The document discusses recent market trends and the relationship between two opposing forces - the "Bubble Chain" and the "Deleveraging Chain". The Bubble Chain refers to rising asset prices driven by central bank liquidity, moving from government bonds to corporate credit to equities. However, a Deleveraging Chain is also occurring, shown through weakness in commodities, emerging markets, and gold. These two chains send inconsistent signals about the economy. The document argues one chain will have to give way at some point, allowing for a realignment. It also analyzes gold's recent sharp decline, putting forward several hypotheses for what triggered it and what implications it could have. The author remains uncertain about which

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May 3rd 2013
Fasanara Capital | Investment Outlook
1. Chasing the yield (income stream) in the markets has now become chasing
the rally (capital gains), which is turn is chasing the next bubble. The
Bubble Chain now expanded from Govies and High Yield into US Equities.
2. Current bubble environment reminds us of the price of wanna-be AAA
paper during the 2007 bubble. This time around, it is not Investment
Banks pushing assets into unsustainable territory but Central Banks
themselves - with obviously more margin for error, but not infinitely so.
3. But the Bubble Chain was not alone. Another chain was also in sight in the
past few months, a Deleverage Chain. The lack of GDP impacted the
markets that are still trying to price themselves against real activity (as
opposed to Central Banks liquidity): Commodity Markets, EMs, Gold.
4. The bubble Chain and the Deleveraging Chain send inconsistent signs
on the state of the economy/financial markets: one of the two will have
to give in at some point, allowing for a re-alignment.
5. What has Gold’s ictus taught us? Liquidity-driven bubble-prone
markets are vulnerable to ‘gap risk’. Toppy markets are gapping
markets. Low volumes, margin calls on leverage, uncertain macro,
evaporating liquidity are all concurring to make that ‘gap risk’ larger.
Discontinuities like Gold’s heart attack will increase in frequency.
6. Correction of 20%-30% in the US in the months ahead would be all but
unjustified. Strategy-wise, we are not buyer at these levels, so we take
profits on optional longs too and go flat, waiting for better valuations.
Missing a rally is not as bad as incurring into a potentially severe loss.
7. One thing is to get accustomed to lower returns expectations, one thing
is to get accustomed to outsized risks. In normal markets, it used to be
low risks for low returns, or high risk for high returns. Now we are live
through a high risks for low returns environment.

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Nominal Rallies and the Fallacy of Growth
During the month just past, the market moved along the path of expected outcomes.
- Italy managed to form a grand coalition government, after two months of
inconclusive discussions, and a relief rally was generated out of it, spreading to
the whole of Europe.
- Nominal rallies on Central Banks liquidity were manufactured in the US and
Japan, where equity markets reached new highs.
- Conversely, also as expected, economic fundamentals deteriorated further,
with the bulk of economic indicators signaling slower growth or outright
contraction for most G10 countries.
The disconnect between financial markets and the real economy increased
markedly under the threat of monetary activism and financial repression. A wave
of newly printed Dollars, Japanese yen and British pounds, together with the expectation
of money printing by the ECB (now that Italy is again an eligible recipient of Northern
Euro parental controls), forced bonds to new lows and investors into lower quality
assets with shaky fundamentals, lower and weaker on the capital structure, from
subordinated debt to equity.
Chasing yields has now turned into being afraid of missing the rally. The
complacency we saw in January has now returned to the markets, as Central Banks
represent the only game in town and no clear catalyst is in sight to spoil the party.
To us, chasing the yield (income stream) in the markets has now become chasing
the rally (capital gains), which is turn has become chasing the next bubble. To
visualize the bubble formations deliberately provoked by financial repression policies,
we can reconstruct the following timeline:
Gov
Bonds
Corp
Credit
High
Yield
US
Equity
The Bubble Chain timeline
Summer 2011 End 2011 H1 2012 Q2 2013
First entering bubble territory

