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FIDELITY INVESTMENTS Fidelity Viewpoints® Webcast: January 29, 2013 Transcript

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[Operator] Good day everyone and welcome to the Fidelity Viewpoints® Webcast.

Before we begin there are some important housekeeping items to review. It’s

important to note that the statements and opinions on this call are those of Shahira

Knight and Jurrien Timmer and are subject to change at any time based upon market

or other conditions.

Fidelity Investments cannot guarantee the accuracy or completeness of any

statement or data. Information provided and references to any specific security are

for informational purposes only and should not be construed as recommendation

for/or investment advice.

Investment decisions should be based on an individual’s own goals, time horizon and

tolerance for risk. Fidelity does not provide legal or tax advice. Consult your attorney

or tax professional.

For opening remarks I would like to turn the presentation over to the Moderator,

Steve Gresham, Senior Vice President of the Private Client Group for Fidelity

Investments. Please begin Steve.

[Steve Gresham] Thank you very much Operator and thank you very much all of you and

good afternoon.

Because you are our most valued clients at Fidelity Investments we want to make

sure that you have the most up-to-date real-time information and, again, we’re

hosting yet another Web site because there is, of course, lots going on in the

markets, lots going in the political world.

Fidelity Public Information


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We are fortunate to have a ten minute special report from Fidelity’s Government

Relations and Public Policy Expert based in Washington D.C. So Shahira Knight is

with us today from Washington and we’re delighted to have her.

With everything going on down there we want to make sure that we stay connected

with you on the most up-to-date news surrounding topics that potentially impact you

as an investor, your family and your investments. So Shahira is the perfect person to

provide that update.

After Shahira finishes her remarks we will welcome back once again Jurrien Timmer

for his first 30 minute market update of 2013. Jurrien, as many of you know, is the

Director of Global Macro for Fidelity and Co-Portfolio Manager for Fidelity Global

Strategies Fund.

Jurrien has more than two decades experience in the asset management world and is

a 17 year veteran of Fidelity. He plays a key role at Fidelity’s Global Asset Allocation

Group where he specializes in global macro strategy and tactical asset allocation.

And as an investment strategist and portfolio manager his work includes

macroeconomic, technical and quantitative disciplines.

Jurrien’s research is widely used by Fidelity’s portfolio managers and analysts and in

addition to this internal role he is also a spokesman on investment matters for

Fidelity’s clients and associates. We are very excited to have Jurrien back again for

this quarter’s update and I’m sure you’ll enjoy it.



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After both of our speakers present we’ll have a question and answer session where I

will ask your questions directly to Shahira and to Jurrien.

With that it is my pleasure to welcome back Shahira Knight.

[Shahira Knight] Thank you very much Steve. I know it feels like over the past few years

we’ve just jumped from one fiscal crisis to another and unfortunately I don’t think

that trend is going to change a whole lot in 2013.

The fiscal cliff law that was just enacted really focused on the tax portions of the

fiscal cliff. It permanently extended the Bush tax cuts for the large majority of tax

payers, it allowed them to expire for upper income tax payers, it allowed the payroll

tax relief to expire for everyone, regardless of income and it allowed the new tax

increases from the President’s healthcare law to go into effect as scheduled this year.

So the good news is that we avoided a scenario where a big tax increase in 2013

could have potentially tipped us back into a recession. We also have a lot more

certainty in the tax law because most of these tax provisions are now permanent. So

we shouldn’t expect to see another big tax cliff in the foreseeable future.

You’ll see that the new law did not address some of the bigger fiscal issues that have

been on the table. Importantly, for both the economy and the markets, the bill didn’t

raise the debt limit; it delayed the onset of the budget sequester, but only by two

months. And the law doesn’t do anything meaningful on deficit reduction.

There will be more tax revenue coming into government coffers, but it’s really a drop

in the bucket relative to the size of the deficits we’re running. The credit rating



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agencies are still warning that they want to see a credible deficit reduction plan put

into place.

So if we go to the next slide you can see that the next few months will likely be

dominated by budget issues. In February we have the State of the Union Address

and the President is supposed to submit his budget on the 4th. He has already said

he’ll miss that deadline, so we’re not sure when we’ll see the budget and we don’t

know if it will be similar to his past budgets or if it’s going to include some new tax

and spending proposals.

On March 1, the budget sequester will take effect. If Congress and the President

want to avoid these spending cuts they have to proactively pass the law before

March 1, to either turn off the sequester or replace it with a different set of

budgetary savings.

A few weeks later on March 27, government funding will expire. So again Congress

and the administration would have to proactively pass a law to authorize funding for

the government agencies and if they can’t reach an agreement by that date we’ll

face the risk of a partial government shutdown.

And then April 15, is the deadline when the House and Senate are supposed to pass

their respective budget resolutions. A budget resolution is not law, so if the House

and Senate can agree on a single budget resolution it really becomes a blueprint that

guides fiscal policy for the next fiscal year, which starts in October. But the exercise

of producing a budget allows each chamber to outline its policy priorities and its plan

for dealing with the deficit.



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And then finally the other looming deadline out there is when we reach the debt

limit. When the limit is reached Treasury can no longer issue any new debt to pay

obligations that have already occurred. You probably remember that the last debt

limit to-date was during the summer of 2011 and it brought with it a lot of market

volatility and an eventual S&P downgrade of our long-term debt outlook.

One point of clarification here, we are actually on track to reach the debt limit in just

a few weeks, but there is legislation pending in Congress right now that would

suspend the debt ceiling until May 19. And that legislation is expected to become

law, so we’re really looking at a May 19 deadline there.

So these three deadlines in red have been referred to as new cliffs and if we go to

the next slide I want to spend the rest of my time talking a bit about each of these

deadlines and try to provide some context about the debate and what may happen.

So if we push the debt ceiling back to May 19 as expected the budget sequester

becomes the first and most immediate debate. Overall if the sequester were

triggered it would reduce spending authority by $85 billion in this current fiscal year.

Actual spending cuts this year would be less than that. About half of these reductions

would affect defense and national security programs. The other half would affect

domestic programs. And then several programs are exempt from the sequester, so

things like Social Security and many safety net programs would not be affected.

