Economic Update October 2011 Recession and EU Crisis Daryl Montgomery November 3, 2011 Copyright 2011, All Rights Reserved The contents of this presentation are not intended as a recommendation to buy or sell any security.

Summary Two biggest issues are whether developed countries are in recession and how EU debt crisis will continue to unfold. U.S. Q3 GDP does not indicate U.S. avoided recession. EU banks are not going to be made solvent by recent bailout decisions. Even with 50% selective default, Greece is still not fixed. Deal in question. Portugal, Ireland, Spain, Italy still in trouble. Centrals banks pumping money into system.

Fiscal State of U.S. – National Debt Clock National Debt: $14.9 trillion State and Local Debt $3.0 trillion Unfunded liabilities $116 trillion. Debt to GDP ratio 99.6% (actually much higher). Doesnt include Federal Reserve or Fannie Mae, Freddie Mac and FHA obligations. Debt Ceiling at $16.4 trillion (up to election). Budget Deficit for 2011 was $1.3 trillion. Estimated Deficit for 2012 is $1.1 trillion Trade Deficit estimated at $538 billion (dependent on price of oil).

U.S. Monetary Base

Growth in Monetary Base

Recent Growth in M1 Money Supply

Historical Growth of M1

Q3 GDP Up 2.5% vs. up 2.9% in Q Lower inflation rate, 3.3% in Q2 vs. 2.0% in Q3 explains better results by itself. Consumer spending up 2.4% vs. 0.7% in Q2 even though consumer confidence back to credit crisis levels. Business spending on equipment up 17.4%, on structures 13.3%. Indicates big boom. Expect several downward revisions in next few years, just like other GDP reports.

This Years GDP Revisions Compared to Last Year Blue line original numbers. Red line revised numbers.

GDP Has Been Inflated by Fed Money Printing Feds balance sheet has increased by $2+ trillion since end of GDP after revisions was just over $13.2 trillion (2005 chained dollars). Up about $600 billion from bottom. Without money printing would GDP be $11.2 trillion or 16% lower (compared to $13.3 trillion in Q4 2007)? Current dollar GDP is $ trillion. Without money printing would it be $13.0 trillion?

Other Economic Indicators October Manufacturing PMI U.S. 50.8, China 50.4, UK 47.4, EU 47.1, Brazil 46.5 U.S. Unemployment rate 9.1%. Consumer credit decreasing at 4.5% annually. Consumer confidence at 39.8, worst since March Retail sales up 8.8% yr over yr, unadjusted for inflation. Official CPI inflation 3.9% yr over yr (Shadow Stats around 11%).

Shadowstats.com and Reported U.S. CPI

Nominal Retail Sales

Inflation Adjusted Retail Sales

Problems in the EU Not Resolved Greek bailout timeline supposed solutions: May billion July billion, plus 21% bondholder loss October billion, plus 50% bond loss for creditor other than EU/IMF Referendum crisis arises only 4 days later. One-year interest rates in Greece before Oct plan as high as 193%, fell to 154%, then rose to 206%. Hard default would be around 75% or more. Would be bigger than Russian default in 1998.

EFSF (European Financial Stability Fund) is to be leveraged from 440 billion to one trillion euros. This is borrowed/printed money. EFSF to be used to buy debt from PIIGS and for bank recapitalization (ie. bailouts) Banks are to raise capital other ways first. This will lead to tighter credit in EU. Dexia Bank already failed, more to come.

Who Owns Greek Debt?

Greek One-Year Bond Yields

Greek 10-Year Bond Yields

Portuguese 10-Year Bond Yields

Italian 10-Year Bond Yields