Stronger Economy and Market

in the Second Half

Byron R. Wien
Vice Chairman, Blackstone Advisory Partners L.P.

Tel: 212.583.5055
Email: wien@blackstone.com

If you would like to receive future monthly market commentary publications by Byron Wien,
please email byronwienscommentary@blackstone.com.

The Ten Surprises of 2011

1. The continuation of the Bush tax cuts coupled with

the extension of unemployment benefits has put
all working Americans in a better mood. Real
Gross Domestic Product rises close to 5% in 2011
driven by improved trade and capital spending in
addition to stronger retail sales. Unemployment
drops below 9%

The Ten Surprises of 2011

2. The prospect of increasing Federal budget deficits

and rising government debt finally begins to weigh
on the bond market. The yield on the 10-year U.S.
Treasury approaches 5% as foreign investors
become more demanding. Spreads with corporate
fixed income securities narrow

The Ten Surprises of 2011 (Contd)

3. Encouraged by renewed economic momentum the

Standard & Poors 500 rises close to its old high of
1500. A broad range of sectors participate, but
telecommunications and utilities lag. With
earnings improving, valuations seem low and
individual investors return to equities for the first
time since the financial crisis. Merger and
acquisition activity becomes intense and the
market reaches a blow-off euphoria. Stocks correct
in the second half as interest rates rise

The Ten Surprises of 2011 (Contd)

4. Although inflation remains benign, the price of

gold rises above $1600 as investors across the
world place more of their assets in something they
consider real. Sovereign wealth funds of
countries with significant dollar reserves also
become big buyers. Hedge funds keep thinking the
price rise is becoming parabolic and sell their
positions and some even short the metal but gold
keeps climbing and they scramble back in

The Ten Surprises of 2011 (Contd)

5. Worried about inflation and excessive growth, the

Chinese decide to use their currency as a policy
tool. They manage the value of the renminbi
aggressively to keep the growth of the economy
below 10% and to prevent consumer prices from
increasing above the 4%5% range. The move is
viewed as a precursor to the world-wide adoption
of a basket including the renminbi as an alternative
to the use of the dollar as the principal
reserve currency

The Ten Surprises of 2011 (Contd)

6. Rising standards of living in the developing world

seriously increase the demand for agricultural
commodities. The price of corn rises to $8.00,
wheat to $10.00 and soybeans to $16.00.
Commodities become a component of more
institutional portfolios

The Ten Surprises of 2011 (Contd)

7. The housing situation improves. Although the

inventory of unsold homes remains high, the
oversupply is drawn down substantially,
contrasting with an increase in 2010. The CaseShiller gradually heads higher and housing starts
exceed 600,000

The Ten Surprises of 2011 (Contd)

8. Continuing demand from the developing world and

a failure to bring onstream new supply causes the
price of oil to rise to $115 per barrel. The higher
price at the pump fails to discourage driving,
increase sales of hybrid vehicles or cause Congress
to initiate conservation measures

The Ten Surprises of 2011 (Contd)

9. Frustrated by the lack of progress against the

Taliban and the corruption of the Karzai
government, President Obama concludes that
whenever American troops return home,
Afghanistan will once again become a tribal state
ruled by warlords. He accelerates the withdrawal
of most military personnel to the end of 2011.
Coupled with the pullout of forces in Iraq, this will
leave the Middle East without a major Western
presence in the face of rising fears of terrorism

The Ten Surprises of 2011 (Contd)

10. Under duress Angela Merkel leads the way in European

financial reform. The weaker countries, having pledged
to cut their budget deficits in half by 2014, are provided
additional transitional aid by the European Union (with
Germanys backing) and the International Monetary
Fund as long as they implement their austerity
programs, increase some taxes and still show modest
growth. The European financial crisis becomes less of a
concern. The policies put in place prove psychologically
satisfying to the financial markets but harmful in the
longer term because they are palliative and do not
represent solutions

Radical Asset Allocation

Asset Class
High quality multinational growth
stocks
Emerging markets equities
Brazil, China, India, etc.
Hedge Funds all strategies

%
10%

Reasoning
Ten to fifteen times earnings 2.5% yield. Reasonable growth

20%

Five to ten percent growth over the next five years.

