1/8/15 macro trading simulation

8/10/2019 1/8/15 Macro Trading Simulation

http://slidepdf.com/reader/full/1815-macro-trading-simulation 1/18

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January 8, 2015 (Thursday)

Since Inception – June 2014:

Equity/Futures Account: +11.23% ($11,212,919)

FX Currency Account: +62.33% ($16,233,254)

Benchmark: S&P 500: +5.36%

Equities/Futures

Year Jun2014 Jul Aug Sep Oct Nov Dec Jan2015 Feb Mar Apr May Tot. Ret

2014-

2015

+2.01% -1.02% +2.02% +6.28% -2.52% +4.29% -1.69% +2.39% +11.23%

FX Currency

Year Jun2014 Jul Aug Sep Oct Nov Dec Jan2015 Feb Mar Apr May Tot. Ret

2014-

2015

-0.15% +4.84% +7.24% +20.17% +6.01% +4.47% +5.58% +2.73% +62.33%



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1/8/15 P&L Breakdown for Equities/Futures Account



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1/8/14 – Platform Snapshot



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Changing Winds(Written on Nov. 17th, 2014)

One subject of history that I’ve really enjoyed since I was a kid was alternative history. “What if” scenarios intrigued

me, such as wondering about an alternate world in which the Battle of Stamford in 1066 never took place before

the Battle of Hastings a month later. William of Normandy losing to King Harold would’ve radically changed the

trajectory of both English and European power. I believe global-macro is largely similar in the sense that imagining

a narrative and envisioning a world different from what we know to be true today requires the same mindset that

derives joy from such an exercise.

Chart 1 (US Dollar Index stretching back to 1985)



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Chart 1 – The charting software, wouldn’t allow me to go back more than to 1985, but in actuality the trend shown

has been intact since the 1970s, when the U.S. formally moved away from the gold standard. If South Korea,

China, Brazil and Mexico were to be included in the weighting of the index, the breakout would have already

occurred (not to mention, the euro and the yen make up 70% of the index weighting).

Chart 2 (Euro-Dollar dating back to 1999 when the currency was introduced)

Chart 2 – The Euro-Dollar breaking all support levels in the last 10 years is becoming a highly probability event –

which also happens to be the level at which the Euro was introduced to the markets in January of 1999.



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Chart 3 (Dollar-Yen since 1985)

Chart 3 – Dollar -Yen has already broken out of the multi-decade slope.

What’s exciting about these long-term charts is that they all hint at a possible liquidation event that also gives rise

to highly probable and favorable risk trades.

Breakdowns or breakouts of this magnitude can trigger liquidation events, as anyone who has bought or sold

within that vast time period could all become underwater on their positions. Take the Euro-Dollar for example.

Around 1.20, you are taking out every level of everyone who has bought in the last ten years. As Japan trashes its



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own currency to support growth or blatantly monetizes its own debt, that will likely force others in the region to

devalue its currency in order to compete with the yen (South Korea - USD/KRW looks very interesting).

An unwind of the decades-long carry trade in which people have borrowed dollars and bought assets abroad – specifically Asia – can have massive ramifications when growth is already fragile in the region. Such disruptions

would likely run parallel to the Asian financial crisis in 1997. Regardless, the U.S. dollar breakout is a high-probability

event and it makes little sense to be long Asian EM equities, including Japan. It’s better to either short or avoid the

second derivative trade of the current monetary policies of the region (equities) and keep the trade simple by

focusing on the currency aspect. Another way to play it would be to be long US-equity and short EM.

Finally, all roads lead back to the shiny stuff. I believe it’s very poss ible that gold will decouple from its traditional

relationship with the U.S. dollar, ironically due to the uncertainty and disruptions that are created as the dollarcontinues its ascent. The currency war among regional Asian nations should also cause the demand for gold to rise

in the region as the forced currency devaluation continues.

I laid out the case in the Nov. 3rd note that gold’s move has always been centered on financial stability. Gold’s

move from $700 to $1900 (from 2008 to 2011) in my opinion was driven by the fear of financial instability and the

perceived inability of central banks to calm the storm. Whether it’s extreme inflation or deflation, start of a bubble

or end of a bubble, the very existence of either extreme is a knock on the system and an erosion of confidence in

central banks. It wasn’t until 2012, after several years of stock markets’ steady rise, that those fears were placated,which also marked the top in gold. And I believe we are again setting up for an environment where gold should

perform like it did in 2008.



