RIP Central Banks25 February 2016

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Market Update

RIP Central Banks

Scenario: Negative Rates?

RIP Central Banks

NEW

HiddenLevers

MARKET UPDATE

Market Update

sources: HiddenLevers, History.com, WSJ, Bloomberg

1

Oil Production

Freeze

2

3

Boomers Now Dying

Call to Break Up TBTF Banks

Market Update: China Slowdown4

sources: HiddenLevers, China Banking Regulatory Commission, People’s Bank of China, NY Times,

China bad loans

now $645b

Jan 2016Record Bank

Lending

Reducing required coverage

First World markets

over China?

China markets plummeting. USA not reacting.

US subprime crisis began

at $600b

Domestics moving

money out

Fed Stress Tests: 2015/2016 Comparison

Fed Stress Test 2015:• Adverse = Stagflation• Severely Adverse = Crash

with flat inflation

Fed Stress Test 2016:• Adverse = Deflation• Severely Adverse = NIRP

sources: Federal Reserve 1, Federal Reserve 2

Lever 2015 Adverse 2015 Severely Adverse

3M Treasury 0.0 -> 2.6 0.0 -> 0.1CPI 1.1 -> 4.0 1.1 -> 1.1Dow Total Stock Market -20% -58%

Lever 2016 Adverse 2016 Severely Adverse3M Treasury 0.1 -> 0.1 0.1 -> -0.5CPI 0.2 -> -0.1 0.2 -> 1.3Dow Total Stock Market -26% -51%

HiddenLevers

RIP CENTRAL BANKS

RIP: Interest Rates Worldwide

sources: WisdomTree, MW

Yield curve shows long duration on low interest debt

RIP: Battle Against Deflation

sources: JP Morgan, Markit

Negative interest rates not lowering currency value as hoped in Japan, Euro area.

25% of Developed Gov’t debt has

negative interest rates. ($23tn universe)

Inflation still ~0

RIP: Why Negative Rates?

sources: HiddenLevers, Whitehouse.gov, Financial Times,

devalue currency

get people spendingrobot takeover

commodities perfect storm

first world demographic shift

Using negative rates to fight deflation is like using plastic forks to fight an atom bomb

jumpstart growth

RIP: Impact on Borrowers + Savers

Effect on Savers• Fees on deposits• Switch to other stores of

value (gold, bitcoin, etc.)• Insurance companies +

pension funds at risk• Take on higher risks in

search for yield.

Effect on Borrowers• Low borrowing costs for

companies/households• Banks unwilling to lend• Who would buy a -1%

corporate bond?

sources: Economist, NYTimes

Negative Rates: Impact on Banks

sources: Credit Suisse, HiddenLevers

Negative rates have led to drop in bank stocks in EU / Japan

BUT – the underlying factor is interest rate margin, not rate level

RIP: Global Bank Comparison

sources: HiddenLevers, Economist

2008-09 US banks recapitalized, Europe not so muchJapan banks in 5y ditch

2015-16US banks lending Europe not recoveringJapan banks in 10y ditch

-38% Japan

-28% Europe

-16% USA

RIP: Fed Report Card (post-2008)

sources: HiddenLevers

US GDP - Meh

US Inflation - Fail

Unemployment – Meh

Equities – Success

RIP: Central Banks Irrelevant in 2016

source: HiddenLevers, Fiscal Times, Telegraph, Economist

Japan-0.10

ECB-0.30

Switzerland-0.75

Fed: +0.50

Negative rates not working abroad.

Central banks out of ammo?

Denmark-0.65

Sweden-0.50

RIP: Central Bank Irrelevant in 2016

source: HiddenLevers, Fiscal Times, Telegraph, 2, Economist

Japan-0.10

ECB-0.30

Switzerland-0.75

Fed: +0.50

Negative rates abroad

Rate hike in USA

Surprise results

Denmark-0.65

Sweden-0.50

yen euro

10y Treasuries

unemployment

euro peg

franc

HiddenLevers

NEW SCENARIO: NEGATIVE RATES?!

GOOD: Reflation Continues

source: HiddenLevers,

CPI trending up in USA, despite Oil Crash

Rising Rents +

Home Prices

CPI rising sinceJan 2015

Healthcare Inflation UP

BAD: Financials StruggleNo rate hikes = no margin for big banks

source: HiddenLevers, Foreign Policy,

low commodities

mitigate

pressure on equities persists

recession avoided-14%

-7%

UGLY: USA Joins Club

new all time lows on 10y treasuries

source: HiddenLevers

first world demographics

to blame

Fed follows Japan + Europe into negative rates

mild recession a la EU/Japan

savers likely go to cash + gold

gold

Scenario: Negative Rates?

12M T-bills

-0.3%S&P

-20%

12M T-bills

0.1%S&P

-8%

12M T-bills

0.8%

Fed is able to raise rates as inflation trends toward 2% in the USA. This enables financial sector margins to recover.

Inflation below target forces the Fed to cut rates. Financial sector hit hard, while market as a whole nears a bear market (measured from 2015 high)

USA joins EU and Japan in negative rate territory, as deflation pulls US into mild recession.

Good:Reflation

Continues

Bad:Financials

Struggle

Ugly:USA

Joins Club

S&P

+8%

RIP Central Banks – Take Aways

NIRP hits financial sector hardest NIRP causes flight to safety

First World Deflation overwhelms Monetary Policy

NIRP does NOT weaken currency