!

"#$ &'()* +)",

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0/ 10".
8y Cullen 8oche, lounder of Crcam llnanclal Croup & 1he
ragmauc CaplLallsm webslLe
23"0 03) 3)45 '*
678",0'0"0'9) -"*',:;<

urchases or sales of securlues on an ouLrlghL basls LhaL
add or draln reserves and change Lhe slze or Lhe
composluon of Lhe SysLem Cpen MarkeL AccounL (SCMA)
poruollo are among Lhe Lools used by Lhe lederal 8eserve
Lo lmplemenL moneLary pollcy." - n? led
!"#$%&'( * + ,%$- .#//. 0*11 '$ 234($5. 2( 6#5

!"#"$%& (")"$*" +%&%,-" ).""/0
=3",:) ', >**)0* ? @ABCC
=3",:) ', D'"E'F'0')* ? @ABCC
=3",:) ', G)0 2/#03 ? AC

1%,2) +%&%,-" ).""/0
=3",:) ', >**)0* ? AC H0IE/,$ '* *J"KK)$ L/# #)*)#9)*M
=3",:) ', D'"E'F'0')* ? AC
=3",:) ', G)0 2/#03 ? AC
23"0 03) 3)45 '*
678",0'0"0'9) -"*',:;<

23"0 '* 03) 7- &#",*('**'/,
+)43",'*(<

CL can alLer long-Lerm lnLeresL raLes.
CL has a powerful psychologlcal lmpacL on boLh asseL
prlces and Lhe economy.
CL lnvolves a poruollo rebalanclng eecL.
CL could poLenually drlve down Lhe value of Lhe dollar
relauve Lo oLher currencles whlch could alLer forelgn
Lrade balances.
23"0 '* 03) 7- &#",*('**'/,
+)43",'*(<

23"0 '* 03) 7- &#",*('**'/,
+)43",'*(<

CL can alLer long-Lerm lnLeresL raLes.
CL has a powerful psychologlcal lmpacL on boLh asseL
prlces and Lhe economy.
CL lnvolves a poruollo rebalanclng eecL.
CL could poLenually drlve down Lhe value of Lhe dollar
relauve Lo oLher currencles whlch could alLer forelgn
Lrade balances.
=/((/, 7- +'*4/,4)K0'/,*N

uoes CL moneuze Lhe debL"?
=/((/, 7- +'*4/,4)K0'/,*N

CL ls noL accuraLely descrlbed as money prlnung". lL's
asseL swapplng".
=/((/, 7- +'*4/,4)K0'/,*N

CL does noL necessarlly allow banks Lo lend more money.
=/((/, 7- +'*4/,4)K0'/,*N

1he money mulupller ls mlsleadlng. 8anks lend when
credlLworLhy cusLomers have demand for loans. noL
when Lhelr supply of reserves ls hlgh.
=/((/, 7- +'*4/,4)K0'/,*N

CL can drlve asseL prlces hlgher, buL lL does noL
necessarlly lmprove Lhe fundamenLals of Lhe underlylng
asseLs.

!"* 78",0'0"0'9) -"*',:
2/#5)$<

Where ls Lhe lnauon?

!"* 78",0'0"0'9) -"*',:
2/#5)$<

Where are Lhe [obs?
!"* 78",0'0"0'9) -"*',:
2/#5)$<

Where ls Lhe growLh?
&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

1he boom.


&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

1he busL.


&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

1he busL.


&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

1he busL.


&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

We are noL !apan..We are !apan on fasL forward".

1) ollcy has been fasLer Lo respond.
2) Cur asseL bubbles were noL as large.
3) Cur sLrucLural lssues are less worrlsome.
4) 1he uSA was a consumer drlven credlL collapse, noL a
corporaLe drlven credlL collapse.

&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

8ecovery from a consumer credlL crlsls ls noL an evenL,
buL a process of balance sheeL heallng.


&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

Whlle Lhe consumer remalns somewhaL weak, corporaLe
proLs are aL all-ume hlghs..


&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

Cne secLor's declL ls anoLher secLor's surplus.

-10.00%
-5.00%
0.00%
5.00%
10.00%
Sector Financial Balances (% of GDP)
Sum Private Sector Federal Govt Current Account
&3) O1 -4/,/(. P 23)#)
!"9) 2) Q)),<

roLs = lnvesLmenL - Pousehold Savlngs - CovernmenL
Savlngs - lorelgn Savlngs + ulvldends

-15%
-10%
-5%
0%
5%
10%
15%
20%
Corporate Profits Breakdown (% of GDP)
Foreign Government Saving Personal Saving Businesses
&3) O1 -4/,/(. P 23)#) >#)
2) G/J<

1he economy has lmproved, buL we're sull operaung way
below our poLenual..
&3) O1 -4/,/(. P 23)#) >#)
2) G/J<

We are ln Lhe 32
nd
monLh of a recovery.
1he average posL-war era expanslon has lasLed 60
monLhs.
Whlle we're noL necessarlly on Lhe verge of recesslon
we're llkely ln Lhe lauer sLages of Lhe expanslon.
&3) O1 -4/,/(. P 23)#) >#)
2) G/J<

Whlle we're ln Lhe mlddle or laLe sLages of Lhe currenL
expanslon Lhe good slgn ls LhaL Lhe prlvaLe secLor ls
heallng and generaung organlc growLh wlLhouL Lhe need
for as much governmenL ald.
Cdds of recesslon ln 2014, aL presenL, appear low, buL Lhe
economy ls sull fraglle and muddllng Lhrough".
23"0 >E/80 03) R#)"$)$
6&"K)#;<

1he 1aper ls comlng ln 2014. My base case - March 2014.
1he led ls llkely Lo announce a reducuon ln Lhe slze of
asseL purchases as well as a change ln forward guldance.
1hls should allow our CL addlcLed" markeLs Lo come
down" slowly from Lhe CL hlgh".

23"0 >E/80 03) R#)"$)$
6&"K)#;<

lf Lhe economy ls llkely Lo remaln weak Lhen surglng
lnLeresL raLes are noL a hlgh rlsk.

1hls ls noL Lhe 70's!
1he led ls llkely Lo keep lnLeresL raLes aL 0 desplLe
Laperlng".

S/0),0'"F 6&"K)#; T'*5*

Plgher lnLeresL raLes.
Less markeL opumlsm (a welcome developmenL).
Lower domesuc lnvesLmenL.
Lower forelgn lnvesLmenL.
R/,U0 &3#/J " 6&"K)#
&",0#8(;

uon'L panlc! ln all llkellhood, Lhe eecLs of CL have been
less slgnlcanL Lhan Lhe malnsLream medla makes lL ouL Lo
be. 1herefore, Lhe Laperlng, whlle creaung rlsks, ls noL
someLhlng we should panlc over.
&3",5*V
Cullen 8oche, lounder of Crcam llnanclal Croup and Lhe
ragmauc CaplLallsm webslLe.
cullenroche[orcamgroup.com
: (838) 220-3383
WebslLes: hup://pragcap.com, hup://orcamgroup.com
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