Hahn Global Investment Outlook

Global Chart Panorama – 3Q 2009

Global Investment Outlook Considering Circuitbreakers & Hurdles to Long-term Recovery Portfolio Shifts Warranted HAHN Investment Strategy Committee June 2009 “We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid.” Richard Fisher, President Dallas Fed, Remarks before the Commonwealth Club of California, May 28, 2008

Investment Stewards

1

Chart Index Section 1: Section 2: Section 3: Section 4: Section 5: Section 6: Section 7: Section 8: Section 9: Section 10: Section 11:

Investment Stewards

Recovery to Date: More to Come? Back From the Financial Abyss? Potential Circuit Breakers … Short Circuits Terms of New Secular Environment Bungees, Rocket Ships and Tractor Pulls? Looming Problems and Nocturnal Goblins Question: Inflation/Deflation/Depression? Can Emerging Markets Save the World? Our 5 Scenarios Long-term Investment Themes Actionable Ideas

Page Page Page Page Page Page Page Page Page Page Page

3 13 25 33 42 53 64 78 86 87 94

2

Section 1: In Early 2009, the World Looked Grim World Stock Market M SCI AC World Stock Market Index, USD Daily 470

420

370

320

Down 59.6%

270

220

170 Feb-09

Dec-08

Oct-08

Aug-08

Jun-08

Apr-08

Feb-08

Dec-07

Oct-07

Source: Barra/MSCI, Northern Trust/Shiller

A lost decade of portfolio returns … and the world still appeared to be on the verge a of melt-down. Investment Stewards

3

GFC Was Running Worse than the 1930s to that Point in Time World Stock Markets, Now vs. Then

Source: Global Financial Database

World Industrial Output, Now vs. Then

Source: Eichengreen and O’Rourke (2009)

At this point in the GFC, world experience was worse than the 1930s. The US may be the analogue then, to China today. Fears certainly abounded. Investment Stewards

4

Massive Interventon Followed. Major World Banks “Printing Money” or “QE” Since Fall 2008

? Source: Various

Swiss National Bk., Bk. of England, US Fed and Bk. of Japan pumped in money. Bk. of Canada announced special measures, too. This was a global phenomenon? Investment Stewards

5

Back From the Financial Abyss? Massive central bank stimulus and government interventions … over 150 in the last 2 months alone (says Roubini). Unprecedented global coordination of monetary policies. Banks no longer tightening loan standards. Improving interbank liquidity … though this highly stratified. Banks with suspect quality still have no access. Bank stress-tests, though not a reliable indication, did trigger new confidence in banking system. Cash/money markets assets again begin to decline U.S. government budget deficit headed to 13-14% of GDP? Surely, this is enough rocket ship fuel to spur economies to rapid recoveries … as we, thought … a Stop/Go/Stop scenario (of the 6 we reviewed). Investment Stewards

6

Massive Stimulus and Interventions Have Taken Place Around the Globe: Interest Rates Slashed 6 5.5 5 4

UK

4.25 4

3

EZ

2

US

1

Japan 0.5

0

1.5 0.5 0.25 0.1

-1 A year ago

Now

Source: RBS, Stephen Blackman, Datastream

It would be a true disaster scenario if such radically and coordinated interest rate reductions around the world did not have an effect ultimately. Investment Stewards

7

Lending Standards No Longer Tightening in Canada: Psychological Hurdle?

Source: Bank of Canada, News N Economics

Banks are no longer shutting the gate after the bolted horses in Canada. Investment Stewards

8

Britain: Openness to Lending and Borrowing Rising, Though Loan Demand Low

Source: Bank of Canada, News N Economics

As governments in UK and US brow beat banks to not bottle up extended liquidity and capital injections, again beginning to consider lending. Investment Stewards

9

Lending Standards Also Loosening in Europe

Source: News N Economics

Investment Stewards

10

Huge Government Intervention Has Taken Place Around the Globe

Source: IMF

$10 trillion plus to date in G12 expenditures to offset banking problems. This is more than 15% of global GDP of 212 countries. Surely lift-off to follow? Investment Stewards

11

Also Emerging Countries Quick to Launch Stimulative Spending Budgets: More Effective

Source: DB Global Markets, DB Research

Key difference between Growth and Sclerotic Countries: Most of deficit stimulus is direct spending … not just filling in black financial holes. Investment Stewards

12

Section 2: Then Relief – No Melt Down: US Stocks Have Strongest Compressed Rally Since 1930s

Up near 42% in 3 months!

