The document discusses: 1) How the US economy has shown resilience in shrugging off confidence shocks in August and that it was too early to expect a disorderly Chinese economic rebalancing, driving an equity market rally. 2) How expectations for the upcoming European summit are low but the markets may respond positively to announcements that avoid overpromising. Ultimately cracks in any plan are expected later in the year. 3) How early Q3 earnings results have surprised to the upside compared to reduced expectations, suggesting concerns about a global slowdown were excessive, and lowering the probability of a double dip recession implied by market prices in early October.

1. EQUITY RESEARCH U.S. Portfolio Strategy | October 21, 2011
Barclays Capital does and seeks to do business with companies covered in its research reports. As a
result, investors should be aware that the firm 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.
PLEASE SEE ANALYST(S) CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 14.
U.S. PORTFOLIO STRATEGY WEEKLY
Happy days: The unintended consequences of
financial repression in the 1940s and 1950s
Our view that the U.S. would shrug off the August twin confidence shocks and
that it was too early for a disorderly Chinese rebalancing seems to be gaining
acceptance. We believe this resilience has been driving the equity rally off the
October low.
We think the bar has been set sufficiently low for this weekend’s European
summit. We expect the markets to accept the upcoming announcements and the
assets most directly impacted to respond favorably. Ultimately, we expect to see
cracks in the plan unfold later in the year.
Earnings season began in earnest this week with the surprise tracking better than
2Q11 (although off reduced expectations and skewed to Financials). Judging by
Industrials, the outlook doesn’t appear as bad as recessionists feared.
We find the similarities between today and the post WWII period (1947–1951)
striking. We believe that the unintended consequences of financial repression,
along with an uncertain public policy outlook help to explain low PE multiples
then and now.
Financial repression may lead to heightened inflation volatility, which we find has an
inverse relationship with PE multiples
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
38 41 44 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13
Vol Pt
2
4
6
8
10
12
14
16
18
12m Inflation Volatility 24m Shiller Cycl Adj Earnings Yield
%
Source: Haver, Professor Robert Shiller, Barclays Capital
Barry Knapp
+1 212 526 5313
barry.knapp@barcap.com
BCI, New York
Eric Slover, CFA
+1 212 526 6426
eric.slover@barcap.com
BCI, New York
Michael Keller, CFA
+1 212 526 2404
michael.keller@barcap.com
BCI, New York
Adam Sussi
+1 212 526 9778
adam.sussi@barcap.com
BCI, New York
VIEWS ON A PAGE 2
OVERVIEW 3
EARNINGS 5
PE MULTIPLES & FINANCIAL
REPRESSION 8
MARKET SNAPSHOT 13

2. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 2
VIEWS ON A PAGE
A rerating of the U.S. economic outlook was at the core of both the loss of upside equity
market momentum this spring and the recent sharp correction. Associated economic
uncertainty, along with political struggles in both Washington and Brussels in dealing with
structural and cyclical public sector debt, have resulted in equity market valuations both on
an absolute and relative basis that we consider attractive. Despite stabilization in the U.S.
macroeconomic outlook and additional monetary policy accommodation, continued public
policy uncertainty and the impact of slowing earnings momentum are significant factors in
our decision to cut our 2011 year-end price target to 1260.
European policy makers have made some degree of progress in stabilizing the financial system
as the U.S. economy shrugged off the August public policy–related confidence shock. In
addition, the Fed’s portfolio compositional changes should help loosen financial conditions;
however, public policy uncertainty seems likely to weigh on business confidence for much of
2012. As a result, we are trimming our 2012 earnings forecast to $102 from $105. While our
base case is for subdued growth, the risks are skewed to the downside. The combination of
slowing earnings growth and asymmetric risks leads to our price target reduction.
Our S&P 500 earnings forecast is $96 for 2011 (+15% y/y) and $102 for 2012 (+6% y/y)
Full-Year 2010A Full-Year 2011E Full-Year 2012E
S&P 500 Level y/y Level y/y Level y/y
Operating EPS* $84 48% $96 15% $102 6%
P/E 15.0x 7% 13.1x -13%
Index 1,258 23% 1260 0%
*Trailing-four-quarter EPS. Source: Barclays Capital
To position ourselves for a late 4Q11 tactical rally, driven by macroeconomic stabilization
and to a lesser extent some incremental monetary policy accommodation, we are following
the roadmap from the fall 2010 rally. Technology, Industrials, Materials and Consumer
Discretionary should lead the rebound while Staples and Utilities should lag.
We’re tactically positioned for a rally, but with a negatively skewed distribution of
outcomes, we’d rather be neutral two defensive sectors than underweight three.
