War Room 27 June 2013 China’s Slowing Growth

War Room Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome

China’s Slowing Growth I.China Boom – History + Current Snapshot II.China Slowdown – Effect on Macro III.China Slowdown – Effect on Markets IV.Historical Comparisons + Scenarios

HiddenLevers CHINA BOOM – HISTORY + CURRENT SNAPSHOT

China – Goodbye Mao, Hello World 1950s-1970s 4.5% GDP annual growth 1976 Death of Mao Zedong 1979 Free market reform Opened to foreign trade % GDP annual growth 500m people out of poverty economy doubled every 8 years

China – Now World’s #2 economy #1 merchandise exporter #1 manufacturer #1 holder of FX reserves #1 creditor nation #2 economy #2 merchandise importer #2 receiver of foreign direct investment source: IMF

China – Overtake the USA as #1? China as B-M-O-C Pundits thought China would be on top by #fail source: Economist From 2005 source: akarlin.comakarlin.com From 2006

China – 2008 Global Financial Crisis CHINA GDP Growth 2007:14.2% 2008:9.6% 2009:9.2% 2010:10.4% 2011:9.2% 2012:7.8% $586 billion government stimulus

China – Current Macro Picture GDP slowing real estate bubble popping tightening liquidity trade deficit below

CHINA SLOWDOWN – EFFECT ON MACRO HiddenLevers It ain’t over til its over

China’s Global Investments Source: Heritage Foundation China’s global investments (energy is #1) are growing rapidly, and a pullback would be felt on every continent.

China’s Trade Balance Sources: China General Admin of Customs, ZeroHedge 2000 – 2008 Steady trade surplus 2008 – present Too many deficits to count consume!

China’s Import Trade Flows Source: IMF, UN FAO world’s largest importer wheat corn vegetable oil pork cotton rice Chinese imports are 10% of GDP for South Korea and Taiwan Significant GDP impact on most Asian neighbors and Australia

Australia: Canary in the Coal mine? Source: Heritage Foundation Over 25% of Australia’s exports directly to China 70% of exports to East Asia (all dependent on China) Australian Dollar down 14% over last month -14% Source: HiddenLevers bummer

Steel Copper Aluminum Industrial Metals: Case of Chinese Bird Flu? 1y -68% 1y -20% 1y -11% source: HiddenLevers

HiddenLevers CHINA SLOWDOWN – EFFECT ON MARKETS

China Slowdown – Markets Reacting to Macro Monday 24June 5.3% down in a day Shanghai Index 4.5 year low China A-Shares 70% off since peak China A-Shares 15% down in June Interbank rate 3.30% to 6.97%

China Slowdown – Corporates with most exposure Luxury will suffer (party’s over ladies)

China Slowdown – Corporates with most exposure Spirits will suffer (fake bags, fake booze)

China Slowdown – MSG tainting EM funds? source: HiddenLevers EM funds keeping pace with Shanghai Composite. two possibilities 1.PMs overexposed to China 2.PMs unloading all of Asia

China Slowdown – Sectors that will lose most? industrial metals mining + equipment industrial transportsolar energy luxurycommodities

China Slowdown – US Dollar will gain source: HiddenLevers Man that dollar sure is strong …

HISTORICAL COMPARISONS + SCENARIOS HiddenLevers

Historical Comparison: China vs Japan Growth Japan grew explosively from , then flat lined. China grew even faster: What’s next? source: World Bank

Historical Comparison: China vs Japan Equities -69% -67% China equity market decline mirrors Japan China + Japan face same demographic problems source: HiddenLevers

Historical Comparison: Lehman vs China Beijing home value / income = 22.3 NYC home value / income = 5.3 Similarities to 2008Differences from 2008 China 2013 private credit / GDP = 180% US 2008 private credit / GDP = 195% US has free-flowing capital markets, 98% of China’s investment capital is domestic US 2008 crisis occurred before Fed intervention, while Chinese central bank is heavily involved in capital markets US real estate bubble popped when US entered recession – China GDP is similarly slowing Chinese equities have already crashed, while US equities were near highs

Good Soft landing Bad Hard Landing Ugly Chinese Recession China Slowdown Scenarios Copper prices a good metric for China’s economic health – key lever in scenarios Commodities are most impacted sector in all scenario outcomes China soft landing effectively priced in today Recession in China (and current Europe recession) overwhelms US economic recovery

China Scenarios – How priced in? Copper and S&P: Correlated over past decade Breakdown in Feb 2013: Is Dr. Copper right or wrong? source: HiddenLevers

HiddenLevers – Product Update Envestnet – Launch of Integration New Homepage + Headers New Levers – bond spreads Integration Partners – improved design Coming soon: 1. Obamacare Scenarios 2. Non-correlated securities screener 3. SMA support