Source: stockcharts.com

Yet, still some 40% below all-time highs of 2007. Investment Stewards

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US Stock Markets Have Recorded Strongest Compressed Stock Market Rally Since 1930s

U.S. up near 42% in 3 months!

Canada up near 42% in 3 months!

Source: stockcharts.com

Still 40% below all-time high of 2007. Investment Stewards

14

Emerging and Frontier Markets Soar Emerging and Frontier Markets, USD, Daily

UP 58% from March low!

Source: Barra MSCI Indices

Investment Stewards

15

Asian Emerging Markets Soar Most Emerging ASIA Markets, USD, Daily, Jan. 1, 2007 to May 2009

UP 65.7% from 2008 low! But, still 54.4% below 2007 high.

Source: Barra MSCI Indices

Investment Stewards

16

Industrial Commodities Have Participated in Recovery

Source: stockcharts.com

GS industrial metals up 43% from low in March 2009. Still down 50% from 2007 high. Investment Stewards

17

Investors Again Head Up the Risk Curve, Beginning to Exit From Money Market Funds

Source: EPFR

Liquidity scare is beginning to reverse as investors again move out of money markets. Investment Stewards

18

Incredible Asset Mix Whipsaws Sending Asset Managers Scrambling

Source: stockcharts.com

Brutal environment for tactical asset management. Changes that typically play out over years, take place in months. Investment Stewards

19

Chasing the Equity Rally? Only Gingerly 1600

Stock Mutual Fund Flows (3-month average)

45,000

1500

1400

25,000

1300 5,000

1200

Millions

Index

1100

(15,000) 1000

900 (35,000) 800 Net Fund Flow

S&P 500 Index

(55,000)

Source: HAHN Investment

Apr-98

700 Feb-99

Dec-99

Oct-00

Aug-01

Jun-02

Apr-03

Feb-04

Dec-04

Oct-05

Aug-06

Jun-07

Apr-08

Feb-09

Many investors caught with high cash weightings. Some capitulation is beginning to occur in recent month. Much more capitulation ahead? Investment Stewards

20

Cash Versus Equity Market Capitalization Receding Though Still Very High Total US Money Market Assets (Mutual Funds)/S&P 500 Market Cap

65%

14,500 13,500 55%

12,500 11,500

S&P 500 USD Trillions

10,500

45%

9,500 8,500 35%

7,500 6,500 5,500

25%

4,500 3,500 15% 2,500 1,500

S&P 500 Market Cap Money Market Assets/S&P 500 Market Cap

500 pSe

89

pSe

90

pSe

91

pSe

92

5%

96 97 95 98 99 94 06 00 93 07 01 03 02 08 04 05 ppppppppppppppppSe Se Se Se Se Se Se Se Se Se Se Se Se Se Se Se

Source: HAHN Investment

Asset preference here still remains in favor of cash versus equities. Indicator has declined modestly as equity markets capitalization has risen. Investment Stewards

21

Shipping Rate Index Again Turning Up. Bungee Effect of Inventorying Decoupling Reverses?

Source: BIG, Baltic Exchange

Deceleration of decline evident in ocean-going freight rates. Yes, demand levels remains modest … stuck at low level. Something fishy in China? Investment Stewards

22

One Bungee Snap-back In Japan: Industrial Production Growth of 4.3% in April

Source: Simon Johnson, MIT

Even Japan, at the “high value-added” end of the export chain, is showing signs of rebounding … or, at least slowing its decline. Investment Stewards

23

Global Leading Indicator Has Stopped Falling: But No Where In Occidental World is Upturn in Sight

Source: OECD

Financial components of leading indicator indices are primarily attributable for improving trend. What does it mean looking ahead? Investment Stewards

