Bill Ackman Finally Pukes Beware Of False Narratives

Bill Ackman Finally Pukes: Beware Of False Narratives

A year ago we wrote about why Bill Ackman should learn a bit of technical analysis. We weren’t suggesting he become an Elliott Wave nut or anything, but that he should adopt the risk management philosophy of a technician. TA clearly defines when to exit a trade. And with this clarity comes superb risk control — our number one job as traders.

But of course our advice fell on deaf ears. Ackman continued to ignore all the technical sell signals in his very public Valeant position. From that time, the stock has dropped another 65%…  

Fundamental investing relies on narratives. This is both a feature and a bug. Without a compelling narrative, other investors won’t flock to your stock and bid up prices.

But narratives aren’t cut and dry like an MA crossover or trend line. This reality makes it’s hard for a portfolio manager to cut risk at the right time. Before he realizes the narrative has departed from reality, the stock could’ve already made a nasty drawdown.

The key is to use narratives to initiate trades. But after the trade is on the book, let technical analysis take over and manage the risk. That’s why we’re proponents of combining different styles of investment analysis. Fundies and techs can add value.

In Valeant’s case, the dominant narrative during its rise was how its CEO Michael Pearson created a new, highly profitable way to run a drug company. Instead of using gobs of money to research new drugs, just acquire old drugs and jack up their prices. This practice slashed costs, boosted revenues, and made Wall Street happy. Ackman and many other hedge funds bought into this narrative and created one of the largest hedge fund hotels of all time.

But eventually the narrative started to turn bearish. Skeptics argued that Valeant’s “growth” was achieved through price gouging. Then more news came out that a speciality pharmacy was in cahoots with Valeant — changing codes on doctors’ prescriptions to Valeant’s brand even when much cheaper generics were available. Valeant was basically ripping off insurance companies to juice their own sales numbers.

By the Fall of 2015 the stock had already fallen 70% from its highs. Here’s where technical analysis could’ve come in handy for Ackman. Technicals clearly signaled that the narrative had changed. It would’ve been easy to observe a trend break on the chart and exit.

But Ackman didn’t have this risk control method in his toolbox. He was instead forced to reassess the narrative and evaluate whether or not his original thesis was still intact. This is an impossible task that requires advanced mental gymnastics. It’s too easy to get emotionally attached to a narrative and succumb to things like confirmation bias and the sunk cost fallacy. Ackman did just that as he continued to buy more Valeant.

That’s why investment narratives should be used to initiate trades, not manage them.

Compelling narratives create large trends which are what you need for huge gains. But technical analysis is what you need to manage your trades. It lets you objectively define your exit. If you’re relying on your interpretation of a complex narrative as an exit strategy, you’re exposing your portfolio to huge drawdowns.

The reality of the market is that no matter how rich or how smart you are, you’ll eventually be wrong. The best in the business call it right a little over 50% of the time. It’s crucial to have a reliable and objective risk management process for when things go south. Without it, you’re setting yourself up to follow in Ackman’s shameful footsteps.

If you want to learn how our team at Macro Ops successfully manages risk, then check out our Trading Instructional Guide here.



Lessons From A Trading Great: Jim Leitner

Jim Leitner is the greatest macro trader you’ve never heard of. He was once a currency expert on Wall Street, pulling billions from the markets, but now he plays the game through his own family office.

Leitner understands the Macro Ops “go anywhere” mentality better than any other trader:

Global macro is the willingness to opportunistically look at every idea that comes along, from micro situations to country-specific situations, across every asset category and every country in the world. It’s the combination of a broad top-down country analysis with a bottom-up micro analysis of companies. In many cases, after we make our country decisions, we then drill down and analyze the companies in the sectors that should do well in light of our macro view.

I never lock myself down to investing in one style or in one country because the greatest trade in the world could be happening somewhere else. My advice is to make sure that you do not become too much of an expert in one area. Even if you see an area that is inefficient today, it’s likely that it won’t be inefficient tomorrow. Expertise is overrated.

He’ll jump into any asset or market, no matter how esoteric. Some of his craziest investments include inflation-linked housing bonds in Iceland and a primary equity partnership in a Ghanaian brewer. He even had the balls to jump into Turkish equities and currency forwards with 100% interest rates and 60% inflation during the late 90’s… the man is a macro beast.