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First it was government bonds, since summer 2011, rallying to rock-bottom levels
never seen by market participants, no matter how old they were. In the following
months yields reached their 200-years lows in Germany, 220-years lows in the US, 140-
years lows in Japan (and 500-years lows in Holland). As Central Banks monetized debt
stock and fiscal deficits, closing the funding gap of insolvent governments, the public
sector crowded out the private sector, pushing it into the next bubble.
The next bubble was Corporate Credit and High Yield. HY, in particular, rallied
strongly early in 2012 and all across the year, until some 6X net debt / EBITDA capital
structures could enjoy 5% yield-to-maturity. Low historical default rates arguments
were soon called up by experts to rationalize the event from a fundamental perspective.
And after yields compressed to farcical levels, it was time to alleviate covenants and
impoverish the collateral/recovery value standing behind such yields: lite-covenant new
issues counted for 30% of total issuance in 2012, vs 5% in 2005 (admittedly another
bubble year, in pectore), whilst reaching record volume issuance at $700bn or so (more
than in 2007, yet another infamous bubble year, this time a mature one, and ready to
bust a year later).
From High Yield, as of August 2012, the bubble virus moved onto to front attack
Equities. And equities inflated progressively, first in Europe (on the anticipation of
unlimited money supply by ECB, who had just rediscovered its basic function of lender
of last resort to insolvent southern Europe), then in the US (who was later to reach new
all-time highs in 2013), and finally in Japan (who learned the trick of currency
debasement from the FED and decided to implement it in truly monumental fashion - for
more than 20% of their GDP in one single year).
Whilst equities were reaching new highs, investors competed to outbid the most
subordinated credits. Virtually no country in Emerging Markets wild frontiers space is
left around the world with a 10% yield attached to it (with the notable exceptions of
Venezuela, Argentina and Pakistan). This month we learned that Rwanda was offered
half of their GDP in a new bond issue (heavily over-subscribed) for less than a 7% yield
(video). Earlier this year, Ivory Coast did some similar magic. In the developed markets,
this week BBVA issued a $1.5bn super subordinated paper (Non-Step-Up Non-
Cumulative Contingent Convertible … which really means the 9% coupon could be paid,
but it can also not be paid and then make no big deal about it): total bids exceeded 9bn.
And the list goes on.
As we argued multiple times, ‘the current bubble environment reminds us of the
price of wanna-be AAA paper during the 2007 credit bubble, under the sign-off of
bullet-proof Rating Agencies calculations. At that time too, shorting credit was made
inexpensive. Timing for the bubble to burst was uncertain, as it is now, but inexpensive

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means that it did not matter that much after all. This time around, it is not the
Investment Banks (and their financial engineering) pushing credit into
unsustainable territory but the Central Banks themselves (and their financial
engineering) - with obviously more margin for error, but not infinitely so.
As we argued in February Outlook, ‘perhaps, the name of the game in 2013 is to
make sure to invest into a real rally as opposed to a fake one, or to invest
deliberately into a fake rally, after careful assessment of the costs of hedging it out
of its fake context. We believe that paying attention to the visible and not so visible
facets of Currency Debasement cross-markets holds the key to safely navigating the
macro picture in 2013’.
To complete the picture, joining the race to Currency Debasament, the ECB has
candidly admitted their open-mindedness to negative nominal rates. As we argued
back in January Outlook:
‘’ We could even imagine a situation where the ECB decides to bring nominal
rates to negative territory, quite extraordinarily. Indeed, negative rates would
likely spur repayments of LTRO money by banks in core Europe (from the 30th of
January onwards, loans can be early redeemed), thus further compressing ECB’s
balance sheet, in favor of peripheral Europe. Liquidity would float more efficiently
where it is most needed, leading to a better use of capital from the viewpoint of the
Central Bank. As the issue has been to date one of Liquidity Trap and falling Money
Multipliers (the difference between base money printed by the Central Bank and
M2/M3 aggregate/money supply actually injected into the economy by
Commercial Banks loans to household and businesses and other means) this may
well be a tool being discussed in the closed rooms of the ECB. Destroying the cost
of capital to the extremes might manage to kick start not only loan supply
but also loan demand, which is now minimal, as the private sector fails to
find a reason to borrow money at even low rates. Negative nominal rates may
sound like heresy today, but should market return to full crisis mood, we believe
they are a real possibility. For once, we have comfortably lived through negative
real yields for a good year now. Moreover, Denmark and Switzerland have already
implemented them, in a desperate attempt to preserve their undervalued
currencies. Additionally, after all, we live through the largest policy
experiment of modern financial history, where new records are registered by
the day, and no clear economic theory within Modern Capitalism is left to
relate to (be it Keynesian or monetarist).’’

