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War Room 31 May2012 Euro Zone Troubles and the World Unraveling

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.

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War Room 31 May2012 Euro Zone Troubles and the World Unraveling

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  1. War Room 31 May2012 Euro Zone Troubles and the World Unraveling

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

  3. Euro Zone Troubles and the World Unraveling • Europe Update • US Decoupling Update • Around the World

  4. HiddenLevers World unraveling: Europe Update

  5. Euro + S&P move inverse to USD Note - Euro and S&P slide approaching 10% since April Fools Day

  6. Euro + USD – projections USD/Euro = Inverse correlation USD/S&P = Inverse correlation 1.40 1.20 1.00 .90 98-100

  7. Scenario Modeling – How the big boys do it http://online.wsj.com/article/BT-CO-20120529-705577.html HiddenLeversvalue – We can help answer: How do other economic levers react to movements in Euro? 2. How do portfolios react to movements in Euro + other levers?

  8. 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

  9. EU Leadership – Bumbling Fools • EU 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

  10. Market reaction depends on EU leadership Guidance Greek default + Euro exit almost fully priced in Well handled, with guidance and action = rally Proof - Gold is a commodity, not a reserve currency 5. Think GM, Bear Stearns • Guidance • Spain default or other PIIGS follow Greece out • Poorly handled, with no plan of action = bloodbath • At risk – anything priced in US Dollars • Defending Euro/Swiss Peg will be difficult • Think Lehman

  11. HiddenLevers World unraveling: US Decoupling

  12. 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.

  13. 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.

  14. 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 Sources: US DOT, American Gas Association, HiddenLevers

  15. HiddenLevers World unraveling: Around the World

  16. BRICs = Horror Stories CHINA China Hard Landing = below 7% growth, will hurt world economy China Recession = negative growth, now a possibility, much more than hurt

  17. BRICs = Horror Stories INDIA India growth weakest in Nine Years as Rupee Slides – 20% down in last year India hard landing = below 6%, and no exports bounce expected

  18. BRICs = Horror Stories BRAZIL Brazil is the worst performing major currency in the past year Brazilian competitiveness should improve, but funds moving with Real

  19. Commodity Land: Russia, Canada, Australia, ME AUD and CAD currencies followed oil prices over the last decade. YTD market moves have tracked oil as well.

  20. 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

  21. 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)

  22. 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.

  23. HiddenLevers – Product Update • Multiple Portfolios in Scenario Modeling • Scenario Hedging Wizard • Portfolio Macro Profile – improved • Integrations • Coming soon: • Custom Asset Upload • Fidelity Integration

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