November 6, 2014 (Thursday

)

Since Inception – June 2014:
Equity/Futures Account: +6.76% ($10,676,499)
FX Currency Account: +51.46% ($15,145,756)

Benchmark: S&P 500: +3.78%

Equities/Futures

Year  

Jan  

Feb  

Mar  

Apr  

May  

Jun  

Jul  

Aug  

Sep  

Oct  

Nov  

Dec  

YTD  

2014  

 

 

 

 

 

+2.01%  

-­‐1.02%  

+2.02%  

+6.28%  

-­‐2.52%  

-­‐0.004%  

 

+6.76%  

FX Currency

Year  

Jan  

Feb  

Mar  

Apr  

May  

Jun  

Jul  

Aug  

Sep  

Oct  

Nov  

Dec  

YTD  

2014  

 

 

 

 

 

-­‐0.15%  

+4.84%  

+7.24%  

+20.17%  

+6.01%  

+5.74%  

 

+51.46%  

11/6/14 – P&L Breakdown

Trade Note from 11/3/14 -

Seeing as the gold-related positions were single-handedly responsible for the horrific loss in October, it cast doubt
on my mind as to whether I’m way too early on the trade or whether I’m completely wrong.
My interpretation of gold’s move has always been that it’s centered on financial stability and is an indictment of
central banks’ perceived ability to calm the storm. Hence why focusing on QE itself as the reason to be bullish is
missing the bigger picture. Gold’s move from $700 to $1900 (from 2008 to 2011) in my opinion was driven by the
fear of financial instability and the perception that central banks had lost control in handling the crisis. It wasn’t
until 2012, after several years of stock markets’ steady rise, that those fears were placated. In other words, the
argument could be made that QE had the opposite effect on the expected price of gold.
What made the drawdown in October scary was that those exact fears reared their ugly heads again and
appeared credible. What allayed those fears was when Bullard hinted that the end of QE should be delayed. The
day Bullard made that comment corresponds with when the market made a sharp U-turn. Not because the
market believed that the Fed would immediately scrap its plan to end QE in the Oct 29th meeting, but because the
belief that the Fed won’t let the stock market fall (in control) was somehow restored. From Yellen to Draghi to
Kuroda, statements such as “whatever it takes” feed into the myth that central banks are all powerful. But nothing
in this world works that way, and as with anything, the pendulum will eventually swing back in the other direction.
The BOJ’s decision to revamp QE last Friday, as much as the markets cheered its actions, actually delivers a
psychological punch to the discussion of whether QE is the right tool. The 5-4 split decision only reinforces the
ongoing doubt about the efficacy of quantitative easing. I wrote back in August’s positions summary (found below
in #3) that Kuroda has been a cheerleader for the policy despite being well aware that the data doesn’t support
his upbeat outlook. Hence Friday’s action is equivalent to waging a thermal nuclear war by wholly monetizing its
own debt, or as millennials like to say, “YOLO”. With that, Japan wrestled and won back the perception that
central banks are in control. But it also reiterated to many that deflationary pressure might be exported out of
Japan, which also brought out sellers of gold who may hold it as purely an inflation hedge.

But if continued deflationary pressures can be equated to delivering psychological punches to the notion of
“central bank omnipotence,” as it is a reminder of the inefficacy of its policies, it’s difficult to see how the selling of
gold by those who don’t see inflation is actually a death nail for the asset class. The longer the deflationary
pressures exist and growth remains anemic, eventually that will again breed the fears of instability and that central
bankers don’t have the level of control that we thought. That will take us back to the environment gold was in
between 2008 and 2011 – this time without hope and without a central bank solution. Ultimately, gold is an
indictment on the central banks.
So I ask myself, which scenario is scarier considering my current positions?: one in which the central bankers end up
holding onto their divinity or one in which they fall from grace?
What’s certain at this point is that the devaluation of both the yen and the euro will continue, and those positions
will be more than enough to ease pressure on the current losses incurred in the equity and futures gold positions, so
I don’t necessarily have to wait for the entire thesis to play out to profit from it.
Current Size of Equity Positions (as of 10/31/14)
IShares MSCI Germany ETF: -120,000 shares = $3,227,400
IShares MSCI South Korea ETF: -65,000 shares = $3,738,800
Market Vetors Junior Gold Miners ETF: +50,000 = $1,294,000
SPDR Gold ETF: +25,000 = $2,805,240
SPDR S&P 500 ETF: Covered = $0
Account Cash Value: $10,681,379, Total Exposure: $11,225,490, Leverage: 1.05x
Current Size of FX Positions (as of 10/31/14)
Euro/USDollar Spot: -19,000,000
US Dollar/Japanese Yen Spot: +21,000,000
Account Cash Value: $14,324,761, Total Exposure: $40,000,000, Leverage: 2.79x

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.

