The document provides an outlook on the 2008 markets from GFAM. It discusses how investor anxiety that began in late 2007 accelerated in early 2008. The document predicts that a recession in the US is likely for 2008, driven by the housing bubble bursting and its impact on consumer debt. It notes rising delinquencies in consumer debt, commercial real estate loans, and other business loans. The effects of the credit crunch could include $250B in credit and mortgage losses, reduced bank lending of $1.25T, and a $300B cut to consumer spending over the next few years. Offsets to declining consumer spending are unlikely due to weak job and business investment outlooks. The global economic outlook is slowing growth in developed nations

1. GFAM 2008 Market Outloo k
The investor anxiety and economic concerns
that dominated the markets at the end of
2007 accelerated at the beginning of 2008.
While anticipating the timing of market
reactions is, at best, problematic, we feel
that our 2007 Outlook identified many of the
trends and opportunities that have impacted
the markets in recent months. In particular,
we believed that the deflation of the housing
bubble would be more severe than many
anticipated. On the positive side, we also
saw the potential opportunities that arose
from the weak U.S. dollar and falling
Treasury yields.
At this juncture, the questions are: will we
see a recession in the U.S. economy in
2008? What are the unique drivers (if any) to
the current slowdown? Clearly, no forecast
is ever certain, but we believe that some
potential outcomes are far more likely to
materialize than others.
Recession Possibilities?
Some Wall Street observers believe that
the recession began in late 2007 On the
.
other hand, the consensus view still calls
for “slow economic growth, but no actual
recession. But before you take solace in
”
the consensus, similar views have been
expressed in the past, even after recessions
had already begun. It is our belief that yes, a
recession is likely for 2008.
We believe that the drivers behind the
recent volatility have not fully played
themselves out. Rather than the typical
economic cycle of contraction following
035 (02/08)
expansion, the current volatility has been
sparked by an asset bubble tied to debt,
debt that must be repaid or written off as
asset prices shrink. The asset, in this case,
is housing prices and how it directly impacts
the consumer sector of the U.S. economy.
Of course, opportunities frequently present
themselves well before an economic
downturn has run its course. The stock
market, in effect, tries to predict future
worth and may begin to price in a recovery
before it shows up in the economic
indicators. Our Active Asset Allocation
approach will be an essential component of
our response to any market turnaround.
In the meantime, let’s take a closer look at
the potential consequences of the current
credit crunch.
T h e E f f e c t s o f a Cr e d i t
Cr u n c h
The problems are not simply mortgage
defaults. The problem has been an
American consumer that has seen sluggish
wage growth since the start of the decade
and felt more inclined to take on debt in
order to fund discretionary purchases.
Now, delinquencies in broad categories
of consumer debt are rising noticeably, as
well as in commercial real estate and other
business loans. Banks are taking losses
on credit cards and car loans, and as some
credit card companies report consumers
are now both cutting back on spending and
paying their bills late.
Genworth Financial Asset Management, Inc.

2. Commercial Real Estate Delinquencies
Commercial Real Estate Delinquencies
$ Million
$ Million
43000 43000
CreditCreditDelinquencies
Card Card Delinquencies
$ Million
$ Million
13500 13500
4Q Average
4Q Average
4Q Average
4Q Average
12670 12670
38000 38000
11840 11840
33000 33000
11010 11010
28000 28000
10180 10180
9350
9350
23000 23000
8520
8520
18000 18000
7690
7690
6860
6860
6030
6030
13000 13000
8000 8000
1992 1994
1992
Source = Federal Reserve Reserve
Source = Federal
1996
1994
1998
1996
2000
1998
2002
2000
2004
2002
2006
2004
2008
2006
5200 5200
1992 1994
1992
2008
Source = Federal Reserve Reserve
Source = Federal
1996
1994
1998
1996
2000
1998
2002
2000
2004
2002
2006
2004
Consumer Balance Sheets
A ballpark figure for credit and mortgage
losses (not including potential losses in the
corporate sectors) is $250 billion. Certainly
the U.S. Gross Domestic product, currently
around $12 trillion, can absorb that potential
loss. The larger concern, however, is that
losses accruing to bank balance sheets
become multiplied in terms of curtailed
lending.
While banks may be increasingly unable
or unwilling to make loans, consumers are
also reluctant to take on new debt as well.
Consumer outlays to non-discretionary
spending (such as food, fuel, medical and
debt services) are greater than at any time
in recent memory. Falling property values
and higher gasoline and food prices further
discourage consumers from extending
themselves.
Banks are generally required to hold on
their balance sheets capital equal to about
one-tenth of the loans they write. Thus,
assuming that half of this debt resides
on bank balance sheets (the remaining
debt having been securitized and sold to
investors) that equals losses of $125 billion.
That, in turn, equals perhaps $1.25 trillion
in loans that banks cannot make. While this
can severely hamper mortgage lending,
the primary risk is that capital may not be
available for small business expansion. Keep
in mind that small businesses are the largest
employer of Americans.
With some economists suggesting housing
prices may decline anywhere from 10% to
30% over the next few years, the reduction
to household wealth could range from $2
trillion to $7 trillion. One rule of thumb
suggests that households cut spending by
six cents for every dollar lost in household
wealth. That translates into consumer
spending cuts as much as $300 billion over
the next few years.
NonDiscretionary Outlays*
as % Wages
*Food + Energy (30.3%) + Medical (26.5%) + Debt Service (23.0%)=79.8%
80.5
79.0
77.5
76.0
74.5
73.0
71.5
70.0
68.5
67.0
65.5
64.0
1980
Source = BEA, Federal Reserve
1982
1984
1986
1988
1990
1992
2008
2006
1994
1996
1998
2000
2002
2004
2006
2008
2008

