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Fed Up Fed 27 February 2014

War Room. Fed Up Fed 27 February 2014. HiddenLevers War Room. CE Credit. Macro Coaching. Idea Generation. Archived webinars. Open Q + A. P resentation deck. Product Updates. Scenario Updates. Fed Up Fed. Market Update Fed Up Fed Scenarios HiddenLevers Use Cases. HiddenLevers.

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Fed Up Fed 27 February 2014

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  1. War Room Fed Up Fed 27 February 2014

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

  3. Fed Up Fed • Market Update • Fed Up Fed • Scenarios • HiddenLevers Use Cases

  4. HiddenLevers Market update

  5. Market Update Chinese Economy Pooped Home Prices Taking a Breather Markets Back in Black for 2014 Commodities Gains Stick

  6. Macro Snapshot Are home prices about to shift down with rates, or vice-versa? Commodities are rebounding, but copper (global indicator) is weak. Unemployment and CPI A-OK.

  7. HiddenLevers Fed up Fed

  8. Fed 2014 – Consensus is Over Yellen inherits fractious Fed, minutes show 19Feb Fed’s Lockhart: Expect a 2015 Rate Hike 19Feb Yellen stresses continued low-rate policy 19Feb Fed’s Fisher: No Rethinking Pace of Taper 14Feb Fed’s Plosser: Taper Process Might Need To Be Quicker 14Feb

  9. Fed 2014 – View on Inflation Inflation should be higher as growth is higher Right now – softer spending + production Inflation in check dollar stable Low inflation = Fed can maintain stimulus Focus on Core inflation, not short term commodities hijinks No inflationary pressure from tech sector doing well Core CPI LOL – Fed worried about unemployment going to low:tight labor market = people get paid more = inflationary sources: HiddenLevers

  10. Fed 2014 – View on Unemployment Fed – no more focus on top line unemployment for policy stance Don’t bank on previous Fed statements about 6.5% threshold Also losing relevancy in 2014 marijuana prohibitions celebrities in advertising Unemployment Lever is losing relevancy already irrelevant to retail expect volatility on days when data comes out headline number not a good snapshot labor market is increasingly complex youth unemployment 20% (still rising) sources: HiddenLevers, Fortune

  11. Fed 2014 – View on Taper Given current trajectory, taper will finish by Q4 2014 (Goldman forecast) Given disagreement rising at the Fed, tread carefully. Depending on market reaction, rates may rise at a measured .05% per QE reduction, or at a more anxious .1% per step 10b/month trimming in place until April/May at least source: BusinessInsider, Kiplinger, MarketWatch

  12. Fed 2014 – View on Interest Rates 2013 projection of 2015 rate hike still holds. Economists’ median forecast is rate hike in March 2015. • FOMC Dec 2013 projections: • 1 year until first rate hike • 3 years until 2% fed rate. source: Fed Reserve Bank SF, KKR

  13. Fed Up Fed – Recap unemployment top line = irrelevant commodities 2014 rise = inflation? too early Inflation is good, but not too much End of QE ---> rate hike 3-6 months of lag likely

  14. HiddenLevers Fed Up Fed – Scenarios

  15. Fed Stress Tests Overview “The … Dodd-Frank Act (DFA) stress tests are regulatory tools the Federal Reserve uses to ensure that financial institutions have … adequate capital.” • Three scenarios released every Nov: • Baseline (Good) • Adverse (Bad) • Severely Adverse (Ugly) • 2013 versus 2014 differences: • Equity downside risk much greater • Risk on = Loftier valuations • Baseline 10y yield forecast raised source: Federal Reserve

  16. Fed Stress Tests 2014: Baseline Scenario Economic growth largely unchanged 10y rates up 120bp by Q1 2016 Q4 2016 rose 4%  4.4% YoY S&P up 10% from current levels source: Federal Reserve, HiddenLevers

  17. Fed Stress Tests 2014: Adverse Scenario Stagflation Not Deflation Economy in slight recession S&P drop raised -25%  -34% 10y rates up almost 300bp by Q1 2016

  18. End of QE - Update Goodbye Outlier Scenarios 10y yields Rates have risen, but so have markets Bond Exodus now priced in CPI lowerunemployment lower  no stagflation HL was wrong Bond Exodus based off 1994 bond crash 10y yields coming in PIMCO dire straits: 2013 bond exodus, 2014 El-Erian exodus source: HiddenLevers

  19. Scenario: End of QE • Not Sure • Easy Money, No Hangover • Good • Economy Back on Track • Bad • Deflation Strikes Back Inflation needs to be monitored. We will introduce a runaway inflation scenario if needed. For now, it is imprudent re QE We are back on track: 10y target = 3% S&P target = 1900  Scenario priced in Taper just began, and commodities spiking due to weather – deflation is paused

  20. HiddenLevers Winners + losers

  21. The Advisor Conundrum Am I too late to the equities rally ? Are bonds a safe harbor or a trap?

  22. Winners + Losers (for the coming rate hike) Summer 2013 bond funds sensitive to rates • Winners • Individual bonds + bond ladders • Hold to maturity in HiddenLevers • Losers • Intermediate + long bond funds • Mortgage REITs, BDCs, utilities source: HiddenLevers

  23. HiddenLevers Use Cases Fed up Fed scenario End of QE macro themesRising Raters Winners scenarioFed Stress Tests portfolio entry Fixed Income scenarioRising Interest Rates

  24. Product Update • Charting Redesign • Economic Data Center – Active Tab • Securities Risk Profile – fund characteristics • Fixed Income – option to hold to maturity • Grendel Integration – single sign on • Coming soon – Risk Monitoring Alpha: • - Run scenarios against whole book of business • - Auto stress test run nightly, summary stats emailed • - Basic dashboard showing most at risk portfolios

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