Education of a Speculator: Steen's Chronicle: Enjoy it while it last..........

Dear All,

This weeks Stress Indicators attached, and below a summary of my outlook plus expected path from here.

Steen

· Monetary Policy: We expect the policy makers central banks to engage in more QE not less, hence we see repricing of risk HIGHER into end of September, early October, but then economic slow-down will start to materialize. (See below)

· FOMC/Fed in September (17/18^th). Tapering will probably happen in September but its size and time frame will be limited. Consensus right now: 10 bln. USD of reduction in "support" – Probably 5 bln. in Treasury and 5 bln. in Mortgage backed. The "new information" will be the 2016 Fed projection which is released. I expect Fed staff to lower significantly the immediate growth and keep the long-term projections (otherwise the debt to gdp explode!)

· Economics: We see zero bound growth in Germany and US next year based on fiscal constraints, worse employment situation, falling disposable income(higher rates, energy prices, lower house prices), significantly lower EMG growth, and geopolitical risk and non-reforms. Furthermore the EMG crisis is a function of much lower current account surplus' which for Asia and BRICs have fallen from surplus' of 5-7% prior to crisis to now zero. This raises marginal cost of capital but also lower export markets for countries like Germany.

· Strategy wise- Beta – The conservative part of the investment) I have moved 80% to fixed income despite consensus of higher rates in market. This is NOT a short-term call but 3% in US Dollar over next 12 month could offer higher potential return than being fully invested into a market place which at best is fairly priced, at worst is in a bubble which the central banks is finally starting to acknowledge.

· Fixed Income call: Now/soon may be the most opportune time to purchase longer duration fixed-income securities in the past two years. Bond yields began to move higher in early May when signs of growth firmed up, the Fed turned hawkish, but long yields rose sharply after Ben Bernanke's maladroit comments regarding the possibility of tapering. The change in the 10-yr bond (on a daily close basis) was from 1.6255 on May 2 to 2.9937 on September 5 -- an almost 85 percent rise (basis-wise) in four months. This was the largest CYCLICAL increase in the last 50 years. Although some factors exacerbated the rise in yields (e.g., the preference of President Obama for Larry Summers as replacement for Bernanke), the fact remains that this large increase in rates was NOT justified by any measure insofar as paltry improvement in CYCLICAL (growth) factors are concerned. History also shows that after bond yields peaked, the subsequent fall in rates ranges from 27 to 45 percent cent (the median being 36 percent). If indeed we have seen the peak at circa 3.00%, then a 36 percent fall will bring yields to the area of 2.25% on the basis of CYCLICAL factors alone.But if we add to that the collective evidence of a likely slowdown in 2014, there is no reaon why we can't see yields again in the range of 1.5%-1-25% by late 2014.

· Strategy Alpha:

1. We expect lower US Dollar based on need for EMG countries through their link to have some easing of conditions – The US Dollar index (80% EURUSD) could fall to 78-79,00 from 82.00 now.

2. Long Gold. Re-pricing of tapering and its impact will make case for lower rates for longer putting pressure on "real rates" down, which is main driver of gold. Long Gold via options. See 1575 by Q4 after our 1200 call in Outrageous Predictions was reached.

3. We also like Corn unlike last year the crop estimates too high and agriculture is setting up nicely for bounce.

4. Long MXN – Mexico remain the "best of the worst"stories in EMG – hit 13.50 now trading down to 13.10 – should we be right on Fed then this could trade significantly lower.

5. Stocks. Been long risk deep into September now only long through options. The perfect set-up for us would be high in S&P around 1770/1800 before we fall back. The re-pricing could give new winds, but the calendar in Q4 is fully loaded with geo-political risks: German election, Italy w. Berlousconi, budget process, FOMC, Syria and generally September and October two months to avoid.

Below some supporting charts:

Fed overconfidence on growth: