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Deutsche Bank AG

Think the Unthinkable…?

March 2011

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data issourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that thefirm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

Global Markets

Nick BurnsFundamental Credit Strategy+44 (0) 207 547 [email protected]

mailto:[email protected]

Global MarketsDeutsche Bank

1

DB forecasts: Economic and across the asset classes

1.8%1.3%UK1.4%1.7%EurolandGDPEconomics

11,0009,565Copper1,7501,417Gold

102114Brent94101WTIOilCommodities

1,5501,280S&P 500US6,8805,718FTSE 100UK

315268Stoxx 600EuropeEquities475426CDX HY10096CDX IGUS420382iTraxx Crossover115103iTraxx MainEuropeCredit

4.00%3.27%US4.00%3.51%UK4.00%3.19%Eurozone (Germany)10yr YieldFixed Income0.50%0.20%Fed Funds Rate1.00%0.50%BoE Base Rate1.75%1.00%ECB Refi RateInterest Rates

3.7%3.4%World2.2%1.6%US4.1%3.3%UK2.3%1.6%EurolandCPI4.2%4.8%World3.5%2.8%US

2011Current/2010


2

Well into the cyclical recovery - but how long will it last?


3

Statistically if the expansion ends by the end of 2011 then thiswould be in line with the historical median expansion length

US Economic Expansions in Length Order (months) since 1854

Source: Deutsche Bank, NBER

0

20

40

60

80

100

120

140

Mar

191

9Ja

n 19

12Ju

l 198

0D

ec 1

867

Jun

1894

Jun

1908

May

189

1D

ec 1

900

Nov

192

7D

ec 1

858

May

188

5Ju

l 192

1Ju

n 18

97A

pr 1

958

Apr

188

8Ju

l 192

4D

ec 1

854

Aug

190

4D

ec 1

870

Mar

187

9N

ov 1

970

Oct

194

5M

ay 1

954

Dec

191

4O

ct 1

949

Jun

1861

Mar

193

3M

ar 1

975

Nov

200

1Ju

n 19

38N

ov 1

982

Feb

1961

Mar

199

1

AverageMedian

Where currentexpansion sits

Where we'll be ifeconomic expansionongoing by Dec 2011


4

US Economic Expansion Lengths (months) since 1854

The ‘Great Moderation’ saw 3 of the longest expansionson record…. …welcome to the ‘Great Volatility’

Source: Deutsche Bank, NBER

0

20

40

60

80

100

120

140

Dec

185

4D

ec 1

858

Jun

1861

Dec

186

7D

ec 1

870

Mar

187

9M

ay 1

885

Apr

188

8M

ay 1

891

Jun

1894

Jun

1897

Dec

190

0A

ug 1

904

Jun

1908

Jan

1912

Dec

191

4M

ar 1

919

Jul 1

921

Jul 1

924

Nov

192

7M

ar 1

933

Jun

1938

Oct

194

5O

ct 1

949

May

195

4A

pr 1

958

Feb

1961

Nov

197

0M

ar 1

975

Jul 1

980

Nov

198

2M

ar 1

991

Nov

200

1Ju

n 20

09

Average

Median


5

Recent cycles were longer with shorter contractions.Could the next recession start in 2012?

Contraction (Peak to Trough)Length (mth)

Expansion (Prev. Trough toPeak) Length (mth)

Total CycleLength (mth)

Total CycleLength (yr)

% of Time inContraction

All Average 17 39 56 4.7 31%

Median 14 30 44 3.7 32%

Pre-1982 Average 18 33 51 4.3 35%

Median 15 27 42 3.5 36%

1982-2007* Average 8 106 114 9.5 7%

Median 8 106 114 9.5 7%

Post-1982 Average 11 95 106 8.9 11%

Median 8 92 100 8.3 8%

Average and Median Lengths of Business Cycles over Different Periods

Source: Deutsche Bank, NBER. * - Excludes latest contraction and expansion.

