gmijuly08monthly

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The Global Macro Investor 2008

Issue No. 41 July 2008 Javea, Spain_____________________________________________________________________________

July 2008 Monthly

In this edition:

Introduction Whoops Apocalypse

Books for the Beach

The Business Cycle

Trade Recommendations

o Sell SXOP (European Constructionand Materials)

o Buy Gold, Silver and Platinum

Commodity Corner

Charts to make you go Hmmm

o Aluminium

o Natural Gas

o Sugar

o Ted Spread

o Credit Spread

o Hogs

Positions (both open and closed out)


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Monthly Publication No.41 July 2008____________________________________________________________________________________

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The Global Macro Investor 2008 2

Introduction

Whoops Apocalypse

The summer is coming and generally the July Monthlyis shorter than usual as many of youare off to the beach and dont want to read too much. The summer is also often quiet.

This months publication is, in keeping, also going to be short, but the difference is that thesummer is not going to be quiet.

The worst we have known

The reason for the short Monthlyis that there really isnt much to say that I havent already

said over the preceding three months. As you know I have spent the last three publicationsoutlining why the markets and the global economies are going to get much, much worse. Inthese kind of markets there is no point in broadening our focus. Lets concentrate on the mainstory and try to protect ourselves or even make money from what is likely to be the worstconditions in which we have ever worked (assuming not many of you were working in1981/1982).

This is not going to be a summer of love.

Lets just do a quick recap of my thoughts.

Broken economic models and a fearful future

There is a real risk that the entire credit/leverage model of economic, financial, corporate andeconomic growth is now dead at least for an entire generation. Thats quite a punchystatement but I think it may well be true.

The world is going to learn the hard way that debt is not wealth. Debt is the inverse of wealth.

The last shoe to drop in the rejection of the debt model will be the collapse of the Chinesecredit bubble, and the emperors new clothing will be revealed. I do not expect this to happenyet, but when it comes (probably in three or four years time) the world will not be the place wenow know and its future will be very uncertain.

When China topples, the era of globalisation will be over and nations will move to protect self-interest over all else. I expect food prices and water to be a major feature of this movetowards self-interest.

The US model of driving economic growth through debt expansion has reached its limit. TheUS has built up 100% of World GDP in debt. This is going to reverse. This unwinding willcreate ramifications for decades.

That does not mean that the business cycle is dead. We will likely get another up-cycle afterthis downturn has finished before possibly the worst global down-cycle since the 1930s. Myguess is that it will start in 2012 or thereabouts.


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Why the apocalypse?

Why the apocalyptical view for the next down-cycle? Essentially, the US growth engine will belargely absent when China, India and the Middle East hit their limits of oversupply that theyare rapidly accumulating now. That stall in future demand also causes huge dents in the up-cycle of raw material supplying countries such as Russia, Canada, Australia and moreconcerningly South Africa, which could head towards society breakdown if it happens.

We are likely to see huge gains in the price of foodstuffs putting tremendous pressure onAsian countries to fight secular inflation. They will see a 1970s style economic quagmire,whilst the fallout of the debt burden will likely lead to US and European deflation.

The aging population is the final icing on the cake. It is a secular change in trend that theworld is hopelessly unprepared for.

Fixed IncomeIn line with my view that the financial model is broken, the fixed income markets have largelyseized up.

Credit spreads are blowing out again.

The inter-bank market is broken entirely.

Banks cannot fund anything at a decent level. Bank trading books that used to fund atLibor +10, now fund at Libor +250 in many cases.

Libor itself is broken.

No one can borrow money because no one is lending.

Mortgages are hard to get, jumbo loans are virtually impossible to secure.

Even non-leveraged businesses such as Family Offices cannot borrow money. Noone will take any collateral.

It is a total bloody mess.

We are also left with a government bond market that is rudderless. The central banks arepanicking. There is no leadership.

Asian central banks, which will certainly see massive inflation for maybe a generation, aretrapped like rabbits in the headlights. For example, Singapore has 7.5% inflation but 12-month rates at less than 1%. Rates are going up in Asia.

The jury is out on what happens in the Western world. Most people think inflation is going toget out of control. I, on the other hand, think deflation is a near certainty. I have never seen acredit crunch in history that was not deflationary.

My bet is still for more rate cuts in the US, Europe, New Zealand and Australia etc., maybethis year or certainly next year.

A collapse in yields will lead to a crisis in the pensions industry. A pensions crisis is the nextshoe to drop in this cycle. There is nowhere for them to hide.


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Softs will be the only answer

Either pension funds load up with soft commodities or they risk not being able to fund theirliabilities. I do not see how they have any other option. They will lose money in equities; yieldswill likely collapse so there is no yield to offer retirees; and they cannot yet profit from helpingfree up the financial system as the risks are still to the downside and its future is unclear.Corporate bond markets will not be the answer as they were in the last cycle. Nor willemerging market equities. Oil is already up 1400% so that offers no opportunity. The nextphase will be soft commodities.