Industrials
Technology
Discretionary
Materials
Energy
Telecom ↑
Health Care ↓
Financials
Staples
Utilities
Underweight Marketweight- Marketweight Marketweight+ Overweight
Note: ↑/↓ = increases/decreases on 9/16/11 to ratings in place since 8/11/11 or earlier. Source: Barclays Capital
Overweight: The performance of the S&P 500 sector is expected to significantly outperform the performance of the
S&P 500 index in the next 3–6 months. Marketweight Plus: The performance of the S&P 500 sector is expected to
outperform the performance of the S&P 500 index in the next 3–6 months. Marketweight: The performance of the
S&P 500 sector is expected to perform in line with the S&P 500 index in the next 3–6 months. Marketweight Minus:
The performance of the S&P 500 sector is expected to underperform the performance of the S&P 500 index in the next
3–6 months.

3. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 3
OVERVIEW
Happy days: The unintended consequences of financial repression
in the 1940s and 1950s; single-digit PE multiples
Our view that the U.S. would shrug off the August twin confidence shocks and that it
was too early for a disorderly Chinese rebalancing seems to be gaining acceptance.
We believe this resilience has been driving the equity rally off the October low.
We think the bar has been set sufficiently low for this weekend’s European summit.
We expect the markets to accept the upcoming announcements and the assets most
directly impacted to respond favorably. Ultimately, we expect to see cracks in the
plan unfold later in the year.
Earnings season began in earnest this week with the surprise tracking better than
2Q11, although off reduced expectations and heavily skewed towards Financials.
Judging by Industrials, the outlook doesn’t appear as bad as recessionists feared.
We find the similarities between today and the post WWII period (1947-51) striking.
We believe that the unintended consequences of financial repression, along with an
uncertain public policy outlook help to explain low PE multiples then and now.
Reverse psychology
Going into this weekend’s European summit, which is expected to last until Wednesday, we
believe expectations are quite low for a constructive outcome—one that avoids
overpromising and under delivering. Our view, based primarily on discussions with
investors, is that the consensus is looking for:
A bank recapitalization structure that results in asset sales rather than incremental
equity and leads to a global credit crunch (hitting emerging markets and commodities
disproportionately).
A Greek restructuring that violates Hayek’s rule of law and penalizes private investors to
the benefit of the public sector (leading to a loss of investor trust in sovereign and
financial sector credit).
An EFSF structure that either leads to a downgrade of France’s sovereign rating or is
insufficient to ‘ring fence’ Spanish and Italian government debt.
While we share the concerns expressed in these ‘consensus’ views we think the bar has
been set sufficiently low such that the markets accept the announcements and the assets
most directly impacted (sovereign government bonds, bank credit spreads and perhaps
equities) respond favorably. Ultimately, we expect to see cracks in the plan unfold later in
the year (such as spread widening across a variety of asset classes, including dollar basis
swaps due to bank balance deleveraging through asset sales) and another wave of crisis
early in 2012.
Notwithstanding somewhat cynical comments about EU bank and sovereign bailouts, it
seems likely that a guarantee structure for unsecured bank debt will be included (in
whatever pronouncements result from the endless summit), which should lower the
probability of disorderly bank deleveraging. Still, we believe that deleveraging will continue
and would remind investors during the most acute phase of the deleveraging process in the
U.S., the dollar went sharply higher (which at the time was quite unexpected). If EU region
banks cut risk-weighted assets (sovereign debt has a zero-risk weighting under Basel
Barry Knapp
+1 212 526 5313
barry.knapp@barcap.com
BCI, New York
We think the bar has been
set sufficiently low such that
the markets accept the
announcements.
If EU region banks cut risk
weighted assets we expect the
path of least resistance for the
euro to be higher.

4. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 4
guidelines), we expect the path of least resistance for the euro to be higher, as repatriation
drives demand for euros. Anecdotal evidence suggests that lines of credit for energy
financing, combined with oil markets in backwardation, could drive crude prices higher as
well. Additionally, a drop in the dollar could contribute to higher equity prices. So, we are
reasonably certain that a ‘pain trade’ for most investors, in the near term, would be a rally in
the euro, S&P 500 and in energy prices. Hence, we think this would be painful for the U.S.
consumer (with a lag), setting the stage for a difficult start to 2012 for both the economy
and markets.
On a more positive note, our non-consensus view that the U.S. would shrug off the twin
confidence shocks of August and that it was too early for a disorderly Chinese economic
rebalancing (away from investment) seems to be gaining acceptance. We believe this
resilience has been the catalyst behind the rally from the early October low (see Stabilization
of US growth outlook drives performance of cyclical sectors, 10/18/11). While we much
prefer the price investors pay for downside protection (index options protection strategies)
rather than sentiment surveys to determine investor positioning, we find this week’s AAII
data to be consistent with what we observed in the volatility markets (as well as anecdotal
commentary from our client meetings). This week the percent bulls increased slightly to
35.8% from 34.4% (the lowest level since August 2010) while the bears dropped to 41.0%
from 46.3% (the highest reading since March 2009). The corollary in index volatility is
downside skew cheapening along with term-structure normalizing as correlation remains at
high levels. Simply put, both indicators are suggesting that the rally has been about short
covering, yet few investors have gotten long.