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The Deleverage Chain timeline
But the Bubble Chain was not alone in the marketplace. While Central Banks were
gambling fast and furious on asset values, provoking inflation in financial levers in the
hope of spillover to the real economy and housing, another chain was also in sight in
the past few months, this time a Deleverage Chain. The lack of GDP is the elephant
in the room of today’s debt-laden economy, and this impacted perhaps the
markets that are still trying to price themselves against real activity (as opposed
to Central Banks’ liquidity): commodity markets and Emerging Markets.
First it was the Gold mining stocks showing signs of stress, as they headed markedly
lower end of last year / earlier on in the year. Shortly afterwards, base metal
commodities felt the hit from expectations of a slowing economy and falling demand
for functional commodities. Growing evidence of China slowing down was then a
powerful accelerator. As if a $8trn economy could grow at 8%+ forever, which would
mean doubling its size in less than 9 years, which would mean creating an output the
size of the whole France every 3/4 years. We have always being skeptical about that,
thus incorporating China Hard Landing Risk Scenario in our road map for fat tail
catalysts, as we do not see the scope for exponential growth in a finite environment. But
the market seems to be surprised by that at every juncture, showing that unreasonable
expectations are structurally built in there (and in the capex plans of the mining
companies around the world for that matter). Other EMs showed their fragility (in
everywhere expect their credit markets), from Russia to Brasil to India and on and on. In
the end, it was time for Gold’s heart attack, as it fell off a cliff while underfunded
financial players panicked to get out of the way until it cleared around a bottom.
Base
Metals
Gold
Miners
Emerging
Markets
Gold
heart
attack
The Deleveraging Symptoms timeline
Jan 2013 Feb 2013 Apr 2013Feb 2013
Showing first weakness in 2013

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Concurrently, in deflationary land, we also recorded declining CPI rates, lower economic
activity indicators and weaker GDPs in most countries.
Let us try out few hypothesis out of recent empirical evidence. Contrary to
conventional wisdom, and recent evidence from the last 20 years, the expansion
in G10 balance sheets seems to be benefiting local markets more than it is
benefiting emerging markets.
It used to be that the credit expansion of developed nations exported inflation and drove
up unit labor costs and asset prices in foreign nations first, before it was having any
impact on local markets (perhaps, as in the process Treasuries got bought by such
foreign nations, which are now crowded out by the FED). Different factors might be at
play, and we do not have space enough here to investigate in details. Amongst others,
the acknowledgement of financial players that EMs failed to bring any diversification
into their portfolios (as they proved to be highly correlated to Development Markets in
the last ten years, and with an higher Beta even, thus expanding volatility for the same
level of expected returns – instead of the diversification benefit one could have wished
for). Also, more in the real economy realm, money printing is specifically targeting
Currency Debasement now, in our opinion, a domestic policy intended at competitive
devaluation and debt monetization: the result is the most desired tentative repatriation
of manufacturing sector in the US, for example, or the competitive advantage for
Japanese tech and automakers over South Korea and other contenders to what is left of
global GDP growth.
Again, we have no space here to expand on the theme. Suffice it to say that we may be
seeing something developing here, thus have to keep monitoring the Deleverage
Chain for more evidence over the coming months.
Bubbles Chains vs Deleverage Chain: re-coupling?
Most obviously, the re-coupling between the bubble Chain and the Deleveraging
Chain might happen with the former coming down, or the latter catching up. Or
they can meet half way. Surely they send inconsistent signs on the state of the
economy/financial markets and we believe that one of the two will have to give in
at some point down the road. One chain may be hinting to the Inflation Scenario we
foresee, the other into the Default Scenario we still see equally possible. Time will tell.
If the deleveraging forces will prevail over the inflationary forces remains to be seen.
We suspect that, at present, the Inflation Scenario will have the lead first.
Currency debasement in an attempt to reach Debt Monetisation is the holy

