Why Bitcoin Is A Fake Currency

Bitcoin vs Gold — Deathmatch 2017

Tyler here with this week’s Macro Musings.

Just a heads up, we released the newest issue of our Macro Intelligence Report (MIR) last night. It’s all about an asset the overall market is getting completely wrong — oil. Within the 40+ pages of this report we go into depth on exactly why the market is wrong and how you can play the coming oil bull market. We’ve got a basket of equities plus an options play on the commodity itself that sets us up quite nicely to take advantage of the trend. With our 60-day money-back guarantee, there’s no risk for you to come along for the ride. Don’t miss your chance. Subscribe to the MIR by clicking here.


Fallible —

In case you missed it, we just launched our brand new YouTube channel this week. We call it Fallibile.

With this channel you can expect quick videos that’ll entertain you while maybe even teaching you a thing or two. We’ll cover some Macro Ops content, but we’ll also be moving into more basic trading concepts to help round out the education we provide.

We won’t be sending out emails for every new video, so be sure to subscribe to the channel and hit the bell for live notifications if you want to know when a new video is published.

You can enjoy AK’s pretty face in our first video below about Bitcoin. So far it’s been very popular around the web. Just click the image to watch!


Our Recent Articles —

The Coming Bull Market In Oil — A warm up for our latest MIR issue…


Articles I’m Reading —

All of the World’s Money and Markets in One Visualization

This is a fantastic infographic that allows us to visualize the market cap of assets relative to each other. I found it while searching for the total market cap of all known gold in the world which is about 7.7 trillion dollars.

If bitcoin were to become the new “digital gold” of the future and demand the same market cap, it would have to trade at a price 25 times the current price of $16,500 per BTC. This is the logic used by the crazy guys on CNBC that are making these “$500,000 a coin” predictions.


Video I’m Watching —

Shout out to one of our Collective members (thanks Aaron!) for finding this documentary on youtube:

The Ascent of Money – Dreams of Avarice

It’s a deep dive narrated by Niall Ferguson on the history of money, credit, and our ever evolving financial system. Some parts of it are already outdated but nevertheless it’s a good brush up on financial history.


Podcast I’m Listening To —

This week I hit up Masters In Business again hosted by Barry Ritholtz. His latest interview with macro legend Felix Zulauf is outstanding.  Barry knows how to ask the right questions and tease out the most important things from his guests and he doesn’t fail here.

At about 30 minutes in Felix starts riffing on China and how he thinks they will address their financial excess in 2018-2019. If you are short on time I recommend fast forwarding to this point and listening to the sound bite. It’s a major theme that we will be tracking in the later half of next year.


Chart(s) I’m looking At —

With bitcoin mania in full force I’ve been looking at a lot of crypto related charts. The chart below by CME group illustrates how transaction costs for Bitcoin skyrocket during mania phases of the market. Typically when costs get to these levels we get a temporary pullback in price.

I wouldn’t ever think about shorting bitcoin but it’s interesting food for thought if you are a long holder looking for a reason to take some exposure off the table.

The article I grabbed this chart out of is well worth the read too. It looks at bitcoin from the perspective of a commodity and explains how supply inelasticity creates bitcoin’s extreme volatility.


Trade(s) I’m Looking At —

I’ve been waiting for a break lower in gold for a long time now and it looks like Christmas came early for me!

In our September MIR we talked about how cheap gold options were and decided to pick some up right when N. Korea fears were at max levels.

Those straddles are finally starting to pay out on the put side and we have a lot of time left before expiry. My prediction is that gold will break $1,000 next year as the rising interest rate trend builds momentum. High real rates are not good for gold.


Quote I’m pondering —

When two extreme opinions meet, the truth lies generally somewhere in the middle. Without exposure to the other side, you will naturally drift toward the extremes and away from the the truth of the matter. ~ Annie Duke

Well said Annie. As traders this is especially important. It’s so easy to get caught up in a narrative and fall for it hook line and sinker. I’m sure they’re are a ton of gold bugs out there regretting their refusal to red team their analysis.

That’s all I got for this week!  

If you’re not already, be sure to follow us on Twitter: @MacroOps. We post our mindless drivel there daily.

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

Have a great weekend.

Your Macro Operator,

Tyler

 

 

The Coming Bull Market In Oil

The Coming Bull Market In Oil

To be a smart contrarian you need to have the confidence to dive into unloved areas of the market and sort through the rummage in search of asymmetric opportunities.

Our team at Macro Ops has been digging deep and has finally “struck oil” in the energy market.  

The popular narrative driving oil’s bear market over the last 3 years has consisted of two core ideas:

  1. Fracking has caused the supply of oil to explode.
  2. The adoption of electric vehicles is killing a huge source of oil demand.  

Combine increased supply with decreased demand and of course you’re going to get a drop in prices.

Though this remains the popular narrative, the latest underlying data is telling a different story. And as always investors are slow to react, creating an opportunity for us.

First off, the market is overstating oil’s supply growth.

OPEC’s recent decision to extend their current output agreement means production will hold steady into the end of 2018.

And production outside OPEC, Russia, and the US and Canada has been shrinking. Over the last year aggregate production as fallen by 0.3 mb/d. It’s expected this number will fall by another 0.1 mb/d in 2018 as well.

This puts pressure on US frackers to pick up the slack. For them to fill the gap they’ll need to grow their output by 20% in 2018.

But what we’re finding is that shale productivity growth is slowing at an alarming rate. This is because frackers have already pulled the easy oil from their tier 1 properties they’re now having to move on to less productive fields.

In addition, oil companies in the US and the rest of the world have significantly cut their CAPEX over the last 3 years.

Global oil and gas investment, as a percentage of GDP, has collapsed from a cycle high of 0.9% in 2014 to just 0.4% today.

That means CAPEX into future capacity is now less than half of what it was just a few years ago. This makes it one of the largest capex reductions in the global oil and gas space, in history.

At the same time, global oil demand is increasing.

And this will only accelerate as we progress further into the “Overheat” phase of the business cycle where commodity prices shoot higher.

