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David A.

Rosenberg January 11, 2011


Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919

MARKET MUSINGS & DATA DECIPHERING

Sushi with Dave


WE ARE NOT SURE IF THIS IS A JAPANESE PROVERB OR NOT, BUT
PICTURES ARE WORTH A THOUSAND WORDS.
Consider the charts below the equivalent of 10,000 words explaining why the
U.S. post-bubble economic and financial backdrop is looking more and more like
the Japanese experience of the past two-decades.

BULLARD NOT BULLISH


“The U.S. is closer to a Japanese-style outcome today than at any time in
recent history … a better policy response to a negative shock is to expand the
quantitative easing program through the purchase of Treasury securities.”
(Seven Faces of “The Peril” St. Louis Fed Reserve Bank President Bullard, July
29, 2010)

CHART 1: BOTH COUNTRIES EXPERIENCED THE BURSTING OF A


HOUSING BUBBLE
Real Private Residential Spending
Japan United States
(¥ billions, 2000) (US$ billions, 2005)
28000 800

750

700
24000
650

600

20000 550

500

450
16000
400

350

12000 300
'89 '92 '95 '98 '01 '04 '07 '10 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Source: Haver Analytics, Gluskin Sheff

Please see important disclosures at the end of this document.

Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms. Founded in 1984 and focused primarily on high net
worth private clients, we are dedicated to meeting the needs of our clients by delivering strong, risk-adjusted returns together with the highest
level of personalized client service. For more information or to subscribe to Gluskin Sheff economic reports, visit www.gluskinsheff.com
January 11, 2011 – BREAKFAST WITH DAVE

CHART 2: BOTH COUNTRIES EXPERIENCED A BUBBLE BURST IN


HOUSING CREDIT
(year-over-year percent change)
Japan: Domestic Bank Lending: Housing Credit United States: Household Liabilities: Home
Mortgages
25% 16%

14%

20% 12%

10%

15% 8%

6%

10% 4%

2%

5% 0%

-2%

0% -4%
'84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '97 '99 '01 '03 '05 '07 '09

Source: Haver Analytics, Gluskin Sheff

CHART 3: WHEN T-BILL YIELDS ARE 0%,


YOU KNOW IT’S JAPAN ALL OVER AGAIN
Three Month Bill Yield (percent)

Japan United States


9.0 5.5

8.0 5.0
4.5
7.0
4.0
6.0
3.5
5.0 3.0

4.0 2.5
2.0
3.0
1.5
2.0
1.0
1.0 0.5
0.0 0.0
90 91 92 93 94 95 96 97 2007 2008 2009 2010
Source: Haver Analytics, Gluskin Sheff

CHART 4: UNPRECEDENTED EXPANSION OF THE CENTRAL BANK’S


BALANCE SHEET
Reserve Bank Credit Outstanding
Japan United States
(billion ¥) (billion US$)
350 2,500

300 2,300

2,100
250
1,900
200
1,700

150 1,500

1,300
100
1,100
50
900

0 700
92 93 94 95 96 97 98 99 00 01 02 03 04 05 2005 2006 2007 2008 2009 2010

Source: Haver Analytics, Gluskin Sheff

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January 11, 2011 – BREAKFAST WITH DAVE

CHART 5: EVEN JAPANESE AND U.S. FISCAL POLICY LOOKS THE SAME
Government Deficit as a share of GDP (percent, inverted scale)
Japan United States
-11 -11
-10 -10 Deficit
Deficit
-9
-9
-8
-8
-7
-7 -6
-6 -5
-5 -4
-4 -3
-2
-3
-1
-2
0
-1 1
Surplus
0 2
89 90 91 92 93 94 95 96 97 98 01 02 03 04 05 06 07 08 09

Source: Haver Analytics, Gluskin Sheff

CHART 6: JAPAN: A MODERN DAY EXAMPLE OF A PROLONGED


DELEVERAGING CYCLE
Japan
10-year Government Note Yield Nikkei Index
(percent) (index level)

9 40,000

8
35,000
7
30,000
6

5 25,000

4 20,000

3
15,000
2
10,000
1

0 5,000
89 91 93 95 97 99 01 03 05 07 09 89 91 93 95 97 99 01 03 05 07 09

Source: Haver Analytics, Gluskin Sheff

CHART 7: JAPAN’S POST-BUBBLE EXPERIENCE: ROLLING RECESSIONS


AND RECOVERIES
Japan: Gross Domestic Product (year-over-year percent change)
12%

8%

4%

0%

-4%

-8%

-12%
'89 '92 '95 '98 '01 '04 '07 '10

Source: Haver Analytics, Gluskin Sheff

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January 11, 2011 – BREAKFAST WITH DAVE

