Gold, Bill Miller, and Buffett’s Thoughts On Inflation

Gold, Bill Miller, and Buffett’s Thoughts On Inflation

Alex here with this week’s Macro Musings.

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

Recent Articles/Videos —

The Oil Bull Market — AK provides some color on the oil rebound we’ve been tracking.

Hedge Fund Letters — Our 10 favorite hedge fund letters for sourcing equity picks.

Japanese Equities Awaken — The Nikkei is ripping. We explain why the run is just getting started.  

Articles I’m reading —

Pseudonymous blogger, Jesse Livermore, put out a fascinating piece on how to calculate and think about likely expected market returns. Everything Jesse pens is a must-read and this piece is no different. His ability to ruthlessly dissect common assumptions with razor sharp logic is unmatched — I’d love to know who he really is.

Jesse comments on a very important secular shift that I’ve been tracking and which is partly cause for today’s high valuations. And that’s the dramatic shift in pension fund weightings in equities. Here’s what he writes:

Beginning in the early 1950s, pension funds began to shift their allocations out of fixed income and into equities. Today, equities and equity-like “alternatives” represent the primary asset classes through which they generate returns. A 2015 survey of state and local pension funds found that the lowest combined exposure to these asset classes was 61% for the Missouri State Employees Retirement System. The highest was 87% for the Arizona Public Safety Personnel Retirement System. The average exposure was around 70%, which checks with flow of funds data (source: Z.1, L.120, fixed income defined to include cash and equivalents, equity exposure from mutual funds estimated from L.122):

In the post, Jesse discusses how the average U.S. pension fund is working off assumptions of 7.5% annual returns. These are optimistic expectations for the low interest rate environment we’re in, especially when combined with the fact that equity valuations are in the 97th percentile of all valuations in history (so, pretty high).

He then breaks down these assumptions into their various components and finds that even under the most optimistic of scenarios, the pension funds are going to fall a few 100bps short of targeted returns. And that’s a big deal…

Read the whole thing, you’ll learn something. Here’s the link.

Somebody with a lot of time on their hands created this document of Buffett’s thoughts on inflation. They combed every article, interview, and letter, in order to aggregate all of the Oracle’s hot-takes on the subject. It’s 100-pages long, but worth a skim. Here’s the link and a snippet:

High rates of inflation create a tax on capital that makes much corporate investment unwise – at least if measured by the criterion of a positive real investment return to owners. This “hurdle rate” the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners – has increased dramatically in recent years. The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil.

For example, in a world of 12% inflation a business earning 20% on equity (which very few manage consistently to do) and distributing it all to individuals in the 50% bracket is chewing up their real capital, not enhancing it. (Half of the 20% will go for income tax; the remaining 10% leaves the owners of the business with only 98% of the purchasing power they possessed at the start of the year – even though they have not spent a penny of their “earnings”). The investors in this bracket would actually be better off with a combination of stable prices and corporate earnings on equity capital of only a few per cent.

With the turning of the long-term debt cycle and the increasing rise of populist politics around the world, it’s odds on that the next secular cycle will be inflationary. It’s good to start studying the specific dynamics of inflationary market regimes and this doc isn’t a bad place to start. Here’s the link.

Also, here’s FT’s Matt Klein’s conspiratorial take on the recent sell-off in crypto (hint: it’s to hurt the North Korean regime). Link here.

And finally, here’s Horizon Kinetic’s 4th quarter portfolio update. Some good stuff in there.

Podcast I’m listening to —

This week I had to go back into the archives of my podcasts rotation because I’d listened to all the new ones. I’m so glad I did because I rediscovered an old (2016) Barry Ritholtz MiB interview with investing legend, Bill Miller. It’s one of the best interviews I’ve heard in a long time. I actually listened to it twice this week because there’s just so many good takeaways in it.

After an incredible 15+ run of consistently beating the market, making him one of the all-time great money managers, Miller took one on the chin in the financial crises and had to temporarily close up shop. But he’s back at it again, and doing really well.

I’m a big fan of the way he thinks about investing and markets. He’s a former military intelligence specialist, like myself, which shows in the way he approaches things. I’m a regular reader of his funds blog (link here) which is worth checking out. Anyways, here’s the link to the episode. Listen to it, it’s good.

And side note: I’m thinking about writing a Lessons from a Trading Great piece on Miller soon. So if you’ve got any articles, interviews, books etc… that include him, please shoot them my way. It’d be much appreciated.

Book I’m reading —

This week I took a break from market related books and instead revisited some classics.

I read Helen Keller’s The Story of My Life which is a fantastically beautiful and inspiring book. I think I last read it in grade school and I’m so glad I came across it again. She was a gifted writer and thinker and her life story really forces you to put your own personal trials into perspective.

It’s a short book and definitely worth picking up. She’s also the author of one of my favorite quotes, which is “Life is either a daring adventure or nothing. Security does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than exposure.”

I also read a compilation of Will Durant’s essays titled The Greatest Minds. Will Durant, and his wife Ariel, are two of my favorite historians. They have a gift for sussing out the major threads that tie history together. They’re also skilled writers with the ability to make their words spring to life. If you haven’t read the book The Lessons of History, you need to. It’s one of my all-time favorites.

Anyways, The Greatest Minds… like all their work, was great. It’s a short and fun read.

Finally, I’m just cracking open Profits and The Future of American Society by Jay and David Levy. The son and grandson of Jerome Levy, founder of the Jerome Levy Forecasting Institute. The book was recommended to me by a friend. It covers Levy’s economic theory which he called the private enterprise system. I’ll share my thoughts on the book, next week when I’m finished.

Chart(s) I’m looking at —

I forget, but I wanna say the chart below is from a report by JPMorgan. It shows that for the current market to truly enter “bubble” territory, as marked by historical instances, we would need to see realized volatility expand along with a continued rally higher. This fits with Granthams “melt-up” thesis and is inline with our current thinking on where things may be headed.

Trade I’m looking at —

I’m keeping a close eye on precious metals/miners. The charts for gold miners are setting up nicely, like this one below of BVN (monthly).

Gold is an important macro instrument to watch because it’s reflective of the fundamental global demand for USD based liquidity. And because of this, it often leads the dollar at key turning points. So if gold is able to make a decisive and sustained break higher from here, then that would be a bearish signal for the dollar. Of course, a lower dollar is positive for gold, which is part of the circular causation mechanism that makes markets so complex.

I’m agnostic at the moment and can see gold, and the dollar, going either way. But it won’t be much longer before the market tips its hand. And then I think we’ll see the beginnings of what will be a large trend and profitable trade for those paying attention.

Quote I’m pondering —

Much of the real world is controlled as much by the “tails” of distributions as by means or averages: by the exceptional, not the mean; by the catastrophe, not the steady drip; by the very rich, not the “middle class.” We need to free ourselves from “average” thinking.  ~ Philip Anderson, Nobel Prize recipient in physics


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.

Japanese Equities Awaken

At Macro Ops we like trades where a confluence of positive tailwinds intersect with a thematic that has a long runway. Opportunities where attractive valuations spawned by negative to neutral sentiment combined with improving fundamentals and accelerating momentum are what we look for.

One of our current holdings checks all these boxes. I’m talking about Japanese equities. A theme we’re playing using futures on the Nikkei (DXJ is the ETF alternative).

The Nikkei has had a good run since it first popped up on our radar back in September.

But this move is only getting started. Here’s why it’s time to be long Japan.

On a valuation basis, Japan is one of the cheapest developed markets. Trading at a forward PE of 15x it’s well below the global PE average of 17X and the US’s lofty forward PE ratio of 18.6X,

While the US and European markets have been getting all of the attention. The Nikkei has quietly made new multi-decade highs.

And after underperforming relative to the rest of the world (ROW) for decades, the Japanese market has been rising faster than global stocks as a whole since 2013.

Relative momentum is an important factor. It makes plainly visible the large trends created from global capital flows. These trends, once started, have a tendency to persist for years.

Behind this improving tape is one of the best looking fundamental backdrops of any advanced economy.

Japan had the fastest increase in earnings growth of all the major stock markets in 17’. Net profits for Topix companies increased 35% Y/Y in the first half of fiscal year 18’.

And the market continues to be overly pessimistic on earnings estimates. This is resulting in forecasts having to be continuously revised higher.

It’s steady positive surprises like these that drive bull markets (the market climbing the proverbial wall of worry). Here’s the same chart along with FTSE Japan on a Y/Y basis, showing earnings surprises (both positive and negative) leading stock returns.

We expect this positive fundamental momentum to accelerate in the year ahead.

After years of stagnation, Japan is finally seeing its nominal GDP make new highs (chart via Morgan Stanley).

Its Leading Composite index (LCI), a composite of 12 indices measuring the country’s economic and financial health, has been strongly trending higher since 2015. This signals robust economic momentum that should continue into the foreseeable future.

We can see this improving economic momentum across the board. The Tankan business conditions survey recently saw its most positive results in over 20+ years.

Employers are on a hiring binge.

The labor market is the strongest it has been in 23 years.

In addition to this great trifecta of low valuations, negative to neutral sentiment, and improving fundamental backdrop, there are a number of catalysts that are set to drive this trend onwards and upwards.

In December, the Japanese ruling coalition approved a draft for a significant tax package (surprisingly, it’s received little attention in the press).

The aim of this tax proposal is to incentivize corporates to raise wages and increase capex spending.

If passed, it would lower the effective corporate tax rate to as low as 20%, down from 30% where it currently sits. The law would allow large corporates to reduce their effective corporate tax rates to 25% if they raise wages by more than 3% as well as expand investment.

The 25% rate could be reduced further, to the minimum 20%, if companies invest into new technologies that are related to the Internet of Things (IoT).

If this proposal gets passed into law (we think it will be, albeit with some minor changes), it will take effect this fiscal year and run for three years.

