Presentation

by

A. Gary Shilling, Ph.D.

to

The Texas Municipal Retirement System

Jan-59 Jan-65 Jan-71 Jan-77 Jan-83 Jan-89 Jan-95 Jan-01 Jan-07 Jan-132%

4%

6%

8%

10%

12%

14%

16%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

Saving Rate (SAAR) - left axisHousehold Debt as a % of Disposable Personal Income - right axis

U.S. Personal Saving Rate and Household Debt (consumer plus mortgage) as a % of Disposable Personal Income

Last Points 4Q 2015- Saving Rate, 5.4%; HH Debt, 104.7%

Source: Bureau of Economic Analysis; Federal Reserve

1947-I 1959-III 1972-I 1984-III 1997-I 2009-III 58%

59%

60%

61%

62%

63%

64%

65%

66%

67%

68%

7%

8%

9%

10%

11%

12%

13%

14%

15%

Compensation of Employees - left axisCorp. Profits with IVA and CCAdj - right axis

Corporate Profits and Employee Compensationas a percentage of National Income

Source: Bureau of Economic Analysis

Last Points 4Q 2015 - Corp. Profits: 12.1%, Employee Comp: 62.6%

1980 1985 1990 1995 2000 2005 2010-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

Avg. Real Weekly Wages of Production and Supervisory EmployeesReal Median Household Income

Real Weekly Wages and Household Incomesyear/year percent changes

Source: Bureau of Labor Statistics; Census Bureau

Last Points 2014- Income: -1.5%, Wages: 1.0%

Jan-07 Sep-08 May-10 Jan-12 Sep-13 May-15-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

Federal ReserveEuropean Central Bank

Bank of EnglandBank of Japan

Central Bank Assetschange since January 2007

Source: Bloomberg; The Central Banks

Last Points: April 2016

5

Jan-07 Dec-08 Dec-10 Dec-12 Dec-14600

800

1000

1200

1400

1600

1800

2000

2200

600

800

1000

1200

1400

1600

1800

2000

2200

S&P 500 Index

Source: Thomson Reuters

Last Point 05/16/16: 2,066.66

1997 1998 2000 2002 2004 2006 2008 2010 2012 2014100

150

200

250

300

350

400

450

500

100

150

200

250

300

350

400

450

500

Reuters/Jefferies CRB Index

Source: Haver Analytics, Thomson Reuters

Last Point 05/16/16: 184.58

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 20144%

6%

8%

10%

12%

14%

16%

4%

6%

8%

10%

12%

14%

16%

Chinese Real Gross Domestic Productyear/year percent change

Last Point 1Q 2016: 6.7%

Source: Bloomberg; Chinese National Bureau of Statistics

Jan-07 Sep-08 May-10 Jan-12 Sep-13 May-15-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Chinese Exports year/year percent change

Source: China General Administration of Customs

Last Point April 2016: -1.8%

2004 2006 2008 2010 2012 2014150%

160%

170%

180%

190%

200%

210%

220%

230%

240%

250%

150%

160%

170%

180%

190%

200%

210%

220%

230%

240%

250%

Chinese Total Debt as a Share of GDPincludes corporate, household, government and bank debt

Source: Bloomberg

Last Point 2015: 246.8%

1997 1999 2002 2004 2007 2009 2012 201411.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

17.0%

United States Manufacturing Value Addedas % share of GDP

Source: Bureau of Economic Analysis; The World Bank

Last Point 3Q 2015: 12.1%

Jul-12 Mar-13 Nov-13 Jul-14 Apr-15 Dec-15

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40 7580859095100105110115120125130

USD/EUR - left axis (inverted)JPY/USD - right axis

Euro and Yen Exchange Rates

Last Points 05/16/16 - USD/EUR: 1.132; JPY/USD: 109.01

Source: Thomson Reuters

Stro

nger

U.S

. Dol

lar

Stro

nger

U.S

. Dol

lar

1996 1998 2001 2003 2006 2008 2011 201325

30

35

40

45

50

55

60

25

30

35

40

45

50

55

60

Non-OPECOPEC

Total Oil Output for Non-OPEC and OPEC Countriesmillion barrels per day

Source: Energy Information Administration

Last Points 3Q 2015 - Non-OPEC: 58.68; OPEC: 37.71

Dec-13 May-14 Oct-14 Mar-15 Jul-15 Dec-15 May-1620

30

40

50

60

70

80

90

100

110

120

20

30

40

50

60

70

80

90

100

110

120

Brent Crude OilWTI Crude Oil

Brent and WTI Crude Oil Pricesdollars per barrel; nearest futures contracts

Source: Thomson Reuters

Last Points 05/16/16 - Brent: $48.97; WTI: $47.72

Oil Breakeven Price for Major Petrostates $ per barrel

Source: Bloomberg; The Wall Street Journal

$52 $58$68 $70 $76

$89 $93 $96 $98 $105

$208

Kuwait Qatar

U.A.E. Iran Iraq

VenezuelaAlgeria

Saudi ArabiaOman

BahrainLibya

$0

$50

$100

$150

$200

$250

$0

$50

$100

$150

$200

$250

*Breakeven price needed in order to balance the national budget.

