2011: Better, Worse or More of the Same

Byron R. Wien
Vice Chairman, Blackstone Advisory Partners L.P.
Tel: 212.583.5055
Email: wien@blackstone.com

Byron’s 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'scommentary@blackstone.com.
The Ten Surprises of 2010
1. The United States economy grows at a stronger than expected
5% real rate during the year and the unemployment level drops
below 9%. Exports, inventory building and technology spending
lead the way. Standard & Poor’s 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 of
successive hikes beginning in the second quarter the Federal
funds rate reaches 2% by year-end
The Ten Surprises of 2010 (Cont’d)
3. Heavy borrowing by the U.S. Treasury and some reluctance by
foreign central banks to keep buying notes and bonds drives the
yield on the 10-year Treasury above 5.5%. Banks loan more to
corporations 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 & Poor’s 500 rallies to 1300
in the first half and then runs out of steam and declines to 1000,
ending where it started at 1115.10. Even though the economy is
strong and earnings exceed expectations, rising interest rates
and full valuations present a problem. Concern about longer
term growth and obligations to reduce leverage at both the
public and private level unsettle investors
The Ten Surprises of 2010 (Cont’d)
5. Because it is significantly undervalued on a purchasing power
parity basis, the dollar rallies against the yen and the euro. It
exceeds 100 on the yen and the euro drops below $1.30 as the
long slide of the greenback is interrupted. Longer-term
prospects remain uncertain
6. Japan stands out as the best-performing major industrialized
market in the world as its currency weakens and its exports
improve. Investors focus on the attractive valuations of dozens
of medium-sized companies in a market selling at one quarter of
its 1989 high. The Nikkei 225 rises above 12,000
The Ten Surprises of 2010 (Cont’d)
7. Believing he must be a leader in climate control initiatives,
President Obama endorses legislation favorable for nuclear
power development. Arguing that going nuclear is essential for
the environment, will create jobs and reduce costs, Congress
passes bills providing loans and subsidies for new plants, the
first since 1979. Coal accounts for about 50% of electrical power
generation, and Obama wants to reduce that to 25% by 2020
8. The improvement in the U.S. economy energizes the Obama
administration. The White House undergoes some
reorganization and regains its momentum. In the November
Congressional election the Democrats only lose 20 seats, much
less than expected
The Ten Surprises of 2010 (Cont’d)
9. When it finally passes, financial service legislation, like the health care
bill, proves to be softer on the industry than originally feared. There is
greater consumer protection, more transparency, tighter restriction of
leverage and increased scrutiny of derivatives, but the regulatory
changes for investment bankers and hedge funds are not onerous.
Trading volume and merger activity increases; financial service stocks
become exceptional performers in the U.S. market
10. Civil unrest in Iran reaches a crescendo. Ayatollah Khamenei pushes
out Mahmoud Ahmadinejad in favor of a more public relations adept
leader. Economic improvement becomes the key issue and anti-Israel
rhetoric subsides. Talks with the U.S. and Europe begin but the
country remains a nuclear threat. Pakistan becomes the hotspot in
the region because of the weak government there, anti-American
sentiment, active terrorist groups and concerns about the security of
the country’s nuclear arsenal
Crowd Sentiment Poll

____________________________________________
Source: Ned Davis Research.
S&P 500 Cyclical Bull Markets within Secular Bear Markets

Dates % Gain Days

11/13/1929–04/17/1930 45.8% 155
07/08/1932–09/07/1932 111.1% 61
02/27/1933–02/05/1934 113.6% 343
07/26/1934–03/10/1937 123.3% 958
03/31/1938–11/12/1938 62.1% 226
04/08/1939–09/12/1939 29.4% 157
10/07/1966–12/03/1968 47.6% 788
05/26/1970–04/28/1971 51.2% 337
11/23/1971–01/11/1973 33.4% 415
12/06/1974–09/21/1976 65.9% 655
02/28/1978–09/08/1978 22.7% 192
04/21/1980–04/27/1981 35.8% 371
09/21/2001–03/19/2002 21.2% 179
10/09/2002–10/09/2007 101.5% 1,826
03/09/2009–04/26/2010 (1) 79.2% 413

