Portfolio Update – August 2023

The other day I was reading the first newsletter I sent, back in August 2022, and I was surprised by how generic it looked like, and it made me smile to see how much I’ve progressed in just 12 months of disciplined focus. This progress wouldn’t have been possible without the opportunity to engage with you and other professionals on platforms like Twitter, where we’ve had the chance to exchange ideas and insights.

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United States

While I’ve always said that all government statistics are made-up equally, and so it doesn’t really matter when it comes down to trading the markets, it’s becoming increasingly challenging to rely on United States data with confidence. For example, one of the major metrics to track for the labor data is the NFP, whose latest release surprised the markets adding 187,000 jobs. However, while superficially this would have meant the job situation remained unchanged since last month, it’s actually not because the previous month has been revised lower. To be fair, each and every NFP number this year has been consistently revised lower.

For the data to be systematically revised, there are only two possible explanations. The first one is that the BLS doesn’t know how to do its job, which I consider unlikely as it’s the same BLS of all the other administrations as well. The second possibility is that there is political pressure to massage the data higher initially, and then revise it lower when nobody’s watching anymore, which aligns with the timing of presidential elections next year.

Setting aside the NFP for a moment, the rest of the labor data presents a mixed picture, but the overall trend suggests that the labor market is indeed weakening. The unemployment rate has risen from 3.5% to 3.8%, which, although historically low, strengthens the case for a pause in interest rate hikes. It’s intriguing, however, that this change isn’t reflected in weekly jobless claims or unemployment benefits data. JOLTS also shows the lowest number of job openings since March 2021, with roughly 1.51 job openings for every unemployed worker, the lowest ratio since September 2021. Private indices from platforms like LinkedIn and Indeed confirm this trend as well.

Moving to inflation, some progress has been made, but both the PPI and the PCE, the metric the Fed follows most closely, are still too high. We are still a long way from celebrating the end of inflation. Also, keep an eye on crude, which is up almost 30% in just two months: the US national gas price just hit $3.83, in-line with last year seasonal record, and the administration cannot rely on the Strategic Petroleum Reserve as it did last year due to the ill-advised policy from that time.

In other words, the United States is just one significant OPEC production cut away from facing potentially crippling inflation once again.

Crude oil futures on the right, US CPI YoY on the left.

Federal Reserve

During Jackson Hole it was made very clear that there is no intention to raise the inflation target above 2%, but the simple fact it was said confirms there’s indeed pressure to raise it behind the scenes. On the other hand, I can understand the reasoning behind the calls for 3% inflation target: no matter the assumptions one uses, it looks likely that the disinflation impulse will be exhausted at around 3% on headline and a tad higher on core, meaning that the policy cost to push it below will likely be too high. In other words, by changing the inflation target from 2% to 3%, the Fed could declare victory earlier and move on.

It was also reaffirmed, once again, that the current policy is “higher for longer”. However, while it was an easy trade to fade rate cut expectations earlier this year, it isn’t so anymore: assuming a policy lag of 6 to 10 months, most of the effects of the rate hikes are yet to be felt, which makes the case for possible rate cuts in 2024 stronger. Indeed, while the investment component of GDP was affected by rate hikes, the consumption part is still positive, and the only way to bring inflation back to target is through increasing delinquencies and softer labor market. In other words, through a recession. How will it unfold, how tough will it be, or how long will it last, these are questions I can’t answer.


This time, the section on the eurozone will start with my favorite country, Italy, as it recently provided a glaring illustration of what not to do when it comes to managing its affairs.

Indeed, for a decade banks have endured minimal profitability due to persistently low interest rates, and this year, thanks to the more restrictive monetary policy, they finally showed some good results. However, the government swiftly announced a special tax targeted to banks, causing sharp declines in share prices, which led the government to quickly reconsider its policy. Maybe, after all, I wasn’t so wrong in describing Meloni government as “pseudo-socialist” back in my September 2022 update.

These events offer two valuable insights. Firstly, Italy seems to hate money, and it’s no wonder that it has none. Secondly, the Italian government appears to adopt a trial-and-error approach to policymaking, experimenting with various measures, observing their impact, and making adjustments as necessary: while this strategy may be effective for startups, it falls short when it comes to governing a nation with its intricate complexities. In other words, we’re governed by amateurs.

Moving to Germany, the country’s PMI has reached new lows, and the accompanying report paints a pessimistic picture: “Any hope that the service sector might rescue the German economy has evaporated. Instead, the service sector is about to join the recession in manufacturing, which looks to have started in the second quarter. […] Our GDP nowcast model, which incorporates the PMI flash estimate, now indicates a deeper fall of the whole economy than it did before, at almost -1%.

Stagflation is a troubling scenario, and it is precisely what the services economy is experiencing: activity has begun to contract while prices have surged, showing an accelerated pace of increase. When inflation remains uncontrollable in the Eurozone’s largest economy, this spells trouble for the ECB.

