Deutsche Bank Private Wealth Management Currency Wars and QE 2: the implications for global investing Marshall Gittler Chief Strategist, EMEA Place des Bergues 3 CH-1211 Geneve 1 Switzerland marshall. gittler@db. com +41 (0) 22 739 0463 December, 2010
Currency Wars and QE 2 How to fix the global imbalances? Hyperinflation wants to be to as is to Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 2
Currency wars and QE 2 The theoretical impact of QE — Bond Hyperinflation yields fall; yield curve flattens Deflation — Risk premium declines — Yield spreads with corporate bonds compress — Stocks rise; wealth effect boosts spending — Currency declines, exports pick up, economy recovers Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 3
Currency wars and QE 2 Actual impact of QE 2: buy the rumor, sell the fact 2 yr/10 yr curve has steepened since Fed began QE 2 Hyperinflation Fed announces rollover of MBS into Treasuries Deflation Fed hints at QE 2 at Jackson Hole Formal announcement Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 4
Currency wars and QE 2 Same pattern occurred in Japan at first 10 yr yields eventually got down to the lowest level in history Hyperinflation Deflation Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 5
Currency Wars and QE 2 Actual impact of QE 2: supporting equities US stocks responded to Fed’s QE 1. 0 & expectations of 2. 0 Hyperinflation Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 6
Currency Wars and QE 2 Actual impact of QE 2: Currency weakened in advance QE 2 has weakened USD vs majors more than EM currencies Hyperinflation Deflation Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 7
Currency Wars and QE 2 Risks of QE: USD collapse? Hyperinflation Deflation Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 8
Currency Wars and QE 2 Risks of QE: commodity bubble? Hyperinflation Deflation Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 9
Currency Wars and QE 2 Risks of QE: global bubble? Did Japan’s QE ignite a global bubble? If so, what might 3 CBs QE do? Hyperinflation Deflation Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 10
Currency Wars and QE 2 Lower risk premium = search for yield — QE to force investors into riskier assets Deflation Hyperinflation — Money likely to flow to countries with: — a less expansionary monetary policies (e. g. , Eurozone, Switzerland or EM countries); — higher interest rates (e. g. the EM countries); and — higher expected growth rates (e. g. , EM countries) Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 11
Currency Wars and QE 2 EM bonds: not yet in bubble territory EM bonds generally have higher nominal & real yields than DM bonds Hyperinflation Deflation Source: Bloomberg Financial LP, Deutsche Bank Global Investment Solutions. Data as of 6 Dec 2010. Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 12
Currency Wars and QE 2 Other carry trades: DM credit, high-yielding equities — Keeping rates low for long should encourage carry trades Hyperinflation Deflation — We recommend: — FX carry trades — Corporate bonds — Equities with a substantial likelihood of high paybacks — Real estate & REITs Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 13
Currency Wars and QE 2 Gold benefits from a low real rate environment Change in gold price during different real Fed Funds rate regimes Source: T. R. Datastream, Deutsche Bank Global Investment Solutions; Data: Jan. 1971 to Apr. 2010 Deutsche Bank Private Wealth Management Marshall Gittler Israel Business Conference 2010 14
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