Mean 62.3% 465

Median 51.2% 337
____________________________________________
Source: Ned Davis Research.
(1) 4/26/2010 represents the current cyclical high date.
S&P 500 Cycle Composite for 2010

12.0 2.50
10.0
2.00
8.0
6.0 1.50

4.0 1.00
2.0
0.50
0.0
-2.0 0.00
-4.0 -0.50
-6.0
-1.00
-8.0
-10.0 -1.50
Jan Feb Mar Apr Ma Jun Jul Aug Sep Oct Nov Dec

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

____________________________________________
Source: Ned Davis Research.
S&P 500 Over-/Undervaluation Versus Ben Graham Intrinsic Value Model

200

150

100

50

-50

-100
12/31/1875 11/30/1902 10/31/1929 9/29/1956 8/31/1983 7/30/2010

____________________________________________
Source: Leuthold Group, LLC.
Stocks Attractive vs. Bonds

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%
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.
Total Notational Derivatives

($ in trillions)
$225
12/31/2009 = $212.81 trillion
$200
(Total notional amount of derivatives contracts at all U.S. commercial banks)
$175
$150
$125
$100
$75
$50
$25

$0
1990 1991 1993 1994 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009

____________________________________________
Source: Ned Davis Research.
Where is the Economic Rebound?

The Deeper the Recession, the Faster When a Financial Crisis Accompanies
the Recovery a Recession, the Spike in Unemployment
GDP Recoveries vs Recessions Is Higher and Longer
9% 4%
1981 2008E
8%
1953

from Year before the Crisis

Percentage Points Change
3%
7%
Increase in Real GDP during

1960 1957
First Year of Recovery

1973
6% 2%

5%
1%
4%
1969
3% 0%
Regression
1990 Y = 1.9 - 1.6 * X
2%
1980 2
R = 45%
2001 -1%
1% -1 0 1 2 3 4 5 6 7 8 9 10
0% Years after the Beginning
0% -1% -2% -3% -4% -5% of the Crisis (or Recession)

Decline in Real GDP during Recession Recessions without a Crisis Crisis with a Recession

____________________________________________ ____________________________________________
Source: ISI Group. Source: ISI Group.
Global Growth
1995 Nominal GDP
Italy Turkey Saudi Arabia
France Other Developed 0.6% 0.5%
3.8%
5.3% 13.8% Indonesia Poland
United Kingdom South Africa
0.8% 0.5%
3.9% 0.5%
Germany Taiwan
8.6% 0.9% Other Developing
Developing Mexico 1.0% 7.9%
Economies Korea
21.7% 1.8%
Japan China
17.9%
2.5%
Brazil
India Russia
2.6%
1.2% 1.1%
United States
25.1%
2008 Nominal GDP Indonesia
Other Developed 0.8% Taiwan Poland
Italy 15.2% Turkey 0.9% 0.7%
3.8% Mexico 0.8% Saudi Arabia
France 1.8% 0.6%
4.7% Korea Iran
United Kingdom 2.0% 0.6%
4.4% Emerging
Germany
Economies China Other Developing
6.0%
34.1% 7.1% 11.5%
Japan
8.1% India
2.0%
Russia Brazil
2.8% 2.6%
United States
____________________________________________
23.7%
Source: ISI Group.
Public Debt as % of GDP

Developed vs. Developing Economies

120% 108% est.

100%

80%

60%
33% est.
40%

20%

0%
'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

____________________________________________
Source: Strategas Research Partners, LLC.
Total Credit Market Debt as a % of GDP

12/31/1922–12/31/2009
400%

12/31/2009 Debt = $52.417 trillion

350% = 362.5%
12/31/2009 GDP = $14.462 trillion

300%

250%

200%

150%

100%
1922 1927 1931 1936 1940 1944 1949 1953 1957 1962 1966 1970 1975 1979 1983 1988 1992 1996 2001 2005 2009

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.
____________________________________________
Source: Ned Davis Research.
The Mountain of U.S. Debt

($ in trillions)

$14 90%
80%
$12
70%
$10
60%
$8 50%

$6 40%
30%
$4
20%
$2
10%
$0 0%
1910 1930 1950 1970 1990 2001 2003 2005 2007 2009 2011 2013