24

Section 3: Obstacles to Strong, Long-term GFC Recovery Remain: Several Circuit Breakers Current optimistic views are vulnerable for several reasons. Reaction of treasury bond and US currency markets to seemingly unlimited borrowing needs of US government are impeding recovery. Main collateral item to financial system — real estate — is still declining. (Key Significant Event we are watching!) Deleveraging of private sectors is a secular trend that will slow economic growth 0.7 to 1.0% per annum. Incomes under pressure, impeding self-sustaining launch. Also, eventually, central banks want to remove triage. Recently, world markets are indicating that governments and central banks will not have unlimited access to capital markets. Investment Stewards

25

Egad … U.S. Interest Rates Rising Rapidly

Source: Stockcharts.com

10-year rates have risen 180 b.p. since late-2008 low. Rates have steadily risen since Fed announced Quantitative Easy policy and T-bond purchases. Investment Stewards

26

The Big Question: When the Bottom? For Now, Residential Real Estate Prices Still Falling

Prices down 32% from 2006 top.

Source: S&P

If continue to fall, undermines financial system further requiring more bail-outs. If bounces, equity markets likely to soar higher. Investment Stewards

27

Housing Continue to Fall & Predicted to Continue. Pressures on Loan Quality Remains Case-Shiller 10 city price index, (blue line), CME futures prices, 26 May 2009 (red triangle), and CME futures prices, 21 Sep 2008 (green diamond). NBERdefined recessions shaded gray, and start date dashed gray line Source: Standard and Poors' [xls], ino.com, and author's calculations.

Source: Menzie Chin, RGE Monitor, St. Louis FRED II, NBER

This narrower index now down 40% from May 2006 peak and CME future are discounting further drop to -52.6% by May 2010. If so, banks still in trouble. Investment Stewards

28

Mortgage Delinquencies Continue to Climb as Mortgage Applications Again Drop

Source: Chris Puplava

Higher interest rates are seem to be hindering real estate recovery prospects. This one of three key factors in our Significant Event Watch at present. Investment Stewards

29

New Impediment to Real Estate Recovery: Rates Again Climbing

Source: ContraryInvestor.com

New mortgage applications now again slumping. Investment Stewards

30

One Positive Sign: Housing Affordability Much Improved, But This Vulnerable to Rising Rates

Source: Moody’s

Imperative that housing prices stabilize if banking sector is to remain stable. Does this hopeful indicator presage big behavioral shift soon? Investment Stewards

31

Oil Prices (Commodities Overall) Again Race Upwards Removing Consumer Spending Room

Source: Stockcharts.com

West Texas has nearly doubled from low of $35.13. Gasoline prices have almost tripled. This is not stimulative for consumer spending. Investment Stewards

32

Section 4: Features of a New Secular Environment Drive Investment Themes Very different environment ahead … that awaits after current recovery phase: Deleveraging by households, rising savings rates … likely to knock down GDP growth 1% per annum Widening wealth skew Demographic bomb Shift of axis … growth vs. sclerotic world Reregulation? Cronyism first to be stamped out? Deglobalization? Maybe the trade side … but not the capital markets.

Investment Stewards

33

Deleveraging and Risk Aversion Here to Stay?

Source: FRBSF Economic Letter 2009-16; May 15, 2009 U.S. Household Deleveraging and Future Consumption Growth

If Japan’s experience is replicated, then long period of deleveraging and sub-par economic growth is ahead. Investment Stewards

34

Demographic Issues Now Compound Recovery Dynamics in G20 Nations

Source: IMF

Old Age crisis estimated to cost more than 5x that of GFC … continuing a long-term rise in government debt levels. Safe conclusion … rising gov’t. debt. Investment Stewards

35

U.S. Financial Asset Values Related to Demographic Trends: Long-term Downtrend Ahead

Source: Carlo A Favero, IGIER-Bocconi University

Ratio of Middle-to-Young suggests that long-term trend is toward gradual deflation of financial assets … though interim reversals likely. Investment Stewards

36

U.S. Wealth Skew Likely to Continue Widening as Middle Class Annihilated by GFC

Source: Contraryinvestor.com

Most wealth losses have occurred in middle income segments. Significant transfers of relative wealth usually the side-effect of major crises. Investment Stewards

37

Definancialization?