You can see how well energy performs in the final years of a bull market in the chart below:

The result of this mismatch in supply and demand has caused inventories to fall drastically.

So what we have here is a market that believes there’s an ever-growing supply of oil faced with shrinking demand, when in reality, the opposite is true. Demand is growing and supply is shrinking which will cause prices rise.

As traders we’re rarely given scenarios where the market is so wrongly positioned. This is one of them.

The argument we’ve made here is just scratching the surface of our full oil thesis. In this month’s Macro Intelligence Report (MIR), we layout the evidence we’ve gathered that shows just how off the market is.

We’ll also show you exactly how we plan to play this oil reversal. We’ve got a basket of oil stocks that are primed to take off along with an options play on the commodity itself.    

And we’re not just covering oil either… we also have some key information about the financial and industrial sectors of the market that you’ll want to hear.

If you’re interested in riding these macro trends with us, then subscribe to the MIR by clicking the link below and scrolling to the bottom of the page:

Click Here To Learn More About The MIR!

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

Like I said, blatant contrarian opportunities like this are rare. Don’t miss your chance to take advantage.

Click Here To Learn More About The MIR!

 

 

Wall Street Wolves, Amazon, & Natural Gas

AK here with this week’s Macro Musings.

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

Our Recent Articles —

Bruce Kovner On Listening To The Market, Politics, & Risk Control: For those of you who missed it, we reposted Bruce Kovner’s speech from Caxton Associates’ 20th anniversary. Lots of great nuggets in here… it’s well worth the read.

Articles I’m Reading —

Operator Darrin recently shared a solid article in the Comm Center about the importance of focus in trading and investing. You can read it here. Below is an excerpt:

Still, the research I’ve undertaken to identify the characteristics of successful traders has consistently shown that cognitive traits, and not just emotional ones, are essential to superior performance.  This is why, for example, I have emphasized the structure of the learning process as a source of mastery in the Enhancing Trader Performance book and why I devoted a large section of the Trading Psychology 2.0 book to the development of creativity and the cultivation of our cognitive strengths.  Show me a successful trader, and I’ll show you someone who displays unusual talents in processing information.

The most basic of these cognitive strengths is focus.  Indeed, the ability to sustain focused attention is seen (albeit in different ways) among both successful day traders and successful investors.  In the daytrader, we see the ability to sustain intense concentration on a number of variables simultaneously.  It is this parallel processing skill that enables the daytrader to act quickly on shifts in buying and selling flows.  Conversely, the skilled investor maintains a depth of concentration over time that allows for a deeper understanding of fundamentals and the supply/demand changes that result from monetary and geopolitical sources.

The challenge faced by these market participants is distraction.  Distraction interferes with focus and thus reduces the quality of our information processing.  Distractions can be emotional in nature, but can result from environmental sources as well.  Indeed, I’ve consistently found that both home environments and trading floor environments are poorly suited for the optimization of focus.  This is why many of the successful traders I’ve known have made it a practice to get away from their screens for periods of time during the day to both renew their concentration and to increase their focus on the bigger picture of what they are doing.

To approach this focus/distraction argument from a different angle, it’s important to avoid “shiny object syndrome”. This is a trap too many traders fall into. They’re constantly jumping from system to system or theory to theory, searching for something new that’ll magically transform their returns. This is often just a distraction that degrades results. The key is to remain focused on executing your own strategy.

Continuous learning and development is a must in this game to keep your edge. But you need to make sure you’re not falling prey to distraction.

Video I’m Watching —

I randomly found this old gem on YouTube the other day. It’s a 60 minutes interview with Jeff Bezos back at the height of the dotcom mania in ‘99. It’s amazing for a few reasons.

First off, it greatly increased my respect for the now richest man in the world. Back in ‘99 Bezos was worth $10 billion on paper yet still worked out of a crummy office space and drove an old Honda. All of Amazon’s cash was used to benefit the customer. He’s maintained this hardcore customer-first approach since inception and I think it’s a great business principle.

Second, the video allows us to peek back at the emotions, reactions, and moods of people caught up in a true market mania. The fervor for dotcom was eerily similar to what we’re seeing in the crypto space today. Having a great example of bubble psychology to reference is helpful.

And finally, the guy’s laugh is absolutely hilarious which makes for an enjoyable watch. I actually laughed out loud a few times!

You can watch it below:

Chart(s) I’m looking At —

Below is a chart plotting the frequency of a 2-sigma move in the S&P 500 spanning from 1995-2015. If the markets were truly normally distributed we should see that frequency sit right around 5%. The chart empirically shows that this isn’t the case. For short time windows the S&P has more 2-sigma movements then what the Gaussian distribution suggests.

This information is extremely useful for anyone interested in buying options. Since the model fails more often over short time horizons it’s better to buy options with below 10 days to expire. The options with 10-25 days to expire are fairly priced according to this study.

Trade(s) I’m Looking At —

We’re watching natural gas closely and considering going long the futures. The COT profile is neutral and technically the price action looks good. Odds are increasing we’ll experience a La Nina this winter which would bring more extreme winter weather to the US.

Looking at CHK’s (a natural gas producer) levels of CAPEX to depreciation shows how far fixed investment into future production has fallen. It’s at its lowest level in the 20+ years for which we have data. The CAPEX picture is similar across the industry.

These low levels of investment into future capacity mean that we’re likely headed for a major supply crunch in the near future. And a supply crunch means much higher prices.

We already hold DOTM calls on CHK which is a synthetic long natural gas play. We might double up our position if the data continues to line up favorably for this trade.

Quote I’m pondering —

Below is a short excerpt from Joel Tillinghast’s excellent book titled Big Money Thinks Small. Considering everything going on in the crypto market this seems timely. If you’ve tried debating with a crypto head on Twitter then this will resonate with you.

French Polymath Gustave Le Bon wrote The Crowd in 1895 as a rant on French politics, but his observations also describe how stock market manias occur. Under the influence of crowds, individuals act bizarrely, in ways they never would alone. Le Bon’s key theme is that crowds are mentally unified at the lowest, most barbaric, common denominator of their collective unconscious — instincts, passions, and feelings — never reason. Being unable to reason, crowds can’t separate fact from fiction. Crowds are impressed by spectacle, images, and myths. Misinformation and exaggeration become contagious. Prestige attaches to true believers who reaffirm shared beliefs. Crowds will chase a delusion until it is destroyed by experience.