FX Trading

Leitner was one of the first traders to understand and implement FX carry trades. A carry trade involves borrowing a lower interest rate currency to buy a higher interest rate currency. The trader earns the spread between the two rates. Here’s his own words from Drobny’s Inside The House Of Money:

The most profitable trade wasn’t a trade but an approach to markets and a realization that, over time, positive carry works. Applying this concept to higher yielding currencies versus lower yielding currencies was my most profitable trade ever. I got to the point in this trade where I was running portfolios of about $6 billion and I remember central banks being shocked at the size of currency positions I was willing to buy and hold over the course of years.

FX carry trades can be extremely lucrative. But if you get caught holding a currency during a surprise devaluation, it can instantly erase all your profits and them some. Leitner was able to protect himself by keeping a close eye on central bank action:

I was always able to sidestep currency devaluations because there were always clear signals by central banks that they were pending and then I just didn’t get involved. Devaluations are such a digital process that it doesn’t make sense to stand in front of the truck and try to pick up that last nickel before getting run down.You might as well wait, let the truck go by, then get back on the street and continue picking up nickels.

Leitner understands that currencies mean revert in the short-term and trend in the long-term. He’s explored the use of both daily and weekly mean reversion strategies:

The other thing that is pretty obvious in foreign exchange is that daily volatilities are much higher than the information received. Think of it like this:

The euro bottomed out in July 2001 at around 0.83 to the dollar and by January 2004 it was trading at 1.28. That’s a 45 big figure move divided by 900 days, giving an average daily move of 5 pips, assuming straight line depreciation. Say one month option volatility averaged around 10 percent over that period, implying a daily expected range of 75 pips.That’s a signal-to-noise ratio of 1 to 15. In other words, there was 15 times as much noise as there was information in prices!

Noise is just noise, and it’s clearly mean reverting. Knowing that, we should be trading mean reverting strategies. In the short term, it’s a no brainer to be running daily and weekly mean reverting strategies. When things move up by whatever definition you use, you should sell and when they move back down, you should buy. On average, over time you’re going to make money or earn risk premia.


No one has mastered global macro options better than Leitner. He knows when they’re overpriced and when they make a great bet:

Short-dated volatility is too high because of an insurance premium component in short-dated options. People buy short-dated options because they hope that there’s going to be a big move and they’ll make a lot of money. They spend a little bit to make a lot and, on average, it’s been a little bit too much. When they do make money they make a lot of money, but if they do it consistently they lose money. Meanwhile, someone who consistently sells short-dated volatility, on average, would make a little bit of money. It’s a good business to be in and not too dissimilar to running a casino. So there is a risk premia there that can be extracted. (Side note: this is the risk premia we harvest in Vol Ops, one of our portfolios in the Macro Ops Hub).

Longer-dated options are priced expensively versus future daily volatility, but cheaply versus the drift in the future spot price. We need to make a distinction between volatility and the future drift of the currency. Since the option’s seller (the investment bank) hedges its position daily, it makes money selling options. Since some buyers do not delta hedge but instead allow the spot to drift away from the strike, they make money on the underlying trend move in the currency. So both the seller of the option and the buyer make money. The profit for the seller comes from extracting the risk premia in the daily volatility, and for the buyer it comes from the fact that currency markets tend to exhibit trending behavior.

We had a study done on the foreign exchange options market going back to 1992, where one-year straddle options were bought every day across a wide variety of currency pairs.We found that even though implied volatility was always higher than realized volatility over annual periods, buying the straddles made money. It’s possible because the buyer of the one-year straddles is not delta hedging but betting on trend to take the price far enough away from the strike that it will cover the premium for the call and the put. Over time, there’s been enough trend in the market to carry price far enough away from the strike of the one-year outright straddle to more than cover the premium paid.

If the option maturity is long enough, trend can take us far enough away from the strike that it’s okay to overpay.

This is a key concept that very few option traders understand. High vol doesn’t mean huge trends. And low vol doesn’t mean no trends. It’s possible to have low vol trends and high vol ranges.

Leitner exploits this kink in option theory by “overpaying” for optionality from a volatility perspective, but still winning from trending markets.

