L i n k e d t o Wi Wi n Se p t e m b e r 1 4 , 2 0 1 1
Pershing Square Capital Management, L.P.
Disclaimer The analyses and conclusions of Pershing Square Capital Management, L.P. ("Pershing Square") contained in this presentation presentation are based based on publicly available available informati information. on. Pershing Pershing Square recognizes recognizes that there may may be confidential information in the possession of instruments of state, governments and other interested parties discussed in the presentation that could lead those constituents and other market participants to disagree with Pershing Square’s conclusions. This presentation and the information contained herein is not investment advice or a recommendation or solicitation to buy or sell any securities, currencies or other investment instruments. All investments involve risk, including the loss of principal. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, historical and anticipated events, access to and changes in capital markets and the values of currencies, currencies, assets assets and liabilities. liabilities. Such statements, statements, estimates, estimates, and projections projections reflect various various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant political, regulatory, economic, competitive, and other uncertainties and contingencies and have been included included solely for illustrative illustrative purposes. purposes. No representations representations or warranties, warranties, express or implied, implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials materials herein herein and Pershing Square disclaims disclaims any liability liability with respect thereto. thereto. Actual results results may vary materially from the estimates and projected results contained herein. Funds managed by Pershing Square and its affiliates own U.S. dollars, Hong Kong dollars and options on the Hong Kong Kong dollar. Pershing Pershing Square manages manages funds funds that are are in the business business of trading trading - buying buying and selling selling – securities securities and other financial financial instruments instruments.. It is likely that that there will be developments developments in the future that cause cause Pershing Pershing Square to change its position position regarding regarding such investments. investments. Pershing Pershing Square may buy, sell, sell, cover or otherwise otherwise change the form of these investmen investments ts for any or no reason. Pershing Pershing Square hereby disclaim disclaims s any duty to any recipient hereof or to provide any updates or changes to the analyses contained here including,
Disclaimer The analyses and conclusions of Pershing Square Capital Management, L.P. ("Pershing Square") contained in this presentation presentation are based based on publicly available available informati information. on. Pershing Pershing Square recognizes recognizes that there may may be confidential information in the possession of instruments of state, governments and other interested parties discussed in the presentation that could lead those constituents and other market participants to disagree with Pershing Square’s conclusions. This presentation and the information contained herein is not investment advice or a recommendation or solicitation to buy or sell any securities, currencies or other investment instruments. All investments involve risk, including the loss of principal. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, historical and anticipated events, access to and changes in capital markets and the values of currencies, currencies, assets assets and liabilities. liabilities. Such statements, statements, estimates, estimates, and projections projections reflect various various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant political, regulatory, economic, competitive, and other uncertainties and contingencies and have been included included solely for illustrative illustrative purposes. purposes. No representations representations or warranties, warranties, express or implied, implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials materials herein herein and Pershing Square disclaims disclaims any liability liability with respect thereto. thereto. Actual results results may vary materially from the estimates and projected results contained herein. Funds managed by Pershing Square and its affiliates own U.S. dollars, Hong Kong dollars and options on the Hong Kong Kong dollar. Pershing Pershing Square manages manages funds funds that are are in the business business of trading trading - buying buying and selling selling – securities securities and other financial financial instruments instruments.. It is likely that that there will be developments developments in the future that cause cause Pershing Pershing Square to change its position position regarding regarding such investments. investments. Pershing Pershing Square may buy, sell, sell, cover or otherwise otherwise change the form of these investmen investments ts for any or no reason. Pershing Pershing Square hereby disclaim disclaims s any duty to any recipient hereof or to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Pershing Square investment.
S t r u c t u r e o f t h e P r e s e nt nt a t i o n I.
The Context
II.
The History
III. The Current ent State of Play IV. IV. Our Our Pre Predi dict ctio ion n of of Wha Whatt is is Like Likely ly to Happ Happen en V.
The Investment Opportunity
VI
Why Now?
S t r u c t u r e o f t h e P r e s e nt nt a t i o n I.
The Context
II.
