EFTA01077755.pdf

EYE ON THE MARKET OUTLOOK 2012 J.P. Morgan Private Bank STimatos /4/P- . mows--r • erre/Ls k trikaz," Zsz 4 `WWRE~,''yEnµS Il 'Pt MIME 44 FUROProp I /6 A•", The post-stimulus economy 2012 marks a transition away from extreme global monetary and fiscal stimulus, as illustrated by the setting sun. The private sector recovery will mostly have to make it on its own from here. The news is better in the US than in Europe or Japan. Asia is expanding, but tighter policy rates are bringing growth back to earth. The height of each tree shows the recovery in each variable relative to its decline during the recession. See inside cover for more details. JP Morgan EFTA01077755 In the wake of the recession, a lot of stimulus was added to the global economy. The level of global policy rates and fiscal deficits defines the trajectory of the sun. Fiscal tightening is scheduled almost everywhere for 2012. On monetary policy, while inflation appears to be cresting. this more often prevents planned policy rate increases, rather than ushering in another period of substantial easing. More monetary policy responses in Europe are likely, but they are mostly intended to prevent a collapse of the Monetary Union as banks and governments de-lever. The height of each tree shows how much each variable has recovered, relative to its prior decline. For example, S&P profits, high-end retail and German GDP have now recovered almost all of what they lost during the recession, while US home prices and European peripheral employment are still close to their post-recession lows. The three comparison points for computing the recovery are the pre-cycle peak: the lowest level of the last four years; and the current value. One exception: US household balance sheet repair is computed as the decline in real per household debt from the peak. Commodity countries like Canada. Brazil and Australia. whose GDP in aggregate is much larger than Southern Europe. recovered rapidly. The speedboat is Asia. whose production and output suffered only minor declines. and which have long since eclipsed pre-recession levels. However, credit and policy rate tightening have caused a slowdown to the Asian speedboat and the rest of the emerging world, compared to the booming growth rates of 2010. The deflated volleyball is the European Economic and Monetary Union. See sources and definitions at the end of this publication. EFTA01077756  MARY CALLAHAN ERDOES Chief Executive Officer J.P. Morgan Asset Management As we turn the page and head into a new year, it is important for us to reflect on the current landscape, and to give you our best thinking on where the world is heading. The past twelve months were filled with unprecedented events. We witnessed Arab Spring uprisings and subsequent governmental changes, a devastating earthquake and tsunami in Japan, the first ever downgrade of U.S. debt, a continuously evolving European sovereign debt crisis, and the formal conclusion of a near decade-long conflict in Iraq. Amidst such transformational events around the world, we recognize that our job of sifting through all of this and finding appropriate investment opportunities for the future is even more important. Our Chief Investment Officer Michael Cembalest, in partnership with our investment teams across the world, has created an insightful framework for understanding and assessing the global opportunities and risks that we can expect in the coming year. I hope you enjoy the clever cover picture Michael commissioned to capture on one page the progress that has been made (or lack thereof) since the global recession of 2008—zoog. We wish you a healthy and happy new year. And most importantly, we thank you for your continued trust and confidence in J.P. Morgan. Most sincerely, EFTA01077757  Eye on the Market I OUTLOOK 2O12 January 1.2012 J.P.Morgan The Post-Stimulus Economy isn't all bad (there are as many tall trees on the cover as short ones), but its risks and uncertainties have not declined that much from a year ago. One historical frame of reference we have been using is shown in the first chart: a prior period of monetary and fiscal uncertainty during which markets were volatile, and sideways. The bull market began in 1982 when there was a clear path forward, even though a lot of the prior mess hadn't been completely dealt with. Where are we this time in terms of monetary and fiscal uncertainty? While fiscal deficits are being reined in and