Strange New World - CFA Institute...Strange New World “I pass with relief from the tossing sea of Cause and Theory to the firm ground of Result and Fact.” – Winston Churchill

Strange New World

“I pass with relief from the tossing sea of Cause and Theory

to the firm ground of Result and Fact.”

– Winston Churchill (The Story of the Malakand Field Force, 1898 – near the Swat Valley, Pakistan)

January 14, 2010

Lawrence SpeidellChief Investment Officer, CEO

Frontier Market Asset [email protected]

It’s about people

Strange New World

Strange New World

Treasury Bill Rate (90 day)

0

1

2

3

4

5

6

7

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

90 day T-bill

Fed Funds

“When the situation was manageable, it was neglected, and now that it is thoroughly out of hand, we apply too late the remedies that might have affected a cure” – Winston Churchill

Monetary Base

400

800

1200

1600

2000

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Y2K (Year 2000)11-Sep-01

Source: St. Louis Fed, January 2010

“The Fed’s job is to provide liquidity” - John Rutledge

The Recovery

Source: Raymond James, Jeffrey Saut, Nov 2009

Strange New World

Strange New World

http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

Consumers – Job Cuts

http://www.calculatedriskblog.com/2009/11/unemployment-stress-tests-unemployed.html

Consumers Employment to Population Ratio

http://www.calculatedriskblog.com/2009/11/employment-population-ratio-record-part.html

Consumers – Job Cuts

-700-600-500-400-300-200-100

0100200300

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Non-Farm Payroll ChgMfg Payroll Chg

10 Payrolls

3%

4%

5%

6%

7%

8%

9%

10%

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

32

33

33

34

34

35

35

Unemployment RateAvg Wkly Hours

9 Unemployment Rate & Wkly Hours

300

350

400

450

500

550

600

650

700

1997

1999

2001

2003

2005

2007

23-J

an-0

920

-Mar

-09

15-M

ay-

10-J

ul-0

904

-Sep

-09

30-O

ct-0

925

-Dec

-09

08-J

an-1

0

20002500300035004000450050005500600065007000

11 Unemployment Claims

Continuing Claims

INITIAL CLAIMS

Consumers

Negative Net Worth in 8.3 million Homes

Consumers: Balance Sheet for Median Household

$56,700$87,300$86,000Net worth103,900103,90099,000Total liabilities

2,4002,4002,400Credit cards

12,80012,80011,800Installment loans

88,70088,70084,800Mortgage on primary residence

Liabilities160,600191,200185,000Total assets

125,400150,000148,300Primary residence

14,60014,60014,400Vehicles

17,90023,90019,000Retirement savings

2,7002,7003,300Bank accounts

Assets$47,300$47,300$47,500Income

200920072004

http://baselinescenario.com/2009/02/15/household-assets-debt-savings-federal-reserve-survey/http://www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf

Negative Net Worth in 10.7 million Homes

Wall Street Journal 11/24/09

Consumers: Car Costs

"You used to be able to find a decent car for $2,500, and you can't anymore, especially in the past two months,"

“Used-vehicle prices have risen above their book values, making it tougher for customers to secure financing”

http://readingeagle.com/article.aspx?id=162023

Consumers: College Costs

Savings Rate Will Rise

Personal saving as a percentage of disposable personal income

-5

0

5

10

15

20

25

30

1929

1935

1941

1947

1953

1959

1965

1971

1977

1983

1989

1995

2001

2007

Source: BEA, Outlook/Savings NIPATable Nov 2009

Strange New World

Assets

Debt

Debt/Assets

Debt Payments / IncomeSource: Laffer Associates 2010

Vicious or Virtuous Circle? Consumer & Production…. or Production & Consumer

20

40

60

80

100

120

140

160

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Consumer Confidence

Consumer Sentiment (UMich)

