rick rieder blackrock, inc. april 17, 2019...80s, and tech spending continues to grow given the...

Rick RiederBlackRock, Inc.April 17, 2019

What is your outlook for domestic economic growth and monetary policy and how has it evolved over recent months?

What are the principal risks to your growth outlook?

Are financial markets appropriately reflecting this outlook and any risks around it?

Rick Rieder,

CIO of Global Fixed Income

NY Federal Reserve Bank, IACFM Meeting

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION

April 17, 2019

I. What is your outlook for domestic economic growth and monetary policy and how has it evolved over recent months? Structurally, we are at the most stable point of US Economic growth in history; cyclically, we are experiencing a tangible moderation back towards potential…

Against a mandate of price stability, inflation and growth volatility are at all-time lows…

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

$ b

n

GDP Dollars: Services vs Goods

Services Goods

2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

US Euroarea

Brazil Japan Russia India China

Share of GDP

Goods Services

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Rolling 5Y Volatility of Core Inflation

Rolling 5Y Volatility of Real GDP

The volatility of Core Inflation and Real GDP

have been hovering near all-time lows for years

0

5

10

15

20

25

30

1950 1980 2000 2010 2017

% o

f G

DP

Contribution to US GDP (% of GDP)

Manufacturing

Finance, insurance, and real estate

Professional and business services

Educational services, health care, and social assistance

Why? The evolution of the US economy towards services and away from goods has significantly reduced the risk of the manufacturing-oriented boom-bust cycles – creating inherently more stable growth

The US stands out in the services vs. goods composition – meaning, domestic monetary policy can be less aggressive

Structurally, we are seeing unprecedented stability in domestic inflation and growth today

The volatility of services growth has persistently been lower than that of goods

0%

2%

4%

6%

8%

10%

12%

19

52

19

56

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

20

08

20

12

20

16

5Y

Ro

llin

g V

ola

tili

ty

GDP Growth: 5Y Rolling Volatility

Goods Services

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

-5% 0% 5% 10% 15%

Re

al

Yo

Y C

ha

ng

e

Price YoY Change

Goods Consumption vs. Prices

-1%

0%

1%

2%

3%

4%

5%

6%

7%

0% 5% 10%

Re

al

Yo

Y C

ha

ng

e

Price YoY Change

Services Consumption vs. Prices

And it is the goods sector that is more elastic and cyclical

Sources: BEA, Bloomberg, OECD


3

Is there a more descriptive answer for growth and growth/inflation potential, and consequently monetary policy, than this graph below? 1

Intangible & Tangible Investment in Europe

Investment in R&D and technological capabilities is resulting in divergent growth trends in the developed world, as the US maintains a better growth outlook than its DM peers… but the disinflationary impact on labor and consumer prices, and the resulting impact on monetary policy is equally important…1

Intangible & Tangible Investment in the US

Intangible & Tangible Investment as % of GDP

Hence, we believe traditional economic models will continue to be inefficient and poorly describe market conditions/monetary policy requirements unless married to an analysis of commerce today, which is in a quiet but distinct revolution at different speeds globally…

Tangible MoreIntangibleIntangible

MoreTangible

The core of this evolution lies in two structural underpinnings: 1) the historic Technological evolution impacting growth and inflation in ways never before seen in history, and 2) the Demographic evolution that is resulting in less demand – especially for goods – and hence lower potential growth and inflation…

The historic influence of technology/ intangibles is a key structural driver of the stable growth in the US

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0%

5%

10%

15%

20%

25%

30%

1960 1975 1990 2005 2020 2035 2050

Po

pu

latio

n G

row

th

Yo

Y

World Growth YoY

World Prices YoY

20-44 Population YoY

Technology has radically changed investment and inflation, which were already being influenced by our second structural economic growth trend: demographic curves

As a % of capital budgets, US corporate allocations to labor peaked in the 1940s, fixed asset investment peaked in the 80s, and tech spending continues to grow

Given the massive deflationary forces of most tech spending, capital investment in tech/ IP, on a real basis in 1970 dollars, has literally gone off the charts

0%

5%

10%

15%

20%

25%

30%

60%

62%

64%

66%

68%

70%

72%

74%

76%

78%

80%

1947 1957 1967 1977 1987 1997 2007 2017

% o

f Cap

ital O

utla

ys

% o

f C

ap

ita

l O

utl

ays

Wages, % of Capital Outlays

Physical Capital, % of Capital Outlays (rhs)

Technology, % of Capital Outlays (rhs)

