#BRICShittingbricks26 Sept 2013

War Room

HiddenLevers War Room

Open Q + A

Macro Coaching

Archived webinars

CE Credit

Idea Generation

Presentation deck

Product UpdatesScenario Updates

I. Market Update- Debt Cliff- Negative Externalities

II. BRICS – Summer Hijinks

III. BRICS Winners + Losers

IV. Scenarios

War Room

HiddenLevers

MARKET UPDATE

Debt Cliff – The Skinny

September 23rd – 27th

House Recess

September 30th Gov’t Shutdown

October 17th Debt Ceiling Hit

Shutdown looms: What is Congress working on?

• House in recess, many members absent

• Sample Bill 1: extending an exemption on fire-retardant materials in ships

• Sample Bill 2: require review of new rules on sleep disorders in truck drivers

Debt Cliff – Scenario ReviewGood

ShutdownAvoided

BadShutdown

Occurs

UglyUS Default

If a shutdown and default are avoided, the market rally may continue as a key risk is eliminated.

A government shut-down (no default) may undermine confidence, but is a minor threat compared to default.

Even a short default on US obligations would shock the market, likely leading to a market correction.

End of QE

Remember the good old

days Bob?

Debt Cliff – Negative Externalities

uncertainty means business and households stop spending

debt ceiling is creating high level of uncertainty

even good outcome can have negative economic effect

Obamacare

Fed – high bar for haircut Teen idols – low bar for haircut

Online marketplaces and health insurance subsidies unhindered

ACA can be implemented amid govt shutdown decently well

Medicaid expansion funds are mandatory, not annual budget

source: Fed, Atlantic, WSJ source: Politico, Washington Post

no QE taper until fiscal debates resolved

GOP against shutdown, but now debt ceiling breach as stick

debt ceiling 2013 = no QE taper govt shutdown won’t kill ACA

debt ceiling breach 2013= -25% +

Market Update – Recap

debt downgrade 2011 = -16%

gotcha!

BRICS – SUMMER HIJINKSHiddenLevers

BRICS: Overview

Top 10 emerging markets according to Global Intelligence Alliance survey

BRICS = BrazilRussiaIndiaChinaSouth Africa

BRICS: Global Growth Leader

BRICS account for over 50% of global growth – and growth has been slowing

Total BRICS GDP over $14T, may pass USA over next few years

BRICS: Cool in the 2000s, Now Kind of Lame

2000s - cool2013 - lame

source: Forbes India

BRICS: Currencies Crashing (except China)

Indian Rupee, Brazilian Real, and South African Rand all down 15% YTD - USD Index is flat for the year

China’s tightly controlled Yuan up 3% YTD and appears to be pegged by China since late August

BRICS: Impact of QE Taper

• QE Taper fears help drive BRICS currencies down, followed by QE non-taper bounce

• US-based India investments show dramatic impact of currency swings – Sensex up 5% over 1yr, US funds at -10%

HiddenLevers

BRICS WINNERS + LOSERS

20% of household

income going to paying debt

Losers - Brazilworking class

boycotting world cup

central bank considering

opening foreign reserves

GDP growth slowed sharply

since 2011

credit markets pricing in a downgrade

BRL at 2008 financial crisis

lows

source: Reuters, Financial Times

7% GDP growth the new normal,

says S+P

Losers – China (now rebounding)

Past 24 months, growth artificial due to stimulus

tighter labor market + wage

growth = slower GDP growth

Manufacturing exports down

1/3 of provincial capitals debt is

bigger than GDP

pros think economic gains are temporary

source: Economic Times, NPR; WSJ

Rising wages take away

outsourcing advantages

Losers - India

Growth rate past 10 years was 7.7, now

4.4%

Rates hiked only in Sept 2013

CPI nearing 11%

Consumption weak, even in

rural areas

INR hit all time low end of

August 2013

source: Economist, NY Times

Manufacturing less than 15% of

economy

Precious metals in disfavor – SA produces 1/3 of

world’s gold

Losers – South Africa

6 percent inflation, double

central bank target

Rand at 4 year lows

Unemployment at

25.6%

Strikes at gold + platinum mines

hurting GDP

consumer confidence

at 10 year low

source: Bloomberg, International Business Times

Losers – Russia2013 growth

forecasts revised downward twice

GDP growth now less than world average

Prior to 2008 commodities

drop, 7% growth

World Bank estimates less

than 2% growth

Weak global demand for

oil + gas

source: Marketwatch, Moscow News

Winners – Stable Currency Countries

source: Marketwatch, Moscow News

e.g. SINGAPORE + KOREA

Stable currencies

More developed

More stability

More infrastructure

Less corruption

source: HiddenLevers

Winners – Frontier EM

Reversion to mean

Lower wage alternatives

Making technology

leaps

Low correlation to other markets

source: HiddenLevers

Using Screener to find Winners/Losers

Losers have strong inverse correlation to USD = crushed if EM currencies fall

Winners if BRICS rebound: correlate well with natural resources, and good S&P up market correlation

source: HiddenLevers

Double Loser – BRICS Fixed Income

• Strong EM bond fund outflows starting May 2013 (as with US bond funds)

• Double whammy – rising interest rates AND falling currencies hit US investors in EM bonds

source: Business Insider

BRICS OUTLOOK: SCENARIOSHiddenLevers

BRICS Outlook: Return of growthOil up on economics not politics

uptick in industrial metals

BRICS internal consumption up

infrastructure improvements

Money flows out of USD

BRICS Outlook: US Decoupling (BRICS exodus)US dollar keeps rising with US equities

consumption of natural gas over oil

US auto sales continue to rise

Illegal immigration ticking up

manufacturing coming back to USA and/or North America

US GDP back above 3%BRICS GDP keeps on slippin’ slippin’

BRICS Outlook: Falling BRICS sink US

Strong USD kills

commodities

BRICS50% of global

growth

US growth flat lines

(no recession)

US exports will decline

EUR rises, may be a

safe haven

BRICS Outlook: Risk ParityGood

Return of Growth

Good + BadUS

Decoupling(BRICS exodus)

BadFalling BRICS

Sink US

• Asset Allocation: multiple categories on funds

• Disclosure – auto-load in settings

• Scenario Library – modification dates

• Integrations – Albridge, Tamarac

Coming soon:

1. Support for SMA + managed products

2. Tamarac single sign on

Product Update