US Equity Markets

A Registered Investment Advisory Firm

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

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

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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

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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.

• 3. The Poor: They pay interest.

• 4. The Rich: They receive interest. ©Copyright 2017 Cumberland Advisors®. Further distribution prohibited without prior permission.

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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.

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II. Federal Deficit (Surplus anyone?)

400

Clinton

300

Carter

Nixon 200 100

Ford

Reagan

G.W. Bush

G.H. Bush

0

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

Source: St. Louis Fed, OMB ŠCopyright 2017 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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6

5

10

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20

25

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

30

0

Source: Haver Analytics

7

Interest Expense: Debt Outstanding FY2017 Estimate $20.15

1,000

20 18

900 16 800

Billions

700

12

600

10

$8.45

Millions

14

8 500

$405.87

$402.44

6

400 4 300

2

0

200

Interest Expense (left)

Historical Debt Outstanding (right)

Source: Haver, Department of the Treasury, Bureau of the Fiscal Service. Treasurydirect.gov. ŠCopyright 2017 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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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

0

Interest Expense

CBO Estimate

Source: Haver, Department of the Treasury, Bureau of the Fiscal Service. Treasurydirect.gov. ŠCopyright 2017 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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US Wealth Inequality

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Highest Marginal Tax Rates

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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

1

May-96

Oct-95

Mar-95

Trillions

III. Total Assets: Fed 5

4

3

2

Pre-Tarp Average: $678 Billion

0

Source: Bloomberg

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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

Source: Bloomberg ŠCopyright 2017 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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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

Source: Bloomberg ŠCopyright 2017 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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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

Weekly Data Source: Bloomberg ŠCopyright 2017 Cumberland AdvisorsŽ. Further distribution prohibited without prior permission.

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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

7%

80 6%

60

5% 40

4%

20

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

0

1981

3%

Source: Bloomberg ©Copyright 2017 Cumberland Advisors®. Further distribution prohibited without prior permission.

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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

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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.

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