Equities

It seems that my view here is playing out. The Dow has just had its worst June since 1930. Iam expecting bad times ahead.

What I am now really shocked at is that there are head-and-shoulders tops in almost everysector and every major market. I dont think I have EVER seen anything like this.

Look at this collection of head-and-shoulders tops we can use the distance from the top tothe neckline to give us downside targets, as the market tends to repeat the same fall againafter the break.

The Eurostoxx has broken the neckline and is leading the way. It is suggesting that themarket can fall another 25% from here, giving a total decline of 50%. Staggering.


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The S&P500 is showing the same signs. If it breaks the neckline it will fall another 20%,taking the total decline to -40%.

The Hang Seng is also forming the same pattern. Worryingly it has fallen 38% so far and thisprojects to a 75% fall in the index from peak to trough. No one is prepared for this. No one.


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China also has a head-and-shoulders top but this one projects back down to a new low forthe index. It suggests a decline in the magnitude of 90%. No, thats not a typo.

Even everyones bull market favourite, India, is in a world of pain


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These types of patterns are repeated everywhere in sectors and indices. Sure, some are notas bad, but nothing looks good. Nothing.

In the end, a theory that I had a while ago may well be proven. The secular bull market inequities died in 2000. Equities are just cyclical plays following the ups and downs of theeconomy, much like they have in Japan since 1990.

The following chart illustrates my point. The SPX is just following Fed Funds. The SPX ismore volatile so it does move around a bit more, but Fed Funds suggest that the SPX willcome down to at least 950. The SPX, just like the short end of fixed income, is just a cyclicaltrade now. The relentless upward trend of equities is finished in the West.


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The Economy

Simply put, there is no light at the end of the tunnel for the global economy.

All forward-looking indicators are pointing lower. I think that the US will hit recession first(although technically NZ might be in one although not clear yet), but then the dominoes allacross the Western world will fall. The UK and Spain are probably next but with the rest ofEurope following suit soon after.

This chart of the European Building and Materials sectors tells it all. There is going to be noescape for anyone. (Note: I wish to go short this sector to express some of these views.)


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The Dollar

I think the Dollar is in the process of turning. The massive write-downs and paybacks of debtwill take trillions of US Dollars out of the system. That can only be bullish.

However, at this point the Dollar is not a clearly trending trade and is thus not an easy trade.The Dollar usually takes eighteen months to two years to turn. Even if it is turning now (whichI think it may be), there will only be trading opportunities until 2010, when the true trendshould accelerate. The only sharp turn in the Dollar was caused by the Plaza Accord. Unlesswe get a Plaza-style event we will not see a sharp turn but a gradual one.

I have marked the previous turns on the chart on the DXY.

In terms of other currencies the trend is also less clear, but I am sure that inflation is not goingto be bullish for Asian currencies (notice the Dollar fell over the whole 1970s inflation period).

Oil

There is not much to say. We are in the process of the blow-off top where demand destructionwill kick in. Oil could go to $150 or $200. Frankly I have no clue, but my suspicion is that $160might be breached.

However, with the global economy this fragile, it is allbad.

Next year expect to see negative YoY% change in oil prices, easing financial conditions andeasing inflation concerns as some demand destruction takes place.


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Soft Commodities

Nothing much new to add; Softs saw the biggest correction since the true bull market began(-24%), and are now bouncing.

In a secular bull market we should now expect to see a 100% rise without any majorcorrection.

From my recent travels I am now certain that exposure levels to Softs from pensions funds,sovereign wealth funds, endowments etc. are in the range of 1% to 2%. What many of theseplayers dont yet realise is that the soft commodity story poses the biggest long-term threat totheir portfolios, and in the case of sovereign wealth funds, one of the biggest long-termthreats to their national security. There will soon be a stampede of investment as we see thatnumber rise from 1% invested to 5% or more.

Also it is worth bearing in mind that as countries such as China have to import more and morefood at higher and higher prices, their trade surpluses will vanish rather rapidly. Sovereign

wealth funds need to take this into consideration too.

This chart of Softs is terrifying. The GS Ag Index has just had a big pullback from its monthly9 Demark signal. This next move up will start new monthly counts. To my eye, that meansthat after such a large correction we could these soft commodities double in the next 12months.


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Hedge Fund and Private Equity

Although many people dont know it yet, I think that we are going to see massive redemptionsfrom hedge funds and private equity funds.

Yet again in times of trouble, too few hedge funds have offered any protection. They liedabout the fact that they can make money in down-markets as well as up-markets. The factsyet again prove this. The best the average hedge fund can say is that they have beaten theS&P500 relatively. Very few hedge funds are actually up this year.

