Dr. Dre and SiFy (Macro Musings)

Alex here with this week’s Macro Musings.As always, if you come across something cool during the week, shoot me an email at alex@macro-ops.com and I’ll share it with the group.Our Recent Articles — The Best Trading Podcasts For Global Macro Investors: The list of podcasts we listen to each month. We’ve got both process and news/commentary listed. If you have any suggestions, be sure to list them in the comments! Articles I’m reading — I loved this piece in the New Yorker where a guy recounts his experience as an investor in the money burning pit that is the New York restaurant business. It’s a great lesson in the competitive nature of business and what differentiates the few winners from the many losers. Lot’s of overlap to successful stock picking. Here’s an excerpt and you can find the link here.

Yet I’ve come to conclude that the restaurants New York needs are doomed, financially, to fail. That’s because amateur capital backed by magical thinking and a desire for fun distorts the economics for everyone. New restaurants, with too-easy access to financing from people like me, invest too much in design, tableware, food, and service, driving up every customer’s expectations of every restaurant in a cyclone of unprofitability. Landlords, with enough dreamers to fill their spaces, can command nightmare rents. If restaurants had to be good business ideas, and attract sophisticated investors who mercilessly demanded a profit, there would be fewer restaurants. They would be less cool. The food would be less good.

KKR put out a great report this week titled Asia: Leaning In. It’s filled with financial chart porn and some great data that backs up one of the primary thematics we’re tracking: the rise of the emerging market middle class and what that means for commodity consumption. Here’s a section from the piece (link here).

Overall, we now hold the view that a multi-year run of solid investment opportunities lies ahead. Indeed, with China rebounding off its low, rising GDP-per-capita stories are now working again across the region. In our view, the macro backdrop has not been this positive for these types of stories since China’s nominal GDP first began falling in 2011. Moreover, both long and short investment opportunities linked to Asia’s ‘new economy’ are now exploding, as middle class consumers are dramatically shifting the way they do business across almost every sector we reviewed during our trip. Finally, while growth remains more muted in more mature economies like South Korea, Australia, and Japan, we see both internal and external forces driving CEOs to create more efficient corporate structures, propelling what we believe will be an important wave of M&A activity during the coming quarters. If we are right about the aforementioned trends, then now is the time for multi-asset class investors to be ‘leaning in.’

Oh, and if you’re at all interested in learning how the global funding eurodollar system works, which, if you’re a macro trader, then you should be, then check out the series on the subject written by Biren Shah over at Perseid Macro. Biren’s a member of the MO Collective and is a super smart dude. Here’s the link and to the right is a useful 2D credit matrix from the piece.Video I’m watching —I don’t watch much TV. I don’t have time for it and I hate sitting on a couch staring mindlessly at a picture screen. Plus I live in the mountains and don’t have cable. But, a couple of buddies talked me into watching The Defiant Ones on HBO. It’s a four part mini-doc that recounts the rise of two legends from the music biz, producer Jimmy Lovine and Dr. Dre. It’s fff’ing good. I LOVE learning about people who are driven by obsession to create and build difficult things. And I love people who work maniacally to get something just right and hold themselves to a standard that most people can’t fathom. The doc is full of gold, from a young Bruce Springsteen spending weeks in the recording studio working tirelessly to get the sound of a single drum beat just so... to an early U2 wearing out the tape on the recorder doing version after version of what became their first hit album. It’s obviously not trading related but it gives you a sense of what it takes to become the best at whatever field you’re in. And in the trading game there’s no real point in actively trading the markets unless you’re trying to be the best. Like I said, it’s on HBO, go and watch it now. You won’t be disappointed.And in a similar vein of obsessed people doing extraordinary things, check out this six minute video titled Endurance Test: The 1000 Days (link here).It gives a preview of “Kaihōgyō” which is a 1000-day pilgrimage performed by Tendai Buddhists. The pilgrimage is so difficult that it’s been completed by less than 50 monks over the last 100 years. And any monk who starts and fails must then take their own life. The pilgrimage involves routines such as 100 consecutive days of 52 mile runs. That’s nuts… I get shin splints just thinking about it. Book I’m reading —This week I’ve been revisiting Nassim Taleb’s Fooled by Randomness. I first read the book maybe 7-8 years ago and thought it a good time to pick up again as I’m working on a piece involving randomness, markets, and trading. I’ve read all of Taleb’s books. They’re all good and worth reading. But I think this one is my favorite with Antifragile a close second. Taleb’s a skilled writer and he packs many powerful ideas into a reasonably short 250 page book. I tab and highlight things I find noteworthy while reading. And this book is one where it seems like every other page is tabbed. There’s too much good stuff to properly summarize. If you’re a trader or are involved in markets someway or another then you just have to pick it up and read it. Here’s a section where Taleb comments on the “usefulness” of reading financial news.

