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HiddenLevers War Room
Open Q + A
Macro Coaching
Archived webinars
CE Credit
Idea Generation
Presentation deck
Product UpdatesScenario Updates
Market UpdateSyria Airstrikes
Manufacturing = 5y high
New Era for Chindia
sources: HiddenLevers, MarketWatch, BusinessWeek, Huff Post, Washington Post, Reuters
Gas = 3 bucks
Macro Snapshot
Jobless claims at 2006 levels
Are jobless claims signaling a peak? Commodities suffer despite industrial rebound (hint: it’s the dollar) – meanwhile S&P is middle of the pack among global indices.
Review: End of QE ScenariosNot SureEasy Money,
No Hangover
GoodEconomy
Back on Track
BadDeflation
Strikes Back
WHAT REALLY HAPPENED66% priced in based on SPX at 2200. This becomes the GOOD scenario now.
Scenario priced in10y target = 3%S&P target = 1900
10y = 2.54% headed down. Commodities in deflation, Equities + GDP not so much.
GOOD: Steady as She Goes
source: HiddenLevers, WSJ, Bloomberg, NY Times
Fed raises rates in mid-2015 as stated
EU rate cut gives Fed
breathing room
US manufacturing hitting its stride
Fed has kept its word on
2014 QE taper
Low inflation means no need
for rate squeeze
Fed balance sheet still bloated
until 2020
BAD: Rate Hike Postponed
Weak economic growth might force Fed to
postpone
Equities caught between easy money and bad growth
Poor global growth +
deflation are catalysts
Fed waits until 2016 due to economic malaise
source: HiddenLevers, NELP, New Yorker, MarketWatch
Rates continue downward drift
of 2014
Yellen watching labor market like a hawk
UGLY: Fed Pops Bubble
Yellen said Fed is prepared to use
rates to pop bubbles
Low VIX and corporate bond
spreads worrisome
Worry is more about junk
bonds than equities
Failure of labor market recovery
makes this unlikely
sources: HiddenLevers, USA Today, NY Times, ThinkAdvisor, SeekingAlpha
QE withdrawal or pre-emptive rate hike backfires
Goldman thinks impact begins
when taper ends
Acknowledged that low rates led to housing
bubble
Acknowledged froth in
tech/biotech sectors
Scenario: Fed HijinksGood
Steady as She Goes
BadRate Hike
Postponed
UglyFed Pops
Bubble
If economic recovery continues, the Fed can stay the course and the present rally may continue into 2015.
If poor economic growth causes the Fed to postpone hikes, weak growth and continued easing might offset each other.
Investor sentiment might shift if the Fed acts more rapidly. Stocks, bonds, and real estate could suffer in a bubble pop.
2014 QE Wind Down Plan
Step 1Remove last $15B of QE next month
sources: Federal Reserve Releases, Yellen Conference Transcript
Key TakeawayNo Fed governor sees rates reaching old 5% levels … ever
Step 2Rate hike mid 2015(1.27% fed funds target)
Step 3Normalize Fed Balance Sheet “by end of decade”
Past Fed Action: Reaction
UGLY scenario:
Fed Pops bubble
Period Fed Funds Change (bps)
S&P Change(%)
12/65 – 12/66 +165 -12.2%
8/67 – 9/69 +540 -0.5%
4/71 – 9/71 +185 -9.35%
3/72 – 9/73 +749 -2.75%
3/74 – 9/74 +304 -32.39%
2/77 – 5/80 +1300 +11.44%
8/80 – 7/81 +1007 +0.34%
1/82 – 3/82 +241 -7.01%
3/83 – 9/84 +294 +8.97%
2/87 – 11/87 +133 -18.97%
4/88 – 4/89 +323 +18.49%
2/94 – 3/95 +300 +7.19%
4/97 – 5/97 +19 +10.46%
7/99 – 7/00 +174 +8.23%
6/04 – 8/06 + 425 +14.66%
S&P reaction
Max Drawdown:-32.39%
Max Rise:+18.49%
Average Change: -0.22%
source: Business Insider
similarities differences
Correct Analogue = Feb – Nov 1987
sources: HiddenLevers, Federal Reserve, St. Louis Fed, Time Magazine
dramatic increase in program trading, now called HFT
market spooked by interest rate hike rumors (1984-85)
brand new fed chair in office
overvalued stock market (P/E)
Then - rates rising globally Now – nope
Then - USD decliningNow – USD rising
Then - inflation concernsNow - nope
Then - Fed Funds rate 7.3Now – 0.0P/E ratios
1987: 182014: 26
technical resistance
QE Myth:USD is getting weaker
sources: HiddenLevers Charts
Despite a steady rise in the US money supply, the dollar is getting stronger. Falling velocity of money means new money doesn’t cause deflation or devaluation.
Reality: USD is getting stronger
QE Myth: Rates are Rising
sources: HiddenLevers
QE 1QE 2
QE 2.5 (Twist) +
QE3
Reality: Rates dropped Post-QE 1, 2 and in 2014
QE Myth: QE is Ending
sources: Wall Street Journal, Wall Street Journal
Info on ECB QE and RatesBank Deposit rates reduced to -0.1% in June 2014. Further cut to -0.2% in September
ECB new asset purchases will increase balance sheet 700 B to 2.7 trillion Euros
ECB likely to expand QE
Info on BOJ QE programFirst case of QE done by Japan to fight deflation in early 2000s.
Recent QE began April 2013 and expected to double money supply.
In addition to bonds, domestic ETFs also purchased (1 B USD) beginning Aug 2014
Reality: QE outsourced to Japan + Europa
Adios QE – Recap
S&P rising + Lower rates make an odd couple
INTEREST RATES ARE NOT RISING
1987 analogy is about rate cycle, not just stock market crash
Global factors have given Fed breathing room
HiddenLevers Use Cases
data center10y/CPI/PMI
scenarioGlobal
Deflation
Adios QE
macro themeStrong Dollar
scenarioFed Action