household balance sheets are healing, the long-term debt questions of the West remain mostly unanswered as of December 2011 (c2, c3). (c1) 1970s post-recovery equity (c2) OECD debt levels (c3) OECD budget deficits market wilderness Percent of GDP. gross Percentof GDP S&P 500 level Gerrnany DAX level 110% 46% 180 I Period of airtime' 800 100% Public expenditure 44% 160 I monetary and fisca uncestaint 700 90% 42% 140 80% 40% 120 600 70% 38% 100 500 60% 36% 80 60 50% 34% 400 40 40% 32% 20 300 30% 30% 1972 1974 1976 1978 1980 1982 1970 1976 1982 1988 1994 2000 2006 2012 1970 1976 1982 1988 1994 2000 2006 2012 With fiscal stimulus coining to an end and with only modest monetary policy easing in the pipeline (see inside cover for more details), the private sector will increasingly have to make it on its own. The US is showing some resilience (c4), while Europe and Asia are showing more signs of a slowdown. The big issue for 2012 will be how deep the European recession turns out to be. Prior sovereign debt crises were almost always solved by a combination of currency devaluation, higher growth and aggressive monetary easing (c5). In contrast, Europe is taking the path of most resistance: no growth, no devaluation, lots of austerity and the decision to turn the ECB into a Bad Bank repository. (c4) Global manufacturing surveys (c5) Fiscal adjustments, then & now (c6) Real S&P 500 earnings yield Purchasing Managers Index, sa Ir Prior Trailing earnings yield lesscore CPI 4.0% European 8% 65 and Latin As of US 7% 3.5% djustments 12/16111 e 1975.2000 £ 3.0% 5% 4% 2 2.5% 0 D. 2.0% 0 Europe 0O 3% 2% O 1.5% 1% today 0% 1.0% Assuming a 15% -1% Currency Devaluation, decline in earnings 0.5% -2% 5% 35% 65% 95% 1956 1965 1974 1983 1992 2001 2010 Equity markets are aware of this, priced as cheaply as they have been in decades (c6). Even assuming a 15% earnings decline", the S&P 500 would still be priced at the cheap end of history. Factoring in valuation, volatility and the risks (both known and unknown), our equity weightings are modestly lower than normal; the US is our largest regional position, and we remain very underweight Europe. In this document, we walk through our views on Europe, the US and Asia, and our investment priorities for 2012. It's a narrative in pictures; when many things are at their widest extremes in decades (equity valuations, government debt, central bank balance sheets, depressed labor incomes, housing inventory, etc.), pictures are better than words. In the appendix, some thoughts on Iran, and a history of European austerity and its connection to social unrest. On the December EU summit. The European debt bubble will be unwound more slowly given the decision by the ECB and member central banks to finance just about every asset held by EU banks. Bilateral lending facilities for sovereigns may also be expanded if necessary. The risk of a 2012 Europe meltdown may have melted, but what remains is a slow burn from a recession, a credit contraction and investors possibly selling all they've got to the ECB and other non-economic buyers. Michael Cembalest Chief Investment Officer " In Q4 2011, the percent of negative S&P 500 earnings pre-announcements matched its 2001 and 2008 peak. Another sign: companies reporting before Alcoa beat consensus earnings for the last 9 quarters, while in Q4, they trailed estimates by 2%. 1 EFTA01077758  Eye on the Market I OUTLOOK 2O12 January 1.2012 J.P.Morgan EUROPE: soul-searchine into a recession A year ago, we noted that Jacques Odors (a principal architect of the Euro) said that Europe needed "to find its soul". As of the time of this writing, they are still looking for it. In Delors' latest interview, he conceded that the Euro was flawed from the start. One of our most frequently used charts (c7) shows how: look at the gap in industrial production between Germany and Italy, which began like clockwork with the European Monetary Union. In prior notes, we highlighted how European North-South disparities in growth and employment have never been larger than they are now, even during the era of frequent devaluation and inflation in Southern Europe. A project designed to foster integration has ended up jeopardizing it. (c7) Death in Venice (c8) Sovereign 10-year yields (c9) Maturing debt, interest due and Industrial Production Index, 1998 = 100, sa Percent primary deficits in 2012, Percentof GDP 140 7.5% 30% ■Maturing debtand interest Germany Italy •Primary deficit€327bn 