Having recently been involved in raising money for a hedge fund, I know that things are muchworse than most people realise. Fund of Funds and Family Offices are strapped for cash.They cannot borrow on decent terms to give them liquidity, and many of their investments aretied up for a year. Many participants started to realise that the hedge fund dream was goingsour earlier this year, but have to wait for year-end to get their money out. That money is

coming out.

Private equity guys offer no ability to exit at decent terms and no transparency as to thesuccess of their strategy. Their business model is built on leverage. That model is broken.This industry will be on its knees in the next two years.

No wonder so many hedge fund managers and private equity shops sold out at the highs. Idid warn that anyone who invested was a fool, but urged those that could sell out to do so.

Summary

The rather dramatic statement is that I urge you to do anything you can to project yourselffrom blowing up (expect P&L bleed even in quiet markets).

Expect correlations to move around a lot.

Expect volatility to be back in a big way.

Be very careful of things like your prime broker or where your cash is held. Check the

documentation. Make sure any deposits are segregated. Check your OTC docs. Checkwhether your swaps might be renegotiated to some non-Libor spread. Banks are going to tryto worm out of everything. It will be a fight for survival.

Be very, very careful. If you have the ability to take risk, then be short equity markets and buysome way out-of-the-money calls on fixed income, keep hold of your Softs and add someprecious metals. That is the only path I see for survival.


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Books for the Beach

Lets lighten up!

Hopefully we are all going to get some time on the beach in the next month or so and as pereach July MonthlyI would like to suggest some books you might enjoy that I have read or re-read over the year. As in previous years, some books are brand new and some are old. Someare business-related and some are off the wall. I have rather eclectic tastes so there shouldbe something for everyone

Affluenza Oliver James

This fascinating book introduces the concept ofAffluenza, of which there are two definitions.

affluenza, n. a painful, contagious, socially transmitted condition of overload, debt, anxiety

and waste resulting from the dogged pursuit of more.

affluenza, n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keepup with the Joneses. 2. An epidemic of stress, overwork, waste and indebtedness caused by

the pursuit of the Economic Dream. 3. An unsustainable addiction to economic growth.

The book explores the connection with the dramatic rise in depression and stress-relatedillnesses since 1950, and the rise of consumerism and the pursuit of money. In the end thesolutions put forwards are a little nave, but the arguments put across throughout the book arevery thought provoking. It is definitely worth a read.

The Little Prince Antoine de Saint-Exupry

A very old, small book about a little prince, written like a fable by one of the most famousFrench aviators and adventurers in the World Wars. This book is over 60 years old and its

strong message, much like Affluenza above, remains pertinent and it also happens to bebeautifully written and illustrated.

It is timeless classic recently brought to life by the discovery that Saint-Exupry was probablyshot down in WW2 by a German Luftwaffe pilot who hero worshipped him but did not realisewith whom he was in a dogfight. On realising that he killed his hero he held the terrible secretuntil last year when some journalists, trying to figure out Saint-Exuprys disappearance in thewar, made the connection. They confronted him and he confessed to a lifetime of sadnessand regret. Another amazing story connected with this magical little book.

The Old Man and The Sea Earnest Hemmingway

Another small but perfect book (actually its a novella). Many of you will have read this as itsclearly one of the most famous books ever written, but re-reading it is still a joy. I urge anyoneto find a single sentence that is unnecessary or unnecessarily constructed. It is so crisp, pureand beautifully written it is a total marvel. It also is nice to be able to finish a whole book in afew hours! Oh, and it won him the Nobel Prize too.

The First Year After Beatrice Amin Maalouf

This is the third book I have recommended from Maalouf (the incredible Samarkandbeingone and Leo the African being the other). This is equally eloquent but not quite as remarkableas the other two, which are historical stories intertwined with fiction. The story explores thesubject of what happens if the world truly favours giving birth to boys over girls. Clearly wesee this trend in China, India and Africa. This book explores the concept and the conclusionsin the form of a novel.


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One Hundred Years of Solitude Gabriel Garcia Marquez

Another illustrious book that many of you will have read. If you havent, then read it. Its astunningly expressive story of a small town in the South America jungle and its venture intothe modern world, intertwined with Amazonian folklore and tradition. I cant really describe it,but its beautiful, uplifting, comic and tragic all at the same time. No wonder he got a NobelPrize for literature too.

Ronnie Ronnie Wood

God, Id have loved to have been a rock star. A surprisingly well-written and honestautobiography from the other guitarist in the Rolling Stones.

The Black Swan Nicholas Taleb

Again a book many of you will have read. Its a great read if you can get over the arrogance.