If you’re not already, be sure to follow us on Twitter: @MacroOps. We post our mindless drivel there daily.

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

Have a great weekend.

Your Macro Operator,

AK

 

 

Using Gold To See Where The Dollar Will Move Next

Using Gold To See Where The Dollar Will Move Next

I’ve written a lot about how the US dollar is the fulcrum of the global financial system.

Commodities are priced in dollars. Global trade is done in dollars. And the majority of international funding is in USD.

The dollar is important. Dollar trends impact markets and assets around the world in various ways. Hence why the dollar is the fulcrum.

But if the dollar is the fulcrum then gold is the foundation on which that fulcrum sits.

I should make clear, I’m no gold bug and have no special affinity for the yellow metal.

But when it comes to analyzing assets and markets we run into a measurement problem. That measurement problem is due to the fact that things that are priced in US dollars, or any currency, fluctuate according to the price of the currency in addition to the good’s underlying supply and demand fundamentals (ie, the price of oil is impacted by the relative price of a US dollar).

And the price of dollars can fluctuate a lot.

You can see how this makes things difficult. When you analyze goods priced in USD you have to also assess the US dollar as well.

Gold is a useful tool helping with this measurement issue.

Perhaps due to gold’s long history as a store of value it has a special place in the market’s psyche. Since gold is priced in USD but has little intrinsic value (ie, little productive use and no cash flows) it acts as a good barometer to gauge the changing relative value of $1 USD of account or the price of 1 unit of USD liquidity (USD assets).

When international demand for USD liquidity exceeds supply, gold tends to perform poorly. And vice-versa when USD liquidity exceeds global demand for that USD liquidity.

Make sense?

Because of this, when I’m trying to discern the probabilities of where the dollar is headed next, I always start with gold. Even though gold is priced in dollars, it often leads at major turning points because the fundamentals are similar for both assets but for whatever reason those fundamentals often show themselves in gold first.

Of course, this isn’t always the case (there’s no such thing as a perfect indicator). But even in the cases when it doesn’t lead it still serves as a good confirming or disconfirming signal for the dollar.

Below are some charts. They’re a little messy but I think they get my point across and show how useful gold can be as a leading and/or confirming signal for the dollar and hence the dollar priced commodities.

This chart shows gold inverted (black bars) and the US dollar (red line) on a monthly basis.

Notice how gold failed to confirm the dollar’s bear move from 94’-96’ when the dollar sold off but gold traded sideways in a range. This is a disconfirming signal for the dollar which suggested the move was a corrective one and not the start of a new trend.

But then in 96’ both the dollar and gold (inverted) began trending upwards together. This signalled that this was the start of a new trend. The macro fundamentals also supported the case. The world was hungry for US dollar liquidity (assets) and demand outstripped supply which was bearish for gold but bullish for the dollar.

Then go to 01’ where  inverted gold peaked and began making lower lows and lower highs. While at the sametime the dollar made one more new high. Gold gave a leading signal that the bull market in the dollar was over.

Now check out this chart.

Here’s the current dollar bull market (red line) on the weekly. The dollar made lower new highs and coiled into a tight range from 13’-14’. At the same time, inverted gold trended higher, not confirming the lower move in the dollar which suggested building pressure in USD demand.

And then again from 16’ to 17’ inverted gold moved lower while the dollar made a new cycle high that gold did not confirm. This gave a sell signal on the dollar and USD shortly turned over thereafter.

Of course, there’s instances where the indicator gives false signals and using it is as much an art as it is a science. It alone shouldn’t be used as a reason to go long or short the dollar but rather as a key input into one’s macro decision making process.

Now let’s quickly look at where gold and hence the dollar may be headed in the near future. Many of the charts are suggesting a coming explosive move in one direction or another.

Below is gold on the monthly timeframe showing a coiling pattern. This type of price action typically precedes large moves.

And I’ve been pointing out over the last month how numerous dollar pairs are at large critical junctures and a coming significant move is likely.

Below are AUDUSD, GBPUSD, and EURUSD on a monthly basis.

Now let’s take a closer look at gold and see if it’s telling us anything.

In this chart, gold (inverted) and marked by the black line failed to confirm the dollars most recent new pivot low. But the disparity isn’t that great so this doesn’t give us much confidence.

Another thing I like to do is to look at the momentum structure of gold to see if momentum is building in one direction or another.

The chart below shows gold (black line) and gold’s momentum relative to its 3-year mean. It signalled the end of the bull market in gold well beforehand. But right now, it’s not tipping the scales in one direction or another. It’s slightly positive to neutral.

So unfortunately it’s tough to get a good read at the moment. My bias is that US stocks are about to start outperforming the rest of the world soon. And this is going to help reverse capital flows which will put a bid back under the dollar and start a new leg higher in the greenback.

There are other macro dynamics such as changing international trade rules, raising of the debt ceiling, and US tax and monetary policy which are supportive of this hypothesis.

And I believe that gold is setting up to signal one way or another soon so I’ll be keeping a close eye on it.

In a future piece I’ll lay out a fundamental macro model I use that shows one way of looking at the big picture USD liquidity supply and demand picture. This is a useful tool for seeing where the attractors are for gold on a cyclic level.

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

 

 

Simplicity, Aaron Brown, & GE

Simplicity, Aaron Brown, & GE

Tyler here with this week’s Macro Musings.


Our Recent Articles —

Lessons From A Trading Great: Ed Thorp – The latest installment in our super popular Trading Greats series. Throp was the original quant and advantage gambler who destroyed market averages year after year. His wisdom is priceless.

A Bullish Big Picture With Growing Near-Term Headwinds – Our recent “Marcus Trifecta” look at the markets.


Article I’m Reading —

I’m a big fan of Euan Sinclair. He’s written a ton of theory on how to think about options and volatility from a practitioner’s perspective. This is no easy task. Most derivate literature out there is bogged down with fancy academic speak and leaves little for the practitioner.

