Alternative Markets Update And Macro Outlook August 2019

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RESEARCH PERSPECTIVE VOL.114 AUGUST 2019 Alternative Markets Update August 2019 The hedge fund industry experienced a decline since its performance of H1 2019. However, the performance remains positive with both of our cross-asset indices achieving a gain of 0.41% in July. The decline of interest rates worldwide helps to increase the attractivity of hedge funds in a currently highly unstable economic environment. Our best performing strategies have not changed, since the last month. Bitcoin Altcoin Actively Managed is still the best performing strategy in 2019 with a YTD of 167.90%, despite the loss of 20.40% in July 2019. The Discretionary Global Macro strategy achieved a YTD of 39.24%, followed by three US equity strategies, including Long/Short US Equities Disruptive Technologies, Long-only US Equities High Conviction and Equities US Activist Event Driven.  Macro Outlook August 2019 by Aquila Markets “It’s our currency, but its your Problem.” John Connally, US Treasury Secretary, 1971.   I periodically mention this famous phrase from Nixon’s treasury secretary, which was said to the other members of the G10 in 1971 in Rome after Nixon had taken the dollar off the Gold Standard and ushered in the current system of floating global exchange rates. Upon reflection of the events of the past few days, and finishing reading Fear, by Bob Woodward (which I regret not reading sooner and I would encourage anyone who hasn’t read it to read it as soon as possible), I have come to realise that Donald Trump as the President of the United States is a defining moment. This is an individual who the world has to come realise has no plan, has no plan to make a plan, has no strategic objectives that are in any way realistic, who’s basic understanding of economics is illiterate nonsense. He has no concept of the link of US/Global security to the US economy, nor does he care to learn. He is surrounded by sycophants who now will not challenge him, unlike the original cabinet which tried to. In a nutshell, he does not recognise, nor wishes to recognise, what the US Dollar represents to both the United States, and the Globe at large.   This has been bought into sharp focus in the past week. China has finally had enough of pandering to him, and is calling him out. The G7 meeting was effectively a slightly lame Biarritz beach party, where many of the very significant global issues that could have been on the agenda were lost in an argument about Amazonian fires and insults to wives. In the middle of this, Trump’s stream of consciousness made the world recognise several things; EVERYTHING he says is nonsense. It may be the case that he makes statements that are in fact true, but this is a coincidence. He makes no effort to be truthful, so it is impossible to handicap his statements.   For this reason, arguably the most interesting speech given at Jackson Hole was by Mark Carney, where he openly verbalised what the world has clearly been talking about behind closed doors for some time- we need a new currency, to act as a corner stone for global commerce. An new reserve currency, not controlled by any one nation, but a currency for all. More importantly, it is NOT the US Dollar. After all, the world has realised that the US system of government, with a constitution that can election an executive who can act in ways that harm both his own nation and the globe, does not work. And so, having the key medium of exchange for global commerce effectively controlled by this nation, is now intolerable.   It is for this reason, that the US administration’s negotiating style is being called by the counterpoints. As a poker player, when you know the guy across the table just bluffs every hand, you wait for a decent set up and call him hard. When you know that the rest of the table knows this too, and they are going to do the same, it becomes even easier. China has made it clear they have had enough of the trying to deal with Trump, whilst Macron walked out of a joint press conference leaving Trump alone. In response to his sudden desire to talk with Iran, President Rouhani rules out a meeting until the US lifts sanctions. In short, they know that trying to engage in dialogue with the US is pointless. Meanwhile, Kim continues to test fire missiles, clearly supported by the Chinese.   An increasing pace of replacing the US Dollar as the global reserve currency seems inevitable, but the US and its media seems to believe that this will not happen, and US exceptionalism will triumph. I don’t believe it will, and I believe we have crossed a rubicon in terms of global reliance on the US Dollar. The consequence for the US is stark; who will fund the budget deficits that have allowed the US to live beyond its means for so long? In the medium to long term, it is clear we can make an increasingly strong case for a structural Dollar decline. Additionally, as the Fed cuts rates hard as I believe they will (whether they should is another matter), this is likely to encourage SAVING, and not consumption, a phenomenon we have seen in both Japan and Europe as we cross the zero bound of interest rates. This is simply not supportive of growth.   Reverting to a note I wrote last week; that variance in markets will increase, I increasingly believe that a weaker dollar in the medium term, as opposed to being vol negative, is likely to be vol supportive. This is significant, as it suggests the risk reversal should not be so skewed to USD calls (please see volometer below), but that implied vols will increase on both sides of the distribution.   In the near term – I continue to favour owning gamma and weighted vega in AUD, NZD, GBP, and JPY families. The near term chop created by the algos, provide variance to cover decay bills. Additionally, I have tried hard to think of a bull case for equities, given the global data flow, leading indicator weakness in things like US transports, geopolitics and I struggle. I continue to favour downside plays in equity indices either as owning puts to hedge long portfolios, or via put spreads for risk reward defined bets to the downside. Figure 1a: Risk & Volatility of Currency Pairs: August 2019, Source: Aquila Markets Figure 1b: Risk & Volatility of Currency Pairs: August 2019, Source: Aquila Markets The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Stone Mountain Capital LTD. Readers should refer to the Disclaimer. Chris Eagle Aquila Markets E : chris.eagle@aquilamarkets.com M : +447712885718   Chris is an experienced executive who runs his own consultancy service which focuses on business development, market structure, financial market analysis and training. He worked on the sell-side for twenty years. He left Jefferies in 2015, where he worked in the Global Foreign Exchange and was Head of FX product distribution. This perspective is neither an offer to sell nor a solicitation of an offer to buy an interest in any investment or advisory service by Stone Mountain Capital LTD. For queries or for further information around our research and advisory services please contact email: research@stonemountain-capital.com under Tel.: +442037228175.     STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London and Swiss representative office. We are advising 30+ best in class single hedge fund and fund of fund managers across equity, credit, and tactical trading (global macro and CTAs). In private equity and private debt, we advise 10+ general partners across the sectors real estate, infrastructure / real assets and capital relief trades (CRT) by structuring funding vehicles, rating advisory and private placements. As per 26th April 2019, Stone Mountain Capital has total alternative Assets under Advisory (AuA) of US$ 53.8 billion in hedge funds and private assets. 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