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Eye on the Market | August 4, 2011 J.P Morgan Today the Delaware, with the caption “America’s structural resilience, fortitude and ingenuity will carry the economy and financial markets in 2011 —and beyond”. Our job is not to point to where we would like the financial markets to go, but rather to point to where they might end up. It’s like the scene in Oliver Stone’s Nixon, when Nixon looks up at a portrait of JFK and says, “When they look at you, they see what they want to be. When they look at me, they see what they are.” Our job is to see financial markets for what they are. 6. All that said, we have lessons to learn here. Too many of our investment discussions this year focused on the negative real return characteristics of cash, and why to reduce it. In a world of deflation risk on financial assets (rather than of goods and services), cash retains substantial option value at times like these. We could have connected the dots more aggressively on our views on Global monetary and fiscal policy weak growth and easy monetary policy, and owned more gold. While %p.a. we have had rising price forecasts for gold and owned it in portfolios, 5 we did not have large enough allocations. Chg in net fiscal “e-pt lending Given the all-time high of US government transfers to households and negative real interest rates, we should not have interpreted positive 3 A economic data earlier this year as being highly representative of the 2 true run-rate of the US economy. The same goes for the global ‘ 4 economy, which as shown in the chart from JP Morgan Securities, has : 4 been the beneficiary of a lot of stimulus that is now fading, for a F Policy rate : variety of economic and political reasons. 02 04 06 08 10 12 Great corporate profits are no guarantee against a problem in financial markets. Corporate profits and P/E multiples were fine in June 2007, but rested on top of a systemic problem in private sector credit markets and private sector balance sheets. This year, strong corporate profits and low P/E multiples sit on top of systemic problems in public sector finances. 7. Inthe wreckage, as usual, there are opportunities, and we will be reviewing them with you in the days ahead. There is a benefit to having held back on our firepower this year. With risk to spend held in reserve, there are oversold assets with considering, particularly among multinationals with strong balance sheets, high dividends and which trade at very low multiples, something we reviewed earlier in the week.” Michael Cembalest Chief Investment Officer The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Michael Cembalest and may differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports. The above summary/prices/quotes/statistics have been obtained from 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 of future results. References to the performance or character of our portfolios generally refer to our Balanced Model Portfolios constructed by J.P. Morgan. It is a proxy for 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 of each client and is serviced through distinct legal entities licensed for specific activities. Bank, trust and investment management services are provided by J.P. Morgan Chase Bank, N.A, and its affiliates. 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