Source: GMO

If long-term deleveraging scenario, secular era favorable to financial sector is also over. Long period of underperformance and basing ahead. Investment Stewards

38

Deep Structural Government Deficits in Sclerotic Countries vs. Growth

Source: IMF March 6, 2009, The State of Public Finances

Favors higher-growth, low financialized, low to mid-income nations vs. occidental high-income world. Investment Stewards

39

Sclerotic Countries Increase Debt-to-GDP, Growth World Ratio Remains Steady

Source: IMFMarch 6, 2009, The State of Public Finances

Growth quadrant of countries not falling into high indebtedness … less relative weight on spending and growth. Investment Stewards

40

Deglobalization? The Jury is Out

Source: Brad Setser, CFR

For now, GFC has triggered rapid pro-cyclical movements in private portfolio capital. But, nations likely to promote capital mobility. Investment Stewards

41

Section 5: Bungees, Rocket Ships and Tractor Pulls Our Stop/Go/Stop scenario is playing out as we reckoned … except for one thing. The “Go” in North America is not happening as quickly as we had hoped. Financial market have bought the “Go” stage on faith. It needs to play out soon … say no later than August/September. That would give the stock market a 6-month lead on the economy. We are scanning for evidence of one of the following: 1. Signs of a general inventory rebuild. 2. Firmness in household income (ex. The effect of gov’t. transfers) 3. A realistic chance of a bounce in housing prices? No economic “bungee” in sight, though rocket ship fuel of government spending has been at work for months. Investment Stewards

42

ECRI Leading Indicator Slowing its Decline … But Yet no Turn 150

20.00%

140

15.00%

130

10.00%

120 5.00% 110 0.00% 100 -5.00% 90 -10.00% 80 -15.00%

70

Economic Cycle Research Institute: Weekly Leading Index (LHS)

60

-20.00%

Annual Change % RHS 50 Jan-68

-25.00% Jan-73

Jan-78

Jan-83

Jan-88

Jan-93

Jan-98

Jan-03

Jan-08

Source: HAHN Investment

Still waiting for absolute upturns … not just a slowing rate of decline. When? The “Go” for our “Stop/Go/Stop” is now overdue. Investment Stewards

43

Decline in Exports Seem to Have Stopped Accelerating: But Are Still Declining

Source: News N Economcs

In Growth Countries, export declines are now decelerating, but remain at low levels year over year. Requires real demand boost in Sclerotic Countries. Investment Stewards

44

Trade Declines Around the Globe Still Grim … and Continuing

Source: News N Economics

Exports still declining … though rate of decline is slowing. Investment Stewards

45

Business Spending is Typical Driver of Recoveries. No Sign Yet of Turn

Source: News N Economics

Investment Stewards

46

No Coincident Upticks Yet in the U.S. Economy: Consider Power Consumption

Source: Edison Electric Institute

Recently, power consumption still running below year ago levels. Investment Stewards

47

Also, Rail Traffic Running Below Year-ago Levels … and Decelerating

Source: Railfax

No “bungee” effect of inventory rebuilding evident. In fact, in recent weeks rail traffic is weakening further. Investment Stewards

48

No Sign of Spending Hotel Bookings Still Declining

Source: Smith Travel Research Inc, and Zacks

Consumers remain reluctant to spend on discretionary items … including travel. Investment Stewards

49

Despite Bailouts and TARP, Bank Lending Still Declining

Source: Nomura Research

Credit is usually a reliable indicator of new demand … though in a deleveraging environment may be delayed. To date, credit growth still declining. Investment Stewards

50

Inventory Bungee Cord Effect Still Not Occurring … But Likely Near

Source: Societe Generale, Datastream

We had hoped that inventory bounces would have occurred by now. Production is still declining … and so are inventories. Investment Stewards

51

Inventory Rebuild Not Yet Happening In the U.S.