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mission of G4 governments, as deleverage/deflation brings with it social unrest
and reshuffles of political elites. However, absent a Crystal Ball, we still maintain our
long-term outlook for Multi-Equilibria Markets (as argued extensively in previous
Outlooks Nov 2012 and Jan 2012).
While the two chains fight each other out, we will continue to test our hypothesis for
positive falsification as the situation evolves. Jury is still out. And in uncertain times as
these ones no one is allowed the luxury to have strong convictions.
What has Gold’s ictus taught us? Gapping Markets
Two weeks ago, Gold’s heart stopped beeping for some time. In a matter of few days
Gold lost 30% of its value. As we write, some ground has been recouped, but the damage
is there. As negative as we are on global economies held on the thin air of Central Bank
liquidity, the movement has surely caught us by surprise and has brought us to question
the motives of such interesting market action. Here again the jury is still out, but we
can tentatively think of few possible theories, and expose them for testing in the
coming weeks:
- Deleverage / Deflation hypothesis: Gold’s flash crash comes after months of
weakness in commodity equities on lower GDP expectations, lower current
economic activity (epitomized by China slowing down), and is the precursor of
deflation in other financial asset classes. Implication: If this was true, equity
and HY markets would be catching up, sooner or later, on much lower
valuations.
- Recovery hypothesis: Gold as a safe haven is in no need, as the economy is on
the path of true recovery. Implication: if this was true, government bonds
would be following, sooner or later, on steadily rising yields, in advance of
Central Banks planning their exit strategies.
- Supply / Demand hypothesis: marginal buyers of Gold are on the loose, whilst
sellers are coming up. Cyprus disposing of their gold? There are various ways to
dispose of its gold: to us, selling it to the market in block trades is the least
efficient one, both to the seller and to the recipient of the sale proceeds. That is
why we are skeptical about this. In the world of LTROs, rehyphotecations,
structured Repos and regulatory capital trades/accounting gimmicks, it seems
naïve to consider it the only option for monetization. Moreover, I always thought
marginal supply / demand has less relevance for a ‘Giffen good’ like Gold, whose
demand tends to rise when prices are higher, and fall when prices are lower. The

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stock of Gold is more relevant, and such stock is not tradeable for 80% of the
total.
- Technicals / market structure hypothesis: a large flow of 400tons was
enough to detonate margin calls on an asset class whose ‘financialisation’ is
remindful of oil in 2008. For Oil too, the total volume of derivatives was some 15
times higher than the underlying available for immediate delivery.
Time will tell. For what is worth, we tend to believe the last hypothesis is the more
relevant one, at present. For this reason, we bought on dips, using gold industry
more when proxying our target exposure to equity (in optional format, again).
Gold to us is a currency, not a commodity, and one currency which is in limited supply,
vis-à-vis paper currencies in unlimited open-ended supply. Numbers should matter, at
some point down the road: this year alone $2.5trn are being printed by FED, BoJ, BoE
(ECB might round it up soon), from $1.15trn last year. This compares to net global bond
supply of $2trn only. But they might be able to buy equity too (Japan’s original idea). So
this is also equivalent to almost 50% of Japan’s GDP, 70% of its market cap at the
beginning of the year (55% now), 15% of the US market cap. In comparison, newly mint
gold is valued around 0.12 trn this year. Looking at the stock instead of the flow, the
total value of Gold ever mined is approx $8.1trn (170,000 tons at $48mn each),
compared with total global money supply M3 aggregate of $70trn (and this is calculated
against historically low levels of money multipliers, as current levels of base money
could mean much higher money supply on historical standards). When Gold was last
delinked to paper money (end of Bretton Woods in 1971), the ratio was around 20%.
And we did not even compare Gold to global debt overhang (public and private), at
almost $140trn. This is simple arithmetic. Coming back to raw data helps putting things
in perspective. These numbers might be totally irrelevant in the short term, but it is
worth to keep them in mind when drafting long term financial plans. Now more than
ever, as the paper currency debasement going through globally is accelerating at
exponential speed and is without historical parallels to refer to.
If anything, by the look of the actual demand which was provoked by the fall in prices,
one could argue that Paper Gold plummeted on those days, while Physical Gold never
really weakened that much (as portable gold coins like American Eagles, Canadian
Maple Leafs and Krugerrands became hard to source). The divergence between the
two has now being initiated, pretty much like when Sovereign CDS instruments
started to price in the skepticism over their enforceability (well before their actual
legal ban last – which may itself also see an equivalent in the gold market one day in the
not so distant future, like Executive Order 6102 in 1933, when Roosvelt made it illegal
for Americans to hold gold coins, bars and certificates for investment purposes). Let