13 Consumer Confidence

-3.5

-2.5

-1.5

-0.5

0.5

1.5

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Dec

-09

Retail SalesRetail Sales ex Autos

14 Retail Sales % Chg

30

35

40

45

50

55

60

65

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

ISM Manufacturing Index

ISM NonManufacturing Index

Contracting

Expanding

5 ISM Manufacturing Index

-7

-5

-3

-1

1

3

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug-

09O

ct-0

9

Industrial Prodn % ChgDur Gds xTransport

6 Production & Orders

Housing and Autos

15 Housing

300

700

1100

1500

1900

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Housing StartsBldg PermitsNew Home Sales

16 More Housing Data

3.5

5.5

7.5

9.5

11.5

13.5

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Existing Home Sales

New Homes Month SupplyVehicle

Sales

Housing 2.5% of GDP versus 6.3%

Residential Construction % GDP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1929

1935

1941

1947

1953

1959

1965

1971

1977

1983

1989

1995

2001

2007

Outlook/GDP NIPATable.xls

Inventory Cycle

Inventory Chg / GDP

-5%

-3%

-1%

1%

3%

5%

1929

1935

1941

1947

1953

1959

1965

1971

1977

1983

1989

1995

2001

2007

Outlook/GDP NIPATable.xls

Corporate Cash is High

Government Stimulus is Underway

Government Risk

Government Risk

Source: Laffer Associates 2010

Government Risk

The Depression 1929-1939

The Depression – Tight Money

The Depression – Tight Money

The Depression - Taxes Up

The Depression – Unemployment 25%

One World…or Two

Emerging/Frontier Countries: Under $10,000 GDP/capita

Frontier Countries: Not in MSCI Emerging Markets Index

.

One World… or TwoPopulation

http://www.worldmapper.org/display.php?selected=117

One World… or TwoElectric Power Production

http://www.dailymail.co.uk/sciencetech/article-1217571/A-new-world-The-amazing-map-based-population-shows-Britain-big-player.html

The Poor World: Human Capital and Financial Opportunity

.

Population 2007

Frontier18.1%

United States5.1%

EAFE10.0%

Emerging Markets66.7%

Market Cap 2007

United States31.3%

EAFE40.8%


Frontier2.8%

World GDP 2007

United States26.2%

EAFE43.8%


Frontier5.0%

One World… or Two

One World…or Two

Convergence is Accelerating GDP per Capita (2000 $)

10

100

1,000

10,000

100,000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

China India Japan South KoreaSingapore United States Brazil PhilippinesThailand Vietnam Russian CyprusMauritius Turkey

VietnamIndia

ChinaPhilippines

Japan

USA

SingaporeS Korea

Brazil

Thailand

Russia

$100

$187

$1323

$538

ChinaGDPperCapita0607

Mauritius $4300

Cyprus $12400

Turkey 2004 $3200

Demographics Favor the Poor Countries

.

Population Demographics

0

2

4

6

8

10

12

14

16

18

20

0 10 20 30 40 50 60 Age < 15

Age

> 6

4

Developed Markets

Emerging Markets

Frontier Markets

JapanItaly

GermanyGreece

Bulgaria

Singapore

Ireland

Argentina

Uganda

Pakistan

UAE

ZambiaBahrain

Peru

Sri Lanka

Nigeria

Vietnam

China

Source: World Development Indicators, 2006 Front ierCountries0607

Poland

Romania

Demographics

1,000

10,000

100,000

1,000,000

10,000,000

1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

India

China

Europe

Russia

Japan

Australia

New Zealand

Population

US

-0.4%

-0.3%

0.3%

-0.5%

-0.6%

0.4%

0.1%

0.4%

Source: UN Population, ChinaPop

Africa 1.2%

Bulgaria -1.1%

2011 2025Population

Growth RateBulgaria 7.7 7.1 -0.6%Ukraine 46.7 43.2 -0.6%Belarus 9.8 9.1 -0.5%Moldova 3.6 3.4 -0.5%Georgia 4.3 4.0 -0.5%Lithuania 3.4 3.1 -0.5%Russia 144.1 136.5 -0.4%Malawi 16.2 23.3 2.6%Occupied Palestine 4.6 6.6 2.7%Somalia 9.6 14.0 2.7%Benin 9.5 13.8 2.7%Tanzania 46.6 67.7 2.7%Burkina Faso 16.8 24.9 2.8%Afghanistan 30.2 45.1 2.9%Uganda 35.0 53.6 3.1%Niger 16.5 27.4 3.7%

