11 slides for 2011

Evariste Lefeuvre – Chief Economist for the Americas

+1 212 891 6197
November 2010
 1. QE, Dollar and liquidity/capital Flows
1. The Fed will not go into a QE3 but no tightening ahead to reduce liquidity: will the USD
continue to drive asset prices ?
2. The long end is poised underperform slightly (significant cap due to weak growth ahead – no
double dip yet as the main issues are structural, not cyclical – unemployment, develeraging,
distribution of income, tax system…).

Dollar and risky assets: 3-m onth correlations

SP 500 OIL
GOLD Future T no te
CDX IG
1.0 1.0

0.5 0.5

0.0 0.0

-0.5 -0.5

Sources : Bloomberg
-1.0 -1.0
Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10

2 November 22, 2010

 2. An ECB early exit to kill the Euro Zone ?
1. The ECB willing to get rid of its non-conventional monetary policy measures: in particular its
subsidies to the non-core banking system. At odd with the EFSF ?
2. The normalization in the monetary market does not imply an early tightening: implication for
the EUR/USD

ECB loans to national banks (€, blns

Monetary policies Normalization and EUR/USD

140 900 2-y go v spreads (Natixis)

Greece 2-y go v spreads (Fwrds)
120 P o rtugal 1.2 EUR/USD - D 1.55
800
Spain 1.0 1.50
100 Ireland
700 0.8 1.45
M RO + LTRO - RHS
80 0.6 1.40
600
60 0.4 1.35

500 0.2 1.30

40
0.0 1.25
20 400 -0.2 Sources : Bloomberg 1.20
Sources : Bloomberg -0.4 1.15
0 300
09 10 11 12
05 06 07 08 09 10

3 November 22, 2010

 3. EUR/USD poised to decline ?

1. Surprising resilience to the institutional crisis.

EUR/USD and institutional risk

EUR/USD and central banks balance sheets Co mpo site CDS Index
(2004/2010) 600 EUR/USD - RHS 1.15
First leg of the crisis 1.7
500 1.20
2007/mid-2008 Since March 2009
1.6
1.25
1.5 400
EUR/USD

1.4 1.30
1.3 300
1.35
1.2
1.1 200 1.40
1 Sources : Bloomberg
100 1.45
50 70 90 110 130 150
Mar-10 May-10 Jul-10 Sep-10 Nov-10
FED to ECB balance sheet (100: 2004)

4 November 22, 2010

 4. Inflation of deflation ? What’s the story for Gold ?

1. Overcapacities, global growth risk (policy mix tightening in EM and fiscal adjustment in
advanced countries): major risk of deflation
2. What is the next scapegoat for gold ? Fiat money (USD) ? Sovereign debt restructuring?

Global CPI and gold prices (since 1986) Gold: an opportunity cost approach

Go ld
10-year UST - RHS
8.00 1450 4.00
y = 13.613x 2 - 4.8115x + 2.8164
1400 3.75
6.00
Global CPI (yoy,%)

1350
3.50
1300
4.00 3.25
1250
3.00
2.00 1200
2.75
1150
0.00 1100 2.50
-0.2 0 0.2 0.4 Sources : Bloomberg
1050 2.25
-2.00 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10
6-m onth log return of gold

5 November 22, 2010

 5. Equities: on cheapest market on earth?

1. Returns are in line with our model but PER are cheap in absolute terms and according to our
valuation tools.
2. Divers: M&A, dividends, EM Capex, share repurchases etc…
3. Yield relative comparative advantage against credit
4. Will corporate go organic? Low rates, no double dip, idle cash costly…

35
Stock / credit arbitrage

30
9

8 25
BBB USD Copmposite 5 year

7
20
6

5 15
y = 1.2734x + 2.7043
4 PE
10 UP_BOUND
3 LOW _BOUND

2 5
1 2 3 4 92 94 96 98 00 02 04 06 08 10
SP 500 Div yield

6 November 22, 2010

 6. How will Asia solve the capital inflow / domestic
inflation equation ? China fears ?

1. In spite of (or due to) the Impossible Trinity (free capital flow, pegged exchange rate and
independent monetary policy) EM governments are unwilling to tighten sharply their monetary
policies: serious inflation / over heating risk.

2. Capital controls cannot fix the global imbalances issue: short term tool. The currency war will
highly depend on China’s FX policy. We expect a slow appreciation, hence a further widening of global
imbalances…

USD/KRW and Risk aversion Em erging m arket overperfornance and USD

(100: jan 2010)
Emerging A sia (M SCI) vs. US
1600 100 110 A DXY - RHS 106
1500 104
USD/KRW 80 100
1400 VIX - RHS (inv.) 102
60 90 100
1300

1200 80 98
40
96
1100
70
20 94
1000 Sources : Bloomberg, Natixis
Sources : Bloomberg 60 92
900 0 07 08 09 10
05 06 07 08 09 10

7 November 22, 2010

 7. Commodities: back to fundamentals?

1. “Assetification” and USD trend will give the trend.

