Principles, Privacy Wars, And Psilocybin

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.


Recent Articles/Videos —

Vol And The SPX — AK covers the recent bull action in the equity indices and discusses whether it will last.

Intuition In Trading — Wendy and Taylor from Billions help AK answer the question whether or not you should trust your intuition when making your trades.  

Shorting Gold — With gold dumping, now is a good time to revisit our bear thesis on the precious metals. AK explains it in this video.

CCJ, FCAU, YTRA — AK reviews a few of the equity positions in the MO portfolio.


Articles I’m reading —

Take a few minutes and read Ben Thompson’s latest post on Stratechery (one of my favorite tech blogs). It’s titled Tech’s Two Philosophies and is a must read for two reasons (1) he shares a short clip from Google’s recent dev conference where they show off their new AI voice assistant (it’s freaking bananas) and (2) Ben does a good job separating the big tech companies in their two different philosophical camps of platform and aggregator, while explaining the pros and cons of each.

Here’s the link (note: we are long google and this video makes me want to buy more).

Next, I’m no Buffett fan boy. I think he’s a wolf in sheep’s clothes… and I prefer Munger of the two. But, regardless, this Buffett site that CNBC put together is pretty cool. It’s got every letter and interview he’s ever done and it’s archived in an easily searchable way. Check it out, here’s the link.  

Lastly, if you’re interested in some good commentary on the commodity market, then give this a read. It’s Goehring & Rozencwajg’s (a commodity fund) latest quarterly letter. They’re my go to for insightful takes on the natural resources market. Here’s the link.


Podcast I’m listening to —

This podcast from Tim Ferriss (link here), where he interviews science writer and university professor, Michael Pollan, absolutely blew me away.

I know a couple of veterans who’ve participated in university trials using psilocybin to treat severe PTSD. Each saw tremendous benefits from the treatment and considers it to be one of the most significant experiences in their lives. Plus, it’s non-toxic and non-addictive. So they have the potential to revolutionize how we treat various mental health disorders.


Video I’m watching —

Ray Dalio put together a cool mini video animation series where he shares the most important principles from his book, Principles. It’s definitely worth a watch even if you have already read the book. The whole series is 30 minutes and you’ll come away with a powerful framework for getting what you want out of life. Here’s the link.


Chart I’m looking at —

We’ve been writing a lot about China recently. And if you want to know why, look no further than the chart below.

Since the global financial crisis China has created the bulk of the private credit. And since credit creation = demand creation = liquidity, the rate of this credit creation can have a huge impact on asset prices and global financial markets.

Our view is that equity markets will continue to grind up from here, if and only if China manages its deleveraging well. If China withdraws its liquidity too quickly, the macro landscape will shift dramatically.

There’s no immediate cause for concern, but we’re actively monitoring this chart in order to update our forward probabilities for the rest of the year.


Trade I’m looking at —

I want to talk about Apple (AAPL) really quick because I think they are making the right moves to position themselves for the coming privacy wars.

They’ve already started removing apps from the App Store that share your location with third parties without explicit consent.

And the latest iOS, currently in beta, has been rumored to include USB Restricted Mode, which means that if the password on your phone isn’t entered for seven days the Lightning port shuts down. MacRumors further explains the implications.

With a time limit on the Lightning port, it seems law enforcement officials and bad actors who have physical access to a device will have one week from the time that it was last unlocked to attempt to access it through unlocking tools like the GrayKey, which uses the Lightning port to install software to crack the passcode of an iOS device.

USB Restricted Mode won’t prevent tools like the GrayKey box from being used on an iPhone, but it does suggest that the passcode needs to be discovered within a matter of days, severely limiting the amount of time that law enforcement officials have to get into a device.

I think they are ahead of the game here. Most of the big techs have been playing defense on the privacy front while Apple appears to already be on the offensive.


Quote I’m pondering —

Financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced.  ~ George Soros

When you spot the distortion — you’ve found yourself an edge.

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.

 

 

Is Volatility Signalling Higher Prices?

Let’s quickly review the overall stock market and see what’s going on. We’ve had some real nice bullish action over the last week, but is it going to last?

Well the S&P 500 (SPY) has officially broken out of its consolidation from the beginning of the year. Price cleared its downtrend line and the prior high of the consolidation. This raises the probability of a new bull trend starting and lowers the probability of continued consolidation and chop. And yea, price is coming back to kiss the breakout, line but that’s just normal action. The breakout should hold.

We’re also seeing confirmation in the volatility markets with VIX (VIX) closing below its prior low put in on March 9th. You almost never see the S&P downtrending with VIX in the teens.

Oddstats tweeted a pretty cool chart of this correlation between the S&P and VIX the other day. The green and blue shading on the equity curve shows what SPX price action looks like with VIX levels of 18 or less. This makes it easy to see that low volatility = bull trends. A low VIX, means stable SPX pricing, which gives large investors the confidence they need to put money to work.

The volatility term structure has also relaxed which means stress is leaving the system. This ratio trades above 1 during times of stress and below 1 when liquidity conditions are favorable. It’s been holding levels below 1 for the last few weeks which gives us more evidence that this bull has legs. The current value is 0.92.

In just 3 months we’ve gone from hyper volatility back to 2017 style vol. This supports the theory that that the selloff we had was machine driven. It had nothing to do with the fundamentals. It was all because the auto selling from margin calls and crowded positioning that needed to be unwound. The fundies never deteriorated with the price action.

In the video above we cover market fundamentals as well. So make sure you watch it!

And as always, stay Fallible out there investors!

Will China’s Slowdown Wreak Havoc On Markets?

The following is an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

Last July, we laid out the case for why China is the most important macro factor this cycle. We talked about why it’s a debt riddled neutrino bomb waiting to go boom… But we also noted how the Chinese Communist Party (CCP) had been injecting liquidity into its economy in order to steady the boat during its all-important National Congress last year.

Our pitch was that we were tactically bullish but strategically bearish (which so far looks to have been the right call).

Well, now that the big gathering of Marx lovers is over and Xi Jinping has been anointed the Grand Emperor for life. The CCP has the all-clear to move forward with managing the country’s deleveraging and transitioning from an export economy to a consumption based one

Why does this matter? Why is China so important to global markets?

