100 Years of Investing in 3 Charts SocGen

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Macro Commodities Forex Rates Equity Credit Derivatives

29 August 2011

Cross AssetBi-monthly

www.sgresearch.com

Global Research Alert100 years of market history in 3 charts for better investment decision-makingHistorical US rates + inflation Long-term rates close to bottom

US long-term rates are now close to a 100-year low. Unless

you believe the US is undergoing a deflation scenario, similar

to the situation seen in Japan 20 years ago (see page 4) they

are well below inflation. The situation is reducing debt

given the debt levels of developed economies. And, fiscal

tightening will probably prove to have a short-term deflationaryimpact in coming months, hence, the recent Fed

announcement it intends to keep its rates low until mid 2013

Source: SG Cross Asset Research, online data Robert Shiller

Historical Price Earnings ratios and dividend yields Equity market valuations. Not cheap enough yet

One of the key questions investors are asking is whether stock

markets are cheap enough to start buying. Over a long

investment horizon, it appears that markets are not cheap

enough to spark a sustainable long-term bull market. To begin

to buy for the long run, we would probably need to wait for a

3% real dividend yield and a forward P/E of 7. Compared to

the top chart, which shows long-term interest rates bottoming,

it seems that US equities have not touched bottom yet. A

short-lived technical rebound makes sense but the debt crisis

will probably not be resolved before the US elections in 2012

and, in Europe, the German election in 2013.

Source: SG Cross Asset Research, online data Robert Schiller, US Bureau of Labor Statistics

Historical Oil and Gold prices Commodity prices seem much too high as

economic growth is slowing

Over the past three years, all commodities have touched

historical highs. The most recent high seen for Gold, in August,

was sparked by forex fears. Oil prices used to be very

sensitive to US growth, but things are different this time, as

emerging market demand partly outpaces that of the US,

maintaining global oil demand at high levels. But, now the

surge in Gold suggests that markets are looking for safe haven

investments, as was the case in the 1930s and the 1970s.

Hence, financial markets begin to doubt that the current

forecast for global growth of 4% pa is sustainable, thus,

commodity prices seem much too high at this stage of the

economic cycle.

Source: SG Cross Asset Research, Bloomberg, US Bureau of Labor StatisticsPatrick Legland Daniel Fermon (Product Manager)(33) 1 42 13 97 79 (33) 1 42 13 58 [email protected] [email protected]

Societe Generale As a result, investors should be awarethat SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singlefactor in making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S)

CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.

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-2

2

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1914 1924 1934 1944 1954 1964 1974 1984 1994 2004

CPI Annual AverageUS Long Rates

DEFLATION

INFLATION

Historical lowrates comparable

to the 1930s

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1871 1891 1911 1931 1951 1971 1991 2011

S&P 500 Real Price (log scale)

Real Yield

Forward P/E

Downward

potentialbefore nextsustainablebull market

Long Bull Market Rally as forwardPE are very low

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1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Real Gold Price (Annual price average)

Real Oil price (Annual price average)

Economicturmoil

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Global Research Alert

29 August 2011

Current situation: Debt trajectory still worrying, eurozone crisis not over

Sharing euro debt problems Credit: AAA eurozone countries are choosing

solidarity to save the eurozone

yet

another summit. The new European bail-out agreement

on Greece from last July pushed European AAA countries

CDS higher but failed to reassure markets. On one hand,

Germany is opposed to Eurobonds and considers that

the only solution is more fiscal tightening, and, on the

other hand, peripheral countries cannot do much more

given current levels of social unrest. The ECB

announcement that it is buying peripheral bonds has sent

10-year yields lower for these countries, but, with manyelections coming soon, the eurozone will probably face

further turmoil in the coming months.

