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War Room 27 Feb 2013 Currency as Investment: May the Force Be with You

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. Debt Cliff Quick Update Currency Fundamentals Currencies as Diversification

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War Room 27 Feb 2013 Currency as Investment: May the Force Be with You

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  1. War Room 27 Feb 2013 Currency as Investment: May the Force Be with You

  2. War Room • Monthly macro discussion • Using tools in context • Update on HiddenLevers Features • Your feedback welcome

  3. Currencies as Investment • Debt Cliff Quick Update • Currency Fundamentals • Currencies as Diversification • III. Currency Macro Themes

  4. HiddenLevers more Debt cliff quick update

  5. Sequester – How much Austerity? slide from Oct 2012 War Room – Eve of Election Update • Spending Cuts • DEFENSE • 1 million jobs • 25% hit to GDP growth • $50 billion / year • DISCRETIONARY • 5% cut to most programs • Cuts already begun: • - Illegal immigrant release • - Unemployment benefits • Exempt • Social Security • Medicaid • Food Stamps sequestration

  6. Defense Cuts Inevitable – Duh! War is Over Current -31% I’m still going strong source: Washington Post • Full sequester = 31% hit to defense budget • In line with historic precedent • Other option = permanent war state

  7. Debt Cliff – Government Shutdown Nigh? • Good • Bipartisan Reform • Bad • Sequester • + • Shutdown • Ugly • US Default I love surprises 350 economists agree: buh-bye US recovery

  8. HiddenLevers Currency fundamentals

  9. Fiat versus Hard Currency 5 Major Currencies USD US Dollar EUREuro GBP British Pound JPY Japanese Yen CFH Swiss Franc Fiat Currency value is extrinsic (aka faith) • 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

  10. Currencies Trade in Pairs • 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 • EUR/USD • USD/JPY • GBP/USD • AUD/USD • USD/CHF Inverse correlation to USD source: HiddenLevers

  11. 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) No dude! Is gold money? Gold isn’t money source: HiddenLevers

  12. Like it or not, you are long the USD source: HiddenLevers • Inflation is always other side of USD trade • Most major currencies up against USD s • Aussie Dollar = big winner since 2008 Crisis

  13. HiddenLevers Currencies as diversification tool

  14. The Rest of the World Thinks in Multi- Currency Europe + Asia Mindset American Mindset Offshore Accounts I’m done juicing Yuan Deposit Accounts I’m still going strong Mental note USD is the world’s reserve currency. (we are spoiled) India Interest Rates

  15. Dollar Yield = Non-Existent USD Yield = 0.1% Inflation = 1.6% Real Yield = -1.5%

  16. 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

  17. Currencies + Correlation • Currency Basket • Performance since 2000:Equal to S&P! • Volatility since 2000:One third of S&P! • Correlation to S&P:LOW! Currencies S&P volatility = less sleep source: HiddenLevers source: HiddenLevers

  18. Currency Exposure is Easy source: HiddenLevers • Many ETFs + funds offer currency exposure • HiddenLevers can help you find them

  19. HiddenLevers Macro Themes in Currency markets

  20. Macro Themes - General Commodities Currencies Defensive Currencies Currencies are useful Commodity proxy minus volatility Flight to safer assets over? source: HiddenLevers EUR peg

  21. 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 15% drop source: HiddenLevers banzai! 20% rise

  22. Euro – Steady Climb + Recent Fall • Euro 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 6m comeback recent drop

  23. QE + US Dollar QE 1 QE 2 QE 2.5 (Twist) + QE3 USD upward trend - 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

  24. HiddenLevers – Product Update • Hedging Wizard – v2 • Screeners – Search Criteria improvements • Stress Test Lead Generator – Launched! • Coming soon: • MoneyGuidePro Integration – go deep! • More polish on site – Icons + Images

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