This would be huge… Japanese public companies have a lot of cash (estimates put it at close to 120tn yen) sitting on their balance sheets. That’s a lot of cash that could potentially be put to work in the real economy.

There’s also a number of positive macro tailwinds, such as a likely fiscal/infrastructure boost in spending as Japan prepares for the coming 2020 Tokyo Summer Olympics. Not to mention, accelerating economic/business ties between Japan and mainland China. China is seeing rising labor costs and so is turning to Japan for robots, amongst many other high-value items.

If you don’t own any Japanese stocks, you might want to rethink that.

In a follow on piece, I’ll talk about a few Japanese stocks we’re tracking which have large upside potential.

PS — If you’d like more of this type of research, then check out the Macro Intelligence Report (MIR) here.

One-Way Pockets

The Oracle Speaks

Alex here with this week’s Macro Musings.

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

Recent Articles/Videos —

Lessons From Stanley Druckenmiller — AK discusses Druck’s advice on betting big, going anywhere, and gaming market scenarios.

The Commodity Boom of 2018 — Our call on oil has been spot on so far. Here’s what we think happens next.

Articles I’m reading —

Mark Dow shared an older but excellent post where he lays out the actual impact of central bank QE on markets and economies. And he explains where credit creation really comes from. This is a must-read for those of you interested in learning what mechanisms drive credit creation and why things like QE induced hyperinflation never materialized following the GFC. Here’s the link and an excerpt.

The truth is the Fed’s monetary policy can influence only the price at which lending transacts. The main determinant of credit growth, therefore, really just boils down to risk appetite: whether banks and shadow banks want to lend and whether others want to borrow. Do they feel secure in their wealth and their jobs? Do they see others around them making money? Do they see other banks gaining market share?

These questions drive money growth more than the interest rate and base money. And the fact that it is less about the price of money and more about the mental state of borrowers and lenders is something many people have a hard time wrapping their heads around–in large part because of what Econ 101 misguidedly taught us about the primacy of price, incentives and rational behavior. If you answer the behavioral questions and ignore the endless misinformation about base money—even when it’s coming from the titans of finance—as an investor you’ll be much better off.

Oh, also, here’s a great primer from Bear Stearns on using return on invested capital (ROIC) as a valuation metric. Some of the slides are sideways so you might want to print it out. Here’s the link.

Plus, here’s a list of the 20 best investment papers of 2017. Some good reading in there.

Video I’m watching —

Buffett did a long (60 min) interview on CNBC this week. I’m more of a Munger fan but this interview was pretty good. If you don’t watch the whole thing, at least check out the section where he explains the market impact of tax reform (starts at about the 15:50 mark). It’s the most succinct explanation of the bill and its impact that I’ve come across. Hint: it’s a huge positive for markets. Here’s the link.

Also, someone (sorry, I don’t remember who) posted to twitter this talk that Mauboussin gave a while back, titled Why You Don’t Understand Luck. It’s focused on luck in sports but could just as easily be about investing. You can find the video here (it’s under 30 mins) and the slides to the lecture here. The three takeaways are (1) We overweight results (2) We rely too much on perception and (3) We make risk-averse choices.

It’s a great talk, check it out.

Book I’m reading —

This week I read One-Way Pockets: The Book of Books on Wall Street Speculation by Don Guyon. I wanna say I ordered this book after Felix Zulauf recommend it in an interview he did a few weeks ago with Barry Ritholtz on the MIB podcast (which was a fantastic interview and you should listen to it if you already haven’t).

Anyways, it’s a fun book. I should admit I’m biased towards old trading books (this one was published in 1917). I love older market books because you find that as much as things have changed, everything kinda stays the same — the most powerful market force, human nature, hasn’t evolved one bit…

In this short book (only 64 pages long) the author shares the results of an in depth study he conducted into the trading habits of the very few successful speculators as well as the money losing public, who were clients of his brokerage firm. And from this study, he teases out lessons and trading rules that are as relevant today as they were 100 years ago. You can read the book in one sitting and it’s worth picking up. Here’s an excerpt.

The few who make money in the stock market await what they consider exceptional opportunities and then play for profits that are worthwhile. They look ahead a week or a month or a year, as the case may be, and disregard the changes that occur in the price movement in each daily session, which to the daily trader assume exaggerated proportions.

Chart(s) I’m looking at —

Market sentiment is stretched by nearly every measure.

But similar to valuation, gauges of sentiment are not that useful from a timing standpoint, at least not by themselves. I’ve always found sentiment to be a much more useful tool for indicating bottoms than I have for picking tops.

These two charts/studies via Nautilus are a great example of how excessive optimism (as noted by the AAII survey) doesn’t necessarily indicate a coming selloff — at least not in the short to intermediate term.

According to Nautilus, each time the AAII numbers have reached these extreme levels of bullishness, the market has shown a positive return on average over the following 1, 3, and 6-months. And the average returns are pretty high.

I believe it’s likely we’re in the early stages of a “melt-up”, where sentiment will increasingly drive accelerating upward trends, which will further boost sentiment, forming a powerful feedback loop. Jeremy Grantham, of GMO, wrote a great piece on the possibility for this, just the other week. It’s worth a read, here’s the link.

Trade I’m looking at —

This is a beautiful chart of Overstock (OSTK) on a weekly basis. A great long-term technical setup that preceded it’s monster run which began earlier last year.

I almost bought some shares of OSTK towards the end of 2016 because it was very cheap on a comp basis.

I didn’t because I thought the CEO Patrick Bryne is nuts (I still do) and I didn’t think the hype around cryptos would amount to anything. This was of course the worst take imaginable. I never gave the potential for a crypto mania any serious thought. Lesson learned….

Anyways, moving on. OSTK is up 400+% from when I last considered buying and I’ve been digging into the company again. A number of smart HF managers, like Mark Cohodes, are bulled up on the stock. You can watch the pitch he gave for OSTK at a Grant’s Pub conference last October here, and here’s the slides.

The basis of Cohode’s thesis is simple. It’s that OSTK is a valuable strategic e-commerce asset which trades at low multiples relative to peers, has high insider ownership, and has the first and only SEC approved stock loan exchange on a blockchain. The company also has sole ownership of Medici Ventures, which has become a kind of VC arm of OSTK that invests in blockchain/crypto technology.

The stock has risen considerably since he gave that presentation, so the valuation argument is less relevant now. The stock still trades at only 1x revenues, which is lower than its peers (Wayfair trades at 1.6x and Amazon 3.6x), but both companies are seeing revenue growth in the 30+% y/y range while OSTK’s sales are declining.

Cohodes recently tweeted that he thinks OSTK will be a $200+ stock. And Bryne, the CEO, has hinted that he’s looking to potentially sell the company.

As a pure e-commerce play, I think the company is a melting ice cube. Go on Glassdoor and read what many of Overstock’s software engineers have to say about the company and its product. It’s not good.

But, because of the speculative times we’re in. I can see OSTK continue to go vertical from here. It’s almost a perfect Zeitgeist stock, with all its unique investments in the crypto space. It’s trading platform Tzero, which utilizes blockchain technology, is pretty interesting. It could end up actually becoming something someday — which is more than I can say about a lot of these crypto companies sprouting up like weeds.

So if you think the crypto bull market has more room to run, and I think it does. Then a small long position in OSTK may actually be one of the safer ways to play it. The company has a tiny float, only 16M shares, and has a short interest of 32.8%! That’s a lot of fuel to drive the stock even higher.

And if I’ve learned one thing from studying bubbles… it’s that things can, and often do, go to a level of stupid that nobody could imagine.

Quote I’m pondering —

Here’s some thoughts on risk, from market wizard Larry Hite.

I have a friend who has amassed a fortune in excess of $100 million. He taught me two basic lessons. First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk.

Risk is a no-fooling-around game; it does not allow for mistakes. If you do not manage the risk, eventually they will carry you out.

I have two basic rules about winning in trading as well as in life: (1) If you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.

Most retail traders are focused on trying to make profits. This is the wrong approach.

In markets, as in many complex endeavors, it helps to follow Carl Gustav Jacobi’s advice and, “Invert, always invert.” The successful speculator focuses on risk; how to spot it, how to measure it, and above all, how to manage it.

Focus on risk, and profits will come. Focus on profits, and risk will blindside you like a frying pan to the face.

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 Commodity Boom of 2018

The Commodity Boom of 2018

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

2018 will be the year the commodity bull gets running…

When a man makes his play in a commodity market he must not permit himself set opinions. He must have an open mind and flexibility. It is not wise to disregard the message of the tape, no matter what your opinion of crop conditions or of the probable demand may be. ~ Jesse Livermore

The stock market has far more short-term countertrends. After the market has gone up, it always wants to come down. The commodity markets are driven by supply and demand for physical goods; if there is a true shortage, prices will tend to keep trending higher. ~ Bruce Kovner

In late August we turned outright bullish on crude oil and energy related stocks. At the time this was a deeply unpopular opinion. No sooner than when we published did we start receiving emails giving us a list of reasons why we were wrong. I love this type of response when I take a real contrarian viewpoint. The more derided and unpopular our market stance, the more profitable the trade usually ends up being.

At the time, WTI crude was trading around $46bbl. And most market players were calling for a return to the $30s. Instead, crude went on a run rising over 30% to +$60bbl where it is today.

The energy stocks we’ve recommended over the last four months have done well.

  • WTI is up over 100%
  • RIG is up 36%
  • CRR is up 70%
  • ESV is up near 50%
  • COG is up 14%

Despite this run up in oil and energy stocks, we’re still hearing primarily bearish takes on the sector with traders looking to call a top after every rise.

Typically after a 30% rise over a short few months, a bullish narrative becomes popularized and widely adopted. But we have yet to see that. This is all the better because the greatest bull runs climb a mountain of disbelief. And that is what we’re seeing here.

This negative sentiment just bolsters the bull case. We think 2018 will be the year of the commodity bull. We expect WTI crude oil to climb over 20% higher and finish the year above $75bbl. This will drive energy stocks (our basket included) up by multiples, and the energy sector will finish the year as one of the best performing sectors.