Public Debt Pct GDP

____________________________________________
Source: Leuthold Group, LLC.
Debt Service is the Critical Factor

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

7% $900
Average Interest Rate on U.S. Government Debt
Excludes TIPS (Treasury Inflation Protected Securities) $800
6%
$700
5% Now
$600

4% $500

$400
3%
$300
2%
$200

1% $100

$0
0%
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010E
2012E
2014E
2016E
2018E
2020E
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Now

____________________________________________ ____________________________________________
Source: Leuthold Group, LLC. Source: CBO and White House Estimates, Leuthold Group, LLC.
U.S. Outstanding Sovereign Debt (by Maturity Timeline)

35%
30.8%
29.8%
30%

25%
21.3%
20%

15%
10.4%
10% 7.8%

5%

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

____________________________________________
Source: Strategas Research Partners, LLC.
Total China Holdings of U.S. Treasuries

($ in billions)

$1,000
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

____________________________________________
Source: Strategas Research Partners, LLC.
Taxes and Government Spending

(Quarterly Data, 3/31/47–3/31/10)

30%
Government Spending as a % of GDP
(59.8-year Average = 19.5% of GDP)
25% 3/31/2010 = 25.3%

20%
Taxes as a % of GDP
15% (59.8-year Average = 18.0% of GDP)
3/31/2010 = 15.9%
10%
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

6%
4%
Surplus as a % of GDP 3/31/20 = -9.4%
2%
0%
-2%
Deficit as a % of GDP
-4%
-6%
(59.8-year Average = -1.4% of GDP)
-8%
-10%
1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007
________________________________________________
Source: Ned Davis Research.
“What Has to Be Cut”
A huge deficit would remain…
Projected Deficit in 2011, under President Obama's Budget Deficit: $1.267 trillion

…even if any one ofDisallow

these steps were taken in 2011
Congressional Earmarks 1.257
(About $4,100 a person)
Eliminate Welfare Payments 1.238

If the Budget Proposal WereCut toForeign Aid One of

Implement The Deficit Would Be Reduced by This 1.226
Remaining Deficit
These Changes:
Shut Down the Department of Education $94 Amount (in billions) 1.173

Close
Allow Bush Tax Cuts Downfor
to Expire theEveryone,
National Endowment
Not Just the for the Arts
Wealthiest 135 1.132
Deficit: $1.267 trillion
(1)
Disallow
Withhold Congressional
Money Earmarks
for War Operations 160 1.257
1.107

Eliminate
Stop the Recovery Act's Stimulus Welfare
Spending andPayments
Tax Cuts 258 1.238
1.009

Cut Foreign
Stop Medicaid Benefits for Poor Patients and Nursing Home Aid
Residents 271 1.226
0.996
Shut Down the Department
Double of Education
Corporate Income Taxes $94
293 1.173
0.974
Allow Bush Tax Cuts to Expire for Everyone, Not Just the Wealthiest 135 1.132
Stop Medicare Benefits 492 0.775
Withhold Money for War Operations 160 1.107
Cut All Domestic Programs Other than Entitlements 530 0.737
Stop the Recovery Act's Stimulus Spending and Tax Cuts 258 1.009
Stop Social Security Checks for Retirees, the Disabled and Survivors 730 0.537
Stop Medicaid Benefits for Poor Patients and Nursing Home Residents 271 0.996
Projected Deficit in 2011, under President Obama's Budget 846 0.421
Double Corporate Income Taxes 293 0.974

Stop Medicare Benefits 492 0.775

Cut All Domestic Programs Other than Entitlements 530 0.737

Stop Social Security Checks for Retirees, the Disabled and Survivors 730 0.537

Cut All National Security Spending 846 0.421

____________________________________________
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.
Federal Spending on Medicare and Medicaid as Share of GDP

20%
2065: M/caid = 3.5%
CBO Projections M/care = 11.1%

2045: M/caid = 3.1%

15% M/care = 8.4%

2025: M/caid = 2.3%

Medicaid
M/care = 5.0%
2008: M/caid = 1.5%
10% M/care = 2.8%
2005: M/caid = 1.5%
M/care = 2.4%
5% 1985: M/caid = 0.6% Medicare
M/care = 1.6%
1965: M/caid = 0.1%
M/care = 0.0%

