war room 27 feb 2013 currency as investment: may the force be with you
TRANSCRIPT
War Room•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
Currencies as Investment
I. Debt Cliff Quick Update
II. Currency Fundamentals
III. Currencies as Diversification
III. Currency Macro Themes
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
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
GoodBipartisan
Reform
BadSequester +
Shutdown
UglyUS Default
Debt Cliff – Government Shutdown Nigh?
I love surprises
350 economists agree:buh-bye US recovery
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)
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
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
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
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
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
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
Currency Exposure is Easy
• Many ETFs + funds offer currency exposure• HiddenLevers can help you find them
source: HiddenLevers
Macro Themes - General
Currencies are useful
Commodity proxy minus
volatility
Flight to safer assets
Commodities Currencies
source: HiddenLevers
Defensive Currencies
over?
EUR peg
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!
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
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