The next two weeks are critical for bearishly biased investors; Europe’s ‘big’ extended
weekend, earnings season, 3Q11 GDP, October ISM, auto sales and payrolls could combine
to create a stable enough macroeconomic environment to draw longs back into cyclical
equity sectors and riskier tiers of the credit market. The October U.S. economic data is of
particular interest for us. If it is as least as strong as the September data (the strongest
month of what is likely to be the strongest quarter of 2011) then all of the slowing growth
dynamics that unfolded in early May (and culminated with the 2Q11 GDP and benchmark
revisions in late July) may cause leading equity investors to reassess their bias towards
defensive sectors.
Figure 1: What we know about October so far is favorable;
the 4wma of jobless claims is approaching the March low…
Figure 2: … and the Empire State and Philly Fed
manufacturing surveys showed strengthening new orders
300
350
400
450
500
550
600
650
700
08 09 10 11 12
000's
Initial Claims (4wk ma) 1wk
-50
-40
-30
-20
-10
0
10
20
30
40
50
08 09 10 11 12
Index
Empire State Mfg Survey: New Orders Index SA
Philly Fed Bus Outlook Survey: New Orders Index SA
Source: Dept. of Labor, Haver, Barclays Capital Source: FRBPA, FBRNY, Haver, Barclays Capital
Our view that the U.S.
would shrug off the August
confidence shocks and that it
was too early for a disorderly
rebalancing in China seems to be
gaining acceptance.
Indicators suggest the rally has
been about short covering.
October U.S. macro data is of
particular interest for us; it may
cause investors to reassess their
bias towards defensive sectors.

5. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 5
What we know about October so far is favorable; the weekly chain store surveys from ICSC
and Redbook are tracking at similar rates to September (4 ½-5% y/y), the four-week
moving average of jobless claims is approaching the post-Great Contraction low (reached in
March 2011), the Empire State and Philly Fed manufacturing surveys showed strengthening
new orders and shipments and even the NAHB Homebuilders survey positively surprised
(see Figure 1 & 2).
The macro trends gleaned from multi-industry manufacturing companies also appear
favorable according to Barclays Capital analyst Scott Davis (Multi-Industry: What We
Learned Today: October 20, 2011). To paraphrase his note, the early read on 4Q is
encouraging; inventory destocking risks have abated, the sell-through in October is better
than expected, and international weakness (so far) is isolated to Europe – risks remain, but
increased visibility on good orders should improve investors’ comfort with the pace of 2012.
In addition, comments from Parker Hannifin’s (PH) 3Q earnings call were consistent with
our view that the drop in business confidence would not have much of an impact on
corporate behaviour.
“If we haven’t talked ourselves into a double dip by now, we probably won’t, because we’ve
been talking about it for the better part of two quarters here.” – Donald Washkewicz,
President, Chairman & CEO
While equity investors may be suffering from ‘macro fatigue’ due to the constant stream of
headlines from European policymakers, they do know how to interpret earnings reports.
While there are some signs of deceleration in the sharp growth in earnings, current quarter
results (as well as forward guidance) do not look consistent with the negative 2012
earnings growth which the market was pricing at the beginning of October.
3Q11 Earnings update
Earnings season began in earnest this week (134 companies, 42% of market cap, have now
reported 3Q11 results). The first significant week of reported earnings often sets the tone
for the season and, historically, proves to be the most important period in gauging investors’
reactions.
On the surface, the surprise (that is actual results relative to estimates) is even better than
2Q11, in part due to marked down analyst expectations. Financials have also played a major
role in the positive results (currently accounting for 79% of the aggregate beat), much of
which is a non-multiple-expanding item of adjustments to liabilities (CVA and DVA).
However, relative to investor expectations in early October of a 2012 earnings decline
(implied by market prices), these results serve to lower the probability of a double dip.
Additionally, Industrials and Materials, two sectors vulnerable to a Chinese slowdown, have
surprised positively on both the top and bottom line, suggesting analysts’ concerns and
investor) about the global slowdown were somewhat excessive.
