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10/23/14 Global-Macro Trading Simulation

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The rally in equities continue to inflict pain on both the short-term and core positions. But in aggregate, the simulation has recovered this week's losses in the equities portfolio from the gains made in the FX account - where the trade setup (from both the fundamental/technical perspective) has been more favorable than equities.
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    October 23, 2014 (Thursday) Since Inception – June 2014: Equity/Futures Account: +14.61% ($11,461,399) FX Currency Account: +34.96% ($13,495,876)  Benchmark: S&P 500: (-0.36%)    Précis: Perhaps the biggest threat to the market is when the music actually stops, when the realization sets in that the panacea isn't in financial engineering, and when the childlike innocence and trust in central banks' ability to fix problems shatters. It's likely that hopes will be crushed as the next cyclical downturn takes inflation, bond yields, and equity valuations to new destructive lows until things become severe enough that central planners outdo the previous method. Rinse, repeat. Down the line, the insane debt levels all around the globe will do everyone in. Such a prognostication is excruciatingly gloomy. Despite this, there will be market swings of excess in both directions and thus I will be able to embrace plenty of opportunities to make money.    Current Size of Equity Positions (for futures and FX positions, please refer to “Platform Snapshot”): IShares MSCI Germany ETF: -120,000 shares = $3,186,000 IShares MSCI South Korea ETF: -65,000 shares = $3,745,900 Market Vetors Junior Gold Miners ETF: +50,000 = $1,574,000 SPDR Gold ETF: +25,000 = $3,081,260 SPDR S&P 500 ETF: -10,000 = $1,951,000 Positions (listed in reverse chronological order): 1) Short S&P 500 (ETF:SPY – initiated 10/9/14) 2) Long Gold Futures (December contract) and Junior Gold Miner ETF:GDXJ) – position initiated on 9/29/14 and GDXJ position on 9/30/14 Flipping the Gold Trade Most of the trades so far for the simulation have been made with the intent to hold them for multiple weeks/months, anticipating the larger moves and turns in the market place. The short gold thesis is something that I've held since 2013 and it's been a core position since the simulation first went live. But I believe there is a possibility of a real sentiment shift regarding the price of gold or at least that the asset class would stop experiencing net outflows given the development in Hong Kong. Gold has performed horribly despite the significant rise in geopolitical tensions and accommodative monetary policies around the world. But what I've learned as a student of the markets is that often correlations or divergences don't happen in an expected way or within an expected time frame and simply that the market doesn't care until it wants to. This is why gold has been a frustrating geopolitical trade. Likely Choppier Seas Ahead It may not feel like it in the last few years, but the world has become a more dangerous and fragmented place. As I wrote in my analysis on the future of the European integration & geopolitics (8/28), since the financial crisis in 2008,    there has been a reversal in the grand march toward globalization/integration since the fall of the iron curtain two decades ago. Nationalism is starting to rear its ugly head again in global hotspots, states are preoccupied with domestic issues and increasingly going back into their shell when it comes to broader international issues, and finally, the unilateral framework of the world order established by the U.S. post-Soviet Union exhibits serious signs of falling apart under the current structure without further restructuring or strengthened commitment by the western world (for which there is no appetite). As a student of history, I like to step back further and look at the confluence of events and all the developments across various themes and regions and tie them altogether. Even if the riots in Hong Kong end peacefully or Putin respects sovereignty of Ukraine, none of it dispels the tensions (or the broader trend of China flexing its muscle in the region or the fact that the old alliances are being broken while new ones are being made) that are cumulatively underneath the surface on a macro level - posing a severe risk to the existing/familiar paradigm. On the monetary side, the world is about to double the size of its sovereign debt load from 2007 supported by little more than half the growth when the debt load was half the size. And the final word has yet to be written on the unprecedented monetary policies in U.S., Europe, and Japan and whether the world's largest economies are in fact playing musical chairs. If the threat of deflation is real, central authority will continue to rely on the printing press to reflate. Thus, perhaps the biggest threat to the market is when the music actually stops, when the realization sets in that the panacea isn't in financial engineering and when the childlike innocence and trust in central banks' ability to fix problems shatters. Hope becomes the biggest enemy of the market as it creates wild swings and extreme positioning. It's likely that hopes will be crushed as the next cyclical downturn takes inflation, bond yields, and equity valuations to new destructive lows until things become severe enough that central planners outdo the previous method. Rinse, repeat. Down the line, the insane debt levels all around the globe will do everyone in. Such a prognostication is excruciatingly gloomy. But I also accept that within it, there will be market swings of excess in both directions and plenty of opportunity to make money in either direction.
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