Private Equity

10%

Reasonable valuations. Volatile

Satisfactory positive performance in good markets; less
downside in bad markets
Strong return on capital over investment period

Real Estate

10%

Limited new construction. Increasing value for existing

20%

Gold

5%

properties
Insurance against financial calamity

Other commodities

5%

Rising standard of living in the developing world

Higher yielding Fixed Income

20%

U.S. Treasury Securities

0%

Cash

0%

Exceptional returns. Wide spread with Treasurys. Limited

downside if no recession occurs

Rapid monetary expansion, weak currency, heavy borrowing
should lead to higher rates
Above allocations can be trimmed to provide reserves

What are the major issues facing investors today?

1. Growth in the United States
a. Housing overhang
b. High unemployment
c. Debt ceiling and budget deficits in the United States
2. Emerging market inflation
3. Recovery in Japan
4. European credit crisis
5. Slowdown in China because of a housing bubble or
some other factor

Why the Economy is Not as Bad as It Looks

7th Quarter Following Recession End Y/Y% (Real)

1976:4Q
1984:3Q
1992:4Q
2003:3Q
Avg
2011:1Q

Res
Investment
25.8%
8.1%
13.1%
10.2%
14.3%
-2.3%

________________________________________________

Source: ISI Group.

Consumer
Spending
5.4%
4.7%
4.7%
3.2%
4.5%
2.7%

Govt
Spending
-1.4%
2.2%
1.9%
2.3%
1.3%
0.2%

Nonres
Investment
7.4%
19.2%
8.8%
2.6%
9.5%
9.5%

NDR Crowd Sentiment Poll

Arrows represent extremes in optimism and
pessimism. They do not represent buy and sell
signals and can only be known for certain (and
added to the chart) in hindsight

S&P 500 Composite Index

Extremes Generated when Sentiment
Reading:
Rises above 61.5% = Extreme Optimism
Decline below 55.5% = Extreme Pessimism

1,600

Daily Data 8/02/2000 7/05/2011

Sentiment must revenue by 10

percentage points to signal an
extreme in addition to the above
extreme levels being reached.

1,400
1,200

S&P500 Gain / Annum When:

12/01/1995 04/25/2011

1,000
800

Average Value Of Indicator At:

Optimistic Extreme (down arrows)= 67.9
Pessimistic Extreme (up arrows)= 46.5
Average Spread Between Extremes= 21.4

600
2000

2001

2002

2003

2004

2005

NDR Crowd
Sentiment Poll is:
Above 61.5
Between 55.5 and 61.5
55.5 and Below

2006

Gain/
% of Time
Annum
1.2
38.2
5.0
21.0
9.5
40.8

2007

2008

2009

NDR Crowd Sentiment Pool

100

2011

7/05/2011 = 59.5

Extreme Optimism (Bearish)

80
60.4

60

62.9

52.8

61.3
46.3

55.7

40

2010

45.7

57.9

52.8

67.8
59.6
53.0

49.6

69.1

55.0 47.7

69.6 67.3
66.3
60.2

58.5 66.5

62.9

70.3

64.9

71.3

63.2

57.1 57.0

50.1

45.5
51.8

51.0
38.9

38.4 35.5

37.4

20

68.9
55.0
68.7
57.1

38.3

Extreme Pessimism (Bullish)

0
2000

2001

2002

____________________________________________

Source: Ned Davis Research.

2003

2004

2005

2006

2007

2008

2009

2010

2011

U.S. Consumer Sentiment (U of Mich)

(May 74.3)
120

100

80

60

40

20

0
1978

1981

1984

________________________________________________

Source: ISI Group.

1987

1990

1993

1996

1999

2002

2005

2008

2011

Economy is Improving Slowly

Real GDP QoQ
Annual (%)

U.S. Employment
600

7.5%

12%

400
10%

2.5%

0.0%

-2.5%

200
8%
0

(200)

6%

(400)
4%
(600)
2%
(800)

-5.0%

(1,000)
1990

-7.5%
2002

2003

2005

2006

________________________________________________

Source: Monticello Associates.

