Future of USD30 July 2014

War Room

HiddenLevers War Room

Open Q + A

Macro Coaching

Archived webinars

CE Credit

Idea Generation

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

• Portfolios – support for models of models

• Portfolios – portfolio can be in multiple households

• Faster servers – improved performance, especially report generation

Coming Soon:

- Lightning Fast Portfolio Entry – paste right into grid

- Landscape redesign of HL

Product Update