The Glasnost Macro Fund
Monthly Letter - March 2013
Europe: Between Scylla and
Charybdis?
The latest events are showing how difficult
it is to solve the European debt crisis, even
when only a small country like Cyprus is
involved. Instead of trying to navigate towards
a federal European democracy by avoiding an
undemocratic decision (Scylla?) and deposit
confiscation (Charybdis?), European leaders
choose to unleash both monsters on Cyprus.
Since we use terms from the Greek (how
appropriate!)
mythology, it is also worth
remembering the History of Rome, as the
plan rescuing Cyprus was presented almost on
the day of the Ides of March. The death of
Cesar is regarded as one of the events marking
the transition from the Roman Republic to
the Roman Empire, with Octavian (later
known as Augustus) strengthening his power
by executing senators and knights. In March
2013, nobody has been executed, but there
is no elected government in Italy, with Mario
Monti staying on as Prime Minister probably
until new elections take place later on this
year. One should however remember that Mario
(Augustus?) Monti complained in 2012 that
he was sorry about the Parliaments having to
approve measures taken to rescue European
countries and the Euro....
Politically, Europe is weaker than ever,
with weak national leaders, like in Spain or
France, no leader like in Italy, and the only
strong one, Mrs. Merkel, facing elections later
on this year. This situation might explain why
the rescue of Cyprus was so poorly handled,
with potential social, economic, financial and
geopolitical consequences not taken into account.
It also explains why European leaders are not
willing or ready to move towards a federal
government, which is the only way to preserve
the common currency. This federal government
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would need to be democratic, and would set
up standard restructuring rules for sovereign
and bank debts, fiscal transfers and shared
economic, social and financial targets. If this
step is not taken, the risk of seeing European
people demonstrating and revolting against
European institutions is important, when it will
be understood that European countries, like
Cyprus, have implicitly renounced sovereignty,
and as unemployment is at record levels and
rising.
Huge risks exist in Europe, as voters are
turning themselves to populist and/or extremist
parties, and as the solution to the Cyprus
crisis might well be a template for rescuing
other countries, as Mr. Dijsselbloem, the
new President of the Eurogroup, said before
retracting himself. Even if the situation of
each European country is specific, the fact that
the tax on bank deposits might be seen as a
model can trigger the withdrawal of deposits
from banks in other countries. Germany wanted
to keep the costs of rescuing Cyprus small for
German taxpayers, but the hidden costs of the
Bundesbank Target 2 account at the ECB might
increase sharply if deposits are withdrawn from
banks in peripheral countries. At the same time,
the European banking union still is an illusion.
The following steps of the rescue of Cyprus
might have important consequences:
• Taxing bank deposits: : It is a breach of the
trust citizens had in their banks. Many individuals in other European countries could
withdraw their savings from banks, making
them weaker.
• Imposing capital controls on Cyprus: It is
the end of a currency zone in all but name.
• Liquidity embargo from the ECB: To get
Cyprus to accept the deal, the ECB threatened to impose a liquidity embargo. A democratic country had to submit itself to un-
elected officials by going against its own
Constitution. This will not generate much
love for European institutions from European citizens.
The decision process on Cyprus, even if it
was quite hectic, shows that Germany is getting
tougher. Whether this new attitude will only
last until the elections or not, remains to be seen.
In any case, the fact that Germany can say no
might be key for the region, with a potentially
longer exit from the crisis for stressed countries,
but a more sustainable outlook in the longer
term, if we want to be optimistic!
United States: Think positive!
US economic figures have overall been better
than expected. The wealth effect generated
by higher equities and real estate prices has
supported consumption, which was also less
affected by tax increases. The rally in US
equities has been very steady, and was barely
affected by bad news. However, one might
wonder if the strength of the S&P 500 does not
mean that it is mispricing risks compared to
other assets.
surprises, while Europe is still in bad shape. A
few years ago, the US had the ability of being
the growth engine of the world, but this is no
longer the case. The US economy is only one
driver in a world without powerful global drivers.
Central Banks across the world do not
have the same mandates, the same tools, or
the same creativity. The Bank of Japan is now
taking bold steps to stimulate its economy, while
much is also expected from the new Governor
of the Bank of England. At the same time,
the European Central Bank seems to have run
out of tools, and Mr. Draghi emphasizes what
has been done by the ECB, what governments
should do (structural changes, labor market
flexibility,), and what should be done at the EU
level to supervise banks.
There are two options for investors this
year: either to take more risks, being confident
that the tailwinds from Central Banks will
benefit equities, or to be focused on the long list
of concerns like political dysfunctions, European
crisis, high unemployment, global tensions,
untested policies by Central Banks and their
unknown exit strategies. Central banks have
done their best since 2008 to give governments
time to implement reforms, but they do not
control all factors. For example, the Bank of
Japan can print an unlimited amount of money,
but it has no control over the age pyramid or
over the conflict on the Senkaku Islands.