Well, it’s mainly because they are the world’s marginal buyer of commodities… by a wide mile. So when China wheezes the rest of the world (and especially emerging markets) catches cholera.

Here’s a short summary of just how important the red dragon has become.  

It’s been said that China builds a new skyscraper roughly every five days.

In the last year alone, the country has built half of the worlds new super skyscrapers (buildings with a minimum height of 656 feet). To put that into perspective, there’s only 113 buildings in New York city, total, that are over 600 feet.

That takes a LOT of steel, copper, cement and other such resources. Another fun fact that I often like to share is this mind bender: China consumed more cement from 2011 to 2013 than the US did in the entire 20th century.

China dominates global commodity consumption. They consume more than half the world’s cement, nickel, coal, copper, and steel every year (image via Visual Capitalist).

Paul Podolsky, a PM at the macro hedge fund Bridgewater, estimates that over “70 percent of the swings in the global economy are driven by swings in the Chinese economy.”

Famed short-seller and fund manager, Jim Chanos, recounted the following regarding China a while back in an interview with the FT :

This story is internally now one of our great stories.

A real estate analyst was addressing the partners and he said: ‘Currently there’s 5.6 billion square meters of high rises in China under construction. Half residential, half office space.’ And I thought for a second and I said: ‘No, you’ve gotten the American, rest of the world metrics wrong. You must mean 5.6 billion square feet. Because 5.6 billion square meters is roughly 60 billion square feet.’

And my analyst looked at me sort of terrified. He was a young analyst at the time. He said: ‘I know. I double checked. It’s 5.6 billion square meters.’ And I thought for a second and I said: ‘Well if half of that’s office space, that’s roughly 30 billion square feet of office space. And that’s a five foot by five foot office cubicle for every man, woman and child in China!’

And that’s when we all looked at each other and our jaws dropped. We realized, wow, this is a once in a lifetime kind of thing, where this whole country is in effect building itself out in a very short period of time.

So then we looked at the capital spending of their miners, and we went back and looked at a time series of those that were around from 1990 on, and once again it was just one of these hit your head kind of moments.

And with the government’s explicit backing to do whatever it takes to keep China growing faster than the rest of the world’s major economies. Right now markets believe in two things: central banks have the market’s back and China has the global economy’s back.

Those are two very, very big pillars and they’d better hold up… because everybody believes them.

This is important —> Right now markets believe in two things: central banks have the market’s back and China has the global economy’s back… One of these beliefs is going to be tested in the coming year.

Before I explain why, let me first layout what exactly makes the CCP and its leader, Xi Jinping, tick. Since they ultimately pull the levers in the country which affect the rest of the world so much.

It can be boiled down to the following: power and control.

Xi Jinping, as the leader of the CCP, cares solely about keeping his grip on power. All leaders, especially authoritarian ones, sit under a heavy sword of damocles. Xi is no different. Maintaining power and control are necessary to his survival.

The same goes for the broader party and its members. The CCP fears social unrest more than anything else; lest the people take to the streets and begin to demand a voice in government. Both know that the best way to keep the peace is by keeping the engine of economic progress turning and never letting things regress, too much.

This is one of the many reasons why undemocratic systems are inherently fragile. They don’t have the shock absorbers that are organic to democracies — we can vote our frustration out.  

Question. Do you know why communism is superior to capitalism?

Answer: Because it heroically overcomes problems that do not exist in any other system.

Anyways, so Xi and fam know that they must maintain stability, both economically and politically to ensure their survival. And since their government is filled with very bright technocrats, they know that they have to deal with their debt problem. They can’t afford to keep kicking that can down the road, anymore.

In addition, communism is all about outward appearance. Dog and pony shows are extremely important in reminding the people that the communist system is really the best. Which is why the CCP’s coming centenary anniversary in 2021 is such a big deal. They need to celebrate 100 years of economic progress.

It’s very important that the Chinese economy is strong like dragon for the centenary in just three years time. The technocrats know this. And they know that if they want a strong economy in 2021 then they need to slow it down, now. This was the theory first put forth by macro hedge fund manager Felix Zulauf, which I wrote about here.

Here’s Felix’s updated thinking on this hypothesis from a recent interview he did with Real Vision (emphasis mine).

2021 is the 100th anniversary of the Communist Party… So I assume that the current president, who is now president for a lifetime, wants to have a good economy in 2021. If he wants to have a good economy then, he’s no dummy, and his experts aren’t either because I think, actually, the Chinese government has the best experts of all the governments in the world. So they have to slow down the pace of the economy in ’18-’19, and reduce some of the risks they have built up. And I think you are seeing that already.

And I think the Chinese think that the fiscal stimulus in the US could take up some of the slack. And I think it is timed that way that when the US pushes their economy a little bit further through the fiscal stimulus, that they could retreat some and it would be balanced. Of course, it will not be balanced because China’s effect and impact on the world economy today is much bigger than the US economy.

So I think the Chinese will most likely overdeliver in their restructuring efforts over the next two years, compared to what the world expects. If that is true, then we will have a stronger dollar for longer, and will have weaker commodities for longer. But once the world then gets disappointed in ’19 or whenever they figure that out– the Chinese are beginning to kick start their economy from 2020 onwards. So I think there are many cycles within these long cycle that we are in. And the mini cycle, I think, is topping.

The theory sounds solid doesn’t it?

I mean, we know the Chinese government is worried about its excessive leverage. And we know that political anniversaries and pageantry are important in their culture. And… it would be wise — and China’s technocrats are wise, if not sometimes hamstrung — for China to move aggressively in deleveraging while the US (its counterpart engine for global growth) is firing on all cylinders, with unemployment sittings at 17-year lows and capital expenditures trending towards generational highs…

But a theory is just an opinion if we can’t back it up with numbers. And as macro operators, we need to be like the late W. Edwards Deming where, “In God we trust; but all others must bring data.”

So let’s peruse the data. And since China likes to fudge the more popular datasets, we’ll look at a dashboard of more esoteric stuff that tends to fly under the radar, unmolested.

Here’s one of my favorites.

It’s the YoY change of railway freight. Remember, in our recent article, we talked about why it’s best to view data at the second derivative level. Because the rate-of-change reveals important trend changes in velocity. Well, we can see that in the chart below.

