Hayman Global Outlook Texas Investor Summit February 14, 2014
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Table of Contents U.S. Fed Tapering & Improving Trade Balance Japan Abenomics & Quantitative Easing Emerging Markets Slowing Growth & Signs of Stress CONFIDENTIAL - 3 - HAYMAN CAPITAL MANAGEMENT, LP
United States Fed Tapering & Improving Trade Balance CONFIDENTIAL HAYMAN CAPITAL MANAGEMENT, LP
U.S. Federal Reserve is Tapering Asset Purchases On December 18, 2013, the Federal Reserve announced it would taper its monthly asset purchases by $10bn to only $75bn a month; subsequently, on January 29, 2014, the Federal Reserve announced it would taper another $10bn to $65bn a month. A continuation of the policy would see additional asset purchases cease by end of 2014 and stabilize the size of the Federal Reserve s balance sheet. $5,400,000 $4,900,000 $4,400,000 $3,900,000 $3,400,000 $2,900,000 Total Federal Reserve Assets (in millions) Fed Balance Sheet No Taper Dec Taper Trajectory Source: Bloomberg. CONFIDENTIAL - 5 - HAYMAN CAPITAL MANAGEMENT, LP
Revolution of Hydrocarbons in U.S. As U.S. crude oil production has increased dramatically led by the shale oil revolution while U.S. consumption of petroleum and other liquid fuels has reduced off its peak in 2005, U.S. net imports have declined dramatically, a trend likely to continue. Total U.S. Crude Oil Production Total U.S. Shale Oil Production (bpd in thousands) 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 (bpd in thousands) 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2007A 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E U.S. Petroleum & Other Liquid Fuels Consumption vs. Supply U.S. Net Imports of Crude & Petro Products (bpd in 000s) (bpd in millions) 25 20 15 60% 27% 10 5-1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 U.S. Supply U.S. Consumption Source: Bloomberg, US Energy Information Administration, Bank of America ML Research. (bpd in thousands) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000-1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CONFIDENTIAL - 6 - HAYMAN CAPITAL MANAGEMENT, LP
Unconventional Hydrocarbons Are Changing U.S. Trade The revolution in unconventional oil and gas projects that has emerged via fracking of shale have radically increased the hydrocarbon production occurring within the U.S. U.S. crude oil production has returned to levels not seen since the late 1980s. It is one of a series of factors that has narrowed the U.S. current account deficit to the lowest point since the late 1990s. That period coincided with the largest USD rally since Paul Volcker slayed the inflation dragon in the 1980s. (bpd in thousands) 9,500 8,500 7,500 6,500 5,500 4,500 3,500 (%) - (1) (2) (3) (4) (5) Total U.S. Crude Oil Production (bdp in thousands) 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 U.S. Current Account Balance (as % of GDP) (6) (7) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bloomberg. CONFIDENTIAL - 7 - HAYMAN CAPITAL MANAGEMENT, LP
Japan Abenomics & Quantitative Easing CONFIDENTIAL HAYMAN CAPITAL MANAGEMENT, LP
Japanese Current Account Structural Deficit The deterioration in the Japanese balance of trade combined with changes in the level of domestic savings and investment have driven the Japanese Current Account into structural deficit. Japanese Current Account Balance (as % of GDP) 5.50 4.50 3.50 2.50 1.50 0.50 (0.50) (1.50) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Quarterly Annualized Trailing 12 Months Source: Bloomberg. CONFIDENTIAL - 9 - HAYMAN CAPITAL MANAGEMENT, LP
Bank of Japan QE Twice as Aggressive as U.S. Policy The Bank of Japan ( BOJ ) announced plans in April 2013 to double the monetary base through JGB purchases of 60-70 trillion per year, which represents approximately 70% of the amounts purchased by the Fed in absolute terms for an economy 1/3 the size of the U.S., or more than twice as aggressive as U.S. policy. Japanese Aggregate Debt Monetization Bank of Japan Total Assets (JPY Trillions) 190 180 170 160 240 220 200 9-month increase: 36% 21 16 224 150 140 180 160 164 23 130 120 140 60 trillion 110 120 100 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 100 Mar-13 Q2 Increase (Apr-Jun) Q3 Increase (Jul-Sep) Q4 Increase (Oct-Dec) Dec-13 Source: Bloomberg. CONFIDENTIAL - 10 - HAYMAN CAPITAL MANAGEMENT, LP