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alone the instruments being used to gain exposure to Gold, as counterparty risk and
collateral to one’s contract is questioned (for example, it seems that physical inventory
at COMEX is free falling in 2013).
Paper Gold prices could be manipulated down and never adjust to the ballooning money
supply (once this one picks up speed on base money creation). What it takes is simple
regulation on exchangeability at a predefined rate, for example. However, should a de
facto Gold Exchange Standard be established by market participants increasingly
turning to Gold as a store of value against monetary madness and such holders of Gold
refusing to sell at fictitiously low prices, such manipulation would end up being
highly deflationary, thus preventing the chief target of policymakers: Debt
Monetisation. That is why we believe that any manipulation would be short-lived
and Gold prices, also just paper Gold prices, have a one-way road ahead in the
long term: up.
Irrespective of the right hypothesis, as we stand ready for positive confutation to our
own view, one conclusion seems clear as water: liquidity-driven bubble-prone
markets are vulnerable to sudden digital adjustment and external shocks, when it
is least expected and on the most valuable asset classes too. Toppy markets are
gapping markets. Low volumes, margin calls on levered players, uncertain
environment, evaporating liquidity are all concurring to make that ‘gap risk’
larger. Once a bubble is recognized for what it is, the ‘gap risk’ that comes with it
should be the number one concern of portfolio risk management, these days. As
we argued in several occasion, we are convinced that a truly multi-dimensional Risk
Management macro overlay strategy is paramount to successfully (or just quietly)
navigate financial markets in the current environment. Discontinuities like Gold’s
heart attack will be recurrent events, increasing in frequency, over the next
several quarters/ years. By the time such gap volatility arises, Central Banks may
still be able to provide the parachute (maybe not), but they are likely to be coming
on the scene after the detonation, thus unable to soften the market action in
between.
Now, then, where in the Bubble Chain should we expect the next bust? Gold also
teaches us to expect it where we would least expect it, perhaps.

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Short-Term Strategy: We reduce positions and turn defensive. Potential for
heavy re-pricing is real, especially in the US, if Gold is any guide
We do believe that equities in the US entered bubble territory, as they have joined
the Bubble Chain we visualised above. Which does not mean that they cannot rise
further from here. Indeed, no less than three weeks ago we reiterated our long positions
there, although we transformed cash longs into optional longs (as a dramatically
exasperated skew allowed us to buy 12 calls against one put, symmetrically around the
spot, leaving us with leverage to the upside and a margin for correction of 10% on the
downside). However, at 1600on the SPX we do believe that we are more in bubble
territory and we better remind ourselves we are in one, not to be caught in the
irrational shopping spree of the herd mentality. As we reiterated in past write-ups
obsessively compulsively, we try to differentiate between nominal rallies and real
rallies, between real gains and elusive returns, as we try to ride a rally as long as we
believe we can hedge it out of its fake context. For the Nikkei, this meant going long
Nikkei but hedging the Yen devaluation (which would otherwise have killed the bulk of
the equity rally YTD: 17% vs 13%). For the US, it means to have the means to hedge a
potential re-pricing to the downside, which we now feel is overdue.
At current rates, we prefer to turn defensive and take profit on most longs, as we
believe May may be the month for a correction to take place. Potential upside is
limited, especially in the US, whilst we see more margin for Europe.
US Equities have entered bubble territory
From a technical standpoint, the graph of the S&P has some striking similarity with
Oil in 2008, Gold in 2011, Tech stocks in 2000, and Housing market in 2007. A
fierce determination of the market to buy on any new low, attempting with frustration
to not miss the rally, making the chart go parabolic. We learn with alarm that NYSE
margin debt has reached 2007’s peak levels at $370bn (Chart). The leverage for
equity investors is high and getting higher, a sign of desperation in chasing the
rally (not just the yield). Critically, margin calls can accelerate the demise of even the
best in class, Gold docet. CAPE (cyclically adjusted P/E) are in red flag territory at
above 20, again reminiscent of past market bubbles. The classic P/E ratio is less
informative, as profit margins are at historical highs, which are unsustainable in a
deteriorating economic landscape. Weaker GDPs (real or nominal) will be the sun
shining on the snow of US profit margins. US corporate profits, profit margins and
investors’ dogmatic confidence in them are indeed the bubble inside the bubble,
as they form the fictitious foundation of valuation ratios. Should they compress as