Source: Contraryinvestor.com

Bungee effect of inventory rebuild still not evident in the U.S. (sclerotic countries) as already seems evident in the Growth Countries. Investment Stewards

52

Section 6: Quite a Few Ball & Chains to Any Recovery. Odds of Second Downturn? Bipolar growth environment ahead — Growth World vs. High-Income Sclerotic World have diametrically different metrics. Global rebalancing, if at all, is happening due to consumption collapse in Sclerotic world. Deleveraging in the private sector for now … but for how long? World will not deglobalize. Reregulation delayed for now. The public has yet to wake up to the extent of wealth transfer to failed sectors.

Investment Stewards

53

Then What About Consumer Spending? Worst Wealth Decline Since the 1930s Continue to Impede

Source Thorsten Polleit, Mises Institute

Inordinate wealth declines (45 to 54 again group has suffered net 50% drop of net worth) radically kick off deleveraging and saving mode. Investment Stewards

54

What About Real Economy? Personal Consumption Yet to Bounce Decisively

Source: EPFR

While decline in PCE is no longer accelerating, other indicators suggest that odds on a strong demand recovery prospects remain modest Investment Stewards

55

Consumer Cash Source: Mortgage ABM Continues to Deteriorate

Source: Contraryinvestor.com

This source of consumer financing likely to be non-existent for years. Investment Stewards

56

Where Will Lift Come to Household Income (Other than Government Transfers)

Source: Casey Research

Rapid unemployment and under-employment. Investment Stewards

57

What Will Again Lift Household Income? Remains Depressed

Source: Contraryinvestor.com

Double whammy for various demographic groups … both wages and interest-related investment income declining. Investment Stewards

58

Consumer Spending Most Reliant Upon Government Transfers … More Fuel Needed

Source: dmarron.com

Question: Given high reliance upon deficit spending/transfers, wouldn’t it be difficult to retract stimulus spending? Investment Stewards

59

Consumer Remain Maimed: Government Withholding Tax Receipts Still Declining Note: 2Q09 is calculated with the first 38 data points of 2Q09 and 2Q08. This number will bounce around less as we move through the quarter. See the spreadsheet below to follow the calculation day-byday. The last bar on the right is 2Q09 www.trivisonno.co m/withholdingtaxes-chart

Source: www.trivisonno.com/withholding-taxes-chart

Given deleveraging mode of private sector, and hugely decimated net worth argument to be made that consumer will remain in bunker. Investment Stewards

60

Banks Are Still Not Fully Reserved Against Further Delinquencies and Defaults

Source: Contraryinvestor.com

Real estate (residential & commercial) still almost 40% of bank balance sheets. Another wave of write-offs ahead? Investment Stewards

61

Full Effect of Economic Downturn Still Ahead for Commercial Real Estate Sector

Source: REIS, www.calculatedriskblog.com

Defaults yet to peak. Investment Stewards

62

Another Bulge in Residential Real Estate Defaults Ahead: Are Banks Fully Reserved?

Source: Zelma Associates, Realty Trac

Should real estate prices continue to fall, sure to be another round of loan write-offs. Investment Stewards

63

Section 7: Deflation, Hyperinflation, Stagflation Depression, a Myriad or Mix of All? Two camps are battling out their views — 1. the hyperinflation crowd warning of another descent into Weimar-style, or an Zimbabwean inflationary blow-off, or 2. Full-fledged deflation … leading to longer-running “balance sheet” depression. What to do … buy gold … or 30-year strip bond coupon? We think the manifestations of monetary inflation will play out much differently … and confusingly … than either of these camps think. Also, still too early to completely deny depression outcome.

Investment Stewards

64

Current Monetary Malfeasance Must Have an Outlet. Many Ways it Can be Manifest Yes, Virginia, there is massive monetary inflation. But where? If the base money expansion is not reversed, longer-term “price” inflation consequences are unavoidable. But, inflation, the great chameleon, can be expressed in many ways … i. e. prices of existing assets or prices of goods and services of current production … or, in the form of widening trade and current account deficits, skewed distribution of wealth, distorted economic input/out, currencies and rising interest rates, rising indebtedness relative to GDP and …. … highly significant … the artificial skewing of value for risk, namely affecting credit spreads. To this point, currencies, bond markets AND RELATIVE CREDIT SPREADS are manifesting monetary inflation. How can that be? Investment Stewards

