Uranium, Unemployment Cycles, and The Fat Pitch

Tyler 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.

New MIR Report Out Soon Sign Up Now: In this month’s MIR, we’ll be revealing our highest conviction asymmetric macro trade idea for the end of 2018 and start of 2019. On top of that we’ll be talking about our process for short-selling and pitching some interesting plays that fit within that framework. To cap it off the report will end with a Greenblatt style hidden value spinoff. Lot’s coming for the month of November!

We have a 60-day money-back guarantee, so there’s literally no risk for you to read about our latest ideas. Sign up to the Macro Intelligence Report by clicking here.

Recent Articles/Videos —

China Won’t Bail Out Global Markets This Time Around — Alex explains why China will shy away from injecting liquidity into the system right now. It’s very unlikely we’ll see a reversal in policy until the end of 2019, at the earliest. This matters big time if your trying to time the recovery in EM.

Articles I’m reading —

The Critical Turtle Trading Teacher William Eckhardt: Launching 1000 Systems —  Eckhardt began trading futures in the 1970’s and also ran the famous Turtle Trader program alongside Richard Dennis. He’s considered one of the founding fathers of the modern day CTA industry.

This article is in interview format with Futures Magazine and spawns a great discussion on the Efficient Market Hypothesis that I agree with.

Futures Magazine: Many in the traditional investment world cling to the notion that markets are efficient. Trend-following is not valid under the efficient market hypothesis (EMH) but here you are 30 years later. Why has the EMH persisted? Talk about this anomaly.

Bill Eckhardt: The random walk model of price change has been so durable because it’s nearly correct. The difference between futures prices and certain random walks is too small to detect using traditional time series analysis. Incredibly, this difference is detectable using trading systems.

Markets are tough to trade because most of the time there just isn’t any edge. The current price accurately reflects all known information. But once in awhile things line up to create a fat pitch where price is clearly wrong. That’s when we have to take a hard swing.

Chart I’m looking at —

The stock market decouples from the real economy quite often. Fear, greed, news, risk control algos, performance chasing and a plethora of other stuff can cause wild gyrations up and down in the broad indices. But those moves don’t stick and continue unless the real economy follows.

That’s why I like keeping an eye on the trend in unemployment. It’s rare for the stock market to have a deep continued sell off without job loss starting to accelerate higher. Before the 2000 bear market and the 2008 bear market, unemployment started to scream higher and breach its 12-month and 36-month moving averages. Bears need to be cautious here in our opinion until the unemployment rate reverses in a meaningful way.

Trade I’m considering —

Energy commodities move in capital cycles. High prices lead to more investment which eventually leads to over-capacity and a supply glut which then drives prices lower sending the process in reverse. Low prices force inefficient producers to shutdown and others to scale back. Eventually these low prices drive excess capacity offline which then leads to tight supply and higher prices. And the cycle begins anew — rinse and repeat.

The Uranium market is at the trough of its capital cycle. CAPEX has shrunk big time as uranium prices have been in a brutal bear market for the last decade.

We’ve taken a couple of shots at some uranium miners over the last two years but with limited success. Price has continued to trend sideways… It’s tough to time when these capital cycles turn.

But now uranium has hit its highest level in more than 2.5 years as big producers of the nuclear fuel buy material in the market and China prepares to reaffirm its plans to build new plants.

We’re taking another research dive into the uranium to space to figure out if this is finally the time that the capital cycle reverses. In the past, one of our favorite picks for this theme has been Cameco (CCJ).

Video I’m watching —

A historic Wall Street documentary — This was shot somewhere between 1920 and 1960 (according to the website). If you watched PTJ’s documentary “Trader” from the 1980’s you’ll get a kick out of this short film too.

Taleb Says World Is More Fragile Today Than in 2007 — Taleb came on Bloomberg TV this Halloween to talk about how we still haven’t solved the leverage problems from 2008. Instead we just shuffled paper around and transferred private debt to the government. He says eventually the US government will hit a point where they won’t be able to borrow enough to service interest payments so they will be forced to inflate the debt away instead. That in turn means high or possibly even runaway inflation. Taleb goes on to explain that he holds gold and land to preserve his wealth for when that time comes.

Quote I’m pondering —

Remember that big stack poker is a game of patience. You don’t have to make a big play in every marginal situation that comes along, just as a good hitter in baseball doesn’t have to swing at balls outside the strike zone. Wait for good solid situations before making big plays. ~ Dan Harrington

Wait for those fat pitches!

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. Alex posts his mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.



China Won’t Bail Out Global Markets This Time Around

I believe there are three important drivers to markets right now. Two long-term and one short-term. These are:

  1. China is actively trying to restructure its economy and end its incessant leveraging.
  2. A growing issuance of treasury paper, driven by a widening budget deficit and quantitative tightening, is sucking up global liquidity and creating a “crowding out” effect in other markets.
  3. Consensus long dollar / long US vs. RoW positioning and sentiment has set the stage for an interim bout of EM outperformance; before another reversal and devastating final sell-off.

We’ve written many times over the last few years about why China is THE most important macro variable this cycle. The reason is in the chart below.

China (orange line) has accounted for the majority of credit creation this cycle. They’ve been the global workhorse by leveraging credit driven demand. As a result, China accounts for over 50% of global GDP growth since the financial crisis.

China is now dead set on ending its super-sized leveraging cycle and transitioning to a more sustainable consumer-driven economy. We know this because President Xi Jingping has told us so as he did here in late 2016.

If we don’t structurally transform the economy and instead just stimulate it to generate short-term growth, then we’re taking our future… If we continue to hesitate and wait, we will not only lose this precious window of opportunity, but we will deplete the resources we’ve built up since the start of the reform era.

Xi finished the above statement by saying the country had until the end of 2020 to make this transition.

Xi’s moves to finally tackle the debt are also clearly showing up in the data. We’ve been writing about it all year, here, here, here, here, here, here, and here.

This is a very big deal that is still largely being ignored by the market. Investors appear to be operating off of the old assumption that Xi and team will stimulate at any moment. But this won’t be the case. It’s very unlikely we’ll see a reversal in policy until the end of 2019, at the earliest. This will give them time to juice the Chinese economy going into the centennial anniversary for the Chinese Communist Party.

Until this happens, we’re going to see a bumpy road ahead for global markets.

Ned Davis’ Global Recession Probability Model is signaling an 80% probability of a global downturn. As noted on the chart, since 1970 we’ve seen a recession 92.11% of the time there’s been a reading above 70 (chart via CMG Wealth & NDR).

Morgan Stanley’s global Financial Conditions Index is rising and now sits at its highest levels since 2015.

And the Global Manufacturing PMI recently turned negative for the first time since the end of 2015.

Meanwhile, we have strong growth in the US — though it’s likely peaked for the cycle — and near record high equity valuations, combined with rising interest rates.

2019 is going to be an interesting year for markets…  

In this month’s MIR, we’ll be covering the opportunities and dangers that we see ahead. We’ll lay out the case for what we think is the most asymmetric macro trade in markets right now; discuss our process for short-selling and pitch some Icarus stocks we’re adding to our books, and then make the pitch for a Greenblatt style hidden value spinoff trade. If you want access to this research click the link below.

Click Here To Learn More About The MIR!

There’s no risk to check it out. We have a 60-day money-back guarantee. If you don’t like what you see, and aren’t able to find good trades from it, then just shoot us an email and we’ll return your money right away.

The macro situation has become fast moving and turbulent. If the data continues to head south we can see a swift revaluation of all the high flying stocks that have driven this bull market. By reading this month’s MIR, you will have an idea of how to sidestep a potential collapse and even profit from it.

Click Here To Learn More About The MIR!



Modern Monetary Theory and Youtube Nostalgia

Tyler here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot Alex an email at alex@macro-ops.com and I’ll share it with the group.

Recent Articles/Videos —

Market Overview — Is this just a short-term bounce? Or is the bull back in play?

Disney — A fundamental overview of one of the largest positions in our portfolio.

PTJ — Jack Schwager reveals how Paul Tudor Jones first learned risk management.

Going Pro — Tyler discusses the different ways to break into the investment industry.

Articles I’m reading —

Eric Lonergan, author of the excellent blog Philosophy of Money, put out a great piece this week on Modern Monetary Theory (MMT). This line of economic thought continues to gain traction amongst policymakers.  There’s a high likelihood it’ll be put into effect following the next economic downturn and this will have huge macro implications. So it’s important to stay abreast on developments in this space. Here’s the link and an excerpt.

MMT has also achieved far more than a reorientation of focus. I think one of its greatest achievements is pedagogic. Stephanie Kelton is a prime example. Much of macroeconomics makes fundamentally simple concepts – such as the relationship of real interest rates to consumption spending – impenetrably complicated. As a result, a great deal of macroeconomic modeling produces a loss of insight and introduces a fresh bias: over-confidence due to complex formalization. MMT achieves the opposite – it makes complex matters, banking, fiscal policy, money creation, far easier to understand than any other approach I am aware of. And in most cases, the explanations are rigorous and accurate. It should not be surprising that MMT has a band of activists – economists like Stephanie Kelton have made macroeconomic problems which are of critical political importance highly accessible, while simultaneously revealing the snake oil peddled by much of the political class. There is a lesson here for everyone.

And Jesse Stine (author of the book Insider Buy Superstocks) shared a Gdoc this week with a list of great monthly charts from around the world showing a wide range of markets/stocks that are deeply oversold and up against their lower Bollinger Bands. Looks like there’s lots of slack in the market for a big bounce. Here’s the link.

Chart I’m looking at —

I’m constantly monitoring and tweeting out the chart of SHY/HYG on tradingview which tracks the direction of credit spreads. As this spread trends higher it becomes more costly for corporations to service their debts. Wider spreads also equals tightening liquidity conditions. That’s not a good thing for risk assets which is why we usually see stock market weakness when credit spreads widen out.

It’s concerning to see this spread on the highs for the year. It’s unlike the February panic because price has been holding above resistance and stabilizing. So unless this spread fails back into the range, I expect a risk-off stance from market participants into the end of the year. If it becomes a false breakout stocks can retest the highs of the year again.

Podcast I’m listening to —

Howard Lindzon came on Patrick O’Shaugnessy’s pod recently so I quickly downloaded and took a listen while at the gym last week. (Link here)

I’ve always thought of Howard as the “Stocktwits guy” but he’s done so much more than that over his venture capital career. I had no idea Howard was an early stage investor in one of the most popular stress balls of all time….

He also attempted to put CNBC on youtube in 2006 during the early moments of online video. The show, called Wallstrip never made it past 2008 but Howard already made his exit to CBS by 2007.

All of the old Wallstrip episodes are still up on youtube. If you want a few laughs check them out. (Link here) They are highly entertaining and nostalgic. Online content from a decade ago has a certain kind of silliness and wackiness that you just don’t see anymore.  

Book I’m reading —

I’ve been on a fiction kick recently which has led me back to rereading The Name Of The Wind by Patrick Rothfuss. It’s a fantasy novel which feels like a darker, more mature version of Harry Potter.

But for me the actual narrative isn’t the best part, it’s the author’s prose. The writing is so clear and finely crafted that the words seemingly absorb into your mind without any comprehension effort at all. My hope is that by reading Pat’s stuff I can pick up a sliver of his writing skill. The guy is an amazing writer.  

Trade I’m considering —

Gold has been a tricky trade since summer. We keep going back and forth on whether or not it will continue to downtrend or finally breakout and retrace some of the down move it had in the beginning of the year. But after yesterday’s sign-of-strength reversal I think it can finally move higher.

All gold needs to do is close above the highs of October 26th.

Once it does that the extreme short spec position will likely work itself off entirely and fuel a sharp rally.

Quote I’m pondering —

Survive and advance. ~ Jim Valvano

When the markets become incredibly tough and painful it’s not the traders job to make money. It’s simply to survive and stay in the game until the fat pitches show up again.

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. Alex posts his mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.



My Notes on Druck, Investor Letters, Stock Pitches, and a Short Dollar Call

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.

Recent Articles/Videos —

Trade Wars — AK reviews what the trade wars mean for US and Chinese stocks.

My Notes On Druck — I talk about my favorite parts from Stanley Druckenmiller’s recent interview on Real Vision.

Articles I’m reading —

Earnings season is picking up and quarterly hedge fund ‘Investor Letters’ are starting to hit my inbox. I have a large list of funds (here’s my old list, which I plan to update very soon), mostly value-oriented ones, that I make sure to read every quarter. It’s a great way to source ideas. Here are some links to what I’m reading along with excerpts.

Arkto Capitals Q3 2018 letter with an update on one its core holdings, RSSS, which he first covered in Q3 of last year (link here).

Research Solutions (RSSS)Our 9% of portfolio holding, which we have increased as a position size from its original 2%, in the nanocap distributor of scientific publications and a provider of a unique science publication management software platform has continued to perform strongly returning 20% for the quarter and close to 140% over the last year. The company continues to gain traction with its Article Galaxy software, introducing an upgraded version in September, as well as rolling out various pricing plans and launching new sales channels which we expect to drive significant revenue growth for the product in the future. The Platform’s business segment, which includes Article Galaxy, grew revenues over 85% for the year with a $2.1mm revenue run rate. While revenues account for only 6.5% of the overall company, with 80% gross margins, the gross profit accounts for 20% of the company’s overall gross profits. We expect that in the next three years the platform’s business will continue to grow at almost triple-digit growth rates off a low base and for the company to begin to generate significant Free Cash Flow, at $5 to $10mm by 202, and $20mm to $30mm by 2023. With the current Enterprise Value at only $50mm, we believe this investment has many years of continued high returns ahead as the market begins to appreciate the true cash flow generating power and very sticky recurring revenues. The current illiquidity of the stock continues to be prohibitive for many institutional investors, however, the company has applied to be uplisted on the Nasdaq stock exchange from its current over-the-counter trading status, which should be a positive for the stock. We have been patiently adding to our position on a regular basis for the last year as our diversified partner base and an average capital commitment of four years allows us to be patient and forward-looking with this investment.

The talented value investor, Matt Sweeney of Laughing Water Capital, put out his Q3 letter (link here). He gives updates on a number of his holdings, as well as pitches some new additions to his portfolio. His letters are always worth reading in full. Here’s him giving his thoughts on pawn shop operator, EZPW, and you can find the full EZPW pitch deck here.

EZCorp, Inc (EZPW) — In addition to a likely acquisition in the near future, the company will be releasing a new 3 year plan in the coming weeks, and following significant shareholder agitation by us and other, much larger holders, it seems likely that the new plan will include an improvement in corporate governance – specifically tying executive compensation to per share metrics, rather than just company-wide metrics. Combined with a likely pending acquisition, a lapping of last year’s hurricane season, impressive operating metrics, cyclical weakness tied to record low unemployment, and a very attractive relative and absolute valuation, the bar for success for EZPW stock is very very low from where we are today.

In Horizon Kinetics’ Q3 letter, they talk about the “cognitive limitations in investing”, structural inflation, portfolio diversification vs. concentration, and then cover the bull case for some mid-sized defense contractors. Here’s the link and some words on CACI.

CACI is a defense electronics company that provides information technology (IT) and professional services predominantly to the U.S. federal government and federal agencies. Two-thirds of sales are from the Department of Defense, which includes the various Armed Forces and classified Dept. of Defense customers. Another quarter are from Federal Civilian customers such as the Dept. of Homeland Security and the Department of Justice. CACI focuses on data integrity and information, command and control, cybersecurity, surveillance and reconnaissance, and intelligence. The demand for its services is mostly created by the increasingly complex network, systems and information environment in which governments and businesses operate, and the need to stay current with emerging technology while increasing productivity.

…If one wanted to see how a company like this might fare during a cyclical downturn, then the Credit Crisis is a handy reference. Between 2006 and 2009, the revenues of the S&P 500 declined by 4.6% on a per share basis. CACI’s revenues rose by 59%. The S&P 500 earnings declined by 42% between 2006 and 2009. For CACI, the figure was up 8%. On a longer-term basis, the 12-year revenue growth for the S&P 500, from the pre-crisis year of 2006 through 2018, was 2.7% per year, while CACI revenues expanded by 10.0% per year on a per-share basis. S&P 500 earnings were up 1.6% per year, and CACI’s by 13% per year. For all of this, the shares trade at 17x the company’s free cash flow for the year ended June 2018. That is after deducting capital expenditures, and it is a trailing figure, and is still less than the stock market’s P/E ratio, much less the market’s free cash flow multiple.

Here’s Bill Miller’s take on markets in the latest Miller Value Fund Letter (link here).

So, to reiterate some things I have been noting in these letters for the past 10 years: It’s a bull market in stocks and it will continue until it ends, and no one knows when that will be. It will end when either the economy turns down and earnings decline, or when interest rates rise to a level where bond yields provide significant competition for stocks. I have seen some folks saying that will be at 3.5% or more on the 10-year, which I find implausible as bonds will still be trading at close to 30 times a return stream that does not grow, while stocks are at just under 17x next year’s earnings, and those earnings will likely advance about 5% or a bit more over the long term. During the bull market of the 1990s, bond yields averaged 6%. Today’s rates are still among the lowest in history, and only 2 years ago they WERE the lowest in history. Valuations of stocks do not appear demanding compared to returns available in other asset classes.

I agree.

And then finally, the latest issue of Graham & Doddsville is out (link here). There’s a number of investment write-ups along with a great interview with Scott Miller who manages Greenhaven Road Capital. Here’s a section where Scott talks about his process.

The research process depends on both the source of the idea and how close it is to something we’ve done in the past – effectively how much domain knowledge I have. In general, I’m trying to get comfortable with product, market, team, and execution risk.

I look for certain attributes to filter ideas quickly. For example, I prefer high insider ownership, asset-light business models (even though Fiat Chrysler – which we own – is not asset-light) recurring revenue, expanding margins, and the potential for operating leverage. The other piece is what Murray Stahl calls invisible companies – companies that don’t screen well, aren’t necessarily telling their story well, and aren’t covered by analysts. In those cases, the research process is initiated by other people explaining the idea to me. Then it becomes, “What are the pieces I have to fill in?”

Chart I’m looking at —

The market is going through a large shakeout right now. It’s due to yields going up to fast along with slowing growth in the rest of the world beginning to hit US companies.

For what it’s worth, I’m of the opinion that this isn’t the start of a major bear market. In fact, I think this selloff will continue for another week, or two, or three… but then, eventually, it’ll rally hard into the end of the year — putting everybody on tilt.

This is my base case and I’ll be quick to flip my script if the data and price action suggest this is a cold take, but the odds of this playing out look pretty good to me. Just one of the many data points I’m looking at are the seasonal returns, and we’re about to head into the strongest 3 and 6-month return periods of the year (charts via BofAML).

Podcast I’m listening to —

Tim Ferriss’ latest podcast with Nick Kokonas is excellent and worth listening to for the full 3-hours. Nick got his start as a successful options trader on the floor of the CME back in the early 90s. He’s since then co-founded The Alinea Group of restaurants (which are considered some of the best restaurants in the world) along with a tech company called Tock, Inc. The guy is impressive…

I love how he looks at everything from a first principles perspective and questions the basic assumptions inherent to legacy systems (ie, how restaurant booking has been done for the last 50-years). It’s a fascinating listen and you’re guaranteed to learn something new. Here’s the link.

Trade I’m considering —

I’ve been bullish on the dollar (DXY) for a while now but I’m not yet buying this latest run. I think this is a false breakout and we’ll see the dollar reverse soon and trap a lot of bulls.

 There’s a number of reasons for my suspicion behind this latest move. One being that positioning and consensus seem too crowded in the dollars favor right now. It’s not near the bullish consensus hit in early 17’ but still seems to easy for the dollar to make a sustained run here.

Second, I’m of the mind that EM stocks are likely to lead the US on the next major leg higher in US equities. Just look at how well EM high-yield debt has been holding up these last few weeks. And with that, we should see capital briefly flow out from the core and to the periphery which should drive down the dollar.

Then there’s Trump attacking the Fed, rising volatility in the US, and then also, definitely take a few minutes and read this great thread on the global plumbing system from Guy LeBas (link here).