2008

2009

2011

0%
1993

1996 1999

2002

2005 2008

Nonfarm payrolls 3-month average

2011

Employment

Employment

Nonfarm payrolls 3-month average

5.0%

A Pick-Up in Job Openings, but probably not enough

(in thousands)
6,000

5,000

4,000

3,000

2,000
2000

____________________________________________

Source: Strategas Research Partners.

2002

2004

2006

2008

2010

________________________________________________

Source: Ned Davis Research.

*
Sale of property, tax benefits from stock options, exchange rate effect, extraordinary rate effect, extraordinary financing items, and combined financing and
investing activities.

U.S. Unemployment Rate

(Unemployed for 27 Weeks or Longer)
May: 4.0%

A Really Dark Spot: Long-term unemployment is 2x the

average of its previous peaks, creating a pool of workers
who will have trouble ever finding another job.
5

U.S. Private Hours Worked

(QoQ % A.R.)
2011:2Q 3.8% e

A Bright Spot: The last time hours worked surged this much,
real GDP was +5.4%.

6%
4%

2%
0%

3
(2%)
(4%)

2
(6%)
(8%)

(10%)
(12%)

0
1970

1975

1980

1985

1990

________________________________________________

Source: ISI Group.

1995

2001

2006

2011

2006

2007

2008

2009

2010

2011

Unemployment Rate for Various Education Levels

18
15
12
9
6
3
0
Jan-00

Apr-01
<HS Diploma

____________________________________________

Source: Strategas Research Partners.

Jul-02

Oct-03

Jan-05

HS Diploma, No College

Apr-06

Jul-07

Oct-08

< Bachelors Degree

Jan-10

May-11

College Graduates

S&P 500 TTM P/E with Long-Term Average

30x

25x

20x
15.8x
14.4x

15x

10x

5x
'50

'60

________________________________________________

Source: Strategas Research Partners LLC.

'70

'80

'90

'00

'10

P/Es of Stocks, Bonds, and Cash

Average S&P 500 Trailing P/E by
Decade

Average Bond P/E by Decade

(100/10-year treasury yield)

Average House P/E by Decade

(U.S. Median Home Price/Median Rent)

25x

35x

25x
33.7x

30x
20x
19.5x

21.8x

20.1x

20x

18.1x

25x

18.7x
17.9x

15x
23.1x

14.6x
20x

21.1x

16.2x

15x

15.2x

12.5x
11.7x
10x
15x

15.5x
13.6x

10x

11.0x

5x
10x
9.9x

0x

5x
60s

70s

80s

90s

____________________________________________

Source: Strategas Research Partners.

00s Current

5x
60s

70s

80s

90s

00s Current

60s

70s

80s

90s

00s Current

S&P 500 Profitability

Operating Margins

Return on Equity

It doesnt get better than this

21%

29%

Probably unrealistic
27%

20%

Comeback from here

Comeback from here

25%
19%
23%
18%
21%
17%
19%

16%

17%

15%
1998

15%
1999

2001

2002

2004

________________________________________________

Source: Monticello Associates.

2005

2006

2008

2009

2011

1998

1999

2001

2002

2004

2005

2006

2008

2009

2011

Private Equity Activity

Total US corporate divestitures M&A Activity
(In billions)

Carve-outs have outperformed in J.P. Morgan

LBO Composite

900

1.8x

(Multiple of invested capital as of 4Q 10)

1.6x

784

800

1.6x

700

1.4x
590

600

552

1.2x

541

1.x

500

1.0x
395

400

300

416

408
0.8x

268

276
219

0.6x

200
0.4x
100
0.2x
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
% of
Total
Market

45%

39%

38%

30%

31%

____________________________________________

Source: Strategas Research Partners.

40%

47%

41%

47%

1Q
'11
53%

0.0x
Non-carve-outs

Carve-outs

Real Broad Trade-Weighted Exchange Value of the US$

140

120

100

80

60
Jan-73

Apr-77

Jul-81

____________________________________________

Source: Strategas Research Partners.