0%
1965 1985 2005 2025 2045 2065

____________________________________________
Source: ISI Group.
Presidential Approval and Unemployment Rate (Inverted)

100% 2%
Nixon Ford Carter Reagan Bush I Clinton Bush II Obama

Unemployment Rate (Inverted)

80% 4%

60% 6%
Approval

40% 8%

20% 10%

0% 12%
1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009

Approval Unemployment Rate (Inverted)

____________________________________________
Source: ISI Group.
Employment vs. Fixed Investment (Year-to-Year Changes)

(Quarterly Data, 06/30/48–09/30/10)

10% 30%
Fixed Investment
Nonfarm Payrolls 25%
(Moved Ahead 1 Quarter)
8% 6/30/2010 = 0.5%
9/30/2010 = 5.2% 20%
6% 15%
Non-Farm Payrolls

Fixed Investment
10%
4%
5%
2% 0%
-5%
0%
-10%
-2% -15%
-20%
-4%
-25%
Correlation Coefficient = 0.79
-6% -30%
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-Farm Payrolls Fixed Investment

________________________________________________
Source: Ned Davis Research.
U.S. Payroll Employment (%), U.S. Civilian Population

(Ages 18-69)

80%

75%

70%

65%

60%

55%

50%
1968 1974 1980 1986 1992 1998 2004 2010

________________________________________________
Source: ISI Group.
How Much Has Each of the Following Been Helped by the Government’s
Economic Policies?

Large Banks 62% 14% 19% 5%

Wall Street Investment Companies 54% 15% 22% 9%

Manufacturing Firms 21% 21% 50% 8%

People Who Have Lost Jobs or Had Hours Cut 15% 21% 61% 3%

Average Working Person 13% 20% 65% 2%

Small Businesses 11% 17% 65% 7%

My Family / Myself 10% 14% 73% 3%

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

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

____________________________________________
Source: ISI Group.
I. The United States Economy
What Government Did, and Didn’t Do
(From Grant’s Interest Rate Observer)

Length Decline in Stimulus as % of GDP

Cycle Peak Cycle Trough (Months) Real GDP 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%

____________________________________________
Source: Grant’s Interest Rate Observer 2009, Federal Reserve & CBO Estimates, and Strategas Research Partners.
Fed Balance Sheet

($ in billions)
2,500

2,000

1,500

1,000

500

0
1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

____________________________________________
Source: ISI Group.
It’s Not Hard to Get +3% Real GDP

4Q 2010 Real GDP

Cont. to GDP
Consumer 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%

____________________________________________
Source: ISI Group.
Performance of Real Personal Income Less Transfer Payments vs Average
of Last Six Expansions

110.0

108.0

106.0

104.0

102.0

100.0

98.0

96.0
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
U.S. Housing Starts and Case-Shiller Month-over-Month

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

Month-over-Month %
3.0 200%

150%
2.5
100%

2.0 50%

0%
1.5
-50%

1.0 -100%

-150%
0.5
-200%

0.0 -250%
1947 1954 1961 1968 1975 1982 1989 1996 2003 2010 2000 2002 2004 2006 2008 2010

____________________________________________
Source: ISI Group.
Shadow Inventory Doubles Potential Homes for Sale

(thousands)
10,000

9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0
11 8

12 8

11 9

12 9

9
08

08

08

08

08

08

08

08

08

09

09

09

09

09

09

09

09

09

10

10

10

10

10

10
/0

/0

/0

/0

/0

/0
1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/

1/
/1

/1

/1

/1

/1

/1
1/

2/

3/

4/

5/

6/

7/

8/

9/

1/

2/

3/

4/

5/

6/

7/

8/

9/

1/

2/

3/

4/

5/

6/
10

10
Existing Inventory 90+ Days Delinquent Foreclosure Inventory

________________________________________________
Source: Strategas Research Partners.
Temporary Employment Survey

80

70

60

50

40

30

20

10

0
1996 1997 1999 2000 2002 2003 2004 2006 2007 2009 2010

____________________________________________
Source: ISI Group.
National Beveridge Curve

(December 2000 – July 2010)

