After reading the FOMC minutes we do not see the Fed tightening until inflation approaches 2% and the economy reaches full employment. However, if the Fed were to tighten - the yield curve would flatten reflecting the increased deflation in the US economy. We continue to believe the only way for the Fed to tighten and keep a steep yield curve to support the banking industry, is for the Fed to unwind its $4 trillion balance sheet.
The beginning of another white paper…
Quantitative monetary policy enables the central banks to have “unlimited capital” at their disposal to support their economies in times of crisis. However, for quantitative monetary policy to be effective long term, the quantitative capital added to the balance sheet must be removed - unwound. If the central banks wait until their bonds mature on their balance sheet, at minimum they no longer have “unlimited capital” during a time of crisis and run the short term risk of another George Soros challenging the central banks. In the 21st century, there are more macroprudential tools at the central bank's disposal to combat a large trader but not enough tools to combat a market challenging a central bank's bloated balance sheet. In short, once quantitative easing is done, the central banks must begin to unwind the QE to insure the central banks have “unlimited capital” in another time of crisis or run the risk of losing credibility.
If the Fed were to begin to unwind its balance sheet, the process of permanently removing $4 trillion would strengthen the US dollar which is in direct opposition of the US Treasury. Currently, Treasury Secretary Jack Lew does not support currency devaluation of the Yen and/or Euro. We continue to believe, a strong US dollar is needed to support the global economy. But until then, any tightening of short term interest rates by the Fed will be deflationary and cause the yield curve to flatten further stressing the banking industry.
As we mentioned in our last email, “Our thesis is lack of demand - deflation - is driving asset prices and interest rates lower.” Until the Fed recognizes “excess supply” rather than “excess demand” is the challenge for the central banks in the 21st century, any talk of tightening of short term interest rates will be counter-productive and deflationary.
Wednesday, May 18th, on the close, we bought US 10yr notes at equivalent yield of 1.855%, yields move in opposite direction to price. We are currently long US 10yr notes and and short the Japanese Nikkei and S&P and are 75% 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 +26.54% 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.