I could be very wrong on this call — it wouldn’t be the first time — and I’ve hedged my ignorance with DOTM calls on the dollar but I covered my long naked position a number of weeks ago.

Quote I’m pondering —

I shared this on twitter recently but wanted to post it here in case some of you aren’t on the twitter train. It’s from Hunter S. Thompson.

Amen to that…

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.


Extreme Ownership, A Chinese Satirist, and 50 Shades of Grey…

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.

Recent Articles/Videos —

Our New Show On Real Vision, The One Thing — AK, the host of our partner brand Fallible has a new show on Real Vision!. We’re super excited to work with these guys, Real Vision produces some of the best financial content out there. The pilot episode is called “The Crypto Conundrum.” If you are interested in bitcoin click here to watch!

Articles I’m reading —

Patrick O’Shaughnessy and team over at O’Shaughnessy Asset Management put out their latest quarterly report/research piece. It’s a great piece where they explore “factors within factors”, specifically looking at “peak yield” which is a company’s cumulative total buyback percentage since its peak share issuance. They then slice the funding sources for these buybacks into “capital pies” and combine it all with the valuation multiple at which the share repurchases took place. This more granular quantitative look at share buybacks gives them “alpha within factors” and improves upon just a plain vanilla quantitative use of buybacks as a factor.

It’s a short read and offers an informative look into where quantitative investing is going (here’s the link).

The New Yorker published a profile on Chinese Novelist, Yan Lianke, titled Yan Lianke’s Forbidden Satires of China, which was the best thing I read all week. The article gives an insightful, sad, and sometimes humorous look into China’s recent past and present.

There are some great lines in the piece. Here’s a few of my favorites.

Because information is so tightly controlled, generations of Chinese have been dream walking through life without realizing it, becoming zombies primed to live in accordance with state dictates. Waking up is unimaginable, because living in reality would require one to confront the atrocities of Chinese history, and to understand the catastrophe that the Party has visited on the country. To be Chinese, then, is to live under enforced amnesia, a medicated slumber of propaganda.

He surmised that Communism, by controlling every aspect of people’s lives, had infantilized generations of Chinese: “People’s sense of themselves as individuals atrophied, so much so that they lost common sense ideas of how to behave ethically without strict parameters.

And when asked about the current political situation in China, this was Yan’s response:

Yan shook his head and responded that it was beginning to remind him of the Cultural Revolution.

Entrekin’s (Yan’s publisher) eyes widened. “Surely it can’t be that bad,” he said.

Yan explained that, particularly since the removal of Presidential term limits, last year, he had sensed a gradual backsliding, especially when it came to issues of free speech. Not only has he frequently been prevented from publishing new books but publishers have also suppressed his backlist: “Anything that has the name Yan LIanke is indiscriminately removed from the shelves.”

There was a brief silence.

China is going through what will be a long and painful deleveraging. Throughout history, the backend of the debt cycle has more often than not, coincided with periods of extreme political regression, militaristic nationalism, and other fun stuff.

What if China is in the beginnings of another “Cultural Revolution” type period. What would that mean for markets, geopolitics, the prospects for war? Here’s the link.

The team over at Evergreen Gavekal recently shared one of my older write-ups on the tightening oil market and provided a great update to the thesis. I believe this is going to become a major macro thematic going into next year and will drive oil prices higher. It’s definitely worth reading to stay abreast on the theme (link).

Lastly, Greenwood Investors put out their latest investor letter where they shared some updates on a few of their favorite deep value names. Their stuff is always worth a read. Here’s a clip and the link.

Telecom Italia is trading at a valuation lower than a Russian telecom, and the country is being treated by investors today as a banana republic. We’re not going to get into a macroeconomic discussion here, but let’s just say we’re finding ourselves increasingly in disagreement with the “establishment” in Brussels which looks determined to prohibit independent government policy despite growing revolutions in nearly every country. Leading economic indicators in Italy are still positive and outperforming much of the rest of Europe, just as investors have decided they are not interested at any price. We have been taking advantage of this wide gap between sentiment and reality and price-agnostic selling.

Chart I’m looking at —

Semiconductors (SMH) serve as a good barometer for the economy and as a leading indicator of risk sentiment for the overall market. Where semis go, the rest of the market tends to follow.

That’s why this chart should make you concerned.

I’m still long-term bullish on the US market but I don’t think the most recent round of volatility is over. The market will probably make new lows soon. This is primarily being driven by the recent jump in interest rates. More market vol is needed to settle the long end before this market can bottom and resume its trend to new highs.

Book I’m reading —

This past week I moved out of my cabin in the woods of Virginia and drove for three days across country to my new home, Austin, Texas. I was able to crank out a bunch of audiobooks on the drive and one of these that I enjoyed was Extreme Ownership by Jocko Willink and Leif Babin. Jocko and Leif were Team guys and share the leadership lessons they and other Seals learned from their time spent in combat. I served in Ramadi and worked with many of their teammates and always came away impressed with these guys.

The book is worth a listen (I actually recommend the audio over the written version since the authors read it themselves which helps add more weight to the stories they tell). It has some great life lessons and you’ll come away with some new ideas about what it means to be a leader. Here’s an excerpt.

The test is not a complex one: when the alarm goes off, do you get up out of bed, or do you lie there in comfort and fall back to sleep? If you have the discipline to get out of bed, you win—you pass the test. If you are mentally weak for that moment and you let that weakness keep you in bed, you fail. Though it seems small, that weakness translates to more significant decisions. But if you exercise discipline, that too translates to more substantial elements of your life.

Also, for you sci-fi fans, I listened to a fun audiobook titled We Are Legion [We Are Bob]. It’s the first in a trilogy (I just started the second book) and it’s an original and easy read (or listen).

Trade I’m considering —

Tencent (TCEHY) is trading at its most oversold levels, ever. I think we’re due for some ‘positive’ narrative surprises for EM and China stocks in particular. Tencent should benefit from this. I’m considering going long for a swing trade (ie, 1-2 months) once this recent bout of volatility completes. We’ll see, though… it really depends on what the dollar is doing; and yields.

Quote I’m pondering —

I kind of like uncertainty to some extent, because it’s a little bit of suspense and excitement and adventure… And you can learn a lot even if things don’t work out. But not everyone likes adventure. A lot of people seem to be against uncertainty, actually. In all areas of life. ~ Paul Buchheit

Markets are endlessly complex… learn to embrace uncertainty and become comfortable operating in various shades of grey or suffer at the foot of false certainty.

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

Real Vision’s The One Thing With AK Fallible

Welcome to AK Fallible’s brand new show with Real Vision — The One Thing. Our first episode is called “The Crypto Conundrum”. Make sure to subscribe to our YouTube channel for more! https://www.youtube.com/c/Fallible?sub_confirmation=1

Be sure to check out our China’s Downfall series here: https://bit.ly/2Ig0JZz

Everyone seems to have an opinion on how much Bitcoin and all these cryptos should be worth…. It seems like everyone is in 1 of 2 camps as usual, yet another binary argument…..Either they think it should be the only thing with value in the world or it’s a zero…… Reality as usual is somewhere in the middle.

But how should we know what’s worth when we haven’t really defined what it is! First let’s talk about what it isn’t….

Well as of right now in 2018 it’s not a currency! The name Cryptocurrency is totally misleading! I can’t directly pay my mortgage with bitcoins, the IRS won’t accept Tax payments in bitcoin…

It’s not Gold either! How can you be called a store of value when you’re value gets destroyed at an almost unprecedented rate! Ethereum the world’s second largest Crypto is down over 80% from its January highs! Stability is key component of value storage!!!

It will also be key to see how cryptos do when the stock market hits the skids….. Gold typically acts as a safe haven in times of uncertainty, and catches a bid, will crypto?

Well then what is it were buying! We’re buying a speculative asset with a valuable technology.

The technology behind blockchain, can be a powerful tool for financial transactions in particular but were not there yet. And we don’t know what shape or form blockchain will look like when it’s widely utilized

To learn more, make sure you watch the video above!

And as always, stay Fallible out there investors!

Follow AK on Twitter: https://twitter.com/akfallible

And Instagram: https://www.instagram.com/fallible_money/

***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.



China Hacks The U.S. and Elon Talks About The Matrix

Tyler here with this week’s Macro Musings.

As always, if you come across something cool during the week, shoot me an email at tyler@macro-ops.com and I’ll share it with the group.

Articles I’m reading —

The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies

Bloomberg Businessweek dropped this bomb of an article yesterday. It’s a riveting story about an attack by Chinese spies that reached almost 30 U.S. companies, including Amazon and Apple.

The Chinese got in at the hardware level, planting a small microchip the size of a grain of rice onto the motherboard of servers that were later shipped off for use by companies in the US. Here’s how the scheme worked according to Bloomberg:   

A Chinese military unit designed and manufactured microchips as small as a sharpened pencil tip. Some of the chips were built to look like signal conditioning couplers, and they incorporated memory, networking capability, and sufficient processing power for an attack.

The microchips were inserted at Chinese factories that supplied Supermicro, one of the world’s biggest sellers of server motherboards.

The compromised motherboards were built into servers assembled by Supermicro.

The sabotaged servers made their way inside data centers operated by dozens of companies.

When a server was installed and switched on, the microchip altered the operating system’s core so it could accept modifications. The chip could also contact computers controlled by the attackers in search of further instructions and code.

Alex thinks the government is leaking this info now to boost public support for what they’re about to do against the Chinese. That makes sense to me. Trump wants to turn up the heat in order to win this trade war. And he needs the political ammo to do it.

How to biohack your intelligence — with everything from sex to modafinil to MDMA — This is a deep dive beast of an article about how to maximize your intellectual potential and output. Topics range from supplements, drugs, blood testing, diet, workout regimes, sex, sleep and much more.

A lot of the stuff this guy’s doing isn’t for the average Joe. You need a team of doctors to help manage everything. But there’s still plenty of actionable advice that I plan on implementing. I want to start with his iPhone strategy by getting rid of all messaging and social media apps from the home screen. I feel like that will stop my mental space from getting constantly hijacked by notifications.

Chart I’m looking at —

This is a significant breakout in the US long bond and it’s important to pay attention to. Stocks and bonds constantly compete for capital. And the higher the interest rate, the more attractive bonds become relative to stocks. If rates move up too quickly from here we could see another correction in equity markets as investors start to prune equity exposure in favor of higher interest rate government bonds.

Podcast I’m Listening To —

I bet most of you have already seen this photo of Elon Musk smoking a joint on Joe Rogan’s podcast.

It intrigued me enough to start the episode and I ended up staying for all two and half hours. (Link here)

Elon and Rogan hit on all the hot topics including flamethrowers, the future of AI, Tesla’s plans, space colonization, the effects of social media on happiness, Elon’s “brain interface” company Neuralink, and the idea that we all might be living in a matrix type simulation.

Whether you love him or hate him, I think this interview is worth the listen. Elon has a lot of interesting ideas outside of Tesla and it’s a breath of fresh air to hear him talk in a casual setting.

Trade I’m considering —

ESPN released their first magazine with a pro gamer on the cover.  This reminded me to get back to work on the esports thematic and Activision Blizzard (Ticker ATVI) has so far been my favorite out of all the companies I looked into.

The company has long-running, popular franchises like Call of Duty, World of Warcraft and Overwatch — games that constantly top the best-seller charts. This gives them a massive audience of around 350 million active users.

The average user spends 50 minutes per day playing or watching Activision’s games. This allows Activision to further monetize via in-game content or pay-to-play features. This so far has translated into eight $1 billion franchises.

To top it off this company is a cash machine. They did over $2.2 billion in free cash flow over the last 12 months.

This impressive company operating in a space with a strong secular tailwind (esports) has me excited.

Quote I’m pondering —

Progress does not march forward like an army on parade; it crawls on its belly like a guerrilla. ~ Michael Lewis

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. Alex posts his mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.



Druckenmiller Speaks! MMT and Wisdom from Bruce Lee

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.

Special Announcement —

Tyler will be hosting a live special event on our DOTM option strategy next Thursday, October 4th at 9PM EST,  He’ll be covering exactly how we used our DOTM option strategy to identify and purchase a call option on AMD that went up 2000% since mid-July. He’ll also be covering one of the most difficult parts of trading — when to take profits on a massive winner. Sign up for this event at the link below and make sure to attend live. There will be no recordings!

Click here to sign up for the DOTM Special Event!

Recent Articles/Videos —

Gerschenkron Growth Model Explained — We explain the Gerschenkron Growth Model and how it spells trouble for China.

Convergent/Divergent — Tyler discusses the difference between convergent and divergent trading and how this idea has helped him structure his portfolio.  

Occam’s Razor — Learn why it’s absolutely critical to simplify your trading process.

Articles I’m reading —

The talented Morgan Housel put out a fun read this week titled “Different Kinds of Smart” on the various kinds of intelligence and the benefits/shortcomings of each. Here’s a clip from the piece and the link.

Being an expert in economics would help you understand the world if the world were governed purely by economics. But it’s not. It’s governed by economics, psychology, sociology, biology, physics, politics, physiology, ecology, and on and on.

Patrick O’Shaughnessy wrote an email to his book club years ago:

“Consistent with my growing belief that it is more productive to read around one’s field than in one’s field, there are no investing books on this list.”

There is so much smarts in that sentence. Someone with B+ intelligence in several fields likely has a better grasp of how the world works than someone with A+ intelligence in one field but an ignorance of that field just being one piece of a complicated puzzle.

