Blackstone Webcast: The Outlook for Europe and the United States

Byron R. Wien Vice Chairman, Blackstone Advisory Partners L.P., Blackstone

Joachim Fels Global Head of Economics, Morgan Stanley

Moderator: Mimi Gammill Managing Director, Investor Relations & Business Development, Blackstone

Fiscal Policy is Unsustainable Almost Everywhere

Stylised government balance sheet
Assets Liabilities
Peoples equity Power to Tax (NPV of future tax revenues) Social Liability (NPV of future primary expenditure)

Government debt / revenues, 2011

Finland Netherlands France Spain

Fiscal assets and liabilities

Germany Belgium Portugal United Kingdom

Real assets (buildings, etc.) Equity stakes (and similar) Other assets (loans, cash, etc.) Gross debt

Canada Italy

Financial assets and liabilities

Ireland United States Greece Japan 0% 50% 100% 150% 200% 250% 300% 350% 400%

Cyclically-adjusted fiscal balance, 2011 (% of GDP)

F inl an d G e rman y Ita ly B elg ium Po rtu ga l N eth erla nds C an ada Fra nce Sp ai n Irel an d G re ece U ni ted K ing dom U nite d St ates Ja pa n -10 -8 -6 -4 -2 0 2

NPV of ageing-related expenditure, 2010-2050 (% of GDP)

Japan Italy France German y Irelan d Sp ain Neth erlands Can ada Greece Po rtu gal United King dom F inlan d Belg ium United St ates 0 50 100 150 200 Pension sp end in g Health care spending

Source: : IMF, Morgan Stanley Research

Blackstone Webcast: The Outlook for Europe and the United States
Byron R. Wien Vice Chairman, Blackstone Advisory Partners L.P., Blackstone

Joachim Fels Global Head of Economics, Morgan Stanley

Moderator: Mimi Gammill Managing Director, Investor Relations & Business Development, Blackstone

Three Secular Problems

1. The polarization of the political process in the United States preventing compromise and discouraging the electorate

2. The open-ended sovereign debt crisis in Europe that now appears larger than the resources of the institutions with the power to deal with it
3. The budget debt problem in the United States which has reached the point where Carmen Reinhart and Ken Rogoff warned in their book This Time Is Different countries will have trouble growing faster than 2% real. This is further complicated by the 2008 recession which was accompanied by a financial crisis. Slow growth and high unemployment usually follow for several years
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Why We are Not Likely to Experience Another 2008 Type Decline?

1. Banking system has gone from insolvency to strong capital ratios

2. No weak/opaque shadow banking system to contend with

3. The financial condition of Corporate America is excellent

4. Profit and revenue growth are still good as is growth in dividends and share buybacks
5. Business inventories are in excellent shape. There is no bubble in housing as in 2008 and most cyclical sectors of the economy are at a very low percentage of GDP
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Source: Omega Advisors.

Why We are Not Likely to Experience Another 2008 Type Decline?

6. Household debt/GDP, while still high, has dropped from 99.5% to 89.6%. Debt service ratio substantially improved

7. The consumer savings rate has gone from 1% to 5.4%

8. Lower dollar should be a plus for exports 9. Oil price decline from $115 to $84wti ($130 to $110 Brent) per barrel positive for consumers and economy generally

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Source: Omega Advisors.

Why We are Not Likely to Experience Another 2008 Type Decline?

10. FED policy of zero interest rates will ultimately work 11. Tame wages and decent productivity 12. Decent M&A activity and large pool of private equity capital 13. Investors are conservatively postured 14. Market valuation very appealing both absolute and particularly relative to alternatives (financial repression)

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Source: Omega Advisors.

8th Quarter Following Recession End 2Yr. % A.R. (Real)

Res Investment Consumer Spending Govt Spending CapEx Real GDP Nominal GDP

1977: 1Q 1984: 4Q 1993: 1Q 2003: 4Q Avg 2011: 2Q

21.5% 24.8% 11.2% 9.4% 16.7% -1.5%

5.4% 5.5% 3.1% 2.7% 4.2% 2.1%

0.6% 3.9% -0.2% 2.8% 1.8% -0.8%

5.2% 12.6% 3.4% 5.3% 5.5%

4.7% 6.6% 3.0% 2.9% 4.3% 2.5%

11.1% 10.4% 5.5% 4.9% 8.0% 4.1%

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Source: ISI Group.

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Then & Now

August 1982 Fed Funds Rate Prime Rate 10-Year UST Yield Trailing S&P 500 P/E Price to Book Dividend Yield Top Marginal Tax Rate Capital Gains Tax Rate % of Workforce in Union
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Current 0.125% 3.25% 2.06% 12.4 2.2x 2.37% 35% 15% 12.3%
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10.12% 14.39% 13.60% 8.8 1.0x 6.60% 50% 20% 20.1%

Source: Strategas Research Partners.

The Typical Conditions That Precede A Recession Are Not in Place

Large private payroll drops in excess of 175k a

month (adjusting for non-recurrings, they are still averaging about 100k growth over last four months);
An inverted yield curve (it is not inverted); Acceleration in inflation (inflation is contained and

so are expectations);
An increase in real interest rates (anything but!);

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Source: Douglas Kass, Seabreeze Partners Management Inc.

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The Typical Conditions That Precede A Recession Are Not in Place

Bloated inventories (low inventories to sales in

place now);
Retreating retail sales (they are expanding;

Negative year-over-year leading economic

indicators (advancing now);

A drop in factory orders (also advancing) and; Outsized durable spending relative to GDP (housing

and autos remain in the crapper)

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Source: Douglas Kass, Seabreeze Partners Management Inc.

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Disclaimer
The views expressed in this commentary are the personal views of Byron Wien of Blackstone Advisory Partners L.P. (together with its affiliates, Blackstone) and do not necessarily reflect the views of Blackstone itself. The views expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstone undertakes to advise you of any changes in the views expressed herein. Blackstone and others associated with it may have positions in and effect transactions in securities of companies mentioned or indirectly referenced in this commentary and may also perform or seek to perform investment banking services for those companies. Blackstone and/or its employees have or may have a long or short position or holding in the securities, options on securities, or other related investments of those companies. Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Where a referenced investment is denominated in a currency other than the investor's currency, changes in rates of exchange may have an adverse effect on the value or price of or income derived from the investment. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one's investment and tax advisors. Certain assumptions may have been made in this commentary as a basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differing facts from the assumptions may have a material impact on any indicated returns. Past performance is not necessarily indicative of future performance. The price or value of investments to which this commentary relates, directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or the solicitation of an offer to purchase any security. To recipients in the United Kingdom: this commentary has been issued by Blackstone Advisory Partners L.P. and approved by The Blackstone Group International Partners LLP, which is authorized and regulated by the Financial Services Authority. The Blackstone Group International Partners LLP and/or its affiliates may be providing or may have provided significant advice or investment services, including investment banking services, for any company mentioned or indirectly referenced in this commentary. The investment concepts referenced in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. This commentary is disseminated in Japan by The Blackstone Group Japan KK and in Hong Kong by The Blackstone Group (HK) Limited.

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