Growth in railway freight slowed, then turned negative, from 2010-14’ when China was doing its stealth tightening.

Looking at this chart alone would have tipped you off to something being amiss. You could have triangulated this with price action in commodity and emerging markets to either help you to side-step or go outright short into what became a nasty bear market.

And then in early 16’, this chart reflected the massive credit injection by the PBoC (China’s central bank) by hockey sticking upwards, which subsequently marked the nadir of the commodity/EM bear market.

Now, while growth in freight traffic is still positive. It’s slowed dramatically since its 17’ peak and looks to be decelerating further. Something we’ll have to keep a close eye on.

Now onto the second derivative of another favorite of mine… year over year Industrial Production Electricity Usage… Fun!

This one is sketching out the same pattern as railfreight traffic. Growth is clearly decelerating from its high-water mark hit last year.

Real estate, both commercial and residential, are telling a similar story.

Home prices in China’s two hottest cities, Beijing and Shanghai, are falling. And the growth in the amount of commercial floor space sold is about to turn negative for the first time in over 3-years.

Real estate plays an important role in the Chinese consumer psyche. If this trend continues it’ll make the economy’s transition to a consumption based one, that much more difficult.

Since China is such a dominant source of global commodity demand, I’ve found that tracking their imports from commodity producing countries to be a fantastic bellwether for what’s really going on in the country.

Below is a chart showing the year-over-year changes in exports to China from the countries largest commodity trading partners.

This chart, like the others, paints a picture of decelerating growth.

Our theory now looks less and less like an “opinion” and more like the word of God, doesn’t it?

But, we can go even further. Let’s look at the source of this deceleration. The supply of money (liquidity), itself.

China’s M1 money supply (narrow money) growth turned negative following its large upswing in 16’-17’. Here it is, charted along with the year-over-year change in industrial metal spot price index. Notice any correlations? Perhaps any leading correlations?

Hopefully, the puzzle pieces are beginning to come together for you.

China is the dominant source of global commodity demand. And liquidity (ie, money supply) drives demand. So ceteris paribus, collapsing Chinese liquidity leads to falling commodity prices.  

So this chart and the next one should have us somewhat concerned; because they clearly show that liquidity in China is rolling over.

People have been wondering why emerging market debt and currencies have dived into a hole, recently. Well, the above is why. China is deleveraging and the rest of the world is just starting to feel the affects.

Does all this mean that we should sell all our positions, convert to cash, and join a friendly prepping community?

No, not exactly…

I’m no curmudgeon or China doomsdayer. I think China will manage things just fine. But growth there is clearly decelerating. And the CCP’s actions give weight to our “slowdown into 2021” theory. So, as long as the data continues to confirm our theory, that’s the one we’ll base our assumptions off of.

I’m guessing the CCP learned its lessons from the painful economic slowdown in 14’-16’ and will proceed with more caution this time around. Taking one step back for every two forward in their move to deleverage — or crossing the debt river by feeling the stones, as Deng Xiaoping would say.

Lucky for them, the US economy is booming and will help soften the blow to the global economy. Which is why we’re not predicting fire and brimstone, just yet.

The above was an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

 

 

Review: Cameco Corporation (CCJ), Fiat Chrysler (FCAU), Yatra.com (YTRA)

We’ve got 3 stocks for you today that our team is bullish on — Cameco Corporation (CCJ), Fiat Chrysler (FCAU), and Yatra.com (YTRA).

Cameco Corporation (CCJ) is one of the largest uranium producers in the world, which makes it a great way to play the coming rebound in the uranium market. Back in 2011 the Fukushima disaster kicked off a 7-year bear market in uranium where prices collapsed 90%. But a nice bottom has been forming over the last few years and we think we’re about to get a bull again. Cameco is one of the best positioned companies to take advantage of this trend. We have a price target on it of $17, which is over a 50% increase from where it is right now.

Fiat Chrysler (FCAU) is crushing the rest of the auto industry is because of their Jeep Wranglers. While every other US auto manufacturer reported a decline in sales for April, Fiat Chrysler reported gains and smashed estimates. And it was all because of a 20% spike in Jeep sales. And that’s great for Chrysler because these are high margin vehicles which make them a lot of money. Our target for this stock is $30 dollars, which is another 30% higher from here.

Yatra Online (YTRA) is one of India’s leading online travel companies. The big reason we like Yatra is because our team is super bullish on India over the next few decades. As the indian population gets richer, they’re going to have a lot more money to spend on travel and vacations. And of course Yatra is perfectly positioned to take advantage of that. This is one of our highest conviction trades.

For more on each of these companies, make sure you watch the video above!

And as always, stay Fallible investors!

Reflexivity, A Billion Dollar Race Track Gambler and Algorithmic Information Dynamics

Tyler here with this week’s Macro Musings.

The May Macro Intelligence Report (MIR) is coming out near the closing bell today. In it we’ll have our latest thoughts on the US dollar, China’s macro deleveraging, and how all this relates to stock markets around the world. If you want to stay plugged into the macro narrative and keep tabs on the trades we’re taking to capitalize on it, get yourself a copy. We have a 60-day money-back guarantee, so there’s literally no risk for you to check out how we’re positioning for the summer months. Click here and scroll to the bottom of the page to sign up for the MIR.


Recent Articles/Videos —

A Developing Soros Style Boom-Bust – Alex explains reflexivity and how the market is always wrong. These are the exact principles George Soros used to extract billions from the global markets.

Ed Seykota’s “Fundamentals” And A Massive Pain Trade – Alex dissects the budding dollar bull trend in the context of reflexivity and market positioning.

Shorting Gold — AK covers our short gold thesis.

Black Swans — AK explains Nassim Taleb’s black swan theory and how to protect your portfolio against these events.


Article I’m reading —

Bloomberg has been killing it with some newly released content. (Probably as a function of moving to a paid subscription model instead of an ad supported one.)

Here’s my favorite one of the week.

The Gambler Who Cracked The Horse Racing Code – A mini bio on race track sharp Bill Benter. Benter got his start in Vegas counting cards based on Ed Thorp’s system in Beat the Dealer. He then transitioned into betting on horse racing at the Hong Kong Jockey Club. Benter created a quantitative system that could accurately predict what horses were going to win. He created this decades before quant analysis became commonplace in professional racetrack wagering.

