Big Trouble in Little China25 March 2014

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I. Market Update

II. Big Trouble in Little China

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Big Trouble in Little China

HiddenLevers

MARKET UPDATE

Market Update

Euro Strength

Ukraine = Blip

Nikkei Spanked

Fed confirms time lag

Macro Snapshot

Consumer confidence climbing faster than retail sales – and NASDAQ is climbing at a pace unseen since the original dot com bubble.

BIG TROUBLE IN LITTLE CHINAHiddenLevers

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

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

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

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

Chinese Economy – Bubbles

Yep

sources: WSJ, Reuters

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

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

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

HiddenLevers

CHINA SLOWDOWN – SCENARIOS

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

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

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

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.

HiddenLevers

MACRO CONSEQUENCES

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

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

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

• Risk Monitoring Alpha

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