Expectations for the balance of 2011 and 2012 were reduced coming out of 2Q11, reflecting
macro concerns and a challenging operating environment. Since the end of the second
quarter, the 3Q11 earnings estimate for the S&P 500 has fallen by ~4% while the estimate
for 2012 declined by ~3% (a proxy for guidance expectations). Off these revised estimates,
revenues and earnings have surprised by 1.5% and 6.6%, respectively (as compared to 1.7%
and 5.0% in 2Q11), with the earnings surprise ratio tracking at 69% (slightly down relative
to 2Q11’s 70%). 3Q11 results (both revenues and earnings) have been skewed heavily by
Financials; excluding the sector, the current earnings surprise is only 1.8%. In our view, if
earnings surprises were really high (or surprise ratios were above trend), it would suggest
The current quarter results as
well as forward guidance does
not look consistent with negative
2012 earnings growth.
134 companies (42% of market
cap) have reported 3Q11 results.
The surprise is even better than
2Q11, in part due to marked
down analyst expectations.
3Q11 have been skewed heavily
by Financials; excluding the
sector, the current earnings
surprise is only 1.8%.

6. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 6
that analysts may have reduced estimates too far; this might be true for certain sectors (i.e.,
Financials), but is not something we’re seeing universally across the aggregate index.
Figure 3: Revenues and earnings are currently beating
estimates by 1.5% and 6.6%, respectively
Figure 4: The earnings surprise ratio for 3Q11 is currently
tracking at 69%
Sector 2Q11 3Q11 2Q11 3Q11
DIS 2.5 1.3 6.7 1.3
STA 2.2 2.1 1.3 4.1
ENR (0.1) 0.4 1.7 1.8
FIN 2.6 3.4 9.9 22.7
HLC 1.4 0.3 3.8 2.1
IND 1.6 1.3 3.7 1.0
TEC 2.9 (0.2) 10.5 1.7
MAT 2.3 6.2 3.6 1.5
TEL 0.6 (0.2) (9.5) 0.0
UTL (0.9) -- 3.4 --
SPX 1.7 1.5 5.0 6.6
SPX ex-FIN 1.5 1.0 4.4 1.8
SPX ex-ENR 2.0 1.6 5.7 6.8
SPX ex-FIN,ENR 1.9 1.1 5.0 1.8
Revenues, Surp % Earnings, Surp %
57 57
64
71
77
71
79
76
72
70
68
6970
50
55
60
65
70
75
80
85
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
Ratio
S&P 500 Earnings Surprise Ratio Avg = 69
Source: FactSet, Barclays Capital
Note: ‘Earnings’ = EPS * Avg Shares
Source: FactSet, Barclays Capital
Note: Surprise Ratio = # Positive Surprise / Total # Reported
So, while the current 3Q11 earnings trends look constructive (especially in light of
recessionists’ fears), any early read on earnings is at best mixed. That said, the market appears
to have priced in some excessive pessimism in many instances. For example, Manpower
(MAN) reported solid 3Q11 results this morning but lowered guidance citing a weaker
macroeconomic environment; however, the stock rallied as the company’s outlook for the
labor market was apparently more favorable than that which the market had priced in.
Investors remain focused on global growth. While the macro data appears to be pointed
toward recovery, investors are looking to this quarter’s operating results to validate the
forward outlook. We’ve been particularly focused on Industrials given that these are
multinational companies with more exposure to the global real economy.
In this morning’s earnings release, despite uninspiring 3Q results, General Electric (GE) cited
strong momentum in organic growth carrying through to 4Q11 and into 2012 (guiding to
double-digit earnings growth next year with expanding margins). The company’s CEO also
went on to say that the situation in Europe “really does appear manageable” allaying some
concerns about protracted European contagion.
In the capital goods space, Parker Hannifin’s (PH) cited international strength and reduced
pricing/cost headwinds (potentially now a tailwind for PH and other Industrials going
forward). With respect to European optimism, the company noted that “we’re not as
concerned about the smaller countries. Of course, we want to see strength across the
board, but the major ones are all doing very well and remain strong for us.”
As for constituents noting subdued prospects, their challenges appear to be more company
specific (as opposed to macro focused). For example, Ingersoll-Rand (IR) beat 3Q
expectations, but reduced its 4Q guidance just 20 days after lowering the outlook; however,
the company cites mostly operational challenges in pursuing its “lean transformation” as it
moves into 2012, not global growth (as international revenues were up 10% in 3Q11,
versus -1% in the US).
While 3Q11 trends look
constructive, any early read on
earnings is at best mixed.
We’ve been particularly focused
on Industrials given that these
are multinational companies.
GE cited strong momentum in
organic growth carrying through
to 4Q11 and into 2012.
PH cited international
strength and reduced
pricing/cost headwinds.
IR reduced guidance, but on
company-specific factors, not
global growth.

7. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 7
On balance, given the general tone of managements’ commentary (around earnings and the
2012 outlook) and the current reads on October’s data (i.e., Fed manufacturing surveys),
the outlook going forward doesn’t appear as bad as the recessionists might have you
believe. However, exogenous shocks (and persistent uncertainty) still pose a risk; as our
Multi-Industry analyst, Scott Davis, notes in his initiating report (U.S. Multi-Industry:
Initiating Coverage: Cash Will Drive Outperformance - Scale in to Year-End, October 13,
2011), “an emerging markets collapse would drive us quickly towards a bear view. That’s
the real risk to our call.”
Blended growth and margins
Blended 3Q11 y/y growth for the S&P is tracking at 11.5% for revenue and 15.0% for
earnings. While Financials account for much of the current 3Q11 surprise, Energy
contributes disproportionately to blended growth; excluding Energy, blended y/y revenue
growth is tracking at 9.0% while that for earnings is tracking at 9.8%. Blended margins for
the aggregate index are currently up ~30 bps (~16 bps excluding Energy).
Figure 5: Blended 3Q11 y/y growth for the S&P is tracking at 11.5% for revenue and 9.7% for earnings
Revenues, $Bn Earnings, $Bn Profit Margin
S&P 500 sector 3Q10 (A)
3Q11
(Blend) y/y % 3Q10 (A)
3Q11
(Blend) y/y % 3Q10 (A)
3Q11
(Blend) y/y bp
DIS 287.1 315.8 10.0 18.7 22.0 17.5 6.5 7.0 0.44
STA 358.1 391.5 9.3 22.9 24.7 8.0 6.4 6.3 (0.07)
ENR 317.1 401.5 26.6 22.8 34.2 49.6 7.2 8.5 1.31
FIN 250.0 271.9 8.8 34.0 38.6 13.5 13.6 14.2 0.59
HLC 273.4 289.5 5.9 28.0 29.5 5.3 10.2 10.2 (0.06)
IND 258.0 282.0 9.3 20.0 23.1 15.5 7.8 8.2 0.44
TEC 235.1 258.1 9.8 41.5 45.4 9.2 17.7 17.6 (0.09)
MAT 82.9 94.8 14.3 5.9 7.5 28.2 7.1 7.9 0.86
TEL 71.9 76.5 6.5 4.5 5.0 10.0 6.3 6.5 0.21
UTL 84.1 90.6 7.7 10.1 9.8 (2.8) 12.0 10.8 (1.16)
SPX 2,217.7 2,472.3 11.5 208.4 239.7 15.0 9.4 9.7 0.30
SPX ex-FIN 1,967.7 2,200.4 11.8 174.4 201.1 15.3 8.9 9.1 0.27
SPX ex-ENR 1,900.6 2,070.8 9.0 185.6 205.5 10.7 9.8 9.9 0.16
SPX ex-FIN,ENR 1,650.6 1,798.9 9.0 151.6 166.9 10.1 9.2 9.3 0.10
Source: FactSet, Barclays Capital
On balance, the outlook going
forward doesn’t appear as bad
as the recessionists might have
you believe.

8. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 8
Unintended consequences of financial repression help explain low
equity multiples
A common argument is that equities are cheap relative to historical averages and should
eventually revert to the mean. While this might be true, multiples have tended to move in
secular ‘super cycle’ trends (the trend through the last cycle was lower). We’ve argued that
changes in growth expectations drive changes in multiples, but we also recognize there are
other forces at work that drive valuation trends. To help investors think about the future
trajectory of multiples, we looked to the past.
The late 1940s and early 1950s, noted by Bernanke as “the most striking episode of bond-
price pegging [by the Fed]” (Bernanke 2002). A combination of public policy uncertainty
and monetary policy missteps (the unintended consequences of financial repression)
coupled with a series of geopolitical events, led to extraordinary levels of price instability
and uncertainty. This substantially raised equity risk premiums and compressed valuations.
During the recession of 1949, S&P 500 PE multiples reached a low of 6x. The parallels with
today are striking: a crisis is fresh on the minds of investors, accommodative monetary with
exceptionally low rates and lingering public policy uncertainty).
Figure 6: In the 40s/50s, a combination of public policy
uncertainty and monetary policy missteps led to
extraordinary levels of price instability and uncertainty …
Figure 7: … which substantially raised equity risk premiums
and compressed valuations. S&P 500 PE multiples reached a
low of 6x
0
5
10
15
20
25
30
40 42 44 46 48 50 52 54 56 58
%
Real Long Bond ERP
0
5
10
15
20
25
40 42 44 46 48 50 52 54 56 58
x
S&P 500 PE Multiple
Source: Barclays Capital Source: Barclays Capital
1938–1945: financing the war
As the threat of WWII heightened, the Fed determined that it should support security prices
(largely based on Europe’s experiences of rising rates in WWI) and in 1939 it was authorized
to buy securities. The start of WWII was largely anticipated (asset prices were relatively
stable) and while public debt increased by 33% during 1939-1941, the Fed made limited
purchases through this period. This quickly changed following the unanticipated attack on
Pear Harbor (December 1941). The Fed and Treasury agreed to stabilize rates (although the
Fed preferred higher rates than Treasury).