Defense and security really take the biggest hits.

Now the budget sequester really isn’t a cliff because it would take several weeks to

implement it. The law actually gives the administration up to 120 days to implement



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it. So we’re not facing a spending cliff on March 1. The cuts would take affect with

the delay and they’d occur gradually over several months.

That means that even if the sequester is triggered on March 1, Congress could

theoretically come back at a later date and take action to reverse it or to change it

before all of the spending cuts occur. A lot of people in Washington believe the

sequester actually will take effect as scheduled.

And the reason why is because this particular debate is not really about reducing the

deficit. It’s about taking these broad-based spending cuts and replacing them with a

different set of budget savings that are better targeted or more sensible. That may

mean replacing it with tax increases, with a different set of spending cuts, or maybe

even with changes to entitlement programs.

And as you can probably guess Republicans and Democrats don’t necessarily agree

on how the sequester should be replaced. If they can’t reach an agreement letting it

take affect may end up being the path of least resistance.

But as I mentioned before, if the sequester is triggered there’s a chance that

Congress could come back at a later date and reverse or change some of those

spending cuts before they actually occur.

The expiration of government funding is more of a cliff because if we don’t pass a

law to fund the government agencies by March 27, then portions of the government

could shut down right away.



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This debate on government funding is not so much about entitlement reform or

taxes. It’s about how much money should we give government agencies to allow

them to do their jobs. You know, a lot of members do not want to flirt with a

government shutdown because the last time this happened in 1995 it really wasn’t a

political winner for anyone.

But some of the newer and more conservative Republicans are willing to shut the

government down for a few days to force some spending reductions in these day-to-

day government operations.

I think most members truly want to avoid a government shutdown, but there is a

real chance that it could happen. If it does it would likely only be portions of the

government that shutdown and it would probably be very temporary, not a long-

term disruption.

And finally the big deadline out there is the debt limit. This is probably the one with

the most economic consequences if it’s not resolved. Since this one’s months away

it’s very hard to predict an outcome, so I thought instead I would just try to explain

how we got here and what the dynamics are moving forward.

But if we step back from the posturing and the line drawing that we read about in

the press I think you would see that most Republicans do not want to breach the

debt limit or put our credit rating at risk.

What they want is to get spending under control and to stabilize the debt because

they believe the debt is the biggest long-term risk for the economy. And more

specifically they want to slow the growth of entitlement programs like Social Security



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and Medicare because entitlements are a very significant contributor to the long-

term debt situation.

The problem that Republicans face is that Democrats clearly have a different idea

about how to reduce the deficit and entitlement reform is not on top of their list. So

to achieve their goal House Republicans are constantly looking for these leverage

points, or these bargaining chips, that will help them extract concessions on

spending.

And they originally thought that the debt limit would be a good leverage point to do

that. So a few weeks ago they drew a line in the sand and they said, “Look we are

not going to increase the debt limit unless spending is cut by an equivalent amount.”

And the President responded by saying, “I am not going to negotiate over something

as important as the debt limit.”

So it looked like they were on a collision course, but when Republicans regrouped it

became evident that the debt limit is not a great point of leverage because most of

them really don’t want to breach it. It’s sort of unchartered territory and they know it

would be very risky.

So they changed their strategy and they introduced a bill that would suspend the

debt limit until May 19. This bill does not include any spending cuts, but it includes a

provision that they refer to as No Budget, No Pay. It very simply says that if the

House and Senate don’t pass budgets by April 15, then members in that chamber

won’t get paid. Their pay will be suspended in an escrow account.



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This bill sort of changes the debate in two ways. First, it gives the Senate an

incentive to produce a budget, which is something they haven’t done since 2009.

And to this extent the bill does seem to be working because key Senate Democrats

have now publicly committed to passing a budget this year.

The exercise of producing a budget will allow Congress to have an open debate about

the deficit. Until now these deficit reduction debates have largely occurred behind

closed doors in very small groups. But the whole process of setting out a budget will

allow a congressional debate now.

The second thing the bill does is it changes the order of the deadlines. Rather than

being the first deadline that they have to deal with the debt limit now goes to the

back of the line. So they’ve essentially bought themselves a few months to make

some progress on deficit reduction without the threat of a debt limit crisis hanging

over them.

Now in a perfect world the budget process will result in a deficit reduction deal and

that would pave the way for a long-term increase in the debt limit before May 19,

but in reality this bill didn’t do anything to change the dynamics of the larger fiscal

debate. The two sides are still very far apart on how to reduce the deficit, and

particularly on what role entitlements and taxes should play.

So it’s kind of hard to see how they reach a deal on meaningful long-term deficit

reduction over the next few months, which means that we may have delayed the

debt limit crisis, but we haven’t necessarily averted it. If this bill’s enacted, and again

we expect it will be, the debt limit will be suspended and it will come back to life on

May 19.



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And at that point most budget experts say that Treasury will be able to use

extraordinary measures to keep us under the limit until July or even August. So a

potential debt limit crisis will likely now be had in the spring or summer.

And when we get to that point I think a lot of conservative Republicans are not going

to tolerate another debt limit increase unless it’s accompanied by some spending

reforms.

So it’s certainly too soon to predict how this plays out, but I think it’s hope that at

the very least they will make some incremental progress on deficit reduction over the

next few months, which would allow at least for another short-term increase in the

debt limit.

And with that, Steve, I’ll turn it back to you.

[Steve Gresham] Great. Thank you very much Shahira. So I know, again, an awful lot going

on and an awful lot of important information for investors.

So before I turn it over to Jurrien I would like you to - would very much like to call

your attention to an article that he has just posted to Fidelity.com, and that’s

fidelity.com/viewpoints. I’d ask you then to click on Market and Economic Insights

when you have an opportunity because this article is proactive. It is the Secular bear

market ending for stocks.



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So why don’t we turn right to Jurrien and let’s go through his always interesting and

very in-depth summary of what he thinks is happening. So Jurrien if you would take

it away.

[Jurrien Timmer] Great. Thanks Steve. If the model, yes there we go, okay good. Today I

am going to talk about two timeframes, the cyclical and the structural, or secular as

it is known in our business, but before I do I just want to give you folks a brief

update, or a brief review on sort of how 2012 stacks up compared to the previous

few years.