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Current Equity Positions (as of 1/5/14 - Monday)iShares MSCI Emerging Markets ETF: -85,000 shares = $3,339,650IShares MSCI Germany ETF: -50,000 shares = $1,407,020

IShares MSCI South Korea ETF: -60,000 shares = $3,317,400

Market Vetors Junior Gold Miners ETF: +95,000 = $2,270,350

SPDR Gold ETF: +32,000 = $3,634,560

Account Cash Value: $11,151,199, Total Exposure: $13,968,980, Leverage: 1.25x

Current FX Positions (as of 1/6/14 - Tuesday)Euro/US Dollar: -16,000,000

US Dollar/Japanese Yen Spot: +18,000,000

US Dollar/Korean Won = +8,000,000

Account Cash Value: $16,134,852, Total Exposure: $42,000,000, Leverage: 2.6x



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Positions (listed in reverse chronological order):

1) Short Emerging Markets (iShares MSCI Emerging Markets ETF – initiated on 11/14) – Reasons detailed in “Changing Winds”

2) Long US Dollar/Korean Won (initiated on 11/14) –

Reasons detailed in “Changing Winds”

3) Short MSCI South Korea (initiated 9/4/14) –

Written on Sept 4th – There are three major headwinds for the country: 1) weaker yen 2) over-reliance on chaebol

and the subsequent lack of diversification, and 3) demographic time-bomb.

Korea is a trading powerhouse. It derives 55% of its GDP from exports and is the seventh largest exporter in the

world. The majority of goods that fall into that export figure are electronic & electric equipment and automobileand transportation equipment. That puts South Korea in direct competition with Japanese multi-nationals that play

in a similar field (the likes of Sony, Toyota, and Honda) who are again getting a renewed boost from the yen’s

weakness, likely to come at the expense of Korean rivals.

This exposes a structural issue within the South Korean economy. The chaebol system (chaebol refers to a family-controlled conglomerate) has made South Korea the 12 th largest economy in the world but it’s also its biggest

threat. In order to bring about quick modernization and economic growth, since the 1960s, the South Korean

government has groomed companies within certain sectors of the economy via protectionist policies and state

subsidies. This path has helped bring rapid growth to South Korea and allowed companies like Samsung, Hyundai,

and LG to become giants on the world stage.

The economy that was ultimately created was one dominated by very few players. Thus, the country’s reliance on

too few companies to be its drivers of growth gambles its economic fate in their hands. Subsequently, the over

dominance by the chaebols stifles competition, creativity, innovation and entrepreneurship (which is



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excruciatingly low for a country of its size) and although the effect of, let’s say, lower creativity is difficult to

quantify, without a doubt the longer-term implications are negative.

To grasp how sorely the Korean economy is in need of diversity, one just needs to look at the components that

make up the weighting of the KOSPI Index. By industry, Electronic & Electric Equipment accounts for 29%, and

KOSPI Transport Equipment accounts for 16%. In total that’s 45%. The top 20 companies with the largest market cap

amount to 49% of the KOSPI Index (Samsung alone accounts for 18%). If you break it down further by chaebol

ownership, for example, Samsung’s Lee family controls 3 out of the 20. More comprehensively, 4chaebol families

(Samsung, Hyundai, LG, and SK) control 12 of the 20 largest companies, or roughly 40%.

Samsung Electronics recently reported disappointing shipment numbers for its flagship Galaxy smartphone. Q2

earnings were disappointing due to declining smartphone sales (revenue declined from 57.46 trillion won to 52.35

trillion won) and the outlook for the second year is likely to be worse. With the expected launch of the iPhone 6 in

September – Apple going after the category of larger screens' turf that Samsung has dominated since the launch

of its Galaxy flagship line and other trinkets such as Apple iWallet – there’s a chance that Samsung will lose atremendous amount of market share.

That should serve as a reminder of how vulnerable South Korea is in terms of how concentrated its economy is

around a few companies. Technology is an extremely competitive space where an advantage or leadership can

quickly turn on its head within a single cycle. Margin compression is the name of the game since all devices quicklybecome commoditized through competition and saturation. It's scary that Samsung Electronics alone makes up

17.5% of the KOSPI or 21% of the assets in the ETF: EWY (Samsung as a holding company roughly accounts for one

quarter of South Korea’s GDP).

As for the auto industry, South Korean companies such as Hyundai and Kia (Hyundai Motors and Hyundai Mobisaccount for 7% of the weighting in the index) have been able to gain market share in the last decade from their

Japanese rivals through aggressive pricing that was partly aided by the strengthening yen. But now the situations

have reversed and Japanese carmakers should be able to compete better on price (every 1% weakening in the

yen boosts Japanese automakers’ operating profits by 2-6% - which is significant given that Toyota exports roughly



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2 million vehicles that it produces domestically).