His latest blog post, Well You Did Ask…, has some great down to earth advice for all aspiring traders.

Here are my favorite excerpts from the post:

And always use the simplest method possible. Trading is a business. Problems are to be solved, not treated as sources of amusement or intellectual challenges. Brute force is often a perfectly acceptable technique.

Since the brilliant work of Sharpe, Markowitz, Treynor and Lintner (apologies for missing out anyone) investors have come to understand the benefits of diversification. Traders need to think differently. From a knowledge perspective, it is very unlikely that anyone will be good at more than one thing. So a trader should try to maximize the value from his one idea.


Video I’m Watching —

It’s very likely Bitcoin is in a huge bubble as we outlined in our latest Bitcoin piece. But there’s a lot of value in listening to the other side of the crypto argument to stress test the bear thesis. Mike Novogratz, former macro trader, now crypto trader has a lot of interesting things to say on the subject.

Bloomberg did an interview with him that you can watch by clicking here.

Novogratz got his start in crypto by buying $500,000 worth of Ethereum when it was trading for less than a dollar.

Over the course of 2016 and into 2017, as ether surged to almost $400 and bitcoin topped $2,500, Novogratz sold enough to make about $250 million, the biggest haul of any single trade in his career. He said he paid tax on the profits, bought a Gulfstream G550 jet and donated an equal amount to a philanthropic project for criminal justice reform.

Must be nice…


Podcast I’m Listening To —

The recent Chat With Traders episode with Aaron Brown was pure gold. It’s a two part episode so make sure to listen to both. Part 1 here and Part 2 here.

Aaron was the former risk manager for AQR — one of the largest quant funds on Wall Street. Before that he made gobs of money trading options on the floor. He also made quite a bit of money playing poker and betting on sports (My kind of guy!)

Inside the episode Aaron discusses how to think about risk — both from a mathematical perspective and an emotional perspective.

If you want even more Aaron head on over to his website at eraider.com. There’s some fantastic stuff on there.

He also wrote a bunch of books that you can pick up on Amazon. My favorite one of his is The Poker Face of Wall Street.

For more podcast recommendations, check out our list of the best trading podcasts here. And don’t forget about our comprehensive reading list for global macro traders and investors either.


Chart(s) I’m looking At —

The latest BofA fund manager survey shows that expectations for a “goldilocks” environment (above-trend growth and below-trend inflation) is at a record high.

What that tells me is this bull trend still has some bullish momentum behind it. But if any incoming data comes in negative it will drastically disrupt this narrative and catalyze a sharp pullback.

I’ll be intensely watching the next growth and inflation data points for an upset.


Trade(s) I’m Looking At —

GE stock has gotten killed lately on news that they are cutting their dividend by 50%. Fundamentally speaking, things aren’t looking too great for GE. But I think investors are starting to overreact to the downside.

The implied volatility in the GE puts has spiked really high making them an attractive sale. I love “fade the fear” trades as they have been the most profitable over the course of my trading career.

I’m currently waiting for a basing pattern to develop before jumping in. It’s a higher probability setup vs trying to catch the falling knife right here.

A short put or short put spread seems like the right trade expression here.


Quote I’m pondering —

“When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.” ~ Paul Tudor Jones

This happened recently in the Nikkei stock index. The candles were slowly trending up for weeks and then out of nowhere a large reversal candle printed.

These volatility signals aren’t the holy grail — but they can help you identify a potential trend change. So listen to PTJ and keep an eye out for them!

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

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

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

Have a great weekend.

Your Macro Operator,

Tyler

 

 

A Bullish Big Picture With Growing Near-Term Headwinds

A Bullish Big Picture With Growing Near-Term Headwinds

There’s some growing signs of weakness in this market. Breadth is slipping, credit doesn’t look too great, there’s more new lows versus new highs being made… that kind of stuff. I’m still not getting any major sell signals, except from my high-yield indicator. It flashed a signal today.

But there’s word the recent weakness in junk may be due to concerns over how deductions for debt and interest payments will be treated in the Republican tax reform plan. I don’t know. Either way, I’m not seeing any major red flags outside of junk bonds just yet.

I’m in “wait and see” mode, just “sitting on my hands” as Livermore would say. I’ve trimmed my book some but mostly because I want to free up capital for other trades that are lining up.

One of these trades is long dollar. I won’t expend much digital ink laying out my long dollar case, I’ve already done that plenty.

The skinny is that the market is underpricing the impact of tax reform, changing trade policies, and the coming normalization of the Treasuries balance sheet. These are bullish drivers for the dollar. I think the market will wake up to this in the coming months.

I’m already long the dollar through the yen pair. But I’m looking to also get long against the aussie and pound as well.

The technicals for the trades are setting up nicely. Take a look at this monthly chart of AUDUSD. Price has broken below a 15-year trendline and recently had a failed breakout to the upside.

Here’s the same chart on a weekly basis. You can see the bull trap failed breakout and now price is near the critical support line of its consolidation zone. The aussie is also plagued from a slowing China and a leveraged domestic housing market. A break below here would spell trouble for the pair.

Similarly, the pound has broken below a major 20+ year trading range shown on the monthly chart below.

It has retraced back up to its previous long-term support level which is now serving as resistance. Price is currently trading at a critical support level where if broken would likely indicate lower prices ahead. GBP has a number of political and economic headwinds, many of which could serve as a catalyst/driver for lower prices against the dollar.

Here’s a quick ‘Marcus Trifecta’ look at the technicals, sentiment, and macro of the market.

Sentiment: A little frothy

Market sentiment has notably shifted to very optimistic over the last six months. And nearly all of the sentiment and positioning indicators we track are showing that.

BofA’s Bull & Bear Indicator is nearing extreme bullish territory. The components of this indicator can be seen in the chart on the right.

And their latest fund manager survey showed that hedgies are becoming quite optimistic on equities and much less risk averse.

The chart below shows there’s a record number of survey participants taking on higher than average risk.

A record number also said stocks are overvalued, yet their cash levels are falling, meaning they’re upping their risk exposure. BofA is calling this a sign of “irrational exuberance”. I’m not sure we’re at that stage yet, but we’re be getting close — as I write this a Da Vinci painting of some dude or a chick that looks like dude just sold for roughly $500M. Yikes…

The latest positioning data has banks and the eurozone topping out as the assets that investors are the most long relative to the survey’s history.

I wonder how much this data is skewed though since banks and European stocks have been investor kryptonite over the last 8 years. Maybe overall positioning here isn’t indicative of extreme bullishness and therefore it’s less reliable as a contrarian signal? I don’t know, just something to think about.

Tech on the other hand remains a one way street. Investors have been throwing money at the big tech stocks, where being long FAANGs has become the “no-brainer” trade in the market. Weekly inflows into the sector recently hit their highest levels on record. And now with the FANG futures coming out things are really starting to get ridiculous.

Technicals: Path of least resistance is still up

SPX continues to trend higher in its ascending channel. The short-term trend is overextended but that alone is not cause for concern (chart below is a weekly).

Small-caps are close to having a failed breakout of their broadening top pattern. The weekly chart below shows price just trying to hold above the top support level of the pattern. Something to keep an eye on.

Many financials are retesting their recent breakouts.

The weekly chart of JPM below is a good bellweather to watch for this sector. This trade is largely moving off of long-term rates, so if the yield on the 10yr continues higher then we should expect to see financials trend up as well.

Macro: Strong but keep an eye on China

Growth is picking up in most countries around the world. Numerous ‘Big Picture’ macro indicators we track are signalling further economic strength in the months ahead, such as the BofA GLOBALcycle chart below showing a hockey stick move higher.

As growth picks up and the global credit cycle progresses, a number of inflationary pressures are building such as growing wage pressures and higher input costs from rising commodity prices. Expect these pressures to continue to build as more output gaps tighten in the coming months.

One of the major threats to the global economic recovery is China.

China’s credit cycle is long in the tooth and now that Xi has consolidated power he has the freedom to make the moves to begin deleveraging the economy. How this plays out will have consequences for the rest of the world. And things won’t be helped by the beginning of a liquidity suck driven by a tightening Fed and a US Treasury normalizing its cash balance; both of which will pull the dollar higher.

I like to keep a close eye on China’s property market since it tends to act as good indication of which direction leverage/credit are moving in the country. And floor space sold in Tier 1 cities has recently fallen through the… It’s something to keep an eye on.

No cause for alarm yet. The broader cyclic indicators we track for China remain supportive in the near-term.

Conclusion: Big Picture remains bullish but near term there’s growing headwinds

  • Sentiment is reaching frothy levels and will likely act as a market headwind in the coming weeks. Tech, especially long FAANG stocks, is a crowded trade and there’s a good chance for a large shakeout soon.
  • Technicals: The trend is still clearly up. It’s overextended in the near-term but that’s not cause by itself for a sell-off. There are signs of growing technical weakness but no major sell-signals yet. It seems the market is waiting for news on tax reform (which I think is going to pass). I wouldn’t be surprised to see stocks rally on positive tax reform news only to sell off shortly after. But who knows, we’ll continue to read the tape and see.
  • The macro is strong and all signs point to higher growth ahead. This growth will bring inflationary pressures over the coming months which is going to push rates higher and change the tune for central banks. A tightening Fed and moves by the Treasury following a raised debt ceiling at the end of the year will start the process for global liquidity to begin to slowly get sucked from the system. This trend will also be exacerbated by more companies raising there CAPEX spend which will pull the buyback bid from markets. On top of this we need to keep a close eye on China where the property market is cooling but the main indicators remain supportive.

If you want more market analysis like this, be sure to the check out our Macro Intelligence Report (MIR) here.

 

 

Pangea Logistics Solution

The Cure For Aging, Bruce Kovner, and 100%+ Returns

Alex is off in NYC celebrating the Marine Corps 242nd Birthday with his old teammates so I (AK) am here with this week’s Macro Musings.

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

Our Recent Articles —

The Bitcoin Bubble: We cover Bitcoin’s history, how to value it as a currency, and how to use liquidity to keep track its trend. Be sure to check it out!

Articles I’m Reading —

Operator Jamie shared a speech from the legendary Bruce Kovner in our Comm Center recently. You can read it here. Here’s an excerpt:

In these efforts, I try to pass on something of the proverbs, ethos and culture of trading that I have regarded as essential to Caxton’s success. Of these, I will mention three:

  1. Listen to the market. Close observation of price behavior is always necessary for the discipline of successful trading and it is very often very helpful in providing evidence about the nature of current conditions. If we can understand what the market is telling us, we will most likely be able to understand how to trade it. Listen to the market, hear it, don’t tell it what to do. Listen.
  2. Take politics and policy seriously. Changes in policy matter. Changes in leadership matter. Study them seriously. This doesn’t mean that politicians and policy makers will get it right – indeed very often they will get it wrong and these ‘mistakes’ in and of themselves may be important to markets. But ignore them at your peril. Policy matters. Politics matter.
  3. Above everything else, never let the discipline of risk control become lax. Those 100-year storms have a way of coming round every few years. If in real estate it’s “location, location, location”, in leveraged trading it is “risk control, risk control, risk control”. It is surprising how often this focus is lost.

Video I’m Watching —

I really enjoy the Kurzgesagt – In a Nutshell YouTube channel. They’re great at explaining a variety of science-related concepts with engaging animation. You can watch their latest video — How To Cure Aging During Your Lifetime — below:


It’s interesting to think about the effects age therapies could have on global economies. Demographic trends would drastically change. A more able-bodied elderly population could mean extended working lives, a huge drop in medical costs, and a number of other unpredictable consequences. And the fact that many scientists believe these age therapies will be viable in our lifetimes makes it even more interesting…

Podcasts I’m Listening To —

Tim Ferriss recently interviewed Walter Isaacson (you can listen here) — the author of various popular biographies including Steve Jobs, Einstein, and Benjamin Franklin. Isaacson’s latest biography is on Leonardo da Vinci.

I’m excited to dig into this book after searching for a comprehensive history on this legendary polymath for a long time now.