Positions (listed in reverse chronological order):
1) 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.
Structuring the Trade
Technically and price action-wise, this does seem like a rather low-risk/high-reward trade given that gold is at the
lower end of the trading range with strong support between $1180-$1200 level and the asset currently trading near
that at $1215. Given that positioning in gold is at extreme lows on the long-side, there's significant upside to this
trade.
The way I plan to structure the trade is through December gold futures contract and through ETF: GDXJ. The junior
gold miners were punished more severely during the downdraft in the price of gold (appropriately so) for taking on

less feasible projects based on lofty future assumptions on the price of gold. If the gold price rises, juniors should see
more relief than the majors.
The trade will constitute about $2 million in exposure on the futures side and additional exposure through equity
positions in GLD and GDXJ. Altogether, it will makeup roughly about a quarter of all positioning (or quarter of cash
value of the account).
2) Short MSCI South Korea (initiated 9/4/14) – Three major headwinds for the country: 1) weaker yen 2) overreliance on chaebol and the subsequent lack of diversification, and 3) demographic time-bomb.
Korea is a trading powerhouse. It derives 55% of its GDP from exports and is the seventh largest exporter in the
world. The majority of goods that fall into that export figure are electronic & electric equipment and automobile
and transportation equipment. That puts South Korea in direct competition with Japanese multi-nationals that play
in a similar field (the likes of Sony, Toyota, and Honda) who are again getting a renewed boost from the yen’s
weakness, likely to come at the expense of Korean rivals.
This exposes a structural issue within the South Korean economy. The chaebol system (chaebol refers to a familycontrolled conglomerate) has made South Korea the 12th largest economy in the world but it’s also its biggest
threat. In order to bring about quick modernization and economic growth, since the 1960s, the South Korean
government has groomed companies within certain sectors of the economy via protectionist policies and state
subsidies. This path has helped bring rapid growth to South Korea and allowed companies like Samsung, Hyundai,
and LG to become giants on the world stage.
The economy that was ultimately created was one dominated by very few players. Thus, the country’s reliance on
too few companies to be its drivers of growth gambles its economic fate in their hands. Subsequently, the over
dominance by the chaebols stifles competition, creativity, innovation and entrepreneurship (which is
excruciatingly low for a country of its size) and although the effect of, let’s say, lower creativity is difficult to
quantify, without a doubt the longer-term implications are negative.
To grasp how sorely the Korean economy is in need of diversity, one just needs to look at the components that

make up the weighting of the KOSPI Index. By industry, Electronic & Electric Equipment accounts for 29%, and
KOSPI Transport Equipment accounts for 16%. In total that’s 45%. The top 20 companies with the largest market cap
amount to 49% of the KOSPI Index (Samsung alone accounts for 18%). If you break it down further by chaebol
ownership, for example, Samsung’s Lee family controls 3 out of the 20. More comprehensively, 4chaebol families
(Samsung, Hyundai, LG, and SK) control 12 of the 20 largest companies, or roughly 40%.
Samsung Electronics recently reported disappointing shipment numbers for its flagship Galaxy smartphone. Q2
earnings were disappointing due to declining smartphone sales (revenue declined from 57.46 trillion won to 52.35
trillion won) and the outlook for the second year is likely to be worse. With the expected launch of the iPhone 6 in
September – Apple going after the category of larger screens' turf that Samsung has dominated since the launch
of its Galaxy flagship line and other trinkets such as Apple iWallet – there’s a chance that Samsung will lose a
tremendous amount of market share.
That should serve as a reminder of how vulnerable South Korea is in terms of how concentrated its economy is
around a few companies. Technology is an extremely competitive space where an advantage or leadership can
quickly turn on its head within a single cycle. Margin compression is the name of the game since all devices quickly
become commoditized through competition and saturation. It's scary that Samsung Electronics alone makes up
17.5% of the KOSPI or 21% of the assets in the ETF: EWY (Samsung as a holding company roughly accounts for one
quarter of South Korea’s GDP).
As for the auto industry, South Korean companies such as Hyundai and Kia (Hyundai Motors and Hyundai Mobis
account for 7% of the weighting in the index) have been able to gain market share in the last decade from their
Japanese rivals through aggressive pricing that was partly aided by the strengthening yen. But now the situations
have reversed and Japanese carmakers should be able to compete better on price (every 1% weakening in the
yen boosts Japanese automakers’ operating profits by 2-6% - which is significant given that Toyota exports roughly
2 million vehicles that it produces domestically).
As a society, the intense focus Koreans put on education produces far more negative outcomes for quality of life
and demographics. It props up the inexcusably high suicide rate (the highest in the world – 38.3 per 100,000) and