Real Yield Divergence U.S. vs. Japan Japanese CPI has picked up while nominal yields remain close to all time lows forcing Japanese real yields into negative territory, part of the Bank of Japan s attempt to force a reallocation of capital from JGBs further out on the risk curve. 3.0 2.0 1.0 10-yr Real Yields U.S. vs. Japan At the same time, US inflation remains anchored while growth and the Federal Reserve s tapering of its QE program has led to nominal yields creeping upwards; this has created a long term rising trend of US real yields. The real yield differential has a strong correlation to the value of USD/Yen over time. - (1.0) (2.0) (3.0) Dec-10 Dec-11 Dec-12 Dec-13 US 10yr Real Yield Japan 10yr real Yield 10-yr Real Yield Differential (U.S. vs. Japan) vs. JPY/USD Hayman expects the current divergence to continue and to force further Yen weakening. 3.0 2.0 1.0 - (1.0) (2.0) (3.0) (4.0) 110 105 100 95 90 85 80 75 70 65 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Differential Yen CONFIDENTIAL - 11 - HAYMAN CAPITAL MANAGEMENT, LP
Emerging Markets Slowing Growth & Signs of Stress CONFIDENTIAL HAYMAN CAPITAL MANAGEMENT, LP
Chinese GDP Growth Rate Under Threat Chinese GDP growth has been robust over the last 10 years but has been fueled by massive increases in credit. Total Social Financing (which includes bank asset growth as well as the shadow banking system) continues to expand at unprecedented levels. However, the utility of TSF is slowing which suggests the Chinese GDP growth rate has entered structural decline. Dramatic Growth in Total Social Financing (RMB in Billions) 20,000 16,000 12,000 8,000 4,000-2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Resource commodity based countries with strong trade links to China are likely to be negatively impacted by the slowing rate of growth. 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Declining Marginal Return on Credit Growth 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 RMB of Growth for Each RMB of TSF 3-Yr Average Source: Bloomberg. CONFIDENTIAL - 13 - HAYMAN CAPITAL MANAGEMENT, LP
Turkish Lira Currency Devaluation Emerging markets have come under renewed pressure recently, hurt by concerns about China's economy and the impact of tapering by the U.S. Federal Reserve, especially on those countries with twin deficits (fiscal deficit and current account deficit), including Turkey. As confidence waned amid political instability, the Turkish Lira experienced a significant and rapid devaluation, reaching record low levels, and foreign reserves were depleted by 12% in a one-month period. The Turkish central bank raised its overnight lending rate to 12% from 7.75% percent and the overnight borrowing rate to 8% from 3.5% in late January to defend the Lira. The Lira has begun to stabilize, but the recent devaluation and the aggressive action taken by the Turkish central bank highlight the sensitive state of emerging markets. 2.4 2.3 2.2 2.1 2.0 1.9 1.8 1.7 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% Turkish Lira vs. USD Turkey Overnight Lending Rate Source: Bloomberg. CONFIDENTIAL - 14 - HAYMAN CAPITAL MANAGEMENT, LP
Brazilian Inflation and Interest Rates Brazil has undertaken a 275 basis point hiking cycle to contain inflation. The SELIC rate has risen from a trough of 7.75% to 10.5% with the most recent hike of 50bps coming on January 15, 2014. The forward rates market in Brazil is pricing in about 65bps of hikes between now and January 2015 and 201bps before January 2017. 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% Brazil Y-o-Y CPI (IPCA) Forward expectations of IPCA Y-o-Y inflation have peaked (high in October 2013 of 6.2% to 5.59% now) as well as M-o- M trends (12-month average high in June 2013 of 0.54% to 0.48% in January 2014 official target is 4.5%). Growth in Brazil is cratering, with GDP contracting in Q3 2013 for the first time since 2009. President Dilma s approval ratings have tanked to the low 30 s with an election due October 5, 2014; a boost to growth will need to start now to have any impact before the election. The inflation trajectory is contained, and with growth stalling and global commodity prices unlikely to significantly increase in the near term, it seems likely the hiking cycle is finished or close to being finished. 4.0% 3.5% Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Y-o-Y 12-mth Avg Brazilian Rates Jan 17 Forward vs. Overnight Rate (%) 13 12 11 10 9 8 7 6 Dec-10 Dec-11 Dec-12 Dec-13 January 17 Forward Overnight Deposit Rate Source: Bloomberg. CONFIDENTIAL - 15 - HAYMAN CAPITAL MANAGEMENT, LP
Argentina vs. Historical European Problem Children Population GDP Debt / GDP Current Yield GREECE 11mm $249bn 157% 7.5% IRELAND PORTUGAL 5mm $210bn 118% 11mm $213bn 124% 3.3% 5.0% ARGENTINA 41mm $477bn 38% Source: Bloomberg, Moody s; Note: Current yield is based on 10-yr government bonds (as of 2/12/14). 13.5% CONFIDENTIAL - 16 - HAYMAN CAPITAL MANAGEMENT, LP