These overpriced long-dated options become essential in choppy markets. They allow you to “outsource” risk management. You can play for a long-term trend without the risk of getting stopped out by a head fake:

Options take away that whole aspect of having to worry about precise risk management. It’s like paying for someone else to be your risk manager. Meanwhile, I know I am long XYZ for the next six months. Even if the option goes down a lot in the beginning to the point that the option is worth nothing, I will still own it and you never know what can happen.

Psychology, Emotions, And Fallibility

Like every other star trader, Leitner has strong emotional control. He views all trades within a probabilistic framework and fully accepts his losses:

At Bankers, I came to realize that I was absolutely unemotional about numbers. Losses did not have an effect on me because I viewed them as purely probability-driven, which meant sometimes you came up with a loss. Bad days, bad weeks, bad months never impacted the way I approached markets the next day.To this day, my wife never knows if I’ve had a bad day or a good day in the markets.

Along with reigning in his emotions, he also acknowledges his own fallibility:

Another thing that I realize about myself that I don’t see in other traders is that I’m really humble about my ignorance. I truly feel that I’m ignorant despite having made enormous amounts of money.

Many traders I’ve met over the years approach the market as if they’re smarter than other people until somebody or something proves them wrong. I have found this approach eventually leads to disaster when the market proves them wrong.

It’s not possible to “crack” the market. You’re guaranteed to eventually be proven wrong no matter how smart you are. And when that time comes, you have to stop the bleeding before death occurs. The trading graveyard is littered with “smart guys” who thought they solved the market puzzle… don’t be one of them.

Investment Narratives

A compelling narrative is both a blessing and a curse.

On the one hand, understanding the dominant market narrative will keep you on the right side of a powerful trend. But it can also lure you into some dumb trades. Not all narratives are rooted in fundamental reality. Oftentimes a false trend will form and lead to a boom/bust process. Here’s Leitner’s take:

We need to quantify things and understand why things are cheap or expensive by using some hard measure of what cheap or expensive means. Then there has to be a combination of story and value. A story is still required because a story will appeal to other people and appeal is what drives markets. If there’s no story and something’s cheap, it might just stay cheap forever. But if there’s a story involved, make sure that you first look at the numbers before you get involved to be sure there is some quantitative backing to the idea.

Leitner’s team always starts with quantitative scans when hunting for equities. If the quant data doesn’t check out, there’s a higher risk of falling prey to an overhyped narrative.

In equities, we start by looking at various valuation measurements like price to book, price to earnings, and price to cash flow. It’s very important to not be too story-driven. A way to avoid that is by using quantitative screens to determine what is cheap. Once you find things that are cheap, then look for stories that argue why it shouldn’t be cheap. Maybe a stock is cheap but it’ll stay cheap forever because there’s no good story attached to the cheapness.

Longs Vs Shorts

It’s no surprise that being long financial assets has a positive expected value over time. Stocks and bonds pay a premium to incentivize investors to move out of cash and take risk.

This is why you need twice your normal conviction to go short. The system is designed to move higher over time, so you better have a damn good reason to fight that drift.

Owning assets, or being long, is easier and also more correct in the long term in that you get paid a premium for taking risk.You should only give your money to somebody if you expect to get more back. Net/net it is easier to go long because over portfolios and long periods of time, you’re assured of getting more money back. Owning risk premia pays you a return if you wait long enough, so it’s a lot easier to be right when you’re going with the flow, which means being long. To fight risk premia, you have to be doubly right.


Mention the word “leverage” around rookie traders and they’ll run for the hills. Most think it’s a quick way to blow up a trading account. But the pros view leverage as a tool that can completely transform and enhance risk-adjusted returns. Ray Dalio is traditionally the one credited with using this concept to make billions.

Let’s say you have a 30-yr bond that returns 6% a year above the cash rate. It has a max drawdown of 20%.

You then compare it to a stock index that returns 9% a year above the cash rate. It has a max drawdown of 50%.

By applying leverage, you can transform the bond into the higher performing asset. Using 2x leverage on the long bond will give you 12% returns with 40% drawdowns. This is a much better deal than the stock index on a risk-adjusted basis. This technique is known as “risk parity.”

Leitner applies it to his fixed income investments:

When using leverage, you want the highest Sharpe ratio because you’re borrowing money against your investment, and the best Sharpe ratios are found in the two years and under the sector of fixed income. On an absolute return basis, two years and under bonds are not going to pay as much as a 10-year bond because the yields are usually lower. But the risk-to-return ratio is also very different.You could be five times levered in the two-year and get a higher payout with the same risk as a 10-year bond because of duration.