Oct-85

Jan-90

Apr-94

Jul-98

Oct-02

Jan-07

Apr-11

U.S. Real Trade Deficit 4 Qtr.Avg.

(2011:1Q: -48.2)
0
(10)
(20)
(30)
(40)
(50)
(60)
(70)
Q4 1994

Q3 1997

________________________________________________

Source: ISI Group.

Q2 2000

Q1 2003

Q4 2005

Q3 2008

Q2 2011

US Corporate Profits Sourced From the Rest of the World

(% of GDP)
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1948

1955

____________________________________________

Source: Strategas Research Partners.

1962

1969

1976

1983

1990

1997

2004

2011

U.S. Productivity 10 Qtr. %

(2011:1Q 9.1%)
14
12
10
8
6
4
2
0
(2)
Q3
1949

Q1
1955

Q3
1960

________________________________________________

Source: ISI Group.

Q1
1966

Q3
1971

Q1
1977

Q3
1982

Q1
1988

Q3
1993

Q1
1999

Q3
2004

Q1
2010

Mfg Compensation per Hour in $ (BLS) U.S. and Germany

$60

Germany 2011: $46.3e

$50

$40

US - 2011: $34.7e

$30

$20

$10

$0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Mfg Compensation per Hour in $ (BLS) U.S.

________________________________________________

Source: ISI Group.

Mfg Compensation per Hour in $ (BLS) Germany

CAPEX Capital Spending-Led Recovery

Rail Car Orders (RSI) S.A. by ISI

U.S. Real Capex Eqp Y/Y%

Rail Car Orders 2011: 1Q: 33795

U.S. Real Capex Eqp & Software 2011: 1Q: 14.7%

$40,000

25%
20%

$35,000

15%
$30,000
10%
$25,000

5%

$20,000

0%
-5%

$15,000

-10%
$10,000
-15%
$5,000

-20%

$0
Q1
1987

-25%
Q1
1991

Q1
1995

________________________________________________

Source: ISI Group.

Q1
1999

Q1
2003

Q1
2007

Q1
2011

Q1
1987

Q1
1991

Q1
1995

Q1
1999

Q1
2003

Q1
2007

Q1
2011

U.S. REAL AND NOMINAL CONSUMER SPENDING

Real Apr $9497.7

Nominal Apr $10773

$12,000

$11,000

$10,000

$9,000

$8,000
2005

2006

2007

U.S. Real Consumer Spending

________________________________________________

Source: ISI Group.

2008

2009

2010

U.S. Nominal Consumer Spending

2011

U.S. Banks' Willingness to Make Consumer Loans

2011:2Q: 28.8%
$80
$60
$40
$20
$0
-$20
-$40
-$60
-$80
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
Q2
Q1
Q4
Q3
1966 1969 1972 1974 1977 1980 1983 1985 1988 1991 1994 1996 1999 2002 2005 2007 2010
________________________________________________

Source: ISI Group.

U.S. Consumer Net Worth

2011: 1Q $55.6 e
$70

$60

S&P 1300

$50

$40

S&P 1300

$30
Mar-98
________________________________________________

Source: ISI Group.

Jun-01

Sep-04

Dec-07

Mar-11

U.S. Total Bank Loans plus Securities Held Outright at the Fed
May 18 $9.23
$9.5

Growth Problem
$9.0

$8.5

$8.0

$7.5

$7.0
Jan-07 May-07 Oct-07 Mar-08 Aug-08
________________________________________________

Source: ISI Group.

Jan-09

Jun-09

Oct-09 Mar-10 Aug-10

Jan-11

Jun-11

Fed Balance Sheet

$3,000

$2,856.4

$2,500

$2,000

$1,500

$1,000

____________________________________________

Source: Strategas Research Partners.

31% is mortgage backed securities

Goldman Sachs Commodity Index

1,000
900
800
700
600
500
400
300
200
100
0
2000

2001

2002

________________________________________________

Source: ISI Group.

2003

2004

2005

2006

2007

2008

2009

2010

2011

U.S. CPI Y/Y%

(Apr 3.1%)
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
Jan1992

Oct1993

Jul1995

________________________________________________

Source: ISI Group.