The Ferriss interview is fantastic because of Isaacson’s ability to share wisdom not only from his own life (he’s also the CEO of the Aspen Institute and a former CEO of CNN) but also from the legends whose biographies he’s written.

One topic comes up again and again in the interview — the cross-disciplinary approach. Being curious about everything, from biology to art to mathematics is how polymaths like Benjamin Franklin and Leonardo da Vinci were able to accomplish so much in seemingly unrelated fields. Their broad interests helped them see connections other couldn’t. And those connections lead to a variety of new discoveries.

We’re fortunate enough to work in a field where the same types of skills are highly valuable. In the world of investing it pays to be able to pull together disparate ideas into cohesive theses. That’s how unique insights are developed… and those are often the most profitable.

For more podcast recommendations, check out our list of the best trading podcasts here. And don’t forget about our comprehensive reading list for global macro traders and investors either.  

Chart(s) I’m looking At —

Last week we mentioned that the Barclays High-Yield Bond ETF (JNK) had closed below its 200-day moving average for the first time since August. JNK is a useful indicator of the market’s risk-appetite. If it falls, we can expect the broader market to follow.

Since last week JNK has continued to plummet. We’re currently keeping a close eye on a market sell-off that could follow.

Another way to evaluate risk appetite is with the High Yield Option-Adjusted Spread.

We can see it’s currently bouncing from 2014 lows, which isn’t a cause for concern just yet. But if it breaks the upper level of the current consolidation, it’s a signal that liquidity may finally be draining from the system.

The last time the spread broke out, in mid-2014, we got the dollar rally and crude crash. And then it’s second leg higher from 2015 through 2016 culminated into the low of the market.

Trade(s) I’m Looking At —

Sometimes our calls pay off quickly…

Last week we mentioned we were looking into Pangea Logistics (PANL), a speciality shipping company. Our thesis revolved around the shipping industry putting in a bottom. The Baltic Dry Index was hitting multi-year highs, international fuel regs were set to pinch supply, and the order book as a percentage of fleet capacity was at an all-time record low.

PANL proceeded to shoot over 110% higher in the last few days.

Pangea Logistics Solution

PANL made us look pretty smart eh? But as the trading game goes, sometimes we’re not sure what the hell is going on…

Trip Advisor (TRIP), a long idea we’ve covered in these pages was crushed after it’s latest earnings report where the company beat estimates. Either we’re really missing something or the market is really wrong. It’s probably the former, but we’re having a tough time seeing it. If you’ve got any insights, shoot us an email.

Quote I’m pondering —

Risk control isn’t an action so much as it is a mindset. It stems largely from putting at least as much emphasis on avoiding mistakes as on doing great things. ~ Howard Marks

We’ve been on a roll lately in our portfolios. Whenever that happens, we try to get even more strict with our risk management. The last thing we want is to get cocky, make a mistake, and squander away our hard earned profits. The goal is to stay objective and not let emotions get in the way.

That reminds me of another quote:

Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum drawdown. ~ Paul Tudor Jones

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

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

Have a great weekend.

Your Macro Operator,

AK

 

 

Bitcoin Bubble

The Bitcoin Bubble: A $6,000 Pokémon Card

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

On May 22nd 2010, computer programmer Laszlo Hanyecz ordered two Papa John’s pizzas. They were Hawaiian style. He paid $60,000,000. According to Laszlo, they were your typical Papa John’s, and tasted only “okay…”

In 2013, a Brit by the name of James Howells accidentally threw away a laptop worth over $45,000,000. He realized what he’d done a few months later and went down to the landfill to dig through mountains of garbage to no avail. James says he’s now “at the point where it’s either laugh about it or cry about it… Why aren’t I out there with a shovel now? I think I’m just resigned to never being able to find it.”

In 2009, a Norwegian named Christopher Koch made a $27 investment on a whim. The investment “annoyed” his then girlfriend who thought it was a waste of money. Today, his $27 investment is worth $30,000,000. Chris now owns property in Toyen, the wealthiest neighborhood in Oslo. He has a new girlfriend.

You’re probably wondering what I’m talking about. Who are these guys that would drop millions on a pizza or somehow forget about buku money stored on a laptop?

The common thread here is bitcoin — the first and most popular cryptocurrency.

I was having some fun with the numbers. You see, Laszlo didn’t really spend $60M on two Papa John’s pizzas. He paid $25 for them, but in bitcoins. 10,000 of them to be exact. It was the first recorded merchant transaction in cryptocurrencies ever.

But the price of bitcoins has gone up a bit since then.

A single bitcoin today is now worth over $6,000. Those 10,000 bitcoins that amounted to only $25 in 2010 are now worth over $60M. So in hindsight, it was an expensive pizza.

Bitcoin has had an annualized rate of return of 715% since then. As far as returns go, that’s pretty darn good…

If you would have bought $10,000 worth of bitcoin in 2009, when our lucky Norwegian bought his, your “investment” would now be worth roughly $1,200,000,000. Granted, you would have had to sit through horrendous volatility and numerous drawdowns in the +80% range, but still….

Alright, I’m done pointing at how extremely rich we all could have been if we’d just bought a couple pizzas worth of bitcoins a few years ago. We didn’t… we bought actual pizzas instead… so let’s wipe our tears and move on.

In this month’s MIR, we’re going to talk about bitcoin, cryptos, blockchains and all that good stuff.

There’s a lot of hype, one could even say a religious zealotry around cryptocurrencies’ future. It’s not hard to understand why. Bitcoin is up over 500% again this year and many of the other cryptocurrencies are up even more. Returns like that tend to create a fervent following.

Today our Macro Ops team will cut through the crypto zealotry to see what’s actually going on in the blockchain market. We’ll briefly talk about what Bitcoin is, where it came from, and how the market is likely to evolve going forward.  

The Beginning… How Bitcoin Was Born

The Bitcoin origin story is a fascinating one.

It was first developed in 2009 by a group of computer programmers. They built it according to a cryptographic architecture created by a pseudonymous author who goes by the name of Satoshi Nakamoto.

The public still doesn’t know who Satoshi is. It’s believed that he actually might be a group of people and not an individual.

