Central bank quantitative easing is proving to be one of the most powerful tools the central banks have for combating deflation and promoting speculation to stimulate the economy. The risk for the central banks are not to create a speculative bubble that has the potential to deflate quickly or even worse “pop”. QE was first developed by the US Federal Reserve which used the monetary policy to responsibly counterbalance the deflationary pressures created from a mis-priced and misused asset-backed market in housing. In short, QE provided demand for assets when investment capital dried up in the private sector.

In China, QE has not been used responsibly but rather used to stimulate speculation to create wealth for the upper-middle class. What we are witnessing is the Bank of China and the central party trying to move from an export economy to an economy driven from domestic wealth. In short, China has tried to create wealth through a real estate boom and thereafter a strong stock market. Unfortunately, China moved too quickly and created a speculative bubble that the global market now needs to deal with.

During a speculative bubble, capital dries up quickly as lower prices erase leveraged purchasing power. The downward loop becomes contagious as assets prices plummet, as leveraged positions try to make margin calls. We have already witnessed the sell-off in commodity prices as China no longer demands raw materials to build housing and Chinese speculators are proving not to be long term holders of stocks. The question is, how contagious is China’s speculative bubble? Luckily, China has made it difficult for foreigners to invest in China therefore any selling pressure in the global markets are limited to Chinese speculators selling assets to make margin calls. Therefore, it is important in the US to determine where there is value rather than speculate on a further sell-off.

Last evening, we bought the S&P at an equivalent index price of 2024 but a close below 2010 and we would sell our long. Given this new position, we are long the S&P, EuroYen and short the German bund and are 75% invested.

Modeled performance since inception, May 2012, net of all fees is +158.46%
In 2012 modeled performance (7 ˝ mo.) net of all fees was +12.46% with a 10% Hurdle rate
In 2013, modeled performance net of all fees was +19.73% with a 10% Hurdle rate
In 2014, modeled performance net of all fees was +56.42% with a 10% Hurdle rate
In 2015, modeled performance net of all fees is 25.24% with an 8% Hurdle rate