4.0

3.5
Job Openings Rate (%)

3.0

2.5
Apr '10

2.0 Jul '10 May '10

Mar '10
1.5

1.0
2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0
Unemployment Rate (%)

________________________________________________
Source: Strategas Research Partners, LLC.
U.S. Workweek and U.S. Private Employment Month-over-Month Change

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

Month Change
40 1,500

39
1,000
38

37 500

36
0
35
(500)
34

33 (1,000)
32
(1,500)
31

30 (2,000)
1964 1969 1974 1979 1984 1989 1995 2000 2005 2010 1939 1948 1956 1965 1974 1983 1992 2001 2010

____________________________________________
Source: ISI Group.
Manufacturing Labor Costs
(In US$)
2002 2007
Hourly Compensation Costs for Hourly Compensation Costs for
All Employees in Manufacturing All Employees in Manufacturing
China $0.57 China $0.94
Philippines $0.90 Philippines $1.37
Argentina $2.98 Mexico $3.91
Brazil $3.07 Brazil $7.13
Slovakia $3.27 Poland $7.69
Mexico $3.44 Argentina $7.98
Poland $4.05 Taiwan $8.15
Czech $4.60 Slovakia $8.49
Hungary $5.05 Czech Republic $9.67 Only 16th
Portugal $6.40 Portugal $10.29
Taiwan $6.84 Hungary $10.49
Highest
Korea $9.80 Singapore $15.43
New Zealand $10.12 Israel $15.92
Singapore $12.04 Korea, Republic $18.36
Israel $12.34 New Zealand $19.19
Spain $13.77 Japan $24.00
Australia $17.94 Spain $24.55
Italy $18.50 United States $30.56
Canada $18.78 Canada $31.91
Ireland $19.69 Italy $32.19
Japan $21.75 5th Highest Australia $34.75
United $22.37 Ireland $35.62
Finland $22.52 United Kingdom $36.66
Sweden $22.96 France $37.68
France $23.07 Switzerland $38.34
Belgium $23.81 Belgium $38.75
Netherlands $24.15 Sweden $38.80
Austria $26.34 Netherlands $39.47
United States $27.01 Finland $39.74
Denmark $27.33 Austria $43.17
Switzerland $28.05 Denmark $47.54
Germany $31.59 Germany $50.73
Norway $32.29 Norway $55.03

$0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00

____________________________________________
Source: Leuthold Group, LLC.
Personal Saving as Share of Disposable Personal Income
(4Q Moving Average)

14%

12%

10%

8%

6%

4%

2%

0%
1959 1963 1967 1971 1976 1980 1984 1988 1993 1997 2001 2005 2010

____________________________________________
Source: ISI Group.
U.S. Consumer Sentiment and U.S. Consumer Confidence

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

120 160

140
100
120
80
100

60 80

60
40
40
20
20

0 0
1978 1983 1988 1994 1999 2005 2010 1967 1972 1977 1983 1988 1994 1999 2005 2010

____________________________________________
Source: ISI Group.
II. The Rest of the World
Global Growth

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%

____________________________________________
Source: ISI Group.
Institutions Underweighted in Emerging Markets
(In US$)
Portfolio allocations to Emerging Markets Price to book ratios, Developed vs
Equities Emerging Markets
35% 4.5

4.0
30%

3.5
25%

MSCI weights 3.0

20%
2.5

15% 2.0
Institutional and Retail surveys

10% 1.5

1.0
5%

0.5
0%
Market Cap Free Float GS Survey BoA ML Pensions & Morningstar 0.0
(MSCI) (MSCI) Survey Investments 1999 2001 2002 2003 2004 2005 2007 2008 2009 2010

Developed Markets Emerging Markets

____________________________________________
Source: JPMorgan Private Bank.
China Real GDP Y/Y%

16%

14%

12%

10%

8%

6%

4%

2%

0%
1991 1994 1996 1998 2000 2003 2005 2007 2010
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q2

____________________________________________
Source: ISI Group.
Japan IP and Eurozone IP

Japan IP Eurozone IP

120 120

100 100

80 80

60 60

40 40

20 20

0 0
1973 1978 1983 1989 1994 1999 2005 2010 1990 1994 1998 2002 2006 2010

____________________________________________
Source: ISI Group.
Real Trade Deficit (U.S., Japan, and Germany) – 4-Quarter Average