Either way, he (they?) are the largest holders of bitcoin after mining it in the early days. They possess more than 1 million of the coins. This puts Satoshi at 247 on the Forbes wealthy list.

Fun fact: There’s a conspiracy — which is probably true — that the NSA uncovered who the actual Satoshi is. When bitcoin was created, the US intelligence community became concerned that it was the product of a rival state like Russia or North Korea. The government was worried it could be weaponized someday against the US, perhaps by upsetting the dollar as the world’s reserve currency.

So the theory goes that the NSA used stylometry, which is the study of written language, in conjunction with their billions upon billions of data points to compare things written by Satoshi to things written by everybody else throughout the world. And the word is… they got a match.

Anyways, here’s how the original Satoshi Nakamoto white paper starts (you can read the whole paper here):

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. The cost of mediation increases transaction costs, limiting the minimum practical transaction size and cutting off the possibility for small casual transactions, and there is a broader cost in the loss of ability to make nonreversible payments for nonreversible services. With the possibility of reversal, the need for trust spreads. Merchants must be wary of their customers, hassling them for more information than they would otherwise need. A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties can be avoided in person by using physical currency, but no mechanism exists to make payments over a communications channel without a trusted party.

What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions. The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.

The problem being solved here is a very important one in computer science. It’s called the Byzantine Generals Problem or BGP.

Here’s how BGP is explained: “[Imagine] a group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors, who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.”

Silicon Valley VC Marc Andreessen explains the importance of this here:

More generally, the B.G.P. poses the question of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet.

The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks – this is the part that is literally like cash – if you have the money or the asset, you can pay with it; if you don’t, you can’t. This is brand new. This has never existed in digital form before.

Marc Andreessen is a smart guy. He, along with many other tech geeks, are excited about what the mysterious Satoshi created.

We should make a quick and important distinction here.

There’s a difference between bitcoin and Bitcoin. Bitcoin, with a capital B, refers to the cryptographic protocol of the network, otherwise known as the blockchain.

Blockchain is the digital ledger that uses the cryptographic protocol proposed by Satoshi to solve the Byzantine Generals Problem — basically, the tech to help with our internet trust issues.

While bitcoin, small b, refers to bitcoin the currency. This is the token that’s connected to the Bitcoin’s blockchain network and which bitcoiners transact in. It’s also often used as a blanket term for cryptocurrencies in general.

There are now over 1,000 different cryptocurrencies that are similar, yet different, to bitcoin with a small b. This list is growing every day.

Summary:

  • Bitcoin was developed from a cryptographic proof that was written by a pseudonymous person or persons who go by the name Satoshi Nakamoto.
  • It was developed to solve the Byzantine Generals Problem of how to establish trust over an untrusted network like the internet, where transacting parties don’t know who they’re transacting with.
  • Bitcoin does this through the creation of a digital ledger (the Blockchain) where two parties can exchange a digital asset in a safe and secured way to the extent that nobody can challenge the validity of the transfer.
  • Bitcoins have gone up A LOT since they were created 8 years ago.

The Blockchain: A Revolutionary Technology

I suggest you spend five minutes and watch this quick YouTube video explaining Bitcoin (link here).

Here’s a quick description of Blockchain via Joseph Pham from Quora.  

If you understand the concept of a blockchain, you will have heard people (especially in enterprise) talk about distributed ledger. It describes a technology that uses a write once, read only “database” system that is bound by cryptographic verification, and bound through a series of “blocks” (batches of data / datasets) that are subsequently verified into a “chain” sequence of linked batches over time. This characteristic is what gives the technology the name “blockchain”. Systems that spread / make copies of these blockchains available across a network are often referred to as distributed ledgers.

You can make a blockchain without distributing it, but it might not be as practical and useful for the real world applications you might consider with blockchains.

Bitcoin is just one configuration of blockchain technology, which integrates certain blockchain technology with innovative monetary incentives, social economics and cryptography. The innovative monetary incentive is to have a self verifying money supply – the bitcoins – which are basically entries in the ledger, that are determined mathematically, through solving a complex cryptographic puzzle (hashing), that must reach consensus (peer validation) and encodes a specific reward schedule (approximately every 10 minutes) and total supply of bitcoins (21 million).

A bitcoin is basically just a token value on a ledger (like in game gold and coin values in video games), that are created based on a set of system rules. There are a lot of Bitcoin based and bitcoin derived blockchain applications (using the Bitcoin open source data repository). These are usually referred to as Cryptocurrencies, as Bitcoin was designed to operate as an e-currency system.

I hope I’m not losing you. Stay with me, we’ll get through this tech talk soon enough.

Just to sum up, a blockchain is a digital ledger that encodes every transaction on its system forever. It uses cryptography to ensure the validity of these ledger entries. It’s basically a one-way street where once entries are encoded, it’s nearly impossible to hack or alter them.

I’ve heard the analogy used that each block of transactions in the chain is like a mosquito encased in amber — Jurassic Park style — and every time crypto miners authenticate a transaction and approve the entire blockchain, the amber gets thicker and thicker around the transaction. Meaning, the longer it lives on the blockchain, the more permanent it becomes; and more difficult (or impossible) to alter.

The blockchain can be distributed or not.

In Bitcoins case, and many of the other cryptocurrencies, this digital ledger is distributed across the world. The benefit of this is that no one entity has power over the network and the data is extremely safe and robust since it’s copied all across the globe. Many servers can be wiped out but the data (the Blockchain) will survive.

The bitcoins, or the crypto tokens, are used as an incentive system for miners on the network.

These digital miners use lots of computing power to solve the cryptographic puzzles (called hashing) that’s needed to encode the bitcoin transactions and maintain the integrity of the blockchain. The network works off a consensus. Once a majority of the miners agree on the answer to a hash, the attached transaction then gets recorded to the blockchain forever.

The Brookings Institute calls the blockchain “a foundational technology, like TCP/IP, which enables the internet. And much like the internet in the late 1990s, we don’t know exactly how the Blockchain will evolve, but evolve it will.”

