2011 in 11 slides

8/8/2019 2011 in 11 slides

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11 slides for 2011

November 2010

Evariste Lefeuvre – Chief Economist for the Americas+1 212 891 6197

8/8/2019 2011 in 11 slides


November 22, 20102

1. QE, Dollar and liquidity/capital Flows

1. The Fed will not go into a QE3 but no tightening ahead to reduce liquidity: will the USDcontinue to drive asset prices ?

2. The long end is poised underperform slightly (significant cap due to weak growth ahead – nodouble dip yet as the main issues are structural, not cyclical – unemployment, develeraging,distribution of income, tax system…).

Dollar and risky asse ts: 3-month corre lations

-1.0

-0.5

0.0

0.5

1.0

Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10

-1.0

-0.5

0.0

0.5

1.0

SP 500 OIL

GOLD Future T note

CDX IG

Sources : Bloomberg

8/8/2019 2011 in 11 slides


November 22, 20103

2. An ECB early exit to kill the Euro Zone ?

1. The ECB willing to get rid of its non-conventional monetary policy measures: in particular itssubsidies to the non-core banking system. At odd with the EFSF ?

2. The normalization in the monetary market does not imply an early tightening: implication forthe EUR/USD

ECB loans to national banks (€, blns

0

20

40

60

80

100

120

140

05 06 07 08 09 10

300

400

500

600

700

800

900Greece

Portugal

Spain

Ireland

M RO + LTRO - RHS

Sources : Bloomberg

Monetary policies Norm alization and EUR/USD

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

09 10 11 12

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

2-y gov spreads (Natixis)

2-y gov spreads (Fwrds)

EUR/USD - D

Sources : Bloomberg

8/8/2019 2011 in 11 slides


November 22, 20104

3. EUR/USD poised to decline ?

1. Surprising resilience to the institutional crisis.

EUR/USD and central banks balance sheets

(2004/2010)

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

50 70 90 110 130 150

FED to ECB balance s heet (100: 2004)

E U R / U S

Since M arch 2009

First leg of the crisis

2007/mid-2008

EUR/USD and institutional risk

100

200

300

400

500

600

Mar-10 May-10 Jul-10 Sep-10 Nov-10

1.15

1.20

1.25

1.30

1.35

1.40

1.45

Co mpos ite CDS Index

EUR/USD - RHS

Sources : Bloomberg

8/8/2019 2011 in 11 slides


November 22, 20105

4. Inflation of deflation ? What’s the story for Gold ?

1. Overcapacities, global growth risk ( policy mix tightening in EM and fiscal adjustment inadvanced countries): major risk of deflation

2. What is the next scapegoat for gold ? Fiat money (USD) ? Sovereign debt restructuring?

Global CPI and gold prices (since 1986)

y = 13.613x2 - 4.8115x + 2.8164

-2.00

0.00

2.00

4.00

6.00

8.00

-0.2 0 0.2 0.4

6-month log return of gold

G l o b a l C P I ( y o y , %

)

Gold: an opportunity cost approach

1050

1100

1150

1200

1250

1300

1350

1400

1450

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

Gold

10-year UST - RHS

Sources : B loomberg

8/8/2019 2011 in 11 slides


November 22, 20106

5. Equities: on cheapest market on earth?

1. Returns are in line with our model but PER are cheap in absolute terms and according to ourvaluation tools.

2. Divers: M&A, dividends, EM Capex, share repurchases etc…3. Yield relative comparative advantage against credit4. Will corporate go organic ? Low rates, no double dip, idle cash costly…

5

10

15

20

25

30

35

92 94 96 98 00 02 04 06 08 10

PEUP_BOUND

LOW_BOUND

Stock / credit arbitrage

y = 1.2734x + 2.7043

2

3

4

5

6

7

8

9

1 2 3 4

SP 500 Div yield

B B B U S D C o p m p o s i t e 5 y e a r

8/8/2019 2011 in 11 slides


November 22, 20107

6. How will Asia solve the capital inflow / domesticinflation equation ? China fears ?

1. In spite of (or due to) the Impossible Trinity (free capital flow, pegged exchange rate andindependent monetary policy) EM governments are unwilling to tighten sharply their monetarypolicies: serious inflation / over heating risk.

2. Capital controls cannot fix the global imbalances issue: short term tool. The currency war willhighly depend on China’s FX policy. We expect a slow appreciation, hence a further widening of global

imbalances…

USD/KRW and Risk aversion

900

1000

1100

1200

1300

1400

1500

1600

05 06 07 08 09 10

0

20

40

60

80

100

USD/KRW

VIX - RHS (inv.)

Sources : Bloomberg

Emerging market overperfornance and USD

(100: jan 2010)

60

70

80

90

100

110

07 08 09 10

92

94

96

98

100

102

104

106

Emerging As ia (M SCI) vs . US

AD XY - RHS

Sources : Blo omberg, Natixis

8/8/2019 2011 in 11 slides


November 22, 20108

7. Commodities: back to fundamentals?

1. “Assetification” and USD trend will give the trend.2. Yet, China growth poised to remain elevated. Moreover, Supply & Demand is back on track!3. On the oil side the oversupply remains

Base metals: inventories and prices

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

-0.1 -0.05 0 0.05 0.1

2-months inventories changes (against 1-y avge)

2 - m o n t h s c h a n g

e i n p r i c e s

Copper

Nickel

Tin

Aluminium

Lead

Zinc

Net US crude imports vs stocks of crude

300

310

320

330

340

350

360

370

380

390

Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

7.5

8

8.5

9

9.5

10

10.5

11

11.5

Crude stocks (mn bbl, lhs)

Net imports (mn b/d, rhs)

Sources : Bloomberg

8/8/2019 2011 in 11 slides


November 22, 20109

7. Will momentum continue to drive the FX market ?

1. Our Momentum index overperformed in the last months of 2010: liquidity driven.2. USD/JPY below 80?3. Inflation threat in EM coupled with monetary policy status quo in G3 should bust carry trades

8/8/2019 2011 in 11 slides


November 22, 201010

9. Spanish tail risk: debt restructuring and Bankingcrisis in Europe?

1. Fiscal balance improvement can hide structural problems. Huge contribution of real estate tofiscal revenues in the 2000ies. Structural fiscal loss.