As we all know the market went through a hell of a crisis in ’08, bottomed in March

’09 and has been moving ever higher ever since. The S&P bottomed at 667 on March

9, 2009, today it closed at 1,507, so that is more than a doubling in value.

And what you can see in this chart, we call this an Efficient Frontier. So if you look at

the horizontal axis that’s the amount of risk or volatility that investors take in various

asset classes. The vertical axis shows the return. And this is from the bottom in 2009

until through December 2012.

And so what you can tell is that the further to the right you go the more risk you

take, presumably the more return you get. Of course it works the other way too, the

more risk you take in a down market, you know, the more negative your return often

gets.

So you have an upward sloping curve there with cash all the way in the bottom left,

emerging market or EM equities all of the way in the upper right and you can see

high yield sort of sticking out there in the upper left.



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And so the way to think about this is anything that’s above the curve, especially to

the left, is a preferred asset class because you’re getting more return than risk and

anything that’s below, especially to the right, is not preferred because you’re getting

- you’re taking on a lot of risk to get little return.

So this is how the last, you know, four years or so looks. Now the size of these dots

shows the beta, or the correlation, of each asset class to the stock market. And I

want to draw, just draw, your attention to that little dot in the middle that is not

purple. So all of the other ones are purple, but the one that’s not is gold.

So for the last four years gold provided a high return of about 20% with moderate

risk and with a negative correlation to stocks. That’s a very nice feature to have in

an asset class.

But now look at the next slide, or the same slide, but now I’ve shown 2012 as a year

overlaid against this 4 year period. And you’ll notice a couple of things. First of all

gold went from a sort of high returning diversifying asset to a low returning risk

asset. It’s now down in the bottom and the dot is now blue instead of white.

So gold definitely disappointed me as a gold fan in 2012. It did not do what it had

done in previous years. So this is something I’m watching carefully in the Global

Strategies Fund, which I co-manage. We still have physical gold in there and I’ll

touch on that a little bit later, but this is something I’m watching carefully.

The other thing I wanted to point out is high yield, even though the return is less in

2012 than it was annualized over the preceding couple of years, you can see how far



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up to the left that dot now is for 2012. So high yield return about 16% in 2012 with

a volatility of only about 3 or 4, which is almost unheard of. So it was kind of the

poster child of Efficient Frontiers.

And high yield is an interesting asset class because now it has reached levels that

are fairly rich by historical standards. So in any case I just wanted to give you this as

a brief summary of how 2012 transpired.

Now my investment process on the Global Strategies Fund is that we look at three

time frames, well we look at multiple timeframes, multiple asset classes across

multiple disciplines. So we look at secular themes, the market cycle and tactical

opportunities. And so for today I’m going to focus on the market cycle and on the

structural themes.

So I’m going to start with the market cycle. And what we do is we look at a whole

bunch of indicators, I mean literally hundreds of them, and we try to gauge where

we are in the business cycle, or in a market cycle.

So the average, historically the average, market cycle is about four years long,

although in recent years it’s been much shorter, it’s been more like six months, and

we try to figure out in which phase of the cycle we are.

So there are four phases. There’s the early cycle phase, so think March ’09, the

economy is terrible, but it’s getting less terrible; the market’s oversold; valuations

are cheap; and the Central Banks are opening up the monetary spigots. That’s

actually the best time to be buying stocks because they tend to be the most oversold

and it’s that rate of change that is driving the market from falling to rising.



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Then you get the mid-cycle phase where the economy is expanding at an

accelerating rate of change, so that’s the sweet spot for the economic cycle. Then

you get the late cycle where the economy is still expanding, but it’s slowing. And

then the down cycle, of course, is what it suggests, which is a recession or a

contraction. The rate of change is falling and the level of output is falling as well.

And what you can see in this chart is that we are mostly in mid-cycle right now and

this is for the global economy. And that is a good time to be invested in what we call

risk assets, which includes stocks; to some degree commodities, depending on which

commodities they are; credit, you know, so high yield bonds, emerging market

bonds, investment grade, corporate bonds, bank loans, you know, things like that.

Generally interest rates rise during that phase, but not tremendously so and stocks

and other risk assets do well.

So that’s where we are right now and we have been sort of moving out of early cycle

into mid-cycle and the next phase, in all likelihood, will be the late cycle, but right

now that’s where we are.

And what I find interesting, and you obviously all know this, but the market has been

on a terror for the last couple of weeks, if not the last month or two. And it’s on a

terror because there’s a confluence of things happening that are all very bullish, at

least for as long as they last.

And one is that the definite economic momentum and, you know, not everywhere,

you know, retail sales were a little soft; consumer confidence was released today,



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that was down a little bit, but generally speaking there has been improving economic

momentum, which clearly provides a tailwind for stocks.

We have the monetary spigot wide-open. As you all know the Fed did, you know, is

now in QE3; or QE4; or QE Forever; whatever you want to call it mode, basically

doing about $85 billion of outright purchases per month. And Bernanke himself has

said that he doesn’t expect this to end until 2015, so you’re looking at $1 trillion a

year, possibly for 2 or even more years.

And, you know, if there’s a common theme to my presentation today it’s that

liquidity makes the world go around and I’m going to show you some charts to

demonstrate this.

So you’ve got economic momentum, you’ve got monetary stimulus, you got strong

technicals and now you have sentiment. You may have heard about this already, but

there’s this talk about this great rotation because investors have been selling

equities, or equity funds, or ETF’s since the October 2007 stock market peak and

instead have been sort of buying bond types of funds.

And there is a sense that maybe now we’re going to see the rotation out of bonds

back into stocks. It’s way too early to know whether that actually is taking place or

not, but you got that sentiment shift, you got the monetary, the technical and the

economic momentum and this is what’s propelling stocks higher.

So I’ll give you a little snapshot here. This chart here shows one of the many high

frequency economic indicators that I follow. This is called the Economic Diffusion

Index for the Global Economy. And very simply if the line, if the blue line, is going up



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generally the stock market goes up with it and if it goes down generally the stock

market goes down with it.