In Mar 1942, the Fed agreed it would purchases Treasury bills when rates reached 3/8
(explicit peg) and support bonds to prevent yields from rising above 2.5% (implicit peg).
Around the same time, Roosevelt introduced a seven-point anti-inflation program that
included wage controls, price controls and rationing of goods, among other things. As the
Fed’s plan (that is, the pledge to keep rates low for an extended period) gained credibility,

9. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 9
investors sold low-yield Treasury bills and bought higher yielding bonds. To support prices,
the Fed had to do the reverse; that is, buy bills and sell bonds. By the end of the war the Fed
owned almost the entire supply of bills (Eichengreen 1990).
With a shaky growth outlook and memories of WWII (the Great Depression and the
recession of 1937/1938) fresh on investors minds, the country entered a post-war period
of financial repression with a soaring a deficit and debt to GDP (even higher than today),
a heavy handed government and an accommodative Fed (but one that lacked
independence).
Figure 8: The country entered a post-war period of financial repression with a soaring a
deficit and debt to GDP, a heavy handed government and an accommodative Fed (but
one that lacked independence)
0
20
40
60
80
100
120
140
29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 01 05 09 13
%
Fed Gov't Debt / GDP Mean
1946 - 121%
1981 - 34%
1993 - 67%
2010 - 93%
1929 - 16%
55%
Source: Haver, FRB, Barclays Capital
1946–1951: Price instability
Following the end of the war, the country fell into a short lived recession (1946). However,
as growth stabilized, prices began to climb in July 1946. Although Congress gradually
repealed many of the war time tax levies, the administration (led by Truman) continued to
intervene with price controls and wage restrictions (except for unions, which could pursue
higher wages). Price controls for goods (which were removed and reinstated) contributed
to exceptional price instability for consumers and businesses.
With the support of Treasury, in July 1947 the Fed discontinued the purchasing of bills, but
succumbing to pressure from Treasury, the Fed agreed to support bonds at 2.5% (as well as
some intermediate term rates). In addition, Congress eliminated wage and price controls
with the Taft Hartley Act in June 1947 (this started the “Right-to-Work laws, which to this
day remains contentious). Inflation abated but bond yields rose, and the Fed purchased
securities to control the rise in yields.
In 1948, inflation rose again and the Fed again was forced to purchase bonds, this time with
cash, adding yet more fuel to inflationary fire. Although the Treasury resisted, the Fed raised
rates in August 1948 to 1.25%. While prices stopped rising, maintaining price stability in the
face of a mandate to keep rates low was increasingly a problem. Congress pushed Truman to
pass a bill to raise reserve requirements (a policy tool from the Great Depression and the
recession of 37/38). As reserve requirements were raised, banks shed Treasuries, which the
Fed was then obligated to purchase. However, despite purchases mitigating the impact of
increased reserves the country fell into recession in November 1948.

10. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 10
As loan demand fell, banks bought securities, but the Fed, committed to the rate peg, sold
securities during the recession, frustrating conditions. While the recession brought about a
much needed pause; inflation turned to deflation, elevating inflation volatility. S&P 500 PE
multiples reached a trough of near 6.0x in 2Q49 (the lowest level until the early 1980s).
The Fed’s experience in the 1948/1949 recession bolstered its conviction (reflected in the
July 1949 FOMC minutes) that its responsibility was to ensure price and income stability,
not interest rate stability. The Fed had drawn a line and its objectives were now formally at
odds with Treasury.
1950–1951: Finally, Fed independence
“Either the Federal Reserve should be recognized as having some independent status, or it
should be considered as simply an agency or a bureau of the Treasury.” Fed Governor
Marriner Eccles, U.S. Congressional hearing 1951
As the economy recovered in 1950 so did prices. The Fed pushed Treasury to raise rates,
but was again forced to buy Treasuries. With the call to war, this time Korea, inflationary
concerns reached a tipping point. The Fed, ‘fed up’ with debt monetization raised interest
rates to 1 3/8% and the FRB of New York raised the discount rate in August 1950,
against the desires of the Treasury. The relationship between the Treasury and Fed was
also reaching a tipping point (it’s rumored that Truman had an ally in the FOMC who
selectively leaked Fed meeting accounts to newspapers in efforts to discredit the Fed).
Shortly thereafter, in January 1951, Truman froze wages and nonfarm prices, even with the
threat of higher rates. Led by fears of WWII rationing (meat rations weren’t lifted until
December 1945), consumers rushed to hoard goods and inflation skyrocketed.