2. Yet, China growth poised to remain elevated. Moreover, Supply & Demand is back on track!
3. On the oil side the oversupply remains

Base metals: inventories and prices

Net US crude im ports vs stocks of crude
Crude sto cks (mn bbl, lhs)
1.6
390 Net impo rts (mn b/d, rhs) 11.5
Tin 1.4
2-months change in prices

380 11
1.2 Lead 370
10.5
1
360
Zinc 10
0.8 350
Copper 9.5
Aluminium 0.6 340
9
0.4 330
8.5
0.2 320
Nickel
310 8
0 Sources : Bloomberg
-0.1 -0.05 0 0.05 0.1 300 7.5
2-months inventories changes (against 1-y avge) Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

8 November 22, 2010

 7. Will momentum continue to drive the FX market ?

1. Our Momentum index overperformed in the last months of 2010: liquidity driven.
2. USD/JPY below 80?
3. Inflation threat in EM coupled with monetary policy status quo in G3 should bust carry trades

9 November 22, 2010

 9. Spanish tail risk: debt restructuring and Banking
crisis in Europe?

1. Fiscal balance improvement can hide structural problems. Huge contribution of real estate to
fiscal revenues in the 2000ies. Structural fiscal loss.
2. Core banks hold b 700 USD of assets of peripheral Europe.
3. ECB holds directly approx. 450 EUR of peripheral debt (through MRO, LTRO, direct
purchases…): 6X its capital & reserves.

Current account and fiscal position change betw een Spain: Em ploym ent, real estate prices and
2002 and 2007 household and corporate debt

4 Employment in const ruction (as %of total employment , LH scale)

Real estate prices (2002:1 = 100, RH scale)
SP 3
Household and corporat e debt (as %of GDP, RH scale)
2 AUS
GER 14 240
Fiscal balance

BEL 1
PORT

ITA 0 13 220
-10 -5 -1 0 5 10 200
NTL 12
GRE FRA
-2 180
-3
11
FIN LUX
160
-4 10
140
IRE -5 Sources: Datast ream, INE, Natixis
9 120
Current account
8 100
02 03 04 05 06 07 08 09 10 11

10 November 22, 2010

 10. Where is the next crisis: MUNIs ?

1. The ARRA had a very low purchase multiplier as most of the spending materialize through federal
transfers to state and local government.
2. S&L government suffer from: debt servicing ; federal mandates and medicare co-payments ;
pensions contributions ; compensations of state workers ; falling revenues (stamp duties on real estate
transactions…) ; creative finance… Broadly an ALM mismatch…
3. Options: higher taxes, layoffs, end of federal program spending, federal government subsidies…
default…
4. Liquidity, outstanding breakdown…

Distribution of revenue by tax types (2006)

Changes in receipts and purchases of goods and
services of States and Local governm ents
(b USD annual rate) Federal State Local
receipts ex ARRA
Property Tax 0 3 97
100 General Sales Tax 0 80 20
80 Purchases Selective/ excise tax 36 52 12
60
recepiuts ex medicaid Individual income tax 80 19 2
40
20
Corporate income tax 87 12 1
0 Motor vehicle license 0 93 7
-20 Social insurance/ret 100 0 0
-40 Other taxtes 54 30 16
-60 Total taxes 67 20 13
-80
-100
Sources: Bruegel.org
8

9
09

10
08

09

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l- 0
-0
-0

-0

-0

-1
p-

p-
n-

n-
ov

ov
ay
ar

ar
Ju

Ju
Ja

Ja
Se

Se
M

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N

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11 November 22, 2010

 11. 2011 tail risks

1. Commodities: The return of backwardation?

.7
2. Asset allocation: will the equity/bond correlation mean revert ? CONTANGO_CL
.6
3. EM growth to decelerate sharply? Side effect of Chinese UP_BOUND_CL
LOW_BOUND_CL
.5
tightening ? EM outflows?
4. End-of-Q2-driven UST bear market ? .4

5. Widespread social unrest? Political / Sovereign risk? .3

6. Protectionism? .2

7. Any candidate for EMU exit ? .1

8. Deflation spread ? .0

9. KRW/CNY/JPY raw ? -.1

10. Capital shortage ? (Basel III) -.2

2007 2008 2009 2010

11. Any suggestion welcome…

Correlation btw SP500 return and UST 10-year
Risk aversion and long term interest rates change (w eekly frequency)

1.0 1.0
4.0 10

20 0.5 0.5
3.5

30 0.0 0.0
3.0
40
10-Y UST -0.5 -0.5
2.5 VIX - inverted scale (RHS)
50
Sources : Bloomberg, Nat ixis
Sources : Bloomberg, NATIXIS
-1.0 -1.0
2.0 60 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
09 10

12 November 22, 2010

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13 November 22, 2010