Cornerstone Chartbook April 2011

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Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 Consumer indicators of monetary health are more positive after significant contractions. Each indicates more confidence by consumers (either willingness to borrow or willingness to spend). Money trends.

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Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 Copper can be a good indicator of forward economic activity; this three year chart demonstrates just how far we’ve come since the depths of the crisis. Macro-economic indicator.

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Much of this growth has been export-driven rather than simply depending upon the US consumer. This is a healthy change. Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 Making things others want.

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Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 Manufacturing activity is up considerably since recent lows. It’s not as cheap as it once was to make things in China, and transportation costs matter. These are both good things for an advanced, value-added economy like the US. Manufacturing.

Credit spreads have contracted, indicating considerably less risk-aversion. :

And the VIX indicates less risk aversion as well.:

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Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 Quantitative Easing part 2 (QE2) and its justification. The Federal Reserve instituted a second round of quantitative easing last fall as the economy had just begun to show signs of recovery but was not yet healthy enough to deal with the reduction in liquidity (as the first round of easing expired) which had unintended consequences around the world. Markets and governments were simply not ready to deal with some of the structural causes of the Great Recession discussed in last quarter’s Chartbook. Many were still in crisis-recovery mode. Also, given that the US is leveraged to asset growth (inflation, some might say), there is a healthy range for inflation targets. After QE part I ended, inflation expectations declined quickly. The worst possible headwind for re- liquifying the banking system is deflation. This time, markets have responded, the macro-economy looks much stronger (see previous slides) and some governments are beginning to tackle longer-term issues.

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Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 Interest rates are too low at present given some inflationary pressure (see the chart of the 3 month bill). The wide yield curve continues to represent a growth opportunity, especially for financial institutions that lend for a spread. A move in short-term (but not long-term) rates would be healthy, but can it be done?

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Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 While there are a number of differences, let’s not forget what got us in this place to begin with… savers are earning nothing (and then being taxed on those “earnings”) and, therefore, are encouraged to take risk. This is not necessarily a bad thing, but it is something to be aware of.

The overall inflation rate for the past year is not excessive (2.16%), most of its growth is concentrated in recent months and food and energy. Unfortunately, this has a disproportionate impact upon the poor.:

The overall inflation rate for the past year is not excessive (2.16%), most of its growth is concentrated in recent months and food and energy. Unfortunately, this has a disproportionate impact upon the poor. Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011

Average Joe Index:

Average Joe Index Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 The price of gasoline, while it only constitutes 4.9% of the CPI “basket”, is often used as a proxy for inflation by the “person on the street”.

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Food inflation is likely to get worse before it gets better. As measured by the Bureau of Labor Statistics, food at home (which represents 7.8% of spending) is only up 2.8% year over year, but proteins (meat, poultry, etc.) are up 6.8% and fruits and vegetables are up 4.3%. It feels worse than that. Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011

Questions we have as we progress…:

Questions we have as we progress… Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 Can the economy remain in recovery mode when the QE2 stimulus is removed? Will inflation remain under control, and will those areas where there are stronger inflation be sensitive enough to cause political unrest? What are ways the Federal Reserve works to “undo” the actions taken during the crisis, and what might not work?

What we expect…:

What we expect… Copyright 2003-2011, All rights reserved. investwithcornerstone.com 4/14/2011 There is not the political will for a third round of Quantitative Easing. As QE2 is completed, interest rates in the US will fall and the dollar will strengthen. This will be for temporary reasons as investors look to reduce risk and not fundamental reasons as well still have not dealt with our structural issues. Inflation will remain in check (likely around 4% on a year/year basis), and its petroleum component will subside. However, food inflation is structural and not temporary. The US will benefit from this trend in many ways (some of them not so intuitive).