War Room 27 Feb 2013

Currency as Investment:May the Force Be with You

War Room•Monthly macro discussion

•Using tools in context

•Update on HiddenLevers Features

•Your feedback welcome

Currencies as Investment

I. Debt Cliff Quick Update

II. Currency Fundamentals

III. Currencies as Diversification

III. Currency Macro Themes

HiddenLevers

DEBT CLIFF QUICK UPDATEmore

Sequester – How much Austerity?

Spending Cuts

DEFENSE1 million jobs25% hit to GDP growth$50 billion / year

DISCRETIONARY5% cut to most programsCuts already begun: - Illegal immigrant release - Unemployment benefits

Exempt• Social Security • Medicaid• Food Stamps

slide from Oct 2012 War Room – Eve of Election Update

sequestration

Defense Cuts Inevitable – Duh! War is Over

• Full sequester = 31% hit to defense budget• In line with historic precedent• Other option = permanent war state

I’m still goingstrong

Current-31%

source: Washington Post

GoodBipartisan

Reform

BadSequester +

Shutdown

UglyUS Default

Debt Cliff – Government Shutdown Nigh?

I love surprises

350 economists agree:buh-bye US recovery

HiddenLevers

CURRENCY FUNDAMENTALS

Fiat versus Hard Currency

August 1971: Nixon ends the gold standard, severs US Dollar’s link to gold

USD is a fiat currency – derives its value by government decree that it is valid tender

Currency value not tied directly to metals – they trade in relative terms (as pairs) instead

5 Major Currencies

USD US Dollar

EUR Euro

GBP British Pound

JPY Japanese Yen

CFH Swiss Franc

Fiat Currencyvalue is extrinsic

(aka faith)

Currencies Trade in Pairs

Inverse correlation to USD

Currencies 101

• Inherently two trades: e.g. buy Euro, sell USD

• When USD drops, by definition other side of currency pair gains

• Top 5 Currency Pairs all include USD

1. EUR/USD2. USD/JPY3. GBP/USD4. AUD/USD5. USD/CHF

source: HiddenLevers

Why We Won’t Cover Gold

Gold not accepted as valid tender (mostly)

Gold volatility = 19% (exact same as S&P)

Gold correlation to S&P high(since 2008-09 crisis)

Is gold money? No dude!

Gold isn’t money

source: HiddenLevers

Like it or not, you are long the USD

• Inflation is always other side of USD trade• Most major currencies up against USD s• Aussie Dollar = big winner since 2008 Crisis

source: HiddenLevers

CURRENCIES AS DIVERSIFICATION TOOLHiddenLevers

The Rest of the World Thinks in Multi- Currency

I’m still goingstrong

I’m done juicing

Mental note

USD is the world’s

reserve currency.

(we are spoiled)

American Mindset Europe + Asia Mindset

Offshore Accounts

YuanDepositAccounts

IndiaInterestRates

Dollar Yield = Non-Existent

USD Yield = 0.1%

Inflation = 1.6%

Real Yield = -1.5%

Sample Yields Worldwide

Yes, cash has a yield

• US yields = some of world’s lowest

• Australia + Canada + Europe:G7 economies, higher yield

• Emerging Markets: higher interest + tactical

• Currencies as bond alternative:Interest + low volatility

Currencies + Correlation

S&P volatility = less sleep

Currencies

Currency Basket

• Performance since 2000:Equal to S&P!

• Volatility since 2000:One third of S&P!

• Correlation to S&P:LOW!

source: HiddenLevers

source: HiddenLevers

Currency Exposure is Easy

• Many ETFs + funds offer currency exposure• HiddenLevers can help you find them

source: HiddenLevers

MACRO THEMES IN CURRENCY MARKETSHiddenLevers

Macro Themes - General

Currencies are useful

Commodity proxy minus

volatility

Flight to safer assets

Commodities Currencies

source: HiddenLevers

Defensive Currencies

over?

EUR peg

USD + Yen – Japan Inflation Gambit

Efforts seem to be working

Japan attempting US-style QE(open-ended purchases of government bonds)

Japan Inflation target = 2%

JPY down 15% since Oct 2013 – NOT defensive

Falling Yen benefits automakers, and other Japan exporters

source: HiddenLevers

20% rise

15% drop

banzai!

Euro – Steady Climb + Recent FallEuro Crisis - Update

• Italy elections = NOISE

• EU uncertainty for USA:- volatility is annoying- keeping clients on sidelines- 2012 roller coaster repeat?

• Keep an eye on:- Euro – under 1.30- Italy + Spain bond yields

• Real Europe Problems- EU growth rate (maybe 0)- French Brain Drain

recent drop

6m comeback

QE + US Dollar

- QE1 + QE2 drove down USD, as Fed fought deflation- Operation Twist + QE3 having less impact – Fed losing control?- Not the “outer limits” just yet – USD getting stronger

QE 1 QE 2 QE 2.5 (Twist) + QE3

USD upward trend

HiddenLevers – Product Update

• Hedging Wizard – v2

• Screeners – Search Criteria improvements

• Stress Test Lead Generator – Launched!

Coming soon:1. MoneyGuidePro Integration – go deep!

2. More polish on site – Icons + Images