So this is a coincident, but very high frequency indicator. It is reported on a weekly

basis and it’s one that I follow very closely. And you can see that since last

summer/fall, since the ECB made, you know, since Mario Draghi at the ECB, made

that famous speech about the bumble bee and doing whatever it takes to protect the

Euro this line has basically been going up. And as long as it’s going up there is

economic momentum.

Now two caveats here, one is that you can see that there is a clear cycle here and its

last - it’s about 44 weeks from trough-to-trough or 22 weeks from peak-to-trough,

or trough-to-peak, and we are starting to get close, maybe within a few weeks, of

this line getting into the cyclicality of maybe making a top, so that’s one caveat.

The other one is you can see that the S&P - or actually this is the MSCI All Country

World Index, so this is a global stock market index that I’ve shown here. You can see

how much further this index has advanced relative to the actual economic indicators.

So you can think of this almost as a valuation expansion. So we all know about PE

ratios expanding or compressing, well this is kind of a fundamental valuation where

stocks are - have moved in the right direction in line with the economic momentum,

but they have moved far more than the fundamentals would support.

And the reason for that is very simple, and you can see this in the next slide, and

that is that the Fed is now printing money at almost twice the rate of QE2, which it



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did from the fall of 2010 until the spring of 2011, or December 2011, and at about

the same rate as QE1, which it did from March ’09 until April 2010.

So this chart shows the KVY, which is an index, an equal weighted stock market

index, so every stock is weighted the same as every other stock. And the blue line is

the Fed System Open Market Account, which is essentially when the Fed is printing

money this is kind of where it shows up.

And you can see that the two lines are unmistakably correlated to each other and it’s

sort of a very simple Pavlovian response, Fed is printing money, stocks go higher;

Fed stops printing money, stocks go lower. In fact when you separate this into two

buckets when the Fed is printing money the stock market goes up about .7% per

week and when the Fed is not printing money it goes up about .1% per week.

So there’s a very clear difference here between when we get stimulus or not and the

Fed, of course, knows this, which is why it’s printing money. It’s not - it’s really not

rocket science. But is there a price to be paid for this? And I’ll address this a little bit

later on.

So you can see the blue line is now starting to expand again because this is the Fed’s

new latest QE phase where it is doing $40 billion of mortgages a month, plus $45

billion of treasuries and you can see the KVY is breaking out to new all-time highs.

So even though the S&P is still about 70 points away the general market, whether

you look at the Russell 2000, or this particular index, is already at new all-time

highs. So this is a very impressive performance, but money printing by the Fed has a

lot to do with it.



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Now the next slide shows technical momentum, so these are the number of new

highs that the market is making minus the number of new lows. And you can see on

the bottom right hand side, those blue bars, you can see we actually have the

strongest momentum now since April 2010, which actually was a peak, but it’s very

hard to pick those tops in real-time because moment, overbought momentum, can

be a bad thing; it can be - or it can be a good thing. And in this case, so far, it has

been a good thing because it just shows that the market is very strong.

Now this has not been lost on investors. Money has been coming into equity, mutual

funds and ETF’s at a very torrid pace, although it’s been mostly global funds and

emerging market funds, not so much U.S. domestic equity funds. But you can see

the fund flows in this chart, flows are the highest since 2011.

So like I said, you have four things happening. You have economic momentum is

improving, you have money printing by the Fed, you have strong technicals, and you

have sentiment that’s very robust.

Now the question is when do we run out of gas here? So far we’re not running out of

gas. In fact every day it seems like the market wants to correct. Even today it was

down earlier and yet here we are closing up 8 points on the S&P and 72 points on

the Dow.

So you can see this market doesn’t want to go down. It shows that investors are sort

of trapped there out of the market. Eventually this is going to end badly, but that

could be several months and, you know, 1,000 Dow points away. That’s not a



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prediction, just to be on the record, but it’s very hard to figure out when these

momentum moves end.

But what we do know is that sentiment has gotten very, very bullish now and that’s

definitely something we haven’t seen in a while. So this chart here shows Wall Street

strategist’s forecasts for the S&P 500. On the left hand you see the forecast for last

year, on the right hand for this year. And you can see how much higher the forecasts

are this year than they were last year.

Last year strategists were fairly downbeat. They were looking at 1,350 on average

for the S&P. We ended up closing at about 1,420 or so. This year they’re looking at

1,575, which is far, far higher. And I’m not saying that’s not attainable, but the

contrarian in me, you know, takes notice of these things. And it’s not just the

strategists; you can see it in the mainstream media as well.

For instance, over the weekend the New York Times had a front page article on how

the small investor is back, there was another one in the Wall Street Journal. Even on

World News Tonight on ABC on Friday, you know, the, sort of the, 6:30 national

news, there was a whole segment where they were - where the anchor was

interviewing, sort of, mom and pop retirement saver and asking them about their

401k and they were saying how, you know, 401k is up and they’re feeling much

better, they’re spending more.

And that’s all fine. This is not a criticism of any of that, but it’s the kind of stories

that we just haven’t seen in a number of years and they’re all coming back now. So

there seems to be a sea shift going on, a sea change, in terms of sentiment.



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Now let me give you a couple of more economic charts here. And again, the common

denominator is liquidity. Liquidity makes the world go round and that’s very much

the case right now. And so I think one of the key things to watch for to know if we’re

going to sustain these rallies or lose them is whether the liquidity spigot will stay

open or not.

So the first chart is - shows Europe, so the top panel is the MSCI Europe Index. And

you can see that the index is trying to breakout. And of course last year was all

about Europe, and the Euro, and Spain, and Greece, etc. But if you look at the red

line in the bottom panel that shows money supply growth, again that is a measure of

liquidity.

And money supply growth a few months ago was as low as it was during the 2008 -

’09 crisis, credit crisis, even as low as the 2002 recession low that followed the

dotcom bubble.

And since then the ECB has been very successful in creating more liquidity through

the LTRO’s and now the promise of, you know, bailing out Spain if it comes for a

bailout. And you can see how the red line is now moving up. That is a sign of

improving liquidity.