130 Belgium 25% • Euro exchange I 6.5% 120 Spain 20% E355bn E203bn rate fixed 110 5.5% 15% 100 4.5% 10% 90 3.5% 5% 80 70 2.5% 0% 1982 1986 1990 1994 1998 2002 2006 2010 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 France Italy Spain I will avoid the endless diagnoses of the problems, and skip to the endgame: a mid-flight redesign of the Euro since markets have lost confidence in it (c8). While Greece, Ireland and Portugal are wards of the state, 2012 borrowing needs of larger countries are in question as well (c9). In Q1 2012 alone, Italy must issue 112 billion in bills and bonds. The ECB balance sheet (c10) may have to grow by I trillion to support sovereigns (ell) and under-capitalized, under-reserved banks (c12, c13), despite opposition from Germany'. This is not just a sovereign/banking crisis, as noted by the rise in corporate debt, particularly in Spain and Portugal (c14). Chart c5 shows that external devaluation is the road typically taken. Europe is taking the internal devaluation route, but so far, Ireland is the only country that has made progress (c15). As for Ireland, we'd be more optimistic if it weren't for a crippling 140% debt to GNP ratio, a consequence of its decision to bail out EU depositors in Irish banks. (c10) Central bank balance sheets (c11) Italian debt/GDP, Total gross (c12) Europe: bigger banks, bigger Percentof GDP general government debt/GDP, percent problems, Liabilities,multiple of GDP 160% 7x 35% ECB plus El trillion Impf I a 140% a.• WWII 6x IForeign banks 30% I Domestic baths 120% 5x 25% 4x 100% 20% 3x 80% 15% 60% 10% lx 40% Ox 5% 20% . . CC in 2007 2008 2009 2010 2011 1861 1886 1911 1936 1961 1986 2011 O acCwa i LL t& < CC (c13 Loan loss provisions on (c14) Change in non-financial corp. (c15) Long road to convergence performing credit loans, Percent debt from 2000.2010, Percent of GDP Unitlaborcost, index, O1 2000 = 100, sa 5% 60% 140 50% 135 Ireland Spain 4% 40% 130 125 Italy 3% 30% 1 120 20% 115 France 2% 10% 110 0% 11J111 1 rliSP log 1% -10% ti ff 100 IIIII los i milollillial IIIIII....t, -20% 95 Germany 0% tg Wl-yCCI=YCht IRCLeiui6E2i On US banks EU banks Enu- OZ (-In , 2000 2002 2004 2006 2009 2011 The boy stamping his feet in the ECB chart is from Die Geschichte vom Suppen-Kaspar (Struwveelpeter). 2 EFTA01077759  Eye on the Market I OUTLOOK 2012 January 1.2012 J.P.Morgan The irony of Italy in the eye of the storm is that since 1991, its primary budget has been in surplus (c16). However, Italy has no choice given its debt burden of 1.9 trillion Euros (el 1), a by-product of its 1980's fiscal crises. Italy has paid a price for this austerity (and its low productivity), generating almost the lowest growth rate in the OECD over the last 20 years, ahead of only Japan (el 7). It's going to take a lot of work to convince markets that Italy is solvent, and that its debt is declining. We don't think it is: c18 shows an optimistic and pessimistic case, although neither represents possible extremes. We assume near-term funding costs of —6%, which as Italian debt matures, bring its overall average cost of debt from 3.9% to 4.4% by 2014. (c16) Italian primary balance (c17) 20-year growth rates, 1991-2011 (c18) Can Italy's debt stabilize? Surplus/clef icit before interest, % of GDP Percent Govemmentdebt, percentof GDP 8% 7% 134% 6% Cyclically 6% Pessimistic case: 131% Real GDP of -1.5%/-0.5% 4% adjusted 5% Primary balance: 2% 128% 1.3%12.2% 4% 0% 3% 125% -2% As reported 122% 2% -4% Optimistic case: -6% 119% Real GDP of 0.5%10.5% Primary balance: 2.6Nd4,1% -8% 1970 1977 1984 1991 1998 2005 2012 NYFg'41i16grcjElegEiNtR5E8kEE'grE... 116% 2010 2011 2012 2013 2014 Will Maastricht 2.0 "work", promising deficit limits that turn Italy and Spain into a Mediterranean Germany? • Germany's long-term plan appears to be: a heavy dose of austerity to reduce sovereign debt trajectories; commitments to run German fiscal policy; a Franco-German governance framework to enforce it; after all of that, a lot more help from the ECB; a lower Euro; and then, eventually, some kind of federalism (Eurobonds or other quasi-permanent transfers). • It's a risky strategy given the risk of a prolonged recession, superimposed on a region with 20 trillion in sovereign and financial sector debt outstanding (el 9). Spain's economy, for example, is in free fall. Sec Appendix A for charts on how bad things arc in Spain, and a history of austerity and unrest in Europe over the last century. • It's