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Big Trouble in Little China25 March 2014
War Room
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HiddenLevers War Room
Open Q + A
Macro Coaching
Archived webinars
CE Credit
Idea Generation
Presentation deck
Product UpdatesScenario Updates
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I. Market Update
II. Big Trouble in Little China
III. Scenarios
IV. HiddenLevers Use Cases
Big Trouble in Little China
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HiddenLevers
MARKET UPDATE
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Market Update
Euro Strength
Ukraine = Blip
Nikkei Spanked
Fed confirms time lag
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Macro Snapshot
Consumer confidence climbing faster than retail sales – and NASDAQ is climbing at a pace unseen since the original dot com bubble.
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BIG TROUBLE IN LITTLE CHINAHiddenLevers
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Revisiting HL China Scenario – June 2013
sources: HiddenLevers, Reuters
trade deficitJapan analogue
Aussie Dollar Industrial metals
bearish consolidation
We got it right We got it wrong
-8
+20…not that wrong
We covered many tells
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Chinese Economy – Current Status
sources: HiddenLevers, Barclays, Economist, Bloomberg
Credit tightening- interest rates going up 10%- bank checks becoming more rigorous
Consumption- growing 13% y-o-y- government relying on this for growth
retail sales Chinese New Year
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Chinese Economy – Current Status
2014 GDP target = 7.5%
Analysts see 50/50 chance of below 7% growth.
sources: HiddenLevers, Economist, Reuters
5y performance - 15% property prices
falling
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Chinese Economy – Bubbles
sources: HiddenLevers, WSJ, ZeroHedge, Reuters
Corporate Debt Defaults
1976 – 2013 0
2014 2
only worse since 2011Chinese Premier to Private SectorExpect more debt defaults
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Chinese Economy – Bubbles
Yep
sources: WSJ, Reuters
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Chinese Economy – Currency Volatility
source: HiddenLevers, WSJ, Reuters 1 , Reuters 2, Quartz
Yuan's importance as global currency - should match China economic rise- overtaken 22 others to be in 10 most used - used often in trade settlement- now tied to commodity derivatives
2014 = Yuan volatility skyrockets- central bank bumbling- disappointing economic data- increased state spending
Consequences- use as global payment currency down 8.5%- FX hedges for exporters now compromised
World ditching Yuan
People's Bank of China"We've got a lot of homework to do before the Yuan can
become an international currency,”
Big Changes in 2014
1. Trading band doubled2. Speculator shake out
Note to People’s Bank
about all those trick moves
…great for Kung Fu.
for Yuan policy, not so much
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China vs India – Currencies + Equities
source: HiddenLevers
long termYuan up, Rupee down
Changing of the Guard?
Indian equities recovered with S+P despite drop in Rupee
Despite GDP Growth, Chinese equities down 60% since 2007
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identity crisisexporter domestic consumption
don’t conflate the BRICS
rapid growthgood luck finding it in China
Big Trouble in Little China – Recap
downside watch copper, upside watch consumption
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HiddenLevers
CHINA SLOWDOWN – SCENARIOS
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China Slowdown: Soft Landing (priced in)
source: Federal Reserve, HiddenLevers
China A-shares down 60% from
highs. Is that bottom?
Govt. goal (via policy changes) is in 7-8% range
100% priced-in based on copper
price trend
2013 China GDP over 7% despite slowing housing,
exports
7% GDP Growth in China
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China Slowdown: Hard Landing
Growth falls to levels not seen
since 1990 – below 5%
Govt. letting Yuan fall to avoid hard
landing
USD strengthens: helps importers, hits commodities
Falling property prices
accelerate in big cities
4-5% GDP Growth in China
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China Slowdown: Recession
Global recession likely, China = ½ of world growth
0% growth last occurred in ‘76 – before most in
China were born
Likely to spark another bond rally in US via
lower rates
Profound effects on commodities
– like 2008
Negative Growth in China
Wall Street analysts predict
Chinese QE if recession looms
sources: HiddenLevers, Wall Street Journal
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Scenario: China Slowdown
Priced InSoft Landing
BadHard Landing
UglyRecession
This is where we are today, with China at mid 7% GDP growth – hence no further impacts predicted.
A hard landing brings commodities down sharply but only a limited correction in US markets.
A Chinese recession would drag the world with it, leading to a 30% drop in equities and a bond rally.
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HiddenLevers
MACRO CONSEQUENCES
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Goodbye Australia. Good luck to EM.
source: HiddenLevers, Financial Times
Australia has been the resource provider for the Chinese growth story.
Resources provided- Coal - Steel- Iron ore - Gold- Natural Gas - Precious stones
VULNERABILITY TO CHINA SLOWDOWN
also vulnerable
IndonesiaBrazilChilePeru
-12
+1
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Black Swan – China Socio-Political CrisisChina has been #1 in economic growth for decades.
At what price?- Press freedoms - Inequality- Human rights - Labor rights- Pollution - Global reputation
Black SwanPolitical unrest in China as a result of recession
Global fallout, not just regional
Not yet. HiddenLevers will monitor.
sources: Forbes, Reporters Without Borders, IHRRI
Global Press Freedom Rankings
Global Human Rights Rankings
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HiddenLevers Use Cases
scenarioBad News BRICS
War RoomBRICS
hitting bricks
War Room China Slowdown
scenarioCommodities Perfect Storm
scenarioChina Slowdown
Big Trouble in Little China
Data CenterCopper
China GDP
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• Risk Monitoring Alpha
- scenarios run against whole book
- automated stress testing run nightly
- alerts based on loss tolerance levels breached
• Charting – Sharing with Titles
• Live Chat for HL support
Coming soon:
- Risk Monitoring dashboard
- Risk Monitoring alerts to contact prospects
Product Update