The History
III. The Current ent State of Play IV. IV. Our Our Pre Predi dict ctio ion n of of Wha Whatt is is Like Likely ly to Happ Happen en V.
The Investment Opportunity
VI. Why Now?
I . T h e Co Co n t e x t
I . T h e Co Co n t e x t
The US Economy Today
The US Economy Today
4
GDP Gr o w t h – U .S. U.S. economic growth remains sluggish Re a l G DP D P Gr Gr o w t h ( % Qo Qo Q – A n n u a l i z e d , S e a s o n a l l y A d j . )
GDP Gr o w t h – U .S. U.S. economic growth remains sluggish Re a l G DP D P Gr Gr o w t h ( % Qo Qo Q – A n n u a l i z e d , S e a s o n a l l y A d j . )
5 ________________________________________________
Source: Bloomberg.
G D P – U.S U.S.. U.S. GDP is still below the Q4 ’07 peak Annu alized Real GDP GDP (Billio n USD, USD, 200 5 Dollar s)
Still below Q4 ’07 peak peak
G D P – U.S U.S.. U.S. GDP is still below the Q4 ’07 peak Annu alized Real GDP GDP (Billio n USD, USD, 200 5 Dollar s)
Still below Q4 ’07 peak peak
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Source: Bloomberg.
6
U n em e m p l oy o y m e n t – U .S .S . Unemployment in the U.S. remains stubbornly high at over 9% U n e m p l o y m e n t R a t e ( %) %)
U n em e m p l oy o y m e n t – U .S .S . Unemployment in the U.S. remains stubbornly high at over 9% U n e m p l o y m e n t R a t e ( %) %)
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Source: Bloomberg.
7
I n f l a t i o n – U .S .S. Inflation has picked up, but seems to have leveled off and is forecast to decrease C o n s u m e r P r ic i c e I n d e x G r o w t h ( Yo Y )
Median Bloomberg Forecast:
2011 +3.0%
2012 +2.1%
I n f l a t i o n – U .S .S. Inflation has picked up, but seems to have leveled off and is forecast to decrease C o n s u m e r P r ic i c e I n d e x G r o w t h ( Yo Y )
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Source: Bloomberg.
Median Bloomberg Forecast:
2011 +3.0%
2012 +2.1%
8
H o m e Pr P r i c e s – U .S .S. U.S. Home Prices are down 32% from f rom peak and have not recovered H o m e P ri r i c e I n d e x ( C a s e Sh S h i l l e r H o m e P r i c e 1 0 - Ci Ci t y I n d e x )
-32% -32 % from fro m peak
H o m e Pr P r i c e s – U .S .S. U.S. Home Prices are down 32% from f rom peak and have not recovered H o m e P ri r i c e I n d e x ( C a s e Sh S h i l l e r H o m e P r i c e 1 0 - Ci Ci t y I n d e x )
-32% -32 % from fro m peak
9
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Source: Bloomberg.
U .S . S . M o n e t a r y Po Po l i c y T o d a y To combat persistent weakness in the U.S. economy, economy, the Federal Reserve has reduced short-term rates to zero and enacted two rounds of quantitative easing
Accommodative Monetary Policy
Economic Wea eakness kness
Real GDP (YoY%)
+1.5%
Unemployment
9.1%
Home Prices (YoY%)
-3.8%
CPI (YoY%)
3.6%
• Near 0% Short-Term Interest Rates through mid-2013 • Multiple Rounds of Quantitative Easing
U .S . S . M o n e t a r y Po Po l i c y T o d a y To combat persistent weakness in the U.S. economy, economy, the Federal Reserve has reduced short-term rates to zero and enacted two rounds of quantitative easing
Accommodative Monetary Policy
Economic Wea eakness kness
Real GDP (YoY%)
+1.5%
Unemployment
9.1%
Home Prices (YoY%)
-3.8%
CPI (YoY%)
3.6%
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Source: Based on the latest available Bloomberg data.