DemographicsChina 2011

(80,000) (40,000) - 40,000 80,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

Females

Males

1,385,864

Population

Source: United Nations Population Prospects, 2009

2011

(80,000) (40,000) - 40,000 80,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

India

1,240,387

Population (000)

2050

(80,000) (40,000) - 40,000 80,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

India 1,663,998

PopulationChina 2050

(80,000) (40,000) - 40,000 80,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

Females

Males

1,536,074

Population

Demographics

Source: United Nations Population Prospects, 2009

Demographics2011

(10,000) (5,000) - 5,000 10,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

Japan 137,002

Population2050

(10,000) (5,000) - 5,000 10,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

Japan 120,721

Population

Demographics2011

(20,000) (10,000) - 10,000 20,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

United States of America

335,705

Population 2050

(20,000) (10,000) - 10,000 20,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

United States of America

444,168

Population

Demographics2011

(20,000) (10,000) - 10,000 20,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

Nigeria 162,394

Population

2050

(20,000) (10,000) - 10,000 20,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

Nigeria 291,619

Population

Demographics2011

(10,000) (5,000) - 5,000 10,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

Russian Federation

144,561

Population2050

(10,000) (5,000) - 5,000 10,000

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80+

80-84

85-89

90-94

95-99

100+

FemalesMales

Russian Federation

124,943

Population

China…the Country

Today: The Middle-Class

3.0%

91%

87%

17%

6.5%

57%

45%

35%

0% 20% 40% 60% 80% 100%

InfantMortality

Adult Literacy

WomenLiteracy

Income <$1/day

IndiaChina

The Middle-Class

China vs India Urban Housebolds by Income

-

20

40

60

80

100

120

140

< $2000 $2000-7500 > $7500

Income

Urb

an H

ouse

hold

s (m

illio

n)

India

China

Source: The Economist, 2008

Middle Class Urban Households

0

50

100

150

200

250

300

350

400

1985 1995 2005 2015 2025

mill

ion

urba

n ho

useh

olds

over $25,000 Income$25,000$12,500$5,000Umder $3100

Source: The Economist, McKinsey, 8/5/06

$2,000 to $12,000 is the sweet spot for consumption(Penetration of durable goods relative to annual income)

$12,000 = 90,000 RMB$2,000 = 15,000 RMB

India Passenger Car Sales

Source: Citigroup India

Introduced Financing

(Thousands)

-

100

200

300

400

500

600

700

800

900

1,000

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

As of 30-Nov-04

Middle Class = Autos

Rate drops below 20%

Comparison of Chinese and US Autos as Percent of Population

Source: Morgan Stanley; FactSet As of 31-Dec-05

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

E

Pas

seng

er A

utos

& T

ruck

s

0%10%20%30%40%50%60%70%80%90%

Pen

etra

tion

Rat

e of

Pas

seng

er A

utos

&

Tru

cks

US Total # Passenger Cars and Trucks on July 1 Chinese Cars

US Penetration Rate: Passenger Vehicles/Population Chinese Penetration Rate: Autos/Population


Comparison of the Pace of Chinese and US Passenger Vehicle Penetration

Source: Morgan Stanley; FactSet As of 31-Dec-05

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

1900

1902

1903

1905

1907

1908

1909

1910

1911

1912

1913

1914

1915

1916

1917

1918

1920

1921

1923

US Passenger Vehicles

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

E

Chinese Cars


Source: BP Statistical Review of World Energy, U.S. Census global population database, respective state statistics bureaus for GDP.