On the rare occasions when I boarded the 6:42 train to New York I observed with amazement the hordes of depressed business commuters (who seemed to prefer to be elsewhere) studiously buried in The Wall Street Journal, apprised of the minutiae of companies that, at the time of writing now, are probably out of business. Indeed it is difficult to ascertain whether they seem depressed because they are reading the newspaper, or if depressive people tend to read the newspaper, or if people who are living outside their genetic habitat both read the newspaper and look sleepy and depressed.

But while early on in my career such focus on noise would have offended me intellectually, as I would have deemed such information as too statistically insignificant for the derivation of any meaningful conclusion, I currently look at it with delight. I am happy to see such mass-scale idiotic decision making, prone to overreaction in their post-perusal investment orders – in other words I currently see in the fact that people read such material an insurance for my continuing in the entertaining business of option trading against the fools of randomness. (It takes a huge investment in introspection to learn that the thirty or more hours spent “studying” the news last month neither had any predictive ability during your activities of that month nor did it impact your current knowledge of the world. This problem is similar to the weaknesses in our ability to correct for past errors: like a health club membership taken out to satisfy a New Year’s resolution, people often think that it will surely be the next match of news that will really make a difference to their understanding of things.)

Also, go and check this out (link here). Derek Sivers, who’s written some great books, is putting together an enormous collection of book notes on his site. It’s killer.And if you want a comprehensive reading list for global macro traders, go here.  Chart I’m looking at —This chart is from the KKR report that I shared up above. It shows what I think is THE most important big picture macro event in markets today. And that’s the “wealth S-curve” as we call it, hitting it’s tipping point. Over the coming decade were going to see the largest increase in the global middle class that the world has ever experienced. This has huge implications for markets. For example, commodity consumption begins to rise exponentially once populations cross the GDP per capita tipping point. And with commodities trading near secular lows and future capacity cut at record amounts over the last three years… well, things could get interesting.Trade I’m looking at — Orange bars = stock price, Grey bars = TTM revenue, Green line = TTM EPS, Blue line = Price to CF per shareSiFy Technologies (SIFY) is an Indian tech conglomerate. It was dumped like a burning turd by institutions back in the early 2000s because of issues with management, abuse of shareholders, and poor capital allocation decisions. But management was replaced back in 2012 and the company has since pivoted its focus and is now expanding its reach in one of the world’s fasting growing markets. Over the last five years SIFY has grown revenue at an annual CAGR of 20%. This growth is accelerating. It’s also profitable on an earnings and cash flow basis. It’s even paying a small dividend now. But it’s only trading at just over 1x sales. I first came across this company a few weeks ago and have been slow to dig into it (I have a lot on my plate at the moment). It has since climbed over 70+%. But at first look, it seems to me that this could just be the beginning of a much larger move. If everything checks out then there’s no reason why this stock shouldn’t be trading at at least $3+, and probably much more. But there’s a good chance I’ll come across a major red flag. A member from our Collective is based out of India and is fairly connected there. So he’s taking a look into the company and management for us. If he gives us the green light then we’ll put on a starter position next week. Quote I’m pondering —

Wall Street history shows that securities more often reach their low point when some danger or disaster is threatened, than upon the actual occurrence of these incidents, and the reason the low point is made just prior to, or at the time the event actually occurs, is: By that time everyone who is subject to fear-of-what-will-happen, is sold out. When the thing does happen or is prevented, there is no more liquidation, and the price rallies on the short interest, or else on the investment demand created by the improved situation. ~ Richard D. Wyckoff

This is such an important concept to understand. News lags the narrative and narratives lag prices and prices move off perceptions over future fundamentals. So you’re not going to get your trading signals from reading the news. It’s worthless! Unless, you approach it from a purely contrarian perspective and skim the news to see what’s priced into the market, already. But either way, news is mostly noise or just old and outdated by the time it gets to the journalist. Markets are priced off the future 12-18 months out. Not what’s happening today or this week. A trader’s precious time is much better spent reading a book, looking at charts, and working on their process. So spend less time reading the paper, blogs (except this one!), and fintwittersphere and more time working on the things with high high ROI (ie, process, study, process, study, process, study…).And almost forgot this one, but here’s a fantastic interview with Daniel Kahneman on the On Being podcast. The site also has a written transcript worth skimming if you don’t have time to listen (link here). And of course if you’d like more trading podcast recommendations, click here.If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I posts my mindless drivel there daily.And if you’d like to discuss macro with the rest of the Operator community, check out our Global Macro Facebook group by clicking here.