Global InterdependenceCenter Conference Milan, Italy David Kotok Chairman & Chief Investment Officer Cumberland AdvisorsInc. February 21, 2005
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Bonds are No Longer Stable Percent 10
Moody’s AAA Monthly Returns 1919-2005 6-13-2003 X
6
2
-2
-6
19 19 19 24 19 29 19 34 19 39 19 44 19 49 19 54 19 59 19 64 19 69 19 74 19 79 19 84 19 89 19 94 19 99 20 04
-10
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Record High Debt
300
300
Total Credit Market Debt as a % of GDP
290
290
(quarterly data 12/31/1922 – 6/30/2004)
280
280
270
270
6/30/2004 6/30/2004
260 250
Debt = $35.182 GDP = $11.643
Trillion Trillion
260
= 302.2%
250
240
240 Annual interpolated GDP (including estimates prior to 1929) used prior to 1946.
230 220
230 220
Domestic Nonfinancial Debt used prior to 1946. As of December, 1946
210
210
Domestic Nonfinancial Debt represented 99.4% of Total Credit Market Debt.
200
200
190
190
180
180
170
170
160
160
150
150
140
140
130
130 1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
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Actual Balances are Growing 4500 4000 3500
OUTSTANDING STOCK OF TREASURYS (Bn. USD$) LESS FOREIGN OFFICIAL & FED HOLDINGS (Bn. USD$)
3000 2500 2000 1500 1000 500
Source: BCA Research
19 85 Q 1 19 85 Q 4 19 86 Q 3 19 87 Q 2 19 88 Q 1 19 88 Q 4 19 89 Q 3 19 90 Q 2 19 91 Q 1 19 91 Q 4 19 92 Q 3 19 93 Q 2 19 94 Q 1 19 94 Q 4 19 95 Q 3 19 96 Q 2 19 97 Q 1 19 97 Q 4 19 98 Q 3 19 99 Q 2 20 00 Q 1 20 00 Q 4 20 01 Q 3 20 02 Q 2 20 03 Q 1 20 03 Q 4 20 04 Q 3
0
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Relative to GDP, Marketable Treasuries are Flat 50
OUTSTANDING STOCK OF TREASURYS (% OF GDP) 45
LESS FOREIGN OFFICIAL & FED HOLDINGS (% OF GDP) 40
35
30
25
20
Source: BCA Research
19 8
5 Q 1 19 85 Q 4 19 86 Q 3 19 87 Q 2 19 88 Q 1 19 88 Q 4 19 89 Q 3 19 90 Q 2 19 91 Q 1 19 91 Q 4 19 92 Q 3 19 93 Q 2 19 94 Q 1 19 94 Q 4 19 95 Q 3 19 96 Q 2 19 97 Q 1 19 97 Q 4 19 98 Q 3 19 99 Q 2 20 00 Q 1 20 00 Q 4 20 01 Q 3 20 02 Q 2 20 03 Q 1 20 03 Q 4 20 04 Q 3
15
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Corporate Profits Very High Corporate Profits as a percent of Nominal GDP 1947 - 2005 9%
Record High
Quarterly corporate after-tax profits with CCA and IVA adjustments in relation to Nominal GDP from 1947 to 2003. The capital consumption and inventory valuation adjustments convert depreciation and inventory withdrawals reported on an historical-cost basis to the replacement-cost measures used in the national income and product accounts. Data source: Bureau of Economic Analysis, (FRED) St. Louis Federal Reserve Bank and Cumberland Advisors, Inc.
8%
7%
6%
5%
4%
3% 1947
1951
1955
1959
CUMBERLAND ADVISORS, INC. A Subsidiary of Harleysville National Bank
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1963
1967
1971
1975
1979
1983
1987
1991
1995
1999
2003
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After-Tax Corporate Profit Growth 1959 - 2005 (YOY, %) 70
Percent (%) Quarterly corporate after-tax profits with CCA and IVA adjustments, year over year (%). Data source: Bureau of Economic Analysis, (FRED) St. Louis Federal Reserve Bank and Cumberland Advisors, Inc.
60 50 40 30 20 10 0 -10 -20 -30 1959
Seven Quarters Negative 2000.1-2001.3
1963
1967
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1971
1975
1979
1983
1987
1991
1995
1999
2003
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Corporate Profits and Stock Market Capitalization as a percent of Nominal GDP 1981 - 2005 9%
8%
7%
6%
P e r c e nt ( %)
Quarterly corporate after-tax profits w ith CCA and IVA adjustments in relation to Nominal GDP from 1981 to 2001. The capital consumption and inventory valuation adjustments convert depreciation and inventory w ithdraw als reported on an historical-cost basis to the replacement-cost measures used in the national income and product accounts. Data source: St. Louis Federal Reserve Bank, Ned Davis Research, Bureau of Economic Analysis and Cumberland Advisors Inc.
170
145 NASDAQ Bubble
120
95
5%
4%
70 Corporate Profits as a percent of Nominal GDP Stock Market Total Capitalization as a Percent of GDP
3% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
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45
20
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Three Ways to View the World The World’s 10 Largest Stock Markets
PPP
GDP
NOTE: World Total 51,766,267
NOTE: World Total 36,356,240
1. United States 10,871,095
1. United States
2. China
6,435,838
3. Japan
Measured in U.S. dollars @ 01/31/05 exchange rates
10,881,609
1.
United States 52.72%
2. Japan
4,326,444
2.
U.K.
11.24%
3,582,515
3. Germany
2,400,655
3.
Japan
9.67%
4. India
3,096,239
4. U.K.
1,794,858
4.
France
4.20%
5. Germany
2,279,134
5. France
1,747,973
5.
Germany
3.04%
6. France
1,632,119
6. Italy
1,465,895
6.
Switzerland
7. U.K.
1,606,853
7. China
1,409,852
7.
Canada
2.89%
8. Italy
1,559,321
8. Spain
836,100
8.
Australia
2.31%
9. Brazil
1,371,655
9. Canada
834,390
9.
Netherlands
2.15%
10. Russian Fed. 1,318,827
10. Mexico
626,080
10. Italy
11. Canada
11. Korea, Rep.
605,331
963,550
3.00%
1.91% Total: 93.12% Rest of the World 6.88% Total: 100%
Source: World Bank Data 2003, MSCI, FRB., Cumberland Advisors, and Laffer Associates. CUMBERLAND ADVISORS, INC. A Subsidiary of Harleysville National Bank
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