All Cycles Pre-1982 Cycles

Average Median Average Median

Last Recession start Dec 2007 Dec 2007 Dec 2007 Dec 2007

Recession 1 start Aug 2012 Aug 2011 Mar 2012 Jun 2011

Recession 2 start Apr 2017 Apr 2015 Jun 2016 Dec 2014

Recession 3 start Dec 2021 Dec 2018 Sep 2020 Jun 2018


6

ISM Manufacturing vs. S&P 500 YoY Change

If recent ISM can hold near recent levels in spite of Oilhike and Japan tragedy then equities can go higher.

Source: Deutsche Bank, Bloomberg Finance LP

30

35

40

45

50

55

60

65

70

Jan 97 Jan 99 Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11

-60%

-40%

-20%

0%

20%

40%

60%ISM (LHS) S&P 500 (YoY RHS)


7

ISM Manufacturing vs. BBB YoY Spread Change (as a % of Spread)

Credit is also highly cyclical, especially as you delvefurther down the credit curve

Source: Deutsche Bank, Bloomberg Finance LP, Moody’s

0

10

20

30

40

50

60

70

80

1948195219561960196419681972197619801984198819921996200020042008

-100%

-50%

0%

50%

100%

150%

200%

ISM (LHS) BBB YoY Spread Change (as % of Spread, RHS, Inv)


8

Structural instability within the Western World’s financial systems


9

Government Plus Financial Debt to GDP in Selected Countries

We are running unparalleled levels of Government plusFinancial debt across the Western World

Source: Deutsche Bank, BIS

0%

50%

100%

150%

200%

250%

1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

USEU Peripheral 5EU-12UKSpain


10

US Debt to GDP back to 1929

A longer-term debt prospective. When did we get tounsustainable levels? Late 1990s?

Source: Deutsche Bank, Bloomberg, BEA, Federal Reserve

0%

50%

100%

150%

200%

250%

300%

350%

400%

1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

Government GSE/Agency Financial ABS Household Corporate


11

Real Treasury (10yr) Return Series

Fixed income – 40 years of pain, 30 years of hedonism…

Source: Deutsche Bank, GFD

0

100

200

300

400

500

600

700

1900 1907 1914 1921 1928 1935 1942 1949 1956 1963 1970 1977 1984 1991 1998 2005

10yr Treasury Real Return


12

UK Real 5yr Gilt Yields – Apart from tumultuous 1970s, UK real yields negativeagain for the only time in last 50+ years

Monetary policy flexibility limited post Golden Era?


-15%

-10%

-5%

0%

5%

10%

1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

vs. CPI vs. RPI


13

US Debt to GDP back to 1929

A longer-term debt prospective. When did we get tounsustainable levels? Late 1990s?

Source: Deutsche Bank, Bloomberg, BEA, Federal Reserve

0%

50%

100%

150%

200%

250%

300%

350%

400%

1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007

Government GSE/Agency Financial ABS Household Corporate


14

US Bailouts Through Time in 2008 USD Including Recent Greece and EU/IMFPackage ($bn)

We live in a world of “Bail-out Hyperinflation”

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Source: Deutsche Bank


15

Log Scale: US Bailouts Through Time in 2008 USD Including Recent Greeceand EU/IMF Package ($bn)

We live in a world of “Bail-out Hyperinflation” – Log scalerequired to show prior decade bail-outs

1

10

100

1,000

10,000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

TAR

P/F

ins/

Aut

osB

ank

of A

mer

ica

EU

Pac

kage

s

Pen

n C

entr

al R

ailro

adLo

ckhe

ed

Firs

t N

atio

nal B

ank

New

Yor

k C

ity

Chr

ysle

r

Con

tinen

tal I

llino

is N

atio

nal B

ank

Sav

ings

& L

oan

Airl

ine

Indu

stry

Mex

ican

Pes

o

LTC

M



16

If the financial system was about the right size in 1998then there will likely be many more systemic shocks

Western World Government plus Financial Debt to GDP Now and in 1998 ($bn)

Source: Deutsche Bank, NBER. * - Excludes latest contraction and expansion.

