Problems That Could Cause a Big Market Decline Daryl Montgomery June 29, 2011 Copyright 2011, All Rights Reserved The contents of this presentation are not intended as a recommendation to buy or sell any security.

Problems Facing the Market Greek debt crisis resurfaces. Rising Swiss franc (many loans in Swiss francs). U.S. budget ceiling needs to be raised, if not done by Aug 2 nd, U.S. will default. -Default will have serious consequences. -Sharp reduction in domestic spending will have significant consequences. Market needs QE3 to continue to go up. China raising bank reserves (4x this year) and lending rates (2x this year so far).

Greek/Euro Debt Crisis Austerity bill votes in Greece today, tomorrow. EU meeting on July 3 rd to decide on 12 billion trance of aid package. Meeting again July 11 th. Without addition aid, Greece must repay: July 15 th billion July 19 th million July 20 th billion July 22 nd billion French, German and UK banks most exposed.

Greek 10-Year Government Bond Yields

Irish 10-Year Government Bond Yields

Portuguese 10-Year Government Bond Yields

Spanish 10-Year Government Bond Yields

Rising Swiss Franc

Fiscal State of U.S. National Debt: $14.45 trillion (implied) State and Local Debt $2.9 trillion Unfunded liabilities $114 trillion Total National Assets: $76 trillion. U.S. Household Debt: $16.2 trillion. Debt to GDP ratio 98% (using official GDP). GDP $14.8 trillion (overstated by trillions). Rating agencies have threatened to downgrade U.S. debt (could happen with or without debt ceiling being raised).

History of U.S. National Debt

Debt Ceiling History in Trillions Aug $5.950 (Clinton) June $6.400 (Bush) May $7.384 (Bush) Nov $8.184 (Bush) March $8.965 (Bush) Sept $9.815 (Bush) July $ (Bush) Oct $ (Bush) Feb $ (Obama) Dec $ (Obama) Feb $ (Obama)

Debt Ceiling Crisis National debt ceiling reached in May. Obama budget deficit projections: $7.21 trillion in next decade (assumes annual GDP growth > 5% and almost no inflation). $12 to $15 trillion would be more realistic, $20 trillion or more a high estimate. Republicans want $2.4 trillion in cuts over next decade before agreeing to raise debt ceiling. Want one vote before 2012 elections. Negotiations have broken down over taxes.

History of U.S. Budget Deficit

Official U.S. Inflation Rates versus Realistic Ones The blue line is the inflation rate calculated as it was in the 1970s. Red line official numbers.

Fed Money Printing Makes the Market Go Up Fed has maintained ZIRP since Dec 2008 on the Fed Funds rate. Denies it is causing inflation. A growing economy makes interest rates go up, but interest rates have not risen implying recovery has not taken place. Fed money printing and the stock rally are closely correlated. QE 2 ends on June 30th. Market needs QE3. Fed will probably start engaging in QE3 months before official announcement. If there is a 30-year interest rate cycle, 2010 should have been the bottom.

Interest Rate Collapse During and After Credit Crisis

Two-Year Treasuries Near All-Time Lows Historical low was 0.33% in November 2010, low in June 2011 has been 0.35%.

Fed Balance Sheet (Money Printing) and the S&P 500

60-Year Interest Rate Cycle