Apr1997

Jan1999

Oct2000

Jul2002

Apr2004

Jan2006

Oct2007

Jul2009

Apr2011

Average Hourly Earnings vs. Core CPI

5%

4%

3%

2%

1%

0%
Jan-92

Feb-94

Apr-96

Jun-98

Aug-00

Sep-02

Nov-04

Avg Hourly Earnings: Prod & Nonsupervisory Y/Y%

____________________________________________

Source: Strategas Research Partners.

Jan-07

Mar-09

Core CPI Y/Y%

Apr-11

U.S. House Price Index (Case-Shiller)

(M/M % Jan: -0.2%)
2.0%
1.5%
1.0%
0.5%
0.0%
(0.5%)
(1.0%)
(1.5%)
(2.0%)
(2.5%)
2000

2001

2002

________________________________________________

Source: ISI Group.

2003

2004

2005

2006

2007

2008

2009

2010

2011

Total Vacant Housing Units

(Units in thousands)

20,000
18,000
16,000

------------------

+4 million excess homes

14,000
12,000
10,000
8,000
Mar-85 Nov-87 Jun-90

____________________________________________

Source: Strategas Research Partners.

Jan-93 Aug-95 Mar-98 Nov-00 Jun-03

Jan-06 Aug-08 Mar-11

Taxes and Government Spending

(Quarterly Data, 3/31/473/31/11)
30%
25%

Government Spending as a % of GDP

(60.0-year Average = 19.6% of GDP)
3/31/11 = 25.0%

20%
Taxes as a % of GDP
(60.0-year Average = 18.0% of GDP)
3/31/2011 = 16.5%

15%
10%
1947

1954

1961

1968

1975

1982

Government Spending as a % of GDP

1989

Source: Ned Davis Research.

2004

2011

Taxes as a % of GDP

6%
4%
Surplus as a % of GDP
2%
0%
-2%
Deficit as a % of GDP
-4%
-6%
(60.0-year Average = -1.5% of GDP)
-8%
-10%
1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987
________________________________________________

1997

3/31/11 = -8.6%

1991

1995

1999

2003

2007

2011

Diminishing Returns from Debt-Financing by Decade

12/31/1949 3/31/2011
($ in billions)

Date Range
12/31/1949 12/31/1959

Decade Change
in Debt
$337.6

Decade Change
in GDP
$248.0

Debt /
GDP
1.36

12/31/1959 12/31/1969

$752.1

$491.3

1.53

12/31/1969 12/31/1979

$2,785.2

$1,654.9

1.68

12/31/1979 12/31/1989

$8,562.8

$2,922.3

2.93

12/31/1989 12/31/1999

$12,549.6

$4,026.0

3.12

12/31/1999 12/31/2009

$26,876.7

$4,669.6

5.76

12/31/2005 03/31/2011(1)

$11,324.4

$2,094.7

5.41

____________________________________________

Source: Ned Davis Research.

(1) Last 5.25 years using most recent data available.

Would You Want Your Member of Congress to Vote for Raising the Debt Ceiling?
(Gallup, 5/58)
80%
70%
60%

46%

40%

40%
33%
26%

20%

21%
15%
8%

0%
Yes

No
GOP

________________________________________________

Source: Strategas Research Partners.

Indep

Don't Know
Dems

40%

Contribution To Change In Deficit Since 2007

Nondefense
Discretionary
Spending

Defense

Social
Security

Revenue

Medicare

Medicaid

NonEconomically
Sensitive
Entitlements

____________________________________________

Source: CBO and ISI Group.

Economically
Sensitive
Entitlements

Unfunded Entitlement Obligations

Vs. Public Debt in U.S.

Vs. Public Debt in Europe

($TN, as of 2004 / 2005)

(TN, as of 2004 / 2005)

80

10

73.40

70

9.3

9.1
8

60

7.7

50

40

5.1
4

30

20

2.6

2.0

10

1.5
9.02

1.4

1.1
0.7

0.3

0
U.S.
Public Debt

Future Entitlement Shortfalls (PV)

____________________________________________

Source: Strategas Research Partners.