not clear that the only difference between Germany and Italy/Spain is a slate of structural reforms. Even if reforms are put in motion, they have a short-term growth cost, particularly when applied to labor markets (c20). So far, Italy's proposed adjustment is based more on higher taxes than lower spending; there has been less of a focus on addressing Italy's yawning productivity gaps vs. Germany, which are also noticeable in France (c2 I ). On the matter of France, it is difficult to believe that it will live by a 0.5% structural budget deficit limit; as shown a couple of weeks ago, it flies in the face of French budgetary history. • Investors are unconvinced: in 2011, US money market funds cut exposure to EU banks in half, and dollar bond issuance by EU banks fell by 70%. Stress tests applied to EU banks, whose gross leverage is 26:1, are seen by many investors as unrealistic (e.g., the latest round stressed sovereign debt, but not household or corporate debt). As the EFSF, the IMF and other non-economic buyers increase exposure, private investors may see this as an opportunity to exit (see Appendix C for some history). • Europe will try to finance budget deficits through the use of bilateral and ECB facilities. But they don't address the region's large current account deficits which finance domestic consumption, particularly in France, Italy and Spain. • A lot of master plans look good on paper; so did Maastricht 1.0. Our sense is that Germany and other AAA countries will not be able or willing to bear the ultimate cost-. If so, Mr. Delors will have to look for Europe's soul someplace other than Berlin. (c19 Outstanding debt in Euro Area (c20) Growth response to structural (c21) Vive la difference] Trillions, EUR reforms, Cumulative percent change in Fteal exports, France as a percentof Germany 14.0 Financial real GDP percapita 64% 125 , corporations Trade Reform 4% 59% 3% Tax Reform 11.0 - General 2% 54% 9.5 - government 1% 0% 49% 8.0 - Financial -1% 6.5 • -2% Reform 44% Labor Reform -3% 5.0 O 3 6 9 12 39% 2001 2003 2005 2CO7 2009 2011 Years 1970 1978 1986 1994 2002 2010 2 Debt to GDP levels in France (85%) and Germany (81%) are already elevated. Based on estimates of growth and gov't deficits, the German ratio is projected to decline, while the French one peaks at 87% in 2014. After including pro rata shares of existing and future bilateral guarantees, assumed guarantees of Central Bank SMP purchases and risk of deficit slippage, both ratios rise well over 90%. 3 EFTA01077760  Eye on the Market I OUTLOOK 2012 January 1. 2012 .J.P.Morgan UNITED STATES: some decounline from Europe and Asia, and the kindness of strangers The US has generated better titan expected news recently, including surveys of manufacturing (c22), light truck sales, consumer spending, etc. Household balance sheets continue to heal, noted by the decline in credit card delinquency rates (c23). But the strong spending data is a bit of a mystery. Some of it can be explained by the decline in debt service (rather than debt levels; c24). But housing isn't contributing much of a boost, given negative pricing trends and massive shadow inventory (c25). There's also the question of how much spending can rise when disposable income is weak (c26); the income measure below includes government transfers, and would look much weaker without them (c57 vs. c58). Perhaps the fact that the wealthiest 10% account for 30%-40% of spending explains its resilience. It looks like parts of the labor market are recovering (c27); if job losses in construction, government and finance stop getting worse, the jobs picture would look much better. Labor incomes are at multi-decade lows relative to corporate sales and GDP, but prospects for the large number ofunemployed may be getting better on the margin, based on jobless claims, manpower surveys, the household survey, and a survey of small business (NFIB). (c22) Some better news from (c23) Credit card delinquencies (c24) Household debt and debt manufacturing surveys, index, sa Percent,90+ daysdelinquent service, Percent of disposable income 70 3.5% 140% - - - 14.0% 130% 13.5% 60 3.0% Debt service—, 120% (RHS) 13.0% 50 2.5% 110% 12.5% 100% 40 2.0% 12.0% 90% 80% 11.5% 30 1.5% 70% 11.0% 20 1.0% 60% 10.5% 2001 2003 2005 2007 2009 2011 2006 2007 2008 2009 2010 2011 1980 1990 2000 2010 (c25) Shadow housing inventory (c26) Spending vs. income (c27) Bipolar labor market Millions of units Percentchange,QoQ, real, annualized, sa Millions 9 Current but unuenvater—s 39 100 8 Bank-owned real estate. 