Going levered long 2-year notes is a better risk-adjusted trade than going long a 10-year note. You get the same return in the levered 2-year, but with less volatility.

Most investors can’t exploit this because they can’t use leverage. But a macro trader using futures can perform all sorts of financial wizardry and vastly outperform a typical cash-only fund.

Portfolio Construction

Over time Leitner has adapted his strategy away from traditional global macro. Instead of using market timing, trend following, and gut feel — the pillars of old school macro — he’s shifted to a multi-strategy approach.

He combines various system-based strategies across five main asset classes: Equities, Fixed Income, Currencies, Commodities, and Real Estate. His goal is to earn the risk premia present in each category. He then reserves a certain amount of his cash for special situation big bets that only come around a few times a year.

We start off by acknowledging that we are ignorant, so we need to be systematic, clip some coupons, and earn some risk premia. It doesn’t matter if it is in currencies, bonds, commodities, real estate, or equities. Of course we have to be smart about it by reading a lot, talking to smart people, and being on top of it all, while acknowledging that we’re not that much smarter than the rest of the world.Then, every once in awhile, we’re going to stumble upon an exciting idea that’s going to give us some extra alpha and the ability to outperform.

After these five main asset categories, we have a last category which we call absolute return.This is where we stick those great, out-of-the-box ideas we come across about twice a year. Sometimes we’re lucky and find major mispricings once or twice a year, and sometimes we’re unlucky and it takes 18 months before the next one comes along. When we find these fantastic ideas, we’re willing to bet up to 10 percent of our fund on one idea. One that we think will double or triple, earning an extra 10 or 20 percent return for the entire portfolio.

The absolute return category is there in order to leave us open to making unsystematic money.

The multi-strat approach is the most robust way to allocate capital. Most of the macro legends of the 70s, 80s, and 90s have moved to a family office format and implemented something similar to what Leitner describes. At Macro Ops we too use a combination of discretionary and systematic strategies to make sure the cash register keeps ringing year after year.

For more details on how Jim Leitner analyzes, sizes, and manages his trades, check out our Ops Notes by entering your email below:



Flying Too Close To The Ground

Flying Too Close To The Ground

It’s not how close you get to the ground, but how precise you can fly the airplane. If you feel so careless with your life that you want to be the world’s lowest flying aviator, then you might do it for a while — but then a great many former friends of mine are no longer with us, simply because they cut their margins too close. ~ Bob Hoover

Bob Hoover was known as the “pilot’s pilot” — one of the greatest to have ever flown. He learned his skills as a fighter and test pilot for the Air Force and is best known for revolutionizing modern aerobatics.

As a crack flyboy, Hoover understood risk better than most. And it was this firm grasp of calculated risk-taking that allowed him to become one of the best aerobatic pilots in the skies and still live to the ripe old age of 94.

There’s an old trading adage that goes “There are old traders, and bold traders, but no bold old traders.” Like the pilots that “cut their margins too close”, markets are constantly claiming the accounts of those who recklessly risk their capital in search of easy profits.

Here’s a rule of thumb to live by: Your margin of risk is dependent on your experience. But no matter how deep your experience, never cut your margins too thin that you risk hitting the ground.

First and foremost, trading is about survival. And to survive, you need to protect your capital.

Many traders, especially inexperienced ones, fly way too close to the ground. This makes their blow up an eventuality.

Bruce Kovner said, “My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.”

Newer traders don’t respect risk because they haven’t gotten burned badly enough… yet. On average our team at Macro Ops risks a fraction of 1% per trade.

A good trader is a good risk manager above all else. Everybody should follow Buffett’s two rules of investing, “Rule number 1, don’t lose money. Rule number 2, don’t forget rule number 1.”

This will not only protect you from fighting the powerful headwinds of negative compounding, but it’ll keep you alive and in the game. Stay alive and you can continue to grow. Continue to grow and maybe someday you’ll acquire the skills to become an ace.

I got my tail clipped roughly ten years ago. Getting your tail clipped is when they cut off the tail of your shirt after your first solo flight (the photo is of me after my successful landing).