CHART 8: INFLATION RECEDES A LONG,


LONG, TIME AFTER A BUBBLE BURST
Consumer Inflation excluding Food & Energy
(year-over-year percent change)
Japan United States

4.0 6.0

3.0 5.0

2.0 4.0

1.0 3.0

0.0 2.0

-1.0 1.0

-2.0 0.0
90 93 96 99 02 05 08 90 93 96 99 02 05 08

Source: Haver Analytics, Gluskin Sheff

CHART 9: THE BULLISH DEMOGRAPHIC ARGUMENT FOR THE U.S.A. IS


LOSING SOME ALLURE
Employment-Population Ratio
(percent)
65

64

63

62

61
United States
60

59

58

57
Japan
56

55
70 75 80 85 90 95 00 05 10

Source: Haver Analytics, Gluskin Sheff

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January 11, 2011 – BREAKFAST WITH DAVE

Gluskin Sheff at a Glance


Gluskin Sheff + Associates Inc. is one of Canada’s pre-eminent wealth management firms.
Founded in 1984 and focused primarily on high net worth private clients, we are dedicated to the
prudent stewardship of our clients’ wealth through the delivery of strong, risk-adjusted
investment returns together with the highest level of personalized client service.

OVERVIEW INVESTMENT STRATEGY & TEAM


As of September 30, 2010, the Firm We have strong and stable portfolio
managed assets of $5.8 billion. management, research and client service
teams. Aside from recent additions, our Our investment
Gluskin Sheff became a publicly traded
Portfolio Managers have been with the interests are directly
corporation on the Toronto Stock
Firm for a minimum of ten years and we
Exchange (symbol: GS) in May 2006 and aligned with those of
have attracted “best in class” talent at all
remains 49% owned by its senior our clients, as Gluskin
levels. Our performance results are those
management and employees. We have Sheff’s management and
of the team in place.
public company accountability and employees are
governance with a private company We have a strong history of insightful collectively the largest
commitment to innovation and service. bottom-up security selection based on client of the Firm’s
fundamental analysis.
Our investment interests are directly investment portfolios.
aligned with those of our clients, as For long equities, we look for companies
Gluskin Sheff’s management and with a history of long-term growth and
employees are collectively the largest stability, a proven track record,
$1 million invested in our
client of the Firm’s investment portfolios. shareholder-minded management and a
Canadian Equity Portfolio
share price below our estimate of intrinsic
We offer a diverse platform of investment in 1991 (its inception
value. We look for the opposite in
strategies (Canadian and U.S. equities, date) would have grown to
equities that we sell short.
Alternative and Fixed Income) and $9.1 million2 on
investment styles (Value, Growth and For corporate bonds, we look for issuers
1 September 30, 2010
Income). with a margin of safety for the payment
versus $5.9 million for the
of interest and principal, and yields which
The minimum investment required to S&P/TSX Total Return
are attractive relative to the assessed
establish a client relationship with the Index over the same
credit risks involved.
Firm is $3 million. period.
We assemble concentrated portfolios -
our top ten holdings typically represent
PERFORMANCE between 25% to 45% of a portfolio. In this
$1 million invested in our Canadian way, clients benefit from the ideas in
Equity Portfolio in 1991 (its inception which we have the highest conviction.
date) would have grown to $9.1 million
2
Our success has often been linked to our
on September 30, 2010 versus $5.9 million long history of investing in under-
for the S&P/TSX Total Return Index followed and under-appreciated small
over the same period. and mid cap companies both in Canada
$1 million usd invested in our U.S. and the U.S.
Equity Portfolio in 1986 (its inception PORTFOLIO CONSTRUCTION
date) would have grown to $11.8 million
usd on September 30, 2010 versus $9.6
2 In terms of asset mix and portfolio For further information,
million usd for the S&P 500 Total construction, we offer a unique marriage please contact
Return Index over the same period. between our bottom-up security-specific questions@gluskinsheff.com
fundamental analysis and our top-down
Notes: macroeconomic view.
Unless otherwise noted, all values are in Canadian dollars.
1. Not all investment strategies are available to non-Canadian investors. Please contact Gluskin Sheff for information specific to your situation.
2. Returns are based on the composite of segregated Value and U.S. Equity portfolios, as applicable, and are presented net of fees and expenses.
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January 11, 2011 – BREAKFAST WITH DAVE

IMPORTANT DISCLOSURES
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reserved. This report is prepared for the use of Gluskin Sheff clients and Past performance is not necessarily a guide to future performance. Levels
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