0%

20%

40%

60%

80%

100%

1947 1957 1967 1977 1987 1997 2007 2017

% o

f C

ap

ita

l O

utl

ays

Wages, % of Capital Outlays

Physical Capital, % of Capital Outlays

Technology, % of Capital Outlays

Sources: Capitalism Without Capital, Federal Reserve, Haver, IMF


The demographic dynamic is another incredibly influential driver of growth and inflation globally –and there is some dispersion across regions, which helps us understand why the US can continue to see lower but solid economic growth while other regions face more onerous challenges…

4

-3%

-2%

-1%

0%

1%

2%

3%

4%

-10%

-5%

0%

5%

10%

15%

20%

25%

1960 1975 1990 2005 2020 2035 2050

Japan Nominal GDP 20-44 Population YoY

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

-5%

0%

5%

10%

15%

1960 1975 1990 2005 2020 2035 2050

German Nominal GDP 20-44 Population YoY

-1%

0%

1%

2%

3%

4%

0%

3%

6%

9%

12%

15%

1960 1975 1990 2005 2020 2035 2050

US Nominal GDP 20-44 Population YoY

-2%

-1%

0%

1%

2%

3%

4%

-20%

-10%

0%

10%

20%

30%

40%

1960 1975 1990 2005 2020 2035 2050

China Nominal GDP 20-44 Population YoY

While the US faces its own aging issues, on a relative basis it has a much brighter medium-term potential outlook than the rest of the DM world from a demographic perspective, which can allow persistent hiring (and a lower NAIRU than seen in history)…

Demographics help us understand future cash flows, which involve problems that can be complicated when compared to liabilities…

Demographics are a key structural driver of demand – the next 60 years look much different than the last 60 years

Sources: Census, Bloomberg, IMF

0

50

100

150

200

250

300

350

400

450

To

tal

Deb

t /

GD

P (

%)


Today in the US, domestic growth looks to be at or above potential; taken in the context of the demographic and technological trends, we could see some continued wage (and real wage) growth but there is good reason to believe this is as good as it gets with inflation

5

So, it’s not surprising to us that inflation expectations touched all-time lows last week

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Output Gap % GDP AHE Nonsupervisory

AHE Real YoY

Cyclically, we see the US economy experiencing late-cycle dynamics with respect to wages; though, we do not expect a hard-landing…

This is because the wage-price link has structurally broken down… this link historically injected volatility into the system: companies raised prices to protect eroding margins from wage inflation; today, technology and demographics weigh on prices, meaning companies struggle to maintain margins in a rising wage environment – thereby acting as a natural brake on the economy

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1990 1995 2000 2005 2010 2015

UMich 5-10Y Inflation Expectations 3mma

Core PCE

Wage (and Real Wage) growth will likely continue to follow the positive Output Gap and low Unemployment Rate, which puts pressure on corporate profits –acting as a self-regulating mechanism on growth

Decomposing margins between productivity, price inflation, and wage growth shows wages as the swing factor the last few years

Today, companies can’t raise prices to maintain margins… price-wage correlation has weakened substantially the past 10y, meaning wage growth can persist without being inflationary

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.54

5

6

7

8

9

10

11

90 92 95 97 0 2 5 7 10 12 15 17 20

Yo

Y

% o

f G

DP

Corporate profits after tax as % of GDP (inverted axis,ls)

Average hourly earnings of production & non-supervisory,total private (24 month lead, rs)

-8

-4

0

4

8

12

16

20

2012 2013 2014 2015 2016 2017 2018 2019

Yo

Y

Corporate Profit Growth, decomposed

DM Revenue Growth

DM Margin Growth

-2

-1

0

1

2

3

2000 2003 2006 2009 2012 2015 2018

% C

on

trib

uti

on

to

4 q

ua

rte

r c

ha

ng

e

Corporate Profit Margin Contributions, DM

Prices Wages Productivity

y = 0.4982x + 3.8412R² = 0.5758

y = 0.5943x + 1.7262R² = 0.6155

y = 0.1516x + 2.168R² = 0.0064

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0% 2% 4% 6% 8% 10%

AH

E: P

rod

uc

tio

n &

No

ns

up

erv

iso

ry Y

oY

Core PCE YoY

1965-1979 1980-2007 2008-2018

Sources: BLS, BEA, Bloomberg, JP Morgan


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2016 2017 2018 2019

1Y

Ch

an

ge

in Z

-Sc

ore

US Growth 2nd Deriv

US Inflation 2nd Deriv

US Capex 2nd Deriv

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2016 2017 2018 2019

Z-S

co

re

US Growth 1st Deriv

US Inflation 1st Deriv

US Capex 1st Deriv

So now the US economy is slowing from a very generous fiscal tailwind to more normal growth –the risk of an overshoot looks low given the stability in core drivers we have outlined; in fact, some of the high frequency data show U.S. data stabilizing/turning up a bit…