2. Core banks hold b 700 USD of assets of peripheral Europe.3. ECB holds directly approx. 450 EUR of peripheral debt (through MRO, LTRO, direct

purchases…): 6X its capital & reserves.

Current account and fiscal position change between

2002 and 2007

-5

-4

-3

-2

-1

0

12

3

4

-10 -5 0 5 10

Current account

F i s c a l b a l a n c e BEL

IRE

GRE

SP

PORT

FIN

FRA

ITA

LUX

NTL

AUS

GER

Spain: Employment, re al estate prices and

household and corporate debt

8

9

10

11

12

13

14

02 03 04 05 06 07 08 09 10 11

100

120

140

160

180

200

220

240

Employment in construction (as %of to tal employment, LH scale)

Real estate pr ices (2002:1 = 100 , RH scale)

Household and co rpo rate debt (as %of GDP, RH scale)

Sources: Datastream, INE, Natixis

8/8/2019 2011 in 11 slides


November 22, 201011

10. Where is the next crisis: MUNIs ?

1. The ARRA had a very low purchase multiplier as most of the spending materialize through federaltransfers to state and local government.

2. S&L government suffer from: debt servicing ; federal mandates and medicare co-payments ;pensions contributions ; compensations of state workers ; falling revenues (stamp duties on real estatetransactions…) ; creative finance… Broadly an ALM mismatch…

3. Options: higher taxes, layoffs, end of federal program spending, federal government subsidies…

default…4. Liquidity, outstanding breakdown…

Changes in receipts and purchases of goods and

services of States and Local governments

(b USD annual rate)

-100-80

-60

-40

-20

0

20

40

60

80

100

J u l - 0

8

S e p - 0 8

N o v - 0

8

J a n - 0

9

M a r

- 0 9

M a y - 0 9

J u l - 0

9

S e p - 0 9

N o v - 0

9

J a n - 1

0

M a r

- 1 0

receipts ex ARRA

Purchases

recepiuts ex medicaid

Distribution of revenue by tax types (2006)

Federal State Local

Property Tax 0 3 97General Sales Tax 0 80 20Selective/ excise tax 36 52 12Individual income tax 80 19 2Corporate income tax 87 12 1Motor vehicle license 0 93 7Social insurance/ret 100 0 0Other taxtes 54 30 16Total taxes 67 20 13

Sources: Bruegel.org

8/8/2019 2011 in 11 slides


November 22, 201012

11. 2011 tail risks

1. Commodities: The return of backwardation?2. Asset allocation: will the equity/bond correlation mean revert ?3. EM growth to decelerate sharply? Side effect of Chinese

tightening ? EM outflows?4. End-of-Q2-driven UST bear market ?5. Widespread social unrest? Political / Sovereign risk?6. Protectionism?

7. Any candidate for EMU exit ?8. Deflation spread ?9. KRW/CNY/JPY raw ?10. Capital shortage ? (Basel III)

11. Any suggestion welcome…

-.2

-.1

.0

.1

.2

.3

.4

.5

.6

.7

2007 2008 2009 2010

CONTANGO_CLUP_BOUND_CLLOW_BOUND_CL

Corre lation btw SP500 return and UST 10-year

change (weekly frequency)

-1.0

-0.5

0.0

0.5

1.0

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

-1.0

-0.5

0.0

0.5

1.0

Sources : Blo omberg, Natixis

Risk avers ion and long term interest rates

2.0

2.5

3.0

3.5

4.0

09 10

10

20

30

40

50

60

10-Y UST

VIX - inverted scale (RHS)

Sources : B loo mberg, NA TIXIS

8/8/2019 2011 in 11 slides


November 22, 201013

Disclaimer

This material has been prepared by Natixis North America. The opinions expressed herein may differ from theopinions expressed by other departments of Natixis and its consolidated subsidiaries (collectively “NATIXIS”).This material is distributed to institutional clients only and is not intended for natural person individual clients.Natixis may trade as principal in the instruments discussed herein. This material is provided to you for

information purposes; any pricing in this material is indicative and is not intended as an offer or solicitation forthe purchase or sale of any derivative or other financial instrument. The information contained herein (and the

data underlying such information) has been obtained from sources believed to be reliable but NATIXIS does notrepresent or warrant that it is accurate and complete. Opinions and estimates expressed herein constitute our judgment as of the date appearing on this material and are subject to change without notice. Natixis shall not beliable for any financial loss or any decision taken on the basis of the information disclosed in this material andNatixis does not provide for any advice, including in particular in case of investment services. In any event, youshould request for any internal and/or external advice that you consider necessary or desirable to obtain,including from any financial, legal, tax or accounting advisor, or any other specialist advice, in order to verify inparticular that the investment(s) described in this document meets your investment(s) objectives andconstraints, and to obtain an independent valuation of such investment(s), its risks factors and rewards.

NATIXIS and its respective officers, directors, shareholders, affiliates and employees, including persons involvedin the preparation or issuance of this document, may from time to time deal in, hold or act as market-makers oradvisors, brokers or commercial and/or investment bankers in relation to the commodities or related derivativeswhich are the subject of this material.

2011 in 11 slides

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