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War Room 27 Feb 2013
Currency as Investment:May the Force Be with You
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War Room•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
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Currencies as Investment
I. Debt Cliff Quick Update
II. Currency Fundamentals
III. Currencies as Diversification
III. Currency Macro Themes
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Sequester – How much Austerity?
Spending Cuts
DEFENSE1 million jobs25% hit to GDP growth$50 billion / year
DISCRETIONARY5% cut to most programsCuts already begun: - Illegal immigrant release - Unemployment benefits
Exempt• Social Security • Medicaid• Food Stamps
slide from Oct 2012 War Room – Eve of Election Update
sequestration
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Defense Cuts Inevitable – Duh! War is Over
• Full sequester = 31% hit to defense budget• In line with historic precedent• Other option = permanent war state
I’m still goingstrong
Current-31%
source: Washington Post
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GoodBipartisan
Reform
BadSequester +
Shutdown
UglyUS Default
Debt Cliff – Government Shutdown Nigh?
I love surprises
350 economists agree:buh-bye US recovery
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HiddenLevers
CURRENCY FUNDAMENTALS
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Fiat versus Hard Currency
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
5 Major Currencies
USD US Dollar
EUR Euro
GBP British Pound
JPY Japanese Yen
CFH Swiss Franc
Fiat Currencyvalue is extrinsic
(aka faith)
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Currencies Trade in Pairs
Inverse correlation to USD
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
1. EUR/USD2. USD/JPY3. GBP/USD4. AUD/USD5. USD/CHF
source: HiddenLevers
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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)
Is gold money? No dude!
Gold isn’t money
source: HiddenLevers
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Like it or not, you are long the USD
• Inflation is always other side of USD trade• Most major currencies up against USD s• Aussie Dollar = big winner since 2008 Crisis
source: HiddenLevers
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CURRENCIES AS DIVERSIFICATION TOOLHiddenLevers
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The Rest of the World Thinks in Multi- Currency
I’m still goingstrong
I’m done juicing
Mental note
USD is the world’s
reserve currency.
(we are spoiled)
American Mindset Europe + Asia Mindset
Offshore Accounts
YuanDepositAccounts
IndiaInterestRates
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Dollar Yield = Non-Existent
USD Yield = 0.1%
Inflation = 1.6%
Real Yield = -1.5%
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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
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Currencies + Correlation
S&P volatility = less sleep
Currencies
Currency Basket
• Performance since 2000:Equal to S&P!
• Volatility since 2000:One third of S&P!
• Correlation to S&P:LOW!
source: HiddenLevers
source: HiddenLevers
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Currency Exposure is Easy
• Many ETFs + funds offer currency exposure• HiddenLevers can help you find them
source: HiddenLevers
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MACRO THEMES IN CURRENCY MARKETSHiddenLevers
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Macro Themes - General
Currencies are useful
Commodity proxy minus
volatility
Flight to safer assets
Commodities Currencies
source: HiddenLevers
Defensive Currencies
over?
EUR peg
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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
source: HiddenLevers
20% rise
15% drop
banzai!
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Euro – Steady Climb + Recent FallEuro 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
recent drop
6m comeback
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QE + US Dollar
- 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
QE 1 QE 2 QE 2.5 (Twist) + QE3
USD upward trend
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HiddenLevers – Product Update
• Hedging Wizard – v2
• Screeners – Search Criteria improvements
• Stress Test Lead Generator – Launched!
Coming soon:1. MoneyGuidePro Integration – go deep!
2. More polish on site – Icons + Images