Now the blue line lags the red line, or I should say the red line leads the blue line,

and the blue line is earnings growth. So as the red line goes up a year later the blue

line follows. So this suggests that Europe is, you know, it’s probably not out of the

woods. We’ll probably get many years of slow growth as this healing process

continues, but with the ECB apparently taking till risk off of the table it has allowed

the system to start healing itself and that’s evident in this chart.



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So in the Global Strategies Fund we are overweight equities and most of that

overweight actually is in European equities. We continue to like this region of the

world. So that’s Europe.

Now we move to China. China is a very interesting story. China last year was in a

growth recession, so not an outright recession, but in a growth recession, meaning it

was growing below trend. So the government said China was growing at 7% to 8%

last year. If you look at, sort of, real on the ground type of indicators maybe it was

more like 3%, 4% or 5%.

And you - and this chart shows you what has happened since then. So the top panel

is the Shanghai Composite, the bottom panel is the Growth Rate in Bank Lending and

the middle panel is the Growth in Shadow Bank Lending. And I’ll explain what that

means.

But what happened was the banks are not really lending a lot of money because

depositors, or households, are not putting money in banks because they’re only

getting like 3% and the inflation rate is higher than 3%. So they have no incentive to

put money in the banks and if the banks are not getting the deposits in they don’t

have money to lend out to businesses. So loan growth is not really happening.

But what is happening is that there’s a lot of shadow lending going on and this gets

sort of inside ((inaudible)). I’m not going to bore you with the details. But what’s

happening is that there is sort of off balance sheet lending going on where depositors

are putting their money not into bank deposits, but into what are called wealth



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management products, or trust loans, that yield much higher rates, so instead of 3%

they yield 8%, 9%, 10%.

And those loans get packaged into, sorry, those deposits get packaged into loans to

property developers. And that’s all fine and well, but this is a relatively unregulated

market and nobody really knows what happens if any of these loans go bad. Right?

If the bank has an under - a non-performing loan the government probably tells

them to rollover the loan, or maybe the government, you know, recapitalizes the

banks because after all the banks are more or less owned by the government

anyway.

But these shadow bank loans nobody really knows what would happen if one of these

loans goes into default and whether the investors will get paid back. So it’s clear that

China, and you can see it from the blue line, that the economy is recovering, but I

don’t know how sustainable it is. It looks like it’s a low quality rebound rather than a

more, sort of, robust rebound.

So China is growing faster now than it was six months ago. That does provide a

tailwind for the global economy, so that’s all good. I am skeptical, however, that this

is going to be a long lasting or sustainable recovery. It could be over in a couple of

quarters. So I remain somewhat more tactical here. We do own Chinese equities and

emerging market equities in the Global Strategies Fund, but we’re keeping them on a

fairly short leash.



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And speaking of emerging markets, again liquidity being the theme, right, we saw it

in the Fed’s QE; we saw it in Europe’s money supply growth; we saw it in China with

the shadow banks; and here we see it in this chart in emerging markets.

The top panel shows the MSCI Emerging Market Equity Index; the bottom line, the

blue line, shows the growth in global foreign exchange reserves, again that is

another form of liquidity. And you can see how the top and the bottom are highly

correlated. When liquidity erodes the markets go down, when liquidity expands the

market goes up. I mean obviously there are other things at play as well, but that’s

kind of a very simplistic way of putting it.

And what I see in this chart is that the liquidity growth, which had all but evaporated

last year, is now trying to bottom. And this is why emerging market equities, which

you can see in the top panel, are trying to breakout in terms of the technicals. So we

are also overweight emerging market equities in the Global Strategies Fund.

So that’s the cyclical lay of the land. So the stock market has some pretty good

tailwinds, whether it lasts another two weeks or another two years is kind of hard to

tell here. You know, we’ve been more tactical in the last couple of years on the fund

and we will probably remain that way.

But having said that I want to get into a couple of more structural themes and

they’re really more questions than answers because we don’t really have the

answers. But I want to get into a couple of structural issues and one of them follows

up on what Shahira was saying earlier and that is, you know, this notion of fiscal

austerity, will we even get it; what kind of fiscal drag will we get, if any; and what

does that do to the economy here in the U.S.?



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So this chart shows the S&P going back to the 1960’s and there are 3 lines below

there and they are total debt, household debt and the, sorry, federal government

debt, household debt and financial sector debt.

And what you can see since ’07 when the housing market peaked is you’re had this

deleveraging super cycle going on on the household balance sheet and in the

financial sector balance sheet, so those are the 2 lines that have been going down

since ’07, but it’s been offset by an expansion in debt by the public sector.

And, you know, we can argue whether that was good or bad, needed or not needed,

whether it does more harm than good, but that’s not my job. What I will say though

is that that expansion in public sector debt, or basically deficit spending, you know, a

classic Keynesian response, probably helped avert another Great Depression.

Again, whether it has unintended consequences that are even worse than the

problems it tried to avoid is an argument that’s better had at a cocktail party, but

not right this moment.

But the question now is if the public sector debt, if that line starts to flatten out

because we’re about to get fiscal austerity has the private sector done enough

deleveraging to be able to withstand that fiscal drag that comes from it right?

So we all know with the fiscal cliff that it may take 1% out of GDP, it may take 2%,

maybe it takes only .5%, it really depends on whether any of these things that

Shahira was talking about, like the sequestration, actually come to pass or not, but

that’s the big question.



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And is the recovery in the housing market, for instance, is that robust enough to

withstand a hit that will come from the public sector if we indeed get into some sort

of fiscal austerity? That’s a very big question. I don’t have the answer. Nobody

knows. That’s why we’ve had this whole uncertainty about the fiscal cliff and why the

market has been on eggshells.

One thing I do know though, if you look at the next chart, is that the fiscal cliff has

turned into what I would call a known unknown. And that sounds kind of corny but,

you know, there’s two kinds of unknown right? There is the known unknowns and

there are the unknown unknowns and last year we had a lot of known unknowns

right?

We had the Euro; we had, you know, the soft patch in the economy; we had the

fiscal cliff and you can see the number of times that the words fiscal cliff were

mentioned in the media in the bars there. It’s just off the chart right? The other

spike in that chart shows the number of times that the words debt ceiling were used

in the Summer of 2011.