The evidence is increasingly pointing to this potentially being a secular bottom in commodities and energy stocks in particular.

We have commodity valuations relative to stocks at 100 year lows.

Commodity pricing relative to stocks tends to follow a full 15.5 year cycle. We’re at the trough of the current cycle — a point that has marked the start of the last three commodity bull markets.

And energy’s relative total returns to stocks is classically a late cycle performer, as we’ve noted at length in our September report on where we are in the Investment Clock cycle.

We are at a long-term inflection point for commodities.

Global growth continues to surprise to the upside, which we expect to continue in 2018. And inflationary pressures are starting to build which will become apparent next year (note: we don’t expect “bad” as in high rampant inflation, but we expect stronger, around 2% inflation to persist towards the second half of the year). And beaten down commodity/value stocks do well in this environment.

Throw in the potential for a new infrastructure spending bill here in the US, as well as increasing expansionary policies in other parts of the world (ie, India), along with the wealth S-curve, and we have the makings for a large secular bull market in commodities that’s ready to get started.

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

Bitcoin Comedy & Stock Market Melt-Ups

Bitcoin Comedy & Stock Market Melt-Ups

Tyler here with this week’s Macro Musings.

Recent Articles/Videos —

Blockchain — We discuss the real value of cryptocurrencies like Bitcoin — blockchain. We explain how blockchain works and its potential transformative uses.

Articles I’m reading —

A Hedge-Fund Titan Puts Away the Punch Bowl

Our favorite macro investor, Ray Dalio, has some sobering thoughts on how financial assets will perform over the next 10-years.

The problem is that with interest rates and risk premia near all-time lows and debt and asset values near all-time highs, there’s little fuel to repeat the process. Just as the Fed can’t cut rates much, it can’t raise them much either, or debt servicing would swamp cash flow and asset prices would sink. Thus Mr. Dalio sees years of low interest rates, and while he thinks stocks are fairly valued, returns to a typical stock-bond portfolio over the next decade will be around zero after inflation and taxes. Whatever you need to retire, save it now: Don’t count on portfolio returns.

We agree with his long-term outlook. The FED has to battle the end of a long-term debt cycle which is incredibly hard to do. This reality is a tough pill to swallow for passive investors — but as macro traders we look forward to the opportunity that a deleveraging cycle will bring.

Video I’m watching —

Bitcoin has officially entered the manic/euphoric phase. It seems like every single article on yahoo finance is about ‘crypto’ instead of stocks.

I’ve been trying to limit my crypto media consumption because it can easily waste your time away, but this comedic video from Seth Myers is well worth the 5 minutes. It’s friggin’ hilarious and perfectly describes the type of mindless buying we are seeing right now in the crypto space.

Podcast I’m Listening To —

If you want a break from the bitcoin bullish chorus take a listen to Patrick O’Shaughnessy newest podcast on crypto — A Sober View on Crypto.

In this episode he interviews Adam Ludwin founder and CEO of Chain, a blockchain technology company targeted at large enterprises. Adam is long the space but with a healthy dose of skepticism and caution. His background is in venture capital so he knows how the game works — it isn’t all about instant riches and 100% wins.

I found it refreshing to hear a balanced take on bitcoin and crypto from a professional investor. His sentiment mostly aligns with ours — the underlying technology in crypto is super exciting but the actual value of the coins/tokens is questionable.

Chart(s) I’m looking at —

Jeremy Grantham’s latest note included the chart below showing a possible blow-off top scenario in the S&P 500.

We agree with Jeremy in that the market is likely to accelerate higher in the short-term. We have synchronized economic strength coupled with easy central bank policy. This sets the stage for financial assets to rally considerably until the Fed and the other CBs get further down their hiking cycle.

Trade I’m looking at —

The Nikkei has started off 2018 with a roar. Price has completed an upside breakout of an ascending triangle pattern.

We’ve been long since before the holidays and have recently added to positions.  

We’re across the board bullish on stocks (in the short-term) but the Nikkei has the most attractive setup from a technical perspective which is why are are putting on exposure here.

Quote I’m pondering —

The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business we are all agents, managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority ‘go with the flow,’ either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest. It explains the discrepancy between a remarkably volatile stock market and a remarkably stable GDP growth, together with an equally stable growth in ‘fair value’ for the stock market.  ~ Jeremy Grantham

We should see even more investment managers and individuals buy the market out of FOMO during this final ascent. If you’re going along for the ride make sure to keep your stops tight. There’s no long-term value at these levels.

That’s all 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.


Your Macro Operator,




Debunking Economics

Mauboussin’s Comparisons, Charlie Munger’s Wisdom, & Debunking Economics

Alex here with this week’s Macro Musings.

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

New Collective Members  —

I want to extend a warm welcome to all of our new Collective members. Our team is currently getting the new recruits up to speed as we prepare to hit the ground running in 2018. I’m psyched about how our community is growing and evolving and I look forward to crushing the markets with everyone in the new year.

If you want to start the year off right with an elite team of traders in your corner, then make sure to check out the Macro Ops Collective. It comes with everything you need to give yourself the best shot at improving your trading game.

Remember, enrollment closes this Sunday, December 31st at midnight. And there’s also a 60-day money-back guarantee. This means there’s zero risk for you to try the Collective and see if it helps you improve your returns. Don’t miss out.

Follow this link to join the Macro Ops Collective!

Articles I’m reading —

Take 20 minutes and read Michael Mauboussin’s latest paper on how to better compare things — in this case, stocks — in order to more effectively derive their relative values. The paper is titled How Well Do You Compare.

Michael first talks about how we are wired to use analogies to try and understand things and arrive at conclusions. This is very useful but it’s also full of cognitive pitfalls when analyzing complex subjects where the most available analogy may not be the most useful.

He then lays out a number of frameworks available to do comparative analysis; along with their strengths and weaknesses. Here’s the three methods he suggest using.

The main point of the paper is to be more critical in what you choose to compare things to. Heuristics are readily available but often ill-suited for the task. Thinking deeper about the “similarity” between the comparative entities leads to better results.  

Here’s the link.

Also, here’s an older but still great post from Meb Faber in which he shares his notes on an “investing checklist” from a class that was taught by the Tiger Cub John Griffin (who was a talented fund manager that just recently closed shop).

Video I’m watching —

My favorite of the Berkshire duo, Charlie Munger, recently gave a talk at the Michigan Ross School of Business. Munger is the Yoda of markets… the guy is a fountain of wisdom as well as a great storyteller. I try and listen to any talk he gives because I learn something new every time. This chat was no different. It’s filled with great stories on what it was like growing up during the depression, and getting started in markets, as well as valuable mungerisms on how to set yourself up for success with better mental models and daily habits.

It’s just under an hour long and definitely worth the watch. Here’s the link. Also, go read Poor Charlie’s Almanack if you haven’t already. It’s one of my all-time favorites.

Book I’m reading —

This week I’ve been reading Debunking Economics by Steve Keen.

I’m only about 100 pages in and it’s a nearly 500 page book so I can’t give a conclusive take on it yet. I’ll do a more extensive write up once I finish. But I do like what I’ve read so far.

The book is a takedown of neoclassical economic (mainstream) theory and all the crazy models and ideas that go along with it and which only a removed arrogant academic could dream up.

He then covers his own theory of economics, which he hopes will someday replace the neoclassical school. I haven’t arrived at that part of the book but I’ve heard him interviewed a few times. He seems to be pitching a much more useful monetary credit based model of viewing economics, similar to what Bridgewater uses for understanding markets.

Keen was recently on the MacroVoices podcast with Eric Townsend. I suggest giving that a listen if you’re not familiar with his ideas (here’s the link). He also has a page on Patreon with some useful videos outlining his theory along with links to his “Minsky Model” program which you can download for free (link, link 2).

Chart(s) I’m looking at —

We’ve been sharing similar charts to the one below for months now. We’ve been energy and select Ag bulls since late summer. A bet that has been paying off and which we think is only getting started. Commodities are at record lows relative to stocks. Throw in the S-curve wealth/demand growth from a rising global middle class (over 4B people for the first time in world history) over the coming decade(s) and you have a pretty asymmetric long-term bet on commodities.

Trade I’m looking at —

Here’s a trade I’ve been digging into: Redknee Solutions (RKN). I got the idea from Scott Miller, hedge fund manager of Greenhaven Road Capital (and someone I’m constantly stealing ideas from). Here’s the summary of his long pitch from one of his latest quarterly letters (emphasis mine).

Redknee (RKN) – This past quarter RedKnee conducted a rights offering, allowing existing shareholders to buy additional shares at a discounted price. The company will use the proceeds to fund their restructuring, which includes significant layoffs and product investments.

The rights offering was fully backstopped by ESW Capital, a growth private equity firm focused on business software companies. ESW has invested over $100M into RedKnee and placed the CEO, who knows the playbook very well and has taken substantially all of her compensation in company stock. ESW’s track record of success in the software industry was discussed at length in Greenhaven Q1 letter. Suffice it to say, I think the “A Team” has arrived. They have begun to outline a restructuring process that will rationalize what had become a bloated organization following two major acquisitions. Redknee billing software is used primarily by wireless phone companies. Under previous management, copious amounts of money were spent on R&D to expand beyond the telecom market. The ESW plan is to focus the company entirely on telecom and have customer needs drive the product investments. Turnarounds take time, even when the “A Team” is executing them. The recent rights offering was done at a substantial discount to any multiple of run rate recurring revenue at which competitor stocks are currently trading. I would expect Redknee short-term earnings to be between dismal and horrible as tens of millions of dollars of restructuring costs hit the income statement. However, over time, ESW has a very good chance of building the company into a profitable business that could be a successful acquirer in the telecom software vertical.We paid a more than fair price to back a very strong and well invented team trying to execute their 41st software turnaround and focus on the wants and needs of their customers. I like our chances.

