We took our eye off the ball by ignoring the British Pound and its impact on the Euro$. In the past, our outlook on a stronger US$ was that it was favorable for exporting nations. But it seems both Japan and Europe need a strong US equity market more than a weak currency to support their markets. As interest rates back up as market participants expect a fed tightening in December, global equity markets have been under pressure. Given our work on the Natural Equilibrium of Interest Rates we recognize the Fed is artificially raising interest rates by paying interest on excess bank reserves. Left to their own devices, the excess supply of bank reserves would cause the natural rate of fed funds to gravitate to 0%. Currently, the Fed is using the interest on its $4 trillion balance sheet to pay interest on excess bank reserves. If needed, the Fed has indicated it could pay interest on excess bank reserves as high a 3%, before the Fed begins losing money. The call for normalization has been so pronounced and misunderstood that it has distorted the natural equilibrium of interest rates and the outlook for inflation.

Up until 2009 and the financial crisis, the supply and demand for excess bank reserves has always been at equilibrium at 0. Because of the bloated balance sheet of the Federal Reserve and the lack demand for capital, excess bank reserves have increased to over $2 trillion. This lack of demand for capital is keeping inflation low given modest economic growth and full employment. Not until excess bank reserves settle back down to 0 in a supply and demand equilibrium will we see inflationary pressures again. In fact, in the FOMC minutes for the first time, the Fed recognized, "the apparent low responsiveness of inflation to the rate of labor utilization." The media has interpreted the FOMC minutes to indicate a tightening in December, "as several participants expressed concern that continuing to delay an increase in the target range implied a further divergence from policy benchmarks based on the Committee's past behavior or risked eroding its credibility, especially given that recent economic data had largely corroborated the Committee's economic outlook." If you read the FOMC minutes in their entirety, the minutes indicate the Fed will wait for inflation to rise as full employment in a global economy seems not to be inflationary.

Given our outlook on the Fed, we expect interest rates and the US$ to move lower as US equities strengthen knowing the Fed will not tighten in December and risk a global sell-off. We continue to like US equities over global equities.

On October 6th, we sold our Euro$ long for a small profit at 1.1155 and entered a new Euro$ position at the same price, mistakenly ignoring the turmoil in the British Pound. On October 12th in the morning before the release of the Fed minutes, we stopped ourselves out of our Euro$ long at 1.1050 for a loss and bought the US 10yr at an equivalent yield of 1.795% - yields move in opposite direction of price. Today, October 13th we bought another position in the S&P at 2,123.50 and on the close sold our original position at equivalent index price 2,132.50. Currently, we are long the US 10yr and S&P.

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 +72.68% with an 8% Hurdle rate
In 2016, modeled performance net of all fees is +30.74% with a Graduated 10% Hurdle Rate

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Disclaimer:

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.