France

Germany

Current Public Debt

U.K.

Italy

Netherlands

0.4
Spain

Future Entitlement Shortfalls (PV)

Previous Government Shutdowns were not Major Events for the

Markets, but this one Might Be
Federal Debt Outstanding
(Monthly, $TN)
15

13
11

Last Click 3/24:

$14.2 TN

9
7
Jan-05

Jan-06

Jan-07
Debt Limit

Jan-08

Jan-09

Jan-10

Jan-11

Total Public Debt Subject to Limit

Federal Reserve % Purchase of Treasury Debt Issuance, 4 Mo. Rolling

75%
60%
45%
30%
15%
0%
-15%

QE2: Fed purchased 70% of

Treasury debt since November

QE1: Fed purchased 40% of

Treasury debt at its peak

'09
____________________________________________

Source: Strategas Research Partners.

'10

'11

Markets QE2 Launched

QE1
S&P increase before QE1

+15%

S&P 1 year later

+47%
QE2

S&P increase before QE2

S&P 1 year later

+17%
???
was 24% on July 1st

____________________________________________

Source: ISI Group.

Major Foreign Holders of U.S. Treasury Securities

All Others
1,013
23%

Switzerland
2%
112
Hong Kong 3%
122
Russia 3%
128
3%
Taiwan
156
3%
Caribbean
4%
155
5%
Brazil
194
OPEC
222

________________________________________________

Source: Monticello Associates.

China
1,145
27%

20%
Japan
908
7%
U.K.
325

China The Big Shift

Net Purchases of U.S. Bonds and Hard Assets

($ in billions)
$100

$80

$60

$40

$20

$0
2005

2006

2007

2008

Net Purchases of U.S. Bonds

________________________________________________

Source: Monticello Associates.

Hard Assets

2009

2010E

A Look At The European Financial Crisis

Severe Spain Employment Problem

Youth Unemployment Rates 15-24 Years-Olds, 2009Q4
Spain

43.0

Slovak Rep.

31.9
29.1

Ireland
France

25.2

Italy

25.1

UK

19.8

USA

19.1

OECD

18.8

Australia

11.9

Germany

10.2

Japan

9.7
0.0

5.0

____________________________________________

Source: ISI Group.

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Eurozone The Strong Have Lent to the Weak

Bank Foreign Public and Private Loans
(% Nominal GDP (2010: 2Q)

Greece

Ireland

France

2.0%

1.4%

14.6%

Netherlands

0.5%

2.3%

Germany

1.0%

U.K.
U.S.

________________________________________________

Source: BIS. ISI Group.

Italy Portugal

Spain

Total

1.0%

5.3%

24.3%

5.4%

0.6%

9.1%

17.9%

3.4%

4.7%

1.1%

5.3%

15.5%

0.6%

6.6%

2.9%

1.0%

4.8%

15.9%

0.4%

0.2%

0.3%

1.0%

Germany Outperforming the Rest of Europe

Germany Real GDP

Eurozone ex Germany Real GDP

$2,350

$5,600

$2,300

$5,500

$2,250

$5,400

Germany Real GDP 2011: 1Q

Eurozone ex Germany Real GDP 2011: 1Q

+7.3%

$2,200

$5,300

+2.2%
$2,150

$5,200

$2,100

$5,100

$2,050

$5,000

Q1 2005

Q3 2006

____________________________________________

Source: ISI Group.

Q1 2008

Q3 2009

Q1 2011

Q1 2005

Q3 2006

Q1 2008

Q3 2009

Q1 2011

Greece Structural Problems Make Recovery Even More Difficult

Greece Nominal GDP Y/Y%
2011:1Q: -4.5%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
Q2
Q4
Q2
Q4
Q2
Q4
Q2
2002 2003 2005 2006 2008 2009 2011

____________________________________________

Source: ISI Group.

