Rick Rieder BlackRock, Inc. April 17, 2019 Rick Rieder, CIO of Global Fixed Income NY Bank, IACFM Meeting

April 17, 2019

What is your outlook for domestic economic growth and and how has it evolved over recent months?

What are the principal risks to your growth outlook?

Are financial markets appropriately reflecting this outlook and any risks around it?

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION I. What is your outlook for domestic economic growth and monetary policy and how has it evolved over recent months? Structurally, we are at the most stable point of US Economic growth in history; cyclically, we are experiencing a tangible moderation back towards potential…

Structurally, we are seeing unprecedented stability in domestic inflation and growth today

Against a mandate of price stability, inflation Why? The evolution of the US economy towards services and away from goods has significantly reduced and growth volatility are at all-time lows… the risk of the manufacturing-oriented boom-bust cycles – creating inherently more stable growth

4.0% The volatility of Core GDP Dollars: Services vs Goods Contribution to US GDP (% of GDP) Inflation and Real GDP 16,000 30 3.5% have been hovering near Services Goods Manufacturing all-time lows for years 14,000 Finance, insurance, and real estate 3.0% 25 Professional and business services 2.5% 12,000 Educational services, health care, and social assistance 2.0% 10,000 20 1.5% 8,000 1.0% $ bn 15

6,000 of % GDP 0.5% 10 0.0% 4,000

2,000 5

Rolling 5Y Volatility of Core Inflation 0 0 Rolling 5Y Volatility of Real GDP 1950 1980 2000 2010 2017

The volatility of services growth has The US stands out in the services vs. goods And it is the goods sector that is more elastic and cyclical persistently been lower than that of goods composition – meaning, domestic monetary policy can be less aggressive GDP Growth: 5Y Rolling Volatility Services Consumption vs. Prices 12% Goods Consumption vs. Prices 12% 7% Share of GDP Goods Services 90% 10% 10% 6% Goods Services 8% 80% 8% 5% 6% 70% 4% 4% 60% 6% 2% 3% 50% 4% 0% 40%

2%

5Y 5Y Rolling Volatility Real YoY Real YoY Change Real YoY Real YoY Change -2% 30% 2% 1% -4% 20% 0% 10% 0% -6% -8% -1% 0%

US Euro Brazil Japan Russia India China

1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 1952 -5% 0% 5% 10% 15% 0% 5% 10% area Sources: BEA, Bloomberg, OECD Price YoY Change Price YoY Change

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 2 The core of this evolution lies in two structural underpinnings: 1) the historic Technological evolution impacting growth and inflation in ways never before seen in history, and 2) the Demographic evolution that is resulting in less demand – especially for goods – and hence lower potential growth and inflation…

The historic influence of technology/ intangibles is a key structural driver of the stable growth in the US

Investment in R&D and technological capabilities is resulting in divergent growth trends in the developed world, as the US maintains a better growth outlook than its DM peers… but the disinflationary impact on labor and consumer prices, and the resulting impact on monetary policy is equally important…1

Intangible & Tangible Investment in the US Intangible & Tangible Investment in Europe Is there a more descriptive answer for growth and growth/inflation potential, and consequently monetary policy, than this graph below? 1 Intangible & Tangible Investment as % of GDP

More Tangible More Tangible Intangible Intangible

As a % of capital budgets, US corporate allocations to labor Given the massive deflationary forces of most tech spending, Technology has radically changed investment and inflation, peaked in the 1940s, fixed asset investment peaked in the capital investment in tech/ IP, on a real basis in 1970 dollars, which were already being influenced by our second structural 80s, and tech spending continues to grow has literally gone off the charts economic growth trend: demographic curves Wages, % of Capital Outlays Wages, % of Capital Outlays 30% 4.0% Physical Capital, % of Capital Outlays (rhs) Physical Capital, % of Capital Outlays World Growth YoY Technology, % of Capital Outlays (rhs) 80% 30% Technology, % of Capital Outlays World Prices YoY 3.5% 100% 25% 78% 20-44 Population YoY Growth Population 25% 3.0% 76% % of Capital %Outlaysof Capital 80% 20% 74% 2.5% 20%

72% 60% 15% 2.0% YoY 70% 15% 1.5% 68% 40% 10% 10% 1.0%

66% % CapitalofOutlays % % CapitalofOutlays % 20% 5% 64% 0.5% 5% 62% 0% 0% 0.0% 60% 0% 1947 1957 1967 1977 1987 1997 2007 2017 1960 1975 1990 2005 2020 2035 2050 1947 1957 1967 1977 1987 1997 2007 2017 Hence, we believe traditional economic models will continue to be inefficient and poorly describe market conditions/monetary policy requirements unless married to an analysis of commerce today, which is in a quiet but distinct revolution at different speeds globally… Sources: Capitalism Without Capital, Federal Reserve, Haver, IMF