As a society, the intense focus Koreans put on education produces far more negative outcomes for quality of lifeand demographics. It props up the inexcusably high suicide rate (the highest in the world – 38.3 per 100,000) and

fuels the corruption in its educational system. The intense competition and structural education issues focused on

entrance exams for its prestigious SKY universities have created an arms race where parents are forced to spend

additional disposable income on hours of private lessons outside of normal school hours. It’s normal for Korean

students starting from 12 years of age to have an additional 6 hours of tutoring after school.

All of this fuels additional downward pressure on the birth rate on top of the usual pressures that take place in

developed/developing countries. The cost of raising a child in such a competitive environment is astronomical.

Thus, South Korea’s birthrate is actually lower than Japan and equally South Korea’s working age population is

falling by 1.2% annually (the fastest decline among OECD) and it will see the biggest jump in its elderly population

compared to any other developed nations (61% of the population versus 10% today). In essence, South Korea sees

Japan when it looks into the mirror – in fact, one could make the case that the demographic issues of Korea areworse.

The breakdown of the weighting in the Korean indices and within what the instrument I have access to ETF:EWY (I

hope to explore other ways of expressing this bet), makes it a compelling longer-term short. But what makes the

trade more attractive is that the country as a whole seems to be oblivious to its problems and the image it sees inthe mirror is eerily similar to Japan.

4) Long Gold (SPDR Select ETF:GLD and Junior Gold Miner ETF:GDXJ – position initiated on 9/30) -

Written on Sept 29th – It may not feel like it in the last few years, but the world has become a more dangerous and

fragmented place. As I wrote in my analysis on the future of the European integration & geopolitics (8/28), since

the financial crisis in 2008, there has been a reversal in the grand march toward globalization/integration since the

fall of the iron curtain two decades ago. Nationalism is starting to rear its ugly head again in global hotspots, states



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are preoccupied with domestic issues and increasingly going back into their shell when it comes to broader

international issues, and finally, the unilateral framework of the world order established by the U.S. post-Soviet Union

exhibits serious signs of falling apart under the current structure without further restructuring or strengthenedcommitment by the western world (for which there is no appetite).

On the monetary side, the world is about to double the size of its sovereign debt load from 2007 supported by little

more than half the growth when the debt load was half the size. And the final word has yet to be written on the

unprecedented monetary policies in U.S., Europe, and Japan and whether the world's largest economies are in

fact playing musical chairs. If the threat of deflation is real, central authority will continue to rely on the printingpress to reflate.

Thus, perhaps the biggest threat to the market is when the music actually stops, when the realization sets in that

the panacea isn't in financial engineering and when the childlike innocence and trust in central banks' ability to fix

problems shatters. Hope becomes the biggest enemy of the market as it creates wild swings and extreme

positioning. It's likely that hopes will be crushed as the next cyclical downturn takes inflation, bond yields, andequity valuations to new destructive lows until things become severe enough that central planners outdo the

previous method. Rinse, repeat.

Down the line, the insane debt levels all around the globe will do everyone in. Such a prognostication is

excruciatingly gloomy. But I also accept that within it, there will be market swings of excess in both directions andplenty of opportunity to make money in either direction.

5) Long USD/JPY (initiated 8/20/14)

Written on August 20th – It was only a matter of time before the yen moved lower on the backdrop of dollar

strength as well as the divergence in central banks' policies -- they've been in different stages of easing for quite

some time now. The prospect of additional easing seems more likely to combat the continued lukewarm data

points in Japan. Kuroda may be publicly positive and appear to be excited about Japan’s growth prospects, but



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inspiring confidence is part of his job as he is trying to amplify the effect of his policy – being downbeat would have

the opposite impact.

USD/JPY cross has been on the radar for a while as it's been in a tight trading range since February of this year. The

position was initiated as it broke out of consolidation and given how long it has consolidated, it will retest and likely

close higher above the previous high of 105.43.

It is likely that this move might be the next leg lower for the yen – part of the larger macro move that has occurred

since late 2011.

6) Short German DAX (short ETF:EWG – initiated 8/18/14) –

Revised on Nov. 14th – I still remain short EWG in part because I see limited upside for the Eurozone (explanation

offered on 8/27 update) but also I still worry about Russia’s next move. Russia has largely been removed from

investor’s worry-list, investors have largely ignored the deep rooted suspicion the Russian bear has towards the westsince the Crimean War in 1853 – which officially marked the radical shift in European geopolitics as the continent

went from French containment doctrine to the one focused on containing Russia.

