EFTA01384457

18 September 2017 Long-Term Asset Return Study: The Next Financial Crisis Figure 7: Percentile Valuations of 15 DM Bond and Equity Markets back to 1800 flth) and US CAPE ratio vs. US 10Y yield (right) 100% 90% - 80% - 35x 30x 25x 20x lex —Average (Bonds and Equity) j 70% - 60% - 50% - / 40% - 30% 20% - 10% - 0% 1800 1825 1850 1875 1900 1925 1950 1975 2000 Sacco Deureehr as t Octal Few. , eM Marent•sp fancy IP 50x 45x 40x 10> u, 0 —US CAPE ratio (LEIS) UST 10Y Yield (RHS) 1800 1825 1850 I8"75 19°0 1925 1950 1975 2000 • Global central banks have facilitated these elevated asset prices. A long series of global financial problems have now been passed through all parts of the financial system with most of these problems stacked up and now resting with central banks and Governments. The buildup of debt that this has created has forced central banks to keep yields at ultra-low levels, thus raising the prices of a variety of other global assets. Italy and Japan have seemingly unsustainable debt burdens and are likely vulnerable to a crisis outcome. However both have had this for some time which mitigates short-term risks. Italy is perhaps more vulnerable because of precarious and fragile politics, elevated levels of populism and a central bank that is regional and not domestically controlled. Japan shows how long a crisis can be avoided but that doesn't automatically mean we should be complacent, especially as the BoJ now owns over 40% of the JGB market (from under 10% in 2012). [Figure 8: Government Debt to GDP ratios - Italy, Japan and G7 aggregate 300% 200% 150% 100% 50% 0% 1800 1820 1640 1060 1800 1900 1920 1940 19(30 1980 wow Japan —Italy G7 Sane Detail* Bank, GIS • I inavial Dant lint On populism, our index (Figure 9) tracking its rise across key DM countries shows that we are close to the 1930s highs. Is this a precursor to a big crisis? Does it make for more unpredictable politics, economics and markets? Deutsche Benk AG/London 16% 14% 12% 10% 8% 6% 4% 2% 0% Page 7 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0084656 CONFIDENTIAL SDNY_GM_00230840 EFTA01384457