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Future of USD30 July 2014
War Room
HiddenLevers War Room
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Presentation deck
Product UpdatesScenario Updates
I. Market Update
II. Future of USD Scenarios
III. USD Economic Relationships
IV. Reserve Currencies of the Future
Future of USD
HiddenLevers
MARKET UPDATE
Market UpdateObama Checked Out
QE Ends in October
Q2 GDP – a perfect 4.0
sources: HiddenLevers, WSJ, CNBC, Real Clear Politics, Guardian, Bloomberg
Russia Sanctions Piling Up
Macro Snapshot
Is RUT a harbinger or just mean reversion and why is 2/10 spread narrowing?
FUTURE OF USD – SCENARIOSHiddenLevers
Benign Decline
Europe currencies +
gold increase modestly
similar decline to 2002-07
market upswing
slow + steady USD decline
USD decline would match
2008 low
USD index = 70
source: HiddenLevers
USD decline + GDP growth would boost commodities
USD = -13%
End of QE Strengthens Dollar
growth scenariomuted impact
on commodities
equities correction
would further boost USD
USD strength would match
mid 2000s highs
USD post-QE 2 has been
volatile but up
rising rates mean higher
demand for USD
source: HiddenLevers
USD Index = 90
Europe currencies + gold suffer
USD = + 11%
Reserve Currency No More
drastic unwinding
+ viable options
plausible triggerUSA/China geopolitical
tension
plausible triggerdebt default
global power structure is
changing
sources: HiddenLevers
USD Index = 55
USD decline would match early 2000s
decline
USD = -32%
Scenario: Future of USDGood
benign decline
Neutral/Badend of QE
strengthens USD
Uglyreserve currency
no more
As the economy strengthens, the dollar might fall as it did in the 2002-2007 period.
Rising rates may drive investors to hold more USD securities, raising the dollar’s value and forcing commodities down.
If US fiscal issues or other concerns cause foreign holders to dump USD, an inflation shock could derail the markets.
HiddenLevers
USD ECONOMIC RELATIONSHIPS
$
USD + Interest Rates
sources: HiddenLevers
Pre 2008rising rates = rising USD
Post 2008inverted relationship
Why? USD as safe haven for EU crisis
2014another inflection point?
USD + Quantitative Easing
sources: HiddenLevers, Financial Sense
QE 1 QE 2 QE3 Taper
QE 1 + 2USD driven down
QE 3 + TaperUSD only gets stronger
Note for your
ignorant clients:
increasing money
supply has not killed
the greenback
USD + Equities
sources: HiddenLevers, Bespoke Investment Group
During flight-to-safety period starting in early 2008, USD + S&P had strong inverse correlation
Rolling correlations show that this relationship flips over time, and turned positive with latest S&P leg starting late 2012
But a correction could quickly restore flight-to-safety dynamic
USD + Commodities/FX
sources: HiddenLevers
USD generally has a strong inverse relationship to oil and other commodities – traded in USD terms
• Euro/USD: perfectly inverse
• GBP inversion with USD strengthened since 2008
• JPY non-correlated to USD
HiddenLevers
RESERVE CURRENCIES OF THE FUTURE
USD = The Classic Reserve Currency
source: US Treasury, IMF, Planet Money
1/3 of US Treasuries Held Abroad
USD makes up 61% of Foreign Exchange Reserves
Foreign banks hold 10x more USD + Treasuries than gold
Foreign Held Assets Value (USD)
US Treasuries Abroad 5.6 trillion
US Cash in Foreign Exchange Reserves 3.8 trillion
Gold Held in Foreign Reserves @ $1,300/ounce 0.97 trillion
US 100$ Notes Held Abroad 0.64 trillion
Currency Composition (%) of Foreign Exchange Reserves
BRICS Bank – announced July 2014
source: Forbes, IMF, Banker Magazine
IMF/World Bank
BRICS Bank (NDB & CRA)
Total Reserves (USD) 12 trillion 150 billion
BRICS Vote (%) 11.03 % 100%
USA Vote (%) 16.8% 0%
IMF type institution
for EM, by EM
28%BRICS share of
world GDP
19%USA share of world GDP
Obvious response to IMF
imbalances
BRICS Bank currency TBD
China contributing
50% of money
global power structure changing
Reserve Currency of the Future – Yuan?
sources: HiddenLevers, The Finanser, Banker Magazine, The ABC
Yuan + USDtravelling
together past 12 months
China bank profits
accelerating as economy slows
China’s banking system may be world’s largest
by 2020
World’s Top 10 Banks
1994: 5/10 banks in Japan
2004: 10/10 banks in USA
2014: 5/10 banks in China
bank profits surpassingpre-crisis
peaks globally
Japan bank capital now 50% of China
only comparable bank profit
recovery = USA
Future of USD – Recap
USD resilient through changing times
China banking mightthink present, not future
Interest rates + USDback to direct relationship
USD strong through equities rally
HiddenLevers Use Cases
scenarioGlobal
Deflation
scenarioEnd of QE
Future of USD
macro themeStronger USD
data centerCurrencies
scenarioFuture of USD
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