Is the global financial crisis of 2008 truly

Is the global financial crisis of 2008 truly over? V. Anantha Nageswaran June 2011

The US remains steeped in denial 2

Negative interest rate gap – to persist Source: Recent Surge in Global Commodity Prices – Impact of financialization of commodities and globally accommodative monetary conditions, Bank of Japan Review, March 2011 3

NYSE Members’ Debit balances in margin accounts Source: Bloomberg Finance, LP 4

What does ‘new normal’ mean? Source: “Barbelling” a Bi-modal World - The Search for Excess Risk Premia and Tail–Risk Insurance May 2010, Deutsche Bank Global Markets (Brad Jones, Asia Investment Strategist) 5

Now, you know why 1980 -2005 was an aberration Source: http: //www. econbrowser. com/archives/2011/05/will_high_oil_p. html 6

No further comments needed Source: Greed & Fear, CLSA Research, April 28, 2011 7

Long-term unemployed: rising trend with implications for skills deterioration Source: “Many Moving Parts: A Look Inside the U. S. Labor Market” – the Annual Report of the Federal Reserve Bank of St. Louis Published (April 2011) with reference traced from Felix Salmon Blog and www. businessinsider. com 8

1982 -2007 was an exception Source: ‘From the golden to the grey age’, DB Special Report, Sept. 2010 9

Medium to long-term return prospects from US equities is rather poor Source: http: //dshort. com/articles/three-valuation-indicators. html 10

We are not too far away from ‘dangerous’ territory on valuation in S&P Composite Source: http: //dshort. com/articles/SP-Composite-pe-ratios. html 11

The virus has spread – an assessment of International and Asia-Pacific conditions 12

The global recovery of capitalists or capitalism? Source: http: //www. ippr. org/Blogs/Nick. Pearce/Wages. Profits. And. The. Recovery. Cui. Bono. aspx 13

This is why the ‘future of financial markets’ is bleak Source: Bureau of Economic Analysis (USA) and Julius Baer 14

History repeats itself? – Australian banks’ home loans lending standards 15 Source: ‘Banks need to update housing lending standards’, Australian Banks – Retail, Bof. A-Merrill Lynch, April 15, 2011

Listen to RBA and not me § The exchange rate has risen further and, in real effective terms, is at its highest level in several decades. Source: http: //www. rba. gov. au/media-releases/2011/mr-11 -07. html 16

Where are we now, in Asia? Source: ‘The Pressure Cooker in Asia – Bubbling Away’, The Asia Investor Letter, DB Global Markets Research, 3 rd May 2011 17

Why the previous slide got it right? – evidence from around Asia Source: ‘The Pressure Cooker in Asia – Bubbling Away’, The Asia Investor Letter, DB Global Markets Research, 3 rd May 2011 18

Commodities – long-term buying opportunity 19

Slowing growth rates in yields over time Source: ‘The Shifting patterns of agricultural production and Productivity world-wide’ (2010) The Midwest Agribusiness Trade Research and Information Center, Iowa State University, Ames, Iowa (Chapter 3) 20

Bulk of the countries witnessing slower yield growth Source: ‘The Shifting patterns of agricultural production and Productivity world-wide’ (2010) The Midwest Agribusiness Trade Research and Information Center, Iowa State University, Ames, Iowa (Chapter 3) 21

Excluding China and Brazil, land labour productivity are falling worldwide Source: ‘The Shifting patterns of agricultural production and Productivity world-wide’ (2010) The Midwest Agribusiness Trade Research and Information Center, Iowa State University, Ames, Iowa (Chapter 3) 22

Chart of crude oil prices since 1861 23

The commodity speed limit for global growth is much lower The trade off between global growth and commodity price inflation has tightened. In the 1980 s and 1990 s growth needed to be above 3. 5% to cause sustained commodity price inflation. That has fallen to less than 2. 5% now. With global growth projected at in excess of 4% for 2010 and 2011 the commodity speed limit is being broken. Source: Barclays Capital Research 24

Commodity sell-off is a BUY opportunity § Extraordinary weather patterns call for buying agricultural commodities on dips – driest April in 352 years in the UK; drought in China (shipping halted in Yangtze river and Hurricanes in the US outnumbering any seen in history) § Good election results in Canada call for overweighting Canadian assets. Dividend stocks and good bonds can be recommended § Long-short hedge fund managers now to be favoured as even Jeremy Grantham withdraws calls to be overweight equities in the Presidential year 3. The play is over. § US Retail sales – excl. gasoline and auto – much weaker § Continuing jobless claims rising § Risk of QE 3 rising – buying commodities on dips makes sense § Re-emphasise the Asian Currency Basket 25

Risk of a low income-trap in India 26

The resilience of India Source: http: //dshort. com/articles/world-markets-update. html 27

Source: Datastream, Bloomberg 28

Index Source: Datastream, Bloomberg 29

Evidence of oligarchic capitalism Source: ‘Tackling structural inequities’, Policy Paper 2, India 2039, ADB (2009) 30

Neither desirable nor sustainable Source: ‘Inequality, rents and the long-run transformation of India’ Michael Walton Draft (April 2010) 31

Final thoughts 32

Investment implications § Build a portfolio that would stand volatility and insure (hope to) against downside risk in the next 24 months § Keep a small portfolio of high quality stocks § As for stock markets, Japan, Russia, Thailand make sense to us § Invest in no-default history Emerging Market bonds for coupons § Keep cash in three structurally sound sovereign bonds § Diversify into physical precious metals, agricultural commodities. Retain exposure to crude oil (Energy Fund or stocks) § Keep a sizeable portion in cash in a diversified portfolio of currencies § Take ‘known downside’ bets on over and undervalued currencies using cash portion as collateral 33

Last word – check this out “To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm” (Hayek) Source: http: //econstories. tv/2010/06/22/fear-the-boom-and-bust/ 34

Convexity is what we are likely to see in the next two years § “It's easy to forget that responses to actions aren't linearly proportional to the force applied, that many situations have a convexity in which just a little more can make all the difference, and a little less does nothing. ” § Some potential convexity areas: § “That China won't run into social trouble in the long run either, even though so far everything proceeds linearly towards growth without political freedom. § As for the US, sooner or later there will arise a successful popular nonlinear response to the linearly increasing concentration of economic power that isn't devoted to popular improvement. ” Source: http: //www. wilmott. com/blogs/eman/index. cfm/2011/4/24/Capitalist-Nonlinearities 35

Quotes of the day § Insanity: doing the same thing over and over again and expecting different results § Only two things are infinite, the universe and human stupidity, and I'm not sure about the former. - Albert Einstein 36

Only Gold matters, going forward Top panel shows Global Government Bond Index, JP Morgan EM Bond Index and MSCI World Free Equity Index. All of them are denominated in US dollars. The bottom panel shows the price of Gold in US dollars, Euro, AUD and GBP. Both the panels are indexed to a starting value of 100 as of October 4, 2002. Source: Julius Baer and Bloomberg Finance LP 37

Important Legal Information (1/2) 38

Important Legal Information (2/2) 39

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