Long story short, he pulled a billion dollars out of the track over the course of his career. This article details the entire crazy story from start to finish. And it’s stuff that Benter has never before released to the public. If you liked Ed Thorp’s come up story from Vegas to Wall Street you’ll love this one too.


Podcast I’m listening to —

If Aaron Brown goes on a show then I’m listening. His latest appearance is on the Better System Trader podcast. (link here)

Aaron’s a veteran quant who actually knows Bill Benter from the article above. He’s a poker player, trader, and the ex-risk manager for AQR — a multibillion dollar hedge fund.

On the podcast Aaron talks about the biggest misconception regarding risk and how traders should approach drawdown management. He also makes a great point on how low volatility environments can be riskier than high volatility environments.

Aaron is the authority on risk management. So if you need help cutting losses, then give this episode a listen.


Video I’m watching —

Alex told me the other day that he was enrolling in an online course on Algorithmic Information Dynamics from the Santa Fe Institute. It’s only $50 and you can take it from the comfort of your home. What piqued my interest was the course trailer. You can check that out by clicking here. And here’s a link to the course sign up page.

The instructors are out to teach us how to tackle causality in non-linear systems from a model-driven approach that does not use traditional statistics and classical probability theory.

The class may help with understanding and modeling complex systems, like economic ones. Give the intro video a quick watch and if you have some down time this summer consider enrolling alongside Alex.


Chart I’m looking at —

I found this table on @OddStats Twitter this week. It shows positive performance begets positive performance and negative performance begets negative performance in stocks. Obviously each year has many other nuances and subtleties that affect eventual performance. But we can at least use this to start tempering expectations for returns in 2018.

Quote I’m pondering —

When I saw that screen light up that day in the Merrill Lynch offices, I lost any residual doubt that Bloomberg could make it. We had picked just the right project. It was big enough to be useful, small enough to be possible. Start with a small piece, fulfill one goal at a time, on time. Do it with all things in life. Sit down and learn to read one-syllable words. If you try to read Chaucer in elementary school, you’ll never accomplish anything. You can’t jump to the end game right away, in computers, politics, love, or any other aspect of life. ~ Mike Bloomberg   

Whenever I’m struggling or frustrated with something I try to chop it up into smaller pieces. Like Bloomberg, I’ve found that breaking up macro goals into micro goals helps to keep things moving forward. And as an added benefit I get a significant mood improvement from having a sense of accomplishment.

If your defined task is overwhelming it’s easy to feel beaten down and burned out because you haven’t been able to cross something off the mental checklist. Completing smaller subtasks helps you stay motivated and moving forward.

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.

 

 

Ed Seykota’s “Fundamentals” and a Massive Pain Trade

Last week we talked about how the market derives its expectations (it simply extrapolates current data ad infinitum) along with why it’s important to view macro data at the second derivative level (the rate of change leads important inflections in the trend).

A process that looks something like this.

We used these mental models to comment on a macro development we’re tracking, which is the decelerating growth in China. As well as what this could mean for markets. You can read the piece here.

These concepts are going to be vital in understanding how markets will unfold over the coming year. And this is because we’re on the cusp of some important trend reversals that will be occuring at same time the market has become firmly anchored to the old narrative — in this game, winners anticipate and losers extrapolate.

The driving force behind this trend-change will be a strengthening dollar. And it’s likely to kick into gear a positive reflexive loop that will drive large returns for those who are positioned correctly.

This reflexive loop is centered around Soros’ idea of benign and vicious circles or what we refer to as the core/periphery model.

We’ve written extensively on this idea which you can read here. But the gist of it is that bull markets that are accompanied by a rising dollar tend to last longer than ones where the dollar is falling. That’s because there are numerous self-reinforcing processes (hence Soros’ use of the word “circle”) that drive an extended trend.

Here’s Soros on the power of benign circles (emphasis mine):

The longer a benign circle lasts, the more attractive it is to hold financial assets in the appreciating currency and the more important the exchange rate becomes in calculating total return. Those who are inclined to fight the trend are progressively eliminated and in the end only trend followers survive as active participants. As speculation gains in importance, other factors lose their influence. There is nothing to guide speculators but the market itself, and the market is dominated by trend followers.

The dollar recently broke out of a 4-month consolidation zone and is now rocketing higher; fueled by crowded short positioning and powerful fundamental tailwinds (ie, rate and growth differentials).

If this bullish dollar trend continues it’ll become the most powerful macro driver of markets over the coming year(s). Not only will it extend the duration of the current bull market but it will drastically impact market trends that have dominated over the last 2-years. We often refer to the US dollar as Archimedes’ Lever. This is now more true than ever…

The incoming data suggests this trend is just getting started (again).

US relative growth versus the rest of the world (ROW) has rebounded and is expected to accelerate in the coming quarters. Stronger relative growth means more attractive returns which draws more capital flows that in turn push up the dollar, increasing total investor returns thus making the US more attractive and giving birth to a feedback loop.

When looking at the dollar you have to analyze the US relative to Europe since the euro accounts for over 60% of the movement in the dollar on a trade-weighted basis. And on this front, the euro looks ready to kamikaze.

The improving relative US economic picture makes for more attractive return prospects in US markets as relative equity momentum picks up. This is driving speculative flows back to the core (the US) and these flows drive exchange rates.

We can see this change in flows directly in the following chart from BofA. Foreign purchases of US equities relative to eurozone equities have recently picked up, and quite significantly so.

On a forward PE basis, the eurozone is now not much cheaper than the US. While at the same time, growth expectations have strongly diverged in favor of US companies.

This dollar trend is going to affect everything from rates to commodities (think gold and oil) to EM stocks as well as specific US sectors. It’ll benefit some markets while hurting others….

There are a number of highly asymmetric trades to be made off this macro shift which we’ll be discussing in depth in our coming monthly Market Intelligence Report (MIR).

Market Wizard Ed Seykota once said that, “Fundamentals that you read about typically are useless as the market has already discounted the price, and I call them ‘funny-mentals’. However, if you catch on early, before others believe, then you might have valuable ‘surprise-a-mentals’.