Government Debt % GDP

180%
160%

Greece

140%
120%

Italy

100%

Eurozone
Portugal
Germany
Spain

80%
60%
40%
20%
0%

Q1
Q1
Q1
Q1
Q1
Q1
Q1
2005 2006 2007 2008 2009 2010 2011
Greece
Portugal

Italy
Germany

Eurozone
Spain

The Rest of the World

Global Growth
EM Employment Now 83% of World Employment

Population

Billions
2011E

Emerging
India

1.2

China

1.4

Other Emerging

3.4

Developed

1.0

World

7.0

________________________________________________

Source: ISI Group.

6.0

Global Growth
Developing Economies Gaining Share of World GDP
1995 Nominal GDP

Other
Italy Developed
France
3.8%
U.K.
5.3%
13.8%
3.9%

Germany 8.6%

Turkey Saudi Arabia

0.6%
0.5%
Indonesia
Poland
0.8%
0.5% South Africa
Taiwan
0.5%
0.9%

Mexico
1.0%

21.9% Developing
Economies

Japan

17.9%

7.9%
1.8%

Korea 2.5%
China

Italy

Other
Developed

14.7%
France
3.7%
4.6%
U.K.
3.8%

1.1%

Indonesia
Taiwan 0.9%
Turkey
0.7%
0.7% Saudi Arabia
Mexico
0.7%
Korea 1.5%
Poland
2.1%
0.7% Iran

Japan 8.8%

8.5%

Source: ISI Group.

10.8%

India

2.1%
________________________________________________

0.6%

China
Emerging
34.1% Economies

Germany 5.8%

Brazil

1.2% Russia

U.S.

2009 Nominal GDP

2.6%

India

25.1%

24.6%

U.S.

Other Developing

2.7%

Russia
2.1%

Brazil

Other Developing

Japan
Japan MFG PMI May 51.3%

Japan Nominal Retail Stores Sales Index

Apr 97.1

$60

$104

$55

$102

$50
$100
$45
$98
$40
$96
$35
$94

$30

$25
Jan-07

$92
Feb-08

Mar-09

____________________________________________

Source: ISI Group.

Apr-10

May-11

Jan-07

Feb-08

Mar-09

Apr-10

May-11

Signs Brazil Slowing

Brazil Consumer Confidence (GVF)
(Apr 118.2)

Brazil Business Confidence (CNI)

(2011: 1Q 60.0)

130

80

120

70

110

60

100

50

90

40

Jan- Jul- Jan- Jul- Jan- Jul- Dec- Jun- Dec- Jun- Dec- Jun06 06 07 07 08 08 08 09 09 10 10 11

____________________________________________

Source: ISI Group.

Mar- Sep- Feb- Aug- Jan- Jul- Dec- Jun- Nov- May- Oct- Mar06 06 07 07 08 08 08 09 09 10 10 11

EM Economy CPIs
Latest 3 Mo. % A.R.
Vietnam
Russia

6.2%

China

4.4%

Brazil

7.9%

Hong Kong

7.0%

Korea

0.4%

Turkey

14.8%

________________________________________________

Source: ISI Group.

33.2%

Emerging Economies Short Rates

May 27 5.42%
10%

9%

8%

7%

6%

5%

4%
Jan-03

Dec-03

Oct-04

____________________________________________

Source: ISI Group.

Aug-05

Jun-06

Apr-07

Feb-08

Dec-08

Oct-09

Aug-10

Jun-11

India
India Nominal GDP Y/Y%

2010:4Q: 17.4%

25%

India Repo Rate Apr 12: 6.75%

18%
16%

20%

14%
12%

15%
10%
10%

8%
6%

5%

4%
2%

0%
Q1 Q1 Q1 Q1 Q1 Q1 Q1
1998 2000 2002 2004 2006 2008 2010
____________________________________________

Source: ISI Group.

0%
2000

2003

2005

2008

2011

China Industrial Production

Apr: 822.7
900
800
700
600
500
400
300
200
100
0
Jan1998

Mar1999

Jun2000

____________________________________________

Source: ISI Group.

Aug2001

Nov2002

Jan2004

Apr2005

Jun2006

Sep2007

Nov2008

Feb2010

May2011

China Consumption and Investment as Percentage of GDP

60%

50%

40%

30%
1978

1983

1988

1993
Household Consumption

________________________________________________

Source: Strategas Research Partners.