Source: SG Cross Asset Research, Datastream

World Equity Markets Equity:

The sharp fall in equity markets in August is a direct

consequence of debt problems and persistently clouded

visibility on economic growth. The Philly Fed 18 August

publication pushed indices down again as markets

anticipated the risk of a new recession in the US. But,

overall, the worst index performer since the beginning ofthe year has, in fact, been the Eurostoxx 50 as European

leaders disagree on how to cope with the eurozone

crisis. Buying European equities is no longer dictated by

valuations. Thus, eurozone equity markets are now the

cheapest among all world equity markets. The issue is

what political leaders of the Eurozone want to achieve

and what message they will deliver in the coming

months.


Safe havens: Gold silver and CHFCommodities: Gold , Silver, CHF as safe haven As the euro suffers the fallout from mixed messages and

the dollar faces the consequences of US debt problems,

precious metals and the Swiss franc appear to be the

clear winners in the current debt crisis. The end of QE2

on 30 June 2011 could well have heralded the end of the

commodities bull market. Only gold and silver look like

safe havens and are moving in line with the CHF. In this

regard, some investors now considered gold as a

currency rather than as a commodity. Hence, in August,

gold reached new highs vs EUR and USD, also

supported by fundamentals.


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120

160

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240

280

Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11

Peripheral countries average

France Germany and Austria average

UK} 5yCDS rebased to 100

24-25March EU

Summit

Ireland acceptedfinancial

assistance fromEU+IMF

Julyagreement

75

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85

90

95

100

105

110

Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11

EuroStoxx50 Nikkei 225

S&P 500 MSCI EM $

USA losing S&PAAA rating

85

100

115

130

145

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Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11

GoldSilver CHF/USDCRB Index

Safe

havens

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29 August 2011 3

Main conclusions: Sell commodities, short-term Buy on Equities

Different ways to the economic recovery Any global economic slowdown will affect

commodities

Emerging market central banks and central banks of

commodity-related economies (Australia, Norway)

decided to increase rates from 2010 as growth was

accelerating and inflation had to be contained. However,

given the current environment, there is a high probability

of a halt in tightening cycles and some countries could

even start to ease. Any further signs pointing to a global

economic slowdown for 2012 will obviously affect

commodities, most likely hitting metal and mining

commodities first and then oil.

Conclusion 1: Avoid commodities


Debt trajectories (US and Europe) and 10 year bond yields As the debt situation worsens, rates must

remain low

The US debt trajectory through 2016 is very worrying,

and explains the recent US rating downgrade from S&P

from AAA to AA+. US debt bears little resemblance to the

structure of German debt or even euro debt, even after

the agreement reached in the US between Democrats

and Republicans. Hence, we can affirm that the euro

crisis is linked directly to the lack of a united front among

European leaders rather than the debt situation itself as a

whole. With progress (although laborious) being made on

austerity plans, rates will probably remain very low for an

exceptionally long period of time.

Conclusion 2: 10-year rates will remain low for major

western countries

Source: SG Cross Asset Research, Datastream, IMF

Volatility chart Short-term recovery in equity markets

Durable goods orders data (+4%) in the US published

last Wednesday, temporarily offset concern of another

US recession. As a matter of fact, in August,

macroeconomic events have pushed volatility much

higher not only in Europe but also in the US, on the back

of recession fears. A trend reversal could now be

expected and Vix should to go back to the 20%. If this

happens, short-term confidence may return to markets

and send indices higher, but not to pre-summer levels as

Conclusion 3: normalisation of volatility expected,sparking a short term recovery on equity markets

-1 0

Inflation %

Growth %3

4

2

5

Decline

US

Inflation+

Rate increase

Deflation0

Three roads to recovery

6+

4+

Emerging markets

SouthernEuropeancountries

Rapiddevelopment

Japan in2012

Northern Europeancountries

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1991 1996 2001 2006 2011 2016

Euro area Gross debt to GDP, % (LHS)

US Gross debt to GDP, % (LHS)

US 10y rate (RHS)

German 10y rate (RHS)

10

30

50

70

Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11

SPX VOLATILITY VIX

VSTOXX VOLATILITY INDEX

First GreekCrisis

European and USSovereign debt crisis

Middle East andJapan Crisis

Ireland Crisis

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29 August 2011

Main risks: The Japanese Equity disease or the dreaded D wordComparing Japanese and US 10YR bond yields The threat of inflation vanishing in the short term

As expected (see Global Research Alert 2 May ) the spectre

of deflation has returned to the fore as western

governments now focus on austerity measures as a means

of restoring confidence. In the US, the property market

remains the worrying part of the economy. Although still at

3.6% in the US and at 2.7% in Europe, inflation may drop

in the coming months owing to the economic slowdown.