10% Consumption Construction + government + 99 7 38 98 Foreclosed 6% finance (LHS) 6 37 97 5 90+ days 2% 96 38 4 delinquen 95 3 -2% 35 94 2 -6% 93 Disposable income, 34 - Total excluding construction + 1 including govt. transfers 92 government + finance (RHS) 0 -10% 33 91 2003 2005 2007 2009 2011 1990 1994 1998 2002 2008 2010 1998 2001 2004 2007 2010 This year's 8% jump in capital spending (c28) was not a surprise. Since 2009 was the first year since 1932 in which the net capital stock declined (c29), the rise was catch-up for a period of underinvestment. We have seen conflicting surveys regarding capex intentions for 2012, with some higher (Citi) and some lower (ISM). We expect a positive contribution from the business sector in 2012, and an economy-wide growth rate of--2.25%. Commercial and industrial loan growth has been rising (c30), offsetting continued weakness in residential loan demand, which supports some optimism on business spending for next year. (c28) Capital spending recovery (c29) Capital stock (c30) C&I loan growth Billions of 2005 USD Percentchange, YoY Percentchange, YoY 12 10% 25% - Estimate for 2011 20% • 8% 11 • 15% - 6% r I 1 I 1 10% • 10 - 5% - 4% 2% r -5% - 9 -10% • 0% -15% - 8 -2% -20% 2003 200.5 2007 2009 2011 '50 '60 70 SO '90 '00 '10 2007 2008 2009 2010 2011 4 EFTA01077761  Eye on the Market I OUTLOOK 2O12 January 1.2012 J.P.Morgan 4 The elephant in the room: US government debt The failure of the Super Committee to agree to a deficit reduction plan cannot be dismissed by saying, "at least they will have mandatory sequestered cuts instead". The Super Committee was supposed to be the beginning of a process, not the end. If it ends here, the government debt burden is not stabilized (c31), and another $5 trillion in deficit reduction over 10 years would still be needed to reach the sustainable debt levels projected in the latest CBO estimate. The problem: almost all government revenues are already spoken for through mandatory programs or interest (c32), and the 2012 budget deficit is still projected at 6%-8%. As a result, there is not that much "fiscal democracy" left, as described by Eugene Steuerle of Brookings, leaving most members of Congress with little to do but fight over the scraps that remain. US gross debt to GDP passed 100% for only the second time in its history last month (c33). The last time this happened, the US was fighting a two-front war and preparing a land invasion of Japan ("Operation Downfall"). As Walt Kelly's Pogo once said, "We have met the enemy, and he is us". An extension of the payroll tax cut that is not fully funded reduces the austerity burden next year (c34), and leaves the Federal debt issue to be dealt with in the future. So far, the US Treasury has survived based on the kindness of strangers: foreign central banks increasing their holdings (c35), and purchases by the Fed (c36). It pays to be the world's reserve currency (c37), which is helping prevent the kind of market revolt that sent European debt markets reeling. However, with the backdrop below, I am reminded of the following remark from late MIT economist Rudiger Dornbusch: "Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought." (c31) Long-term debt scenarios (c32) Percent of gov't. revenue not (c33) The US reaches its Pogo Net debt to GDP, percent committed to mandatory spending moment, Gross debt to GDP, percent 110% 70% 120,0 100% C BO June Alternative case s 60% 100% 90% 50% Budget Control Act Phases 1 & 2. 80% 80% 40% S5 trillion 70% 30% 60% 60% 20% 40% 50% 10% CBO August Baseline 20% 40% 0% 30% -10% 2004 2007 2010 2013 2016 2019 1962 1971 1980 1989 1998 2007 2016 1922 1944 1966 1988 2010 (c34) Fiscal adj. in 2012, Change in (c35) Foreign holdings of US debt (c36) Fed holdings of US debt cyclically•adjusted fiscal deficit, %of GDP Percent of total net debt outstanding Percent of total net debt outstanding 4% 35% 18% Fiscaltightening Official sector 30% 16% 14% 12% 15% 10% Assuming payroll tax cuts & unemployment insurance 10% 8% - benefits are extended -5% J Fiscal easing 5% 6% 1963 1971 1979 1987 1995 2003 2011 1994 1998 2002 2006 2010 1994 1998 2002 2006 2010 (c37) Reserve currency status does (c38) Quarterly state tax revenue not last forever growth, Percent change, YoY Some good news for municipal bond 18 buyers: state tax revenues have picked US 14 up after some tax rate increases, and