Government plus Financial Debt to GDP1998 2010 Excess Debt to GDP Created since 1998

Austria 63% 135% 72%Belgium 122% 200% 78%Finland 62% 70% 8%France 58% 140% 82%Germany 76% 125% 49%Greece 99% 183% 84%Ireland 60% 415% 355%Italy 133% 210% 77%Luxembourg 29% 108% 79%Netherlands 82% 213% 131%Portugal 53% 186% 132%Spain 74% 202% 128%EU-12 81% 164% 84%Peripheral 5 107% 214% 107%Peripheral 4 73% 218% 145%Peripheral 3 72% 248% 177%UK 64% 213% 149%US 127% 191% 64%


17

Peripheral CDS off recent wides following EU leader’spositive announcements on EFSF reform

Current2011Wide Date

2011Tight Date

Greece 1,059 1,157 11 Mar 11 826 02 Feb 11

Ireland 594 680 10 Jan 11 561 04 Feb 11

Italy 156 257 10 Jan 11 156 17 Mar 11

Portugal 512 556 10 Jan 11 391 02 Feb 11

Spain 219 361 10 Jan 11 218 02 Feb 11

European Peripheral Average CDSEuropean Peripheral 5yr CDS, 2011Wides and Tights

Source: Deutsche Bank, Mark-it

0

100

200

300

400

500

600

700

800

Jan 10 Apr 10 Jul 10 Oct 10 Jan 11

Peripheral Average

Peripheral (ex Italy) Average

EU/IMF bail-out announced


18

While spreads have come off their historic wides, yieldsare once again flirting with their post-Euro highs

Average 10yr European PeripheralBond Yield

Average 10yr European PeripheralBond Spread (vs. Bunds)

10yr Yields vs. Post-Euro Highs 10yr Spreads vs. Post-Euro Wides

Source: Deutsche Bank, Bloomberg

Greece Ireland Italy Portugal Spain

Current 12.18 9.51 4.68 7.32 5.17

High 12.90 9.65 5.90 7.62 5.88

Date 09 Mar 11 11 Mar 11 28 Jan 00 09 Mar 11 18 Jan 00

Greece Ireland Italy Portugal Spain

Current 899 632 149 413 198

Wide 974 669 200 460 283

Date 07 Jan 11 30 Nov 10 30 Nov 10 11 Nov 10 30 Nov 10

3

4

5

6

7

8

9

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Peripheral Average Yield

0

100

200

300

400

500

600

2007 2008 2009 2010 2011

Peripheral Average Spread


19

Weakest European sovereigns still pricing in significantprobability of a credit event

EU Sovereign CDS Implied Credit Event Probabilities – 50% Recovery Rate

Source: Deutsche Bank, Mark-it

1.8%1.2%0.7%0.4%0.1%181513107Norway

2.9%2.0%1.2%0.5%0.2%3025191410Sweden

3.1%2.1%1.2%0.6%0.2%3227211612Finland

3.9%2.6%1.5%0.8%0.3%4033262015Denmark

4.1%2.7%1.5%0.7%0.3%4234251915Netherlands

4.4%2.7%1.4%0.6%0.2%453423158Germany

5.4%3.6%2.1%1.1%0.4%5546352720UK

6.5%4.4%2.6%1.3%0.4%6757443322Austria

7.3%4.9%2.8%1.2%0.3%7563472914France

13.4%10.2%7.0%3.9%1.4%14413512110070Belgium

14.5%11.0%7.5%4.0%1.2%15614613010262Italy

19.6%15.4%11.0%6.3%2.4%219208195163119Spain

40.1%34.0%27.4%17.8%8.0%512520534491417Portugal

44.8%39.2%32.5%23.4%12.1%594622654668647Ireland

65.3%58.6%50.6%37.5%20.1%1,0591,1031,1761,1761,119Greece

5yr4yr3yr2yr1yr5yr4yr3yr2yr1yr

Implied Cumulative Default Rates (50% Haircut)Spreads


20

Write downs from peripheral exposures could bedebilitating for banks

European Bank Exposures to Peripherals on Ultimate Risk Basis ($mn)