Thus, with unemployment still at 9.1%, it seems illusory to

expect inflation in the coming 12 months and hence thereis no risk of bond yields climbing. The bond market

suggests the real thing to worry about is deflation, again

extreme scenario but nevertheless a major threat for

western economies.


Comparing

decadeIf you believe in a Japanese scenario be afraid,

If we accept the idea of a three-stage crisis (taking as our

starting points 2000/01 + 2007/08 + 2011), we haveprobably reached a s

decade of the 1990s. A Japanese-style scenario for the US

could gain traction, particularly if there is no real estate

recovery in the US, high unemployment levels persist, and

economic sentiment remains depressed. Such a

configuration would suggest that, in June 2011, we exit a

bear market rally, which was fuelled by restocking and

QE2. Another 20% drop in the equity indices could then

be observed in the coming months if this scenario were to

materialise.


Main economics events: in the next two weeksEconomic calendar summary

Date Release Comments

30 August US S&P Case Schiller propertyprice, Minutes of FOMC meeting

Property remains one of the major weaknesses of the US economy. Economists are now expectinganother 4.9% drop in prices.

1 September ISM manufacturing The ISM is now expected at 48.8. Previously it was just above 50

2 September US unemployment rate The consensus expects US unemployment to remain stable at 9.1%.

8 September BOE announces rates

ECB announced rates

BoE and ECB to maintain interest rate status quo at respectively 0.5% and 1.5%

8 September China CPI Prior inflation figures were at 6.5%. Inflation should remain above People Bank of China target of 4%

0

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0 1000 2000 3000 4000 5000

Duration (days)

Japan 10-year bond yield (starting in 1990)

US 10-year bond yield (starting in 2000)

German 10-year bond yield (starti ng in 2000)

Bond yield on acontinuing downward

trend ...

Recovery from Japan's lost decade'

... maybe in 3 years time in the US

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0

1 0 0 0

2 0 0 0

3 0 0 0

4 0 0 0

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Duration (Days)

Nikkei 225 (starting in 1979)

S&P 500 (starting in 1990)

Euro Stoxx 50 (starting in 1990)

Japanese Real Estateand

Valuation Crisis

US ValuationCrisis

Bear marketrally

F171529

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29 August 2011 5

Main Cross Asset Movers: Waiting for a signal from Jackson Hole2week cross asset movers (%) as of 25 August 2011 Market turmoil could ease slightly

Still some tension on CDS as the debt crisis remains

the major source of concern for global economies.

Equity market less volatile than in early August but

far from recovering.

Precious metals move in opposite directions to

equity markets.

Rates reached historical lows in most western

countries.


Trade idea: Long Nikkei - short copperSpread against German 10 year yield 10-year bond spread between peripheral

countries and Germany still high

Spread confirms the crisis is far from over. Next

European summit on 21 September will be key to

reassure markets,

Strong pressure again on Greece as the 10-year

yield spread with Germany reaches new highs,

Following the ECB decision to buy peripheral

bonds, rates decreased in Italy and Spain.


Long Nikkei / Short Copper Long Nikkei - Short copper

Growth prospects in Japan (+3.3% for 2012) and the

US (+1.8% for 2012) are rebalancing as the US is

slowing and s shouldfavour stronger growth,

Japanese equity markets have not yet recovered

from the fall-out from the earthquake,

Copper may be very sensitive to any global

economic slowdown, specifically as we forecast a

bumpy economic lending in China.


