War Room - January 2014

1. Eurozone Renaissance?
30 January 2014
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3. I. Market Update
II. Eurozone Renaissance?
III. Scenarios
IV. HiddenLevers Use Cases
War Room

4. HiddenLevers
MARKET UPDATE

5. Market Update
EM – Secret’s Out
Risk is Back
Diminishing QE
Tech Banged Up

6. Macro Snapshot
US GDP and unemployment improving, but labor participation, CPI, and EM
currencies are weak. Nat gas climb = Polar Vortex. Are these prices sustainable?

7. EUROPE RENAISSANCE?
HiddenLevers

8. Eurozone - Overview
Eurozone = second biggest economy
Eurozone population = 330 million
Unemployed population = 20 million
France + Germany + Italy + Spain =
Historically 75% of Eurozone economy
2
330m
20m
75
sources: HiddenLevers, Wikipedia

9. Europe – Historical Scenario Overview
Two Euro Crisis Periods:
• Nov 2009 – June 2010
• Oct 2011 – July 2012
The 2011/2012 cycle
ended with Greek default
and bailout.
Summer 2011 correction
driven by other factors
(US downgrade etc)
Euro Crisis I
Euro Crisis II:
Greek Default
The Greek default impacted the Euro and commodities, but little S&P downside

10. Europe Macro Picture: Unemployment
sources: Eurostat, Deutsche Welle
Youth unemployment
exceeds 50% in Spain,
Greece, and Hungary,
and exceeds 25% in
most of the EU.
Japan
USA
EU
Euro Zone
Euro Zone unemployment is
still over 12%, and
significantly higher than the
broader EU, United States,
and Japan.

11. Europe Macro Picture: GDP + Currencies
• Germany recovered strongly from
financial crisis, but recent growth
on par with France (in dumpster)
• UK is accelerating, 2.8% Q4 2013 is
almost on par with US
• Despite growth weakness, major
EU currencies outperformed USD
in 2013
And demand is flat.
source: HiddenLevers

12. Europe – Market Activity
The S&P 500 has
outperformed all
major European
markets since 2009.
Germany’s DAX kept pace
with S&P in 2013, while
France (CAC 40) and UK
(FTSE 100) lagged behind.
source: HiddenLevers

13. Europe – Focus on PIIGS
Unemployment
stuck at 20% +
for years
Spain Housing
still falling into
2015
2014 = turnaround year for trouble makers
PIIGS ETFs have
high volatility
source: HiddenLevers, Zero Hedge, Reuters, Irish Times, CBC News, Economist, Economist Data Center
2014 expected GDP 2013 Performance
Portugal + 0.8% n/a n/a
Italy + 0.7% EWI + 26%
Ireland + 2.1% EIRL + 42%
Greece + 0.6% GREK + 26%
Spain + 1.0% EWP + 29%
Eurozone + 1.4% IEV + 22%
PIIGS GDP as % of Eurozone GDP

14. Europe – Comparison to USA
source: HiddenLevers, Guardian UK, Financial Times , Forbes, Country Economy, Eurostat
5y chart – Europe Markets recovery lags US
• double-dip +
severity
• record level
unemployment
• brutal fiscal
tightening
• no decision-maker
accountability
• political agendas
• poor corporate
credit
Recovery Comparison
USA Eurozone
2008 - 0.3% + 0.4%
2009 - 2.8% - 4.4%
2010 + 2.5% + 2.0%
2011 + 1.8% + 1.6%
2012 + 2.8% - 0.7%
2013 + 1.9% - 0.4%
2014 (exp) + 2.8% + 1.4%
What prevents
US style
bounce back
in Eurozone?
114%
28%

15. Eurozone GDP clinging to positive EU won’t repeat US comeback
PIIGS in healthier place
Europe Renaissance? – Recap
Greek default = correct analogue

16. HiddenLevers
EUROPE RENAISSANCE? – SCENARIOS

17. Good: Bona Fide Recovery
source: HiddenLevers, Reuters, Irish Times, CBC News, Economist,
EU equities + Economy both catch up to USA
No countries in
depression
No removal of
stimulus by ECB
Margins rising as
EUR rises
PIIGS
must
participate
Monetary policy
is now
supportive

18. Mild: Recovery amidst US Correction
PIIGS
need not
participate
source: HiddenLevers
Europe Currencies + Markets rising, US not so much
USA
risk back on table,
no US boost
Germany + France
playing catch up
Markets Recovery
NOT
Economic Recovery

19. Bad: Euro Trashed
No abatement
in
debt + austerity
source: HiddenLevers, Guardian UK, Wall Street Journal
Still many skeletons in EUR closet
Default in
Euro Zone
still possible
EU banks
counterparty risk
comes to fruition
outlier scenario
political regime
changes in
Germany
Merkel re-elected, Sept 2013

20. Scenario: Eurozone Renaissance?
Good
Bona Fide
Recovery
Mild
Recovery
Amidst US
Correction
Bad
Euro Trashed
European growth
accelerates, adding to
global recovery and
boosting US markets.
European equity
markets play catch-up,
but real growth is
slow, with no carry-
over benefit to US.
German politics or
other black swan
enables debt crisis to
come back into play

21. HiddenLevers
WINNERS + LOSERS
winner loser

22. Find it on HiddenLevers
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Scenario Notes
Macro Themes
Economic
Data
Center
War Room
Eurozone Renaissance?

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