6

0

1

2

3

4

5

6

7

8

9

-6%

-4%

-2%

0%

2%

4%

6%

8%

2003 2008 2013 2018

Nominal GDP CEO Confidence

-5

10

25

40

55

70

-4%

-2%

0%

2%

4%

6%

2000 2005 2010 2015

GDP: Real YoY Change

US - Empire Manufacturing 6m Ahead General BusinessConditions 3m Rolling Avg

Many reliable leading indicators highlight the moderation we are expecting today – especially some pockets of weakness in manufacturing; though, growth in Q1 tends to be deceivingly weak – especially recently – so we wouldn’t overreact to disappointing data at the start of 2019

1.95

3.18

2.42 2.60

1.56

3.58

2.80

1.60

0%

1%

2%

3%

4%

5%

6%

Q1 Q2 Q3 Q4

Re

al

GD

P Q

oQ

Average GDP QoQ

Since 1948 Since 1988 Since 2014

Q1 14 -1.0 Q2 14 5.1

Q1 15 3.3 Q2 15 3.3

Q1 16 1.5 Q2 16 2.3

Q1 17 1.8 Q2 17 3.0

Q1 18 2.2 Q2 18 4.2

GDP

Cyclically, US growth is moderating toward potential after a boost from fiscal policy and synchronized global growth

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2016 2017 2018 2019

Z-S

co

re

EU Growth 1st Deriv

EU Inflation 1st Deriv

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2016 2017 2018 2019

Z-S

co

re

China Growth 1st Deriv

China Inflation 1st Deriv

Some of the high-frequency data we track is showing signs of stabilization in the US and even abroad, which reinforces our view that we are decelerating but not at risk of contracting in the near-term

Sources: BEA, Bloomberg, BlackRock


3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

-20%

-10%

0%

10%

20%

30%

40%

2015 2016 2017 2018 2019

Rate

YoY

, 3M

MA

Mortgage Applications (YoY, 3M MA)

30Y Homeowner Commitment Rates (rhs)

Monetary Policy reached neutral last Summer/Fall, which was a headwind to interest-sensitive areas of the economy; now the Fed doesn’t need to do anything for ‘some time’ as policy is at or around neutral, and the U.S. economy will largely self-calibrate itself from here…

7

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

$ T

rn

Corporate Net Issuance

… and the leverage built up during that easy-for-longer period is now very clearly coming down making financial stability more reliable…

-5%

0%

5%

10%

15%

1950 1960 1970 1980 1990 2000 2010 2020 2030

YoY

Fed Funds

Demographic Model of Potential Growth

Credit Yield

Potential Growth – Credit Yield Easy

Tight

We measure the stance of policy by looking at the cost of capital relative to potential growth (return on capital); this tells us that policy was appropriately very easy in ‘09 – ’11, potentially stayed too easy for a bit long, and is now close to neutral after tightening the past few years

Raising the policy rate to neutral led to a tangible slowing of the interest sensitive parts of the economy, especially housing…

Monetary policy is another cyclical influence that pressured growth recently but we believe can be more passive/ supportive going forward

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1985 1990 1995 2000 2005 2010 2015Sta

nd

ard

De

via

tio

n o

f Y

oY

Ch

an

ge

s

Rolling 5Y Volatility of Core Inflation

Rolling 5Y Volatility of Fed Funds Rate

As we shift further to a services economy, the Fed should feel more content conducting policy in a slow and steady fashion… there is less of a need to react to the diminishing importance of the more volatile goods sector, especially with the Funds Rate off of 0% and in the realm of “neutral”… 3

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1985 1990 1995 2000 2005 2010 2015

Core CPI Fed Funds Rate

Sources: Bloomberg, Moody’s, BlackRock


II. What are the principal risks to your growth outlook? Notwithstanding the Fed’s dovish pivot and nascent policy easing in China, Global Liquidity continues to contract, which remains an underappreciated tail risk for global markets

8

30%

14%19%

18%

19%

Ex-China FXReserves

Fed BalanceSheet

ECB BalanceSheet

BOJ Assets

PBOC Assets

6%

38%

20%

28%

8%

Share of Global Growth, 2019 estimates

Japan

US

EM ex China

China

Europe

Contribution to global liquidity stock:

10%

15%

20%

25%

30%

35%

40%

0

5,000

10,000

15,000

20,000

25,000

30,000

Global Liquidity as a % of World GDP (USD)

Total Global Liquidity (USD bns)

Global Liquidity as a % of World GDP (USD)

