TLF Capital's thoughts on the current business cycle and financial markets. Traditional wealth managers, who generally subscribe to some form of a generic asset allocation model throughout business and market cycles, may not be communicating current conditions, which we do find unique, clearly. We think it is a wise time for investors to think about their current asset allocation. We hope you find the presentation helpful and thought-provoking.

1. TLF Capital, LLC
“Business and Market Cycles…We Are in Unique Times. How Are You Positioned?”
Ed McCabe
212-554-5000 (office)
917-902-6814 (mobile)
ed@tlfcap.com
TLF Capital, LLC
1370 Avenue of the Americas, 24th Floor
New York, NY 10019
November 28, 2017

2. Easy Money: Current Interest Rates in Historical Perspective
Source: Robert Shiller, Yale School of Management
Note: 10 year Treasury after 1953. Before 1953, it is government bond yields from Sidney Homer, “A History of Interest Rates.”
10 Year Treasury Yields

3. Easy Money: While the Fed’s QE Decelerated Some Time Ago and Has Now Ended, the
ECB and BOJ Have Grabbed the Baton
 QE among the Fed, ECB, and BOJ totals $14.1 trillion.
 The Fed has ended QE. The ECB and BOJ are likely nearing the end of QE as well.

4. Easy Money: Households Deleveraged Following the Financial Crisis; After 13
Consecutive Quarters of Growth, Household Debt Now Exceeds 3Q08 Levels
 Household debt, at $12.96 trillion, is $280 billion higher than the past peak of 3Q08 and 16% above the 2Q13
trough

5. Adjusted for Inflation, Household Income is Now Back to Where it Was 17 Years Ago
 The rise in household debt is in part due to a lack of income growth
 Stagnant household income is a major reason for widespread discontent and social division
Source: Federal Reserve Bank of St. Louis
Real Median Household Income in the United States

6. Easy Money: Global Debt Bubble Looming?
Source: IIF, BIS, Haver, U.S. Global Investors
 Over the last fifteen years global debt has grown
144% from $89 trillion to $217 trillion
 Global debt as a percentage of global GDP has
grown from 246% to 327% over the same
period
 Since the Financial Crisis the world has added ~$70
trillion worth of debt (+46%)
 During the same period global debt to global
GDP has grown from 276% to 327%
 Normalized interest rates would make refinancing
this debt much more expensive, hindering global
GDP growth

7. The Current Business Cycle: Expansion Modest in Growth but Long in Duration
GDP Growth Since Q309Business Cycles Since WWII
 The average and median economic expansions since WWII have lasted 63 and 58 months, respectively
 Excluding this cycle, the average and median expansions since WWII lasted 60 and 52 months, respectively
 This expansion is in its 101st month
Source: National Bureau of Economic Research
Source: Bureau of Economic Analysis

8. The Current Business Cycle: Flattest Yield Curve in Ten Years
Spread Between 10-Year and 2-Year Treasuries
 Spread between 10-Year and 2-Year Treasuries is currently signaling the likelihood of a slowdown in GDP
 Should the yield curve invert history says we are nearing a recession
Source: Federal Reserve Bank of St. Louis

9. The Current Bull Market: Second Longest and Second Best Returning Since WWII
S&P 500 – Current Bull Market
 This bull market is likely closer to its end than its beginning
 The average bull market since WWII has lasted 58 months; the current bull market is in its 104th month
 The average bull market since WWII has returned 149%; the current bull market has returned 285%

10. Bull Market Aided by Leverage: Margin Debt is at an All-Time High
Stock Margin Debt is at an All-Time High Stock Margin Debt at Highs Preceded the Bursting of the Tech Bubble and
the Financial Crisis
Source: NYSE
Source: NYSE
 The bursting of the tech bubble in March 2000 and the financial crisis that began in September 2008 were
preceded by record margin debt
 Margin debt: March 2000 - $279 billion; July 2007 - $381 billion
 Margin debt is currently at an all-time high of $561 billion