Britain 10 states have also been shrinking their 6 payrolls and capex plans to balance France C 2 budgets. This has a broader economic Nether' a -2 -6 cost, but in isolation, supports the credit risk of many state and local Spain -10 issuers, particularly general obligation Portugal -14 and essential service revenue bonds. Year -18 1400 1575 1750 1925 2100 1999 2003 2007 2011 C EFTA01077762  Eye on the Market I OUTLOOK 2012 January 1, 2012 J.P.Morgan ASIA: finding out what growth looks like without all the stimulus 2011 should have been a good year for Asian financial assets; after all, Asia generated the best combination of real GDP growth and corporate profits growth of the three major regions (c39). We had positioned for this, but were not rewarded for it, as Asian equities underperformed. The first problem: Asia over-stimulated, bringing policy rates net of headline inflation to zero. While the recovery in GDP growth was V-shaped, it also brought with it much higher inflation (c40). Blunt policy measures were then needed to rein it in. China is one illustrative example: money supply growth had to fall by more than half (from 30% to 13%) in order to bring inflation under control (c41). The good news is that inflation is now in retreat, with the latest reading close to 4%. The rate of Chinese RMB appreciation will probably slow, as it did from July 2008 to July 2010 when growth slowed down. (c39) 2011 real GDP and earnings (c40) Asla over-stimulated (an Chinese Inflation comes down as growth. Percent change, YoY Percentchange, YoY money supply tightens 16% 11% ReaI GDP 8% %,YoY, lagging 6 months YoY 14% 10% (LHS) 7% 30% 10% CPI 12% 6% (RHS) 8% 25% - 10% • Asia ex. 5% 6% 8% Japan 4% Dev. 687:9: 20% 4% 6% Europe 5% 3% 2% 4% 4% 2% 15% - 2% US \ 1% 0% 3% 0% 1 2% . 2% Real GDP EamIngs 2001 2003 2005 2007 2009 2011 0% 10%1998 2000 2003 . 2006 1 2009 I 2011 The second problem is European bank deleveraging, which runs the risk of a credit contraction in Asia, as the region was the primary beneficiary of the expansion in EU and UK bank balance sheets (c42). While organic growth in Asia is real, in places like China, growth has become more reliant on more and more credit (c43). The impact of monetary tightening, credit tightening and slower growth in Europe can be seen in the decline in Chinese exports and manufacturing surveys (c44). (c42) Bankenstein's Monster (c43) Heavy reliance on credit, China's (c44) Chinese exports & manufacturing Billions,USD society-wide credit as % of nominal GOP survey, Percent change, YoY Index, sa 1,000 - 240% 60% Exports 58 900 - European 220% • 50% n us1 (RHS) 56 800 • bank claims 40% 54 200% 700 - on Asia ex. 30% 52 600 - Japan 180% 20% 50 500 • 10% 160% 0% 48 400 - -10% 46 140% ronri l l i 300 - -20% 44 200 • 120% 42 -30% 100 -. 100% 40% 40 2005 2006 2007 2008 2009 2010 2011 2002 2003 2005 2006 2008 2009 2011 2005 2007 2009 2011 We are still optimistic on the region for the long haul. Consumer spending in China is growing at a rapid pace: pay attention to growth rates in spending, rather than its share of GDP (c45). The region has been running current account surpluses for years, reducing sensitivity to external shocks (c46). Reduced financing from Europe will be felt, but can be made up by domestic sources given high saving rates. We expect 2012 to be an improvement over 2011, even at lower projected growth rates (c47). (c45) Chinese consumer watch the (c46) Asia's current account balance (c47) Asla ex. Japan real GDP growth level, not the share, % of GDP Yuan Percentof GDP rates, Percent change, YoY 50% Annual retail - 13.303 6% - 11% IMI sales per capita 11,3C0 10% Historical forecast 47% , (RHS) 4% 9% 440,4 -, 9,300 8% 41% . Household 7,300 2% 70/0 consumption/GDP ChinalJapan 6% 38% - 5.300 5% Consensus (LHS) forecast 0% 4% 35% • 3.300 3% 32% 1.300 -2% 2 /0 1993 1996 1999 2002 2005 2008 1990 1993 1996 1999 2002 2005 2008 2011 1994 1997 2000 2003 2005 2008 2011 6 EFTA01077763  Eye on the Market I OUTLOOK 2O12 January 1.2012 J.P.Niforgan INVESTMENTS Concerns about the world's imbalances have resulted in more idle cash than I have seen in 25 years. The first 3 charts below look at some of it, parked in US commercial bank retail deposit accounts, central bank and sovereign wealth funds, and corporate balance sheets. A related example: $700 billion in unspent leveraged buyout, real estate and venture capital commitments as of Q3 2011. Measures of short interest and mar