First Solo Flight

My first solo was supposed to take place a week earlier than it did. But it was cancelled. As I was going through my pre-flight checklist that morning, there was a horrible crash on the runway.

Another student working towards his pilot’s license botched his landing. Unlike other students flying slow and easy Cessnas, he insisted on learning to fly in a P-52 Mustang. The difference is like learning to drive a Toyota Camry versus a drag racer.

He was learning on a powerful machine… like a trader learning to trade while using too much leverage.

When coming in to land, he knew he wasn’t going to stick it, so he tried to do a pass through. A pass through is when you push the throttle and climb back into the air to circle around and try again. He put his throttle all the way in — on a Cessna this is fine — but on a P-52 Mustang the engine is so powerful that the torque flipped the plane over. The pilot stuck the landing on his head. The crash was fatal.

As traders we’re not dealing with anything as serious as our lives — it’s just money. But to make it in this game, you need to take the preservation of your capital just as seriously.

Paul Tudor Jones said, “… at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.”

Keep your margins wide. Stay well above the ground and carefully calculate risk. Only press the leverage as you gain the experience.

If you want to learn how our team at Macro Ops manages risk, then check out our Trading Instructional Guide here.



George Soros The Way Ahead Lecture

A Review Of George Soros’ “The Way Ahead” Lecture

The following review is straight from Operator James, a member of the Macro Ops Hub.

With my TV broken for the last several months, and a useless repairman backed by a company going out of business, I’ve had a lot of time to devote to learning and thinking. Recently I realized I need to dig into fundamentals and decided George Soros was the best place to start. Thankfully there’s plenty of his speeches and lectures online (along with a lot of ‘Soros is the devil’ articles and something about him being a Nazi).

Soros’ “The Way Ahead” lecture series from 2010 is very interesting. It covers his theory of reflexivity and how it applies to financial markets. The lecture contains some interesting ideas that have yet to happen, but seem to apply to the near future. You can watch the lecture below. To follow are my quick notes and thoughts on the material presented.

7:00 to 8:00 – Back in 2010 Soros felt the financial crisis was not the end. He expected another crisis within a year or two. Obviously that didn’t happen. But he explains that he didn’t see the recovery from 2009. I’m not saying a crisis is around the corner, but we should never lose sight that one could be.

9:00 to 9:30 – Eventually the US won’t dominate the world as it has in the past. If Soros is right, a new paradigm will emerge. There will likely be many potential opportunities to profit during the shift. As a 13th generation American, I’m saddened by the short-sightedness of our leaders, but a new world order is not the end, but rather an opportunity.

12:00 to 17:50 – Soros discusses the concept of central and periphery currency flows.

20:30 to 21:00 – After talking about global financial regulations needing a force with teeth, Soros mentions how the system is currently constructed to give rise to ‘financial protectionism’ that could disrupt the global markets.

40:40 to End – Soros discusses many points in the last few minutes of the lecture. The overriding theme is: what happens after the dollar rises and puts developing countries in a bind? The world does not seem to trust American leadership anymore and that could spell trouble for US debt and dollar dominance. My intention is not to say that the following will absolutely happen, but rather to game scenarios to see where things may land. Ultimately, how do we profit from these events should they happen? I will try to encapsulate as many points as possible:

  • If the USD continues to advance higher, will the other powers (including China) want to operate under the Bretton Woods arrangement? Soros’ suggests the world should move to an SDR basket as a reserve currency. But could this realistically happen? I doubt the current US administration would be willing to sit down with the Chinese and allow a new world order where the dollar ceases to be the reserve currency. After all, USD reserve currency status provides certain advantages to the US government (e.g. greater debt spending because foreign governments are willing to buy in).
  • Would it be in China’s best interest to join an SDR-like arrangement? With all the poverty still racking their country, I doubt they’d want to give up their manufacturing advantage by becoming the reserve currency. Maybe they think they can do better than the Americans and prevent the hollowing of their rust belt. But of course I should mention that America can still produce a lot. I see it everyday. However, I also happen to know by dealing directly with the Chinese that they’re skeptical of automation (plant automation is my profession).
  • Around 46:50 to 47:00 Soros concedes that if Obama fails to prevent a double-dip, the population could become susceptible to populism. We didn’t have another dip in asset prices, but the folks in the places that voted for Trump didn’t see it that way. Shortly before the election I interviewed an engineer who worked for the steel industry in western PA. He told me he was looking for a job because a lot of plants had shut down and he knew he was next. This is a common story that illustrates that the people that voted for Trump did not care about stock prices.
  • At 48:50 Soros mentions that China will need a more open society if it wants to be considered a developed country. This point makes me wonder whether a crisis will serve to open China up, or makes it more isolated. This is something we’ll have to wait to see.

