EFTA01149904.pdf

Eye on the Market I June 30, 2011 J.P. Morgan The Five Stages of Greece. We are putting the finishing touches on a piece on U.S. commercial real estate, which will come out next week. Heading into the weekend, a brief note on Europe. In almost every client meeting, I am asked "what's going to happen in Greece?". The best way to answer that question is by using the Kflbler-Ross model, the Five Stages of Grief, adapted for Greece. This model defines the process as Denial, Anger, Bargaining, Depression and Acceptance. Manifestations of this process appear below, personified by representatives of European governments, central banks and regulatory bodies. Axel Weber's journey from the top to the bottom of the table is illustrative of the epiphanies people (and markets) have had to face. The Five Stages of Greece Stage Date Manifestation Articulated by DENIAL 12/28/2009 "We don't need the IMF: it is illegal in Europe to finance budget deficits Bundesbank President Axel using the kind of central bank funds which are at the IMFs disposal" Weber 01/29/2010 "Greece will not default. In the euro area, default does not exist." EU Monetary Affairs Commiss loner Joaquin A kmnia ANGER 02/26/2010 "Its an attack on the euro zone by certain other interests, political or financial. Greece Prime Minister We are being targeted, particularly with an ulterior motive or agenda. " Papandreou 02/26/2010 "Attacks by investors and the hostility shown by some sectors of the British Spanish Transport Minister and U.S. press amount to collusion. None of what is happening. including Jose Blanco editorials in some foreign media with their apocalyptic comnrntaries, is happening by chance or innocently" 03/01/2010 - We have to strengthen the primacy of politics. We have to be able to stop Jean Claude Juncker. financial markets. We have instruments of torture in the basement. We will Eurogroup head display them if it becomes necessary" BARGAINING 06/21/2011 "We believe that the private sector could play a role in helping Greece, European Commission provided that it doesn't result in a credit event or default. Of course. it should president Jose Manuel be done in agreement with the European Central Bank." Banoso Ing'RFNSION U6/20/2011 arc difficult, the reform fatigue is visible in the streets of Athens. Olli Rehn. EC Commissioner Madrid and elsewhere. and so is the support fatigue in some of our member for Economic/Financial Affairs states" 06/23/2011 "The most serious threat to financial stability in the EU stems from the Jean Claude Trichet.EO3 interplay between the vulnerabilities of public finances in certain EU member President states and the banking system. There are potential contagion effects across the union and beyond" ...Risk signals for financial stability in the euro area are flashing "red" as the debt crisis threatens to infect banks. ACCEPTANCE 05/08/2011 "Ireland will never repay the (250bn it has borrowed from the EU and IMF. Unnamed Irish Fine Gael senior government insiders have admitted — but we will not default until our Minister, to the Irish Mail -EU partners agree we have no choice. A senior minister last night told the Irish Mallon Sunday that the Cabinet expects our crippling debts to be restructured within three years. However. Fine Gael is pinning its hopes on the EU being forced by outside events, such as the collapse of the Greek economy. into a realisation that Ireland cannot hope to pay off the debt mountain accumulated by our rogue banks." 06/27/2011 "There are, unfortunately, only very limited options: Ether a default or partial Former Bundesbank President haircuts or a guarantee for the outstanding amount of Greek debt.... At some Axel Weber point you've got to cut your losses and restart the system". The latest deal for Greece, based on a French proposal, is another chapter in the "Bargaining" stage: it maintains the fiction that Greece's debts will be repaid at Par, and does little to address the crumbling economic and social situation in Greece, rising deposit outflows out of Greek banks and the possible exhaustion of their eligible collateral to post at the ECB, and collapsing Greek imports and exports. The plan is mostly designed to continue transfers from the EU taxpayers and the IMF to French and German banks, and buy some time (perhaps a year or so). 