Profiting as the Hangover Begins

Nandu Narayanan, Chief Investment OfficerTrident Investment Management

Presentation roadmap

• Macro reality is not benign• Asset markets are divorced from reality• Catalysts that could end the global liquidity party and bring on

the hangover• Opportunities for profit

Global reality is not pleasant

• Global economy is weak despite years of stimulus• Debt levels are high globally and continue to rise• Inflation is low and real debt burdens are increasing• Political tensions are rising because most voters have lost out

in the recovery of the last few years

Global economy is weak

Year Developed Countries

Emerging Countries

World

2010 2.5 7.3 3.8

2011 1.3 6.1 3.0

2012 1.4 4.6 2.5

2013 1.3 4.6 2.4

2014* 1.7 4.1 3.0

Source: JP Morgan, Global Data Watch* Estimate

GDP Growth Rates (%)

Economic growth rates are low despite years of stimulus

Source: Bloomberg

3/961/9

711/9

79/9

87/9

95/0

03/0

11/0

211/0

29/0

37/0

45/0

53/0

61/0

711/0

79/0

87/0

95/1

03/1

11/1

211/1

29/1

3-5.0

-2.5

0.0

2.5

5.0

7.5

Global GDP Growth (Quarterly %)

Global economy is weak

Unemployment is higher today than in previous recessions

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20135.5

6.0

6.5

7.0

7.5

8.0

8.5

Global unemployment rate

Rate

(%)

Source: Organization for Economic Co-operation and Development

Debt levels are high and rising

Source: This Time is Different, Carmen Reinhart, Kenneth Rogoff

Inflation is very low

High and rising debt levels and low inflation pave the road to default

8/00 8/01 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/12 8/13-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

CPI (year on year % change)

EURO US CHINA Japan UK

Source: Bloomberg

Political tensions are rising

• The Middle East is in flames (Syria, Gaza, Iraq, Egypt, Libya) and there is no resolution in sight.

• The Ukraine conflict has caused a total breakdown in cooperative efforts among the major competing global powers to solve problems.

• Western sanctions are increasing tensions on the world’s U.S. dollar-based trading system with a potential breakdown increasingly likely.

Source: Deutsche Bank

Key risks

Asset markets are divorced from reality

• The technology bubble is back Snapchat valued at $3.6 billion on paper with zero revenues More Facebook advertising agencies than regular ones in the U.S. Fab.com, with a broken business model, has raised $336 million

• Subprime lending is back Subprime share of new auto loans is 34%, almost a record Amount financed per vehicle and loan terms both at all-time highs

• Junk bond yields at lowest levels ever Spreads at 400 basis points, matching 2007 levels 10-year funding available at 6.5% as opposed to 9% in 2007 due to lower Treasury yields

• Barely any S&P top-line growth for the last two years

• The euphoria in the markets is almost entirely because of excessively easy global monetary policy

Catalysts for change

• U.S. Federal Reserve will soon be ending its quantitative easing • The political situation in Europe is likely to become more unstable

(Scotland vote, Catalan independence referendum in November 2014)

• Chinese growth is likely to slow markedly stimulus appears unlikely• More printing by Japan and/or Europe might mean currency wars• The instability in Ukraine and the Middle East could worsen and

disrupt oil supplies and global trade

Opportunities for profit

• Buy fixed income– Rates are very high in Norway, Sweden, South Korea, Australia, but not supported by fundamentals– Canada, the U.K. and the U.S. project significant rate increases – however, this will not materialize

• Buy Japanese equities with the yen hedged out– More Bank of Japan printing is imminent, and asset prices will reflate in Japan

• Short select developed country currencies against other developed and emerging currencies

– The yen and euro seem vulnerable given policy shifts – go long Norwegian krone, Canadian dollar, Swedish krone, Indian rupee

• Short developed country junk bonds and be prepared to buy developing country bonds

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