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 3 The demographic dynamic is another incredibly influential driver of growth and inflation globally – and there is some dispersion across regions, which helps us understand why the US can continue to see lower but solid economic growth while other regions face more onerous challenges…

Demographics are a key structural driver of demand – the next 60 years look much different than the last 60 years

While the US faces its own aging issues, on a relative basis it has a much brighter medium-term potential outlook than the rest of the DM world from a demographic perspective, which can allow persistent hiring (and a lower NAIRU than seen in history)…

25% 4% 15% 2.5% 15% 4% 40% 4%

2.0% 20% 3% 30% 3% 1.5% 12% 3% 10% 15% 2% 1.0% 20% 2% 9% 2% 10% 1% 0.5% 5% 10% 1% 5% 0% 0.0% 6% 1% -0.5% 0% 0% 0% -1% 0% -1.0% 3% 0% -10% -1% -5% -2% -1.5%

-10% -3% -5% -2.0% 0% -1% -20% -2% 1960 1975 1990 2005 2020 2035 2050 1960 1975 1990 2005 2020 2035 2050 1960 1975 1990 2005 2020 2035 2050 1960 1975 1990 2005 2020 2035 2050

Japan Nominal GDP 20-44 Population YoY German Nominal GDP 20-44 Population YoY US Nominal GDP 20-44 Population YoY China Nominal GDP 20-44 Population YoY

Demographics help us understand future cash flows, which involve problems that can be complicated when compared to liabilities…

450 400 350 300 250 200 150

Total Total / Debt GDP(%) 100 50 0

Sources: Census, Bloomberg, IMF

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 4 Today in the US, domestic growth looks to be at or above potential; taken in the context of the demographic and technological trends, we could see some continued wage (and real wage) growth but there is good reason to believe this is as good as it gets with inflation

Cyclically, we see the US economy experiencing late-cycle dynamics with respect to wages; though, we do not expect a hard-landing… Wage (and Real Wage) growth will likely continue to follow the positive Output Gap and low Unemployment Rate, which puts pressure on corporate profits – acting as a self-regulating mechanism on growth Corporate Profit Growth, decomposed 3.0% 6.0% 4 4.5 2.0% 5.0% 5 4.0 20 1.0% 4.0% 3.5 DM Revenue Growth 0.0% 6 16 3.0% 3.0

-1.0% YoY 7 2.5 DM Margin Growth -2.0% 2.0% 12 8 2.0 -3.0% 1.0% -4.0% % GDP of 1.5 8 0.0% 9

-5.0% 1.0 YoY -6.0% -1.0% 10 0.5 4 -7.0% -2.0% 11 0.0 90 92 95 97 0 2 5 7 10 12 15 17 20 0

Corporate profits after tax as % of GDP (inverted axis,ls) -4 Output Gap % GDP AHE Nonsupervisory Average hourly earnings of production & non-supervisory, -8 AHE Real YoY total private (24 month lead, rs) 2012 2013 2014 2015 2016 2017 2018 2019

This is because the wage-price link has structurally broken down… this link historically injected volatility into the system: companies raised prices to protect eroding margins from wage inflation; today, technology and demographics weigh on prices, meaning companies struggle to maintain margins in a rising wage environment – thereby acting as a natural brake on the economy Decomposing margins between productivity, Today, companies can’t raise prices to maintain margins… price- So, it’s not surprising to us that inflation price inflation, and wage growth shows wages as wage correlation has weakened substantially the past 10y, expectations touched all-time lows last week the swing factor the last few years meaning wage growth can persist without being inflationary

10% Corporate Profit Margin Contributions, DM 1965-1979 1980-2007 2008-2018 5.0% 3 9% 4.5% 8% 4.0% 2 3.5% 7% 3.0% 1 6% 2.5% 5% 2.0% 1.5% 0 4% y = 0.4982x + 3.8412 R² = 0.5758 1.0% 3% -1 y = 0.5943x + 1.7262 0.5% 2% R² = 0.6155 0.0% y = 0.1516x + 2.168 1990 1995 2000 2005 2010 2015

AHE: Production & Nonsupervisory YoY& ProductionAHE: 1% -2 R² = 0.0064 2000 2003 2006 2009 2012 2015 2018 0% UMich 5-10Y Inflation Expectations 3mma

% Contribution % Contribution to 4 quarter change 0% 2% 4% 6% 8% 10% Prices Wages Productivity Core PCE Sources: BLS, BEA, Bloomberg, JP Morgan Core PCE YoY