65

Monetary Malfeasance Distorting Capital Markets – Emitting False Signals

Source: Northern Trust, Paul Kasriel

Inflation is a chameleon. Many analysts (even Paul Kasriel) are misinterpreting credit market signals, not recognizing distortions of inflation. Investment Stewards

66

What’s Wrong With Gold? All the King’s Men Can’t Get it Through $1,000

Source: Stockcharts.com

If the manic, unprecedented malfeasance of the world’s central banks of the last 18 months isn’t enough … what is? Clue that different inflation effect at play. Investment Stewards

67

US Dollar Venting Inflation Worries: Leads to Inflation and Debasing of Living Standard

Source: Stockcharts.com

USD first rose due to unwinding pressures. Now flows are moving the other way as “funding crisis” fears heighten. Investment Stewards

68

US Government Debt to Rise Substantially Over Next Decade Even in Mild Scenario

Source: Casey Research

Debt at state level is rising as well. This depiction does not include off balance sheet debt. This has long-term inflationary consequences. Investment Stewards

69

Now, Most Credit Growth is On the Government Balance Sheet

Source: Brad Setser CFR

Consumers and business are deleveraging. How long? Will this be a secular trend? Investment Stewards

70

For Now, Government Funding Dependent Upon Retrenching Consumer, Not Foreign Savings

Source: Paul Swartz, CFR

However, given the enormity of government bond issuance, dependent upon “fear” capital piling into perceived safety of T-bonds. Investment Stewards

71

Yet, U.S. Remains Reliant Upon Foreign Support for Treasury Bonds: A Sensitive Vulnerability

Source: Contraryinvestor.com

Analysts miss the point when argue that foreign reliance is declining. Yes, current account is declining but total existing foreign holdings are still rising. Investment Stewards

72

Comparison: Great Depression to U.S. Economic Situation in GFC Updated Figure 2. World Stock Markets, Now vs. Then

Source: Barry Eichengreen Kevin H. O’Rourke, 4 June 2009

Still too early to put zero probability on a longer-running Japan-like recession scenario. Investment Stewards

73

Comparison: Great Depression to U.S. Economic Situation in GFC Updated Figure 1. World Industrial Output, Now vs. Then

A Tale of Two Depressions

Source: Barry Eichengreen Kevin H. O’Rourke, 4 June 2009

Investment Stewards

74

Comparison: Great Depression to U.S. Economic Situation in GFC Updated Figure 4. Central Bank Discount Rates, Now vs. Then (7 country average)

Source: Barry Eichengreen Kevin H. O’Rourke, 4 June 2009

Investment Stewards

75

Comparison: Great Depression to US Economic Situation in GFC Updated Figure 3. The Volume of World Trade, Now vs. Then

Source: Barry Eichengreen Kevin H. O’Rourke, 4 June 2009

Investment Stewards

76

Comparison: Great Depression to US Economic Situation in GFC Figure 5. Money Supplies, 19 Countries, Now vs. Then

Source: Barry Eichengreen Kevin H. O’Rourke, 4 June 2009

Investment Stewards

77

Section 8: Can China Pull Up the World? Consensus is Long Emerging Markets State credit growth statistics in China … up at an annualized rate of 55% are questionable. Power consumption statistics in recent months do not align with stated GDP reporting. Massive overcapacity exists … even in educational institutions. Speculative commodity imports this year (iron ore, aluminum … etc.) at all time highs, far in advance of requirements. We are skeptics. Unlikely that a country that has one-tenth the GDP per capita of the U.S., can alone pull up the entire world by its bootstraps. Investment Stewards

78

Bungee Effect in China Manufacturing Hub? Exports Increasing In Supplier Countries

Source: News N Economics

Encouraging that the “bungee” seems to be occurring elsewhere. But, so far this effect is modest … and likely due to speculative flows. Investment Stewards

79

In China Bank Loans Soaring: But Not Being Used in Investment Spending

Source: JP Morgan

Such rapid credit growth begs the question as to the efficiency and effectivenessof its use. Could lead to future loan problems. Investment Stewards

80

Trade Has Greatly Affected China Though Trade Surplus is Actually Widening

Source: Brad Setser CFR

The domestic impact of slowing global trade upon China is underestimated. Import value declined more rapidly than exports. (Commodity collapse) Investment Stewards

81

Growth Driver of Urbanization: Long-term Trend Subject to Short-term Reversal

Source: Puplava

This “China Story” is favorable long-term, however, many workers are being sent back to the country side s export jobs disappear. Investment Stewards

82

Huge Commodity Imports: What’s the Rationale? Better than USD?