And what this tells me is that the fiscal cliff has become such a known unknown that

it may not really influence the market anymore. And if you think about it from a, sort

of, behavioral economics perspective, you know, what happened in November and

December right?

So the market peaked in September after QE3 was announced and it went, the S&P,

went from 1,476 and it went down to like, whatever, 1,420 or something, then it



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went up again, and then we had the election and it went all of the way down to

1,343 and part of that was the fiscal cliff.

And people who sold in anticipation of the fiscal cliff saw an eleventh hour deal, just

like everybody said there would be, and then the market, you know, started going

up. And so if you are an investor and you get conditioned by, you know, sort of your

experiences what are you likely going to do? Are you going to say, “Well I’m going to

sell again now because fiscal cliff part two is around the corner.” Or are you going to

say, “Well they’ll figure it out. Why don’t I just not sell, or even buy?”

And that seems to be what’s happening now. And so the market appears to have

become desensitized to this whole fiscal fiasco, or fiscal follies, as they call it, and

maybe that is the exact wrong thing to do. And I’m not here to judge, but I’m just

here to observe.

So the last time around there was a sell the rumor, buy the news event maybe, just

maybe, this time around it will be a buy the rumor, sell the news event. And like I

said, or like Shahira said, around mid-March is when some of these debt lines are

really starting to come to pass, sequestration on March 1, the continuing resolution

on March 31.

So, you know, a top, a market top, in March sometime it would not surprise me at all

on the basis of this chart, as well as on the basis of the charts that I showed earlier

where the economic momentum, the sentiment, the technicals, by that time, you

know, four or six weeks from now they may all have come to some sort of a climax

and maybe at that point the markets ready to roll over into a summer swoon, which

by the way is exactly what’s happened every year since 2010. Now the question is,



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does that top come at S&P 1,510; 1,550; 1,600? That of course is completely

unknowable.

The other big structural question, and again it’s one without an answer, is what are

the unintended consequences of all of this monetary stimulus by the Fed and also

other Central Banks? And as you probably know the Bank of Japan is now in the

game as well. So everybody wants a weak currency. We’ve got this race to the

bottom going on, which is one of the reasons why we continue to own physical gold

in the fund.

And this chart kind of shows what the risks are. So in my humble opinion the Fed,

you know, the risk reward of what the Fed is doing is skewed to the downside. I

think the Fed obviously is achieving higher asset prices with monetary stimulus and

that’s clearly happening. But I don’t know that it’s going to achieve any kind of

economic gain other than just the wealth of the Fed from higher stock prices.

But what can go wrong? There are two things that can go wrong in my opinion and

they are on opposite sides of the economic spectrum. One is that at some point we

may be going back into a recession and at that point the Fed’s toolkit is going to be

completely empty right? They are already printing at $1 trillion a year; rates are

already at 0%. I mean what else can they possibly do to kind of prevent or help

smooth out another recession if and when it comes? So that’s risk number one.

The other risk is on the opposite side of the spectrum and it’s kind of shown in this

chart. This chart shows the TIPS Breakeven Spread in the blue line. Basically what

that means it shows investors where the market’s expectation for inflation.



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And what’s interesting is that when the Fed did QE1 inflationary expectations were

non-existent. Basically the market was looking for deflation and the Fed was very

concerned about deflation because that’s what happened during the Great

Depression. They didn’t want to repeat that mistake, so it went into QE1 mode back

in ’08 and then especially in ’09.

Then it ended QE1 when the TIPS Breakeven went to about 2.4%, then it dipped

back below 2%, it did QE2, went back up to about 2.6%, it ended QE2, then it went

back down below 2%, it did Operation Twist, and now the breakeven is at 2.5% and

not only is it not ending QE it is actually doubling down on QE doing $1 trillion a

year.

And to me this, you know, is a very dangerous game. And I don’t know if inflationary

expectations will ever really get sort of unleashed, you know, whether that inflation

genie ever gets out of the bottle, but certainly, to me, this is the main risk for this

year and maybe next year is that all of the sudden the 10-year Treasury Yield is not

at 1.5% where it was a few months ago, not at 2% where it is today.

Maybe all of the sudden it’s at 2.5% or 3% and inflationary expectations are starting

to accelerate and the Fed is still printing money and all of the sudden it needs to stop

doing that and it can’t because the market is now so conditioned to getting QE that

the Fed can’t not do QE because then stocks will collapse.

That to me is the main risk here that the Fed is basically painting itself into a corner

from which it can’t get out. So I think, and again this is not a prediction, but I think

this is something that we all need to think about as a possible risk going forward.



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And then, yes, and then my last structural theme, and then I’ll open it up to

questions if we have time, and it’s one that Steve mentioned earlier is, you know,

and again I don’t have an answer to this, but we’ve been going sideways for 13

years now and, you know, if you look at long-term history in the market since 1871

the annualized return has been 8.8% for the stock market.

You can divide that long-term history into two types of markets, secular bull markets

where the market goes up above average, and secular bear markets where it goes

up below average or it doesn’t even go up at all.

The typical secular bull market lasts 21 years. It sees returns of about 17% per year.

The typical secular bear market lasts about 14-1/2 years; it shows nominal returns

of only 1%, real returns of -2%. Since 2000 the S&P has gone up 1.4% per year. It’s

been - it’s gone down 1% per year in real terms and we are now in the 13th year of

that period.

So we need to ask the question, now that the S&P is only 70 points away from its all-

time high and now that the Dow is only a couple of hundred points away from its all-

time high, did that secular bear market end in 2009 and are we in a new secular bull

market?

That’s a very important question because, like I said, many investors, and I imagine

a lot of people on the phone, are probably heavier in bonds than they were five years

ago and lighter in stocks than they were five or ten years ago and is that still the

right asset allocation.



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You know, I don’t - I can’t answer that question for you of course, but it’s something

to be thinking about because if we are ending a secular bear phase and going into a

secular bull phase where the market now goes up above average for the next 10 or

20 years that’s going to be a pretty big change.

Now I’m not at all convinced that that’s about to happen. The typical secular bear

market has three cyclical downturns in it and we’ve only had two from 2000-2002

and from 2007 to 2009, so I am not at all willing to declare the secular bear market

over, but it’s something we need to think about because it’s going to affect our asset

allocation.