• Near 0% Short-Term Interest Rates through mid-2013 • Multiple Rounds of Quantitative Easing
10
U.S. Monetary Policy Will Remain Extremely Accommodative: “The committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation infla tion over the medium medium run – are likely to to warrant exception exceptionally ally low levels for the federal funds rate at least through mid-2013” - Feder Federal al Reserve Reserve statement, statement, August August 2011 2011
U.S. Monetary Policy Will Remain Extremely Accommodative: “The committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation infla tion over the medium medium run – are likely to to warrant exception exceptionally ally low levels for the federal funds rate at least through mid-2013” - Feder Federal al Reserve Reserve statement, statement, August August 2011 2011
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11
Source: Press, Release August 9, 2011 – Board of Governors of the Federal Reserve System (http://www.federalreserve.gov/ newsevents/press/monetary/20110809a.htm).
Compare with Economy X
Compare with Economy X
12
GDP Gr o w t h – Ec o n o m y X Economy X has recovered strongly from the global recession Real GDP Grow t h (YoY) (YoY)
GDP Gr o w t h – Ec o n o m y X Economy X has recovered strongly from the global recession Real GDP Grow t h (YoY) (YoY)
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Source: Bloomberg.
GDP – Ec o n o m y X Economy X GDP is well above its peak L T M Re Re a l G DP D P (B (B i l l i o n L o c a l C u r r e n c y )
GDP – Ec o n o m y X Economy X GDP is well above its peak L T M Re Re a l G DP D P (B (B i l l i o n L o c a l C u r r e n c y )
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Source: Based on Bloomberg data (Cumulative Last 4Q’s).
14
U ne n e m p l o ym y m e nt n t – E c o no no m y X Unemployment is 3.4% and back to pre-recession lows U n e m p l o y m e n t R a t e ( %) %)
U ne n e m p l o ym y m e nt n t – E c o no no m y X Unemployment is 3.4% and back to pre-recession lows U n e m p l o y m e n t R a t e ( %) %)
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Source: Bloomberg.
15
H om o m e Pr P r ic i c e s – E c o no no m y X Since January 2006, home prices are up ~90% Home Price Index
H om o m e Pr P r ic i c e s – E c o no no m y X Since January 2006, home prices are up ~90% Home Price Index
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Source: “Centaline Property Centa-City Leading Leading HK Index” - Bloomberg.
16
I nf n f la l a t i o n – E c o no no m y X Inflation is accelerating and is now nearly 6% U n d e r l y i n g C o n s u m e r P r i c e I n d e x G r o w t h ( Yo Y )
I nf n f la l a t i o n – E c o no no m y X Inflation is accelerating and is now nearly 6% U n d e r l y i n g C o n s u m e r P r i c e I n d e x G r o w t h ( Yo Y )
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Source: “Monthly Report on the Consumer Price Index” - Census and Statistics Department, Hong Kong SAR Government. (http://www.censtatd.gov.hk/products_and_services/products/publications/statistical_report/prices_household_expenditure/index_cd_B1060001_dt_detail.jsp).
17
E c o n o m y X ’s ’ s M o n e t a r y Po P o l i c y M i r r o r s t h e U S’ S’s Despite surging growth and inflation, Economy X’s monetary policy mirrors that of the United States with a near-zero interest-rate policy and large amounts of money printing
Economy X
Real GDP (YoY%) Unemployment % Home Prices (YoY%) CPI (YoY%)
U.S.
+5.1%
+1.5%
3.4%
9.1%
+18.5%
-3.8%
+5.8%
+3.6%
E c o n o m y X ’s ’ s M o n e t a r y Po P o l i c y M i r r o r s t h e U S’ S’s Despite surging growth and inflation, Economy X’s monetary policy mirrors that of the United States with a near-zero interest-rate policy and large amounts of money printing
Economy X
Real GDP (YoY%) Unemployment % Home Prices (YoY%) CPI (YoY%)
U.S.
+5.1%
+1.5%
3.4%
9.1%
+18.5%
-3.8%
+5.8%
+3.6%
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Source: Based on the latest available Bloomberg data. 18 Press Release, August 22, 2011 – Census and Statistics Department, Hong Kong SAR Government (http://www.censtatd.gov.hk/press_rel ease/press_releases_on_statis tics/index.jsp?sID=2798&sSUBID=19062&displayMode=D).