Or Ill Dress You in Mourning Larry Collins and Dominique Lapierre

One of the more articulate and most fascinating biographies I have ever read. It is the parallelstory of the rise of the greatest bullfighter of the modern era, El Cordobs and the story of thebirth of modern Spain. Its a story of bone-grinding poverty, civil war and the rise of NewSpain through the life of an incredible young bullfighter who became the obsession of a wholenation. You might not like bull fighting, but this book is stunning and unbelievably powerful. Itmakes Hemmingways book of bullfighting Death in the Afternoonfeel like it was not worthreading and thats saying something. It is also the most approachable account of the civil warI have read.

Lapierre went on to write City of Joyabout Calcutta and Freedom at Midnight, and the two ofthem wrote O, Jerusalem! Talented bunch.

The Eyre Affair Jasper Fforde

This literary detective thriller comedy (clearly there is no such category) is so off the wall itdefies description, but so intelligent you feel a bit stupid at Jasper Ffordes knowledge ofclassic literature. If Im making it sound like The Da Vinci Code for books then I am not gettingmy point across. It is so unique I cant describe it. Its a really enjoyable page-turner. Theeasiest thing I can do is crib someone elses description from Amazon about the book.

Jasper Fforde has a rich imagination that moves in wacky directions, an off-the-wall sense ofhumor that never quits, and a deep knowledge and love of literature which give shape andsubstance to this hilarious "thing" he's created. Not really a mystery, sci-fi thriller, satire, orfluffy fantasy, this wild rumpus contains elements of all these but feels like a completely newgenre. Fforde combines "real" people from the "historically challenged" world of his plot with

characters from classic novels, adding dollops of word play, irony, literary humor, satire--andeven a dodo bird--just for spice.

I hope that you enjoy reading some of these or re-discovering one you may have read a fewyears ago. Hopefully they will take your mind off the horrors of the economy and the markets.Have a great summer break. I have a feeling you might need it.


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The Business Cycle

The economy continues its slow-motion crash course

ISM is slowly chopping its way lower

BAA spreads have been leading the way for ISM and they suggest that ISM is in for a torridtime in the next six months


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Consumer sentiment is leading ISM too

Consumer sentiment is now at levels only seen in the bad recession of 1980


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The OECD leading indicator for the US also suggests some big falls in ISM are only round thecorner

Our yield curve model suggests that this is only a temporary pause in the rate cutting cycle. I

know most of you dont believe it yet, but I am certain of it. What it shows is that Europe lagsthe US, but when Europe starts to slow the US has another down-leg. This is a very strongrelationship.


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It also suggest the US yield curve will go to 300bps in the coming six to seven months.

Europe is clearly going to slow rapidly. Take a look at IFO expectations versus IP itsuggests we are going to see negative IP growth in Europe


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IFO also leads the DAX equities in Europe are in for a rough time.

Meanwhile back in the US, IP has finally turned negative too


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Housing is still a mess. Our index has finally had an uptick, but from the worst levels inhistory. This is a leading indicator. It leads the economy by at least 12 months.

Housing sector employment is driving total employment. Housing is suggesting that we aregoing to see more layoffs than the last recession.


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And remember this fascinating chart from Gerard Minack of Morgan Stanley? EPS is going tocontinue to fall for another two years to the lowest levels in the last 50 years.

Over here is sunny Spain the dark clouds are gathering this chart is ber scary. We areheading for the worst recession in 40 years.


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Even the OECD Leading Indicator for India is now negative.

Cheery world, isnt it? Im trying very hard to stop myself buying some tins of food, bottledwater, a shotgun and heading for the hills.


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Trade Recommendations

Trade Recommendation 1

Sell SXOP European Construction and Materials Sector

This trade recommendation is written up in the Introduction.

Trade Recommendation 2

Buy GoldBuy SilverBuy Platinum

The world is falling apart. Its the time to buy precious metals. They have been correcting for awhile now, but look poised to break out again. I think it makes sense to be long.

The charts all have wedge patterns

Gold


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Silver

Platinum


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Commodity Corner

The chart you need to think very hard about

If there is one chart that you need to grasp, it is this chart of the GS Agriculture Index dividedby the SPX.

Just think through what it is telling us about the future. It is a world so shocking that it almostlooks like it is going backwards. If we return to the highs we are seeing a complete re-ratingof financial assets versus agriculture.

I think we may well go through those highs in the coming decades. That would be a 20-foldoutperformance of Ags over the SPX.

Here is the chart


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Commodity Update

As many people have expressed concerns about the potential expansion of land and newcrops, I thought it would be constructive to take some time to show the limited scope for aneasy solution.

We have previously shown how the yields on most major field crops have been entering aperiod of limited yield growth compared to previous yield advances, and when compared toglobal income growth.

Other components are the productivity of the workers themselves and the need for theexpansion of higher value perishables: fruits and vegetables.

