EMMA Program was up 2.4% in March and 10.4% YTD.
February and March were kind to journalists/analysts and macro traders alike. But while journalists/analysts have the luxury of reporting/opining without real risk, we have to turn a profit.
Trading themes developed too fast recently they created too much overlapping effect. Since February we witnessed a range of macro events from the rise of domestic hardliners, escalating geopolitical risk, possible trade wars, to record treasure auction. Multiple price peaks and valleys had been created in short order, and though along the way we scored some big wins but unfortunately also got caught in a few whipsaws and limit moves that eroded our profitability.
All this is very similar to the 2016 election night, played out in slower motion. Then, as now, multiple macro themes emerged, correlations were broken, and the transition was messy. These days we change our opinions like we change our dirty socks - often. Although the jury is still out (and will be for a while) on the net effect of recent development, there are clear signs of longer trends taking shape. We intend to continue exploiting them.
Tax Cuts without Reforms = Major Fiscal Stimulus = Higher Inflation.
This spending gap is to be financed by more treasury sale which increases future debt servicing costs at a time when the Fed is raising rates and unwinding QE. Yields should keep going up.
We align our trades with the man’s worldview and ego - 1950’s version of American prosperity and world pecking order, worship of money and business, self-importance, need for popularity, and underdog mentality.
Rising Geopolitical Tensions
American withdrawal from Middle East creates power vacuum and unstable new alliances that embolden instigators to take risk, creating unintended consequences.
Rising Protectionism and Populism
Trade wars represent a major macro shift. Reduced international cooperation and rising domestic political pressure should affect global growth, currency moves, exports, and political outcomes e.g. Mexican election, soybean, lean hog export to China.
These phenomena do not exert themselves in isolation. In a dynamic, non-linear system, outputs often become inputs; effects on the margin are disproportionately large. Throw in human emotions, it is not easy to be consistently right. As a result, we are revisiting our risk management practice in case we get caught in 1) sudden large moves, 2) sudden correlations change, rendering our hedges ineffective.
From our day-to-day trading, we have observed some rapidly changing correlations, e.g. oil followed supply/demand last year before tracking the stock market in January, then geopolitics took charge since March. Gold was vulnerable to interest rates and US dollar for a long time until recent risk-off sentiment kicked in. One place where this shows up is the widening Gold/Silver price spread. After a process of elimination we found ourselves curiously favoring a long crisis portfolio – gold, oil, and volatility index.
History (and future) is path dependent. Our job as risk manager is to always have a few working theses and to construct a portfolio that is resistant to shocks of binary events. Although the work lately was intense it was truly enjoyable. For all of 2017 we lamented the lack of meaningful signals, these days we feel like we are flying a malfunctioning plane in a storm – all the indicators are going off and they are all important. It doesn’t mean that a crash is imminent, but it is clear that 2018 will not be kind to mediocre managers.
Please email us if you'd like to follow our performance.
Jeff Lee, CTA