44

46

48

50

52

54

56

58

60

0%

2%

4%

6%

8%

10%

12%

14%

16%

2016 2017 2018 2019

PM

I

Ind

ex,

% Y

oY

China Li Keqiang Index (6m lead)

Markit Japan Composite PMI (rhs)

Markit Eurozone Composite PMI (rhs)

Global Liquidity is as important as ever to Global Growth; despite plans to end tightening, it continues to contract today

(5,000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

-5%

0%

5%

10%

15%

20%

25%

30%

35%

US

D b

ns

Yo

Y

Total Global Liquidity (USD bns) (rhs)

Total Global Liquidity (USD bns) YoY

Sources: Bloomberg

In addition to liquidity, which we view as a principal risk, other risks remain. Those include the often-talked about trade tensions and risk of auto tariffs, the risks of Brexit and Eurozone weakness worsening, and the always present geopolitical and domestic political risks.

The ECB and BoJ will maintain easy policy for a long time but incremental liquidity would need to come elsewhere (EM/ China or the US, which is currently draining liquidity)

…if China is unable/ unwilling to add further liquidity, not only is a continued contraction of liquidity a risk but the other large economies could also continue to slow

Today, the US, China, and EM ex China all have ample capacity to ease policy, but the make-up of the global liquidity dynamic is critical to understand in this context…


-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Yo

Y

Fed Assets (USD bns) YoY

ECB Assets (EUR bns) YoY

BoJ Assets (JPY bns) YoY

PBOC Assets (USD bns)

World FX Reserves ex-China (ex-FX) YoY

The liquidity cycle that we have depicted for years is remarkably persistent; if the recent Fed pivot can relieve the stubborn USD strength, China and EM central banks would have greater scope to ease without the gravitational pull on global capital toward attractive US risk-free rates – cessation of Fed balance sheet reduction will go a long way toward facilitating this cyclical evolution

9

Global FX Reserves Grow

DM Central Banks ease via rate cuts and new asset

purchases

All sources of Global Liquidity rise

Credit spreads tighten, equities rally, G10 rates stay stubbornly low, and

volatility collapses

DM Central banks feel good about economic

growth but nervous about easy Financial Conditions – they announce plans to

tighten

Markets wobble on plans to tighten but global

liquidity remains robust and risk-on remains the

theme

DM central banks taper, reduce balance sheets,

and/ or raise policy rates

Global FX Reserves contract

All sources of Global Liquidity fall

Global risk-off theme kicks in

DM Central Banks stop tightening

USD weakens and EM central banks are enabled

to pursue pro-cyclical easing

USD rallies and G10 rates rise; EM central banks are

forced into pro-cyclical tightening to support

weak currencies and fight inflation

March 2018

May 2018

Q4 2018

Q1 2019

Ongoing Fed Balance Sheet reduction without offsetting liquidity

creation elsewhere has been a stubborn roadblock to a much

needed reboot of this cycle

US Liquidity was contracting and ECB ending QE served as

an effective tightening of Liquidity

2008, 2011, 2014, 2017

2010, 2012, 2016

Taper Tantrum, 2015 Fed Hike, 2018 Tightening

2015, 2018

Fed QE 1,2,3; BoJ 2014; ECB, PBoC 2016

Sources: Bloomberg, BlackRock


III. Are financial markets appropriately reflecting this outlook and any risks around it? The requirement for easy policy/low rates alongside of an aging population, low potential growth, and the absence of an inflationary impulse are creating unusual dynamics including an immense need for financial assets and an inability for financial intermediaries to hit their liability requirements…

10

0

10

20

30

40

50

60

70

1990 2000 2010 2020 2030 2040 2050 2060

US

$ T

rill

ion

s

65+ Financial Asset Demand Projection

Because of the massive growth of pension and insurance assets and the demographic revolution, roughly 3x as much value needs to be invested today relative to 2000

$0

$25

$50

$75

$100

$125

$150

$175

US

D T

rill

ion

s

Global Liquid Asset Base

US Households US Corporates US Insurance US Pensions

EU Households EU Corporates EU Insurance + Pension JP Households

JP Corporates JP Pension JP Insurance SWFs

CBs Int. FX Reserves US HF, PE, MF & ETF

-1,000

-500

0

500

1,000

1,500

2,000

US

D B

illi

on

s

Net G4 Issuance, Net of Central Bank QE

EUR JPY GBP

Outside of the US, DM Fixed Income issuance is still nearly non-existent

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2,500

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

US

D T

rn

Fixed Income Net Issuance, Net of Fed

IG corporates HY corporatesEM Corporates EM SovereignBuild America Bonds Non-agency MBSAgency MBS CMBSABS CLOsMunis Private PlacementsTreasuries, net Agency DebtTotal US Net Issuance, Net of Fed

