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‘US Equity Markets’ Nov. 3, 2017 Global Interdependence Center Little Rock, Arkansas

Michael D. McNiven, PhD Managing Director & Portfolio Manager Michael.McNiven@Cumber.com

Outline

• I. The Surplus Mentality (rather than debt spirals) – Two slides

• II. US Fiscal Policy (debt, interest expense, taxation) – Seven slides

• III. Monetary Policy (Fed) – Four slides

• IV. US Market – Two slides

I. The Surplus Mentality • Four Economic Classes of People • 1. The Destitute: The truly forgotten men, women and sometime children. They are homeless and often helpless. They need our assistance, empathy, respect and assistance to secure food, shelter, clothing and fuel. • 2. The Dependents: They rely on others including the government or family for the majority of their personal maintenance and support.

The Surplus Mentality • Surplus. A “surplus” is the discretionary income that is not absolutely necessary to sustain life or lifestyle. related to Overplus. “plus” means “in addition to”

• Things to do: 1. Create a surplus. This can happen on any income. 2. Direct surplus toward building short-term cash reserves 3. Use surplus to pay down debt 4. Use surplus for investments to start receiving interest.

II. Federal Deficit (Surplus anyone?) 400

Clinton

300

Carter

Nixon 200 100

Ford

Reagan

G.W. Bush

G.H. Bush

Obama Trump

-100 -200

-300

Billions

-400

Annual Federal Deficit 2016 -$438.5 Billion OMB Estimate

-500

Surplus/Deficit

-600 -700

-800 -900 -1000

OMB Estimate 2017: -$584.7 Billion

-1100 -1200

-1300 -1400 -1500

2026 Estimate, $27.43

2025 Estimate, $26.53

2024 Estimate, $25.67

2023 Estimate, $24.83

2022 Estimate, $24.00

2021 Estimate, $23.20

2020 Estimate, $22.45

2019 Estimate, $21.70

2018 Estimate, $20.88

2017 Estimate, $20.35

2015, $18.12 2016, $19.54

2014, $17.79

2013, $16.72

2012, $16.05

2011, $14.76

2010, $13.53

2009, $11.88

2008, $9.99

2007, $8.95

2006, $8.45

2005, $7.91

2004, $7.35

2003, $6.76

2002, $6.20

2001, $5.77

2000, $5.63

Trillions

Historical Debt Outstanding US Government

Source: Haver Analytics

Interest Expense: Debt Outstanding FY2017 Estimate $20.15

1,000

20 18

900 16 800

Billions

700

600

$8.45

Millions

8 500

$405.87

$402.44

400 4 300

200

Interest Expense (left)

Historical Debt Outstanding (right)

Interest Expense: Debt Outstanding Interest Expense on Debt Outstanding US Treasury (Fiscal Year To Date) through October, 2017 1,400

1,200

Billions

1,000

800

2015 $402.44

2006 $405.87

600

400

200

Interest Expense

CBO Estimate

US Wealth Inequality

Highest Marginal Tax Rates

May-17

Oct-16

Mar-16

Aug-15

Jan-15

Jun-14

Nov-13

Apr-13

Sep-12

Feb-12

Jul-11

Dec-10

May-10

Oct-09

Mar-09

Aug-08

Jan-08

Jun-07

Nov-06

Apr-06

Sep-05

Feb-05

Jul-04

Dec-03

May-03

Oct-02

Mar-02

Aug-01

Jan-01

Jun-00

Nov-99

Apr-99

Sep-98

Feb-98

Jul-97

Dec-96

May-96

Oct-95

Mar-95

Trillions

III. Total Assets: Fed 5

Pre-Tarp Average: $678 Billion

Source: Bloomberg

Fed Maturity Structure: Assets Less Than One Year

One To Ten Year

Over Ten Years

$5.0

QE3 $4.5

$4.0

$3.5

QE2

Trillions

$3.0

QE1 $2.5

$2.0

$1.5

$1.0

$0.5

$0.0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Factors Using Reserves

Deposits Not Reserve Balances

Reverse RPs Foreign Official & International Accts

Reserve Balances

TSLF-3/11/08

$5,200 $5,000 $4,800 $4,600 $4,400 $4,200 $4,000 $3,800 $3,600 $3,400 $3,200 $3,000 $2,800 $2,600 $2,400 $2,200 $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0

Series Break PDCF-3/16/08 TSLF-3/11/08, 950 TAF-12/12/07 Series Break

$ Billions

Factors Using Reserves on Federal Reserve's Balance Sheet (Liabilities) from 8/8/2007 to 10/25/2017

Currency in Circulation Treasury Cash Holdings Reserve Balances TAF-12/12/07

Currency in Circulation

Reverse RPs: Foreign Official and International Accounts Deposits - Not Reserve Balances TSLF-3/11/08 PDCF-3/16/08

Reverse-RPs with Dealers Other Liabilities and Capital "TDWP - 8/17/07" Series Break

Fed Duration Estimated Duration of Federal Reserve Asset Holdings As of 10/25/17 6.5

6.0

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0 2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

IV. Corporate Profits to GDP 11%

180

160

10% CorporateProfits as a Percent of GDP (Quarterly, Left Axis) 9%

140

Stock Market Total Capitalization as a Percent of GDP (Monthly, Right Axis) 120

8% 100

NASDAQ BUBBLE

80 6%

5% 40

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

Asset Prices Vs. GDP 450

Central Bankers' Bubble?

Growth Index (Dec. 31, 1991 = 100)

400

350

300

Housing Bubble

250

200

Dot-Com Bubble

150

100

Recession

Source: Bloomberg

Net Worth of U.S. Households

Nominal GDP

Concept Credit: TCW

Disclosure All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed. Past performance is no guarantee of future results. All investments involve risk including loss of principal. Fixed income investments are subject to interest rate and credit risk.