Without firing a single shot, the West has inflicted an economic pain on the country and it has without a doubt has

hurt the country’s ego.

That exactly is the source of my worry. Putin’s ego is essentially a wild card. And I also worry that the West would

take it too far to drive a point: which is to remind Russia that there’s no benefit in territorial expansion through force.

But the risk of that message getting lost as the rouble continues to tumble and as the country starts burning through

its $400 billion reserve. Which seems like a lot, but given that half of the annual budget (which is based on a$100/bbl) is dependent on oil revenues is certain to anger the Russian bear.

And that is bad news since history has long shown that over-punishing a nation can lead to unintended violent

outcome.



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7) Short EUR/USD (initiated 6/17/14) –

Written on June 17th and edited on August 27th – The short euro trade has been the most highly concentrated (andthe longest held) position since I began this trading simulation.

I believe short EUR/USD trade has been one of the few macro trades where all elements of the trade (historical

analysis, policy analysis, economic data, trends/technicals and etc) all line up favorably to be short.

From 8/27:Good trades are often those that have multiple catalysts to push prices in the desired direction. But great trades

are those that right or wrong, will move in that direction anyway.

The short euro trade has been the most highly concentrated position since I began this trading simulation. The

divergence in central banks’ policies (Fed vs. ECB) and the growing divergence in economic data points have

been the main reasons for holding a negative view on the euro against the U.S. dollar since May of this year. Andthat as the economic realities become worse, the chances of QE in the Euro zone will increase. On the flipside,

contrasting Fed policy will strengthen the U.S. currency, further fueling the weakness in the Euro.

Government policy is not providing the solution so the burden will only continue to disproportionately fall on

monetary policy to somehow uncover the panacea for Europe’s woes. In my opinion, the future does not look

bright. I see all of this as part of the larger macro trend that is moving Europe away from the intended goal of

integration.

The sovereign debt crisis in 2011 clearly drew the line between the haves and the have-nots. What is also ironic

about the situation is that the event left both sides bitter. The haves were upset because of the imposed financialobligation to help those who have less (or those who lied and abused the system) and the side on the receiving

end felt they were being overly punished and bullied by those who have more. Those feelings still continue to burn

and run counter to a longer-term integration process.



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Those grievances eventually manifested themselves in domestic politics. All across Europe, parties that have lost

significant ground to their socialist or center-left political adversaries for decades came back to the forefront of

their respective domestic political stages in the first half of this year.

In France, the National Front won the nationwide election for the first time – with nearly 25% of the vote, winning

118 council seats on a local level. In the UK, the UK Independence party won 23 seats – making it a first time in a

century that neither the Conservative nor the Labour Party won the election. In Finland, the newcomer Finns Party

established itself as a legitimate third-party option after winning 13% of the vote. And the Five Star Movement Party

in Italy scored 21% of the vote – just behind the ruling Democratic Party. Even Germany saw newcomersAlternative Party and a neo-nazi party burst onto the political scene.

The narrative was much the same for Netherland, Hungary, and Greece – those who favored leaving the currency

union did extraordinarily well. This laundry list speaks to the political earthquake Europe experienced in its first major

election after the sovereign crisis and to the growing persuasion of the Euroskeptic platform.

Despite what the establishment and spin-doctors in Brussels may say, one could characterize the population as

having one foot over the fence. One final push over and they may never come back. The more radical tools

imposed from Brussels to stave off disintegration may also be the stick that knocks voters to the other side.

It took a great amount of effort in the decades following World War II to convince Europeans of the merits ofEuropean unity and the eventual path toward integration. But in one single swoop, all of that has changed. The

younger generation, which has fleeting ties and experiences to the Great Wars and vague memories of the Iron

Curtain of the Cold War, only knows the failures of the integration experiment.

The worry is that it may be too late to win back the hearts of voters. A further push for integration in order to savethe union will produce even more backlash and build on the momentum Europskeptic parties have already

displayed in the recent election. But doing nothing will also produce a similar outcome as recession, stagnation,

high youth unemployment (and high unemployment in general) will see anger directed at Brussels. It’s a lose -lose

situation.



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There is also one other wild card that may push the euro even lower and that is the situation in Ukraine. Further

escalation will punish the strongest European economy, which does the most amount of business with Russia thananyone else on the continent. And the consequent safety trade will be away from the Euro but into U.S. assets –

which is why EUR/USD pair makes the most sense to short.