The WSJ published a great piece of investigative journalism on the strong arm tactics China uses to acquire valuable IP from Western companies. This has been going on for decades and it’s a significant reason why there’s an escalating trade war today.

The article is worth reading in full. Here’s the link and an excerpt.

DuPont Co. suspected its one time partner in China was getting hold of its prized chemical technology, and spent more than a year fighting in arbitration trying to make it stop.

Then, 20 investigators from China’s antitrust authority showed up.

For four days this past December, they fanned out through DuPont’s Shanghai offices, demanding passwords to the company’s world-wide research network, say people briefed on the raid. Investigators printed documents, seized computers and intimidated employees, accompanying some to the bathroom.

Beijing leans on an array of levers to pry technology from American companies—sometimes coercively so, say businesses and the U.S. government.

Lately, I’ve been reading up on an emerging popular economic school of thought called Modern Money Theory (MMT). Here’s a blurb from a post by The Roosevelt Institute which lays out what MMT is all about (emphasis mine).

There is an alternative view propounded by economists following what has been called “Modern Money Theory”, which emphasizes the difference between a currency-issuing sovereign government and currency users (households, firms, and nonsovereign governments) (See here and here). They insist that the notion of “fiscal sustainability” or “solvency” is not applicable to a sovereign government  — which cannot be forced into involuntary default on debts denominated in its own currency. Such a government spends by crediting bank accounts or issuing paper currency. It can never run out of the “keystrokes” it uses to credit bank accounts, and so long as it can find paper and ink, it can issue paper currency. These, we believe, are simple statements that should be completely noncontroversial. And this is not a policy proposal — it is an accurate description of the spending process used by all currency-issuing sovereign governments.

MMT’ers argue that governments should be less concerned with running fiscal deficits, because currency issuing governments can’t default on their debt since its denominated in its own currency which they can always just print more of.

This is factually true and if governments were to spend wisely (ie, invest in high return projects like public infrastructure and education), especially in a counter-cyclical fashion when there’s an increasing amount of slack in the system, then it would likely make sense to run structurally higher deficits.

It’s also not difficult to see how MMT could be taken to the extreme and abused by government profligacy. But whatever your thoughts, it’s important to pay attention to because the idea is gaining traction amongst policy makers — economist Stephanie Kelton, a torch bearer for MMT, is the economic adviser to Bernie Sanders. I suspect we’ll see some MMT influence on policy following the next economic downturn; which will certainly make for some interesting markets for us macro players.

Anyways, here’s a link to the above article and here’s another good write-up on MMT via Bloomberg. It’s worth reading up on and getting familiar with.

Chart I’m looking at —

The economic slowdown in China continues. We’ve been covering this development since the beginning of the year and expect Chinese growth to continue to decelerate significantly going into next year. This is when things should really start getting interesting for emerging markets (chart via Bloomberg).

Video I’m watching —

Kiril Sokoloff interviewed Stanley Druckenmiller for a 90 min chat on Real Vision. I haven’t watched this yet but will be doing so this weekend. Druck is the GOAT and I’m pretty excited to watch this. I’ll take extensive notes and share these with the group.

Book I’m reading —

This week I revisited a book that I read a number of years ago and enjoyed, which is The Warrior Within: The Philosophies of Bruce Lee by John Little.

I’m a big Bruce Lee fan and this book covers his life, his philosophy, and his daily habits and practices. Lee was a deep thinker and achieved an incredible amount considering his short life and the many adversities he faced. There’s tons of practical wisdom in these pages and it’s well worth picking up. Here’s an excerpt:

You must accept the fact that there is no help but self-help. For the same reason, I cannot tell you how to “gain” self-knowledge. While I can tell you what not to do, I cannot tell you what you should do, since that would be confining you to a particular approach. Formulas can only inhibit freedom, externally dictated prescriptions only squelch creativity and assure mediocrity. Bear in mind that the freedom that accrues from self-knowledge cannot be acquired through strict adherence to a formula; we do not suddenly “become” free, we simply “are” free.

Trade I’m considering —

I pitched the bull case for Blackberry (BB) in last month’s MIR. The company came out with earnings today and beat on both revenues and earnings. As of this writing, the stock is up 16+%. The weekly chart below shows a nice breakout of a 9-month bull flag after a long multi-year basing pattern. The fundamentals and technicals suggest this stock is going much higher. I think it takes out its 2013 highs in the not too distant future.

Quote I’m pondering —

Be soft, yet not yielding.
Be firm, yet not hard.

~ Bruce Lee

Be water my friends…

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.


The Knock-On Effects Of A Deleveraging China

Over the last two decades China has been following the Gerschenkron Growth Model to deliver high levels of extended economic growth.

The Gerschenkron model of growth goes like this:

  • Undeveloped countries are plagued by poor infrastructure and have low savings and investment rates.
  • To increase investment and boost development, they lower the household’s share of GDP thus increasing governments and producers share of GDP. This in effect raises the nation’s savings rate, providing more money to invest.
  • This investment is then directed by government into big infrastructure projects and export focused industries.
  • The country then grows by increasing its market share of global exports and investing in high return projects.
  • Eventually the country maxes out the amount of productive investment it can absorb. This results in each new unit of debt having less and less of a positive economic effect.
  • The vested interests who became rich and powerful on the back of the investment led economy aren’t incentivized to rebalance. So they keep adding unproductive debt until, eventually, debt servicing costs exceed the economy’s capacity to service it and the economy inevitably goes through a painful forced or managed rebalancing.

China is now at this last step.

China has to rebalance its economy. It needs to transition from an investment and export led economy to a consumption based one; retransfer wealth from the vested interests in local government and private businesses back to households. In addition, it needs to deleverage by paying down, writing off, or inflating away its debt stock.

The quickest way to resolve a debt problem like this and rebalance an economy is to go through a financial crisis where assets are sold and debt written down. This is what the US did in the 1930s. But China can’t go this route because this path involves high levels of unemployment that bear socio-political risks, which the CCP can’t afford.

A much more likely scenario (which I believe we’re beginning to see now) is one where the CCP takes a gradual and pragmatic approach.

They assign the debt servicing costs to local governments, who are then forced to sell assets in an orderly manner to pay down debt. And then the CCP goes after debt in the most vulnerable areas of the economy, primarily the off-balance sheet / shadow banking sector and P2P lending, while balancing this with leveraging in the visible areas parts of the economy (ie, local government issuing bonds to boost specific investment).

This approach means that we shouldn’t expect a hard landing or financial crisis. It’s likely to look much more like Japan’s lost decade, though China has made it very clear in recent months that they won’t make the same mistake the Japanese did and let their currency strengthen too much. So we should expect the yuan to continue slowly devalue against the dollar.

When I share this China bear thesis with people I almost invariably get the question “Why now? What’s keeping them from kicking the can down the road, again?”