Argentina Significant Developments The 2nd Circuit Court of Appeals upheld the lower courts ruling regarding the litigation; however, it declined to lift the stay on Judge Griesa s injunction in order to prevent a prejudicial outcome prior to the possible hearing of an appeal by the Supreme Court of the United States (SCOTUS). Argentina s appeal to be heard en banc by the entire Court of Appeal was denied in late 2013, giving them until mid February 2014 to file a petition for certiorari in the Supreme Court. Argentina has retained a former Solicitor General, Paul Clement, to act as specialist SCOTUS counsel, a step Hayman considers to be a very positive sign for both the likelihood that the appeal will be heard but also for the fortunes of Argentina s case. Following a cabinet reshuffle in the second half of 2013, Kirchner s government placed renewed emphasis on the resolution of outstanding creditor complaints. In October 2013, Argentina began settling outstanding cases at the International Court for the Settlement of Investment Disputes (ICSID). Former Economy Minister Lorenzino was appointed the head of a specialist debt restructuring unit tasked with resolving outstanding issues with the Paris Club as well as ongoing litigation. CONFIDENTIAL - 17 - HAYMAN CAPITAL MANAGEMENT, LP
Argentina What Kirchner Should Do Following the Second Circuit Court of Appeals ruling, Kirchner announced plans to re-open a debt swap offer to holdout creditors on the same terms as those offered in 2005 and 2010. Kirchner is attempting to show Argentina s willingness to negotiate with holdouts and to pay its debts; however, the holdout creditors are not expected to accept the new swap offer given the significant haircut it represents. Kirchner should engage the hold-outs and try to come to a settlement. This will be a complete departure from her current stance of not wanting to pay them one penny more than the previous exchange offers of 2005 and 2010. In fact, she did not even want to re-open these offers but did so to placate the US courts. Settlements ordered by the US Courts are not likely to trip the MFN agreements given to those who have already exchanged bonds in one of the other two offers (93% have exchanged and 7% are holding out). Kirchner should get creative in her settlement talks by offering new par bonds with extended terms (i.e. 20+ years to maturity) and low coupon (i.e. 2%). By doing so, she should be able to satisfy the judgments in the NY courts and save face that she did not burn through significant FX reserves to do so. NML/Singer is not likely to fall for a bond with an NPV of 30c but will likely negotiate for more; he is fully aware of the fact that any settlement with holdouts will likely cause a massive yield compression in all bonds. Any settlement with holdouts will likely allow Argentina access to international capital markets (which they have been shutout from since 2001). This will be extremely beneficial to the 41 million people living in Argentina as well as to the Argentine government. Kirchner should also continue to engage in a more rapid or aggressive devaluation of the official exchange rate (7.8) versus the offshore rate (12.0) which has just recently accelerated. They had allowed a basic linear devaluation from 3.2 in 2008 to 6.5 at the end of 2013 before the rapid devaluation to 7.8 currently in 2014. Argentina has engaged in severe limitations on imports as well as capital controls to avert additional capital flight and continued widening of the current account balance. CONFIDENTIAL - 18 - HAYMAN CAPITAL MANAGEMENT, LP
Argentina Embracing a Needed Devaluation Argentina has been allowing a controlled devaluation of the Peso (ARS) throughout the last few years but significantly increased the rate of depreciation into the end of 2013. On January 23, 2014, Argentina stopped intervening and allowed a 12% devaluation. The unofficial blue dollar rate is closer to 12 ARS to the USD. 8.50 8.00 7.50 7.00 6.50 6.00 5.50 Official Exchange Rate Argentine Peso vs. U.S. Dollar The devaluation will limit imports and encourage delayed exports which will help to reduce the depletion of FX reserves and encourage economic growth. 5.00 4.50 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Source: Bloomberg. CONFIDENTIAL - 19 - HAYMAN CAPITAL MANAGEMENT, LP
Argentina Impact on Foreign Law FX Bonds Following the significant devaluation, foreign law FX bonds traded off recent highs in the low 70s. Argentina Euro Denominated 7.82% Discount Bond Price 75 70 65 60 55 50 45 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Source: Bloomberg. CONFIDENTIAL - 20 - HAYMAN CAPITAL MANAGEMENT, LP