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 5 So now the US economy is slowing from a very generous fiscal tailwind to more normal growth – the risk of an overshoot looks low given the stability in core drivers we have outlined; in fact, some of the high frequency data show U.S. data stabilizing/turning up a bit…

Cyclically, US growth is moderating toward potential after a boost from fiscal policy and synchronized global growth

Many reliable leading indicators highlight the moderation we are expecting today – especially some pockets of weakness in manufacturing; though, growth in Q1 tends to be deceivingly weak – especially recently – so we wouldn’t overreact to disappointing data at the start of 2019

Average GDP QoQ 8% 9 6% 70 6% 8 Since 1948 Since 1988 Since 2014 6% 4% 55 5% 7 3.58 4% 3.18 6 4% 2% 40 2.80 2% 2.42 5 3% 2.60 1.95 1.60 4 0% 25 1.56

0% 2% Real GDP RealQoQ 3 -2% -2% 10 1% 2 -4% 0% 1 -4% -5 Q1 Q2 Q3 Q4 -6% 0 2000 2005 2010 2015 GDP Q1 14 -1.0 Q2 14 5.1 2003 2008 2013 2018 GDP: Real YoY Change Q1 15 3.3 Q2 15 3.3 Nominal GDP CEO Confidence US - Empire Manufacturing 6m Ahead General Business Q1 16 1.5 Q2 16 2.3 Conditions 3m Rolling Avg Q1 17 1.8 Q2 17 3.0 Q1 18 2.2 Q2 18 4.2

Some of the high-frequency data we track is showing signs of stabilization in the US and even abroad, which reinforces our view that we are decelerating but not at risk of contracting in the near-term

2.0 2.0 2.0 2.0

1.5 1.5 1.5 1.5

1.0 1.0 1.0 1.0

0.5 Score 0.5 0.5

- 0.5

0.0 0.0 0.0 Score

0.0 Score

Score

- -

-

Z Z Z -0.5 -0.5 -0.5 -0.5

1Y 1Y ChangeZ in -1.0 -1.0 -1.0 US Growth 1st Deriv -1.0 US Growth 2nd Deriv EU Growth 1st Deriv China Growth 1st Deriv US Inflation 1st Deriv US Inflation 2nd Deriv -1.5 -1.5 -1.5 -1.5 US Capex 1st Deriv US Capex 2nd Deriv EU Inflation 1st Deriv China Inflation 1st Deriv -2.0 -2.0 -2.0 -2.0 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 2016 2017 2018 2019 Sources: BEA, Bloomberg, BlackRock

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 6 Monetary Policy reached neutral last Summer/Fall, which was a headwind to interest-sensitive areas of the economy; now the Fed doesn’t need to do anything for ‘some time’ as policy is at or around neutral, and the U.S. economy will largely self-calibrate itself from here… Monetary policy is another cyclical influence that pressured growth recently but we believe can be more passive/ supportive going forward

We measure the stance of policy by looking at the cost of capital relative to potential growth (return on capital); this tells us that policy was appropriately very easy in ‘09 – ’11, potentially stayed too easy for a bit long, and is now close to neutral after tightening the past few years As we shift further to a services economy, the Fed should feel more content conducting policy in a slow and steady fashion… there is less of a need to react to the diminishing importance of the more volatile goods sector, especially with the Funds Rate off of 0% and in the realm of “neutral”… 3

5.0% 15% 10% 9% 4.5% 4.0% Tight 8% 10% 3.5% 7% 3.0% 6% 5% 2.5% YoY 5% 2.0% 4% 1.5% 0% 3% 1.0% 0.5% Potential Growth – Credit Yield Easy 2% -5% 1% 0.0%

1950 1960 1970 1980 1990 2000 2010 2020 2030 Standard Deviation of YoY Changes 1985 1990 1995 2000 2005 2010 2015 0% Fed Funds 1985 1990 1995 2000 2005 2010 2015 Rolling 5Y Volatility of Core Inflation Demographic Model of Potential Growth Credit Yield Core CPI Fed Funds Rate Rolling 5Y Volatility of Fed Funds Rate

Raising the policy rate to neutral led to a tangible slowing of the interest … and the leverage built up during that easy-for-longer period is now very sensitive parts of the economy, especially housing… clearly coming down making financial stability more reliable…

40% 5.5% Corporate Net Issuance 0.70 30% 5.0% 0.60 20%

4.5% Rate 0.50 10% 4.0% 0.40

0% YoY, 3M MA 3M YoY, $ $ Trn 0.30 -10% 3.5% 0.20 -20% 3.0% 0.10 2015 2016 2017 2018 2019 Mortgage Applications (YoY, 3M MA) 0.00 30Y Homeowner Commitment Rates (rhs)