That’s a fair question. Chinese leaders have publicly stated as long ago as 2006 that the country had a serious debt problem and that they’d work to deleverage. Only to obviously do the opposite.

But there’s been a very important change over the last year that makes this time different. And that’s the centralization of power.

Only two types of government have been able to handle and survive a difficult economic and debt rebalancing like this (1) robust democracies with strong institutions (like the US in the 30s) or (2) strong centralized authoritarian regimes (like China in the 80s).

This is what the whole anti-corruption campaign and last year’s 19th Party Congress where Xi became de facto emperor, are all about: Xi consolidating power.

Many people have the misconception that the Chinese government is a well oiled machine, where word is past from on top and carried out at the bottom. But in practice this isn’t the case at all.

The real power and control over debt fueled spending has rested with the vested interests at the local government level; from the provincial on down.

There are two Chinese idioms that relate how things actually work, one is ‘heaven is high and the emperor is far away’ and ‘from above there is policy, but from below there are countermeasures’. Meaning, local government officials are free to do as they please, even if it goes against Beijing’s wishes.

This is why over the last decade we’ve seen leaders in Beijing come out talking about the dire need to rein in the country’s debt but local leaders continuing to borrow, spend, and build.

The vested interests who have become rich and powerful are reluctant to stop the activities that made them so.

The anti-corruption campaign that has punished or jailed over 1.5 million party members since 2012 has been effective in clamping down on dissidence. Xi now has the control and authority to carry out Beijing’s wishes.

The SCMP reported last week that updated party rules “state that failing to implement policies from the top is now officially a breach of discipline that can see cadres lose their jobs or even be expelled from the party. Those who refuse to implement policy directives from the party’s Central Committee, who run their own agenda, or ‘are not resolute enough, cut corners or make accommodations’ in applying them, will be subject to punishment under the new rules, which took effect on August 18.”

That’s why this time IS different

President Xi clearly stated his intentions in 2016, saying “If we don’t structurally transform the economy and instead just stimulate it to generate short-term growth, then we’re taking our future… If we continue to hesitate and wait, we will not only lose this precious window of opportunity, but we will deplete the resources we’ve built up since the start of the reform era.” He finished by stating that the country had until the end of 2020 to make this transition.

Another common objection I hear is, “they’re not deleveraging, they’re easing!” But this isn’t so. This misunderstanding is partly due to a failure to view the data holistically as well as intentional misdirection by the Chinese in order to manage the market’s response.

A recent paper by the Paulson Institute (the Macro Polo blog) helps clarify the recent words and actions out of Beijing. Here’s some highlights from the report with emphasis by me.

Upon a cursory look, the message from the Politburo meeting seems contradictory, emphasizing both deleveraging and growth. But this can be reconciled by clarifying just exactly what Beijing means by “deleveraging” in the current context.

Top policymakers are well aware that they’ve gotten a lot of flak from businesses and investors, as well as local governments, for tightening policies that have dried up credit. The complaints have grown since the beginning of 2018, so the Politburo meeting’s emphasis on deleveraging is meant to signal that amid grumbling among the masses, the central government is holding the line. In other words, Beijing isn’t going to do what’s popular—opening up the credit spigot again—but rather doing what it deems necessary for China’s economic stability. Indeed, the July Politburo meeting readout notably included Beijing’s renewed vow to uphold deleveraging, which was not included in both the April Politburo meeting readout and the December 2017 Central Economic Work Conference.

Even though the emphasis on deleveraging remains fixed, the central government appears ready to tweak its approach around the edges. Based on the readout of the latest State Council Financial Stability Commission meeting, deleveraging in 2H2018 and beyond will be targeted rather than across the board. At least for the time being, deleveraging has been tweaked to mean “structural deleveraging.”

What this means in the second half is that deleveraging will mostly rely on administrative measures targeted at state-owned enterprises (SOEs) and local governments. Meanwhile, the existing financial measures will remain but will not be further tightened, and monetary policy will become more accommodative and be more in line with inflation trends. In other words, Beijing is simply moving from its triple threat on tightening to just a “double” threat.

A more accommodative monetary policy does not necessarily mean that credit growth will increase. In fact, credit growth will likely remain subdued because of the continued clampdown on shadow banking. Even in the absence of additional regulations, the shadow banking sector will continue to shrink in size under the existing policy environment. If Chinese banks remain reluctant to lend to high-risk borrowers, then the disappearance of shadow banking won’t be offset by increased lending through formal channels.

You can find the report here, it’s worth reading in its entirety.

China is deleveraging and we should expect this deleveraging campaign to gain momentum over the next two years. The current trade war with the US gives the CCP even greater political cover in carrying out painful reforms as it gives them an easy scapegoat to assign blame.

Why this matters

The knock-on effects of a deleveraging China will be numerous and far reaching. The increased market volatility, the bear market in EM, the collapse in gold, and the rise of the dollar are all just the start of things to come. There’s no doubt that it’s long and slow deleveraging will be felt everywhere.

And one thing I find interesting is that this is all starting just as the market’s become blind to the China slowdown threat after fretting about it for years. The chart below via BofAML shows that the China tail risk is hasn’t been front and center on investor’s minds in nearly 4 years.

Practically speaking, we should expect EM to continue a slow and grinding descent lower — again, we shouldn’t expect any quick crashes, as global liquidity remains relatively robust. It’s likely that the EEM breakout of last year was just a massive bull trap. Price should continue lower back into its consolidation zone from here.

China’s largest trading partners (shown on the chart below via Atradius) are some of the most exposed to a Chinese deleveraging.



Ray Dalio on Debt Cycles, A Long Tech Trade, And God Walking With The Devil

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.

Recent Articles/Videos —

China VS Russia & Japan — Is China headed for the same disaster both Russia and Japan experienced? Make sure you subscribe to Fallible to follow our latest series on China’s downfall!

Why Emerging Markets Are A Dead Money Trade — Find out why Alex thinks it’s too early to buy the EM dip.

Articles I’m reading —

I’ve been digging into global housing markets lately. It’s a sub-thematic of the two most important macro drivers of the current market, which are (1) the market’s continual underpricing of the Fed’s rate path and (2) the slow and quiet Chinese deleveraging.

13-D Research recently shared some of their work on the subject where they discuss how whacky things have become in select metros around the world. Here’s a snippet (emphasis by me).

In Vancouver, home and condominium prices are up roughly 60% in just the past three years. In Sydney, house prices jumped over 80% between the end of 2009 and the peak last September. And in Toronto, Stockholm, Munich, London, and Hong Kong, housing rose by 50% on average since 2011. As the IMF writes: “In recent years, the simultaneous growth in house prices in many countries and cities located in advanced and emerging market economies parallels the coordinated run-up seen before the crisis.”

…In its annual housing report released last September, UBS concluded: The risk of a real estate bubble in top global cities has increased significantly in the past five years.The role foreign and institutional money has played in escalating home prices beyond the spending power of the local population was at the heart of the Swiss bank’s concern.