In the US, record treasury issuance is boosting supply, but spread-sector issuance is expected to be lower in 2019 and well below pre-crisis levels

-1,000

-500

0

500

1,000

1,500

2,000

2003 2006 2009 2012 2015 2018

$ b

nUS Spread Product Net Issuance, Net of Fed

YoY Change in US 65+ Financial Asset Demand

Spread product issuance is not even enough to match the demographic need

Sources: Fed, BoJ, ECB, JP Morgan, BLS, BlackRock


IG Credit had been the asset available to hit liability targets, particularly pre-Tech/Pharmaceutical repatriation and major telecommunications/media M&A, but now this supply is contracting, which is resulting in a dearth of supply in the face of immense demand - ultimately, incentivizing stretching for yield

11

So much has been made of the large growth of the BBB market, especially relative to BBs, with lots of discussion of an imminent downgrade disaster…1

0

500

1,000

1,500

2,000

2,500

3,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

$ b

n

The amount of BBB rated debt has increased by 5.3x since 2007, while BB debt has increased 2.3x. The BBB market is

now 4.8x times larger than the BB Market

BBB Outstanding Debt BB Outstanding Debt

Issuer * Driver of Deleverage

How company is deleveraging

GE Avoid Downgrade to HY

<2.5x target

Anheuser Avoid Downgrade to HY

~4.6x to 4.0x in 2020

Kraft Heinz Avoid Downgrade to HY

~4.4x, 3x target

AT&T Post-M&A 3.3x to 2.5x in 2 yrs

Verizon Post-M&A 2.7x to low 2x in 2 yrs

Comcast Post-M&A 3.5x to 2.5x in 2 yrs

Dell Post-M&A ~5.5x to 4x in 2 yrs

Apple Repatriation 1.4x gross, declining 0.2x/yr

Microsoft Repatriation 5% annual debt reduction

Cisco Repatriation 40% debt reduction to date

Sherwin Post-M&A 4x to current 3.5x, ~0.75x to go

WestRock Post-M&A 4x to current 3.5, 2.5x target

Against this growth of debt from 2012-2018, there is a notable shift in company intentions for greater deleveraging, both proactive and in reaction to weak performance

This trend of deleveraging in IG (some for good reasons and some for bad) is generally a positive but reminds us dispersion is likely down the cap stack

Distribution of Large-Cap BBBs by Sector (%)

26%

25%

8%

16%

10%

6%

4%2% 2%

Communication Services

Health Care

Consumer Discretionary

Energy

Industrials

Consumer Staples

Information Technology

Materials

Real Estate

And there is much less yield available today, even with U.S. rates having moved up somewhat over the past few years… 2

0%

1%

2%

3%

4%

5%

6%

7%

8%

20

18

20

17

20

16

20

15

20

14

20

13

20

12

20

11

20

10

20

09

20

08

20

07

20

06

20

05

20

04

20

03

20

02

20

01

20

00

Average Coupon

Global Agg Avg Coupon US Agg Avg Coupon

… creating massive demand for new issues as a risk-addition to portfolios… 2

2.00x

2.20x

2.40x

2.60x

2.80x

3.00x

3.20x

3.40x

3.60x

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

US IG Oversubscription (x Over; 30DMA)

0

1

2

3

4

5

6

7

8

9

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

US IG New Issue Concession (bps; 30DMA)



…and with the lack of assets and some restrictive regulation (such as Solvency II for insurance companies), it is creating potential debt mis-valuations vs. equity and/or a need to own more equity where possible to hit return targets (for those that can)…

6.00

8.00

10.00

12.00

14.00

16.00

18.00

2000 2003 2006 2009 2012 2015 2018

Co

st

of

Ca

pit

al

EU COE US COE

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Co

st

of

Ca

pit

al

EU COD (after-tax) US COD (after-tax)

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

2000 2003 2006 2009 2012 2015 2018

Co

st

of

Ca

pit

al

EU WACC US WACC

• Germany’s post-crisis average growth rate is running at ~180bps below the US

• Europe’s WACC is ~100bps below the US (driven by COD which is at 0%)

• Thus the ECB should lower the COD by at least a further 80 bps to keep the denominator consistent with the US*

• OR, the ECB can buy equities to lower the cost of equity*

*We are not advocating either of these actions, simply illustrating the challenge faced by the ECB in replicating the conditions that exist in the US

Based on the 6 largest industrial companies with a 20 year trading history. Companies used for the US: Exxon Mobil, Verizon, Walmart, Procter & Gamble, Intel, Pfizer; Companies used for the EU: Total, Siemens, BASF, Daimler, Telefonica, Adidas. The companies stated above are shown for illustrative purposes only and are not meant to be a recommendation to buy or sell any security.