As we mentioned in some of our monthly
letters, investors are buying equities with more
enthusiasm now, and slowly getting out of
cash or bonds. The new safe heaven trade is
buying US blue chips. These companies are
well diversified, well managed, with a balanced
geographical exposure. Their home country Investment Themes
is pragmatic, learning from mistakes, with a
Central Bank providing plenty of liquidity, and European sovereign debt crisis: The
managing well its currency.
European crisis is far from being over. Deficits
in Spain and France are worse than expected,
The main risk we see for US equities, apart from growth is still negative in several countries and
the European or Korean crisis, is actually too unemployment is reaching record levels. This
much good news, as these will trigger the end of trend is not sustainable, and we expect a bumpy
asset purchases by the Federal Reserve.
road for European markets. We took profit on
our short Euro/USD, and went long EUR/CHF
as the Swiss National Bank has proved its
2013: a new environment with determination to support EUR/CHF close to
current levels.
opportunities and risks
Financial markets in 2013 are starting to be
less correlated, and more focused on local risks
and local opportunities. The Cyprus crisis has
had a large impact on European markets, but
barely affected US ones, for example. There are
growth gaps between regions and countries, with
the US and Japan showing upside economic
m www.gougenheim.com, [email protected]
T +41 555 110 450
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Reflation and monetary stimulus: We
still carry a position on dividend payments of
European corporates. It offers a cautious way to
benefit from their sound financial situation, and
from lower risk premium. For all the reasons
described above, we are also long US Equities.
Market normalization: Current market
uncertainties and volatilities generate favorable
entry points on some strategies. We are buying
on dips US and Global Equities whenever there
is an opportunity.
Global macro relative value:
Differences in growth rates and financial situations
among countries and economic sectors generate
favorable entry points in some strategies. As
such, we remain short volatility on GBP/CAD.
We are also long USD/CHF and EUR/ILS.
m www.gougenheim.com, [email protected]
T +41 555 110 450
B Churerstrasse 47, 8808 Pfäffikon SZ, Switzerland
Portfolio
Our investment process is based on a rigorous and unique approach combining a discretionary
analysis of the environment, quantitative review of markets, and strict risk management rules.
The sizing of each trade is based on its risk/reward profile and on our level of conviction, with a limit on the capital at risk of 0.75% of the Net Asset Value.
In the below table, we reported the paper portfolio performance prior to October 2012
and Glasnost Macro Fund SPC Master Fund (Bloomberg: GLMACMU KY Equity)
performance since October 2012 .
Table 1: Monthly Performance (gross of fees)
2013
2012
Jan
0.90%
Feb
1.06%
Mar
0.09%
1.00%
1
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1.81%
0.18%
1.10%
0.70%
-0.50%
1.05%
-0.21%
-0.05%
-0.67%
Table 2: Performance Contribution - Mar. 2013
Theme
European Sovereign Debt Crisis
EUR/USD
Short Euribor Spread 2013-03/2013-06
Short Euribor Spread 2013-06/2014-06
Reflation & Monetary Stimulus
Long Gold
Long S&P 500
Long Div. Eurostoxx
Long T-Note
Long Schatz
Market Normalization
Taiwan vs. Hang Seng
Short Term Reversal
Global Macro Relative Value
Personal Household vs. Food & Beverages
GBP/CAD
EUR/ILS
Long Call USD/CHF Short Put USD/CHF 2013-05-03
Relative Value Equity Volatilty
Dow Jones vs. Dax
S&P500 vs. Dax
S&P500 vs. Dow Jones
Euribor/Short Sterling
Monthly P&L
+0.19%
+0.16%
-0.00%
+0.03%
+0.03%
+0.02%
-0.01%
+0.01%
+0.01%
+0.00%
-0.11%
-0.09%
-0.02%
-0.02%
+0.04%
-0.02%
-0.28%
+0.18%
-0.01%
+0.05%
+0.03%
+0.02%
-0.03%
Live/Closed
Live
Live
Live
Closed
Live
Live
Closed
Closed
Live
Live
Live
Live
Live
Live
Live
Closed
Closed
Closed
Live
This document is confidential and is intended only for the person to whom it has been delivered. It
is not an offer or solicitation with respect to the purchase or sale of any security. An offering of
interests in The Glasnost Fund SPC (the ”Fund”) will be made only by means of a Confidential
Private Placement Memorandum and only in such jurisdictions where permitted by law. Additional
information regarding the Fund is available from Gougenheim Investments AG upon request.
1 Past
performance is not a guarantee of future results.
m www.gougenheim.com, [email protected]
T +41 555 110 450
B Churerstrasse 47, 8808 Pfäffikon SZ, Switzerland
YTD
2.05%
4.47%