In Hong Kong, it now requires 19.4 times the average salary of a resident to buy a home, up from 4.6 times in 2002. In London, the equivalent price-to-income multiple today is at 16 times. Paris, Singapore, New York, and Tokyo all have multiples greater than 10. The IMF has charted the escalating divergence of real estate and income appreciation globally since 2010.

I’ve tried to not focus on real estate this cycle because it feels too much like ‘fighting the last war’. But nonetheless, I think there may finally be actionable trades to be made off this theme as global liquidity continues to tighten. Here’s the link to the 13-D piece.

Ray Dalio (warning: there’s lot’s of Dalio in this week’s Musings) shared a short writeup on Linkedin this week, where he updates his views on where we are in the current cycle. Ray makes an important point about how longer bull markets tend to follow deeper contractions, like the one we just experienced in the GFC. He thinks we have a “couple more years left” in the current one, which I agree with. Here’s an excerpt and the link.

To reiterate where we stand now, a) the short-term debt cycles (also called business cycles) of most developed countries are in the 6th or 7th innings so they are not near their contraction phases. These expansions typically go on about 7-8 years (plus or minus a few years) with the longer ones coming when there is a lot of slack due to the last contraction being a deep one and when growth has been slow. Since the last one was deep, growth has been relatively slow, and debt growth is not high relative to income growth, and since capacity constraints that now exist are not leading to dangerously high inflation and fast tightening, it looks to me that we have a couple more years left in this cycle’s expansion.

And lastly, Institutional Investor did a great profile on famed short seller, Jim Chanos, that’s worth a read. Apparently, his Kynikos Capital Partners fund, which runs a 190% long and 90% short strategy, has returned a net annualized gain of 28.6% since inception in 1985. Those are Soros/Druck type numbers. Here’s the link.

Chart I’m looking at —

I remain bullish on US stocks but the high positive rate of change in yields recently, makes me cautious over the short-term (next 1-4 weeks). Stocks and bonds compete for capital flows and fast rising bond yields pull demand from stocks and back into bonds. My BAA yield ROC chart below shows that yields have picked up quickly enough to warrant caution.

The S&P 500 is also now technically overextended. The weekly chart below shows it’s bumping up against the upper part of its bollinger band. I’m looking for a pullback down to the midrange of the band (red line) which also happens to be right at its trend line. This pullback should be viewed as a buying opportunity.

Video I’m watching —

Ray Dalio has been doing the rounds on the financial news networks the past few weeks promoting his new book (more on that next). Here’s a 15 minute clip of his interview with Bloomberg’s, Erik Schatzker, that’s worth a watch. In it, Ray discusses his debt cycle framework and applies it to emerging markets, and what’s going on in Turkey and Argentina, specifically. It’s worth a watch. Here’s the link.

Book I’m reading —

This week I’m reading Dalio’s new book, A Template for Understanding Big Debt Crises. I’m a little over half way through the it and I’m a little disappointed. That’s not to say the book isn’t good. It is. And at the price of FREE (for the PDF/ebook versions) it’s certainly worth picking up. But if, like myself, you’ve read his previous white paper on the subject — which I think has been taken down from BW’s site — and were hoping for some new major additions, then you’re in for a let down.

With that said, it’s an excellent primer on the subject and an easier read than the original paper. And maybe there’s some new stuff towards the end of the book, we’ll see. I’ll be sharing my book notes with the Collective next week. Here’s a cut on depressions from the book.  

Some people mistakenly think that depressions are psychological: that investors move their money from riskier investments to safer ones (e.g., from stocks and high-yield lending to government bonds and cash) because they’re scared, and that the economy will be restored if they can only be coaxed into moving their money back into riskier investments. This is wrong for two reasons: First, contrary to popular belief, the deleveraging dynamic is not primarily psychological. It is mostly driven by the supply and demand of, and the relationships between, credit, money, and goods and services—though psychology of course also does have an effect, especially in regard to the various players’ liquidity positions. Still, if everyone went to sleep and woke up with no memory of what had happened, we would be in the same position, because debtors’ obligations to deliver money would be too large relative to the money they are taking in. The government would still be faced with the same choices that would have the same consequences, and so on.

Trade I’m considering —

I’m considering putting on a big position in Facebook (FB) soon; preferably after we see a broader market correction in the next few weeks which will help reset rates and sentiment a bit. FB stock is currently trading at major support in its 100-week moving average (green line below).

Sentiment has notably shifted on the stock since management reset growth expectations in their last earnings call. I view management’s moves as being smart and strategic, and which should ultimately be beneficial to patient shareholders.

One of my favorite value investors, Jake Rosser of Coho Capital, put out a great write up on FB in his latest Investor Letter. The entire letter is worth a read (he also discusses Disney (DIS), which happens to be our largest stock holding at the moment). Here’s the link and his concluding remarks on FB.

Strong Downside Support with Homerun Potential. The best money to be made on a stock is when  there is a sizable gap between future cash flows and anticipation of those cash flows. In Facebook’s  case, we think the gap is sizable enough to result in multiples of value creation over the next five years. If we net out Facebook’s $42 billion in cash, as well as its stake in WhatsApp, (since it is not yet profitable –we assume WhatsApp is only worth its acquisition price of $19  billion) then we are recreating core Facebook and Instagram for 18x forward earnings, in-line with the forward earnings multiple for the S&P 500. Not bad for a 30% grower with 35% operating margins (future margin guidance on Q2 earnings call that caused the stock to collapse – still 10% better than Google). This  valuation is based upon current Wall Street estimates, which have given little credit to Facebook’s non-nameplate platforms.

You get the optionality of future monetization of Facebook’s messaging apps and home-run potential with Instagram for free. We like the set-up and believe our downside is well-protected.  As a result, we have made Facebook our largest position. The steady rise in equity markets has made it more difficult to source stock bargains, but as concentrated investors we only need one or two opportunities a year to  make a difference. As students of the world’s best companies we prepare our shopping list well in advance. When volatility strikes, we can act quickly having already spent years (in many cases) researching the companies we purchase.  As French Micro-biologist Louis Pasteur once said, “chance favors the prepared mind.”

Quote I’m pondering —

As the story goes, God and the Devil were debating about the goodness of man as they walked down a seldom-used road. While they were arguing about man’s inner nature, they noticed the lonely figure of a man approaching them. Suddenly, the man bent over and picked up a grain of “truth.” “You see,” God exclaimed, “man just discovered ‘truth’ and that proves that he is good.” The Devil replied, “Ah, so he did. But you don’t understand the nature of man. Soon he’ll try to organize it, and then he’ll be mine!” ~ Bennett W. Goodspeed, from his book “The Tao Jones Averages”

I love this little story…

That’s it for this week’s Macro Musings.

If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.