Nevertheless, there is a glimmer of hope that the decline in manufacturing may be nearing its trough. Indeed, the downward trajectory in PMI measures for new orders and stock of purchases has started to lose momentum, suggesting that the inventory cycle could be on the verge of a turnaround in the coming months. Furthermore, the rate of decline in new export orders eased in August, despite the fact that demand from overseas markets is still contracting rapidly: I interpret this development as an initial, albeit cautious, sign that the global economy’s industrial sector may stabilize sooner rather than later.

In contrast, the service sector has only just begun to see a decline in activity, as new business has decreased for the second consecutive month, and companies have displayed reluctance in hiring new staff. Curiously, service sector companies appear confident in raising prices at an even faster rate.

European Central Bank

There is a growing pressure for the ECB to pause with the rate hikes, but we have to keep in mind that although this is possible, it would be a terrible choice: pausing the rate hikes would narrow the interest rate differential between the euro and the dollar, bringing the exchange rate back to levels last seen in October. This, in turn, could have a negative impact on inflation. The ECB is well aware of this dynamic, which is why I anticipate a rate hike with dovish commentary in September, possibly followed by a pause in October.

Furthermore, it is becoming increasingly evident that relying on a single currency for states with varying levels of productivity can give rise to numerous challenges. This issue was known from the inception of the euro, yet the project moved forward anyway, resulting in the current situation.

The complexities of the Eurozone and its inherent challenges are well-explained in must-read books such as “The Fall of the Euro: Reinventing the Eurozone and the Future of Global Investing” and “The Tragedy of the European Union: Disintegration or Revival?“.


The PMI readings indicate that Australia’s economy is currently experiencing a cyclical slowdown, marked by consecutive drops in both output and new orders indexes over the past two months. Notably, the services sector, which had been resilient, has shown a significant loss of momentum in the last three months. Conversely, the manufacturing sector has stabilized just below the neutral 50 level.

In a contrasting trend, the employment index has shown improvement and is comfortably above the neutral level, which suggests ongoing labor demand and employment growth in both services and manufacturing sectors. Considering also that the business confidence remains high, indicating optimism among business leaders, this positive outlook is likely to deter workforce reduction during this short-lived economic slowdown.

Turning to the RBA, it surprised the markets by keeping interest rates steady at 4.10%. Indeed, although the expectations were split, the consensus was still favoring a 25bps hike. The RBA’s rationale for this decision is rooted in the belief that inflation is on a downward trajectory, prompting the central bank to exercise caution and buy more time rather than tightening monetary policy aggressively. Lowe himself acknowledged that recent data aligns with the expectation of inflation returning to the bank’s 2%-3% target over a measured period.

In light of these comments, the market view shifted with traders sensing that the RBA is done hiking, but of course that could change in an instant were inflationary pressures to appear again in the future.

A few months ago, I expressed my perspective on the Federal Reserve’s decision to pause, and I find it applicable in this context as well: now that the pause has materialized, the focus has shifted towards its duration. I had a short position on the Australian dollar going into the RBA meeting, anticipating a pause (tweet), and I capitalized on the currency’s weakness following the RBA’s decision.

United Kingdom

The BoE hiked interest rates by 25bps, raising them to 5.25%, which was in line with market expectations after a surprise 50bps hike in June. However, there has been a substantial change in the BoE’s statement, transitioning from “will adjust the Bank Rate as necessary” to “will ensure the Bank Rate is sufficiently restrictive for sufficiently long”: this shift has tempered expectations for the pace of further rate hikes, with markets now pricing in a terminal rate below 5.75% by February. As expected, the immediate market reaction led to a lower pound and higher short-dated GILTs.

While the unemployment rate at 4.2% might make a case for a pause in rate hikes, the persistently high inflation, which continues to exceed expectations, present a counterargument. As I mentioned a few months ago, “the BoE is trapped”.


This month brought considerable excitement in the world of currency trading, reminiscent of George Soros’s famous bet against the Bank of England. The reason for this excitement is the BoJ reluctance to raise interest rates, despite all the other major economies doing so and growing signs of inflationary pressures.

This situation has made the strategy of borrowing yen to purchase other currencies (known as the carry trade) highly attractive, but at the same time this process has led the yen to steadily depreciate. Unless there’s a shift in monetary policy, the only way to prevent further depreciation is through active market intervention by buying yen with foreign exchange reserves: however, this approach is unsustainable and can only continue as long as the central bank has sufficient reserves to fund such interventions.

Every serious trader knows about it, and that’s why every time an economy tries to defend its currency because of unrealistic policies, the market bets against it: after that, it’s only a question of time before the market wins.