Resources

0

3

6

9

12

15

18

21

24

27

30

33

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Oil

cons

umpt

ion p

er c

apita

(bar

rels

/yea

r) U.S.A.

S. Korea

Japan

Oil per capita rises rapidly in response to the GDP growth afforded by inexpensive labor, then levels off in a service economy at saturation.

India

P.R. China

The two lower lines are EIA 's High Growth case for China and Ind ia. 2006-07E est imates f rom EIA.

Hong Kong

Oil Consumption (000 barrels/day)

100

1,000

10,000

100,000

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

2017

2022

2027

2032

2037

2042

2047

2052

2057

Source: BP 2008

US

China

IndiaJapan

Russia

Germany

Resources

• Things will look different in 40 years….

• (Based on 2002–2007 growth rates)

Source: BP Statistical Review of World Energy, Frontier Market Asset Management, 2009

No Sub-prime Problems in Emerging/Frontier

Convergence is Accelerating

GDP per Capita (2000 $)

10

100

1,000

10,000

100,000

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Vietnam

India

China

JapanUSA, $46,096 SingaporeS Korea

BrazilSri LankaRussia

$100

$192

$6,300

ChinaGDPperCapita0912

Bangladesh

Turkey

$234

India, $1,715

France

Turkey

France

Assumptions: Growth to 2015 ~= 2000-2008, 2016-2025 lose 1/3 of premium over 2.5%, 2026-2050 lose another 1/3

Source: World Bank, Frontire Market Asset Management, 2010

Strange New World

GDP 2008

EAFE56%

China5%

India2%

Frontier4%Emerging

Markets10% United

States23%

Est 2025 GDP (Bil)

EAFE47%

China11%

India3%

Frontier5%Emerging

Markets13%

United States21%

Est 2050 GDP (Bil)

EAFE40%

China18%

India4%

United States18%

Emerging Markets

14%

Frontier6%

Source: World Bank. UN Population Survey, Frontier Marekt Asset Management, ChinaGDPperCapita0912.xls

Convergence is Accelerating

Assumptions: Growth to 2015 ~= 2000-2008, 2016-2025 lose 1/3 of premium over 2.5%, 2026-2050 lose another 1/3

2008 GDP/Cap

Est 2015 GDP/Cap

Est 2025 GDP/Cap

Est 2050 GDP/Cap

Korea, Rep. $14,469 $22,356 $35,076 $98,399Japan $39,911 $41,673 $48,602 $78,251United States $37,757 $40,037 $47,239 $75,261Latvia $5,695 $9,706 $17,445 $59,442Slovenia $12,559 $17,472 $24,871 $56,139Australia $23,527 $27,652 $33,637 $55,739Israel $20,513 $24,529 $29,183 $46,617France $24,019 $24,974 $29,240 $45,891Italy $19,796 $19,192 $21,993 $33,994New Zealand $14,890 $16,381 $19,643 $32,331Croatia $6,287 $8,900 $13,163 $32,137Slovak Republi $5,197 $8,273 $12,441 $32,013Argentina $8,693 $12,066 $15,941 $31,392Czech Republic $7,087 $9,822 $13,940 $31,349Kazakhstan $2,166 $4,218 $7,953 $28,508Portugal $11,259 $12,271 $15,179 $27,266Russian Federa $2,637 $4,819 $8,407 $27,107Brazil $4,087 $6,222 $9,403 $23,902Romania $2,444 $4,395 $7,526 $23,799Hungary $6,097 $7,683 $10,606 $22,883China $1,612 $3,351 $6,203 $22,539Chile $5,882 $7,573 $9,974 $19,846Turkey $4,950 $6,636 $8,974 $18,562Mauritius $4,527 $6,182 $8,429 $17,966Mexico $6,404 $7,030 $8,305 $13,982Sri Lanka $1,074 $1,689 $2,583 $6,806Vietnam $576 $1,073 $1,904 $6,216Mongolia $626 $1,120 $1,795 $5,050India $637 $1,056 $1,688 $4,711

Valuations: Frontier Markets are Attractive

Price/Earnings Ratios

0

5

10

15

20

25

30

35

40

45Ja

n-99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Source: MSCI, S&P, Frontier PE PB ROE Charts, Dec 2009

EAFEUS

EM

US 28.6x, EAFE 28.6x, Emerging 20.6x, Frontier ex-GCC 11.6x

Frontier


Price/Book

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

U.S.