There’s a more indepth write up, which is pretty good, on Seeking Alpha. Here’s the link.

The pitch is simple. RKN is a turnaround play of a company that previously floundered under mediocre leadership which led to lack of execution focus and bloating expenses.

The turnaround is being led by ESW Capital. ESW has a stellar track record of buying into struggling tech companies and righting the ship. They’ve put $100M+ into the business, installed their own veteran CEO, and are heavily incentivized to do good work. But like Scott points out, restructurings and turnarounds are never cheap and over the near term the numbers will suffer.

Technically the stock looks like it’s putting in a base. I’m considering putting on a small starter position.

Quote I’m pondering —

When I was in the first grade, the teacher asked each of us what we wanted to be when we grew up. I said, ‘a detective.’ This investigative nature has carried through into adulthood. I love searching for clues, synthesizing tons of unrelated data, and arriving at a logical conclusion. While these observations are not entirely scientific, they are things I’ve seen repeatedly over the years. ~ Marty Schwartz

The more time I spend in this game the more I realize that the vast majority of people (traders, managers, pundits) don’t know what the frack they’re talking about. This game is hard and complex. And because of the way we’re wired, we instinctively default to easy answers, which are more often than not, wrong. We prefer nicely packaged popular accepted “truths” over hard wrought contrarian independent thinking/ideas.

The fact is that it’s just so much easier to be lazy. To only look at a couple of valuation ratios and maybe draw a trendline to make a trade decision versus digging into the footnotes of a 10K or brainstorming “what ifs?” and scenario gaming.

Most people don’t want to do the work. Because of this, there’s a LOT of edge in just putting in the time and effort to develop the necessary skills and do the tough work. You need to be a hard charging market detective like ole’ Pitbull Marty Schwartz. There’s no easy way to winning in this game.

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

And if you’d like to discuss macro with the rest of the Operator community, check out our Global Macro Facebook group by clicking here.

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


Your Macro Operator,




The Rock, Einhorn Q&A, & Buyback Binges

Alex here with this week’s Macro Musings.

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

Special Event —

Special Event Trailer  — Tyler will be hosting a special event next Wednesday, December 27th at 8PM EST. He’ll be talking about how we used a multi-strategy mindset to earn 40% returns with only a 4% drawdown. He’s also going to show you how to deal with the 2 most common trading frustrations.

Make sure to watch the trailer above and register for the event! You won’t want to miss it.

Recent Articles/Videos —

2017 Performance Review — Detailed results of how our portfolio performed this year. You won’t see many trading websites do this. Check it out!

Reflexivity — AK made a great video explaining George Soros’ theory of reflexivity through the examples of Jeff Bezos and Dwayne “The Rock” Johnson. You can check it out below:

We also recently created a Fallible Facebook page. Be sure to go like it here. We’ll be posting and discussing various topics on that page.

Articles I’m reading —

The WSJ did a comprehensive write-up on how the recently passed tax reform will impact each industry group. Here’s the link, it’s worth scrolling through.

Cliff Asness and team over at AQR put out an interesting paper looking into the validity behind the popular criticisms of corporate America’s so-called “buyback binge”. Not surprisingly, they find there’s not much, if any, evidence to support this pessimistic take. The paper’s worth a read (link here). Here’s a summary of its concluding remarks.

The popular press is replete with commentary seeking to damn the behavior of corporate managers in handing free cash flow back into the hands of shareholders. Investment professionals have even been heard to comment on the profligate use of free cash flow when it is used to buy back common shares. These criticisms are often, even regularly, without merit (at least merit that can be demonstrated), sometimes glaringly so. Whilst there is always the possibility for agency issues to create incentives for corporate managers to engage in sub-optimal share repurchase decisions, we feel that in aggregate share repurchase activity is far less nefarious than the popular press would lead you to believe. In fact there is at least as much “agency theory” arguing that paying back free cash flow is a positive as there is that it’s a negative. Aggregate share repurchase activity has not been at historical highs when measured properly, and when netted against debt issuance is almost a non-event, does not mechanically create earnings (EPS) growth, does not stifle aggregate investment activity, and has not been the primary cause for recent stock market strength. These myths should be discarded.

And for those of you who are of a real wonkish bent, NBER put out a beast of a paper titled The Rate of Return On Everything, 1870-2015.  It gives a great breakdown of the total returns for all the major asset classes covering 16 advanced economies over a 135 year period. One of the more interesting takeaways is that housing has shown similar long run returns to equities but with less volatility on a national level. Here’s the link.

Urban Carmel, writing at his blog The Fat Pitch, put out a must-read piece last Friday detailing his thoughts on what’s to come in 2018. I’m a big fan of Urban and his data driven BS fluff free take on market action. He sums up the article saying.

US stocks will likely rise in 2018. Earnings growth, investor sentiment and valuation suggest that mid-single digit appreciation is a reasonable expectation, but the truth is wild cards, especially investor psychology, could push returns much higher (or lower). A bear market is possible, but unlikely. An intra-year drawdown of 10% (even a 14%) is odds-on; it will feel like the end of the bull market when it happens.

I concur. Here’s the link.

The whole blockchain/crypto orgy has officially gone full retard. Penny stock companies are adding blockchain to their names and rising 1,500% overnight, totally validating Fama’s theory of efficient markets.

This Bloomberg article covers these new ‘innovators’ of the blockchain-gig-social-mobile economy. Companies from reverse bra makers to juicers and furniture makers are pivoting to the blockchain and getting in on the ground floor of this amazing technological revolution!

Video I’m watching —

Value investor David Einhorn did a Q&A as part of the Oxford Unions speaker series. He talks about how he got started in the game and built up his fund, Greenlight Capital. As well as what it takes to be a great investor and where he thinks the market and economy are today. He’s a smart and thoughtful guy and the video is worth a watch (link here).

Book I’m reading —

This week I read Long-term Front-running by Michael Fritzell. You can find Michael on twitter under the handle @Fritz844. He’s a good follow and also writes a great markets/trading blog called Fritz Capital.

I really enjoyed this book. It’s a quick read (only 88 pages) and it covers the nuts and bolts of Michael’s trading framework as well as touch on some market theory.  

Here’s an excerpt from the chapter How to understand what is priced in:

Next-year consensus estimates for sell-side tend to be too bullish in the order of 5-10%. So in order to gauge true investor expectations you may want to scale down consensus numbers somewhat.

Well-publicized facts about the company are almost always priced in. If the average investor and analyst know about the fact, then it is probably priced in. If you think people’s first instinct is to go long (or short) a particular stock, the investor community is probably biased on the upside (downside).

A trick to get a sense of the overall level of bullishness is to ask who the burden of proof is on. If you pitch an idea, do other investors take your side immediately, or do they require evidence that your view is correct? If the answer is the latter, you idea is probably off-consensus.

What sell-side analysts typically do is to assume that current growth rates continue for a few years and then converge to long-term GDP growth. Analysts rarely expect earnings to go to zero, or for growth to continue for multiple decades. That’s why it often makes sense to bet on growth companies and bet against companies in decline.

A word of caution: Just because a PE ratio is low, does not necessarily mean that earnings expectations are too low. And just because people are expressing negative views about a company, doesn’t necessarily mean that estimates are too low. You will have to dig deeper into estimates.

A story about a new exciting product for example, will be reflected in a set of assumptions that go into analyst models. By putting them into a DCF model they in turn affect earnings estimates. Does the story about the success of a product make sense, do the assumptions make sense and does their impact on earnings estimates make sense?

Chart(s) I’m looking at —

BofA’s latest fund manager survey is out. Here’s a few charts of note.

Growing signs of ‘exuberance’ but cash levels are still pretty high. And energy is still on manager’s sh*t list which is coincidentally one of my favorite sectors going into 18’.

Trade I’m looking at —

Long Criteo (CRTO). I came across this trade from Fritzell’s blog (you can read the post here) and have started digging into it and like what I see so far.

Here’s a summary of Fritzell’s long thesis.

Criteo is an ad-tech company that buys ad inventory from Google and Facebook and offers customers performance-based, targeted ads. The moat is possesses comes from network effects: it sits on a treasure trove of data, which helps explain why its click-through rates are 4x the industry average. Customer retention rates are 90% and ROI for customers is very high. The reason the stock is down is because of third-party cookie restriction in iOS 11 (potential impact of 7-10% of revenues). I consider this to be a one-off – with still-positive growth to be expected in 2018. I am comfortable with the risk of ad blockers, for the following reasons: 1) tough privacy restrictions in Safari is nothing new, in fact Criteo’s competitor AdRoll expects almost zero impact on its business thanks to work-arounds 2) publishers already adjust their impressions based on the percentage of users using ad blockers anyway 3) advertisers usually find ways around ad blockers and 4) ad blockers don’t work in apps, which is where time is increasingly being spent. Ad fraud may be common across the industry, but customer retention rates are high and ad performance is easily measurable through ComScore data. Much of the negative news should be priced in at this point with the stock down 42% from the peak and short-sellers doing victory laps. The stock is relatively inexpensive given the underlying overall 20-25% growth momentum in the digital advertising market in my view, and will continue to grow on a secular basis.

Fritzelll was early with his call and underestimated the impact to revenues from apple’s third-party cookie restrictions in iOS 11 (the company came out with guidance for a 22% not 7-10% hit to revs). The stock is down 30+% on the news. But from my digging so far this doesn’t appear to be game changing news for the company’s future. And now the market seems to be offering up a wide moated growth company, in a strong secular growth industry, for a discount (it’s trading at just 0.8x sales).

I don’t know. I’ve got to dig a bunch a more. I’ve lost a lot of fingers over the years catching knives (I can’t seem to help myself) so do your own diligence.

Quote I’m pondering —

Here’s two quotes/excerpts that I’ve been thinking about lately.