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they will, equities would re-price yet for the same level of average P/E multiples
being priced in.
From a fundamental standpoint, we do not believe in global decoupling in GDP rates
(global recessions as a cascade phenomenon). Most recessions in local markets for
G10 countries have coincided with recessions on a global scale. This was true in the
70’s, in the 80’s, in the 90’s, in 2000, in 2008. As Germany and France are getting
closer to economic contraction, while Japan, UK, Italy and Spain GDP are outright
shrinking, we find it hard to believe that the US will remain unscathed as the year
progresses. Conversely, we remain skeptical of GDP picking up in those countries
anytime soon, as we think of it as the elephant in the room of today’s crisis resolution
policies. International trade linkages are the key transmission channel for recessions to
spread around: 46% of revenues in the S&P is built on foreign sales (60% for the
heavy tech sector). On top of everything, fiscal tightening should be a direct hit to
corporate profits and margins, as the public sector deficit moderates at the expenses of
the corporate sector (whilst household savings rate grows from here).
Again, this is not to say that US equity is on the verge of collapse. However, a steep
correction of 20%-30% in the months ahead would be all but unjustified. Gold
suffered of such heart attack, as liquidity comes and goes, and buying on
borrowed money has no mercy for mild fluctuations, making steep correction
steeper.
Strategy-wise, we are not buyer at these levels, so we take profits on optional
longs too and go flat, in expectation of more attractive valuations. We will not be
chasing yields and rallies at these levels, as the upside is limited and the gap down a
potentially damaging one. Missing a rally is not as bad as incurring into a potentially
severe loss. Basic arithmetic indicates that if one loses 40% on a specific position, he
has to make +67% performance just to go back to where he started. Let alone the
possibility, of fat tail scenarios kicking in on such correction, pushing the house of
cards of financial engineering down with it.
‘In 1720, Sir Isaac Newton owned shares in the South Sea Company, the hottest stock in
England. Sensing that the market was getting out of hand, the great physicist muttered
that he ‘could calculate the motions of the heavenly bodies, but not the madness of people’.
Newton dumped his South Sea shares, pocketing a 100% profit totaling $7,000. But just
months later, swept up in the wild enthusiasm of the market, he jumped back at a much
higher price – and lost 20,000 (or more than $3mn in today’s money). For the rest of his
life, he forbade anyone to speak the words “ South Sea” in his presence’. (from Benjamin
Graham ‘the intelligent investor’).

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Inflection point for our Value Book
For more data points on our Strategy positioning, and how it is derived from our
outlook, please refer to the attached Appendix (Portfolio Buckets). Let us just say that
we are currently effecting yet another inflection point in the Value Book. While we filled
it with export champions Senior Secured High Yield securities (from northern
Europe and the US) at end 2011 / early 2012 (which reached bubble territory shortly
thereafter), while we moved to Equity in September 2012 (missing August rally to be
surer of money printing green light by German Constitutional Court), we now lighten it
up. Few weeks ago we substituted cash longs for optional longs (as we thought the
bubble would inflate some more before correcting hard or soft, quickly or progressively,
and skew-ness in the market allowed for heavily asymmetric profiles). Now we close
optional longs too, waiting for incoming data before reconsidering. We think the
risk of gapping markets is high on historical standards. Not yet a correction in credit
perhaps, but in equity it could well be. Hedging programs run in parallel to our Value
book and we currently are seeking ways to increment them as cheaply as possible.
Accepting lower returns expectations, not so much outsized risks
We acknowledge that we live in a low yield / low expected returns environment. But
one thing is to get accustomed to lower returns, one thing is to get accustomed to
outsized risks. In normal markets, it used to be low risks for low returns, or high risk
for high returns. Now we are live through a high risks for low returns environment.
Our investment strategy attempts at drifting away from this format to construct
low risks for digital zero or high returns. If the deal is CCC credit (overrated by
complacent lagging-indicators Rating Agencies) offered at 5%/6% return, then we
might as well stay in cash (except for tactical short-dated spots). The carry strategy is
today the riskiest it has been in decades, as we move on the thin ice of
experimental Central Bank laboratory. By the same token, the opportunity cost for
calling ourselves out is the smallest, as returns are pale anyway. We might as well
just embrace fully the liquidity trap and financial repression environment. On the other
end, we believe that the current equilibrium is unstable, and seek positioning for
an unsettlement of such equilibrium (Multi-Equilibria Markets). This is what we have
in mind when we seek to amass growing quantities of Cheap Optionality, cross
assets, methodically, via our hedging book (Fat Tail Risk Hedging Programs). High
cross asset correlation and high downside Beta helps in the process of building
this unconventional risk management policy, as you can aim at hedging one asset
class with another for minimization of hedging expenses.