1 EFTA01149904  Eye on the Market June 30, 2011 J.P.Morgan Here's another timeline of where I think we are in Greece: at the latter stages of the "let's keep lending more money and rolling existing exposures and hope it gets better" phase of the Mexican sovereign debt crisis in the 1980's. I expect the latest deal to be the last one before the eventual (and inevitable) restructuring of Greek debt. Mexico's lost decade: kicking the can down the road makes it bigger Public sector external debt/GDP 65% 60% Rescheduling r New money operations 55% 50% 45% 40% 35% 30% 25% YOU ARE HERE 20% 15 1982 1983 1984 1985 1986 1987 1988 1989 1990 Source: Mexico Ministry ot Finance and Public Credit. Some good news: Japan is rebounding rapidly from the earthquake. Manufacturing surveys have recovered 93% of the decline in March, and there has been a significant easing of supply-chain disruptions. Industrial production rose 5.7% (month over month) in May, with similar gains expected for June and July in production and exports. Retail sales are less than 2% below pm-quake levels. In our March 15, 2011 Eye on the Market ("Matter over Mind", we reviewed the history of the 1995 Kobe earthquake, and topics like the recovery in Confederate farm output after the Civil War, and the recovery in Japanese industrial production and German exports from 1946 to 1954. Our conclusion: countries with higher income, higher educational attainment, greater openness, more complete financial systems, better developed supply chains and decentralized governments can recover quickly from natural and man-made disasters. The theory is working out in practice in Japan. In the rest of non-Japan Asia, industrial production continues to climb, with Malaysia as the only country whose production is still below pm-crisis (2007) levels. Michael Cembalest Chief Investment Officer The material contained herein is intended as a generalmarker conzmentary. Opinions expressedherein are those ofMichael Cembalest and may differfrom those ofother J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and shouldnor be treated as such. Further. the views expressed herein may differfront that containedin J.P. Morgan research reports. The above summary/prices/quotes/statistics have been obtainedfrom sources deemed to be reliable. but we do not guarantee their accuracy or completeness, any yield referenced is indicative and subject to change. Past performance is not a guarantee offuture results. References to the performance or character ofour portfolios generally refer to our Balanced ModelPortfolios constructed by LP. Morgan. Iris a proxyfor client performance and may not represent actual transactions or investments in client accounts. The model portfolio can be implemented across brokerage or managed accounts depending on the unique objectives ofeach client and is serviced through distinct legal entities licensedfor specific activities. Bank trust and investment management services are provided by J.P. Morgan Chase Bank. N.A. and its affiliates. Securities are offered through J.P. Morgan Securities LLC(JAWS). Member NYSE. FINRA and SIPC. Securities products purchased or sold through JPMS are not insured by the Federal Deposit Insurance Corporation ("FDIC"): are not deposits or other obligations ofits bank or thrift affiliates and are not guaranteed by its bank or thrift affiliates: and are subject to investment risks, including possible loss of the principal invested. Not all investment ideas referenced are suitable for all investors. Speak with your J.P. Morgan Representative concerning your personal situation. This material is nor intended as an offer or solicitation for the purchase or sale ofany financial instrument. Private Investments may engage in leveraging and other speculative practices that may increase the risk of investment loss, can be highly illiquid. are not required to provide periodic pricing or valuations to investors and may involve complex tax structures and delays in distributing important tar information. Typically such investment ideas can only be offered to suitable investors through a confidential offering memorandum whichfully describes all terms. conditions. and risks. IRS Circular 230 Disclosure JPMorgan Chase & Co. and its affiliates do nor provide tax advice. Accordingly. any discussion of U.S. tax matters containedherein (including any attachments) is nor intended or written to be used. and Limner be used. in connection with the promotion. marketing or recommendation by anyone unaffiliated with !Morgan Chase & Co. of any of the matters addressed herein orfor the purpose ofavoiding U.S. tax-related penalties. Note that J.P. Morgan is not a licensed insurance provider. 0 2011 JPMorgan Chase & Co 2 EFTA01149905