And that’s precisely what’s currently unfolding with the yen. Indeed, the yen depreciated to levels not seen since October 2022 and July 2023, both levels at which the BoJ intervened. As you can see in the chart below, as the yen continued to depreciate in the latter half of the month, the central bank became increasingly active in the market. However, the effectiveness of these actions dwindled rapidly.

USDJPY 30m price action from August 14th to September 1st

Looking ahead, there appear to be three main possibilities:

  1. The BoJ changes its monetary policy, putting an end to the carry trade.
  2. The BoJ maintains its current stance but ceases its market intervention, willingly or not, resulting in the yen becoming known as the “Japanese Lira.”
  3. Another G10 central bank gets involved in defending the yen, possibly in exchange for very favorable long-term loans.

Considering that the Shinichi Suzuki, the Japanese Finance Minister, said on Friday that “currencies should be set by markets, although sudden moves are undesirable”, I think the first scenario is unlikely. The main issue is that Japan faces the significant issue of a weak yen driving up import costs for fuel and food, which reduces household purchasing power and necessitates measures to subsidize gasoline retail prices and mitigate utility bill increases.

In any case, while USDJPY was an obvious long at 144 and an obvious fade at 147, any move at the current levels to me looks like a gamble, and I won’t take any new position here unless we either get back to the extremes or the BoJ releases some new statement.


China has officially entered deflation territory, with a YoY CPI at -0.3% and a PPI at -4.4%. After this data, the current economic debate, succinctly summarized by Adam Wolfe in his Twitter thread, revolves around whether this deflationary trend is temporary or requires a strong policy response.

On one hand, there are those who focus on the microeconomic factors, arguing that the recent CPI deflation is primarily due to falling pork prices and anticipate a rebound. They believe that PPI deflation has already hit its lowest point and suggest that the impact of deflation is being overstated. On the other hand, those looking at the macroeconomic picture contend that China’s negative output gap and underutilized resources will exert downward pressure on prices. In other words, they argue that weak demand in the property sector has led to increased household savings without translating into real economic demand. Despite these arguments, the People’s Bank of China (PBoC) aligns with the first group and expects CPI inflation to gradually pick up, as indicated in their Monetary Policy report.

Furthermore, retail sales have only grown by 2.5%, falling short of consensus expectations by two percentage points, and the unemployment rate has increased from 5.2% to 5.3%.

It’s worth noting that the Chinese government has announced that it will no longer release monthly data regarding youth unemployment, which has been rising steadily throughout the year, peaking at 21.3%. A significant implication of elevated youth unemployment is the potential erosion of the deterrence effect traditionally associated with authority and governance. In contexts where a significant portion of the young population faces unemployment and lacks socio-economic prospects, the prevailing aura of fear and respect for authority may diminish: for a country that has historically relied upon a measure of fear-based governance to maintain social control, the prospect of an upsurge in civil unrest becomes a matter of paramount concern.

However, I agree with Michael Pettis and I think the latter part of this year may not be as dire as the initial seven months suggest. Considering the bearish sentiment has even made it to the cover of The Economist and the Chinese government is taking extensive measures to stimulate the economy, to me it looks like the country’s undervalued, presenting a potential attractive buying opportunity. However, adhering to my personal rule of “never investing through capitalistic means in a socialist country”, I have chosen not to make any investments. Rather, I’m very bullish on the Aussie, which should benefit from the Chinese rebound.


This month, I made some significant changes to my portfolio structure and management approach.

Firstly, I’ve started differentiating between my long-term holdings and my trading portfolio to better track my trading metrics. My long-term holdings, which include MOWI, SALM, QUBT, and QS, with MOWI being the largest position, will be relatively passive, and I won’t actively monitor them more than once a month except for hedging activities.

On the other hand, my trading portfolio is now primarily focused on currencies, as I’ve explained in the previous update. While I won’t completely abandon equities, I’ve decided to concentrate my efforts on mastering FX. So far, the Sharpe of 1.89 confirms this has been a good choice.

In terms of recent trades, I exited my Pirelli position early in the month, realizing an average gain of 4% to free up capital and prepare for a potential market shift. Although a market correction did occur, it was smaller and shorter-lived than expected. Nonetheless, I’m content that I anticipated it. Additionally, my trailing stop on IONQ was triggered, locking in a 70% unrealized profit.

In the realm of currencies, I had profitable short positions on USDCNY at 7.33, USDJPY at 147, and EURUSD at 1.0933. I made several attempts to time the bottom of the Australian Dollar, taking small profits each time, but they fell short of my expectations. Nevertheless, I maintain a bullish outlook on AUD and anticipate a potential rebound.

As of September 1st, 2023, my trading portfolio is long AUDUSD, with no other open positions. However, please note that my trading portfolio experiences high turnover, so the exposure may have already changed by the time you read this update. On a side note, this is also one of the many reasons why I don’t share my trades on Twitter, but rather focus on outlining my thought process and ideas.