Sources: Bloomberg, Moody’s, BlackRock

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 7 II. What are the principal risks to your growth outlook? Notwithstanding the Fed’s dovish pivot and nascent policy easing in China, Global Liquidity continues to contract, which remains an underappreciated tail risk for global markets Global Liquidity is as important as ever to Global Growth; despite plans to end tightening, it continues to contract today

Global Liquidity as a % of World GDP (USD) 35% 35,000 Total Global Liquidity (USD bns) (rhs) 30% 30,000 30,000 40% Total Global Liquidity (USD bns) YoY Total Global Liquidity (USD bns) 25% 25,000 25,000 35% Global Liquidity as a % of World GDP (USD) 20% 20,000 20,000 30% 15% 15,000 15,000 25% YoY 10% 10,000 USD bns 10,000 20% 5% 5,000 5,000 15% 0% 0 0 10% -5% (5,000)

Today, the US, China, and EM ex China all have The ECB and BoJ will maintain easy policy for a …if China is unable/ unwilling to add further ample capacity to ease policy, but the make-up long time but incremental liquidity would need to liquidity, not only is a continued contraction of of the global liquidity dynamic is critical to come elsewhere (EM/ China or the US, which is liquidity a risk but the other large economies understand in this context… currently draining liquidity) could also continue to slow

Share of Global Growth, 2019 estimates Contribution to global liquidity stock: 16% 60 14% 58 8% 6% 12% 56 Japan Ex-China FX 10% 54 Reserves PMI 8% 52 Fed Balance US 19% 6% 50

30% Sheet Index, % YoY 4% 48 28% EM ex China ECB Balance 38% 2% 46 18% Sheet China BOJ Assets 0% 44 14% 2016 2017 2018 2019 20% 19% Europe PBOC Assets China Li Keqiang Index (6m lead) Markit Japan Composite PMI (rhs) Markit Eurozone Composite PMI (rhs) In addition to liquidity, which we view as a principal risk, other risks remain. Those include the often-talked about trade tensions and risk of auto tariffs, the risks of Brexit and Eurozone weakness worsening, and the always present geopolitical and domestic political risks.

Sources: Bloomberg

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 8 The liquidity cycle that we have depicted for years is remarkably persistent; if the recent Fed pivot can relieve the stubborn USD strength, China and EM central banks would have greater scope to ease without the gravitational pull on global capital toward attractive US risk-free rates – cessation of Fed balance sheet reduction will go a long way toward facilitating this cyclical evolution

USD weakens and EM central banks are enabled Global FX Reserves Grow to pursue pro-cyclical easing Fed QE 1,2,3; BoJ 2014; Q1 2019 ECB, PBoC 2016

Ongoing Fed Balance Sheet DM Central Banks ease via DM Central Banks stop reduction without offsetting liquidity rate cuts and new asset tightening creation elsewhere has been a purchases Q4 2018 stubborn roadblock to a much 2008, 2011, needed reboot of this cycle 2014, 2017

60% Global risk-off theme All sources of Global kicks in 50% Liquidity rise 40% 2010, 2012,

30% 2016

20% Credit spreads tighten, All sources of Global YoY 10% equities rally, G10 rates Liquidity fall stay stubbornly low, and 0% volatility collapses -10%

-20% DM Central banks feel good about economic -30% Global FX Reserves 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 growth but nervous about contract easy Financial Conditions – they announce plans to

Fed Assets (USD bns) YoY tighten USD rallies and G10 rates US Liquidity was ECB Assets (EUR bns) YoY Markets wobble on plans Taper Tantrum, 2015 Fed rise; EM central banks are contracting and ECB BoJ Assets (JPY bns) YoY to tighten but global Hike, 2018 Tightening forced into pro-cyclical ending QE served as PBOC Assets (USD bns) liquidity remains robust tightening to support an effective tightening World FX Reserves ex-China (ex-FX) YoY and risk-on remains the weak currencies and fight of Liquidity theme inflation

May 2018 2015, 2018 DM central banks taper, reduce balance sheets, and/ or raise policy rates March 2018

Sources: Bloomberg, BlackRock

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 9 III. Are financial markets appropriately reflecting this outlook and any risks around it? The requirement for easy policy/low rates alongside of an aging population, low potential growth, and the absence of an inflationary impulse are creating unusual dynamics including an immense need for financial assets and an inability for financial intermediaries to hit their liability requirements…

Because of the massive growth of pension and insurance assets and the demographic revolution, roughly 3x as much value needs to be invested today relative to 2000