Fruits and veggies compete for resources, including land, labour, investment, and water. Butthe problem is that the devastatingly weak yield growth means that in order to keep pace withthe needs and wants of rising incomes across the world, we have to see ever more land andresources diverted to these high value goods.

Yields have failed to keep pace with general population growth, let alone GDP growth, foralmost 40 years! And it has recently become even worse.


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The per capita land harvested for vegetables is consistent with this premise: Grain Yieldshave roughly outpaced population growth on average, and have therefore been able to offerup land. This has all happened while the veggie yield per capita has been firmly negative.


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If we take a look at the differences in water intensity between grains and fruit & veggies, wecan see that vegetables are more demanding. This means that they demand not only moreacreage, but more water per acre as well.

This is a reason why the grain per capita chart below is so closely related to global water percapita. The larger and wealthier the new emerging countries become, the more waterintensive crops they will demand. This helps limit the immediate increase in grain resourcesthat everyone is expecting any day now.

Grains lag water by five years. Per capita water peaked in 1979, five years before grainoutput.


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For these constraining reasons, a full onslaught of acres will lag ten years by our estimates,unlike previous episodes where we saw yields save the day.

The other major resource deficiency is farmers. The offspring of farmers dont want to farmwhilst the farmers themselves are becoming too old to do so. Demand for farmers is thusincreasing. This deficit of workers has led to increasing reliance on mechanisation.

In the 1960s the argument went, as long as we can replace workers with machines, therewill be no problems. So workers numbers dropped and machinery numbers rose. Simple!


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There is just one problem with this scenario. And thats the subject of saturation. Back in the60s people were amazed at the productivity gains that tractors made, jumping from 250hectares per tractor up to 350 HA by 1970. This growth in machinery demand helped to spurthe last major commodity bull market as machinery forced (or allowed) younger prospectivefarmers to seek other employment and a better life. The great migration from farms to citiesfollowed suit over the next few decades.

But by the 1990s Hectare Per Tractor growth looked non-existent. The gains in productivityhad been had. Today marginal farmers across the world are adding to their machinery use,but at the slowest pace ever recorded. The gains have been had and the market is nowofficially saturated. Effectively we need employees to run the machinery, but they have left forthe cities.

In countries such as Russia, they lack both the mechanical equipment and the people to farm.The price of foodstuffs is going to have to increase a long way to make it economically viable(financially and socially) for people to farm the land in the middle of Russia. This doesnt takeinto account the cost of transportation of the crops after harvest.

Corn

The USDA report today (coming out later) will give us a better idea of the situation at hand inthe Midwest. But for today we have plenty of estimates to work with. You already know ourviews on yields. This view is exacerbated by the fact that Iowa has the highest yields in theworld! So if we take some conservative projections of, lets say, a drop in yields to 147bu/acreand a drop of 2.5m harvested acres to 76.3m. That would leave us with a production of11.22B bu. If we drop the total use by 3Mmt we get a global stock-to-use of 11.8% and a USstock-to-use of 3.8%!


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The only other scenario that could reverse this US stock-to-use number is if the UScurbs exports in order to build its horribly low Ending Stocks. The US is like OPECfor corn. The country controls over 50% of the global export market and it wouldnt

take much to send importers scrambling to secure supplies. That would be incrediblybullish for the price of corn, clearly

With an export ban of 20Mmt from the US (to build Ending Stocks) we would seestock-to-use hover around 11% and demand for new sources of corn explode!Taiwan, the EU and Mexico would look to be the hardest hit by such a measure, whileArgentina and Brazil would be thebiggest winners.

The Chinese have once again founda couple billion bushels of corn that theyseems to have misplaced and thats about all the bearish news I could find on cornthis month. There is nothing you can believe coming out of China

According to some accounts there are sixteen bankruptcy filings from ethanolcompanies, and the market expects this to rise to +50 by the end of the year. Roughly75% of all ethanol producers are vertically integrated though, and own both cornfieldsand ethanol production capacity, and are therefore unlikely to go bust. Keep an eyeon this however, as the major bearish factor in the market is the Government pullingthe plug (even a little bit) on ethanol.


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Soybeans

Soybeans are in pretty much the same boat, only they are twice as speculative to assessbecause of the shorter growing period. So we will again keep our figures conservative. So for

harvested acres we will assume 72m, along with a yield of 40.70bu/acre. That gives us2.93B/bu. This would take expected production down by 175m/bu and Ending Stocks woulddrop precipitously to give us a US stock-to-use of erm.. 1.

I once again propose watching out for a drop in US exports. China will be the biggestloser by far, and nothing will push the market up more than China and India againbanging the drum of increasing stockpiles; and although global stock-to-use will stillbe at 19%, thesestocks arent in China. Expect some bigbuying in the next ninemonths. Brazil and Argentina are once again the winners.

