European 10yr rates have backed up as corporations raise cheap capital causing US 10yr rates to back up on spread. The US 10yr is tightening to +170bp to the German 10yr Bund and still cheaper than Japanese and European bonds. The US$ is overall stable as the currency move is happening in the EuroYen where the $Yen and Euro$ are both going higher. We see the backup in yields as positive for economic growth and a warning to the Fed if they were to tighten too soon in December. We expect more accommodative talk out of the ECB with suggestions of buying bonds beyond March 2017. We also expect the Fed to keep rates low longer as they wait for the US economy to overheat and create more inflation. In sum, we see the central banks assisting their sovereign economies move towards growth and will not begin to tighten until inflation rises above 2%. Global asset prices should rally during this period while interest rates struggle with increased demand for credit.
The challenge for the central banks is not to tighten too soon to avoid a liquidity crisis from a global sell-off in bonds and equities. As we wrote in our last email,
We do not believe the Federal Reserve should tighten further as the Fed is already artificially keeping fed funds high by paying interest on the excess bank reserves from interest received from its $4 trillion balance sheet. Given the Natural Equilibrium of Interest Rates, fed funds should naturally be at 0% because there is more supply of excess bank reserves (cash) than demand. The risk is, if the Fed were to tighten. Because the Impact of Monetary Policy is nonlinear near zero any tightening of fed funds would have a large impact and hinder the already weak economy. If the Fed were to tighten, we would expect another pull back similar to January 2016 and possibly worse if the negative loop created by artificially high interest rates causes both the bond market and equity market to sell-off creating a liquidity crisis. If such a crisis were to happen, the Federal Reserve with its $4 trillion balance sheet would not be able to add liquidity in a large scale. Therefore, we do not expect the Fed to tighten but rather wait until the US economy uses all its excess bank reserves to drive fed funds higher. Once the supply of excess bank reserves meets demand, fed funds will naturally rise above 0% as the rate paid for fed funds is the implied rate for inflation, the Natural Equilibrium of Interest Rates.
On Thursday, October 27th we bought the S&P at an equivalent index price of 2134. We are currently long two positions in the 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 +31.50% 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.