Source: CEIC

Commodity imports are running huge volumes, unrelated to actual consumption. Are Chinese diversifying dollar reserves? Investment Stewards

83

Economist Stats Do No Confirm Strong Chinese Rebound?

Source: www.chinashipping.com.cn

Freight index still declining. Investment Stewards

84

Chinese Power Consumption Belies Slower Real Economy than Hype Suggests

Source: Economic Data

Overall picture of a rebounding China economy to this does not jive. Investment Stewards

85

Section 9: Revised 5 Scenarios: Two Scenarios Account for ⅔ Probability Global Chance %

Growth Bloc Chance %

Sclerotic Bloc Chance %

#1. Classic Deflationary Depression

5.8 %

2.5 %

7.5 %

#2. Global Purgatory (1990s Japan Scenario) (3 to 18 months)

33.3 %

20.0 %

40 %

#3. New World Global Economic Stimulus, Infrastructure Cycle (18-month to 4-year horizon)

35.0 %

55 %

25 %

19.2 %

7.5 %

25 %

6.7 %

15 %

2.5 %

100 %

100 %

100 %

#4. Velocity Inflation/Expansion

#5. Global Boom Inflationary Boom with Real GDP Growth

TOTAL Source: HAHN Research

Investment Stewards

86

Section 10: Major Long-Term Investment Themes

Investment Stewards

87

Food, Agriculture

Favorable dynamics for this commodity group long-term … especially as cyclical commodities are over-speculated again. Investment Stewards

88

Technology Sector Attractive in Slow-growth Environment

Source: The Chartstore

Efficiency and cost-saving rewarded in such an environment. Long base building period now behind … serves as ideal launch point. Investment Stewards

89

Consider Long-Term Wealth Drivers for the World: Urbanization Expected to Continue 75 70

World Urban Population (%)

Percent of Total Population

65

Forecast: World Urban Population (% of Total)

60 55 50 45 40 35 30 25 1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

Continuing urbanization is a strong driver to economic growth. Almost 20% of population will move in 40 years. Investment Stewards

90

Another Long-Term Wealth Driver, #2: Continuing World Population Growth 11.0

Low Variant Forecast 10.0

Medium Variant Forecast 9.0

High Variant Forecast

Billions

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1950

1960

1970

1980

Source: United Nations Population Division, 2008 Revision

1990

2000

2010

2020

2030

2040

2050

Format: HAHN Investment

Though slower than peak growth rates in the 1960s, world population forecast (MV) to be 40% higher by 2050. Investment Stewards

91

Long-Term Wealth Driver #3: Productivity Growth

Source: Bureaus of Industry & Security, US Department of Commerce

Historically, productivity has added an average of 0.3% to 0.8% to annual economic growth. Investment Stewards

92

Long-Term Wealth Driver #4: Globalization of Living Standards 300

300

250

250

Rest-of-World GDP

Rest-of-World GDP

High Income World GDP 200

World GDP up 2.7x

150

$US Trillions

$US Trillions

200

150

100

100

50

50

-

High Income World GDP

World GDP up 4.6x

-

2007

Scenario #1 50% of HighIncome GDP

2007

Scenario #2 100% of HighIncome GDP

What would occur if low-income nations were to achieve 50% of high-income per-capita GDP? World economy up 2.7x. Investment Stewards

93

Section 11: Actionable Ideas

Investment Stewards

94

False Dawns? Even Worst Economic Periods Have Experienced Substantial Rallies

Source: www.chartoftheday.com

Rotational equity markets likely for next few years. A lease one false dawn would be a normal experience. Investment Stewards

