Tyler here with your latest Friday Macro Musings…
As always, if you come across something cool during the week, shoot us an email at firstname.lastname@example.org and I’ll share it with the group.
Latest Articles/Videos —
MO Podcast #1 Volatility, Smart Beta, Ancient Chinese Philosophy, and Poker — Check out our very first MO podcast with Chris D. and Tyler! Available on all major platforms.
MO Podcast #2 Macro Ops Monthly Intelligence Report, Dollar, Tesla, and Birds — For the second episode of the MO podcast Chris D. talks with Alex about his history as a United States Marine Corps sniper and how that has helped him navigate markets. Available on all major platforms.
Emerging Markets Explained — AK goes over the history of how the emerging markets fund was created as well as what the EEM ETF is actually composed of.
Articles I’m reading —
At the beginning of 2018 Dalio went on TV in Davos and said something along the lines of “you would look pretty stupid holding cash in 2018.”
Cash then went on to be one of the best performers of 2018… and the internet took notice, trashing Dalio and his early 2018 Davos “prediction” gone wrong.
People assumed Dalio stuck to that call for the full year, but Dalio and his hedge fund Pure Alpha updated their outlook as the year played out (something every good trader does) and posted some killer numbers — their best since 2011. (Link here for full article.)
The O’Shaughnessy Asset Management team put out a deep dive on quant value investing that I found interesting. (Link here)
In it, they take a look at four specific value measures: trailing-twelve-month P/E ratio, CAPE, PRE (Price to Retained Earnings), and average investor equity allocation.
All of the measures show that the equity market is historically overvalued. But they go on to say that this means nothing for forward 1-3 year returns. Valuations only matter to investors holding for the long haul. The statistical relationship just doesn’t mean much on a shorter time frame.
It’s good to read about this stuff now and then so we can avoid making the mistake of sitting out in the short-term because a long-term metric is telling us to do so. Many traders have missed out on the upside in stocks over the last few years because they have been overly focused on valuation metrics.
I think this is one of the more important macro charts right now. Markets took this week’s FOMC announcement as a sign that the Fed has put the breaks on the hawkishness for good. But easier policy this year will drive greater risk-taking in markets which could then feed into the real economy. And, ultimately, that may lead to a more hawkish Fed later this year. Remember, we always need to look at what’s likely to happen versus what’s being priced in and it seems the market has become fairly one-sided in their pricing of future outcomes for the Fed Funds Rate.
And then there’s this one on hedge fund positioning.
Hedgies aren’t taking much risk compared to the past. They have a defensive stance right now which means rallying in the equity market will likely bring in FOMO buying as funds feel the pressure to keep up.
Podcast I’m listening to —
If you’re a short-term trader check out Linda Raschke’s episode of the Futures Radio Show. If that name sounds familiar it’s because Linda was interviewed in Jack Schwager’s New Market Wizards book. She’s a hardened veteran of the trading business and has lots of quality intel and wisdom for the next generation of traders.
At the beginning of the show, Linda speaks about a few concepts that we talk about a lot here at MO.
- She said trading experience allows you to spot the “fat pitch” and press when appropriate.
- She also said 2 days of her trading month make up 80% of her monthly profits.
Both of these statements are in line with our mental model of how markets work. They move according to a power law, meaning the truly fertile opportunities only come around every so often. But, when they do, they pay out big to those who know when to press at the right time.
The trader’s first job is to control risk so we don’t get taken out of the game. But just controlling risk won’t make you rich. You have to go for the jugular when conditions align and squeeze the fat pitch for all it’s worth…
Book I’m Reading —
Can’t Hurt Me by David Goggins — Do you feel yourself caught in a rut, unmotivated, and beaten down by life’s challenges? Have you struggled with pushing your limits in the gym and at work? If so, get your hands on a copy of this book as soon as possible. It has expanded my mind in ways no self-help book ever has. And since then I’ve been able to push my mental and physical pain thresholds to new heights.
David Goggins is an ex-SEAL who’s a regular on the ultra marathon circuit. To succeed in these pursuits he’s had to find ways to dampen that little voice in the back of all of our heads that tells us to quit when things get uncomfortable. Goggins learned how to hack his own mind and give that little voice the finger as he endured excruciating circumstances. He shares these mental hacks in this book. And it’s not BS fluff. It’s actionable tips that will help you push when things get hard.
Goggins even gives you clear and simple action items that you can integrate into your life so the initial shot of motivation you get from reading this book sticks with you for the long haul.
If you like audiobooks I highly recommend the Audible version of this title because in between chapters the reader and David Goggins put on “mini podcasts” which expand on what’s written down in the book. It’s a really interesting format and I think the audiobook/podcast combo will become more popular over the years as these two genres start to blend more.
Trade I’m looking at —
The Fed has given the bulls the all-clear. Here’s a summary of this week’s Fed meeting from Tim Duy’s Fed Watch.
The Fed gave markets participants all they could really hope for at the conclusion of the first FOMC meeting of 2019. Notably, the Fed shifted their guidance from further rates increases to patience, enshrining the recent Fedspeak in the FOMC statement and making clear that they Fed was in no rush to change policy and the next policy shift could be up or down. And if that alone were not enough, the Fed announced that they would likely be winding down the balance sheet run-off sooner than expected. Federal Reserve Chairman Jerome Powell came prepared avoid the missteps of the December FOMC meeting and markets rewarded him with a solid rally in stocks and bonds.
So now that they’ve shifted gears a bit I’ve gotten interested in our FOMC trade again. The FOMC trade involves shorting volatility on the day of a Fed meeting and covering the position around 30-60 minutes after the announcement.
This trade worked great during the bull run of 2013-2016, but in 2017 the trade ran started to putter — there just wasn’t enough vol to sell off with a VIX in the 11 handle.
2018 didn’t do too well either. Depending on how long one held after the announcement the trade scratched or had a down year.
The trend has finally reversed now that the Fed has started to ease up on the economic brakes.
Below charts out the intraday price action of volatility fund VXXB on January 30th. Going short 3 hours before the announcement and covering 30 minutes after the announcement produced gains of just over 2%. Not bad for a one day return.
Quote I’m pondering —
We might describe our world as having retail sanity, but wholesale madness. Details are well understood; the big picture remains unclear. A fundamental challenge… is to integrate the micro and macro such that all things make sense. ~ Peter Thiel
If you’re not already, be sure to follow Alex on Twitter: @MacroOps. He posts his mindless drivel there daily.
Have a great weekend.
Co-Founder of Macro Ops, Trader, Poker Player, Game Theorist, Volatility Specialist