PLEASE NOTE, THAT OUR TRADE IDEAS WILL BE PUBLISHED SEPARATELY

We would like to thank Nicolas Harari, Junior Thematic Strategist, for his valuable contribution to this report.

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Itraxx main

Wheat

Itraxx Xover

Silver

SMI Swiss Index

Dax Index

Sensex 30 Index (India)

German Govt 10 Yr Yield

France Govt. 10 Yr Yield

Athex Greece Index

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GreekIrishPortugueseItalianSpanish

Way over 2010Sovereign Crisis Peak

} 10y yield spread against Germany

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26-Aug-10 26-Oct-10 26-Dec-10 26-Feb-11 26-Apr -11 26-Jun-11

Nikkei 225 (USD)

Copper 3months (USD/MT)

F171529




29 August 2011

APPENDIX Analyst Certification: The following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately reflect his or her

personal views about any and all of the subject securities or issuers and (ii) no part of his or her compensation was, is, or will be related, directly or indirectly, to thespecific recommendations or views expressed in this report: Patrick Legrand

FOR DISCLOSURES PERTAINING TO COMPENDIUM REPORTS OR RECOMMENDATIONS OR ESTIMATES MADE ON SECURITIES OTHER THAN THEPRIMARY SUBJECT OF THIS RESEARCH REPORT, PLEASE VISIT OUR GLOBAL RESEARCH DISCLOSURE WEBSITE AThttp://www.sgresearch.com/compliance.rha or call +1 (212).278.6000 in the U.S.The analyst(s) responsible for preparing this report receive compensation that is based on various factors generated by investment banking activities.Non-U.S. Analyst Disclosure: The name(s) of any non-U.S. analysts who contributed to this report and their SG legal entity are listed below. U.S. analysts are

employed by SG Americas Securities LLC. The non-U.S. analysts are not registered/qualified with FINRA, may not be associated persons of SGAS and may not besubject to the FINRA restrictions on communications with a subject company, public appearances a Patrick Legrand Société Générale Paris.IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any securities and has

been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or completeness. SG does, from time to time, deal,trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the securities, or derivatives thereof, of persons, firms or entitiesmentioned in this document and may be represented on the board of such persons, firms or entities. SG does,, from time to time, act as a principal trader in debtsecurities that may be referred to in this report and may hold debt securities positions. Employees of SG, or individuals connected to them, may from time to timehave a position in or hold any of the investments or related investments mentioned in this document. SG is under no obligation to disclose or take account of thisdocument when advising or dealing with or on behalf of customers. The views of SG reflected in this document may change without notice. In addition, SG mayissue other reports that are inconsistent with, and reach different conclusions from, the information presented in this report and is under no obligation to ensurethat such other reports are brought to the attention of any recipient of this report. To the maximum extent possible at law, SG does not accept any liability

whatsoever arising from the use of the material or information contained herein. This research document is not intended for use by or targeted to retail customers.Should a retail customer obtain a copy of this report he/she should not base his/her investment decisions solely on the basis of this document and must seekindependent financial advice.

The financial instrument discussed in this report may not be suitable for all investors and investors must make their own informed decisions and seek their ownadvice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein. The value of securities and financialinstruments is subject to currency exchange rate fluctuation that may have a positive or negative effect on the price of such securities or financial instruments, andinvestors in securities such as ADRs effectively assume this risk. SG does not provide any tax advice. Past performance is not necessarily a guide to futureperformance. Estimates of future performance are based on assumptions that may not be realized. Investments in general, and derivatives in particular, involvenumerous risks, including, among others, market, counterparty default and liquidity risk. Trading in options involves additional risks and is not suitable for allinvestors. An option may become worthless by its expiration date, as it is a depreciating asset. Option ownership could result in significant loss or gain, especiallyfor options of unhedged positions. Prior to buying or selling an option, investors must review the "Characteristics and Risks of Standardized Options" athttp://www.optionsclearing.com/publications/risks/riskchap.1.jsp.

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100 Years of Investing in 3 Charts SocGen

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