Figure 9: The Fed was fed up with debt monetization and in
August 1950, against the desires of the Treasury, raised
interest rates to 1 3/8%
Figure 10: Led by fears of WWII rationing, consumers rushed
to hoard goods and inflation skyrocketed
-10
-5
0
5
10
15
20
46 50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10
y/y % chg
CPI Expectations: 6m CPI Expectations: 12m
-10
0
10
20
30
40
50
40 42 44 46 48 50 52 54 56 58
%
CPI 3m/3m annualized
Source: FRB PA, Haver, Barclays Capital Source: Haver, Barclays Capital
The ongoing dispute between the Fed and Treasury reached a head in February 1951, when
the Fed notified Treasury that it would no longer support bond prices. Fortunately for the
Fed, a large near-term refunding and new issuance requirements (and pressure from
Congress), forced Treasury to put an end to the dispute. In March 1951, the two parties
agreed to the Treasury-Fed Accord, which eliminated the Fed’s obligation to monetize
the debt of the Treasury at a fixed rate in a Joint announcement by the Treasury and Fed
on March 4, 1951.

11. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 11
1951–1959: Post Accord, price stability
Following the Accord, Treasury prices were allowed to fall and by year end, bond yields
were 2.75%. Throughout the 1950s, the Fed was very concerned with managing inflation
expectations (the FOMC minutes in Aug 55 characterize inflation as “a thief in the night.”).
From 1951 until 1959, CPI fell to 1.5% from 9.5%, while short-term rates rose to 4% from
1%. Although nominal rates were more volatile, inflation, and inflation expectations
were subdued and real rate volatility fell.
However, this didn’t mark the end of financial repression; real rates generally remained low
(or negative) and were below real GDP. Debt to GDP, which peaked at 121% in 1946,
gradually declined as nominal GDP extinguished debt obligations (real debt levels fell). S&P
500 PE multiples, which troughed at single digits, climbed steadily higher through the
expansion of the 1960s, before inflation uncertainty again arose in the 1970s, culminating
with single digits in early 1980s.
Parallels with today
The parallels with today are striking. We believe it is these similar factors that drove
multiples to historic lows in the 1940s and help explain today’s low multiples
environment. Public policy uncertainty is high, monetary policy is extraordinary
accommodative and negative real rates are aimed at stimulating the economy (which
should provide a dose of inflation and chip away at the highest debt to GDP since 1946
(that is financial repression)). While the mountain of debt in the 1940s was built up
defending our country (as opposed to financing consumption), both periods, nonetheless,
followed the crises. Much like the threat of another war (Korea) and another financial
downturn likely influenced investors’ attitude toward asset prices in the late 1940s and early
1950s, the looming threat of another financial crisis, this time in Europe, weighs on
investors today.
Figure 11: Maintaining negative real rates may produce inflation (the Fed’s goal in our
view) and should heighten inflation volatility (which we find has an inverse relationship
with PE multiples)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
38 41 44 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13
Vol Pt
2
4
6
8
10
12
14
16
18
12m Inflation Volatility 24m Shiller Cycl Adj Earnings Yield
%
Source: Professor Robert Shiller, Haver, Barclays Capital
We expect public policy to remain challenging and for it to get worse before it gets better
(particularly headed into the 2012 elections). However, ultimately inflation may prove the
larger concern. Balancing growth and inflation is difficult and history shows that holding
rates below inflation for extended periods often begets higher inflation (one of the Fed’s
goal, in our view). In addition, we think it is almost certain to heighten inflation volatility

12. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 12
(which we find has an inverse relationship with PE multiples). Indeed, inflation volatility
increased steadily through the last cycle and looks to be rising (despite inflation at relatively
low levels).
We expect financial repression to continue and while we believe the Fed is acting
appropriately, as we’ve illustrated, the strategies are risky (but we believe the cost of doing
nothing is far greater). We could envision a scenario in 2013 when policy concerns are
alleviated and financial repression leaves the Fed behind the curve, faced with elevated
inflation expectations and perhaps in need of another Accord with Treasury to begin the
tightening process. Once that process is complete (the unwinding of extraordinary
measures), it seems a likely time for secular multiple expansion.
References:
Bernanke, Ben, “Deflation: Making Sure ‘it’ Doesn’t Happen Here,” Speech before Nation
Economics Club, Washington D.C. November 21, 2002.
Eichengreen, Barry, and Peter M. Garber, “Before the Accord: U.S. Monetary-Financial Policy,
1941-51,” in R. Glenn Hubbard, ed., Financial Markets and Financial Crises, Chicago:
University of Chicago Press for NBER, 1991.
Hetzel, Robert L, and Ralph F. Leach, “The Treasury-Fed Accord: A New Narrative
Account,”Federal Reserve Bank of Richmond, Economic Quarterly (Winter 2001) pp. 33-55.