The Brazilian Vegetable Oils Industry Association has extended its ban on soybeanplanting in the Amazon. It was started in the summer of 2006, and was scheduled toend on July 31

stof this year. It will now go until July 2009. Greenpeace and the oils

industry association concludes that no new soybean plantations were detected in anyof the 193 areas that registered deforestation of 250 acres or more during the firstyear of the moratorium. The agreement includes about 94 percent of Brazil's soybeancrushers.

With this new bout of flooding across the mid-west and a very large chance of loweryields and acres, its highly likely that the USDAs projections for a jump in EndingStocks wont be fulfilled. The numbers were speculative to begin with. That said weshould expect demand for all oilseeds to drop in the next year.


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Coffee

The USDA came out with its quarterly coffee report and has forecasted a record coffee cropof 140.6m bags, while their consumption number (consumption = exports + domestic

consumption) came in just above production at 140.1m bags. This would bring producerstock-to-use to about 12.25%.

The USDA has now voiced concerns about the coffee producing countries unusuallylow Ending Stocks, and now believes that there will be less coffee exported this yearin order to rebuild them. The worry lies mainly with Brazil and is likely bullish forArabica. Because of the off-cycle year next year, we can expect to lose roughly 7% ofthis years output. That would push production to 130.76m bags. If we decreasedemand (because of the global slowdown) by 2.2% then we get demand of 137mbags. This would drawdown producers stock-to-use to 7.97%... This assumes perfectweather.

Tata Coffee out of India has reported that the unseasonable rains have hurt a largeamount of its Robusta coffee in March. There has been no quantifiable facts givenyet, but it is likely that other farmers in region were also hurt. If we extrapolate this,then it is likely that the USDA has overstated Indias export and production figures for

2008/09.

The major area of concern for coffee farmers is the issue of fertiliser costs and theweaker USD. In BRL terms, coffee has gone nowhere in price since 2004. If we takeinto consideration the huge jump in fertiliser costs as a % of coffee revenues, we cansee that prices are near 2003 levels! This doesnt do much to encourage newplanting.


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Looking at the price of coffee and using the new input data for fertiliser costs, we cansee that the real selling price of coffee in BRL terms has been moving slowlydownwards.


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Cotton

The USDA has made an amazing estimate, calling for cotton demand to rise this year to

127m bales! It is likely the USDA is making the mistake of looking at new capacity and notprofitability or output. They did call for production to fall by 3% to 116m bales though, withEnding Stocks at 54.1m bales. This will bring the stock-to-use down to 42.6% if the USDAnumbers are correct. If demand were roughly flat, as we would like to keep our estimatesconservative, stock-to-use would be sticky at 46%...

Reports of buying interest for imported cotton in China has become more sporadic,Guangdong Province, the biggest textile exporting region of China has witnessed acontinuous drop in its exports this year and as a result are planning on curtailingcotton imports.


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With poor profitability still in the cotton market and inconsistent weather, manyanalysts are predicting another loss of cotton acreage in the US. These estimatesrange from 500k to 1.2m acres! Even with a drop of 500k acres, stock-to-use wouldstill be at 108% for the US and the effects on global stock-to-use would be a roundingerror to most analysts.

Wheat

Wheat estimates for all categories were raised this month. Production was raised to 663Mmtby the USDA and to 658Mmt by the IGC. Stocks were raised to 132Mmt by the USDA and143Mmt by the IGC. Last but not least, demand was raised as well but not by enoughaccording to our calculations.

With the surge in feed prices this month, its hard not to see a jump of at least 5% inconsumption this year. In case you didnt know, that would mean that demand would exceedsupply again. The market is not expecting this

This would take Ending Stocks down to 110, and stock-to-use would then drop to 17%, from19.3% last year. But until we see statistical confirmation from the USDA we have to assumethat the current forecasts from the USDA and IGC for 20.4% and 22.5% (respectively) stock-to-use is correct.

Its really all bearish supply side news, so I wont bore you all with country-by-countryannouncements this month. But the next wave in the wheat market will likely be about of bullish demand side news on the back of higher feed prices and the likelihoodof curbed US exports. So yes, we acknowledge that Ukraine, Russia, the EU,Australia, India and all the other countries of the world will have massive wheat outputincreases this year. But there will be demand for this wheat in the near future,whether its from farmers trying to hedge their exposure to corn deliveries or countriestrying building grain stock.


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Charts to make you go Hmmm

Chart 1

Aluminium

Im scared of trading industrial commodities in this environment but blimey, Aluminium istrading well


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Chart 2

Natural Gas

Another commodity that is doing well is Natural Gas. The price has risen 100% in six months!


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Chart 3

Sugar

It is only a matter of time before that other oil substitute sugar, takes off too when it goes itis probably going up 300% in a very short space of time.


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Chart 4

Ted Spread

This Ted spread chart scares the hell out of me it looks like we are going to a new levelonce we break this channel. I can only interpret this as a complete breakdown of the financialmarkets. A total failure of the system. Oh god.