The market is positioned for a weakening dollar. Everyone knows that everyone knows that the dollar is in a bear market because: the widening deficits in the US, chaos in the White House, overvalued US stocks, the technical breakdown of the dollar bull trend, USD bull cycles only last 7 years etc… This is common knowledge and is now embedded in the price. Positioning shows that this narrative has become entrenched. The market, as always, has been extrapolating the past into the future. It hasn’t realized yet that the future has changed. It’s about to be in for a surprise…

If you want to stay on top of this incredibly important shift in the macro narrative, subscribe to the MIR by clicking the link below and scrolling to the bottom of the page:

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.

If the US dollar maintains trend, a seismic shift will occur in the macro landscape. The greenback is the linchpin macro asset that will affect every other asset class out there. Keeping tabs on this trend will be vital for any trader that wants to knock 2018 out of the park. By subscribing to the MIR you will have real-time monthly updates on this important trend.

Click Here To Learn More About The MIR!

 

 

From Bullish To Bearish In Gold?

Today we’re going to revisit gold. I’m going to explain what’s going on in the gold (GLD) market and what trades we put on last week in the Macro Ops portfolio to take advantage.

Earlier this month I released a video explaining why our team was bullish on this precious metal. But at the end of that video I explained that even though we were bullish, we were still waiting for price to confirm. About a week after we released that video it looked like we finally got our breakout. But we didn’t immediately put on a trade because we wanted to wait for the close to make sure it was real. And that ended up being the right move because as you can see we got a huge breakout failure. It was a bull trap.

This failure was an inflection point. Over the last year gold had everything going for it to rally, but it still failed. The dollar was down almost 15%, we had political drama everywhere, geopolitical tensions were rising from trade wars to potential nuclear strikes, and to top it off we had the rise of inflation narrative coming back front and center.

But gold still failed to breakout higher. And now conditions are actually shifting to become bearish for gold.

Last monday we saw gold break below its triangle pattern. We put on a starter position of just 25 bps to test the waters because we knew there was potential of another fake out. We were also putting on 75 bps of long dollar (UUP) positions at the same time. And going long the dollar is very closely correlated to going short gold, so we needed to size smaller when considering our total portfolio construction. By Thursday we saw the follow through in gold that we wanted and put on another 25 bips on, doubling our position. Again we sized a bit smaller because we also doubled our dollar position. And now we’re going to sit and wait for the trend to play out.

For more be sure to check out the video above!

And as always, stay Fallible investors!

 

 

A Developing Soros Style Boom-Bust

The Palindrome (Soros) once said, “The generally accepted view is that markets are always right — that is, market prices tend to discount future developments accurately even when it is unclear what those developments are. I start with the opposite view. I believe the market prices are always wrong in the sense that they present a biased view of the future.

That last part is very important. Do you know what Soros means when he says the market is wrong because it’s biased about the future?

I’ll tell you. It’s an important concept to understand. And a helpful mental model to use in today’s choppy market action.

The market is supposed to be a forward discounting machine. It’s supposed to look out into the near future and make judgements on things like revenues, margins, earnings, inflation, the discount rate, potential risks, geopolitical shocks etc… and then make bets on what the proper value (the price paid today) is for those future cash flows.

That’s no easy task… it’s a lot of things to take into consideration. The market and economy is a complex beast. There’s a lot of unknowns and unknown unknowns. And like the great sage Yogi Berra once said “It’s tough to make predictions, especially about the future.”

To top things off, we (as in, we humans) abhor uncertainty. We can’t stand it. It drives us bonkers. Especially if it’s uncertainty surrounding something that’s a strong emotional trigger — like our finances or the stock market.

So here we have a problem. The future is hazy. The market is complex. The future path of the stock market is hazy and complex, i.e. it’s uncertain. Humans hate uncertainty. Round peg + square hole.

But the human mind is inventive when it needs to be, especially with the right incentives. Like making a lot of money in the stock market.

So to get around this seemingly intractably uncertainty-judgement issue, the majority of market participants simply extrapolate the present into the future. They take the hard numbers; the revenue growth, margin trends, and current cash flows. And just extend them out a few years. Boom… problem solved… no more uncertain future. Good earnings today = good earnings tomorrow. Money in the bank.

This is called anchoring. It’s a cognitive bias where we overweight the first or most easily available information when making judgements. It’s a useful heuristic and works pretty well, most of the time. Especially in markets. Financial and economic data tends to trend once it gets going. Kind of like Newton’s First Law.

The problem is, markets are reflexive. Meaning, our observations of the market affect the market itself, which in turn affects our observations and so on. You smell what I’m cooking?

This manifests itself in situations like the following.

The longer we see positive earnings growth, the more market participants begin bullishly extrapolating this earnings growth into the future. This results in the buying of more stock, which drives valuations up, and thus creates a market that’s now more incentivized to maintain and propagate the bullish narrative… and more importantly slap on cognitive blinders to new info that may threaten this narrative.

And so the narrative and the market form a self-sustaining feedback loop that goes on and on. It occasionally gets tested by disconfirming evidence. Each test it survives, the stronger the reflexive relationship becomes. As each dip bought leads to more confidence that so to will the next one and the one after that. Extrapolation ad infinitum…

This is why Soros said the market is always wrong because it presents a biased view of the future. The market is always biased in the direction of the established trend. Because it utilizes anchoring and extrapolation to form judgements instead of objectively and equally measuring the weight of available information.

And like I said, this works most of the time. But when it doesn’t, it really doesn’t…

As traders we always need to be cognizant of the trend. As well as the key data points that are the foundations of the driving narrative of that trend. But we also need to objectively look out into the future to see if any freight trains are headed our way that could derail the narrative.

Just the process of gaming numerous potential scenarios is a valuable exercise as it keeps our minds fresh, open, and unwedded to a single narrative or outcome.

Market Wizard, Bruce Kovner, attributed this process as one of the main reasons behind his enormous success. He said:

I’m not sure one can really define why some traders make it, while others do not. For myself, I can think of two important elements. First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.

