1. 2013 FORECAST: A LOOK AHEAD
Puget Sound Economic Forecast
Michael Dueker
Chief Economist
Russell Investments

2. 2013 Economic Outlook: Will we avoid over-
exuberant near-term budget slashing?
Michael Dueker, Chief Economist
January 10, 2013
V810

3. Important Information and Disclosures
Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any
investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax,
and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of
return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times,
unintentionally reduce returns.
Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock
market, or of any specific investment.
Bond investors should carefully consider risks such as interest rate, credit, repurchase and reverse purchase transaction risks. Greater risk, such as increased
volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage
backed securities, especially mortgage backed securities with exposure to sub-prime mortgages.
Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.
Copyright© Russell Investments 2011. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form
without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.
Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a
subsidiary of The Northwestern Mutual Life Insurance Company.
The Russell logo is a trademark and service mark of Russell Investments.
Date of first use: January 2013
CORP-7323
This presentation was created for informational purposes only and is not meant for further distribution.
3
V308

4. Russell viewpoint:
Scenarios likely to shape asset returns in 2013 as a whole
PROBABILITY ≈ 65%
PROBABILITY ≈ 15% PROBABILITY ≈ 20%
Equity markets have Modest recovery proceeds Downside to growth –
greater upside potential with growth near 2.0 pct. recession or stagnation
than economic growth if
long-run concerns are Policymaker blunder
addressed › Square-root-shaped (10%)
recovery › Financial meltdown in
Smooth
› Inflation stays near Fed’s European periphery or
› Risky assets rally
across the board, target of 2 pct lawmaker-induced
recession in U.S.
bond yields rise › Equity valuations rise
modestly modestly (upper single Economic stagnation/
digits) confidence slump (10%)
Bumpy
› Renewed drought in
› Fed is perceived to be
› Bond markets in the core jobs market
behind the curve
sell off mildly as U.S. › Negative equity price
› Mediocre year for
growth is not derailed; environment
risky assets and bad
year for fixed income 2.15% 10-year Treasury
yield at end of 2013
Source: Russell Investments research. There is no guarantee that any stated expectations will occur. As of December 2012.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific
investment.
p.4
V308

5. BCI forecasts look consistent with a 7.3 percent unemployment rate
in December 2013
Business cycle index as of December 2012 data
Out of sample forecasts were calculated by simulating the time-series model into the future.
3 Source: Recession data from National Bureau of Economic Research
YELLOW BARS INDICATE PERIODS OF RECESSION
2
sample st. devs. from zero
1
0
-1
-2
-3
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a
projection of the stock market, or of any specific investment.
Source: http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
5
V810

6. Employment forecast shows an average gain of 170 thousand per
month during 2013
Forecasts of nonfarm payroll employment changes as of
November 2012 data
Source: Actual employment data from St. Louis Fed's FRED database
400
200
0
thousands of jobs
-200
-400
-600
-800
http://www.russell.com/Helping-Advisors/Markets/BusinessCycleIndex.aspx
6
V810

7. Europe has a growth problem beyond current recession—
business cycle indexes for US and Eurozone
 Eurozone and U.S. business cycle indices (2007-2012)
Values shown for the in-
sample estimates and out- 3
of-sample forecasts are the
median of the simulated
2
Sample standard deviations
values for the quarter. Out-
of-sample forecasts were
calculated by simulating the
1
time-series model into the
future.
Source: U.S. recession 0
data from National Bureau
of Economic Research.
Data through 2012Q3 -1
-2
-3
Euro U.S. In-sample estimates | Out-of-sample forecast
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. There is no
guarantee that the stated results will occur. Index performance is not indicative of the performance of any specific
investment. Indexes are not managed and may not be invested in directly.
7
V810

8. Russell‘s forecast is 2.1 pct real GDP growth in 2013
3.0
2.5
Annualized growth (%)
2.0
1.5
Source: Russell 1.0
Investments. Data as of
12/31/2012.
The Blue Chip is a panel of
approximately 50 top
economic forecasters.
0.5
Forecasting represents
predictions of market prices
and/or volume patterns
utilizing varying analytical -
data. It is not 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
representative of a
projection of the stock Russell Blue Chip
market, or of any specific
investment.
8
V810