3. Taken over two years, this would represent
a 2% hit to consumer spending per year.
With savings rates near zero, consumers
may choose to save instead of spend in
order to shore up their personal balance
sheets. Any increase in savings, by
definition, must come from spending,
reducing GDP in the process.
Of course, increased savings rates would
be a positive for the economy in the longterm. At some point, increased savings
deposits would make more capital available
for business expansion through bank loans,
helping alleviate the credit crunch.
Offsets to Consumer
Sp e n d i n g D e c l i n e s ?
In addition to increased savings, are there
other sources of economic strength to
offset the decline in consumer spending we
outlined in the last section?
One argument is that with employment
strong, consumers will continue to spend.
We believe that logic, however, is flawed.
The simple cause-and-effect equation is that
recessions cause job losses; job losses do
not cause recessions. Most often, the job
losses mount well after the recession is
underway, and may even continue even
after the economy is deemed to have been
in a “recovery.
”
Another argument put forth by many marketwatchers is that strong corporate balance
sheets and ample cash reserves will lead to
strong capital expenditures by businesses,
a segment that represents about 16% of
the economy. While it might be true that
corporations have the capacity to increase
spending, their willingness to invest during
a downturn is highly questionable. Recent
surveys of CEOs have indicated confidence
levels similar to that achieved during past
recessions, which does not suggest an
appetite for increased spending.
Finally, others suggest that exports, at
12% of U.S. GDP will compensate for any
,
declines in the consumer sector, which
represents 71% of U.S. GDP While it is
.
true that a weaker U.S. dollar has increased
exports, the segment may not be large
enough to compensate for U.S. consumerled weakness. Moreover, any downturn in
the U.S. will, at some point, likely affect the
global economy, simply given the sheer size
of U.S. GDP at 20% of the global economy.
G l o b a l E c o n o m i c H e a lt h
This leads us to consider the health of the
global economy, where we find the theme of
slowing economies being played out across
most of the developed world. The emerging
world, on the other hand, continues to
steam ahead, fueling demand for crude
goods of all types.
This growing demand for commodities of
all types by the emerging world presents
another opportunity. Of course, in the near
term, emerging economies may suffer
from a slowdown in the developed and
(especially) U.S. economies. While emerging
markets are developing consumer societies,
they still depend on exports of both finished
and crude goods to the developed world.
Despite this short-term risk, we remain long
term bullish on emerging economies.
There are, however, opportunities to
capitalize on the strengths of overseas
markets that are now developing consumer
societies, especially when coupled with
a weak U.S. dollar. One asset category
prominent in a number of our strategies is
“Domestic Export, which invests in U.S.
”
based companies that derive a significant
amount of their revenue and profits from
overseas markets. This asset class may be
poised to capitalize on overseas consumers
and businesses around the globe that are
becoming increasingly prosperous as a weak
U.S. dollar makes U.S. goods and services
more competitive overseas.
C u rr e n c i e s a n d F i x e d I n c o m e
The dollar has weakened since 2002
against our major trading partners, but lately
the weakness has accelerated as lower
short term interest rates relative to other
economies and weaker growth prospects
make the dollar less attractive versus
investments in other countries.
While this has presented opportunities for
investing abroad or investing in companies
that export abroad, it presents a worry for
financing U.S. debt. Foreign capital has
flowed into the U.S. providing both a floor for
the dollar and a ceiling on U.S. interest rates
on the longer end of the yield curve. Now
that there is a risk that the capital inflows
will continue to be reduced, concerns mount
that the dollar will fall further.
We think it likely that global investors will
continue to favor non-U.S. dollar assets.

4. While we see weakness in Europe and the
potential for rate cuts in that region keeping
the Euro from appreciating further against
the dollar, we see Asian and emerging
markets currencies appreciating further
versus the dollar. This, of course, will make
their exports to the US more expensive
(and our exports to them cheaper), thus
narrowing our trade deficit but crimping their
economies in the process.
Fortunately, the U.S. is seen as a “safe
haven” for assets worldwide, and assets
fleeing to “quality” may mitigate the
currency decline.
Positioning for 2008
In the U.S., we remain focused on defensive
strategies early in the New Year, favoring
quality, large cap over smaller caps, and
favoring growth over value.
However, the U.S. economy is flexible
and nimble despite its size. No economic
downturn lasts forever. The stock market
can turn at a moments notice, creating
significant opportunities – opportunities
unique to the nature and character of forces
driving the recovery.
In a fast-changing environment, it is critical
to be active and forward-looking. Our active
asset allocation approach, with access to
dozens of potential asset classes, leaves
us poised to benefit quickly when the
turnaround finally materializes.
Genworth Financial
Asset Management, Inc.
16501 Ventura Blvd.,
Suite 201
Encino, CA 91436
Tel: 800 691.6680
www.gfaminc.com
©2008 Genworth Financial,
Inc. All rights reserved.
Genworth, Genworth
Financial and the Genworth
logo are service marks of
Genworth Financial, Inc.
Advisory services provided
by Genworth Financial
Asset Management, Inc.
(“GFAM”), an investment
adviser registered with the
U.S. Securities and Exchange
Commission, and a wholly
owned subsidiary of Genworth
Financial, Inc.
We look forward to investing in 2008 to
highlight the ever-changing market and
economic outlook and we thank you for your
continued business.
All charts supplied by MacroMavens, LLC.