Global Liquid Asset Base $175 70

$150 60

$125 50 $100 40 $75

USD TrillionsUSD $50 30 US$ Trillions $25 20 $0 10

0 US Households US Corporates US Insurance US Pensions 1990 2000 2010 2020 2030 2040 2050 2060 EU Households EU Corporates EU Insurance + Pension JP Households JP Corporates JP Pension JP Insurance SWFs 65+ Financial Asset Demand Projection CBs Int. FX Reserves US HF, PE, MF & ETF

In the US, record treasury issuance is boosting supply, Outside of the US, DM Fixed Income but spread-sector issuance is expected to be lower in Spread product issuance is not even enough to issuance is still nearly non-existent 2019 and well below pre-crisis levels match the demographic need Net G4 Issuance, Net of QE Fixed Income Net Issuance, Net of Fed 2,500 2,000 2,000 2,000 1,500 1,500 1,500 1,000 1,000 1,000 500

500 USD Trn 0 500 -500 $ bn

USD Billions 0 -1,000 0 -1,500 -500 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 -500 IG corporates HY corporates -1,000 EM Corporates EM Sovereign -1,000 Build America Bonds Non-agency MBS Agency MBS CMBS 2003 2006 2009 2012 2015 2018 ABS CLOs US Spread Product Net Issuance, Net of Fed EUR JPY GBP Munis Private Placements Treasuries, net Agency Debt YoY Change in US 65+ Financial Asset Demand Sources: Fed, BoJ, ECB, JP Morgan, BLS, BlackRock Total US Net Issuance, Net of Fed

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 10 IG Credit had been the asset available to hit liability targets, particularly pre-Tech/Pharmaceutical repatriation and major telecommunications/media M&A, but now this supply is contracting, which is resulting in a dearth of supply in the face of immense demand - ultimately, incentivizing stretching for yield

So much has been made of the large growth of the BBB Distribution of Large-Cap BBBs by Sector (%) Against this growth of debt from 2012-2018, there is a market, especially relative to BBs, with lots of notable shift in company intentions for greater deleveraging, both proactive and in reaction to weak discussion of an imminent downgrade disaster…1 Communication Services performance The amount of BBB rated debt has increased by 5.3x since This trend of deleveraging in IG (some for good reasons 3,000 2007, while BB debt has increased 2.3x. The BBB market is 2% 2% Health Care and some for bad) is generally a positive but reminds us now 4.8x times larger than the BB Market 4% dispersion is likely down the cap stack 2,500 Consumer Discretionary 6% Issuer * Driver of How company is 26% Deleverage deleveraging 2,000 10% Energy GE Avoid Downgrade <2.5x target to HY 1,500 Industrials Anheuser Avoid Downgrade ~4.6x to 4.0x in 2020 $ $ bn 16% to HY 25% Kraft Heinz Avoid Downgrade ~4.4x, 3x target 1,000 Consumer Staples to HY 8% AT&T Post-M&A 3.3x to 2.5x in 2 yrs 500 Information Technology Verizon Post-M&A 2.7x to low 2x in 2 yrs Comcast Post-M&A 3.5x to 2.5x in 2 yrs Dell Post-M&A ~5.5x to 4x in 2 yrs Materials 0 Apple Repatriation 1.4x gross, declining 0.2x/yr 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Microsoft Repatriation 5% annual debt reduction Real Estate Cisco Repatriation 40% debt reduction to date BBB Outstanding Debt BB Outstanding Debt Sherwin Post-M&A 4x to current 3.5x, ~0.75x to go WestRock Post-M&A 4x to current 3.5, 2.5x target

And there is much less yield available today, even with … creating massive demand for new issues as a risk-addition to portfolios… 2 U.S. rates having moved up somewhat over the past few years… 2 Average Coupon US IG Oversubscription (x Over; 30DMA) US IG New Issue Concession (bps; 30DMA) 8% 3.60x 9

7% 3.40x 8 6% 3.20x 7 5% 6 4% 3.00x 3% 5 2.80x 2% 4 2.60x 1% 3 0% 2.40x

2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2.20x 1

Global Agg Avg Coupon US Agg Avg Coupon 2.00x 0 Sources: Bloomberg, BlackRock Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 11 …and with the lack of assets and some restrictive regulation (such as Solvency II for insurance companies), it is creating potential debt mis-valuations vs. equity and/or a need to own more equity where possible to hit return targets (for those that can)…

The most significant difference in cost of capital between Europe and the US is the cost of debt, as this has brought the European cost of capital below where it is in the US. 1 18.00 6.00 13.00 12.00 16.00 5.00 11.00 14.00 4.00 10.00 3.00 12.00 9.00 2.00 8.00

10.00 of Capital Cost Cost of of Capital Cost Cost of of Capital Cost 1.00 7.00 8.00 0.00 6.00 6.00 5.00 2000 2003 2006 2009 2012 2015 2018 2000 2003 2006 2009 2012 2015 2018

EU COE US COE EU COD (after-tax) US COD (after-tax) EU WACC US WACC Based on the 6 largest industrial companies with a 20 year trading history. Companies used for the US: Exxon Mobil, Verizon, Walmart, Procter & Gamble, Intel, Pfizer; Companies used for the EU: Total, Siemens, BASF, Daimler, Telefonica, Adidas. The companies stated above are shown for illustrative purposes only and are not meant to be a recommendation to buy or sell any security.