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Chart 5

Credit Spreads

Hmmm Single As are blowing out again


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Chart 6

Hogs

This inflation-adjusted chart of Lean Hogs is unreal. Its ready to blow


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Positions

FX

Trade Recommendations Entry Price % Since Inception %YTD

Sell NZD vs. AUD Oct 27th

2006 0.86 7.86% 9.46%

Sell GBP vs. Yen Nov 5th

2007 238.28 11.79% 4.57%

UAE Dirham Fwd: Exp Nov/8/08 Nov 8th

2007 3.62 1.10% -0.35%

Sell ZAR vs. USD Jan 31st

2008 0.1336452 5.46% 5.46%

Sell ZAR vs. AUD Jan 31st

2008 0.14921 11.82% 11.82%

Sell ZAR vs. RUB Jan 31st 2008 3.2637 9.21% 9.21%Sell Euro vs. USD May 1

st2008 1.5475 -2.02% -2.02%

Sell JPY vs. TWD May 1st

2008 0.2933 2.42% 2.42%

Sell KRW vs. TWD May 1st

2008 0.0304 4.09% 4.09%

Sell Euro vs. TWD May 1st

2008 47.61 -0.74% -0.74%

Closed Out Trades 2008 Closing Date % Since Inception %YTD

Sell USD vs. Yen Oct 27th

2006 Mar 6th

2008 13.85% 8.62%

Fixed Income

Trade Recommendations Entry PriceReturns since

Inception Returns YTD

Short UK 10-yr yields Sept 30th

2005 4.28% -76bps+11.79% -54bps+2.15%

Short US 10-yr bond yields Jan 31st

2005 4.14% +17bps+14.16% -6bps+2.08%

Short US 5-yr bond yields Mar 17th

2006 4.62% +127bps+12.3% -7bps+2.33%

Short US 2-yr bond yields Nov 17th

2006 4.84% +221bps+7.84% +25bps+2.41%

Fed Funds Futures May 2009 May 30th

2008 97.015 8 8

EDM9 Nov 8th 2007 95.825 149.8 106.8EDZ8 Mar 21

st2007 95.475 137.5 22.0

Short Sterling: Dec 2008 Feb 29th

2008 95.39 -163 -163

Short Sterling: June 2009 Nov 5th

2007 94.4 -59 -61

Short DE 2-yr bunds yields Nov 8th

2007 3.91 -53bps+2.54% -49bps+1.97%

Long Asian Yieldsvs. US 10-yr Jan 4th

2007 Avg. 0.744 0.744

Taiwan Jan 4th

2007 2.57 0.970 0.970

India Jan 4th

2007 7.75 1.230 1.230

Singapore Jan 4th

2007 2.65 0.875 0.875

Thailand Jan 4th

2007 4.87 0.140 0.140

US 10-yr Jan 4th

2007 3.91 -0.06 -0.060

Singapore 10 year (long yields) May 1 2008 2.44 1.18 1.18


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Closed Out Trades 2008 Closing Date % Since Inception %YTD

