richard C. Koo, Lessons from Japan: Fighting a Balance Sheet Recession, May 2010
 Pushing on a String
CONFIDENTIAL INFORMATION

HOW TO SPOT A LIQUIDITY TRAP

This relationship flies in the

face of monetary theory

You are
here!

Source: Hussman Funds

 I Think We’re . . .
CONFIDENTIAL INFORMATION

VELOCITY FALLS WHEN MONEY IS INCREASED

Money Growth Up
=
Velocity Down

You are
here!

Source: Hussman Funds

 Turning Japanese
CONFIDENTIAL INFORMATION

THE JAPANESE EXPERIENCE IS IDENTICAL

This should
look familiar

Source: Hussman Funds

 Demand for Credit is Muted
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FINANCIAL OBLIGATIONS RATIO

Source: St Louis Fed

 Artificial Boost to Income
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GOVERNMENT TRANSFER PAYMENTS

Government now
represents more than
20% of personal income

Source: Clusterstock
 Offsetting the Credit Contraction
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NONFEDERAL DEBT & FEDERAL DEBT

Private sector credit decline has

offset increase in public debt

Source: Van Hoisington

 Funded by Savings
CONFIDENTIAL INFORMATION

Source: Richard C. Koo, Lessons from Japan: Fighting a Balance Sheet Recession, May 2010
 GDP Ended Where it Started
CONFIDENTIAL INFORMATION

S&P, DEBT & INTEREST RATES: 1929-1941

Rates
Down

Debt
Up

Source: Van R. Hoisington, The Debt Deflation/Inflation Debate, October 2009

 Double Decades of Deflation
CONFIDENTIAL INFORMATION

NIKKEI, DEBT & INTEREST RATES: 1989-2008

Debt
Up

Rates
Down

Source: Van R. Hoisington, The Debt Deflation/Inflation Debate, October 2009

 Hoping for Inflation
CONFIDENTIAL INFORMATION

CORE CPI HITTING ALL TIME LOWS

Just one
accident
away from
deflation

Source: St Louis Fed

 Size Matters
CONFIDENTIAL INFORMATION

THE CHOKING POINT IS LOWER TODAY

Source: Decision Point

 Little Upward Pressure on Rates
CONFIDENTIAL INFORMATION

BOND YIELDS REFLECT ECONOMIC CYCLES

Source: Societe Generale

 Follow the Leader
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Source: NY Times
 Within The Realm of History
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THE FULL PERSPECTIVE ON RATES

Source: Guggenheim Partners

 Seven Lean Years
CONFIDENTIAL INFORMATION

“There is in the situation today a nerve-wracking creative tension. At one extreme,

massive stimulus induces government debt to rise to levels that cause a real problem in
servicing the debt – or at least a crisis of confidence. At the other extreme, a draconian
attempt to hold debt levels while the economy is still fragile runs the risk of causing a
severe secondary economic decline. Deciding which horn of this dilemma to favor will
probably prove to be the central economic policy choice of our time. I am sympathetic to
those in power. This is not an easy choice. My guess, though, is that the best course is
less debt reduction now and a longer, slower reduction later. Overdoing it now may well
cause an economic setback for an already tender and vulnerable global economy that
might easily be enough to more than undo all of the benefits of debt reduction. Indeed,
with a weaker economy leading to lower government income, it might sadly cause debt
levels to rise after all. This need for time to cure all ills is one reason why I picked a
seven-lean-year recovery over a more normal and rapid one. The bad news, though, is
that in the end, by hook or by crook, debt levels must be lowered at every level, especially
governmental. There is almost no way that this process will be pleasant or quick.”

Source: Jeremy Grantham, GMO Summer Essays, July 2010

Investment
Conclusion
 Odds in Bernanke’s Favor
CONFIDENTIAL INFORMATION

MONETARY & FISCAL POLICY EFFECTS ON THE PRESIDENTIAL CYCLE 1964 - 2007

Source: Ned Davis Research

 At Least During Year Three
CONFIDENTIAL INFORMATION

COMPOSITE OF 29 PRESIDENTIAL CYCLES 1888 TO 2004

Year Three of the

Presidential Cycle has
demonstrated unusually
spectacular returns.

Source: The Chart Store

 But “Inflation is Deflationary”
CONFIDENTIAL INFORMATION

Source: Hedgeye Risk Management

 When in Doubt a Barbell is Best
CONFIDENTIAL INFORMATION
 Contact Information
CONFIDENTIAL INFORMATION

Broyhill Asset Management

800 Golfview Park
Post Office Box 500
Lenoir, NC 28645

Christopher R. Pavese, CFA

chris@broyhillasset.com

Phone: 828 758 6100

Fax: 828 758 8919