Source: Deutsche Bank, BIS

EuropeanBanks Other Key Countries Banks Peripheral Banks

Total France Germany Netherlands UK Greece Ireland Italy Portugal Spain

Greece 146,779 57,319 36,840 5,271 12,146 0 7,890 5,256 10,097 871

Ireland 423,023 43,594 138,567 19,153 131,627 449 0 14,616 3,512 13,984

Italy 831,688 424,474 153,721 43,373 66,804 549 40,337 0 3,535 32,911

Portugal 205,742 41,325 37,240 6,349 22,244 126 5,256 4,598 0 77,775

Spain 646,949 164,598 181,648 72,703 104,712 664 26,575 25,864 23,901 0

Total Exposure

Weakest 3Peripherals

775,544 142,238 212,647 30,773 166,017 575 13,146 24,470 13,609 92,630

All Peripherals 2,254,181 731,310 548,016 146,849 337,533 1,788 80,058 50,334 41,045 125,541

Peripheral BanksPeripheral Exposure

298,766

Potential Write-Downs

Weakest 3Peripherals at 10%

77,554 14,224 21,265 3,077 16,602 58 1,315 2,447 1,361 9,263

All Peripherals at10%

225,418 73,131 54,802 14,685 33,753 179 8,006 5,033 4,105 12,554

Peripheral Banks 29,877


21

Key issue for banks - significant amount of term debtrolling off in the next two years

European Bank Senior/Covered/Gov GTD Bond Redemption Profile to 2020 (€bn)

Source: Deutsche Bank, Dealogic DCM Analytics. Excludes bonds less than €25mn equivalent outstanding at time of issuance.

0

100

200

300

400

500

600

700

800

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Gov GTDCoveredSenior


22

LIBOR OIS Differential and ForwardsUsage of the ECB MRO and LTROFacilities (€bn)

Liquidity adequate for now, thanks to ECB

Source: Deutsche Bank, ECB, Bloomberg

0

100

200

300

400

500

600

700

800

900

1,000

2005 2006 2007 2008 2009 2010 2011

MRO LTRO

0

50

100

150

200

250

300

350

400

Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12

EURUSDGBP

Forwardmarkets

Lehman'sdefault


23

A longer-term perspective on asset returns

From the golden to the grey age


24

Rolling 25-year Real and Nominal Return of 50/50 Split of US Treasuries andEquities

The Golden Era / Great Moderation is over….


-2%

0%

2%

4%

6%

8%

10%

12%

14%

1924 1930 1936 1942 1948 1954 1960 1966 1972 1978 1984 1990 1996 2002 2008

Nominal Real

Golden Era


25

35-54yr Productivity Ratios for Different Global Regions

Demographics would make de-levering difficult for developedeconomies. Emerging markets have a much better profile

Source: Deutsche Bank, UN Population Division

0.20

0.30

0.40

0.50

0.60

0.70

0.80

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

World More Developed RegionsLess Developed Regions Least Developed CountriesChina IndiaUSA


26

Population in Millions (left) and % of the Population in the ‘Economically Active’15-64 year old Group (right)

Is India is the new China? Is China the new Developed World?

Source: Deutsche Bank, UN Population Division

0

300

600

900

1,200

1,500

1,800

China India MDW

1970 2010 2050

50%

55%

60%

65%

70%

75%

China India MDW

1970 2010 2050


27

Shiller PE Ratio and Total Returns in Nominal (N) and Real (R) Terms CoveringStructural Bull/Bear Cycles

Secular bear markets can last 20 years….


0

5

10

15

20

25

30

35

40

45

50

1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011

Shiller P/E Ratio

N: +112.2%R: -17.5%

N: +1230.0%R: +899.6%

N: +129.6%R: -24.7%

N: +598.6%R: +683.4%

N: +37.4%R: --0.5%

N: +2203.5%R: +1227.6%

N: +6.8%R: -18.7%

Average

20yrs

20yrs 17yr

s

11yrs?