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014 2015 2016 2017 2018

Re

al

GD

P Y

oY

Gro

wth

(%

)

US Germany

Avg US Avg Germany

12

The most significant difference in cost of capital between Europe and the US is the cost of debt, as this has brought the European cost of capital below where it is in the US. 1

0.5

1.0

1.5

2.0

2.5

3.0

Ind

exe

d t

o 2

01

0

SPX SX5E

Eurostoxx is up 15% since 2010

SPX is up 2.8x

But cost of capital is only half the equation… Price is a function of both the cost of capital and the growth rate…1,2



-300%

-200%

-100%

0%

100%

200%

300%

400%

500%

600%

1990 1995 2000 2005 2010 2015

Contribution to Change in S&P from Change in Risk-Free Rate

Contribution to Change in S&P from Change in Equity Risk Premium

Contribution to Change in S&P from Change in EPS

More policy stimulus (monetary) is creating anomalies and a dearth of global financial assets as places like Europe and Japan can’t stimulate enough growth/inflation (to de-lever)…

13

Lower rates can influence spread and risk-assets to compress – directly through the risk-free rate and through premiums as well…

Exuberance

Pessimism

Earnings growth is the biggest contributor to return over time

Since 2016, the risk-free rate has detracted from performance

Hence, with other DM central banks with a very limited toolkit, it may require the Fed to be easy(ier) which can push equity prices and other financial asset valuations higher…

… and there is still a massive and growing amount of existing bonds that are negative yielding today

5

6

7

8

9

10

11

12

13

2016 2017 2018 2019

Us

$ T

rn

Total negative yielding debt stock, US$ trillion

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Japan 10Y Germany 10Y Swiss 10Y

Contribution from: Since 1990 Since 3/2009

Change in Earnings 495% 170%

Change in Risk-Free Rate 201% 72%

Change in Equity Risk Premium 65% 44%

Total Change in S&P 761% 286%

Sources: JP Morgan, Bloomberg, BlackRock


Questions

Is China willing to use all its tools, including credit expansion to support Chinese (and consequently Global) Growth/Trade? If not, what are the implications for US/Global Growth?

15

Any other views on why inflation continues to moderate within today’s positive growth dynamics?

Are there areas of the U.S. economy that are more at risk of slowdown from here?

Elected for life

?

Sources: DB, as of 12/31/2018


16

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Important Notes


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Important Notes


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Important Notes


Rebecca PattersonBessemer TrustApril 17, 2019

Euro area: Growth and Monetary Policy

April 17, 2019

Rebecca Patterson

Chief Investment Officer

Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer Trust makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any fund or portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing.

Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indices in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index.

2

42

46

50

54

58

62-200

-150

-100

-50

0

50

100

150

200

250

2010 2012 2014 2016 2018

Recent Bifurcation between Domestic and External Growth Drivers

3

As of February 28, 2019 for unemployment and March 31, 2019 for PMI. MoM, 3MMA stands for month-over-month, three month moving average.

Source: Bloomberg, Eurostat, Markit

Monthly Net Change in Unemployed Persons (L)

Manufacturing PMI, inverted (R)

MoM, 3MMA,Thousands

Eurozone Monthly Net Change in Unemployed Persons and Markit Manufacturing PMI

Europe Vulnerabilities: A lot of Known Unknowns

As of March 31, 2019. Bps stands for basis points.

Source: Bloomberg, ZEW

Italy’s Populist Government Resulting in Greater Bond Risk Premium

Spread Between Italy and Germany 10-Year Government Bond Yields

Bps

0

100

200

300

400

500

600

700

2011 2013 2015 2017 2019

Declining Economic Sentiment in EU’s Largest Economy and Region

-100

-80

-60

-40

-20

0

20

40

60

80

100

2010 2012 2014 2016 2018

Germany

Eurozone

ZEW Survey of Current Situation

Inflation Keeps ECB in Easing Mode; Fiscal Help Seems Unlikely for Now

5

Left as of April 8, 2019 and right as of 2017. EU reflects the EU-28 countries.

Source: Bloomberg, Eurostat

1.1%

1.3%

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2013 2014 2015 2016 2017 2018 2019

Euro Inflation Swap Rate 5Y5Y Budget Balance

-4%

-3%

-2%

-1%

0%

1%

2%

EU

Net

herlan

ds

Ger

man

y

Ital

y

Fran

ce

Spa

in

Little Room/Desire for Fiscal StimulusInflation Measures Still Lagging Target

% of GDP

What Will ECB Do in the Next Major Downturn?