What we’re talking about here is playing the game at Keyne’s second and third levels… Playing the player… Understanding what the market is focusing on and what exactly is being priced in. Then weighing that against the incoming data and gaming alternative futures to the one the market is focused on and thinking about what catalysts could trigger a phase shift.

Is this easy? No, of course not.

But there are a number of tools and models we can use to make this scenario gaming a more fruitful exercise. One of these is to focus on the second-derivative of data. That’s the trend in the rate of change instead of the trend in the absolute number.

This is important because trends lose steam before they turn. The market focuses on the growth — it wears the bullish blinders — while we want to keep our eyes peeled for a potential slowdown, or a change, in that growth. This will tip us off to a coming trend change in the data. A trend change that could destroy the narrative and cause a phase shift.

This is why we look at year-over-year data versus absolute numbers. It’s not the absolute level it’s the relative rate of change over time that matters.

And this brings us to an important point in how we should think about potential future outcomes going forward. Since it’s the relative rate of change that’s important, then the base period in which current data is measured against (the prior year in year-over-year) is pretty important. It’s essentially a hurdle. A low hurdle is easy to clear. A high one and the markets likely to trip.

We’ve benefited from having a low bar over the last few years. The goldilocks economy, of low growth and low inflation, kept expectations low which made for an easy hurdle. But with the recent tax cuts and a globally synchronized growing economy at our backs we’ve seen earnings growth, and expectations, jump.

Just look at the chart below. Consensus estimates have earnings growth peaking in the 3Q of this year.

Simply put, after this year we’re going to have a HIGH hurdle to clear. And current expectations are for this global synchronized growth trend to continue. Remember, current trend extrapolated ad infinitum… But will it?

While growth here in the US remains strong, as shown below by our composite leading indicator entering expansion territory for the first time in nearly four years. There are signs that the world’s second biggest economy is beginning to limp.

China is in the difficult spot of trying to manage a deleveraging while shifting its economy from a production centric to a consumer focused one. All while trying to maintain financial stability lest the CCP upset the apple cart and drive people into the streets demanding *gasp* freedom.

Because of China’s economic size and especially its hunger for natural resources. It’s importance on the global stage is significant, and only becoming more so.

BofA wrote in a recent letter how, “On close inspection, DM and Chinese growth are increasingly intertwined. While the two series were nearly uncorrelated in the previous cycle, their correlation has increased considerably in the current cycle. Moreover, Granger causality tests suggest that the ECI for China leads the developed-market common factor by four to five months but not vice versa.”

China matters. It sneezes and the rest of the world catches influenza…This is why we should be somewhat concerned by the recent slowdown in the rate of change in the data coming out of China.

The second-derivative shows a trend-shift occurring. Chinese liquidity has turned, as shown below by the YoY change in the M1 money supply — which tends to lead China’s PMI by 3-months. And this tightening liquidity is showing up in industrial production electricity usage. One of the few seemingly untainted data points that come out of the country.

And growth in domestic credit to households has rolled over.

Danske bank writes the following on some of the ways this could impact the rest of the world, noting:

The moderate slowdown of the Chinese economy is expected to dampen the global inflationary impact from China further over the coming year with PPI inflation declining further to around 1% by the end of 2018 down from a peak at 7.5% in early 2017. The inflationary impact of reductions in overcapacity is also set to fade, as China has already come quite far in cutting overcapacity and steel prices and other commodity prices have recovered to more ‘normal’ levels.

So here we have new incoming data that doesn’t exactly jive with the current market consensus. But it could potentially have a large impact on the dominant narrative and even cause a complete trend-shift. We have all the necessary information to game various scenarios on how this can play out.

We know that the market is still strongly positioned bullish. It’s extrapolated current trend-growth rates out to the wazoo.

We know that a combination of tax cuts and global synchronized growth last year has given us a boom in earnings this year. This earnings growth should peak in the second half, leaving us with a high hurdle and declining growth going into 2019.

We know that the market has recently anchored to the “reflation” narrative with expectations for much higher inflation becoming a consensus belief (charts below via BofA fund manager survey). As well as one of the top fears or “tail risks” on investor’s minds…

This new dominant belief over rising inflation has driven bond yields higher. And since bonds compete with equities for capital flows. And their rates are used in valuing and assigning a multiple to stocks, the high rate-of-change in yields has caused stocks to sell off.

This creates the interesting scenario — one of many possible outcomes — where a slowing China could be bullish for US stocks; over the near-term, at least. This is because a gradually slowing China (keyword being gradual) would feed into lower inflationary pressures and maybe a more dovish Fed, if not, it’d at least help put a floor under bonds.

And this outcome would then spawn a whole host of other potential outcomes.

A slowing China could extend the Fed’s rate hiking cycle and thus spur US relative market outperformance versus the rest of the world. This would put a bid under the dollar and a strengthening dollar would raise foreign investors total return outlook in US markets. Which could spark a virtuous cycle of money flowing back into the US.

Throw in the likelihood of the corporate share buyback orgy reaching new climatic heights this year and we have the makings for a core renewed driven rally. One that would have many large consequences for the dollar, gold, oil, and emerging market stocks.  

Isn’t this game fun?

If this scenario plays out, then the market will double down on its US-centric bullishness and extrapolate, extrapolate, extrapolate. While also failing to see that by doing so it sows the seeds of its own destruction. Let’s return to Soros again:

Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.

If a self-reinforcing process goes on long enough it must eventually become unsustainable because either the gap between thinking and reality becomes too wide or the participant’s bias becomes too pronounced. Hence, reflexive processes that become historically significant tend to follow an initially self-reinforcing, but eventually self defeating, pattern. That is what I call the boom/bust sequence.

Two trends are always interacting with one another, in a reflexive loop. One trend is reality and the other is a misconception of that reality. As global macro traders we need to focus on both. And the best way to view “reality” is by measuring it at the second derivative level.

You now know what the market’s potential misconception is. As well as how growth-trends are unfolding.

There are a number of sizable trends that are about to develop… along with massively asymmetric trades that are soon going to catalyze.

We’ll be discussing all of this in our next Market Intelligence Report (MIR) that comes out next week.

Click here to secure your copy!

 

 

Carry, The Death of Gold, and Antimodels

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.


Recent Articles/Videos —

Explaining The Yield Curve — AK covers what’s going on with the yield curve including why it’s flattening, what that flattening means, and how long we have till a recession hits.