But cost of capital is only half the equation… Price is a function of both the cost of capital and the growth rate…1,2 6.0 3.0

5.0 2.5 4.0 SPX is up 2.8x • Germany’s post-crisis average growth 3.0 2.0 rate is running at ~180bps below the US 2.0 • Europe’s WACC is ~100bps below the US (driven by COD which is at 0%) 1.0 1.5

• Thus the ECB should lower the COD by Indexed to 2010

0.0 at least a further 80 bps to keep the Real Real GDP YoY Growth (%) 1.0 denominator consistent with the US* -1.0 Eurostoxx is up 15% • OR, the ECB can buy equities to -2.0 since 2010 2010 2011 2012 2013 2014 2015 2016 2017 2018 0.5 lower the cost of equity*

US Germany *We are not advocating either of these actions, simply illustrating the challenge faced by the ECB in Avg US Avg Germany SPX SX5E Sources: Bloomberg, BlackRock replicating the conditions that exist in the US

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 12 More policy stimulus (monetary) is creating anomalies and a dearth of global financial assets as places like Europe and Japan can’t stimulate enough growth/inflation (to de-lever)…

… and there is still a massive and growing amount of existing bonds Hence, with other DM central banks with a very limited toolkit, it may require the that are negative yielding today Fed to be easy(ier) which can push equity prices and other financial asset valuations higher…

13 Lower rates can influence spread and risk-assets to compress – directly Total negative yielding debt stock, US$ trillion through the risk-free rate and through premiums as well… 12

11 600% Earnings growth is the biggest contributor to return over time 10 500% Since 2016, the risk-free rate 9 400%

has detracted from performance Us $ Trn$ Us 8 300% Exuberance 7 200%

6 100%

5 0% 2016 2017 2018 2019 -100%

4.0% -200% Pessimism 3.5% -300% 3.0% 1990 1995 2000 2005 2010 2015 2.5% Contribution to Change in S&P from Change in Risk-Free Rate 2.0% Contribution to Change in S&P from Change in Equity Risk Premium 1.5% 1.0% Contribution to Change in S&P from Change in EPS 0.5% Contribution from: Since 1990 Since 3/2009 0.0% Change in Earnings 495% 170% -0.5% Change in Risk-Free Rate 201% 72% -1.0% Change in Equity Risk Premium 65% 44% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total Change in S&P 761% 286% Japan 10Y Germany 10Y Swiss 10Y Sources: JP Morgan, Bloomberg, BlackRock

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 13 Questions Is China willing to use all its tools, including credit expansion to support Chinese (and consequently Global) Growth/Trade? If not, what are the implications for US/Global Growth?

Elected for life ?

Any other views on why inflation continues to moderate within today’s positive growth dynamics?

Are there areas of the U.S. economy that are more at risk of slowdown from here?

Sources: DB, as of 12/31/2018

PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 15 Important Notes

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PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 18 Important Notes

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PRESENTATION TO THE NY FED IACFM - LIMITED DISTRIBUTION 19 Rebecca Patterson Bessemer Trust April 17, 2019 Euro area: Growth and Monetary Policy

April 17, 2019

Rebecca Patterson Chief Investment Officer Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer Trust makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any fund or portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing.

Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indices in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index.

2 Recent Bifurcation between Domestic and External Growth Drivers

Eurozone Monthly Net Change in Unemployed Persons and Markit Manufacturing PMI

MoM, 3MMA, Thousands 250 42 Monthly Net Change in 200 Unemployed Persons (L)

46 150

100 Manufacturing PMI, inverted (R) 50 50

0 54 -50

-100 58

-150

-200 62 2010 2012 2014 2016 2018

As of February 28, 2019 for unemployment and March 31, 2019 for PMI. MoM, 3MMA stands for month-over-month, three month moving average. Source: Bloomberg, Eurostat, Markit

3 Europe Vulnerabilities: A lot of Known Unknowns

Declining Economic Sentiment in EU’s Largest Italy’s Populist Government Resulting in Greater Bond Economy and Region Risk Premium ZEW Survey of Current Situation Spread Between Italy and Germany 10-Year Government Bond Yields 100 Bps 700 80 Germany 60 600