These are just my own thoughts on the lecture. I would love to hear yours as well. Please feel free to respond in the comment section below. Thanks!  

To learn more about our investment strategy at Macro Ops, that includes wisdom learned from Soros, click here.



Anthony Bolton's Investing Against The Tide

A Review Of Anthony Bolton’s “Investing Against The Tide”

The following review is straight from Operator Kean, a member of the Macro Ops Hub. To contact Kean, visit his website here.

Anthony Bolton is one of Britain’s most well-known investors. He’s managed money professionally for close to 3 decades at Fidelity Investments, and during his time as head of the Special Situations Fund, he’s averaged annualised return of 20%!

Bolton shares his wealth of experience in his professional self-styled journal titled Investing Against The Tide. Forwarded by well-known investor Peter Lynch, a long-time colleague of Bolton’s, the 200+ page book reflects Bolton’s investment philosophy and practices.

While the book isn’t as light a read as Scott Fearon’s Dead Companies Walking, I found it to be more valuable from a practical perspective. Bolton not only shares his experiences, but his conceptual investment framework as well.

The book is split into 2 parts. The first is titled “principles and practices from a life running money”. The second is titled “experiences and reflections from a life running money.” The former covers the ‘how and what’ of Bolton’s investment framework, while the latter is more introspective, with commentary on the ups-and-downs of his investment career.

The first part includes:

  • What to look for in management
  • Developing an investment thesis
  • Gauging market sentiment
  • Constructing a portfolio of shares
  • Assessing the financials of a company
  • Understanding valuations
  • Technical analysis and the importance of price charts
  • Market timing

These sub-chapters are brief (some barely 2 pages long), with Bolton offering his take on what to look for during the investment process. Given that bottom-up fundamental analysis can be quite complex, workable ‘Occam’s Razor’ parameters are needed for decision making.

The second part of the book covers:

This is the section where Bolton reminisces about his career, including his own mistakes and what he sees as the future of the industry.

Bolton also shares 12 attributes needed to be successful in the markets:

One interesting part of Bolton’s strategy is his use of technical analysis. Not many fundamental bottom-up stock pickers are known for calibrating their investments with technical analysis. Bolton explains:

The way I look at technical analysis today is as a framework or overlay into which I put my fundamental bets on individual stocks. I see it as a discipline for my stock picking. What I mean by this is that, if the technical analysis confirms my fundamental views, I may take a bigger bet than I would do otherwise. However, if the technical analysis doesn’t confirm my fundamental positive view, it makes me review my investment thesis on a company, for example checking that there aren’t negative factors we have overlooked. If my conviction is very strong I will often ignore the technical view; at other times if it conflicts I will take a smaller bet or reduce my position…

… I look at the technical situation as a summation of all the fundamental views available on a stock at that particular moment and it can sometimes be a warning signal of problems ahead. In a world where every professional fund manager knows that at least two out of five share picks they make will not work out as they hoped this is very useful…

… One of the great disciplines of technical analysis is that it forces you to cut losses and run profits – something that’s always easier said than done. Although at heart I’m a fundamentalist I have definitely found that the combination of two approaches seems to work better than just one on its own. A few years ago I spoke at a technical analysis conference and said that if I was on a desert island and was only allowed one input for my investment decisions, it would be an up-to-date chart book. I think today I would still be of the same opinion. The trouble with fundamental data is that I can’t single out only one source that on its own would be sufficient. I could, if pushed, run a portfolio with just a chart book – although on a desert island, it wouldn’t be high up on my list of survival items.

So who says technical analysis is voodoo?

Bolton’s book is great for long-term equity investors, particularly for those who are value-oriented. I’d rate it a 4 out of 5.

To learn more about our investment strategy at Macro Ops, click here.



A Review Of Lawrence Creatura’s “Long and Short

A Review Of Lawrence Creatura’s “Long and Short: Confessions of a Portfolio Manager”

The following review is straight from Operator Kean, a member of the Macro Ops Hub. To contact Kean, visit his website here.