Articles I’m reading —

One of the Hottest Short-Dollar Trades Just Fell Into the Red – Emerging markets FX has been our radar recently as we just completed a Masterclass on it for the Collective.

One of the largest drivers of EM FX trading is the carry — or the spread between the interest that you earn owning the foreign currency minus the interest you pay on the funding currency. (The USD is one of the most popular funding currencies.)

This trade is incredibly profitable during a dollar bear market. But it doesn’t work well at all when the dollar turns around and enters a cyclical bull market. As you can see from the chart below things haven’t been working out too great for the EM FX carry trade until recently in 2016-2017 as the dollar retraced it’s 2014 gains.

But now after the recent move up in the dollar this week, the carry trade is under fire yet again. The year-to-date returns are now at a scratch and headed for the red.


Book I’m reading —

I’ve been wanting to do a deep dive into COT data for awhile now, and I’ve finally started this process last week. The Commitments of Traders Bible was recommended to me by another trader so I decided to pick up a copy.

The author, Stephen Briese, really did write the ultimate reference on the subject. It’s probably the only book you’ll ever need on COT data. Briese starts with the history of the reports, then picks apart each and every data point so you get a thorough understanding of exactly what’s included in these COT releases. He caps off the book by telling us how to turn all that data into actionable trading signals.

If your a fanatic about positioning data and you think it can really bolster your trading edge, check this book out. You won’t be disappointed.


Chart I’m looking at —

Tech stocks that like to grow revenue no matter the cost have been the darlings of this bull market. But eventually this will come to an end once these stocks break trend. Investors will flock back into good ‘ole fashion value companies that are more robust to poor macro conditions. The chart below suggests that the “value comeback” will happen earlier rather than later.


Trade I’m looking at —

Short gold looks attractive here and we have already initiated positions.

After the big breakout failure on April 11th, gold has been going straight down.

Gold has had literally every reason in the world to rally and it can’t. Inflation expectations have been moving higher, the dollar has been caught in a bear trend, Trump has been doing all sorts of shenanigans in the White House, and gold still can’t hold a breakout.

So if gold won’t go up when it has everything going for it, what’s it going to do when those drivers turn against it?

The latest breakout in the dollar index this week suggests that the drivers for gold are starting to turn bearish. We think this will lead to washout down below the $1200 level.


Quote I’m pondering —

People focus on role models; it is more effective to find antimodels — people you don’t want to resemble when you grow up. ~ Nassim Taleb

I think what Taleb suggests here would be a good mental exercise. We all read Market Wizards. We all study the Trading Greats. But few of us ever think about antimodels — at least I haven’t. Perhaps take a weekend to think about who you wouldn’t want to emulate as a trader.

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.

 

 

A Millennial Boom in Asia and an Asymmetric Opportunity in Precious Metals

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.


Articles I’m reading —

Jeff Bezos’ latest annual letter to shareholders is fresh off the press. His letters are always worth a read, and this one is no exception. This year, Bezos asks the question of whether high standards are intrinsic or teachable (he believes they’re teachable). He then lays out his, and Amazon’s, philosophy for teaching and maintaining high-standards. Here’s a section on the difference between universal and domain specific standards.

Another important question is whether high standards are universal or domain specific. In other words, if you have high standards in one area, do you automatically have high standards elsewhere? I believe high standards are domain specific, and that you have to learn high standards separately in every arena of interest. When I started Amazon, I had high standards on inventing, on customer care, and (thankfully) on hiring. But I didn’t have high standards on operational process: how to keep fixed problems fixed, how to eliminate defects at the root, how to inspect processes, and much more. I had to learn and develop high standards on all of that (my colleagues were my tutors).

Understanding this point is important because it keeps you humble. You can consider yourself a person of high standards in general and still have debilitating blind spots. There can be whole arenas of endeavor where you may not even know that your standards are low or non-existent, and certainly not world class. It’s critical to be open to that likelihood.

It’s a short and thoughtful read. Here’s the link. Oh yeah… Bezos also discloses the number of Prime members for the first time. Amazon now has 100 MILLION prime users… To put that into some perspective, there’s 126 million total households in the US. That’s bananas…

Also, Eric Lonengran, a macro hedge fund manager and author of the excellent Philosophy of Money blog, wrote a post on how we should think about trade deficits. Hint: it’s not as simple as just “deficits are bad!”. Here’s an excerpt and the link.

To make it clear how foolish the ‘deficits are bad’ argument is, consider not just that for every country with a trade surplus there has to be one with a deficit, but every country that has a current account deficit also must have a capital account surplus on its balance of payments, in other words it receives more in inward investment than it sends overseas. In principle, Trump could reduce the trade deficit by making the US a lot less attractive to invest in. In fact, the evidence has shown for a very long time that the capital inflows which America receives on average receive very poor returns, so much so, that America manages to have net external assets. It would make more sense for the Chinese population to complain that its capital is being wasted financing the US government, for a near-zero real return.

Lastly, check out this new tool from Google. It’s called Talk To Books. Here’s the link. It uses AI and natural language processing to respond to your questions/thoughts with relevant excerpts from books. It’s pretty awesome and a great way to go down the rabbit hole on a topic and do some good book discovery.


Podcast I’m listening to —

Russ Roberts’ latest EconTalk podcast is killer. One of the more interesting interviews I’ve listened to in a while. In this episode, he chats with Jerry Muller about Jerry’s recent book, The Tyranny of Metrics, which is about how well-intentioned metrics often create perverse incentives. Here’s a snippet from the talk.

You know, some years ago the National Health Service in Britain had a lot of complaints about waiting times to be admitted to the hospitals were too long. So, they declared that hospitals would be penalized if the waiting time to get in to, to be admitted to the hospital was 4 hours or more. So, what did the hospital–so, some of the hospitals did the following: When they had patients coming in by ambulance and they knew that the wait was going to be more than 4 hours, they would have the ambulance circle around the hospital until they could admit the patients within 4 hours. Which sounds kind of amusing at first, until you think about the fact that there were then patients sitting at home, waiting to get picked up by those ambulances, who weren’t picked up in a timely way. So, the hospital could meet its metrics in a way that was transparent, but with negative effects for the actual purposes of the institutional. So, one of the things that metric fixation does, is it turns us all into gamers.