fuels the corruption in its educational system. The intense competition and structural education issues focused on
entrance exams for its prestigious SKY universities have created an arms race where parents are forced to spend
additional disposable income on hours of private lessons outside of normal school hours. It’s normal for Korean
students starting from 12 years of age to have an additional 6 hours of tutoring after school.
All of this fuels additional downward pressure on the birth rate on top of the usual pressures that take place in
developed/developing countries. The cost of raising a child in such a competitive environment is astronomical.
Thus, South Korea’s birthrate is actually lower than Japan and equally South Korea’s working age population is
falling by 1.2% annually (the fastest decline among OECD) and it will see the biggest jump in its elderly population
compared to any other developed nations (61% of the population versus 10% today). In essence, South Korea sees
Japan when it looks into the mirror – in fact, one could make the case that the demographic issues of Korea are
worse.
The breakdown of the weighting in the Korean indices and within what the instrument I have access to ETF:EWY (I
hope to explore other ways of expressing this bet), makes it a compelling longer-term short. But what makes the
trade more attractive is that the country as a whole seems to be oblivious to its problems and the image it sees in
the mirror is eerily similar to Japan.
3) Long USD/JPY (initiated 8/20/14) - it was only a matter of time before the yen moved lower on the backdrop of
dollar strength as well as the divergence in central banks' policies -- they've been in different stages of easing for
quite some time now. The prospect of additional easing seems more likely to combat the continued lukewarm
data points in Japan. Kuroda may be publicly positive and appear to be excited about Japan’s growth prospects,
but inspiring confidence is part of his job as he is trying to amplify the effect of his policy – being downbeat would
have the opposite impact.
USD/JPY cross has been on the radar for a while as it's been in a tight trading range since February of this year. The
position was initiated as it broke out of consolidation and given how long it has consolidated, it will retest and likely
close higher above the previous high of 105.43.

It is likely that this move might be the next leg lower for the yen – part of the larger macro move that has occurred
since late 2011.
4) Short German DAX (short ETF:EWG – initiated 8/18/14) – Flipped the position from being long and shorted the
DAX as insurance against Putin (a peace deal where Putin washes his hands clean of Ukraine goes against all that I
know about Russian history and the man I studied in college – an extended analysis on this was written for 8/27
update and have been archived on scribd) and against continuing deterioration in economic conditions in the
Eurozone. The bet is that it is more likely for the DAX to break 9000 than it is likely to hold the line.
Finally, to reference George R. Martin’s Game of Thrones, “Winter is coming” and Putin will likely play one of his
trump cards with his most prized weapon – natural gas.
5) Short EUR/USD (initiated 6/17/14) – The short euro trade has been the most highly concentrated (and the longest
held) position since I began this trading simulation. The divergence in central banks’ policies (Fed vs. ECB) and the
growing divergence in economic data points have been the main reasons for holding a negative view on the
euro against the U.S. dollar since May of this year.
I believe short EUR/USD trade has been one of the few macro trades where all elements of the trade (historical
analysis, policy analysis, economic data, trends/technicals and etc) all line up favorably to be short.
Now that the ECB is on this unprecedented path, the path of least resistance to fix the European malaise will
continue to disproportionately fall on monetary policy and not on government policy/structural reform.
As I wrote in the detailed commentary about the changing political winds in Europe (8/27/14 update), the end
game for the Euro zone continues to look bleak and, frankly, even in the absence of the ABS purchase
announcement, in the long-run, shorting the Euro against the dollar certainly is a great way to reflect the long-term
negative prospect for the currency’s future.

11/6/14 – Platform Snapshot (Optimized for viewing on iPhone, iPad, or Android)

Nikkei and JPY

USD/JPY

US 10-Yr Note Yield

DAX

MSCI South Korea (EWY)

Trading Account Rules:
1) Starting Account Size:
a. Cash equities/futures/option: $10million
b. Forex: $10million
2) For the cash account (non-forex), macro views will be reflected using listed equity indexed ETFs with deep liquidity/volume and
net assets of $1 billion or greater in order to best represent the odds of the strategy being scalable (single-stock, company
specific stocks will not be traded).
3) Most of the speculative positions can also be accurately expressed using futures, but because the volume is more constrained at
different times and because the platform fails to take volume into consideration (hence the trades' impact on the actual price),
the use of futures will be limited. Positions that I deem to be core/longer-term would be better expressed via equities. But for
commodities such as crude oil, silver, copper, etc., they will solely be expressed through the futures contract market due to
contango/decay issues that most commodities ETFs suffer.
4) The overall goal is to identify attractive opportunities with goals of holding the positions for multi-week/month periods.
Importance will always be put on liquidity and risk exposure. Also, being able to realistically liquidate all positions by end of
trading day or vice versa, scale up risk, will be an advantage of the strategy.

5) Daily updates will be simple and short, as you’ll receive a time-stamped screenshot of the account summary where detailed
positions and P/L will be all within a single image.

6) Leverage for spot currency position will be limited to 2.5x the underlying cash

Leverage for equity/futures account will be limited to 1.3x the underlying cash – with net aggregate overnight risk exposure (“net
liquid value”) often falling well below that limit.