Today, Chairwoman Yellen brilliantly communicated the FOMC’s outlook on further Fed tightenings. She reiterated, the committee “expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate" and added, “economic and financial conditions remain less favorable than they did back at the time of the December FOMC meeting.” Furthermore, by acknowledging the US economy is affected by globalization, the Fed recognizes their monetary policy affects the global economy and how the global economy impacts the US economy. As the Fed further discusses the effects of globalization, they begin to acknowledge the global deflationary pressures on the US economy. Which we view as positive and bullish for asset prices. Janet Yellen further goes on to acknowledge, “the evidence on balance indicates that the economy's "neutral" real rate--that is, the level of the real federal funds rate that would be neither expansionary nor contractionary if the economy was operating near its potential--is likely now close to zero.” After writing our whitepaper Near-Zero Monetary Policy, we believe the natural and optimal rate for short term interest rates in a global economy is 0%.
It is clear from Janet Yellen’s comments she still believes the impact of monetary policy is linear, rather than nonlinear as we have demonstrated, because she believes, “with the federal funds rate so low, the FOMC's ability to use conventional monetary policy to respond to economic disturbances is asymmetric.” In fact, the closer Fed Funds are to 0%, the greater the monetary impact of a basis point move, as demonstrated by our nonlinear equation, (basis point move / fed funds). In short, as Fed Funds get closer to 0%, the nonlinear relationship becomes more evident as a smaller basis point move has the same monetary impact of a large basis point move when Fed Funds are at higher rates. In sum, the nonlinear impact of monetary policy as it approaches zero cancels out the asymmetry relationship that Janet Yellen speaks of. In truth, we see Janet Yellen’s asymmetric argument as an excuse not to tighten too quickly.
Though Janet Yellen’s outlook on further tightenings is potentially bullish for US asset prices, her acknowledgement of the strength of the dollar and how it affects US exports is concerning for the global economy. To reiterate, we believe both Japan and Europe need a weaker currency to combat deflation. Since our export market is fairly small on a relative basis, a strong dollar, which is deflationary, would enable the Fed to generate economic growth by being more accommodative for longer.
Tuesday, March 29th on the close, we bought the S&P at an equivalent index price of 2055. After this trade we are long the S&P, in a synthetic option on the Japanese Nikkei bias to the long side, long the German 10yr bund and short the US 10yr note and 88% invested.
In 2012 modeled performance (7 ½ 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 +72.68% with an 8% Hurdle rate
In 2016, modeled performance net of all fees is +18.74% with a Graduated 10% Hurdle Rate
The Unicorn Macro Fund, LP (“Fund”) operates under the SEC rules of 506(c) of Regulation D. This rule allows general solicitation as long as all purchasers of the Fund are accredited investors and the Fund takes reasonable steps to verify that purchasers are accredited investors. The 506(c) rule benefits funds that perform better than their peers, because for the first time, Regulation D funds can post their results publicly.
The Fund trades both long and short positions in a variety of global markets and its performance is not correlated to any one market. Performance of the model of the Fund is measured by Net Asset Value (NAV) which is net of all fees, is unaudited, and may include the use of estimates. Individual results will vary based on the timing of an investment and past performance is no guarantee of future results and there is a possibility of loss.
The modeled results are based only on capital appreciation from macro style trades. The results do not include dividend reinvestment or any other form of cash flow and are taxed as ordinary income. All trades have a risk/reward objective of at least 3 to 1 and each full position risks no more than 2% of assets. There will be times when market conditions may alter these objectives. Since the inception of the model our trading of the methodology has become more precise.