U.S. Japan Germany

0 35 50

(10) 30 40

25
(20) 30
20
(30) 20
15
(40) 10
10
(50) 0
5

(60) 0 (10)

(70) (5) (20)

1994 1997 2000 2003 2006 2010 1980 1985 1990 1995 1999 2004 2010 1970 1977 1983 1990 1996 2003 2010
Q4 Q4 Q4 Q4 Q4 Q2 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q2

____________________________________________
Source: ISI Group.
China

% Global Nominal GDP, 2008

20%

18%

16%

14%

12%

10% 8.5%
8%

6% 8.7%
4%

2%

0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 e

China % World Japan % World

____________________________________________
Source: ISI Group.
China M2 Year-over-Year %

35%

30%

25%

20%

15%

10%

5%

0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

____________________________________________
Source: ISI Group.
China is Tightening Lending Practices

China Bank Loans

SA by ISI, Y-o-Y%
40%

35%

30%

25%
Feb-2010:
20% 27.3%

15%

10%

5%

0%
1998 2000 2002 2004 2006 2008 2010

____________________________________________
Source: ISI Group.
Consumer Spending as % of GDP

China U.S.
50% 72%

71%
48%

46%
70%
44%

42%

40%
68%
38%

36% 35%

34% 66%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

____________________________________________
Source: Strategas Research Partners, LLC.
Timeline of Events
1421–1423 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 to
sail 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 and
Ptolemy.
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 was
given 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.
III. Some Thoughts about the Price of Oil
Oil Supply / Demand Outlook World Primary Energy Demand
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

Peak Oil:
2015
18,000 Other Renewables
Biomass
16,000
Hydro
14,000 Nuclear
12,000 Gas
Oil
Mtoe

10,000 Coal
8,000 WEO – 2008 total

6,000 Peak Oil: 2010

4,000
2,000
0
1980 1990 2000 2010 2020 2030

____________________________________________
Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.
Oil Supply / Demand Outlook
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

25
22

20
Barrels Per Person Per Year

17

15
13

10
10 9 9
8
7
5
5 4 4
2 2
1
0
U.S. Japan Europe Russia Brazil China India

2008 2030

____________________________________________
Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.
Oil Supply / Demand Outlook
BRIC and Middle East Demand Outlook

(In Mmbl/d)
2008 2030
Demand Demand 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

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”

____________________________________________
Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.
Predicting the Unpredictable!
WTI Crude Oil Prices

The range of WTI crude oil prices will expand significantly after 2013 as OPEC utilization
is rising
($/bbl)
$200
$180
$160
$140 Forecast

$120
$100
$80
$60
$40
$20
$0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

____________________________________________
Source: Bank of America Merrill Lynch, Bloomberg and BofAML Global Commodity Research.
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 Blackstone
undertakes 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 companies
mentioned or indirectly referenced in this commentary and may also perform or seek to perform investment
banking services for those companies. Blackstone and/or its employees have or may have a long or short position
or 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 specific
investment objectives and financial position. Where a referenced investment is denominated in a currency other
than the investor's currency, changes in rates of exchange may have an adverse effect on the value or price of or
income derived from the investment.
Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the
economic consequences of any transaction concepts referenced in this commentary and should be reviewed
carefully with one's investment and tax advisors. Certain assumptions may have been made in this commentary as
a basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differing
facts from the assumptions may have a material impact on any indicated returns. Past performance is not
necessarily 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 the
solicitation of an offer to purchase any security.
To recipients in the United Kingdom: this commentary has been issued by Blackstone Advisory Partners L.P. and
approved by The Blackstone Group International Partners LLP, which is authorized and regulated by the Financial
Services Authority. The Blackstone Group International Partners LLP and/or its affiliates may be providing or may
have provided significant advice or investment services, including investment banking services, for any company
mentioned or indirectly referenced in this commentary. The investment concepts referenced in this commentary
may 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.
Question & Answer Session
Closing Remarks
2011: Better, Worse or More of the Same
Byron R. Wien
Vice Chairman, Blackstone Advisory Partners L.P.
Tel: 212.583.5055
Email: wien@blackstone.com

Byron’s 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'scommentary@blackstone.com.