War Room 27 Feb 2013 Currency as Investment: May the Force Be with You

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

Currencies as Investment I.Debt Cliff Quick Update II.Currency Fundamentals III.Currencies as Diversification III.Currency Macro Themes

HiddenLevers DEBT CLIFF QUICK UPDATE more

Sequester – How much Austerity? Spending Cuts DEFENSE 1 million jobs 25% hit to GDP growth $50 billion / year DISCRETIONARY 5% cut to most programs Cuts already begun: - Illegal immigrant release - Unemployment benefits Exempt Social Security Medicaid Food Stamps slide from Oct 2012 War Room – Eve of Election Update sequestration

Defense Cuts Inevitable – Duh! War is Over Full sequester = 31% hit to defense budget In line with historic precedent Other option = permanent war state I’m still going strong Current -31% source: Washington PostWashington Post

Good Bipartisan Reform Bad Sequester + Shutdown Ugly US Default Debt Cliff – Government Shutdown Nigh? I love surprises 350 economists agree: buh-bye US recovery

HiddenLevers CURRENCY FUNDAMENTALS

Fiat versus Hard Currency August 1971: Nixon ends the gold standard, severs US Dollar’s link to gold USD is a fiat currency – derives its value by government decree that it is valid tender Currency value not tied directly to metals – they trade in relative terms (as pairs) instead 5 Major Currencies USD US Dollar EUR Euro GBP British Pound JPY Japanese Yen CFH Swiss Franc Fiat Currency value is extrinsic (aka faith)

Currencies Trade in Pairs Inverse correlation to USD Currencies 101 Inherently two trades: e.g. buy Euro, sell USD When USD drops, by definition other side of currency pair gains Top 5 Currency Pairs all include USD 1.EUR/USD 2.USD/JPY 3.GBP/USD 4.AUD/USD 5.USD/CHF source: HiddenLevers

Why We Won’t Cover Gold Gold not accepted as valid tender (mostly) Gold volatility = 19% (exact same as S&P) Gold correlation to S&P high (since crisis) Is gold money? No dude! Gold isn’t money source: HiddenLevers

Like it or not, you are long the USD Inflation is always other side of USD trade Most major currencies up against USD s Aussie Dollar = big winner since 2008 Crisis source: HiddenLevers

CURRENCIES AS DIVERSIFICATION TOOL HiddenLevers

The Rest of the World Thinks in Multi- Currency I’m still going strong I’m done juicing Mental note USD is the world’s reserve currency. (we are spoiled) American Mindset Europe + Asia Mindset Offshore Accounts Yuan Deposit Accounts India Interest Rates

Dollar Yield = Non-Existent USD Yield =0.1% Inflation=1.6% Real Yield =-1.5%

Sample Yields Worldwide Yes, cash has a yield US yields = some of world’s lowest Australia + Canada + Europe: G7 economies, higher yield Emerging Markets: higher interest + tactical Currencies as bond alternative: Interest + low volatility

Currencies + Correlation S&P volatility = less sleep Currencies Currency Basket Performance since 2000: Equal to S&P! Volatility since 2000: One third of S&P! Correlation to S&P: LOW! source: HiddenLevers

Currency Exposure is Easy Many ETFs + funds offer currency exposure HiddenLevers can help you find them source: HiddenLevers

MACRO THEMES IN CURRENCY MARKETS HiddenLevers

Macro Themes - General Currencies are useful Commodity proxy minus volatility Flight to safer assets Commodities Currencies source: HiddenLevers Defensive Currencies over? EUR peg

USD + Yen – Japan Inflation Gambit Efforts seem to be working Japan attempting US-style QE (open-ended purchases of government bonds) Japan Inflation target = 2% JPY down 15% since Oct 2013 – NOT defensive Falling Yen benefits automakers, and other Japan exporters source: HiddenLevers 20% rise 15% drop banzai!

Euro – Steady Climb + Recent Fall Euro Crisis - Update Italy elections = NOISE EU uncertainty for USA: - volatility is annoying - keeping clients on sidelines roller coaster repeat? Keep an eye on: - Euro – under Italy + Spain bond yields Real Europe Problems - EU growth rate (maybe 0) - French Brain Drain recent drop 6m comeback

QE + US Dollar - QE1 + QE2 drove down USD, as Fed fought deflation - Operation Twist + QE3 having less impact – Fed losing control? - Not the “outer limits” just yet – USD getting stronger QE 1QE 2 QE 2.5 (Twist) + QE3 USD upward trend

HiddenLevers – Product Update Hedging Wizard – v2 Screeners – Search Criteria improvements Stress Test Lead Generator – Launched! Coming soon: 1. MoneyGuidePro Integration – go deep! 2. More polish on site – Icons + Images