Current Brent Crude, $/barrel: $48.97

2001 2002 2004 2006 2007 2009 2011 2012 2014 20160

100

200

300

400

500

600

700

800

0

100

200

300

400

500

600

700

800

Saudi Arabia Foreign Exchange Reservesbillion USD

Source: Bloomberg; International Monetary Fund

Last Point March 2016: $587.08

United States Crude Oil Productionmillion barrels per day

Source: Energy Information Administration

Last Points 05/06/16: 8.80

2000 2001 2002 2004 2005 2006 2008 2009 2010 2012 2013 20140

1

2

3

4

5

6

7

8

9

10

0

1

2

3

4

5

6

7

8

9

10

Crude Oil Rotary Rig Count and Average Oil Production Per Rig

Source: Bloomberg; Baker Hughes

Last Points April 2016: Rigs, 332; Oil Prod., 475

2008 2009 2010 2011 2012 2013 20150

200

400

600

800

1000

1200

1400

1600

0

50

100

150

200

250

300

350

400

450

500

Rig Count - left axisAverage Oil Production Per Rig (barrels/day) - right axis

A Successful Cartel

1. Involves a commodity that can otherwise be left in the ground, avoiding production and inventory costs until it’s needed.

2. Its product is so much in demand that buyers are relatively insensitive to price.

3. The commodity has few if any close substitutes.

4. It includes most of the low-cost suppliers and has few meaningful non-cartel competitors.

5. It involves relatively few cartel members, thereby promoting discipline.

6. It's sponsored by governments and even religious authorities that benefit from the cartel and protect it.

7. It operates in a period of strong economic growth and robust demand for the product.

8. It faces few technological improvements in the industry.

Unfavorable Climate for OPEC

1. Alternatives to oil, especially natural gas but also government-subsidized renewables, are growing.

2. Non-OPEC supplies are leaping, notably from Russia and especially American frackers.

3. Infighting among OPEC members has destroyed discipline.

4. Global economic growth is weak, and the ongoing shift from goods production to services in China and elsewhere is curbing oil demand.

5. Conservation is limiting oil demand.

6. Rapid technological advances in fracking, horizontal drilling, deep-water and Arctic drilling, etc. are mushrooming non-OPEC supplies at low and declining costs.

World Crude Oil Supply and Demandmillion barrels per day

Source: Bloomberg; International Energy Agency

Last Points 4Q 2015: Ex. Supply, 2.3; Demand, 94.8; Supply, 97.1

2001 2002 2003 2004 2006 2007 2008 2009 2011 2012 2013 2014-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

75

80

85

90

95

100

Excess Supply - left axisDemand - right axisSupply - right axis

Mar-11 Oct-11 May-12 Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-1520%

30%

40%

50%

60%

70%

80%

90%

20%

30%

40%

50%

60%

70%

80%

90%

Tank Net Available Shell Storage Capacity UtilizationTank Working Storage Capacity Utilization

Crude Oil Storage Capacity UtilizationCushing, OK

Source: Energy Information Administration

Last Points 05/06/16: Shell, 77.3%; Working, 92.9%

Note: Net available shell includes idle (not working) capacity.

Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

United StatesEurozoneJapan

Producer Price Indexyear/year percent change

Source: Bloomberg; Bureau of Labor Statistics

Last Points 04/16: U.S., 0.0%; Japan, -4.2%; 03/16: EZ, -4.2%

Jan-07 Sep-08 May-10 Jan-12 Sep-13 May-15-5%-4%-3%-2%-1%0%1%2%3%4%5%6%

-5%-4%-3%-2%-1%0%1%2%3%4%5%6%

GoodsServices

U.S. Personal Consumption Expenditures Implicit Price Deflato year/year percent change

Source: Bureau of Economic Analysis

Last Points March 2016 - Goods: -1.8%; Services: 2.1%

Japanese CPI and Real GDP year/year percent change

Source: Japanese Cabinet Office

Last Points 4Q 2015- GDP: 0.8%; CPI: 0.3%

1981 1985 1989 1993 1997 2001 2005 2009 2013-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Real GDPConsumer Price Index

Jan-15 Mar-15 May-15 Jul-15 Oct-15 Dec-15 Feb-16 May-161.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

3.2%

3.4%

10 Year Treasury Yield30 Year Treasury Yield

10 and 30 Year Treasury Yields

Source: Federal Reserve

Last Points 05/16/16 - 10-Yr: 1.75%; 30-Yr: 2.60%

Jan-07 Dec-08 Nov-10 Oct-12 Sep-1470

75

80

85

90

95

100

105

70

75

80

85

90

95

100

105

U.S. Dollar Indexspot price

Source: Bloomberg

Last Point 05/16/16: 94.57

Stro

nger

U.S

. Dol

lar

Stro

nger

U.S

. Dol

lar

1980 1985 1990 1995 2000 2005 2010 2015-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

200

400

-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

200

400

Federal Budget Balance$ Bil.

Source: Congressional Budget Office

Last Point 2015: -$439

26

Questions and Discussion