[Steve Gresham] Okay and we have a lot of questions, obviously, for our two speakers. And

again I want to thank the two of you.

So Shahira if I may call you back? There has been a lot of discussion this week and a

new announcement about possible immigration reform and that seems to have

overshadowed the budget and tax issues for the moment.

Do you think this is a temporary distraction or have Americans become immune to

Washington fiscal policy politics?

[Shahira Knight] Yes and yes. I think it is a temporary distraction in that the debt limit was

just moved out to the middle of May, or it will be, and the immigration story is a little

bit newer and fresher and so that’s what’s being focused on right now.



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But I think that the fiscal issues will come back. So I think that the distraction right

now is temporary and that this whole sort of cycle with the new cycle and the budget

issues will come back to the forefront again.

But at the same time I also do think that people are getting a little bit immune. You

know, like I said, people are getting used to the fact that we are just dealing with

short-term fiscal crisis, after short-term fiscal crisis and even we saw at the end of

last year there wasn’t a ton of market volatility around the fiscal cliff. People thought

that’s because people are getting immune to it, so I think the answer is yes to both

of those.

[Steve Gresham] Okay. I’m going to give you three quick ones as well, which have to do

with the fiscal cliff deal and understanding the impact on a couple of three different

issues involved in personal finance.

So the first one, is it expected that Congress will make permanent beyond 2013 the

ability to transfer directly from an IRA to charities for individuals over the age of 70-

1/2?

[Shahira Knight] No it is not expected that that provision will be permanent. That provision

is part of a group of things that we call tax extenders. It’s dozens and dozens of

provisions that Congress generally renews on an annual basis.

And in the past it’s been - received very little fanfare because it’s been seamless, but

the extensions have been more controversial recently, which is why people are

paying attention to it more. I think that issue, in particular, if Congress gets serious

about tax reform I think some kind of permanent solution may happen in tax reform.



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But if we don’t have tax reform, which would be an uphill lift in this Congress, then I

think we can count on these annual - on this provision being extended on an annual

basis again and not having a permanent solution anytime soon.

[Steve Gresham] Okay. Thank you. Another question, can you tell us about the changes for

estate taxes included in the end of the year fiscal cliff deal?

[Shahira Knight] Sure. So the fiscal cliff deal extended the 2012 Estate Tax Law on a

permanent basis with only 1 change. And that 1 change is that the top tax rate went

from 35% to 40%. So this year the estate tax exemption will be $5.25 million per

person. That exemption will be indexed for inflation annually. And then for the value

of the estate above that it will be subject to tax and the top rate now will be 40%

instead of 35%. So really the same as 2012 law except for the top tax rate

increasing.

[Steve Gresham] Okay and one other fiscal cliff tax question. Did the end of the year fiscal

cliff deal include any changes to taxes on municipal bonds?

[Shahira Knight] It did not. And just for people who may not be aware of this, it was very

much on the table that as part of the fiscal cliff deal to raise revenue there was

discussion of perhaps reducing or even eliminating the tax exemption on municipal

bonds. That ultimately was not included in the fiscal cliff deal, however I don’t think

we’re out of the woods on that one.

I think that with these debates over the sequester, and government funding, and the

debt ceiling generally there, you know, there is going to be a debate about whether



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higher taxes should be part of that equation. And so I think this proposal is going to

come - we’re going to see it again in future debates, but it was not part of the fiscal

cliff deal.

[Steve Gresham] Okay and then the last one for you, Shahira, what has, or will happen,

with regard to extended unemployment insurance, which our client question,

thought, was last extended in the spring of 2012?

[Shahira Knight] Sure. So this is for long-term unemployed. They have sort of emergency

unemployment benefits right now where their unemployment benefits are extended

beyond the normal period. That was also part of the fiscal cliff deal. Those

emergency unemployment benefits were extended through the end of 2013.

[Steve Gresham] Okay. Thank you very much. So Jurrien let me turn to you here, lots of

questions as usual for you as well. Let me see here how about corporate profits

seem to be coming in okay, which makes the market attractive, however, with the

government debt out of control it appears we have two different paths. Do you

expect the debt crisis to have an effect on corporate profits and at which point might

we see this happen?

[Jurrien Timmer] Well that’s the point I was trying to make earlier in terms of the structural

backdrop of the private sector delevering and the public sector increasing its debt

level.

So when the public sector does deficit spending it’s essentially fiscal stimulus, which

in the past few years has complimented monetary stimulus and it’s one of the

reasons why the economy hasn’t collapsed after the credit crisis in ’08.



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So the market - so this is kind of - it’s difficult because on the one hand you want

obviously fiscal discipline. In Washington it means you keep your good credit rating,

it means you keep rates down because investors don’t lose confidence in your

currency and your bond market, but on the other side it means fiscal austerity,

which creates a drag on economic growth, at least over the near term, maybe not

over the long term.

And that drag on economic growth, if that is not offset by sort of organic growth in

the economy in the private sector, you know, that could actually knock down

corporate earnings because when the government spends money on transfer

payments and things like that that puts money in the hands of people who then

spend it and that supports, you know, corporations.

So it’s a long-term versus short-term thing. I think that the more important thing -

so one important thing is, is whatever fiscal drag we’re going to get is that going to

be enough to offset the recovery that we’re seeing, clearly in the economy, the

housing market, etc.? If there’s going to be a lot of austerity then maybe it will

overwhelm that rebound. If it’s only minor, which my guess is it’s going to be

because politicians don’t like to cut spending, then maybe it will be okay.

What I think is more important in terms of the corporate sector right now, in terms

of corporate earnings, is what’s happening in Europe and China. And China sort of

reaccelerating here, even though it’s a low quality rebound in my opinion, I think

that’s a more important factor affecting company earnings because when you look at

last, the last, two quarters, third and fourth quarters, they were fairly weak.



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And the reason they were weak was because, mostly because, of the non-U.S.

earnings coming from overseas and also because companies were not spending

money anymore because of the uncertainty around the fiscal cliff. So that

uncertainty started to dissipate now. China is rebounding and I think that’s really

what’s driving the improvement in company earnings that we’re seeing in the current

earnings season.