6

As of April 12, 2019. The ECB asset purchase programs include: Asset-Backed Securities Purchase Program (ABSPP), Covered Bond Purchase Program 3 (CBPP3),

Public Sector Purchase Program (PSPP), and Corporate Sector Purchase Program (CSPP).

Source: Bloomberg, European Central Bank

Asset Purchase ProgramCumulative Total at Year-End

Possible ECB Next Steps

Restart asset purchases

Broaden types of asset purchases

Extend forward guidance towards more rate cuts/ tiered interest rates

“Helicopter money”

0 €

500 €

1,000 €

1,500 €

2,000 €

2,500 €

3,000 €

2015 2016 2017 2018

PSPP CSPP CBPP3 ABSPPBillion

Dovish ECB Policy: Short-term Transmission Channels

7

More Foreign Demand for U.S.

Bonds, Credit

Stronger USD

Weaker EUR

Stronger Euro Export Shares

Potentially Weaker European

Bank Shares

Lower European Interest Rates

Weaker U.S. Multinational

Shares

Pressure on CNH

Transmission channels noted assume other growth, policy variables stable

Meaningful Economic and Financial Linkages Between Euro area and U.S.

8

As of April 12, 2019. Bps stands for basis points. Rolling correlation is based on the daily change in the 10-year yield. High Yield OAS is measured using the Deutsche

Bank Credit Strategy Dm USD HY OAS.

Source: Bloomberg, CBOE, Deutsche Bank

350

450

550

650

750

850

10

20

30

40

50

2010 2011 2012 2013

VIX Index and High Yield Corporate Bond SpreadRolling-90 Trading Day Correlation Between U.S. and German 10-Year Government Bond Yields

USD High Yield OAS (R)

VIX Index (L)

Bps

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

2009 2012 2015 2018

80

90

100

110

120

130

140

150

Jun 16 Oct 16 Feb 17 Jun 17 Oct 17 Feb 18 Jun 18 Oct 18 Feb 19

Brexit has Already Taken a Toll on U.K. Assets

9

As of April 3, 2019.

Source: Bloomberg

S&P 500 in USD

FTSE 100 in GBP

FTSE 100 in USD

U.K. and S&P 500 Performance Since Brexit VoteIndexed to 100 on June 23, 2016

Developed Market Equities ex. U.K. in USD

11.21.41.61.8

22.22.42.62.8

3

2018 2019 2020

U.S.

5.8

5.9

6

6.1

6.2

6.3

6.4

6.5

6.6

2018 2019 2020

China

1.2

1.25

1.3

1.35

1.4

1.45

1.5

2018 2019 2020

U.K.

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2018 2019 2020

Euro area

Consensus Real GDP Growth Forecasts

As of April 10, 2019.

Source: Bloomberg

Bob JainMillennium Management

April 17, 2019

Investor Advisory Committee on

Financial Markets

April 2019

Market Overview

1

1. Includes ETNs 2.Excludes Money Market Fund FlowsSource: Credit Suisse, Morgan Stanley, Bloomberg, BlackRock

Global ETF1 AuM Has Grown to Over $5TGlobal regulated funds (MF & ETF) are $50T

US ETF Assets by Asset Type100% = $3.4T

2.42.7

3.03.5

4.9 5.1

20142013 2015 2016 20182017

+16%

Annual US Mutual Fund2 vs. ETF Flows ($B)

20%

19%

47%

Eq. Int’l

Alternatives

Bonds12%

2%

Eq. US

Eq. Sector

320 326

-4-104

247

-172

186242 245 287

466

313

2013 2014 201720162015 2018

Mutual Fund ETF

US Fixed Income ETF Assets by Type100% = $630B

19%

18%

18%Govt/Credit

4%Credit

Broad

Muni

Govt

High Yield

Inflation

5%

6%

Active Short

Other

4%

EMD

Mortgages3%

Loan

2%6%

7%

8%

2

Risks – Liquidity Mismatch in Mutual Funds and ETFs

Mutual Funds ETFs

Cash buffers

Revolvers

Hold more liquid securities

Sales loads

Redemption gates

In-kind redemptions

Secondary market / trade at a discount

• $37B in ETFs: $34B Equities, $2.5B Fixed Income

• Largest ETF is TQQQ at $4.3B managed by ProShares (NASDAQ 100)