Romer, Christina, and David H. Romer, 2002. “A Rehabilitation of Monetary Policy in the
1950’s,” American Economic Review v92, 121-127
The Miller Center Online. 2011. Miller Center, University of Virginia. October 21, 2011
http://millercenter.org/president/truman/essays/biography/4

13. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 13
MARKET SNAPSHOT
Figure 1: Price performance Figure 2: Relative performance, total return
Index
As of
10/20/11 1wk, % 3m, % 12m, % YTD, %
Discretionary 302 -1.1 -5.5 11.0 2.2
Staples 318 0.0 -2.1 7.9 4.9
Energy 503 1.0 -12.6 14.0 -0.7
Financials 172 1.5 -14.6 -12.4 -19.7
HealthCare 376 -1.2 -7.4 4.2 3.1
Industrials 276 -0.4 -12.8 -0.8 -8.2
Technology 407 -3.4 -4.1 5.6 0.7
Materials 205 -2.8 -17.4 -4.2 -14.5
Telecom 124 -0.6 -5.6 1.4 -4.0
Utilities 174 1.1 2.4 6.5 9.4
S&P500 1,215 -0.8 -8.3 3.2 -3.4
Russell 2000 1,731 -2.3 -16.3 -0.8 -11.1
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
10/21/09 4/21/10 10/21/10 4/21/11
0.90
0.95
1.00
1.05
1.10
1.15
1.20
Rel Perf: Cyclical / Defensive Sectors (L)
Rel Perf: S&P 600 (small) / S&P 500 (large) (R)
RatioRatio
Note: S&P 500 sector indices. Source: FactSet, Barclays Capital Source: FactSet, Barclays Capital
Figure 3: Valuation multiples
P/Earnings
LTM
P/Earnings
NTM Div Yield LTM
DivYield
NTM P/Book P/Sales LTM P/Sales NTM
EV/EBITDA
LTM
EV/EBITDA
NTM
Health Care 13.5 10.8 2.3 2.5 2.3 1.1 1.1 7.0 6.9
Technology 13.4 11.9 1.0 1.1 3.1 2.2 2.0 7.3 6.6
Staples 15.2 14.0 3.0 3.3 3.3 1.0 0.9 9.1 8.6
Industrials 13.5 11.8 2.4 2.6 2.4 1.1 1.0 8.8 7.9
Telecom 16.9 15.3 5.5 5.6 1.7 1.1 1.1 5.8 5.5
Financials 11.3 9.4 1.8 2.2 0.9 1.4 1.4 -- --
Materials 12.3 10.6 2.3 2.5 2.1 1.1 1.0 6.7 6.0
Discretionary 15.3 13.5 1.5 1.7 2.9 1.0 0.9 7.7 7.1
Energy 10.8 9.8 1.9 2.1 1.8 0.9 0.8 4.9 4.5
Utilities 13.7 13.8 4.2 4.3 1.5 1.2 1.2 8.0 7.8
S&P 500 12.8 11.4 2.1 2.3 1.9 1.2 1.1 7.5 7.0
Russell 2000 19.6 13.8 2.1 2.2 1.4 0.8 0.7 8.3 7.1
Valuation Metrics (as of 10/20/11)
Index
Note: S&P 500 sector indices. NTM is comprised of bottom-up consensus estimates from FactSet. *Valuation score is the renormalized sum of normalized relative
valuation metrics expressed in common units of standard deviation away from the mean (z-score) since 1973. Source: FactSet, Barclays Capital.
Figure 4: S&P 500 net EPS revisions Figure 5: Equity risk premium (to real IG credit yields)
-100
-80
-60
-40
-20
0
20
40
60
03 04 05 06 07 08 09 10 11
Index
Net Revisions: S&P 500, 13wk ma 4wk ma
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
13
76 81 86 91 96 01 06 11
%
Real Credit ERP Mean +/- SD
Source: FactSet, Barclays Capital Source: Barclays Capital

14. Barclays Capital | U.S. Portfolio Strategy Weekly
October 21, 2011 14
ANALYST(S) CERTIFICATION(S)
I, Barry Knapp, hereby certify (1) that the views expressed in this research Company Report accurately reflect my personal views about any or all of the
subject securities or issuers referred to in this Company Report and (2) no part of my compensation was, is or will be directly or indirectly related to the
specific recommendations or views expressed in this Company Report.
IMPORTANT DISCLOSURES
The analysts responsible for preparing this report have received compensation based upon various factors including the firm’s total revenues, a portion of
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For current important disclosures, including, where relevant, price target charts, regarding companies that are the subject of this research report, please
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and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research
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Barclays Capital, the investment banking division of Barclays Bank PLC (Barclays Capital, London)
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17. US11-0244