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War Room 31 May2012
Euro Zone Troubles and the
World Unraveling
War Room
•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
Euro Zone Troubles and the World Unraveling
•Europe Update
•US Decoupling Update
•Around the World
WORLD UNRAVELING: EUROPE UPDATEHiddenLevers
Euro + S&P move inverse to USD
Note - Euro and S&P slide approaching 10% since April Fools Day
Euro + USD – projections
1.20
1.00.90
98-100
USD/Euro = Inverse correlation
USD/S&P = Inverse correlation1.40
Scenario Modeling – How the big boys do it
HiddenLevers value – We can help answer:
1. How do other economic levers react to movements in Euro?
2. How do portfolios react to movements in Euro + other levers?
http://online.wsj.com/article/BT-CO-20120529-705577.html
Spain Bond Yields – another lever to watch
Significance
• Spain bond yields approaching last fall’s danger zone near 7%
• Yields breach 7% = Spain will likely default before Greece
• Spain default = Euro Zone over, too big to rescue
EU Leadership – Bumbling FoolsEU leaders efforts so far
• Merkel suggests Greek referendum on Euro during election
clueless
• ECB gives low cost loans to EU banks to buy own government bonds
backfired
• EU bails out Greece doesn’t work for TBTF PIIGS
• Austerity programs brutal + not working
• Euro Bonds no agreement + 7 year timeframe
Guidance
1. Spain default or other PIIGS follow Greece out
2. Poorly handled, with no plan of action = bloodbath
3. At risk – anything priced in US Dollars
4. Defending Euro/Swiss Peg will be difficult
5. Think Lehman
Market reaction depends on EU leadership
Guidance
1. Greek default + Euro exit almost fully priced in
3. Well handled, with guidance and action = rally
4. Proof - Gold is a commodity, not a reserve currency
5. Think GM, Bear Stearns
WORLD UNRAVELING: US DECOUPLINGHiddenLevers
US Decoupling: Not in Markets
US markets have joined Europe heading lower, though not yet at the same rate.
The inversion between the USD and world equity markets continues.
US Decoupling: Could Housing Be A Plus?
Bad RE loans at banks continue to drop, with commercial leading the way.
New home sales and housing starts point to improvements in construction sector.
Sources: US DOT, American Gas Association, HiddenLevers
US Decoupling: Oil + Nat Gas to the Rescue?
$10 oil price drop = $40B direct annual savings for American consumers
Natural gas almost 50% cheaper than last year = $30B savings for US economy
WORLD UNRAVELING: AROUND THE WORLD
HiddenLevers
BRICs = Horror Stories
China Hard Landing = below 7% growth, will hurt world economy
China Recession = negative growth, now a possibility, much more than hurt
CHINA
BRICs = Horror Stories
India growth weakest in Nine Years as Rupee Slides – 20% down in last year
India hard landing = below 6%, and no exports bounce expected
INDIA
BRICs = Horror Stories
Brazil is the worst performing major currency in the past year
Brazilian competitiveness should improve, but funds moving with Real
BRAZIL
Commodity Land: Russia, Canada, Australia, ME
YTD market moves have tracked oil as well.
AUD and CAD currencies followed oil prices over the last decade.
Commodity Land: Energy Ties
Saudi Arabia #1, Russia #2, Canada #10 in total oil exports
Australia is world's #1 coal exporter
As go energy prices, so go currencies and economies of these nations
Long Term: China + EM Demand Drive Commodity Land
China became #1 auto market in 2009, but still has only 1 cars per 25 people (US almost 1:1)
Source: E2AF.com (Nikkei Business Publications)
Non-BRICS Emerging Market: Asia
Philippines GDP up at 6.2% rate in Q1
Turkey GDP growth over 8% in 2010 and 2011
Both economies have large, young populations and good access to major markets nearby
Philippines and Turkey both outperformed the S&P and Asia index in 2012 YTD.
HiddenLevers – Product Update
• Multiple Portfolios in Scenario Modeling
• Scenario Hedging Wizard
• Portfolio Macro Profile – improved
• Integrations
Coming soon:
• Custom Asset Upload
• Fidelity Integration