The only analytic tool that mattered was an intellectually advantage disparate view ~ Michael Steinhardt

According to Buddhism, the root of suffering is neither the feeling of pain nor of sadness nor even of meaninglessness. Rather, the real root of suffering is this never-ending and pointless pursuit of ephemeral feelings, which causes us to be in a constant state of tension, restlessness and dissatisfaction. Due to this pursuit, the mind is never satisfied. Even when experiencing pleasure, it is not content, because it fears this feeling might soon disappear, and craves that this feeling should stay and intensify. People are liberated from suffering not when they experience this or that fleeting pleasure, but rather when they understand the impermanent nature of all their feelings, and stop craving them. This is the aim of Buddhist meditation practices. In meditation, you are supposed to closely observe your mind and body, witness the ceaseless arising and passing of all your feelings, and realise how pointless it is to pursue them. When the pursuit stops, the mind becomes very relaxed, clear and satisfied. All kinds of feelings go on arising and passing – joy, anger, boredom, lust – but once you stop craving particular feelings, you can just accept them for what they are. You live in the present moment instead of fantasising about what might have been. The resulting serenity is so profound that those who spend their lives in the frenzied pursuit of pleasant feelings can hardly imagine it. It is like a man standing for decades on the seashore, embracing certain ‘good’ waves and trying to prevent them from disintegrating, while simultaneously pushing back ‘bad’ waves to prevent them from getting near him. Day in, day out, the man stands on the beach, driving himself crazy with this fruitless exercise. Eventually, he sits down on the sand and just allows the waves to come and go as they please. How peaceful! ~ Yuval Harari, Sapiens: A Brief History of Humankind

I hope you all have a fantastic holidays and get to spend it with the people you love, eating good food, drinking the good stuff, reflecting on the year that’s passed, and getting excited about the year ahead.

Thanks for being a reader, it’s a real pleasure getting to share our work with you.

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

And if you’d like to discuss macro with the rest of the Operator community, check out our Global Macro Facebook group by clicking here.

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


Your Macro Operator,




Macro Ops 2017 Portfolio Review: Pain + Reflection = Progress

Macro Ops Portfolio

Return Metrics *Through December 8th 2017
YTD: 22.19%
12-Month Return: 20.57%
Inception (Jan 1st, 2016): 40.88%
Annual Vol: 7.85%
Sharpe Ratio: 2.29
Max DD: 3.97%

To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes. ~ George Soros

I learned that everyone makes mistakes and has weaknesses and that one of the most important things that differentiates people is their approach to handling them. I learned that there is an incredible beauty to mistakes, because embedded in each mistake is a puzzle, and a gem that I could get if I solved it, i.e. a principle that I could use to reduce my mistakes in the future. ~ Ray Dalio

Alex here.

Every six months we sit down and pore over our trade logs, journal, and public writings from the previous two quarters. We review what we thought markets would do, how we placed and managed bets on these opinions, and then compare them to how reality actually unfolded.

It’s a ruthless study of our mistakes; in thinking and in execution.

It’s without a doubt the most valuable exercise we do.

Sharing this review process is unusual for a trading site. We’re one of the few services that are transparent with our performance. I know of many that tout their BS records by pulling gimmicks on a paper account, claiming nonsense 80% win rates, 350% annual returns, etc.  

We’re traders first and foremost. And as traders, all we have is our risk-adjusted P/L.

One of our principles when starting MO was to be completely transparent… to bare our warts and all (this year I feel like a leper). At the end of the day, like you, we just want to become better traders. Being fully transparent helps us do that.

For those of you who aren’t familiar with our approach to markets, let me give you a quick rundown of how we do things.

The Macro Ops Portfolio consists of two broad strategies — big bet macro and volatility carry. The goal is for these two strategies to balance each other’s return streams like a barbell.

This is important because all strategies perform well or poorly in different market regimes. And since distinct market regimes can last years, it helps to utilize multiple strategies that perform well in opposing environments. This smooths your equity curve, making your returns more stable. And there’s a psychological benefit as well, in that it keeps you from pressing a strategy ill-fit for the environment because you’re hungry for returns.

Big bet macro trading focuses on placing asymmetric bets on large market mispricings caused by a misinterpretation of the fundamentals, technicals, and/or sentiment.

This strategy is structured to have a low win rate with high return potential. The aim is to capitalize on the inherent 90/10 return distribution of markets by maximizing Pareto’s Law and letting positive compounding do its work.

The returns on this trading strategy are naturally bunchy; meaning they tend to experience long periods of flat returns followed by a large jump in NAV over a short period of time.

Volatility carry thrives in the opposing regime, one of low volatility and smooth price movements. Its primary aim is to generate positive carry by harvesting the volatility premium. We increase and reduce its leverage in accordance with our macro framework.

It’s a more efficient and lucrative means of collecting risk premium from the market versus sitting in a passive diversified portfolio.

This philosophy of opposing strategies has served us well as proven by our investment results since we started Macro Ops two years ago. We’ve managed to produce slightly over 40% in gains while only taking a max drawdown of 4%.

Now onto a critical assessment of our 2017 performance…

Our Biggest F*ck Up

Our biggest f*ck up this year was not immediately cashing out of our business, liquidating all our boring equity, commodity, and FX trades and then using that cash to buy as much crypto coins we could safely leverage up to our eyeballs for purchase.

This would have been the smart and responsible thing to do. Had we done it we’d have similar returns to all the visionary crypto twitter bros… the Buffetts of the digital age… who had the insight early on to see that bitcoin is worth at least the total market cap of the world or more or whatever… because the amazing thing that these investors discovered is that assets with no intrinsic value (ie, no cash flows or real utility) are the most valuable things of all. Because everybody says so and so it is…

The big takeaway from this experience is to always buy and HODL… always.

To be honest, we’re still peeling back this gem of investing wisdom, trying to unlock its eternal truth. What does it mean and where did it come from? We don’t know but we’ll continue to study it diligently in the hopes that we too can someday properly HODL in markets.

Moving on, this was a shit year for me personally. Relative to the opportunity set, it’s been one of the toughest years for me in some time. The following are the complete stats for the macro trades:

Macro Trades

Return Metrics *Through December 8th 2017
YTD: 6.80%
12-Month Return: 4.01%
Inception (Jan. 2016): 23.52%
Annual Vol: 11.26%
Sharpe Ratio: 1.02
Max DD: -9.50%

The mediocre 2017 performance is largely due to the fact that we’ve been in a market regime that doesn’t lend itself to macro trading.

The market had a sharpe ratio of over 5 this year. That’s insane…. The strategy for Hindsight Capital this year would have been to buy everything on January 1st, leverage up, and then go on vacation.

This type of macro environment is a killer for active managers and it’s why big name macro funds have been dropping like flies.

(Image via @sentimenttrader)

Paul Tudor Jones shuttered his flagship macro fund this year, as did Hugh Hendry. Brevan Howard’s AUM shrunk to a fraction of what it once was. John Burbank surrendered and killed off his macro fund only to start another fund trading crypto and digital kittens (I assume). Tiger cubs have been getting gored left and right with the latest being John Griffing announcing that he’s quitting the game.

Even the GOAT, Stanley Druckenmiller, recently said on CNBC that he’s had the worst year of his career and has come close to having his first down year in over 30+ years of trading.

This again, is why we diversify strategies. Over the last two years the market has awarded passive holders of risk. Stock pickers and traders have had a rough go.

But to be honest, this is an excuse and excuses don’t pay the bills nor allow for valuable lessons learned.

Despite it having been a tough environment for macro trading I’m more disappointed in my execution and I could have and should have done much better this year.

What’s tough to stomach is is that we nailed most of the major themes throughout the year. Here’s a breakdown of the calls we put out in our monthly reports (MIR).

  • January: We wrote, “the US market will likely go on a tear higher from here… European and Japanese stocks should also perform well.” We were leaning bullish the dollar but remained open to its direction and noted that should the “dollar turn, we’ll buy up emerging markets and commodities, hand over fist.”
  • February: We noted that we hadn’t yet “seen the level of frothiness or excitement that’s indicative of a market top” and that at “Macro Ops we’ll continue to play the US market to the long side until we see the bond/stock spread go over 1.
  • April: We talked about how we thought pessimism was overblown in Europe and the markets should rebound. We predicted a Macron win and believed that the European stock market would embark on a Soros style false trend and outperform.
  • May: Our MIR titled “A Three Legged Bull” we wrote “During the last few years of the 90’s tech boom, sentiment clearly reached euphoric levels. This market is missing that component… This is why we refer to this market as a three-legged bull. It has until very recently, lacked the fourth leg of the bull which is extreme optimism. While we’re seeing small pockets of excessiveness in some parts of the market, it’s still a ways from the heady euphoria that typically marks the end of the 5th stage. This is one of many reasons we believe there’s still plenty of room for stocks to run. With only three legs this bull has walked more slowly than past cycles, and because of its missing leg, it’s also likely to endure longer.”
  • July: We pitched Chinese equities noting that “(a.) China is starting to benefit from a weaker yuan which can been seen through a rise in exports. (b.) A strengthening global economy is leading to increasing demand for Chinese goods. (c.) China’s all-important Congress is coming up in November. This makes it likely they’ll ease off this recent period of tightening to juice the economy.”
  • August: We criticized market perma bears who had for years been citing the high valuation multiples without understanding the context behind them. Writing:


  • September: We wrote about the turning of the ‘Investment Clock’. And how we should begin to see growth and inflation pick up over the coming quarters. And how this should drive the outperformance of energy and value stocks in the months ahead.
  • November: We talked bitcoin and discussed about how it’s purely a speculative vehicle at this point. But we noted that it was likely to head much higher because global liquidity is flush, it’s an illiquid asset and there’s still probably lots of untapped global demand for it (ie, Greater Fools).

We were right on most of the big trends throughout the year.