Lawrence Creatura recently shared his insights from over two decades of investing in markets. The following are my takeaways from Long & Short: Confessions of a Portfolio Manager.

Identify Your Comparative Advantage

Creatura advises that investors understand their edge. This point is similar to Warren Buffett’s advice about knowing your ‘Circle of Competence’ — finding what you’re really good at and being aware of where that boundary/circle ends. Creatura writes: Read more

The Capital Cycle

How The Capital Cycle Works

The following is an excerpt from our monthly Macro Intelligence Report (MIR). If you’re interested in learning more about the MIR, click here.

If you’ve been following Macro Ops for a while, then you know the Bridgewater Debt Cycle model is the foundation for how we view larger market movements. The debt cycle drives the short-term business cycle (5-8 years) as well as the longer-term secular cycle (50-75 years).

Here’s how it works:

  1. The central bank lowers interest rates, bringing down the cost of money
  2. This lower rate feeds into the rest of the economy, bringing down lending rates
  3. Borrowing becomes cheaper and more attractive, driving consumers and businesses to borrow and spend more (boosting demand)
  4. Existing debt becomes cheaper to service, leaving consumers and businesses with more income to spend (boosting demand)
  5. The discount rate at which businesses and financial assets (risk-premia spread) are valued is lowered, increasing the present value of assets, which creates a flow into riskier assets (boosting demand)
  6. Since one person’s spending is another’s income, a wealth effect is created and credit profiles improve, allowing consumers/businesses to borrow and spend more, creating a virtuous demand cycle

Eventually, central banks raise interest rates and the feedback loop shifts into reverse, until interest rates are lowered once again and the cycle starts anew. Short-term debt cycles compound into long-term debt cycles. This is how demand spawns and how bull and bear markets are born and die.

Again, if you’ve been following us for some time, then you know that we’re in the tail end of the current short-term debt cycle. And this short-term debt cycle is on the backend of the long-term debt cycle. This means we’re in the early stages of a secular deleveraging, which is why growth has been so elusive and also why Western politics have been so populous (a period not unlike the last secular deleveraging in the 1930’s).

The Debt Cycle model looks at everything from a demand perspective. But we can also look at these cycles from the viewpoint of supply. Doing so gives us greater granularity of the forces at work. Read more

Expected Value (EV) & Bayesian Analysis In Trading

Expected Value (EV) & Bayesian Analysis In Trading

An alternative title for a trader is “professional uncertainty manager.”

Trading is a business of possibilities, not certainties. Despite our best efforts to predict financial markets, we’ll inevitably be wrong time and time again. Many of our bets will lose purely due to bad luck or unforeseen circumstances. It doesn’t matter if they were objectively good bets. Read more

Guerilla Speculation

Guerilla Speculation

The following is an excerpt from our weekly Market Brief. If you’re interested in learning more about Market Briefs and the Macro Ops Hub, click here.


“If you wait by the river long enough, the bodies of your enemies will float by.”

“He will win who knows when to fight and when not to fight.”

“If a battle cannot be won do not fight it.” ~ Sun Tzu

The Art of War by Sun Tzu dates from 6th century B.C and is the oldest known manual on military strategy.

I first read it in my early teens and was captivated by the weight of the wisdom packed into such a short book. It’s not just a treatise on war but a deeper philosophical look at the underpinnings of how nature works, and more importantly, how we should operate within it.

It’s one of the few books that I revisit every few years and still manage to come away with new insights each time.

Sun Tzu birthed the concept of guerilla warfare. Guerilla warfare enables a small force to defeat a significantly larger and more well equipped one. It accomplishes this through extreme patience, knowledge of thyself and thy enemy, and a superior strategy that shapes the rules of the game to one’s advantage. Read more

Plan Your Trades And Trade Your Plan

Plan Your Trades And Trade Your Plan

The following is part 3 of our 3-part psychology series. You can read part 1 here and part 2 here.

Clearly our biology and the biases that come with it are hazardous to our financial health.

But how exactly do we solve this problem?

The trick is to plan your trades and trade your plan.

The first step to successful trading is creating a solid strategy that accounts for every possible market scenario. High volatility, low volatility, black swans, it doesn’t matter. Everything should be planned for. Nothing should be a surprise. Read more