What makes the Ukraine situation dangerous is what made the First World War dangerous – nationalism – and the

answer is once again found in history. Ironically, the possession of Ukraine in WWII was fought between Germany

and Russia. When Germany was finally defeated, Stalin subdued all nationalism but that was especially the case inUkraine. From ethnic cleansing (Tartar population in Crimea/Ukraine) to sending all dissenters to the eastern corners

of Sibera (never to be seen again).

In other words, the collapse of the Soviet Union made it inevitable that Ukrainian nationalism would reassert itself

like a coiled spring. Ukrainian statehood and nationalism has never been more embraced than it is now since its

independence. Poroshenko is playing a very dangerous game by branding the conflict as a fight for survival andmatching Russia’s nationalistic war cry with one of Ukraine's own. Initially, I have largely written off the impact of

the conflict as a distraction. However, Poroshenko’s rash pursuit of achieving complete military victory in Donetsk

and Luhansk, has made me somewhat fearful as head-on collision of nationalism often produces unfortunate

outcomes.

In order to understand Russia’s actions, one need to look at what Ukraine historically meant to her. Kiev was in fact

a capital for the early formation of Russian identity. The word Russia derives from the name of the early kingdom,

Kingdom of Rus and its capital of Kiev. West’s condemnation of Russia’s action in Ukraine only reinforces Russia’s

long history of suspicion and the narrative of “Russia against the world”. One must look at the events through the

eyes of a “Russian bear” that has fought the European coalition time after time again througho ut history as theforeign policy of continental Europe shifted from “containing France” to “containing Russia” from 1800s onward.

The most relevant war of them all was the Crimean War in 1853 that Russia lost to a coalition of European

superpowers. Thus, the expulsion of Yanukovych was the earliest reminder of this conflict, the long-standing view

that Russia is being contained and robbed of its possessions.



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A lot of analysis that discounts Russia’s ability to be more of a menace based on potential economi c hardship that

Russia may or may not face is essentially discounting the resilience and the loyalty of the Russian people.

Historically, the “Russian Bear” has been known for its ability to persevere . But beyond that, one should also realize

that under Putin most Russians have enjoyed a significant boost in their standard of living. The chaos during the

liberalization era under Yeltsin and the shame/shock Russians felt when their empire suddenly fell were reversed (at

least it felt that way) when Putin rose to power. And for that the Russian people will be far more loyal than what

voters in the West would be willing to tolerate under similar circumstances.

Going back to the main point, the aggressive nature in which Poroshenko is aiming for quick and total victory in

Luhansk and Donetsk has made the situation a dangerous coin-toss with serious ramifications. The more the conflict

turns into a head-on match between two nationalistic forces, the greater chance that it will escalate into a deadly

struggle where only one remains standing. In that case, it’s another reason to avoid the euro and another reason

to own the U.S. dollar. But since that is the trade I already have on, it has geopolitical insurance (if there is suchthing) built into it.



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Trading Account Rules:1) Starting Account Size:

a. Cash equities/futures/option: $10million

b. Forex: $10million

2)

For the cash account (non-forex), macro views will be reflected using listed equity indexed ETFs with deep liquidity/volume andnet assets of $1 billion or greater in order to best represent the odds of the strategy being scalable (single-stock, company

specific stocks will not be traded).

3) Most of the speculative positions can also be accurately expressed using futures, but because the volume is more constrained at

different times and because the platform fails to take volume into consideration (hence the trades' impact on the actual price),

the use of futures will be limited. Positions that I deem to be core/longer-term would be better expressed via equities. But for

commodities such as crude oil, silver, copper, etc., they will solely be expressed through the futures contract market due to

contango/decay issues that most commodities ETFs suffer.

4) The overall goal is to identify attractive opportunities with goals of holding the positions for multi-week/month periods.

Importance will always be put on liquidity and risk exposure. Also, being able to realistically liquidate all positions by end of

trading day or vice versa, scale up risk, will be an advantage of the strategy.

5) Daily updates will be simple and short, as you’ll receive a time-stamped screenshot of the account summary where detailed

positions and P/L will be all within a single image.

6) Leverage for spot currency position will be limited to 2.5x the underlying cash

Leverage for equity/futures account will be limited to 1.3x the underlying cash – with net aggregate overnight risk exposure (“net

liquid value”) often falling well below that limit.

1/8/15 macro trading simulation

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