40 500 20 400 0

-20 300 Eurozone -40 200 -60 100 -80

-100 0 2010 2012 2014 2016 2018 2011 2013 2015 2017 2019

As of March 31, 2019. Bps stands for basis points. Source: Bloomberg, ZEW Inflation Keeps ECB in Easing Mode; Fiscal Help Seems Unlikely for Now

Inflation Measures Still Lagging Target Little Room/Desire for Fiscal Stimulus Euro Inflation Swap Rate 5Y5Y Budget Balance % of GDP 2.5% 2%

2.3% 1%

2.1% 0%

1.9% -1%

1.7% -2%

1.5% -3%

1.3% -4% EU Italy Spain

1.1% France 2013 2014 2015 2016 2017 2018 2019 Germany Netherlands

Left as of April 8, 2019 and right as of 2017. EU reflects the EU-28 countries. Source: Bloomberg, Eurostat

5 What Will ECB Do in the Next Major Downturn?

Asset Purchase Program Cumulative Total at Year-End Possible ECB Next Steps Billion PSPP CSPP CBPP3 ABSPP 3,000 €

. Restart asset purchases 2,500 €

2,000 € . Broaden types of asset purchases

1,500 € . Extend forward guidance towards more rate cuts/ tiered interest rates 1,000 €

500 € . “Helicopter money”

0 € 2015 2016 2017 2018

As of April 12, 2019. The ECB asset purchase programs include: Asset-Backed Securities Purchase Program (ABSPP), Covered Bond Purchase Program 3 (CBPP3), Public Sector Purchase Program (PSPP), and Corporate Sector Purchase Program (CSPP). Source: Bloomberg,

6 Dovish ECB Policy: Short-term Transmission Channels

Lower European Interest Rates Weaker EUR

More Foreign Potentially Stronger Euro Stronger USD Demand for U.S. Weaker European Export Shares Bonds, Credit Bank Shares

Weaker U.S. Pressure on Multinational CNH Shares

Transmission channels noted assume other growth, policy variables stable

7 Meaningful Economic and Financial Linkages Between Euro area and U.S.

Rolling-90 Trading Day Correlation Between U.S. VIX Index and High Yield Corporate Bond Spread and German 10-Year Government Bond Yields Bps 0.90 50 850 VIX Index (L)

USD High Yield OAS (R) 0.80 750 40 0.70

650 0.60 30 0.50 550

0.40 20 450 0.30

0.20 10 350 2009 2012 2015 2018 2010 2011 2012 2013

As of April 12, 2019. Bps stands for basis points. Rolling correlation is based on the daily change in the 10-year yield. High Yield OAS is measured using the Deutsche Bank Credit Strategy Dm USD HY OAS. Source: Bloomberg, CBOE, Deutsche Bank

8 Brexit has Already Taken a Toll on U.K. Assets

U.K. and S&P 500 Performance Since Brexit Vote Indexed to 100 on June 23, 2016 150

140 S&P 500 in USD

130 Developed Market Equities ex. U.K. in USD

120 FTSE 100 in GBP

110

100

FTSE 100 in USD 90

80 Jun 16 Oct 16 Feb 17 Jun 17 Oct 17 Feb 18 Jun 18 Oct 18 Feb 19

As of April 3, 2019. Source: Bloomberg

9 10 Consensus Real GDP Growth Forecasts

U.S. China 3 6.6 2.8 6.5 2.6 6.4 2.4 2.2 6.3 2 6.2 1.8 6.1 1.6 6 1.4 1.2 5.9 1 5.8 2018 2019 2020 2018 2019 2020

U.K. Euro area 1.5 1.9

1.45 1.7 1.5 1.4 1.3 1.35 1.1 1.3 0.9 1.25 0.7 1.2 0.5 2018 2019 2020 2018 2019 2020

As of April 10, 2019. Source: Bloomberg Bob Jain Millennium Management April 17, 2019 Investor Advisory Committee on Financial Markets

April 2019 Market Overview

Global ETF1 AuM Has Grown to Over $5T Annual US Mutual Fund2 vs. ETF Flows ($B) Global regulated funds (MF & ETF) are $50T Mutual Fund ETF +16% 4.9 5.1 466 320 326 287 313 3.5 242 245 247 3.0 186 2.7 2.4

-4 -104 -172 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

US ETF Assets by Asset Type US Fixed Income ETF Assets by Type 100% = $3.4T 100% = $630B Loan Mortgages Other Eq. Int’l 3% EMD Credit 4% 20% Active Short 19% Muni 5% 2% Eq. US 6% 47% 6% 4% 19% Inflation 18% Bonds 7% Broad 12% High Yield 8% 2% 18% Alternatives Govt/Credit Eq. Sector Govt