Charlie Munger has said, “Show me the incentive and I’ll show you the outcome” and, “I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. Never a year passes that I don’t get some surprise that pushes my limit a little farther.”

Simply put, incentives are everything. For whatever reason, this is a lesson that we (humans) need to learn over and over again.

Check out the talk, it’s great. Here’s the link.


Book I’m reading —

I finally finished reading all 600 pages of Yardeni’s book, Predicting the Markets. The book covers a wide range of topics, from economic and market history, to the highlights of Yardeni’s career, and finally to the models and tools he uses to analyze various assets.

The book has a lot of breadth and depth. I enjoyed it, though at times it’s a trudge and could have been perhaps 100-200 pages shorter. I’d give it 4/5 stars and would recommend it to any of you who like nerding out on economic history and the various economic indicators we can use in forecasting. Here’s a section on how Yardeni thinks about the typical US dollar cycle. A timely mental-model to keep front of mind, imo.

US monetary easing and economic recovery expand US trade deficit. During recessions, the United States tends to adopt stimulative monetary and fiscal policies to revive US economic growth. The resulting rebound in demand typically widens the US merchandise trade deficit because imports rise faster than exports. The growth of imports is boosted by recovering domestic demand. The growth of exports usually lags because overseas economic growth tends to trail recoveries in the United States. So the US trade deficit as a percentage of nominal GDP is likely to narrow during recessions and widen during recoveries and expansions.

Expanding trade deficit depresses value of US dollar. As the trade deficit widens during recoveries, the trade-weighted foreign-exchange value of the dollar tends to fall. This happens because the widening trade deficit increases the supply of dollars in the foreign-exchange market as US importers seek the foreign currencies they need to buy foreign-made goods. Foreign exporters who are paid in dollars by US customers seek to convert their dollar receipts into their local currencies.

Foreign central banks buy dollars, propping up the dollar’s value. At this early stage of a global recovery, foreign central bankers often choose to prop up the dollar relative to their currency. To do so, they purchase dollars and sell their own currency in the foreign-exchange market. Why? To keep their currencies from appreciating, because when a nation’s currency does so relative to the dollar, the nation’s exports to the United States become more expensive and therefore less competitive in the world’s biggest and most rapidly recovering consumer and business market. To fully benefit from the recovery in the United States, central bankers naturally tend to intervene in the currency markets by buying dollars. Rapidly growing exports to the United States spread the US boom to the rest of the world.

Such foreign intervention spreads US monetary ease globally. The central banks also tend to spread and to amplify the Fed’s easy monetary policy worldwide. If they don’t “sterilize” their US dollar purchases (and domestic currency sales) through open-market sales of domestic bonds — thus buying back their local currency — then the rapid growth of their international reserves, i.e., dollars, will increase their domestic monetary base and money supply.

When the Fed tightens, the dollar strengthens and foreign central bank’s intervention slows. When the Federal Reserve tightens monetary policy, dollar reserves growth tends to slow. The dollar typically strengthens when monetary policy turns more restrictive. Foreign central banks no longer must intervene as aggressively in the currency markets to support the dollar. Also, as noted above, when the global economic expansion matures, policy-driven liquidity tends to be replaced by prosperity-driven liquidity, i.e., more jobs, more incomes, more consumption, and more private savings.

Where in the dollar cycle do you think we are?

I believe the dollar is going to be the primary macro driver of markets starting sometime in the second half of this year. A number of macro instruments (ie, dollar, bonds, precious metals) are currently lining up at critical inflection points. I expect some big trends to be born soon…


Chart I’m looking at —

KKR shared the following charts in their most recent Global Perspectives report (here’s the link).

The two charts show the rise in the ‘Experiences over Things’ trend and how millennials put greater emphasis on fun and leisure than their parents did. This secular thematic is especially noticeable in Asia, where a tidal wave of millenials are about to enter their prime spending years — and they have a lot more money than the previous generation.

KKR notes that “while ‘Experiences over Things’ is not a new theme for us, the pace of implementation appears to have accelerated across both Asia and Europe in recent quarters. In India, for example, cinema is exploding, with new air-conditioned multiplexes. There is also the continued focus on wellness and beauty, including a notable increase in experiential healthy dining options. As Exhibit 42 shows, increased travel by both locals and foreigners remains a secular theme throughout Asia, a trend we heard several times during our time in Mumbai. Estimates are now that international tourist arrivals are forecast to increase by 331 million to reach 535 million by 2030 (a 4.9% increase per year), making Asia the region with the highest absolute gain in arrivals.”

These are big long-term trends that are going to reshape markets and the world over the next few decades. This is just one of the many reasons why Yatra Online (YTRA) is one of my highest conviction investments.

Also, here’s an infographic slide from Goldman Sachs which talks about the millennial boom we’re seeing here in the US.


Trade I’m looking at —

Did you guys see the textbook breakout in silver this week? The charts for silver and silver miners look sweeeet…. Check out this one below of Coeur Mining (CDE). That’s a good looking tape.

And remember the chart I shared last week highlighting the stretched gold/silver ratio? Well the flipside of that, the silver-to-gold ratio, often leads major moves in the precious metals complex. See the chart below from JC Parets.

I remain somewhat skeptical of the prospects for a renewed breakout in precious metals. But we have to stay open to the possibility and let price be the final arbiter, as always. With the charts looking as good as they do, and the dollar teetering on its 7-year trendline, the risk/reward seems pretty good here for putting on a position.

You can buy some long-term DOTM calls on a few of these miners, like CDE or PAAS, for cheap right now. Those will pay out big in the event that precious metals break out and run higher.


Quote I’m pondering —

Technical analysis reflects the voice of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely critical and alerts me to existing disequilibria and potential changes. ~ Bruce Kovner

Price is king which is why we need to learn how to listen to the tape. There’s a lot of info crammed into these little 2-dimensional representations of market supply and demand. Like Livermore once said, “The thing to do is watch the market, read the tape to determine the limits of the get-nowhere prices, and make up your mind that you will not take an interest until the price breaks through the limit in either direction.”

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.