EAFE

MSCI EM

US 2.2x, EAFE 1.6x, Emerging 2.2x, Frontier ex-GCC 1.6x

Frontier



Return on Equity

0%

5%

10%

15%

20%

25%Ja

n-99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

EM

EAFE

U.S.

US 7.7%, EAFE 5.6%, EM 10.5%, Frontier ex-GCC 13.8%

Frontier

U.S.


The Numbers…

Risk and Return 10 years (12/99-12/09)

-5%

0%

5%

10%

15%

0% 5% 10% 15% 20% 25%

Annual Standard Deviation

Ann

ualiz

ed R

etur

n

S&P

EAFE

MSCI Emerging Markets

S&P Frontier Markets

Source: MSCI, S&P Dec 2009

S&P 500 EAFE

MSCI Emerging Markets

S&P Frontier

BMI10 year return to 12/09 -9.1% 17.2% 137.1% 277.3%

Correlation to S&P 1.00 0.87 0.79 0.50Standard Deviation 16.2% 18.0% 21.7% 18.1%

Real S&P is Below the Trend Line

StockTotalRtnGFD1800 2009.xls

Real S&P 500 & Cowles Index 1871 to 2009

0.0100

0.1000

1.0000

10.0000

100.0000

1,000.0000

01/3

1/18

71

01/3

1/18

81

01/3

1/18

91

1/31

/01

1/31

/11

1/31

/21

1/31

/31

1/31

/41

1/31

/51

1/31

/61

1/31

/71

1/31

/81

1/31

/91

1/31

/01

1/1/

11

Source: S&P, Cowles Indes, Frontier Market Asset Management, December 2009

Buy when 10 year REAL return is negative


Real S&P 500 & Cowles Index Over Rolling 10 Year Periods 1871 to 2009

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

02/2

8/18

71

02/2

8/18

81

02/2

8/18

91

2/28

/01

2/28

/11

2/28

/21

2/28

/31

2/28

/41

2/28

/51

2/28

/61

2/28

/71

2/28

/81

2/28

/91

2/28

/01

Source: S&P, Cowles Indes, Frontier Market Asset Management, December 2009

-3.20%


What Next?

American Association of Individual Investors Survey

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nov

-87

Aug

-88

May

-89

Feb-

90

Nov

-90

Aug

-91

May

-92

Feb-

93

Nov

-93

Aug

-94

May

-95

Feb-

96

Nov

-96

Aug

-97

May

-98

Feb-

99

Nov

-99

Aug

-00

May

-01

Feb-

02

Nov

-02

Aug

-03

May

-04

Feb-

05

Nov

-05

Aug

-06

May

-07

Feb-

08

Nov

-08

Aug

-09

Cash

Bonds

Stocks

Cash was 45% in March, now 18% (avg 25% 1997-2009)

Stocks Bonds CashMar-09 41% 14% 45%Dec-09 64% 18% 18%Average 60% 15% 25%

Source: http://www.aaii.com/membersurveys/AssetAllocation/AssetAllocationSurvey.cfm

Results for 2008 & 2009

Returns 2008 2009 2 yr returnBangladesh 5% 40% 47%COLOMBIA -25% 84% 38%

Namibia -5% 30% 24%CHILE -35% 87% 21%

Lebanon -23% 52% 17%ISRAEL -29% 55% 10%

PERU -40% 72% 3%Panama -14% 18% 2%BRAZIL -56% 129% 0%

INDONESIA -56% 128% 0%SOUTH AFRICA -38% 58% -2%

TAIWAN -46% 80% -2%MEXICO -43% 57% -11%

Botswana -34% 30% -15%MOROCCO -11% -5% -15%

MSCI Emerging -53% 79% -16%PHILIPPINES -52% 68% -19%

CHINA -51% 63% -20%S&P 500 -37% 26% -20%Mauritius -47% 50% -21%KOREA -55% 72% -23%