We started the year bullish and remained bullish throughout (though I’ll admit, at times, I became too cautious and held more cash when I should have pushed harder. I should have just focused on my liquidity indicators which were saying BUY and not on the vertical persistence (overbought) nature of the trend).

We called the rebound in Europe and China while also hitting the bottom in the energy sector.

And in addition to the macro, we researched and pitched a number of stocks that went on to kill it, but we either never got a position on or were sized too small relative to the opportunity.

Here’s some of the names we covered but didn’t fully exploit.

AAAP we covered in our April MIR when it was trading for $38. It went on to rise over 110% and now trades for $82 — we never got a position on.

In that same report we pitched FCAU when it was trading at just over $10. It’s now up over 80% at $18+. There was GAIA in March, now up 60% —  sized too small. In August we pitched IBKR which went on a tear of 65% — sized too small and too slow on the trigger. In November I wrote about PANL which quickly ran up 257% — no position.

Considering how much we got right on our macro calls and micro picks, this should’ve been a great year for the macro trades. But again the poor performance all comes down to execution error on my part. We didn’t fully take advantage of the opportunity set we uncovered from our research.

I mean, it’s always going to be the case that you’re sized too small in your winners and too large in your losers. That’s just a reality of trading. But, after studying all the macro trades for this year it’s clear that execution could have been much much tighter.

My sloppy execution dragged on our returns in the second half of the year. Where in the first half, which we talked about in our mid-year review, was decent. The macro trades were up 10.5% and beating the market. My takeaway then on where I performed poorly was “Failing to execute and size up on solid macro themes.”

This has been a creeping issue in my trading this year and I need to work to develop the systems necessary to dial in my execution so we produce the results that we deserve from our research.

Our second half performance was also hit by a stupid large long put option position against TSLA (2% of capital). I broke one of my rules, which is to never bet against the one-percenters like Elon Musk because even if they can’t pull off their high wire act they can still inspire a rabid investor fan base.

We still have plenty of time on these options and I think there’s a good chance the trade will finish in the money. But it wasn’t worth the capital drag. Not to mention, worth breaking my rules for.

The brightside going into 2018 is that the signs are pointing to a coming regime change in markets and a return of volatility. Sentiment and positioning are stretched and credit spreads can’t get much tighter. Meanwhile, inflation is set to trend higher which is going to drive yields up next year. We’re not predicting the end of the bull market in 18’ but we do have high conviction that this period of low-vol melt up is coming to an end.

So my money is on our macro trades having a much better year in 18’.

Vol Trades

Return Metrics *Through December 8th 2017
YTD: 37.82%
12-Month Return: 37.82%
Inception (Jan. 2016): 58.40%
Annual Vol: 8.49%
Sharpe Ratio: 2.83
Max DD: -4.46%

Tyler here.

Vol carry has been the easiest trade of 2017 — which is quite comical considering this time last year every single analyst on Wall Street thought Trump’s first year in office would create extremely high volatility.

Literally the exact opposite happened.

Take a look UVXY, the ultra short vol ETF. I think it wins the prize for best mega-trend of the year. (Outside of crypto!)

Our volatility strategy nailed most of this trend, while also managing to stay out of the market during the large spike in August.

One thing that separates our vol trading from the pack is that we just don’t sit blindly shorting these products into oblivion. We carefully assess the macro environment and then tweak position sizing and even go long volatility depending on the macro read.

All 4 of our short vol trades were winners. And we actually still won on 60% of the long vol trades. So all in all a great year. The macro reads helped the vol trading tremendously.

But performance wasn’t perfect and there’s still room for improvement which is why I want to dissect some trades for nuggets of info that we can take with us in the years ahead.

Short Vol

The first three vol cycles I sold played out in a conventional manner. The overpriced futures slowly rolled down the curve as SPX floated higher. Buyers of volatility paid sellers of volatility for hedging a risk event that never happened.

The highlight of our performance came after Trump struck a last minute deal with the Dems to move the debt ceiling deadline further out in time.

I figured short-term vol would get crushed with the only macro catalyst kicked down the road. I upped leverage and aggressively sold volatility at the beginning of September. That call ended up paying off and was the largest winner of the year.

After a very profitable October cycle, I couldn’t bring myself to sell futures for the next cycle at extremely low prices. I also thought that debt ceiling fears were going to creep back in towards the end of the year and send the price of fear higher.

That never panned out. The debt ceiling was ignored and instead investors continued buying the market on hopes of tax reform.

I should have kept with the program and continued to ride the trend. All of our macro liquidity indicators were in bullish territory and the data said to keep selling vol. I overrode those signals and succumbed to the bear narrative that vol was “due to blow up.”

Lesson: stick to the process and ignore the noise of the Twiterrati.

All in all I’m satisfied with our performance on the short side this year. We hit this trend hard in the right spots and fully exploited this low vol market regime.

Long Vol

There were 5 times in 2017 where I took a stab at going long VIX

  • Pre-French elections
  • The August N. Korea scare
  • The pre-debt ceiling deadline
  • November super lows
  • End of year debt ceiling rehash

I won on the first three, got cocky, and then went on to give back those profits on the last two long vol trades of the year.

As traders we have to constantly battle emotional pulls towards fear AND greed. Experience helps to control things, but maintaining proper balance is always a challenge. I could of better managed my emotional highs during the late fall of this year.

Position sizing was the other thing that killed me here. I played smaller in the beginning of the year and bigger at the end of the year. If your small on your wins and large on your losses it doesn’t matter how good of a hit rate you have. Your P&L won’t look good. I want to focus on using more consistent position sizing next year.

To sum up, I think I can walk away from 2017 content with the performance. I’m not ecstatic — things could of been better going into the end of the year. But overall the process here is working.


Excellence is an art won by training and habituation. We do not act rightly because we have virtue or excellence, but we rather have those because we have acted rightly. Excellence, then, is not an act, but a habit. ~ Aristotle

We started MO two years ago with the aim of building a trading service/site that we always wanted but that didn’t exist.

We plan to continue busting our asses improving and evolving our service so that it stands head and shoulders above the other sites out there; we want to be the best when it comes to education, trade theory, analysis tools, trading returns, and quality of its community.

We don’t aim to grow into a giant Motley Fool-type business because that would mean serving the common denominator. We want to foster a community of diehards — of traders, who, like us, are singlemindedly focused on becoming the absolute best; who think differently than the average market participant and strive for a deeper understanding of how this game works.

The MO community is still small, but I think we’ve been successful in our hunt for quality.

If you want to join us on our journey, definitely check out the Macro Ops Collective.

Our Operator Collective has shared in the success you’ve read about above by receiving our research and trade alerts. They see exactly what we’re doing in portfolio, REAL-TIME.

The Collective is a solid community that continues to grow and compound its network — more ideas, better trades, and bigger profits for everyone. If you’re a serious trader, check it out below. To sign up, scroll to the bottom of that page.

There’s a 60-day money-back guarantee too. Like I said, we’re always upfront with our community. That’s why we give you the opportunity to try the Collective for two whole months before you commit. If at any time you feel it’s not a good fit, we’ll refund your money right away.

We’re only keeping the doors to the Collective open till December 31st at midnight EST. After that, enrollment will shut down. Please take advantage before then.

Click Here To Learn More About The Macro Ops Collective!



Rentech, Druck On Bitcoin, & The Way Of The Dollar

Alex here with this week’s Macro Musings.

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


Recent Articles/Videos —

A Repricing In The Oil Market — We reiterate our bullish call for the energy space.

Fox, Disney, and Netflix — AK covers the deal that just went through and what it means for Netflix. He also thoroughly expresses his love for Bob Iger…


Articles I’m reading —

The New Yorker put out a really great long form piece on Jim Simmons, the founder of the secretive money machine, Renaissance Technologies. The article focuses more on Simmons’ current philanthropy work and less on his trading background or information about Ren-tech, but it’s a fascinating read nonetheless.

When reading the article it becomes very apparent how much smarter Simmons is than you (at least that was my take away) which is why he’s worth $18.5B. But I’ve always been fascinated by Ren-tech and how a hedge fund, staffed by physicist and linguists (not MBAs), has continuously produced one of the best performance records in the business. Apparently, they do this by looking for relationships in all types of esoteric data, or what they call “ghosts” in the system. I can’t remember where I read it, but one example they’ve given was looking at how the weather in Paris at the time of the market open effected stock prices in NYSE or something… Interesting stuff.

Here’s an excerpt from the piece and the link.

On a wall, Simons had hung a framed slide from a presentation on the Chern-Simons theory. He helped develop the theory when he was in his early thirties, in collaboration with the famed mathematician Shiing-Shen Chern. The theory captures the subtle properties of three-dimensional spaces—for example, the shape that is left if you cut out a complicated knot. It became a building block of string theory, quantum computing, and condensed-matter physics. “I have to point out, none of these applications ever occurred to me,” he told me. “I do the math, they do the physics.”

High-level mathematics is a young person’s game—practitioners tend to do their best work before they are forty—but Simons continued to do ambitious mathematics work well into adulthood. In his sixties, after the death of his son Nick, who drowned in Bali in 2003, he returned to it. “When you’re really thinking hard about mathematics, you’re in your own world,” he said. “And you’re cushioned from other things.” (Simons lost another son, Paul, in a bike accident, in 1996.) During these years, Simons published a widely cited paper, “Axiomatic Characterization of Ordinary Differential Cohomology,” in the Journal of Topology. He told me about his most recent project: “The question is, does there exist a complex structure on the six-dimensional sphere? It’s a great problem, it’s very old, and no one knows the answer.” Marilyn told me she can tell that her husband is thinking about math when his eyes glaze over and he starts grinding his jaw.

If you want to learn more about Simmon’s background, Numberphile has a solid interview with him which you can find on Youtube, here.

Not sure where I came across this one (maybe someone on twitter shared it?) but it’s a paper Michael Mauboussin did years ago titled The Economics of Customer Businesses. I try to read everything by Michael but I don’t think I had seen this one before. It’s good.

