Important Information

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. This material has been prepared solely for the purposes of illustration and discussion. Broyhill Asset Management is the marketing name for the investment management business conducted by Broyhill Asset Management, LLC. and its affiliates. Broyhill Asset Management, LLC is an SEC Registered Investment Advisor. Private investment vehicles are offered through Broyhill Wakin General Partners LLC, Surety Capital Management LLC, and Broyhill Strategic Partners LLC, and are only offered by delivery of confidential offering memorandum and subscription materials to eligible investors who meet certain statutory and/or regulatory criteria. Each General Partner is a separate legal entity and is affiliated with Broyhill Asset Management, LLC through common ownership and control. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. Any security offering is subject to certain investor eligibility criteria as detailed in the applicable offering documents. The information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summary form for convenience of presentation, it is not complete and should not be relied upon as such. Any information, data, statement, opinions, or projections made herein may contain certain forward looking statements, projections, and information that are based on the beliefs of Broyhill Asset Management as well as assumptions made by, and information currently available to, Broyhill Asset Management. Such statements reflect the view of Broyhill Asset Management with respect to future events and are subject to certain risks, uncertainties and assumptions (including, but not limited to, changes in general economic and business conditions, interest rate and securities market fluctuations, competition from within and without the investment industry, new products and services in the investment industry, changes in customer profiles, and changes in laws and regulations applicable to Broyhill Asset Management). Should one or more of these other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. All information, including performance information, has been prepared in good faith; there are no representations or warranty expresses or implied, as to the accuracy or completeness, of the information, and nothing herein shall be relied upon as a promise or representation as to the past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models, and/or other analysis (which may not necessarily be described herein), no representations or warranty is made as to the reasonableness of any such assumptions, models, or analysis. The information set forth herein was gathered from various sources which are believed, but not guaranteed, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to change at any time. Accordingly, neither Broyhill Asset Management not its principals or affiliates make any representations as to the timeliness of any information in this presentation.

How Do You Say Easy Money in Mandarin?

Conference Dial-In Number: (218) 339-3600 Participant Access Code: 722682# Conference Playback Number: (218) 339-3699 Access Code: 722682#

Thursday, November 3rd, 2011 The call will begin promptly at 11:00AM EST

Agenda

Characteristics of a Bubble Cyclical Slowdown

Logical Fallacy
Food for Thought

Agenda | 4

Bubble Behavior

Manias, Panics, and Crashes

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Compelling Growth Story Blind Faith Misallocation of Capital Surge in Corruption Fixed Currency Regimes Credit Boom Moral Hazard Madness of crowds Ponzi Finance Bubble Valuations

Source: GMO White Paper, Chinas Red Flags, March 2010

Bubble Behavior | 6

A Compelling Growth Story

CHINAS CONTRIBUTION TO WORLD GROWTH

Bubble Behavior | 7

Blind Faith

Advantages over market economies An advantage of a planned economy, one which was among the most important for socialist economists of the early 20th century, is that it is theoretically not subject to major pitfalls of market economies and marked-oriented mixed economies. A planned economy, in theory, does not suffer from business cycles; it does not experience alleged crises of overproduction such as the one that was believed to have contributed to the Great Depression. From the modern perspective, planned economies theoretically do not result in asset bubbles massive misallocations of resources such as the dot-com bubble of the late 1990s or the housing bubble of mid-2000s.
Source: Wikipedia
Bubble Behavior | 8

Misallocation of Capital

CHINA CONSUMPTION & INVESTMENT AS PERCENTAGE OF GDP

Source: JPMorgan
Bubble Behavior | 9

Investment Boom in Historical Context

CHINAS BOOM HAS SURPASSED ANYTHING WE HAVE EVER SEEN HISTORICALLY

Source: Knight Capital

Bubble Behavior | 10

Corruption

Bubble Behavior | 11

Fixed Exchange Rates

ACCUMULATION OF RESERVES FINANCED BY AN EXPANDING MONETARY BASE

Bubble Behavior | 12

Easy Money

LOCAL GOVERNMENT DEBT GREW 36-FOLD IN 13 YEARS!

Bubble Behavior | 13

Moral Hazard

GROWTH RATE OF LOANS & DEPOSITS

Bubble Behavior | 14

The Madness of Crowds

Bubble Behavior | 15

Ponzi Finance

OFF-BALANCE SHEET FINANCING HAS GROWN IN IMPORTANCE

Bubble Behavior | 16

Bubble Valuations

A TALE OF FOUR HOUSING BUBBLES

Bubble Behavior | 17

Chinas Ghost Cities

http://www.youtube.com/watch?v=wm7rOKT151Y&feature=related
Bubble Behavior | 18

Cyclical Slowdown

Yield Curve Warning of Imminent Growth Slump

CHINESE YIELD CURVE AT LEHMAN LEVELS

Source: Bloomberg
Cyclical Slowdown | 20

Chinese Credit Expansion: Too Far, Too Fast

CHINA IS A HIGHLY INDEBTED COUNTRY

Cyclical Slowdown | 21

Monetary Conditions Have Become Restrictive

CHINESE M1 & M2 GROWTH (YOY%)

Source: Societe Generale

Cyclical Slowdown | 22

Tighter Credit Driving Underground Lending

WENZHOU PRIVATE LENDING RATE

Cyclical Slowdown | 23

Large Volume of Shadow Banking Flowing to Real Estate

CHINESE PROPERTY DEVELOPERS ARE LOOKING EVERYWHERE FOR FUNDING

Source: Societe Generale

Cyclical Slowdown | 24

The Result A Decline in NPLs?

