War Room 31 May2012 Euro Zone Troubles and the World Unraveling.
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Transcript of 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 + 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 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
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
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
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.