Here’s the link and an excerpt.

Not market related, but here’s a cool article where the author uses statistical analysis, similar to the sabermetrics used in baseball, to determine who’s the most effective battlefield general in history. Any guesses? (Hint: he’s French). Here’s the link.

Lastly, here’s an interesting pitch deck by @Find_Me_Value where he shares some of his stock selection process and presents a bull thesis for CMCSA and CHTR (link).


Video I’m watching —

The GOAT aka Stanley Druckenmiller went on CNBC this week to talk markets, tax reform, and bitcoin. Here’s the link to the full 30 minute video, it’s worth watching in its entirety.

Here’s what I found to be the most interesting takeaways:

  • Druck remarked that he thinks the Senate’s version of the tax plan would be more bullish for markets in 2018 than the House’s version. This is because the corporate changes wouldn’t take effect until 2019 versus 2018, which would drive a boom in CAPEX next year because businesses could then expense these investments in 19’, under the proposed changes.
  • He noted how he finds it ironic that crypto bros are made up of mostly environmentalists but within the next two years the bitcoin network will require over half the US’s annual energy consumption just to maintain its network. Not exactly a green currency.
  • He likes the FANGs and made the interesting point that despite AMZN’s high stock price it’s only selling at 3x revenues, which when compared to its growth, is fairly reasonable. And FB, for example, is trading at a PEG of 1x. He argues that people shouldn’t be focusing on their PE multiples but instead their future earnings potential because these companies are under-earning intentionally as they invest in growth and in widening their moats.


Book I’m reading —

I recently finished reading The Way of the Dollar by John Percival. It’s one of the best trading books I’ve come across in a while. It’s out of print and I couldn’t find a hard copy anywhere, and I looked (let me know if you know of a place where I could get one). The only version I could find was a digital one on hung up on some website. Here’s a link to a landscape view of the book which you can just print out, like I did, or read it on your computer.

John was the man behind Currency Bulletin (CB) which was a popular FX newsletter back in the day. The book is primarily about CB’s methodology for trading the currency markets but it’s filled with timeless trading wisdom that apply to traders of any market, such as this cut:

In all markets, price extremes are usually attended by a consensus that the trend, be it up or down, will continue; and by a peak of speculation in line with the trend. Hence the excruciating paradox of financial markets, that sentiment is most bullish at the peaks when prices have only one way to go which is down; and most bearish at troughs vice versa: at the top there’s no-one left to buy, and at the bottom no-one left to sell.

This paradox is absolutely central to the working of all financial markets and we need all the help we can get to understand it so thoroughly that it becomes part of our nature. The more bullish things are, the more bearish they are. Bullishness is born as hope in the midst of despair. Hope swells to confidence and confidence swells to euphoria, and the process contains the seed of its own destruction and the birth of its opposite, fear. Fear is nurtured by falling prices and the two feed on themselves until they swell to despair. And so the cycle is completed and ready to begin again with the birth of hope. This is both the way things are and the way they have to be. We haven’t understood the process until we have grasped that. The despair creates the price trough: the price trough creates the despair. The price extreme is the definition of the extreme of despair, which is in turn, by definition the moment when hope comes to prevail; hope feeds and is fed by rising prices until the peak of price and euphoria leave prices with only one way to go, which is down.

This circular process underlies every price fluctuation in free markets from the smallest one measured in seconds or minutes to the largest measured in years or decades. So it has always been and so it will always be, because it must be. The ancient Chinese symbol called T’Ai-chi T’u or “symbol of the ultimate reality”, more commonly known as the yin yang symbol, is delightfully appropriate to the way markets are — and uncannily appropriate to the way currency markets are.

It’s a quick read and well worth your time.


Chart(s) I’m looking at —

This is a chart showing the calendar monthly returns for the S&P 500 going back to 1987. If you look at the top row, showing this year, you’ll notice that it doesn’t look like any of the other years — there’s no red. The market has already set a record for the most consecutive up months and if it closes in the green in December it’ll mark the first calendar year where there were no losing months.

This is pretty amazing, especially when you consider the near total absence of volatility. The index has now gone something like 70 days without even a 1% swing in price. This is abnormal…

And what’s even more interesting is that these “good times” aren’t unique to the US.

Look at this chart showing sector returns across the world. Nearly EVERY THING IS GREEN. And not by a little, but a lot. In that CNBC Druck interview, Druck recalled how one market commentator had said “this year, all you had to do was get out of bed and you made money” to which Druck replied, “well, I guess I got out of the wrong side of bed” (he’s had one of his worst trading years, ever).

It’s been a tough market for macro traders. But… like all things in life, there’s a season for everything, and this period of volatile-less melt up won’t persist forever. And as Percival wroteHope swells to confidence and confidence swells to euphoria, and the process contains the seed of its own destruction and the birth of its opposite.”


Trade I’m looking at —

I’ve been waiting for an entry into Square (SQ), the payments tech company run by Jack Dorsey. The stock is off 25% from its highs and is battling with its 50day moving average, which has been a key level of support in the past.

Here’s TTM revenues and free cash flows. Sidenote: this chart is from KoyFin which is a great new financial data platform created by a buddy of mine. Check it out, it’s free.

This is a momentum swing trade. I want to see price strongly close above both the 50 and 10-day moving averages before putting on a position. And we may see one more sharp move lower before that happens.


Quote I’m pondering —

I’ll leave you with two quotes; one timely and one timeless.  

At a late stage, speculation tends to detach itself from really valuable objects and turn to delusive ones. A larger and larger group of people seeks to become rich without any understanding of the processes involved… swindlers and catchpenny schemes flourish. ~ Charles Kindleberger


The Perfect speculator must know when to go in; more important he must know when to stay out; and most important he must know when to get out once he’s in. ~ Jay Gould



The Oil Market’s Massive Repricing

The Oil Market’s Massive Repricing

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

Seeking out asymmetric trades today is a bit tougher than normal because of where we are in the cycle. We’re in the latter stages and valuations are high (very high) so upside is somewhat limited on the whole and completely dependent on sentiment.

But it’s not late enough in the cycle where it makes sense to start pressing shorts — the trend is still up and could persist for another couple of years.

The large vampire squid (aka, Goldman Sachs) noted recently that the “average valuation percentile across equity, bonds and credit in the U.S. is 90 percent, an all-time high.

A good approach in environments such as these is to stick with the large trends that are running, but to start toeing the water in the few discarded and unloved assets that have upside asymmetry and a relative margin of safety.

For our team at Macro Ops, the asset that fits the bill is oil.

Back in August we wrote about why we thought the puzzle pieces were coming together for a bullish oil rebound — a veritable “Marcus Trifecta” of macro, sentiment, and technicals signaling major upside asymmetry.

We made the argument that the market was overestimating oil’s future supply growth while understating demand. Furthermore, we remarked how the market was headed for a supply constrained environment due to a record level of cuts in CAPEX (ie, reduction in the investment into future supply) to the global oil market over the past few years.

Lastly, we wrote how the bullish case for oil was made even more delectable by the trend rates in GDP growth and inflation. The “Investment Clock” framework has us entering the “Overheat” phase of the business cycle. In this phase, commodities and oil and gas stocks in particular historically perform very well. The chart below shows energy’s relative total return outperformance in the final year(s) of a bull market.

This was, and remains, a very contrarian call. And that’s all for the better.

Since our August report, WTI crude has climbed from $49/bbl to a high of $59/bbl last week. The basket of three oil and gas stocks that we recommended is up over 12%; roughly double the S&P’s return over the same time.

So we’re off to a decent start.

But as we’ve continued to dig into the energy story we’ve become more convinced that there’s incredible asymmetry building in the space. Today we’re going to reiterate our bullish call for oil and gas equity outperformance going into 2018 and update the evidence on why it’s nearing time strike it rich.

There Will Be… Bull? — The Coming Oil Bull Market

One of the more difficult, yet important, jobs of a trader is tease out what’s likely to happen versus what’s already priced in. It’s at this intersection of the unfolding path of reality and embedded expectations where trades are born and die.

But getting inside the head of every other market participant and weighing their thinking against the price of the market is tough going for obvious reasons.

A workaround we use is paying attention to the popular stories that market participants are telling. And more importantly, how these stories evolve and react to new information, and then how these reactions get reflected in prices.

Narratives are the human way of trying to make sense of a chaotic, complex, system. The stories we tell ourselves are often wrong, incomplete, and sometimes crazy. But nonetheless our ability to believe in them has been so powerfully ingrained in us because it’s helped us thrive as a species.

Author of the book Sapiens, Yuval Harari, notes the following:

Sapiens rule the world, because we are the only animal that can cooperate flexibly in large numbers. We can create mass cooperation networks, in which thousands and millions of complete strangers work together towards common goals. One-on-one, even ten-on-ten, we humans are embarrassingly similar to chimpanzees. Any attempt to understand our unique role in the world by studying our brains, our bodies, or our family relations, is doomed to failure. The real difference between us and chimpanzees is the mysterious glue that enables millions of humans to cooperate effectively.

This mysterious glue is made of stories, not genes. We cooperate effectively with strangers because we believe in things like gods, nations, money and human rights. Yet none of these things exists outside the stories that people invent and tell one another. There are no gods in the universe, no nations, no money and no human rights—except in the common imagination of human beings. You can never convince a chimpanzee to give you a banana by promising him that after he dies, he will get limitless bananas in chimpanzee Heaven. Only Sapiens can believe such stories. This is why we rule the world, and chimpanzees are locked up in zoos and research laboratories.

We are genetically programmed to buy into the popular narratives that are shared by the crowd. That’s why it’s so damn hard to be a contrarian… it’s literally against our biological programming to go against the herd.

Similar to how species react, adapt, and evolve slowly in response to environmental stresses, so too do the popular narratives adjust slowly over time as new information enters the picture that challenges their validity.

This is why popular market narratives always lag the market. And once the market finally acknowledges the faults in the prior narrative, we see violent surges and reversals in price.