The amount of bad debt held by mainland commercial banks declined during the second quarter, the China Banking Regulatory Commission said.

Problem, or non-performing loans dropped 2.4 per cent to 422.9 billion yuan at the end of June while the nonperforming loan ratio slipped 10 basis points from March to 1 per cent in June.
- South China Morning Post

Cyclical Slowdown | 25

Logical Fallacy

Consumption Share of GDP

CONSUMPTION 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 45.3% 44.0 42.2 40.6 38.8 36.9 36.0 35.1 35.0 33.8

INVESTMENT 34.6% 36.2 39.1 40.5 39.7 39.6 39.1 40.7 45.2 46.2

GOVERNMENT 16.0% 15.6 14.7 13.9 14.1 13.7 13.5 13.3 12.8 13.6

TRADE 4.0% 4.2 4.0 5.1 7.4 9.7 11.4 10.9 7.0 6.4

Source: Michael Pettis, China Financial Markets

Logical Fallacy | 27

The Arithmetic of Consumption

EXPECTED CONSUMPTION AS SHARE OF GDP 46.0% GDP Growth 2.0% 4.0% 6.0% 8.0% 10.0%
Source: Michael Pettis, China Financial Markets

50.0%

54.0%

5.1 7.2 9.3 11.3 13.4

6.0 8.1 10.2 12.2 14.3

6.8 8.9 11.0 13.1 15.2

Logical Fallacy | 28

The Implications

As consumption declined as a share of GDP, investment increased. By definition, as China rebalances, this must reverse.

Consumption has grown at a very rapid 7-8% annually over the last decade. If it remains at this level, China can slowly rebalance with GDP growth of 4-5%. But history suggests that if GDP growth drops this sharply, it will be incredibly difficult for income and consumption growth to be maintained.

Logical Fallacy | 29

Food for Thought

These Things Arent Banks

Chinese banks have very little breathing room to absorb potential losses. A 1215% NPL ratio would erase all bank equity. Fitch reports bad loans could rise to 1530% of bank assets. NPLs reached 40% during Chinas last financial crisis and these loans are still lingering on Chinas balance sheet. The recent surge in Chinese debt exceeded credit expansions during the US credit bubble, in Japan prior to its property bubble and in South Korea before the Asian Financial Crisis.
Food For Thought | 31

Copper Hangover

China has for the first time revealed the estimated size of its copper inventories, shedding light on one of the commodity markets biggest mysteries. Chinese copper inventories stood at 1.9m tonnes at the end of 2010, more than the US consumes in a year, according to estimates by the state-backed China NonFerrous Metals Industry Association. The estimate is significantly higher than the 1.0m-1.5m tonnes range that foreign executives have assumed in the past. - Financial Times
Food For Thought | 32

Hot Money Indicator

RATES, RENMINBI, & HOT MONEY

Food For Thought | 33

Remnants of Smoot Hawley

CHINAS LIQUIDITY PUMP HAS JUST BEEN SWITCHED OFF

Food For Thought | 34

Bottom Line

Every single case in history where countries have undergone decade(s) of investment-led miracle growth has ended far worse than even the most pessimistic forecasts during the boom period. China is the most extreme version of this growth model to date. Why should it somehow find itself immune from the consequences that have afflicted every one of its predecessors?

Food For Thought | 35

Related Investment Positions

Chinese Yuan Puts
160.0%
140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 0.5% Capital at Risk Notional Exposure

Related Credit Default Swaps

90.0% 81.5%

139.7%

80.0% 70.0% 60.0% 50.0% 40.0%

30.0%
20.0% 10.0% 0.9% Annual Carry Notional

0.0%

Australian Interest Rate Swaptions

140.0% 120.0% 100.0% 80.0% 60.0% 128.5% 120.0% 100.0% 80.0%

Australian Currency Puts

112.9%

60.0%
40.0% 20.0% 1.9% 40.0% 20.0% 1.0%

0.0%
Capital at Risk Notional Exposure

0.0%
Capital at Risk Notional Exposure
Food For Thought | 36

Contact Information

Broyhill Asset Management 800 Golfview Park Post Office Box 500 Lenoir, NC 28645

Phone: 828 758 6100 Fax: 828 758 8919

For more information please contact: Mr. Christopher R. Pavese, CFA chris@broyhillasset.com