1998
Investment

2003

2008

China Percent of World GDP

32.96%

35%

17.48%

16.81%

16.75%

16.16%

15.60%

15.16%

11.77%

11.15%

7.83%

6.95%

5.20%

4.80%

4.63%

4.66%

4.59%

5%

5.24%

11.06%

10%

5.14%

15%

8.83%

17.10%

22.31%

28.97%
24.89%

20%

22.68%

25%

25.45%

30%

0%
0001 1000 1500 1600 1700 1820 1870 1900 1913 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2003 2004 2005 2006 2007 2008

________________________________________________

Source: Strategas Research Partners.

Eye on Copper and China

Copper

China Shanghai Index

(US$/lb)

(1990 = 100)

500

6,000

450

5,000

400

4,000

350

3,000

300

2,000

250
Jan10

1,000
Feb- Apr10
10

Jun- Aug- Sep- Nov- Jan- Mar- Apr10

10
10
10
11
11
11

____________________________________________

Source: Strategas Research Partners.

Jun11

Nov- Apr- Sep- Feb- Jul- Dec- May- Oct- Mar- Aug- Jan- Jun06 07 07 08 08 08 09 09 10 10 11 11

China represents 9.4% of the World Gross Domestic Product but:

53.2%

Cement

47.7

Iron ore

46.9

Coal

45.4

Steel

46.4

Pork

37.2

Eggs

28.1

Rice

24.6

Soybeans

China Real GDP, Y/Y%

2011: 1Q: 9.7%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Q1
1998

Q1
1999

Q1
2000

____________________________________________

Source: ISI Group.

Q1
2001

Q1
2002

Q1
2003

Q1
2004

Q1
2005

Q1
2006

Q1
2007

Q1
2008

Q1
2009

Q1
2010

Q1
2011

China Yuan
May 30 6.483
7.0

6.9

6.8

6.7

6.6

6.5

6.4
Jan2009

Mar2009

Jun2009

____________________________________________

Source: ISI Group.

Sep2009

Nov2009

Feb2010

May2010

Jul2010

Oct2010

Jan2011

Mar2011

Jun2011

Some Thoughts about the Price of Oil

Oil Supply / Demand Outlook

Change in Oil Demand by Region, 20082030
All of the growth in global oil demand comes from non-OECD, with China contributing
42%, India contributing 19%, the Middle East 17% and other emerging Asian economies
most of the rest

____________________________________________

Source: ExxonMobils 2010 Energy Outlook; Bank of America Merrill Lynch.

Crude Oil Iran has 9% of Worlds Reserves 3% of Production

25%
20%
15%
10%
5%
0%
Saudi
Arabia

Iran

Iraq

Kuwait Venezuela

%world reserves

________________________________________________

Source: BP Statistical Review. Strategas Research Partners LLC.

UAE

Russia

%World Production

Libya

Kazakhstan Nigeria

Oil Supply / Demand Outlook

Change in Oil Demand by Region, 20082030
All of the growth in global oil demand comes from non-OECD, with China contributing
42%, India contributing 19%, the Middle East 17% and other emerging Asian economies
most of the rest

OECD Pacific

-1.2

OECD Europe

-1

OECD North America

-1

E. Europe / Eurasia

0.7

Africa

0.8

Latin America

1.3

Other Asia

1.8

Middle East

3.5

India

3.9

China

8.6
(2)

____________________________________________

Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.

4
Mmbl/d

10

Disclaimer
The views expressed in this commentary are the personal views of Byron Wien of Blackstone Advisory Partners L.P.
(together with its affiliates, Blackstone) and do not necessarily reflect the views of Blackstone itself. The views
expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstone
undertakes to advise you of any changes in the views expressed herein.
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Q&A

Stronger Economy and Market

in the Second Half
Byron R. Wien
Vice Chairman, Blackstone Advisory Partners L.P.

Tel: 212.583.5055
Email: wien@blackstone.com

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please email byronwienscommentary@blackstone.com.