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#BRICShittingbricks 26 Sept 2013 War Room
#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
