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Big Trouble in Little China 25 March 2014 War Room
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HiddenLevers War Room Open Q + A Macro Coaching Archived webinars CE Credit Idea Generation Presentation deck Product Updates Scenario Updates
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I.Market Update II.Big Trouble in Little China III.Scenarios IV.HiddenLevers Use Cases Big Trouble in Little China
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HiddenLevers MARKET UPDATE
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Market Update Euro Strength Ukraine = Blip Nikkei Spanked Fed confirms time lag
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Macro Snapshot Consumer confidence climbing faster than retail sales – and NASDAQ is climbing at a pace unseen since the original dot com bubble.
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BIG TROUBLE IN LITTLE CHINA HiddenLevers
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Revisiting HL China Scenario – June 2013 sources: HiddenLevers, ReutersReuters trade deficitJapan analogue Aussie DollarIndustrial metals bearish consolidation We got it rightWe got it wrong -8 +20 …not that wrong We covered many tells
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Chinese Economy – Current Status sources: HiddenLevers, Barclays, Economist, BloombergEconomistBloomberg 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
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Chinese Economy – Current Status 2014 GDP target = 7.5% Analysts see 50/50 chance of below 7% growth. sources: HiddenLevers, Economist, ReutersEconomistReuters 5y performance - 15% property prices falling
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Chinese Economy – Bubbles sources: HiddenLevers, WSJ, ZeroHedge, ReutersWSJZeroHedgeReuters Corporate Debt Defaults 1976 – 2013 0 2014 2 only worse since 2011 Chinese Premier to Private Sector Expect more debt defaults
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Chinese Economy – Bubbles Yep sources: WSJ, Reuters
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Chinese Economy – Currency Volatility source: HiddenLevers, WSJ, Reuters 1, Reuters 2, QuartzWSJReuters 1Reuters 2Quartz 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 doubled 2.Speculator shake out Note to People’s Bank about all those trick moves …great for Kung Fu. for Yuan policy, not so much
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China vs India – Currencies + Equities source: HiddenLevers long term Yuan 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
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identity crisis exporter domestic consumption don’t conflate the BRICS rapid growth good luck finding it in China Big Trouble in Little China – Recap downside watch copper, upside watch consumption
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HiddenLevers CHINA SLOWDOWN – SCENARIOS
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China Slowdown: Soft Landing (priced in) source: Federal Reserve, HiddenLeversFederal Reserve 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
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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
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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 JournalWall Street Journal
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Scenario: China Slowdown Priced In Soft Landing Bad Hard Landing Ugly Recession 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.
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HiddenLevers MACRO CONSEQUENCES
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Goodbye Australia. Good luck to EM. source: HiddenLevers, Financial TimesFinancial 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 Indonesia Brazil Chile Peru -12 +1
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Black Swan – China Socio-Political Crisis China has been #1 in economic growth for decades. At what price? - Press freedoms- Inequality - Human rights- Labor rights - Pollution- Global reputation Black Swan Political unrest in China as a result of recession Global fallout, not just regional Not yet. HiddenLevers will monitor. sources: Forbes, Reporters Without Borders, IHRRIForbesReporters Without BordersIHRRI Global Press Freedom Rankings Global Human Rights Rankings
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HiddenLevers Use Cases scenario Bad News BRICS War Room BRICS hitting bricks War Room China Slowdown scenario Commodities Perfect Storm scenario China Slowdown Big Trouble in Little China Data Center Copper China GDP
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Risk Monitoring Alpha - scenarios run against whole book - automated stress testing run nightly - alerts based on loss tolerance levels breached Charting – Sharing with Titles Live Chat for HL support Coming soon: - Risk Monitoring dashboard - Risk Monitoring alerts to contact prospects Product Update
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