Short Aussie 3-yr bond yields Mar 6th

2005 March 2008 +16.38% +0.91%

EDH8 Oct 1st

2006 March 2008 130bps (+31.63%) 142.5bps(+33.73%)

Commodities

Trade Recommendations Entry Price% Since

Inception %YTD

Corn March 09* Aug 31st 2006 380.13* 97.88% 48.79%Corn Dec 08* Oct 31

st2006 288.779* 172.53% 66.24%

Oats Mar 09 Jan 16th

2007 258.52 54.63% 28.13%

Oats Sept 08 Apr 16th

2008 408 9.22% 9.22%

Oats Dec 08* Jan 16th

2007 408.33* 13.68% 9.06%

Wheat Sept 08 Apr 16th

2008 953.2 -4.32% -4.32%

Wheat Dec 08 Nov 30th

2007 7.744 0.21 18.71%

Soybeans Nov 08 Apr 16th

2008 1361 16.19% 16.19%

Rough Rice Sept 08* Nov 1st

2007 1230.99* 50.04% 15.05%

Rough Rice Nov 08 Apr 16th

2008 2099 -10.91% -10.91%

Coffee Mar 09 Feb 28th

2007 135.64 10.70% 6.30%

Coffee Sept 08 Apr 16

th

2008 139.5 9.35% 9.35%Coffee Dec 08 Oct 31st

2006 161.44 -3.31% -8.95%

Cotton Mar 09 Oct 1st

2007 69.75 4.46% 11.80%

Cotton Oct 08 Apr 16th

2008 81.79 -4.50% -4.50%

Cotton Dec 08 Jan 16th

2007 83.81 -2.88% -7.22%

Live Cattle August 08* Jan 16th

2007 89.787* 10.94% 4.82%

Live Cattle Dec 08* Jan 16th

2007 106.37* 7.69% 0.26%

RL Lumber Sept 08* Dec 1st

2006 400.72* -46.30% -25.61%

Palladium Oct 25th

2006 321.5 47.12% 27.84%

Short Oil vs. Sugar Jan 31st

2008 15.76 -34.58 -34.58%

Short Oil vs. Lumber Jan 31st

2008 2.36 -26.27 -26.27%

*Rollover value

Closed Out Trades 2008Closing

Date% Since

Inception %YTDCorn July 08 650/700 callspread Apr 16

th2008 Jun 30

th2008 50 ticks,+7.7% 50 ticks,+7.7%


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Equities

Trade Recommendations Entry Price% Since

Inception %YTD

Long Aussie Wheat Board Feb 1st

2006* $4.74 -48.73% -17.06%

PGW Jan 25th

2007 $1.63 59.51% 17.65%

Grain Corp Feb 29th

2008 13.75 -39.56% -39.56%

ABB Grain Feb 29th

2008 8.58 1.40% 1.40%

Noble Group SG Feb 29th

2008 2.24 8.48% 8.48%

Padiberas Apr 16th

2008 2.19 -24.66% -24.66%Rogers Agriculture Index(DIAPAGB KY) Feb 2

nd2006 909.9 41.18% 20.54%

COTN Cotton ETF Oct 1st

2007 254 -1.57% -0.79%

International Paper Mar 21st 2007 $36.34 -35.64% -27.76%

Short Hang Seng Nov 5th

2007 30,468.00 27.65 20.75

Short H-Shares Nov 5th

2007 19540 39.54 26.73

Short BHS Aug 28th

2007 18.89 32.98 19.87

Short PRC.PA Jan 4th

2008 16.28 43.98 43.98

Short SXAP Euro Autos May 30th

2008 301.37 16.26 16.26

Short Eurostoxx SX5E June 9th

2008 3597.34 7.15 7.15

Short FTSE 100 June 9th

2008 5877.6 5.92 5.92

Short South African All Shares June 9th

2008 31487.15 3.53 3.53

Short EEM June 9th

2008 144.34 6.68 6.68

Ranbaxy Jan 4th

2008 425.5 22.93% 22.93%

Dr. Reddy Jan 4th

2008 728.6 -10.36% -10.36%Cipla Jan 4

th2008 212.7 -1.03% -1.03%

Apollo Hosp Jan 4th

2008 572 -14.34% -14.34%

Wyeth Jan 4th

2008 535.35 -19.31% -19.31%

Dubai DFM General Index Jan 6th

2008 6190.45 -12.67% -12.67%

Saudi General Index Jan 6th

2008 11712.6 -20.72% -20.72%

VIX September 08 Feb 29th

2008 26.31 -19.26% -19.26%

V2X Index 08 Jan 4th

2008 21.085 22.98% 22.98%

*Includes dividend x4

Closed Out Trades 2008 Closing Date% Since

Inception %YTD

VIX/J8 April Jan 4th

2008 Apr 15th

2008 -6.38% -6.38%

AG Apr 16th

2008 May 30th

2008 -10.66% -10.66%

TNH Apr 16th

2008 May 30th

2008 2.33% 2.33%

ADM Nov 30th

2007 May 30th

2008 9.22% -14.49%

DE Nov 30th

2007 May 30th

2008 -5.39% -12.98%

North American Palladium Oct 25th

2006 May 30th

2008 -37.53% 54.12%

AWB June 08 $3 Call Options Apr 16th

2008 Jun 24th

2008 -2.2% -2.2%


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Background

Raoul Pal has been publishing The Global Macro Investor sinceJanuary 2004 to provide original, high quality, quantifiable andeasily readable research for the global macro investmentcommunity. It draws on his considerable experience in running ahedge fund and advising many more.

In its first three years of publication the compound returns of therecommended portfolio has been +287.65% with a 72% averagenumber of winning vs. losing recommendations.

Raoul Pal retired from managing client money in 2004 and nowlives on the Valencian coast of Spain.

Previously he co-managed the GLG Global Macro Fund in Londonfor GLG Partners, one of the largest hedge fund groups in theworld.

Raoul moved to GLG from Goldman Sachs where he co-managedthe hedge fund sales business in Equities and Equity Derivativesin Europe. In this role Raoul established strong relationships withmany of the worlds pre-eminent hedge funds learning from theirstyles and experiences.

Other stop-off points on the way were NatWest Markets andHSBC, although he began his career by training traders intechnical analysis.

Should you wish to receive information about membership please

email us [email protected].

The number of members is STRICTLY limited, with only a few freespaces coming up each year, as the membership is full. If thereare no free spaces available a waiting list will apply.

Documents

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