Black Stone Webcast - Outlook for US & Europe 2011.10.05

8/4/2019 Black Stone Webcast - Outlook for US & Europe 2011.10.05

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Blackstone Webcast: The Outlook forEurope and the United States

Byron R. Wien Vice Chairman, Blackstone Advisory Partners L.P., Blackstone

Joachim FelsGlobal Head of Economics, Morgan Stanley

Moderator: Mimi GammillManaging Director, Investor Relations & Business Development, Blackstone



2

Cyclically-adjusted fiscal balance, 2011 (% of GDP)

0% 50% 100% 150% 200% 250% 300% 350% 400%

Japan

Greece

United States

Ireland

Italy

Canada

United Kingdom

Portugal

Belgium

Germany

Spain

France

Netherlands

Finland

Government debt / revenues, 2011

NPV of ageing-related expenditure, 2010-2050(% of GDP)

People’s equity

LiabilitiesAssets

Social Liability

(NPV of future primaryexpenditure)

Gross debt

Power to Tax

(NPV of future taxrevenues)

Real assets

(buildings, etc.)

Financial assets andliabilities

Other assets(loans, cash, etc.)

Equity stakes

(and similar)

Fiscal assets andliabilities

People’s equity

LiabilitiesAssets

Social Liability

(NPV of future primaryexpenditure)

Gross debt

Power to Tax

(NPV of future taxrevenues)

Real assets

(buildings, etc.)

Financial assets andliabilities

Other assets(loans, cash, etc.)

Equity stakes

(and similar)

Fiscal assets andliabilities

Stylised government balance sheet

-10 -8 -6 -4 -2 0 2

Japan

United States

United Kingdom

Greece

Ireland

Spain

France

Canada

Netherlands

Portugal

Belgium

Italy

Germany

Finland

0 50 100 150 200

United States

Belgium

Finland

United Kingdom

Portugal

Greece

Canada

Netherlands

Spain

Ireland

Germany

France

Italy

Japan

Pension spending

Health care spending

Fiscal Policy is Unsustainable Almost Everywhere

Source: : IMF, Morgan Stanley Research



Blackstone Webcast: The Outlook forEurope and the United States

Byron R. Wien Vice Chairman, Blackstone Advisory Partners L.P., Blackstone

Joachim FelsGlobal Head of Economics, Morgan Stanley

Moderator: Mimi GammillManaging Director, Investor Relations & Business Development, Blackstone



44

Three Secular Problems

1. The polarization of the political process in the United

States preventing compromise and discouraging theelectorate

2. The open-ended sovereign debt crisis in Europe that now

appears larger than the resources of the institutions with

the power to deal with it

3. The budget debt problem in the United States which has

reached the point where Carmen Reinhart and Ken Rogoff

warned in their book “This Time Is Different” countries willhave trouble growing faster than 2% real. This is further

complicated by the 2008 recession which was

accompanied by a financial crisis. Slow growth and high

unemployment usually follow for several years



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1. Banking system has gone from insolvency to strong

capital ratios

2. No weak/opaque shadow banking system to contend

with

3. The financial condition of Corporate America is excellent

4. Profit and revenue growth are still good as is growth in

dividends and share buybacks

5. Business inventories are in excellent shape. There is no

bubble in housing as in 2008 and most cyclical sectors of the economy are at a very low percentage of GDP

________________________________________________

Source: Omega Advisors.

Why We are Not Likely to Experience Another 2008 Type Decline?



66

6. Household debt/GDP, while still high, has dropped

from 99.5% to 89.6%. Debt service ratio substantiallyimproved

7. The consumer savings rate has gone from 1% to 5.4%

8. Lower dollar should be a plus for exports

9. Oil price decline from $115 to $84wti ($130 to $110

Brent) per barrel positive for consumers and economy

generally

________________________________________________





10. FED policy of zero interest rates will ultimately work

11. Tame wages and decent productivity

12. Decent M&A activity and large pool of private equity

capital

13. Investors are conservatively postured

14. Market valuation very appealing – both absolute and

particularly relative to alternatives (financial

repression)

________________________________________________





8th Quarter Following Recession End 2 –Yr. % A.R. (Real)

________________________________________________

Source: ISI Group.

*

Res

Investment

Consumer

Spending

Govt

Spending CapEx Real GDP

Nominal

GDP

1977: 1Q 21.5% 5.4% 0.6% 5.2% 4.7% 11.1%

1984: 4Q 24.8% 5.5% 3.9% 12.6% 6.6% 10.4%

1993: 1Q 11.2% 3.1% -0.2% 3.4% 3.0% 5.5%

2003: 4Q 9.4% 2.7% 2.8% – 2.9% 4.9%

Avg 16.7% 4.2% 1.8% 5.3% 4.3% 8.0%

2011: 2Q -1.5% 2.1% -0.8% 5.5% 2.5% 4.1%



Then & Now

________________________________________________

Source: Strategas Research Partners.

August 1982 Current

Fed Funds Rate 10.12% 0.125%

Prime Rate 14.39% 3.25%

10-Year UST Yield 13.60% 2.06%

Trailing S&P 500 P/E 8.8 12.4

Price to Book 1.0x 2.2x

Dividend Yield 6.60% 2.37%

Top Marginal Tax Rate 50% 35%

Capital Gains Tax Rate 20% 15%

% of Workforce in Union 20.1% 12.3%



The Typical Conditions That Precede A Recession Are Not in Place

________________________________________________

Source: Douglas Kass, Seabreeze Partners Management Inc.

Large private payroll drops in excess of 175k a

month (adjusting for non-recurrings, they are stillaveraging about 100k growth over last four

months);

An inverted yield curve (it is not inverted);

Acceleration in inflation (inflation is contained and

so are expectations);

An increase in real interest rates (anything but!);



The Typical Conditions That Precede A Recession Are Not in Place

________________________________________________

Source: Douglas Kass, Seabreeze Partners Management Inc.

Bloated inventories (low inventories to sales in

place now);

Retreating retail sales (they are expanding;

Negative year-over-year leading economic

indicators (advancing now);

A drop in factory orders (also advancing) and;

Outsized durable spending relative to GDP (housingand autos remain in the crapper)



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 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 or

income 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 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. 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.*

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Black Stone Webcast - Outlook for US & Europe 2011.10.05