From: US GIO

From: US GIO To: Undisclosed recipients:; Subject: Eye On The Market: Desperately Seeking Shinzo Date: Mon, 18 Mar 2013 19:01:03 +0000 Attachments: 03-18-2013_-_Desperately_Seeking_Shinzo.pdf Inline-Images: image001.png; image002.png; image004.png Eye on the Market, March 18,2013 Topics: The possible economic and investment impact of Japan's monetary and fiscal bazooka; and the latest round of historical revisionism in Europe Desperately Seeking Shinzo. Pressures from low growth, stagnant corporate profits and lost competitiveness have apparently reached a breaking point in Japan, not just economically, but also politically. The Shinzo Abe Administration differs from its predecessors, and appears intent on breaking the cycle of deflation. As mentioned in our 2013 Outlook, while there are structural problems in Japan, aggressive monetary and fiscal policy could move those issues to the back- burner as far as markets are concerned in 2013. This looks more like a "trade" than a long-term investment, but for investors able to hedge out the Yen exposure (given Japan's intention to debase it), Japanese equities may continue to perform well for a while longer, even after the Nikkei rally since last fall. Like the cicada which lives underground for 17 years and then emerges for a short, vibrant period above ground, 2013 is a year in the sun for Japanese equities after 2 decades of underperformance. The attached note walks through the details, with a review of the Japanese economy, its equity markets and proposed efforts to revive the deflation-fighting techniques that Japan used in the 1930's. The benefit of being underweight Japanese equities Cumulative outperformanoe of MSCI World ex-Japan vs MSC' World, rolling 2 years 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% IL.. Last appearance of the Cicadas -15% J (Japanese outperform ance) 1988 1992 1998 2C00 2004 2008 Source: Bloomberg. 2012 US Dollar and Local currency total returns by region Year to date USD Local 2007-2012 1 USD Local S&P 500 10.0% 10.0% 15% 15% MSCI Europe 5.8% 9.2% -5% -4% Euro Stoxx 2.7% 3.8% -17% -17% MSCI Japan 11.5% 22.6% -22% -44% Nikkei 9.0% 20.9% -7% -33% MSCI EM -1.0% -0.3% 36% 39% Source: Bloomberg. Data as of March 15, 2013. In the U.S., the private sector is doing OK, with household demand, housing, production and employment all running at a solid pace. In Europe, to me the event of the week wasn't the proposed confiscatory tax on Cypriot bank deposits (given the uniqueness of the situation), but the bizarre comments from the former President of the Euro Group about the threat of war as a justification for continuing with European austerity. Remarks like this are part of the Creation Myth of the Euro, and seem to ignore the fact that if there are rising regional tensions, you don't have to look very far to figure out where they are coming from in the charts below. More in the attached PDF. EFTA01137115 Germany vs Italy: Industrial Production Index 1999=100 1401 Euro fixed 130 Germany 120 110 100 90 80 70 1982 1988 1990 1994 1998 2002 2008 2010 Source: OECD, GaveKalSecurities. Michael Cembalest J.P. Morgan Asset Management Unemployment: Euro Periphery minus Germany, Percent 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% 1971 1979 1987 1995 2003 2011 Source: JPMAM. BoS, Bo P, OECD, NSS, IMF. Cur ent account deficits Percentof GDP 4% Euro fixed 2% France, Germany, U.K. 0% -2% -4% Greece,Italy, Ireland, -8% Portugal, Spain -8% 1975 1980 1985 1990 1995 2000 2005 2010 Source:OECD. This email is confidential and subject to important disclaimers and conditions including on offers for the purchase or sale of securities, accuracy and completeness of information, viruses, confidentiality, legal privilege, and legal entity disclaimers, available at http://wwwjpmorgan.corn/pages/disclosures/email. EFTA01137116