HIGHER FOR LONGER MUCH HIGHER FOR MUCH LONGER THE GREAT SAVINGS SQUEEZE OF 2018

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1 HIGHER FOR LONGER MUCH HIGHER FOR MUCH LONGER THE GREAT SAVINGS SQUEEZE OF 2018 INTL FCStone Financial Inc. Member FINRA/MSRB/SIPC Broker Dealer Division Vincent Deluard, CFA Global Macro Strategist

2 DISCLAIMER TO BE DETERMINED BY COMPLIANCE AND/OR LEGAL The trading of derivatives such as futures, options, and over-the-counter (OTC) products or swaps may not be suitable for all investors. Derivatives trading involves substantial risk of loss, and you should fully understand those risks prior to trading. Past financial results are not necessarily indicative of future performance. All references to futures and options on futures trading are made solely on behalf of the FCM Division of INTL FCStone Financial Inc., a member of the National Futures Association ( NFA ) and registered with the U.S. Commodity Futures Trading Commission ( CFTC ) as a futures commission merchant. All references to and discussion of OTC products or swaps are made solely on behalf of INTL FCStone Markets, LLC ( IFM ), a member of the NFA and provisionally registered with the CFTC as a swap dealer IFM s products are designed only for individuals or firms who qualify under CFTC rules as an Eligible Contract Participant ( ECP ) and who have been accepted as customers of IFM. This material should be construed as market commentary, merely observing economic, political, and/or market conditions. It is not intended to refer to any particular trading strategy, promotional element or quality of service provided by the FCM Division of INTL FCStone Financial Inc. or IFM. Neither the FCM Division of INTL FCStone Financial Inc. nor IFM is responsible for any redistribution of this material by third parties or any trading decisions taken by persons not intended to view this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the opinions or viewpoints of the FCM Division of INTL FCStone Financial Inc. or IFM. All forecasting statements made within this material represent the opinions of the author unless otherwise noted. Factual information believed to reliable, was used to formulate these statements of opinion; but we cannot guarantee the accuracy and completeness of the information being relied upon. Accordingly, these statements do not necessarily reflect the viewpoints employed by the FCM Division of INTL FCStone Financial Inc. or IFM. All forecasts of market conditions are inherently subjective and speculative, and actual results and subsequent forecasts may vary significantly from these forecasts. No assurance or guarantee is made that these forecasts will be achieved. Any examples given are provided for illustrative purposes only, and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. Reproduction or use in any format without authorization is forbidden. Copyright All rights reserved. 2

3 Understanding Interest Rates The interest rate is the price that clears the market for savings From GDP accounting: X-M = S-I Current account balances determines net savings In global capital markets, the equilibrium interest rate is set so that: I=S=X=M If too many countries chase trade surpluses at the same time, excess savings will push interest rates down

4 Current Account Deficit / Surplus in $ Billion The Triple Savings Glut of the 2000s-2010s China, Germany, Russia and KSA accumulated $8 trillion in excess savings since ,600 Chinese Surplus German Surplus Saudi + Russia All Deficit Countries Borrowing Needs 1, What happened in 1999? Source: OECD, IMF

5 What Happened in 1999? The Triple Shock of 1999 January : the euro was launched, the Deutsche Mark is retired World s largest exporter blessed with a weak currency August: Putin becomes Prime Minister as Brent prices recover from a secular low of $9.6 OPEC and Russia s oil revenues explode November: U.S.. China sign WTO agreement China starts building $4 trillion reserve hoard

6 $ billion The Petrodollar Glut: $2.1 Trillion Russia and Saudi Arabia accumulated surpluses worth $2.1 trillion since ,400 2,100 Holdings of U.S. Treasuries Estimated oil revenues Cumulative current account balance 1,800 1,500 1, Source: OECD, IMF

7 The German Glut: $2.8 Trillion Home Ownership Rate by Country Germany Japan U.K. U.S. France Canada Netherlands Italy Greece Spain Poland Singapore 52% Germans hate mortgage debt! 62% 64% 65% 65% 68% 68% 73% 74% 78% 84% 91% 40% 50% 60% 70% 80% 90% 100% Source: World Bank

8 The Chinese Glut: $3.1 Trillion The day China decided to build a $4 trillion reserve stash The IMF s public shaming of Suharto, Jan

9 The Great Savings Squeeze of 2018: OPEC The U.S. Has Become the World s Top Producer of Oil in 2018

10 The Great Savings Squeeze of 2018: Germany Auf Wiedersehen Balanced Budgets, Hallo Pension Shock

11 The Great Savings Squeeze of 2018: China The Chinese Surplus Has Already Melted China is no longer investing its currency reserves in U.S. treasuries

12 The Great Savings Squeeze of 2018: Chindia India's growth will permanently overtake China's in % 14% China India 12% 10% 8% 6% 4% 2% Source: OECD, IMF 0%

13 The Great Savings Squeeze of 2018: World 4.0% Projected World Growth Rates Based on OECD Long-Term Forecasts Deficit Countries GDP Growth Surplus Countries GDP Growth 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Global savings glut turns into a squeeze Source: OECD, IMF

14 The Great Savings Squeeze of 2018: World A Financial Perspective on Life Net Savings Over Time Peak earnings + empty nest College First job First house + kids Retirement & medical expenses Childhood Household formation Accumulation Decumulation

15 Thousands The Great Savings Squeeze of 2018: U.S. 14,000 Change in US Population by Age Group, Census Bureau Estimates 12,000 10,000 8,000 6,000 Millennials Boomers 4,000 Millennials' kids 2, ,000-4,000-6,000 Under to to to to to and over

16 The Great Savings Squeeze of 2018: U.S. CBO s Budget Outlook 2019 to 2029 The presenting member estimated borrowing needs to exceed $12 trillion without factoring in the possibility of a recession which would pose a unique challenge for Treasury over the coming decade. Additionally, given stagnation in international reserves, there is likely an increased need for this debt to be financed domestically. This blue-sky discussion, in the context of the optimal debt model, focused on the need to expand demand, while preserving the key tenets of regular and predictable issuance at the lowest cost to taxpayers over time. A number of possible new products were reviewed including CPI subcomponent linked TIPS, ultra-long dated issuance, zerocoupon issuances and an expanded FRN program. Treasury Borrowing Advisory Committee Letter to the U.S. Treasury, January 29, 2019

17 $ Million The Great Savings Squeeze of 2018: U.S. Financial Assets of U.S. Households* Cumulative Purchase of Securities by Private DB Plans 70% 60% Cash Allocation Equity Allocation Bond Allocation Household can only buy more bonds if they sell equities... 8,000 7,000 All Securities Debt Treasury Debt Private pension plans have bought treasuries in but they are in a secular downtrend 6,000 50% 5,000 40% 4,000 30% 3,000 20% 2,000 10% *Includes mutual fund assets split by asset classs according to their objective Source: Fed Flow of Funds 1,000 Source: Federal Reserve 0%

18 Conclusions 1. The savings glut is turning into a savings squeeze: rates will go higher for longer, much higher for much longer 2. This forecast is based on supply and demand, not economic fundamentals 3. Higher inflation, higher deficits, or a politicized Fed would worsen the outlook Shorten duration, raise cash: cash is an asset class again! Short-term treasuries and variable rate bonds are safe place to hide The massive rotation into U.S. treasuries will create volatility, with possibly counter-intuitive feedback loops (Q4 2018)

19 THANK YOU AND GOOD LUCK!