Who is Economy X? Why would Economy X have the same monetary policy as the United States?
Who is Economy X? Why would Economy X have the same monetary policy as the United States?
19
Economy X = Hong Kong
Why Does Hong Kong share U.S. monetary policy? The Hong Kong Dollar’s (HKD) peg to the U.S. Dollar (USD) forces Hong Kong to import the U.S.’s ultra- accommodative monetary policy, despite its much stronger economy
Economy X = Hong Kong
Why Does Hong Kong share U.S. monetary policy? The Hong Kong Dollar’s (HKD) peg to the U.S. Dollar (USD) forces Hong Kong to import the U.S.’s ultra- accommodative monetary policy, despite its much stronger economy
II. The Hist ory
II. The Hist ory
T h e H o n g K o n g Do D o l l a r Ov Ov e r T i m e Hong Kong has implemented several different currency regimes, demonstrating a pattern of change and adaptation during times of stress H K D /U /U S D ( i n ve ve r t e d )
Sterling Pe Peg g
h t g n e r t S D K H
Free Floati Floating ng
Dollar Peg
7.75 to 7.85 Band e t d i n S e k m t a i e m W m 8 o 9 ’ C
e t d i n S e g m i n t o r m t m S o 5 C 0 ’
T h e H o n g K o n g Do D o l l a r Ov Ov e r T i m e Hong Kong has implemented several different currency regimes, demonstrating a pattern of change and adaptation during times of stress H K D /U /U S D ( i n ve ve r t e d )
Sterling Pe Peg g
Free Floati Floating ng
h t g n e r t S D K H
Dollar Peg
7.75 to 7.85 Band e t d i n S e k m t a i e m W m 8 o 9 ’ C
________________________________________________
e t d i n S e g m i n t o r m t m S o 5 C 0 ’
22
Source: “Hong Kong’s Linked Exchange Rate System” – Hong Kong Monetary Authority, p.34 (http://www.info.gov.hk/hkma/eng/public/hkmalin/index.htm).
S t e r l i n g L i n k A d o p t e d (1 (1 9 3 5 )
By 1935, facing a dramatic rise in the price of silver and a shrinking money supply, Hong Kong abandoned silver as backing for its currency
HK replaced the silver link with a Sterling-based currency board
At the time, HK was a British colony and Sterling was a major reserve currency
S t e r l i n g L i n k A d o p t e d (1 (1 9 3 5 )
By 1935, facing a dramatic rise in the price of silver and a shrinking money supply, Hong Kong abandoned silver as backing for its currency
HK replaced the silver link with a Sterling-based currency board
At the time, HK was a British colony and Sterling was a major reserve currency
23
T h e S t e r l i n g Pe P e g (1 ( 1 9 3 5 -1 -1 9 7 2 ) Sterling’s Sterling’s role as an international reserve currency was displaced by the USD after WWII D e n o m i n a t i o n o f Fo r e i g n C u r r e n c y R e s e r v e s 1 9 5 0 -1 -1 9 8 2
Sterling
T h e S t e r l i n g Pe P e g (1 ( 1 9 3 5 -1 -1 9 7 2 ) Sterling’s Sterling’s role as an international reserve currency was displaced by the USD after WWII D e n o m i n a t i o n o f Fo r e i g n C u r r e n c y R e s e r v e s 1 9 5 0 -1 -1 9 8 2
Sterling
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Source: “The Decline of Sterling: Managing the Retreat of an International Currency, 1945-1992” - Catherine R. Schenk, p.23.
S t e r l i n g L i n k A b a n d o n e d (1 (1 9 7 2 ) In 1949 and in 1967, Sterling was devalued. Shortly after the 1967 devaluation, the HKD was revalued revalued by 10% 10% against Sterling Sterling to preserve preserve its purchasing purchasing power HKD/USD (inverted)
h t g n e r t S D K H
1967 14% Sterl 1967 Sterlin ing g devaluation deva luation – Countered by +1 +10% 0% HKD revaluati revaluation on