28

S&P 500 Shiller P/E Ratio vs. US 35-54yr Productivity Ratio

Demographics are reversing…

Source: Deutsche Bank, GFD, UN Population Division

0

5

10

15

20

25

30

35

40

45

50

1950 1957 1964 1971 1978 1985 1992 1999 2006 2013 2020 2027 2034 2041 2048

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85Shiller P/E Ratio (LHS) 35-54yr Dependency Ratio (RHS)


29

Real Adjusted UK FTSE All Share Price only Index Through History

Real price rises in equities are a modern day phenomena…UK…


0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1693 1715 1737 1759 1781 1803 1825 1847 1869 1891 1913 1935 1957 1979 2001

Real FTSE All Share


30

US Treasury and Corporate Bond Yields vs. Equity Dividend Yields

Some dividend yields are above govt/corp bond yields butoverall yields low…

Source: Deutsche Bank, Bloomberg LP, GFD, Moody’s

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1802 1817 1832 1847 1862 1877 1892 1907 1922 1937 1952 1967 1982 1997

Dividend Yield10yr Treasury Yield30yr BBB Yield


31

Equities starting to look better relative to fixed income. Butstill dependent on the cycle for performance

US Equity Earnings Yield vs. Real Fixed Income Yields

Source: Deutsche Bank, Bloomberg LP, GFD, Moody’s

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001

EY-Real 10yr Yield EY-Real 3m Yield EY-Real BBB Yield

Equities Cheap vs. FI

Equities Expensive vs. FI


32

Financial assets likely to produce sub-par returns basedon mean reversion

Nominal Returns Real Returns

3yr 5yr 10yr 3yr 5yr 10yr

Equity (S&P 500) -3.2% 0.4% 3.1% -5.8% -2.1% 0.6%

Treasury (10yr) -0.6% 1.4% 2.8% -3.2% -1.2% 0.3%

Treasury (30yr) 3.9% 4.3% 4.5% 1.2% 1.7% 2.0%

IG Corporate Bond 4.5% 5.0% 5.3% 1.8% 2.3% 2.8%

BBB Bond 4.5% 5.1% 5.6% 1.8% 2.5% 3.1%

Property -5.6% -2.5% 0.0% -8.0% -4.9% -2.5%

Gold -26.5% -16.1% -7.3% -28.4% -18.2% -9.5%

Oil -23.2% -13.8% -6.1% -25.2% -16.0% -8.3%

All Commodities -13.6% -7.5% -2.7% -15.8% -9.8% -5.0%

US Asset Potential Annualised Returns Based on Mean Reversion overDifferent Time Horizons



33

Rolling 25 Year Total Returns (Annualised), Nominal (left) and Real (right)

Return still in the shadow of the ‘Golden Age’… Commoditiesonly an inflation hedge longer-term…

Source: Deutsche Bank, Bloomberg LP, GFD, Moody’s, NBER

-5%

0%

5%

10%

15%

20%

1924 1935 1946 1957 1968 1979 1990 2001

Corporate Bonds TreasuriesEquities Commodities

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1924 1935 1946 1957 1968 1979 1990 2001

Corporate Bonds TreasuriesEquities Commodities


34

Appendix 1

Important Disclosures

Additional Information Available upon Request

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see themost recently published company report or visit our global disclosure look-up page on our website athttp://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.

Special Disclosures

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, theundersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in thisreport. Nick Burns

http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.


35

Regulatory Disclosures

1. Important Additional Conflict DisclosuresAside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs. Investors are stronglyencouraged to review this information before investing.

2. Short-Term Trade IdeasDeutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longerterm ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific DisclosuresAustralia: This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.

Japan: Disclosures under the Financial Instruments and Exchange Law: Company name – Deutsche Securities Inc. Registration number – Registered as a financial instrumentsdealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risksinvolved in stock transactions – for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed witheach customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemmingfrom foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered as rating agency in Japan unless specifically indicated asJapan entities of such rating agencies.

New Zealand: This research is not intended for, and should not be given to, “members of the public” within the meaning of the New Zealand Securities Market Act 1988.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in theRussian Federation.

Risks to Fixed Income PositionsMacroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that islong fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss.The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FXdepreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation(including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation ofprofits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed incomeinstruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common inemerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track.The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest ratereference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be receivedare denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.

https://gm.db.com/equities

http://gm.db.com.

http://globalmarkets.db.com/riskdisclosures.


36

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