EAFE -43% 34% -24%TURKEY -62% 98% -25%

INDIA -65% 103% -28%HUNGARY -62% 78% -32%

POLAND -54% 43% -35%Kenya -39% 5% -35%

Kazakhstan -46% 4% -45%S&P Frontier -55% 20% -46%

RUSSIA -74% 105% -46%Ghana -10% -41% -47%

Slovak Rep -33% -23% -49%Estonia -64% 41% -50%

Vietnam -67% 50% -51%Romania -72% 33% -62%

Ukraine -82% 31% -77%

Risk Seeking: Loss Aversion & Utility Function

• Coin toss: lose $100…. Win ??

Myopic Loss Aversion and the Equity Premium Puzzle, Shlomo Benartzi and Richard Taylor, Quarterly Journal of Economics 1998

Risk Seeking: Loss Aversion & Utility Function

• Coin toss: lose $100…. Win ??• Paul Samuelson’s wager:

– Coin toss: win $200, lose $100– Colleague’s response: “no” for one toss, “yes” for 100 x

• Loss Aversion Factor ~ 2.5x• 1 toss Utility = 50%*1*200 + 50%*2.5*(-100) = -25• 2 toss Utility =

25%*win both+50%*split+25%*lose both =.25*400 + .5*100 + .25*2.5*(-200) = +25

Myopic Loss Aversion and the Equity Premium Puzzle, Shlomo Benartzi and Richard Taylor, Quarterly Journal of Economics 1998

Risk Seeking –

Source: Meir Statman, Countries and Culture in Behavioral Finance, CFApubs.org, Sept 2008

Optimism – Pew Survey

.

Life Satisfaction versus Income

0

10

20

30

40

50

60

70

80

$100 $1,000 $10,000 $100,000

GDP/Capita USD

% S

atis

fact

ion

7-10

Series1

Developed

Emerging

Frontier

Log. (Series1)

USA

Source: Pew Opinion Survey 2007, Ondine Frontier Countries0706


Optimism versus Income

0

10

20

30

40

50

60

70

80

90

100

$100 $1,000 $10,000 $100,000GDP / Capita

% O

ptim

istic

Source: Pew Opinion Survey 2007

MaliSenegal

Bangladesh

USA

Pakistan

India

South AfricaKenya


.

"Next Generation Better Off" versus Income

0

10

20

30

40

50

60

70

80

90

100

$100 $1,000 $10,000 $100,000GDP / Capita

% O

ptim

istic

Series1 Developed

Emerging Frontier

Log. (Series1) Source: Pew Opinion Survey 2007

Japan

BangladeshChina

USA

Italy

Optimism:

Source: Human Security Centre, UBC

Optimism:

Optimism: Determination








Conclusion: Reasons for optimism

Inflation: Production: Employment: Consumer: Financial:

Saddam Hisein executed

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

PPI monthly % ChgPPI xFood/Energy

2 PPI Monthly % Chg

-2.0%

-1.6%

-1.2%

-0.8%

-0.4%

0.0%

0.4%

0.8%

1.2%19

9719

9920

0120

0320

0520

07D

ec-0

8Fe

b-09

Apr

-09

Jun-

09A

ug-0

9O

ct-0

9

US CPI monthly % ChgCPI xFood/Energy

Annual Monthly1 CPI Monthly % Chg

30

35

40

45

50

55

60

65

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

ISM Manufacturing Index

ISM NonManufacturing

Contracting

Expanding

5 ISM Manufacturing Index

-7

-5

-3

-1

1

319

9719

9920

0120

0320

0520

07D

ec-0

8Fe

b-09

Apr-

09Ju

n-09

Aug-

09O

ct-0

9

Industrial Prodn % ChgDur Gds xTransport

6 Production & Orders

-700-600-500-400-300-200-100

0100200300

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Non-Farm Payroll ChgMfg Payroll Chg

