War Room - April 2012

1. War Room 26 April 2012
Government Spending:
Belt Tightening Coming?

2. War Room
•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome

3. Government Spending: Belt Tightening Coming?
•Market Snapshot
•Trends + Policy Projections
•Outlook + Scenarios

4. Market Update

5. GOVERNMENT SPENDING:
TRENDS + POLICY PROJECTIONS
HiddenLevers

6. US Deficit: Historical Context
Source: Bloomberg
Spending has spiked since the financial crisis, and
revenue has collapsed, exacerbating deficit trends

7. US Government Budget, 2011 Breakdown
Source: Budget of the United States, HiddenLevers Research
31% ($1118B):
All Other Spending
25% ($905B):
Defense
24% ($855B):
Health Care
20% ($725B):
Social Security
36% ($1300B):
Borrowing / Deficit
64% ($2303B):
Tax Revenue
The Big 3 now
account for 70%
of all government
spending.
All other
spending could
be eliminated,
and US would
still be in deficit.

8. Defense Spending Historical Trends
Defense spending rose faster than any other category over the last
decade, including Social Security and health care.

9. Social Security
 Defense spending
peaked with Iran and
Afghan wars
 Budgets proposals call
for flat spending going
forward
 Social Security,
Medicare, Medicaid
grow while defense
shrinks over time
Source: WSJ, White House OMB

10. Social Security vs Health Care, Forecast
Source: CBO 2010 Analysis
Long term, Social Security growth slows while health care costs explode.

11. Healthcare Inflation vs CPI
Healthcare inflation has consistently exceeded CPI over the last 50
years, though recent trends might be showing improvement.

12. Healthcare Costs: Long Term Trend
 Health care = 1/3 of the
economy in 25 years
 Government pays 50% of
health care costs today
 At current rate, health
care takes 100% of
federal budget by 2035!
Source: President's Council of Economic Advisors

13. Healthcare eating up Defense Spending
2011
Veterans benefits = 1/6 of
defense spending
Cost of Veterans health care
Up 300% in past decade
2015
$63.9 billion projected
Source: US Department of Defense, HiddenLevers Research

14. Health Care Costs Increases Wasteful
Obvious:
Medicare + Medicaid
will be unsustainable
Not so obvious:
80% of projected
increases come from
excessive cost growth.
Excessive cost growth
cost of treatment growing faster than growth in per
capita GDP and CPI

15. GOVERNMENT SPENDING:
SCENARIOS
HiddenLevers

16. Lots of Noise from the Top
Even Top Brass not
on same page
Who’s right?

17. U.S. Fiscal Reform – How will it go down?
No Policy
Alteration
Rising Interest Rates
and Inflation
Deflationary Spiral
Fiscal Reform
Succeeds
Fiscal Reform
Fails
Fiscal
Reform
Cost Cuts Inevitable
Defense Spending + Health Care
Weimar
Japan Zimbabwe
USA ?
government
choices

18. No Policy Alteration = Status Quo
No Policy
Alteration
Rising Interest
Rates and Inflation
Deflationary Spiral
Weimar
Japan Zimbabwe
USA ?
Covered in March 2012 War Room
Fixed Income Outlook

19. Consequences - Chaos:
1. Akin to debt ceiling aftermath
2. Equities crushed, along with faith in government
3. Bonds likely strong, yields come in – not intuitive
4. Lack of confidence hits business + personal spending
Fiscal Reform – Inevitabilities + Market Reaction
Consequences - Confidence
1. Confidence up as perceptions of govt improve
2. Equities – winners and losers, but broad rally
3. At risk – healthcare, defense, physical metals
4. Gold – investment demand decreases
5. Lowered expectations of future inflation

20. Conclusion
Fiscal Reform must zero in on Health Care Costs

21. HiddenLevers – Product Update
• Scenario Modeling on Multiple Portfolios
• Charting - More Freedom
• Add Portfolio – Paste from MS Excel
Coming soon:
• Scenario Hedging Wizard