11. Investing on Autopilot: ETFs Have Become Very Popular and Added Fuel to the Market
US 1940 Act ETF Assets Under Management ($ billions) US 1940 Act ETF Flows ($ billions)
 ~99% of ETF assets are in passive strategies (i.e. indexing)
 At the end of 2016, it is estimated ETFs made up ~30% of daily dollar value trading and ~20% of daily volume
(source: Credit Suisse)
 ETFs leveraged 2x-3x underlying indices have risen in popularity, introducing risk not understood by many
investors and regulators
Source: 2017 Investment Company Fact Book Source: 2017 Investment Company Fact Book

12. Investing on Autopilot: Active Investing Losing Massive Share to Passive; The Impact
of ETF Outflows During a Significant Downturn Has NEVER Been Tested
Mutual Funds + 1940 Act ETFs: Active vs. Passive Strategies ($ billions) Mutual Funds + 1940 Act ETFs: Active vs. Passive Flows ($ billions)
 Passive strategies, predominantly through ETFs, have seen assets grow at an annualized 20.8% since 2008
 Actively managed mutual fund assets are essentially flat since 2013 due to redemptions and the shift to passive strategies
 Passive strategy inflows driving stocks blind to valuation or fundamentals
 ETFs performance has not been tested in a significant downturn
 What happens when flows reverse?
Source: 2017 Investment Company Fact Book Source: 2017 Investment Company Fact Book

13. Stocks Look Expensive
Stock Market Capitalization-to-Nominal GDP: “The Buffet Indicator”
 The “Buffet Indicator” is just off the high of the first quarter of 2000, which preceded the bursting of the tech
bubble
Source: Wilshire 5000 Full Cap Price Index, Federal Reserve Bank of St. Louis

14. Bubbles?
 The Fed has already voiced caution over the rise in commercial real estate, saying valuations “have been an area of
growing concern…”
 Despite low mortgage rates, residential home price appreciation and meager wage growth have caused housing
affordability to plummet
Commercial Property Price Index S&P/Case-Shiller US National Home Price Index
Source: Green Street Advisors Source: S&P Dow Jones Indices LLC

15. Bubbles?
 197 private companies valued at over $1 billion; collectively worth $679 billion
 Bitcoin!?!?
Global Unicorn Club: 197 Private Companies Valued at $1B+
Source: CBINSIGHTS (as of 5/26/17)
Bitcoin
Source: Quandl

16. If You’ve Been Invested in Stocks You’ve Had a Great Run Since 2009
 The S&P 500, including dividends, has compounded at 15.2% since January 1, 2009
 $5.0 million invested would now be worth $17.2 million for a total gain of 244% (in other words, $1.00 invested would
now be worth $3.44)

17. Your Great Run Has Been Aided by a Number of Unprecedented Tailwinds; Winds are
Shifting
 You bought the market well if you started investing in 2009; the S&P 500 was down 56.4% peak (1,516, 10/9/07) to trough
(683, 3/5/09).
 The market appears expensive.
 The Fed has kept interest rates at historically low levels.
 The Fed is tightening.
 The Fed implemented unprecedented quantitative easing (QE), growing its balance sheet from $1.9 trillion to $4.4 trillion
since the financial crisis.
 The Fed recently ended QE. Other central banks are likely not far behind.
 With the rise of passive investing, ETFs and index mutual funds have enjoyed massive and consistent inflows,
mechanically putting money to work in stocks daily, blind to valuation and fundamentals of the underlying constituents of
the indices.
 At what level will marginal buyers of the stocks underlying these indices step in if these vehicles see outflows?
 WE BELIEVE NOW IS A WISE TIME TO THINK ABOUT YOUR ASSET ALLOCATION.

18. Thank You
Ed McCabe
212-554-5000 (office)
917-902-6814 (mobile)
ed@tlfcap.com
TLF Capital, LLC
1370 Avenue of the Americas, 24th Floor
New York, NY 10019
November 28, 2017