9. Russell‘s inflation forecast remains close to 2 pct.
3.0
2.5
Annualized growth (%)
2.0
1.5
Source: Russell
Investments. Data as of 1.0
12/31/2012.
The Blue Chip is a panel of
approximately 50 top
economic forecasters.
Forecasting represents
0.5
predictions of market prices
and/or volume patterns
utilizing varying analytical
data. It is not
-
representative of a 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2
projection of the stock Russell Blue Chip
market, or of any specific
investment.
9
V810

10. Investor complaint:
 For how long do we have to live in a world in which
Greece not getting its next installment of bailout
money could set off a financial crisis?
 We‘re not supposed to be like an emerging-market
economy with recurrent crises?
 Include additional Greece-like political risk factors
on the list, such as our own fiscal cliff
 Answer: for the indefinite future
p.10
V810
FINANCIAL PROFESSIONAL USE ONLY

11. Political risk: not a one-off but a fact of life
 It might not feel good to see politicians‘ hands on the rudder, but
with debt-to-GDP ratios near 100 percent in the wake of the Great
Recession, auto-pilot does not work.
 We simply have to accept this increased role of politicians in our
lives, as much as we dislike the idea.
p.11
V810
FINANCIAL PROFESSIONAL USE ONLY

12. V810
0
2
4
6
8
-4
-2
2006-04-01
p.12
2006-07-01
2006-10-01
2007-01-01
2007-04-01
2007-07-01
2007-10-01
2008-01-01
2008-04-01
2008-07-01
made the grade
2008-10-01
2009-01-01
2009-04-01
2009-07-01
2009-10-01
2010-01-01
2010-04-01
2010-07-01
2010-10-01
2011-01-01
2011-04-01
4 qtr nominal GDP growth
2011-07-01
2011-10-01
2012-01-01
2012-04-01
Why QEternity? Nominal GDP growth has not
4 qtr nominal GDP growth

13. Tree-chopping analogy
 After two rounds of QE by the Fed, some people consider QE to
be a tried-and-failed strategy.
 Think of a tree-chopping analogy, however. If one takes two
swings at a tree with an axe, steps back and sees that the tree
does not fall over, the conclusion is not that the axe cannot cut
down the tree!
13
V810

14. The Fed‘s ‗scary‘ balance sheet: Will the Fed be
caught holding the bag?
p.14
V810

15. How the Fed will shrink its balance sheet
(when the time comes)
p.15 Illustration only for future 3-month T-bill yield
V810

16. V810

17. Super Mario (Draghi) is trying to change the game
 Long Term Refinancing Operations
 Prevented liquidity squeeze on European banks
Outright Monetary Transactions
To provide interest-rate subsidy to Spain, Italy
 Longer term problems still not fixed
 European recession, grinding in periphery
 Ongoing fiscal austerity
 New acronym: NTGES (Never To Grow European
States)
17
V810

18. Greece is the Corvair of Europe:
Insolvent at any interest rate
 ECB bond  Potential crisis
purchases may solution: stronger
solve Spain and growth, banking
Italy funding needs union, subsidized
interest rates
p.18
V810

19. The pain in Spain....
%
Unemployment Rates
30
25
Latest 2007
20
15
10
5
0
Germany Italy France Ireland Portugal Greece Spain
Source: Datastream
p.19
V810

20. ―You can always count on Americans to do the right
thing—after they‘ve tried everything else‖
—Winston Churchill
20
V810

21. ―You can always count on Americans to do the right
thing—after they‘ve tried everything else‖
—Winston Churchill.
With respect to the current
situation in Europe, try
substituting Germans for
Americans in the quote above
and see how it looks.
21
V810

22. What steps would enhance long-run investor confidence?
› 19 percent solution?
Fiscal plans that
› Divided government a help or hindrance?
would put U.S.
› Where are the reasonable people?
on solid footing
› What is a fiscal conservative?
European › Wages rose too fast in peripheral states
measures that › Uncompetitive, overvalued real exchange rate
address › What example do we have of restoring
overvalued real competitiveness through deflation, austerity?
exchange rates
Chinese growth › Current policy is of the “Damn the torpedoes”
not based on variety
rising Invest./GDP › Will investments yield disappointing returns?
ratio
p.22
V810

23. China‘s unbalanced economy
% of GDP China: Consumption & Investment % of GDP
55
50
45
40
Fixed Investment Consumption
35
30
25
20
1980 1985 1990 1995 2000 2005 2010
Source: Datastream
p.23
V810

24. If you build it, will they come?
Austria in Guangdong The ghost city of Ordos
V810

25. www.russell.com