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Paradigm shift in the markets and the need for a unconventional portfolio
management tools
All in all, to us, the paradigm shift in the markets calls for a decisive shift in portfolio
management, along the following key guidelines:
- Portfolio should account for tail scenarios to stay with us for the foreseeable
future, bubble-prone markets on excess liquidity, vulnerable to downside shock
scares. In our world, this is implemented via our proprietary methodology for
Fat Tail Risk Hedging Programs
- Thus, the need for a truly multi-dimensional risk management policy, Hedging
Book, running in parallel to the Value book, whereas this typically belonged to
different silos of the asset management industry (and still is). Hedging means
bothering to spend the cash needed in expensing such overlay.
- Use cross-asset correlation to your advantage , at a time when diversification
(a’ la Markowitz) no longer helps as everything is correlated to everything else,
and on top of things rates can’t fall no more, mathematically, as they did for the
best part of the last 40 years, complicating things for the most widely held
asset class – Credit – and its use within a portfolio.
- Fully invested portfolios are no longer optimal. The Value book can at times
be heavily underinvested so as to adapt to unstable and gapping markets,
whilst replacing cash positions with optional positions and synthetics on low
volatility.
Again, we will send out these write-ups on a monthly basis only (as opposed to weekly
or biweekly as previously was the case). For any intra-month update on the
views/positionings please feel free to get in touch. Also, please be invited to our
Monthly Outlook Presentation on the 9th of May in 55 Grosvenor street.

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What I liked this month
Bundesbank declares 'war' on Mario Draghi bond bail-out at Germany's top court.
Bundesbank unleashed assault on every claim made by ECB to justify OMT. Read
World factory orders flash warning signals despite booming markets Read
How much liquidity is there: JP Morgan Research Research
The global hunt for yield drove investors this morning to offer Rwanda almost half
its GDP as its bond offer was wildly oversubscribed. Video
W-End Readings
Generation jobless. The number of young people out of work globally is nearly as big
as the population of the United States. Read
How Empires Fall. Parallels between the Roman Empire’s demise and today’s
societies. Expansive, sclerotic bureaucracies that lost sight of their purpose… Soon the
institutional culture is one of self-aggrandizement, gaming of departmental targets,
protection of budgets and a collapse of the work ethic to the minimum level needed to
avoid dismissal…. When a storm arises--a conflict with neighbouring powers, an
outbreak of plague, a disastrous drought--the imperial tree falls, not because the
challenge was too great but because the core of the tree had been weakened by the
gradual loss of surplus, purpose, institutional effectiveness, intellectual vigour and
productive investment. Read
The Silent Epidemic In A Broken, Deranged System: Stress. America has hit 90
million people who are not in the workforce. I say few dare mention state-cartels and
debt-serfdom, because once you question these you question the entire debt-based
"growth" that underpins our social order. If people refuse to become debt-serfs, the
system will implode. Read
Financial sector ups and downs and the real sector in the open economy: Up by
the stairs, down by the parachute. Sharp fluctuations in the financial sector have
strongly asymmetric effects, with the majority of real sectors adversely affected by
contractions, but not helped by expansions. Read

16. 16 | P a g e
Long Live China’s Slowdown. Just as China must embrace slower growth as a natural
consequence of its rebalancing imperative, the rest of the world will need to figure out
how to cope when it does. Read
Francesco Filia
CEO & CIO of Fasanara Capital ltd
Mobile: +44 7715420001
E-Mail: francesco.filia@fasanara.com
55 Grosvenor Street
London, W1K 3HY
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