[Steve Gresham] Okay let me shift to overseas. We’ve got a number of questions about

China and Japan and I think you talked a lot about China, but if you can return back

to Japan and let me try to blend a couple of these questions together.

I think the key point is Japan has got, as one of our clients has said, has got a

aggressive new monetary policy and what do you see is the impact of that for - and

basically the outlook for the Japanese market?

[Jurrien Timmer] Yes. So Japan, if you look at the largest six economies, right, U.S.;

Europe; U.K., well six largest Central Banks, Fed; ECB; Bank of England; Bank of

Japan; Swiss National Bank; People’s Bank of China, the only one that has been

stingy in the money printing department over the past few years has been the Bank

of Japan.

What’s happening now is that they had an election a few months ago, Shinzo Abe

was elected sort of in a - with a strong mandate. He won the Lower House by 2/3.

And essentially he has told the Bank of Japan in so many words that, “You better get

more aggressive or I’m going to take away your independence.”



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And so now all of the sudden the Bank of Japan has gotten religion and they are the

last of the major Central Banks to now pursue this very aggressive expansionary

policy meant to drive down the yen, the currency, because every other country on

the planet is already doing it.

You know, nobody wants a strong currency and the yen was sort of the one

remaining strong currency out there. And so they are trying to drive down the value

of the yen so that they become, can become, more competitive.

In the fund, we have exposure to Japanese equities because finally we’re getting

some real reflation there, but at the same time we don’t want exposure to the yen

because what you’re going to gain in the stock market you may lose in the currency.

So this is a little bit tricky and so, you know, we have a, sort of a, foreign exchange

hedge position in Japanese equities, but that’s not something that everybody can

achieve.

So that’s sort of what’s happening there. But they had an election and that put a

whole new regime in place and they are now finally joining the race to the bottom

that is so evident everywhere else in the world.

[Steve Gresham] My first point is to thank very much Shahira and Jurrien for their

participation this afternoon. As always lots of content, lots of very specific concepts

that we’re trying to share with all of you, our very best clients. So thank you, the

two of you, very much for what you have shared with us here today.



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And of course I’d like to also thank all of you as clients of Fidelity for, first for,

attending the event today, excellent thoughts and questions as always.

And as a reminder, if there are any questions that come up that we haven’t been

able to get to please contact the person that invited you to this call and your Fidelity

representative and make sure that we can get answers to those questions for you.

Thank you everyone. Please remain on the line for some important disclosures to

follow from the Operator.

[Operator] Before we go, I have some important information pertaining to what you've just

heard.

Past performance is no guarantee of future results.

The information presented reflects the opinions of Jurrien Timmer, Director of Global

Macro, for Fidelity Asset management as of January 29, 2013. These opinions do not

necessarily represent the views of Fidelity or any other person in the Fidelity

organization and are subject to change at any time based upon market or other

conditions. Fidelity disclaims any responsibility to update such views. These views

may not be relied on as investment advice and, because investment decisions for a

Fidelity fund are based on numerous factors, may not be relied on as an indication of

trading intent on behalf of any Fidelity fund.

As with all of your investments through Fidelity, you must make your own

determination whether an investment in any particular security or fund is consistent

with your investment objectives, risk tolerance, financial situation, and your



eReview #: 640768.1.0

evaluation of the investment option. Fidelity is not recommending or endorsing any

particular investment option by mentioning it in this conference call or by making it

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and you should bear in mind that laws of a particular state and your particular

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Information provided in the podcast is general and educational in nature, is provided

for informational purposes only, and should not be construed as legal or tax advice.

The statements and opinions expressed are those of the author and not necessarily

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Diversification/Asset Allocation does not ensure a profit or guarantee against loss.

Stock markets are volatile and can fluctuate significantly in response to company,

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involves risks, including the loss of principal.

The gold industry can be significantly affected by international monetary and political

developments such as currency devaluations or revaluations, central bank

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trade or currency restrictions between countries. Fluctuations in the price of gold and

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eReview #: 640768.1.0

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price change of each of the index's 1650 component stocks from the previous day's

close. Source: Kansas City Board of Trade



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The Russell 2000 Index is a market capitalization–weighted index designed to

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market and economic conditions. Small-cap stocks are generally more volatile than

large-cap stocks. Value stocks can perform differently from the market as a whole.

They can remain undervalued by the market for long periods of time.

30-year treasury and 10 year treasury are a fixed income securities backed by the

full faith and credit of the U.S. government and are used as benchmarks for the

pricing of various corporate fixed income instruments.

Fidelity does not provide legal or tax advice. Laws of a particular state or laws which

may be applicable to a particular situation may have an impact on the applicability,

accuracy, or completeness of such information. Federal and state laws and

regulations are complex and are subject to change. Changes in such laws and

regulations may have a material impact on pre- and/or after-tax investment results.

Fidelity makes no warranties with regard to such information or results obtained by



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its use. Fidelity disclaims any liability arising out of your use of, or any tax position

taken in reliance on, such information. Always consult an attorney or tax professional

regarding your specific legal or tax situation.

The Fed Funds rate is the rate of interest on overnight loans of excess reserves

among commercial banks. 30-year treasury and 10 year treasury are a fixed income

securities backed by the full faith and credit of the U.S. government and are used as

benchmarks for the pricing of various corporate fixed income instruments. The S&P

Gold group is an index of gold stocks as defined by Standard & Poor’s. The NAREIT

All Issues REITs Index is an index of real estate investment trusts as defined by the

Nat’l Assoc. of Realtors.

All data downloaded from Haver Analytics. All country and regional equity indices:

MSCI. All bond indices: Barclays. Gold: Handy & Harman. All GSCI: Goldman Sachs

Commodity Index. Currencies: Morgan Stanley. Hedge Fund Data: Hennesee

.

Before investing, have your client consider the funds' investment objectives,

risks, charges, and expenses. Contact Fidelity for a prospectus or summary

prospectus, if available, containing this information. Have your client read it

carefully.

Fidelity Brokerage Services, LLC, is a member of the New York Stock Exchange, the

SIPC, and is headquartered at 900 Salem Street, in Smithfield, Rhode Island, zip

code 02917.

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