We want to identify the popular story that’s embedded in prices and look for instances where new information signals a diverging outcome. The more divergent, the more lucrative the trade.

We want to be ahead of this narrative adoption. If we can lead the story then we can make money.

Going back to the oil markets:

The popular story over the last three years of the oil bear market rested on two things (1) that the world is awash in oil thanks to the introduction of fracking and (2) the adoption of electric vehicles was going to soon kill the internal combustion engine, thus clipping off a big source of demand for oil.

But the data doesn’t support this narrative.

Like most popular stories, this one was born in some truth.

But that truth, or rather its supporting facts, have evolved. And the popular narrative of the oil market has not yet fully awoken to the new reality.

Once it does we’re likely to see $80, even $100/bbl oil in the coming year.

Here’s why.

The consensus in oil is predicated on the belief that fracking and the introduction of shale oil has led to a new paradigm of sustainable drilling productivity growth, making the US a major swing producer in the global market.

But recent data isn’t backing this up.

Supply forecasts have been predicated on the belief that improvements in fracking technology will continue to increase well productivity at the growth rates we’ve seen over the last few years. The expectations are that this rate will compound, bringing ever more supply growth online.

The problem is that these forecasters have mistaken the source of that “well productivity growth”.

For example, output in the Bakken shale (one of the most productive shale regions in the US) more than tripled from 2012 to 2015. Recent research done by MIT suggests this rise in well productivity was not actually due to improved fracking technology and efficiency gains… but rather because shale companies abandoned their less productive fields following the market slump and instead pumped from their prime acreage.

In addition, the E&Ps have been tapping their drilled but uncompleted (DUCs) wells.

The combination of only pulling from Tier 1 fields, along with draining pre-drilled wells, led to forecasters greatly overestimating future supply growth by misattributing the excess supply to technology driven productivity gains.

So while forecasters have been modeling out continuous well productivity growth of roughly 10%, the real number is likely closer to 6% or less. And while that difference may not seem like a lot, when you think about the compounding effect that 40% less growth has over time… it’s huge.

This has led to forecasters continuously overestimating US production over the last year.

Commodity Hedge Fund, Goehring & Rozencwajg Associates (GRA), wrote the following  in their latest quarterly letter (emphasis mine):

Most oil analysts at the start of 2017 believed US crude production would grow by approximately one million barrels per day between January 1st and December 31st. That level of growth would imply full-year 2017 oil production of 9.3 million barrels per day or 450,000 b/d above 2016 levels… Many analysts felt these estimates would ultimately be revised higher.

Even with substantial OPEC production cuts, the energy analytic community has vigorously argued that because of strong US shale oil growth, global oil markets would remain in long-term structural surplus…

However, data has now emerged suggesting that US crude production growth is rapidly slowing…

Between September 2016 and February 2017, US crude production grew by 100,000 barrels per day per month, but since then US production has ground to a near standstill. Between February and July, US production has only grown by 33,000 barrels per day per month – a slowdown of 67%. Moreover, preliminary weekly data for August and September (adjusted for the impact of Hurricanes Harvey and Irma) suggest that production growth has slowed even more.

The slowdown in US onshore production growth is even more puzzling given the huge increase in drilling that took place over that time. The Baker Hughes oil rig count is up 130% since bottoming in May of last year. In spite of a surging rig-count, onshore production growth is now showing signs of significant deceleration.

Although it is still early in the production history of the shales, it now appears the growth in US shale production may not be nearly as robust as originally expected. If our observations and analysis are correct, then the oil market will be even more under-supplied that we expected in the 4th Q of the year and incredibly undersupplied into 2018. The ramifications are going to be huge.

The deceleration in production growth has led to a large comparative drawdown in inventories.

GRA notes that “inventories have now drawn down to critical points where further inventory reductions will result in severe upward price pressure” and, “If our inventory extrapolation is correct and inventories reach these levels (and they should — our modeling has been correct over the past nine months), then prices have historically surpassed $100 per barrel.

Signs of a tightening supplies are beginning to show in the futures market where the spot price has recently pushed above long dated futures for the first time in years.

Despite this new data indicating a market moving closer to a supply deficit, the market continues to operate under the old narrative and faulty assumptions.

The irony is that these faulty assumptions (wrongly extrapolating shale productivity growth into the future) has driven OPEC to extend their output cuts — where compliance has been strong — for another year.

On top of this, oil companies are beginning to focus more on cash flows and less on production which means even less CAPEX (investing into future production). And this is all following the largest reductions to CAPEX in the history of the oil and gas market over the time for which we have data.  

This is setting the market up for a massive repricing sometime in the coming year(s). None of this is priced in.

Despite crude’s recent rally, the most bullish piece put out by the Street has come from Goldman Sachs which went out on a caveat filled limb saying they expected WTI to finish the year at a whopping $57.50 (it’s trading at $56 right now).

Oil trader and fund manager Pierre Andurand of Andurand Capital (who’s fund has returned over 560% since 2008) noted the following in his recent investment pitch in Sohn, London (summary via marketfolly):

Oil prices will go much higher than consensus. In the last 18 months there has been a lot of negative hype about oil prices. The two most discussed factors have been US shale production and electric vehicles. US shale has been called the internet of oil.

Demand for oil has rarely been as strong as it is today. Demand is as high as it was 10 years ago when there was a lot of talk about the super cycle and demand growth. New oil discoveries are at all-time lows.

Supply will peak before demand at current oil prices. Oil demand will peak sometime between 2027 and 2035, much later than the consensus view. The supply of electric vehicles will be constrained by a shortage of batteries.

Supply will peak in 2020. Oil discoveries peaked in the 1960s. They stabilised in the 1990s making a lower peak with US shale discoveries in the early 2000s but they have been declining since then. We are finding 10x less oil than we were 20 years ago. Global reserves are going down fast. We have a 100bn barrels (or 10% less) of reserves than we had 10 years ago when everyone was worried about peak oil. The largest declines have been in ex-US small oil fields. The rate of decline will quicken and supply will be less than expected.

Nobody wants to invest in oil projects that take 6 years to come to market and 20 years to make a profit. Against expectations, US production is flat this year. Productivity per well will go down. We could need $100 a barrel oil to mitigate the fall in supply.

If OPEC goes back to full production, there would still be a deficit of half a million barrels per day. Inventories are low.

OPEC is unlikely to go back to full production leaving a deficit of 1m barrels per day. In this scenario oil could easily reach $80 per barrel.

While the “Death of the Combustion Engine” narrative sounds compelling, the data again doesn’t support it.

Even under the most bullish adoption estimates, EV’s impact is expected to be limited in the coming decade. Bridgewater notes that “in even the most bullish scenarios, only 0.2-0.3 mb/d of oil are expected to be displaced over the next five years.” (charts below via BW)

That’s a drop in the bucket.

While EV’s will undoubtedly change the energy landscape in the distant future, it’s not going to have a material impact within the next decade, which is the timeframe we’re investing in.  

In any case, EV’s impact pales into comparison to the growth in the global car stock that we’ll see over the next decade. Charts below again via BW.

This goes back to the powerful impact of Asia, which led by India, is hitting the wealth S-curve that we talked about in the October MIR.

We’re going to see the global middle-class balloon to over 4 billion people in the coming years. This means EXPONENTIAL growth in commodity consumption… and a lot more gas guzzling cars on the road.

Which brings us to our current cycle.

We are hitting that sweet spot in the global business cycle where the world economic engine is firing on all cylinders.

The OECD Growth Indicator below shows all 35 OECD countries are in growth and/or accelerating expansion mode for the first time since 2007.

And this has led to GDP forecasts being continuously revised upward.

The demand forecast for oil is also being continuously revised higher.

It’s frequent data surprises like these that eventually force new narrative adoption and drive new trends.

Under this backdrop of greater than expected rising demand and significantly lower than expected supplies, we have oil and gas equities priced near secular lows, and completely out of favor with the market.

Do you think there may be some asymmetry here?

Now of course, there’s potential downsides that may delay our bullish oil thesis.

The big unknown is China. With President Xi having consolidated power there’s now talk he’s going to make some moves to deleverage the economy. And there’s evidence in the data of this effort (look at the recent selloff in metals).

It’s unclear how aggressive the communist party will be in cleaning up China’s balance sheet. Since the CCP’s number one priority is maintaining social order, it’s unlikely they’ll move too swiftly and risk blowing up the system.

But China remains a black box. All we can do is look at the data available and adjust fire as we go.

Besides, there are numerous potential geopolitical shocks that could light a fire under our bull case.

There’s potential war brewing between Saudi Arabia and Iran using Lebanon and Hezbollah as proxies. Not to mention the new Saudi crown prince seriously shaking things up at home. Then there’s North Korea always on the brink of war and Venezuela which is quickly becoming a failed state. And the list goes on…

Arguably none of this is priced into the market at the moment.

But there are signs that the popular story is changing… albeit slowly.

This change is being led by the rise in price (as always). And we can bet that sometime next year, a reflexive loop will form where the rise in prices spurs adoption of our bullish oil thesis which further drives prices.

John Percival’s quip, “Listen to what the market is saying about others, not what others are saying about the market” perfectly applies here.


  • The popular narrative surrounding oil over the last 3 years has been:
    • 1) Supply is rapidly growing due to fracking driven productivity growth
    • 2) Electric vehicles are taking away a huge source of demand
  • But the latest data doesn’t support this narrative…
  • Forecasters have been misattributing increased oil supply to productivity gains when it was really from tapping Tier 1 fields and DUCs.
  • Drillers have cut production and CAPEX and are now experiencing large drawdowns in inventories.
  • The most bullish scenario for electric vehicles displaces only a miniscule amount of oil demand over the next decade. Oil demand is actually set to rapidly grow as Asia hits the wealth S-curve
  • The market is slowly waking up to this reality and there will be a massive repricing once it does.

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