Big Trouble in Little China 25 March 2014

1. War Room Big Trouble in Little China 25 March 2014

2. HiddenLevers War Room CE Credit Macro Coaching Idea Generation Archived webinars Open Q + A Presentation deck Product Updates Scenario Updates

3. Big Trouble in Little China • Market Update • Big Trouble in Little China • Scenarios • HiddenLevers Use Cases

4. HiddenLevers Market update

5. Market Update Ukraine = Blip Fed confirms time lag Euro Strength Nikkei Spanked

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

7. HiddenLevers Big Trouble in Little China

8. Revisiting HL China Scenario – June 2013 We got it right We got it wrong bearish consolidation …not that wrong +20 -8 We covered many tells Aussie Dollar Industrial metals Japan analogue trade deficit sources: HiddenLevers, Reuters

9. Chinese Economy – Current Status 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 sources: HiddenLevers, Barclays, Economist, Bloomberg

10. Chinese Economy – Current Status 5y performance - 15% property prices falling 2014 GDP target = 7.5% Analysts see 50/50 chance of below 7% growth. sources: HiddenLevers, Economist, Reuters

11. Chinese Economy – Bubbles Corporate Debt Defaults 1976 – 2013 0 2014 2 Chinese Premier to Private Sector Expect more debt defaults only worse since 2011 sources: HiddenLevers, WSJ, ZeroHedge, Reuters

12. Chinese Economy – Bubbles Yep sources: WSJ, Reuters

13. Note to People’s Bank about all those trick moves …great for Kung Fu. for Yuan policy, not so much Chinese Economy – Currency Volatility Big Changes in 2014 Trading band doubled Speculator shake out 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,” source: HiddenLevers, WSJ, Reuters 1 , Reuters 2, Quartz

14. China vs India – Currencies + Equities long term Yuan up, Rupee down source: HiddenLevers Changing of the Guard? Indian equities recovered with S+P despite drop in Rupee Despite GDP Growth, Chinese equities down 60% since 2007

15. Big Trouble in Little China – Recap downside watch copper, upside watch consumption rapid growth good luck finding it in China don’t conflate the BRICS identity crisis exporter  domestic consumption

16. HiddenLevers China slowdown – Scenarios

17. China Slowdown: Soft Landing (priced in) 7% GDP Growth in China China A-shares down 60% from highs. Is that bottom? 100% priced-in based on copper price trend 2013 China GDP over 7% despite slowing housing, exports Govt. goal (via policy changes) is in 7-8% range source: Federal Reserve, HiddenLevers

18. China Slowdown: Hard Landing 4-5% GDP Growth in China Falling property prices accelerate in big cities Growth falls to levels not seen since 1990 – below 5% Govt. letting Yuan fall to avoid hard landing USD strengthens: helps importers, hits commodities

19. China Slowdown: Recession Negative Growth in China 0% growth last occurred in ‘76 – before most in China were born Wall Street analysts predict Chinese QE if recession looms Profound effects on commodities – like 2008 Global recession likely, China = ½ of world growth Likely to spark another bond rally in US via lower rates sources: HiddenLevers, Wall Street Journal

20. 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.

21. HiddenLevers Macro consequences

22. Goodbye Australia. Good luck to EM. 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 vulnerableIndonesia Brazil Chile Peru +1 -12 source: HiddenLevers, Financial Times

23. Black Swan – China Socio-Political Crisis Black Swan Political unrest in China as a result of recession Global fallout, not just regional Not yet. HiddenLevers will monitor. China has been #1 in economic growth for decades. At what price? - Press freedoms - Inequality - Human rights - Labor rights - Pollution - Global reputation Global Press Freedom Rankings Global Human Rights Rankings sources: Forbes, Reporters Without Borders, IHRRI

24. HiddenLevers Use Cases Big Trouble in Little China scenario China Slowdown scenarioCommodities Perfect Storm Data CenterCopperChina GDP scenarioBad News BRICS War Room BRICS hitting bricks War Room China Slowdown

25. Product Update • 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