95

Insiders Are No Longer Buying

Source: Sentiment Trader

Investment Stewards

96

Safer Countries: Canada, France, Germany Private credit as % of national income, selected advanced economies 2007 Denmark Netherlands Ireland Spain Switzerland UK USA New Zealand Austrlia Italy Germany France Belgium Greece Finland Japan Czech Republic Canada

Source: RBS

0%

50%

100%

150%

200%

Focus on global bond markets of countries with low consumer debt and below-average financialization … Canada, Germany … even France. Investment Stewards

97

Run in Corporate Bonds vs. Government Bonds Long in the Tooth

Source: yahoo.finance.com

As corporate yield spreads to government bonds have narrowed, corporate bonds have outperformed substantially. Yields spreads now too low. Investment Stewards

98

High Connectivity of GFC, Argues Recovery… and Disappointments…Will Be Interconnected

Source: IMF

However, this will also mean that the second “STOP” of our “STOP/GO/STOP” scenario will be correlated to Emerging. Investment Stewards

99

Emerging Markets as a Group Now Over-bought on a Rotation Basis Ranking: EMG Relative to World Emerging Markets

World

0

5

10

15

20

25

30

Source: HAHN Investment

While “Growth Countries” favor in our long-term strategies, intermediate term advances of selected emerging markets are ahead of fundamentals. Investment Stewards

100

Time To Reduce Beta … to Lower Exposure to Mini-Bubble Recovery

Source: Sentimentrader.com

Sentiment indicators again shifting … i.e. insiders now longer supportive. Investment Stewards

101

Optimism on Equities Again At Near Extremes Suggesting Best Outlook is Discounted

Source: Sentimentrader.com

Rapid recovery in investor sentiment now suggests that little upside is left in view of substantial scenario risks that still exist. Investment Stewards

102

Fixed-income Pessimism Also Now Likely Overdone

Source: Sentimentrader.com

While long-term outlook for US treasury bonds remains complicated (still cannot ignore risk of USD funding crisis) pessimism overdone near-term. Investment Stewards

103

S&P500 Valuation? No Longer Undervalued

Source: BCA

Deleveraging, stagflationary environment will likely not be friendly to high equity valuations. Investment Stewards

104

U.S. Asset Mix Volatility in the Extreme: Longterm Strategies … Quickly Become Short-term HAHN US Stock/Bond Ratio

0.4

0.3 0.2

0.1

0 Dec-08

Dec-07

Dec-06

Dec-05

Dec-04

Dec-03

Dec-02

Dec-01

Dec-00

Dec-99

Dec-98

Dec-97

Dec-96

Dec-95

Dec-94

Dec-93

Dec-92

Dec-91

Dec-90

Dec-89

Dec-88

Dec-87

Dec-86

Dec-85

Dec-84

-0.1

-0.2 -0.3

-0.4

Source: HAHN Investment

Volatility of relative performance between major asset classes is extreme … far more than involving the 19897 crash. Must shift away from equities. Investment Stewards

105

Unprecedented Global Asset Mix Gyrations: Far Exceeding 1987 Instabilities. Buy Bonds! HAHN World Stock/Bond Ratio

0.4

0.3 0.2

0.1 0 Dec-08

Dec-07

Dec-06

Dec-05

Dec-04

Dec-03

Dec-02

Dec-01

Dec-00

Dec-99

Dec-98

Dec-97

Dec-96

Dec-95

Dec-94

Dec-93

Dec-92

Dec-91

Dec-90

Dec-89

Dec-88

Dec-87

Dec-86

Dec-85

Dec-84

-0.1 -0.2

-0.3 -0.4

Source:HAHN Investment

Based on quarterly rotational patterns, opportune time to again move into fixed-income. High real rates are now attractive. Investment Stewards

106

The Big “Bond Trap” We Feared Has Occurred: Opportunity? We Think … Shortly

Source: www.stockcharts.com

Real yield levels are now mouth-watering … a huge yield curve literally a red-flag to the “carry trade. Investment Stewards

107

1.888.957.0602 www.hahninvest.com “GCP-2009-3Q v09-Jun-17” HISCo\Publications\GCP-Global Chart Panorama\Global Chart Panorama 2009\GCP-2009-3Q\

Investment Stewards

108