1. Includes ETNs 2.Excludes Money Market Fund Flows Source: Credit Suisse, Morgan Stanley, Bloomberg, BlackRock 1 Risks – Liquidity Mismatch in Mutual Funds and ETFs

Mutual Funds ETFs

Cash buffers

Revolvers

Hold more liquid securities

Sales loads

Redemption gates

In-kind redemptions Secondary market / trade at a discount

2 Risks – Specific Cases in Mutual Fund and ETF Market

Loans High Yield Levered ETFs

• $1,200B overall market, • $2,500B overall market, • $37B in ETFs: $200B Mutual Funds, $400B Mutual Funds, $34B Equities, $10B ETFs $40B ETFs $2.5B Fixed Income

• Largest ETF is HYG at $17.3B • Largest ETF is TQQQ at • Largest ETF is BKLN at $5.1B managed by BlackRock $4.3B managed by managed by Invesco ProShares (NASDAQ 100) HYG Volumes as % of HY OTC Cash Volumes

30%

• MF and ETF settle T+2, 20% • Products offered in 1.5-3x

average loan settled T+16 in 10% leverage and inverse 2018 0% Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

HYG Exchange Volumes as % of OTC HY Cash

HYG Gross Primary Volumes as % of OTC HY Cash

Source: Morgan Stanley, BlackRock 3 Other Risks

Passive Concentration Product Proliferation Centralized Players

1 Passive AuM / S&P Market Cap (%) US ETF Launches • Index providers 263 20 252 19 16 29 • Large fund complexes 4 8 189 4 7 15 5 183 10 7 12 57 • Exchanges 5 13 45 4 27 0 10 114 33 1 8 9 3 24 3 156 158 5 142 125 67 0 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19 2014 2015 2016 2017 2018

ETN Comm. Mixed Bond Alts Equity

1. Mutual Fund and ETFs Source: Bloomberg, Morningstar, Morgan Stanley 4 Scott Minerd Guggenheim Partners April 17, 2019 Analysis of Fed Reinvestment Options

• The Fed's portfolio of Treasury securities has a much longer weighted average Chart 1: Estimated WAM of Treasury Portfolios (Years) maturity (WAM) (-8.1 years) than the overall Treasury market (-5.8 years), a legacy of the Fed's QE programs as well as Operation Twist (Chart 1 ). 10 9 • The WAM of the Fed's Treasury portfolio has been increasing recently due to the fact that most of their reinvestment purchases have been focused on newly 8 issued 3y, 1 Oy and 30y securities. 7 • This is because the Fed's $30 billion cap for Treasuryreinvestment 6 tends to bind mainly during quarterly refunding months (Feb, May, Aug, Nov), when 3y, 1 Oy and 30y tenors are issued at the mid-month 5 auctions that coincide with the date that the Fed's reinvested holdings mature. 4 3 +---...----.----.---.---..,,.---..--' • Per the FOMC minutes and subsequent speeches, Fed officials are Dec-02 Jun-05 Dec-07 Jun-10 Dec-12 Jun-15 Dec-17 considering actively shortening the WAM of the Fed's Treasury portfolio by reinvesting Treasury and/or MBS paydowns into shorter-dated Treasuries once OperationTwist -Fed UST Holdings runoff ends, likely later this year. UST outstanding -UST outstandingless Fed

• In Chart 2 we present analysis performed by BAML which illustrates various re­ investment scenarios the Fed could take going forward. Chart2: Fed's Treasury Portfolio WAM Under Reinvestment Scenarios In years, through end-2021 • The estimated timeline over which the Fed's Treasury portfolio will converge to 11 the WAM of the outstanding Treasury stock under each scenario is indicated in Timeline for convergence to WAM parenthesis. 10 of outstanding UST stock (5.75y) 9 • Scenario 1 (Well into 2030s): maintain current strategy for coupons 03u;., and mortgages 8 2029 • Scenario 2 (2029): maintain current strategy for coupons, reinvest 7 mortgages in bills 6 • Scenario 3 (2022): coupons reinvested in 2s and 3s, reinvest mortgages in bills 5 2022 • 2021 Scenario 4 (2021 ): all reinvested in bills 4 3 Jan-04 May-07 Sep-1,0 Jan-14 May-17 Sep-20

-SOMAWAM scenario1 -scenario2 Source: Guggenheim Investments, BAML, Federal Reserve. Data as of 01/23/2019. Note: Chart 2 assumes unwind stops at end-2019. -scenario3 -scenano4

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GUGGEnHElm 4