• Products offered in 1.5-3x leverage and inverse

• $2,500B overall market, $400B Mutual Funds, $40B ETFs

• Largest ETF is HYG at $17.3B managed by BlackRock

• $1,200B overall market, $200B Mutual Funds, $10B ETFs

• Largest ETF is BKLN at $5.1B managed by Invesco

• MF and ETF settle T+2, average loan settled T+16 in 2018

3

Risks – Specific Cases in Mutual Fund and ETF Market

Source: Morgan Stanley, BlackRock

Loans

0%

10%

20%

30%

Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

HYG Exchange Volumes as % of OTC HY Cash

HYG Gross Primary Volumes as % of OTC HYCash

High Yield Levered ETFs

HYG Volumes as % of HY OTC Cash Volumes

• Index providers

• Large fund complexes

• Exchanges

US ETF LaunchesPassive AuM1 / S&P Market Cap (%)

4

1. Mutual Fund and ETFsSource: Bloomberg, Morningstar, Morgan Stanley

67

142 125156 15824

2733

45 57

3

1

12

7

3

54

45

7

16 29

20172014

8

84

10

0114

2015

13

2016

189

2018

183

252263

9

19

Bond

ETN

Mixed

Comm.

Alts Equity

Other Risks

0

5

10

15

20

’12 ’14 ’15 ’16 ’17 ’18 ’19’13

Passive Concentration Product Proliferation Centralized Players

Scott MinerdGuggenheim Partners

April 17, 2019

Analysis of Fed Reinvestment Options

• The Fed's portfolio of Treasury securities has a much longer weighted average Chart 1: Estimated WAM of Treasury Portfolios (Years)maturity (WAM) (-8.1 years) than the overall Treasury market (-5.8 years), alegacy of the Fed's QE programs as well as Operation Twist (Chart 1 ).

• The WAM of the Fed's Treasury portfolio has been increasing recently due tothe fact that most of their reinvestment purchases have been focused on newlyissued 3y, 1 Oy and 30y securities.

• This is because the Fed's $30 billion cap for Treasury reinvestmenttends to bind mainly during quarterly refunding months (Feb, May,Aug, Nov), when 3y, 1 Oy and 30y tenors are issued at the mid-monthauctions that coincide with the date that the Fed's reinvested holdingsmature.

• Per the FOMC minutes and subsequent speeches, Fed officials areconsidering actively shortening the WAM of the Fed's Treasury portfolio byreinvesting Treasury and/or MBS paydowns into shorter-dated Treasuries oncerunoff ends, likely later this year.

• In Chart 2 we present analysis performed by BAML which illustrates various reinvestment scenarios the Fed could take going forward.

• The estimated timeline over which the Fed's Treasury portfolio will converge tothe WAM of the outstanding Treasury stock under each scenario is indicated inparenthesis.

• Scenario 1 (Well into 2030s): maintain current strategy for couponsand mortgages

• Scenario 2 (2029): maintain current strategy for coupons, reinvestmortgages in bills

• Scenario 3 (2022): coupons reinvested in 2s and 3s, reinvestmortgages in bills

• Scenario 4 (2021 ): all reinvested in bills

Source: Guggenheim Investments, BAML, Federal Reserve. Data as of 01/23/2019. Note: Chart 2 assumes unwind stops at end-2019.

GUGGEnHElm

10

9

8

7

6

5

4

3 +---...----.----.---.---..,,.---..--'

Dec-02 Jun-05 Dec-07 Jun-10 Dec-12 Jun-15 Dec-17

Operation Twist UST outstanding

-Fed UST Holdings-UST outstanding less Fed

Chart 2: Fed's Treasury Portfolio WAM Under Reinvestment Scenarios In years, through end-2021

11

10

9

8

7

6

5

4

3

Jan-04 May-07

-SOMAWAM

-scenario3

Sep-1,0 Jan-14

scenario 1

-scenano4

Timeline for convergence to WAM of outstanding UST stock (5.75y)

May-17 Sep-20

-scenario2

2029

2022

2021

03u;.,

Please see Disclosures and Legal Notice at end of document 2

Disclosures and Legal Notice

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.

The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest or any financial instrument.

No representation or warranty is made by Guggenheim Investments or any of their related entities or affiliates as to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose. The views expressed in this presentation are subject to change based on market and other conditions. The opinions expressed may differ from those of other entities affiliated with Guggenheim Investments that use different investment philosophies. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources.

Past performance is not indicative of comparable future results. Given the inherent volatility of the securities markets, it should not be assumed that investors will experience returns comparable to those shown here. Market and economic conditions may change in the future producing materially different results than those shown here. All investments have inherent risks.

GUGGEnHElm

The views and strategies described herein may not be suitable for all investors. This material is provided with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters.

The comparisons herein of the performance of the market indicators, benchmarks or indices may

not be meaningful since the constitution and risks associated with each market indicator, benchmark or index may be significantly different. Accordingly, no representation or warranty is made to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose.

© 2019 Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC. The information contained herein is confidential and may not be reproduced in whole or in part.

GPIM 38120

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