10 Payrolls

7 Capacity Utilization

65

75

85

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

20

40

60

80

100

120

140

160

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Dec

-09

Consumer Confidence

Consumer Sentiment (UMich)

13 Consumer Confidence

16 More Housing Data

3.5

5.5

7.5

9.5

11.5

13.5

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Existing Home Sales

New Homes Month SupplyVehicle

Sales

15 Housing

300

700

1100

1500

1900

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Housing StartsBldg PermitsNew Home Sales

18 Real GDP and Inflation

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

Sep-

05

Mar

-06

Sep-

06

Mar

-07

Sep-

07

Mar

-08

Sep-

08

Mar

-09

Sep-

09

Real GDPGDP Deflator

Quarterly

8 $ vs Euro & Yen

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1997

1999

2001

2003

2005

2007

23-J

an-0

920

-Mar

-09

15-M

ay-0

910

-Jul

-09

04-S

ep-0

930

-Oct

-09

25-D

ec-0

908

-Jan

-10

$ per Euro$ per 100 Yen

15

35

55

75

95

1997

1999

2001

2003

2005

2007

23-J

an-0

920

-Mar

-09

15-M

ay-0

910

-Jul

-09

04-S

ep-0

930

-Oct

-09

25-D

ec-0

908

-Jan

-10

Annual Monthly + Last 3 Weeks

3 OIL: West Texas Intermediate

0500

1000150020002500300035004000

1997

1999

2001

2003

2005

2007

23-J

an-0

920

-Mar

-09

15-M

ay-

10-J

ul-0

904

-Sep

-30

-Oct

-09

25-D

ec-0

908

-Jan

-10

19 U.S. Stocks

S&P

R2000

Rel Large/Small = S&P/R2000

-3.5

-2.5

-1.5

-0.5

0.5

1.5

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09A

pr-0

9Ju

n-09

Aug

-09

Oct

-09

Dec

-09

Retail SalesRetail Sales ex Autos

14 Retail Sales % Chg

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1997

1999

2001

2003

2005

2007

23-J

an-0

920

-Mar

-09

15-M

ay-0

910

-Jul

-09

04-S

ep-0

930

-Oct

-09

25-D

ec-0

908

-Jan

-10

10 Yr Note

10 Yr TIPS (Real Yield)

Expected Inflation =

4 Bonds - TIPS = Expected Inflation

2.46%

Expected Inflation

3%

4%

5%

6%

7%

8%

9%

10%

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Dec

-09

32

33

33

34

34

35

35

Unemployment RateAvg Wkly Hours

9 Unemployment Rate & Wkly Hours

12 U.S. Trade Balance

-70

-60

-50

-40

-30

-20

-10

0

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

300

350

400

450

500

550

600

650

700

1997

1999

2001

2003

2005

2007

23-J

an-0

920

-Mar

-09

15-M

ay-

10-J

ul-0

904

-Sep

-09

30-O

ct-0

925

-Dec

-09

08-J

an-1

0

20002500300035004000450050005500600065007000

11 Unemployment Claims

Continuing Claims

INITIAL CLAIMS

20 Money Supply

400

600

800

1000

1200

1400

1600

1800

2000

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10

Base

0

3

6

1997

1999

2001

2003

2005

2007

Dec

-08

Feb-

09Ap

r-09

Jun-

09Au

g-09

Oct

-09

Dec

-09

17 Fed Funds, T-Bill 90 day

FED Funds

90 Day T-Bill

1/14/2010 Frontier Market Asset Management, Larry Speidell, [email protected] 858-454-1440

Documents

Strange New World - CFA Institute...Strange New World “I pass with relief from the tossing sea of Cause and Theory to the firm ground of Result and Fact.” – Winston Churchill