That seems to be the broad consensus amongst technologists regarding blockchain’s potential — it’s revolutionary and will have as sizable impact as the internet itself. But nobody is quite sure exactly how, yet.

The reason is partly because the use cases for blockchain appear to be nearly limitless. Here’s an excerpt from a report by BofA on the subject.

To be frank, it’s difficult for us to think of a large industry where there is no applicability of a blockchain, given the technology’s ability to reduce data storage costs and prevent tampering. After all, blockchain at its core is just a way to store and access data. Startups, trials and proof-of-concepts are abundant in a myriad of industries. Blockchain technology could make tracking and managing digital identities more secure and efficient. A distributed ledger could aid online voting, cutting down on voter fraud. In financial services, the technology could ease payments and transfers; smart contracts could improve trade settlements. Smart contracts on the blockchain are being used to shake up prediction markets. In the music industry, the blockchain can be used to solve licensing issues: Artists, including English singer-songwriter Imogen Heap, have released music directly to fans via blockchain platforms.

Companies ranging from Walmart to Maersk are now using the tech to better track and manage their supply chains. A number of banks and brokerages like BNY Mellon are using it to record transactions.

It’s a safe assumption to say that blockchain is revolutionary and is here to stay. But like the internet in the early 90’s, we don’t know exactly how it will revolutionize things. And again, like the internet, it will probably take a decade or two at least for the tech to mature and dramatically add value.

Now that we’ve got that out of the way, what about the value in cryptocurrencies. Is there any?

What are they worth? Is it a bubble or is this just the beginnings of the largest bull market in history?

Summary:

  • Blockchains are the cryptographic technology underlying cryptocurrencies.
  • There’s a broad consensus that this technology is revolutionary and will have far and wide-ranging impacts on many areas of the economy; similar to the internet.
  • But like the internet in the 90’s it’s still early days for this technology and nobody is quite sure how it will evolve.

The video below explains more about blockchain’s potential:

 

Valuing Cryptos: Zeros Or Heros?

To value something we have to first define what it is and what it isn’t. And in the case of cryptocurrencies’, this is not exactly easy.

Let’s start with the obvious. Bitcoins, ethereum, Litecoins, and the hundreds of other crypto tokens are typically thought of as currencies, as their names imply.

But what makes a currency? And do these crypto tokens check the mark?

A currency is measured by how well it functions as two things:

  1. Medium of Exchange: Currencies exist to make transactional commerce possible. This means that the currency needs to be accessible, transportable, and fungible in that it’s accepted by large amounts of buyers and sellers as legal tender.
  2. Store of Value: Currencies have to act as a reasonable store of value. Meaning, buyers and sellers need to feel comfortable keeping a certain amount of their wealth in it, knowing it will retain its purchasing power.

Let’s start with cryptos as a medium of exchange. We’re going to focus on bitcoin, since with a market cap of $100B, it’s the most popular of all the cryptocurrencies.

Here’s NYU Professor Aswath Damodaran on bitcoin as a medium of exchange:

The weakest link in crypto currencies has been their failure to make deeper inroads as mediums of exchange or as stores of value. Using Bitcoin, to illustrate, it is disappointing that so few retailers still accept it as payment for goods and services. Even the much hyped successes, such as Overstock and Microsoft accepting Bitcoin is illusory, since they do so on limited items, and only with an intermediary who converts the bitcoin into US dollars for them. I certainly would not embark on a long or short trip away from home today, with just bitcoins in my pocket, nor would I be willing to convert all of my liquid savings into bitcoin or any other cryptocurrency. Would you?

There are a number of reasons why bitcoin has failed to make large inroads as a medium of exchange. One reason is that as the tech stands now, it’s a costly and timely transaction process compared to the available alternatives.  

Here’s BofA again:

The problem with bitcoin as a peer to peer payment system is that it’s expensive, relative to conventional alternatives. This comes from the mining process. Mining isn’t a zero sum game. The economics of mining are pretty simple. There is a fixed reward per block mined. At present, each block generates 12.5BTC. So, each block mined produces in Dollars around 12.5*bitcoin/dollar rate. At present, this is around $60k per block. This is a function of the bitcoin price. There are roughly 2000 transactions in a block, give or take. This implies that around $30 of bitcoin are created per transaction at present. Economically, we would regard this as a cost of the transaction, although this is not how people always view it.

Miners need to be paid because the cost of mining (of applying CPU to blockchain hashing) is becoming prohibitively expensive. It requires enormous and increasing amounts of energy. The chart below demonstrates such:

The electricity being used to mine bitcoin is now equivalent to the amount it would take to power over 1 million US homes!

Or to put it another way, the total energy consumption of the world’s bitcoin mining activities is more than 40 times that required to power the entire Visa network. The annual energy consumption is equivalent to 13,239,916 barrels of oil!

Not only are the costs of transacting and running the network absurd, but the speed at which transactions are processed are extremely slow. BofA lays out the problem:

To illustrate, Visa’s payment system processes 2,000 transactions per second, on average, and can handle up to 56,000 per second, if needed. Assuming similar transaction handling capabilities at other large payment schemes such MasterCard, UnionPay, AliPay etc, total digital payment transaction volume in the retail space can be an order of magnitude higher than the aforementioned 2,000 transactions per second. Assuming 20,000 retail transactions are processed every second, it would take about 100 minutes for one second’s worth of transactions to be recorded on the bitcoin blockchain.

Lastly, due to the astronomical rise of bitcoin and other cryptos over the last few years, the tokens have drawn quite a bit of attention. This has created a speculative fever where the tokens are not being bought for their value, or as a means to transact, but rather as a gambling vehicle used to bet on further price gains.

It’s a momentum driven market where everybody’s chasing returns. And that creates an issue because people don’t want to be like Laszlo Hanyecz and spend their bitcoins on a stupid Hawaiian pizza when those bitcoins could be worth many multiples of what they are today.

This creates a conundrum for cryptos. As Aswath Damodaran puts it, “It remains an unpleasant reality that what makes crypto currencies so attractive to traders (the wild swings in price, the unpredictability, the excitement) make them unacceptable to transactors.”

So bitcoin fails (currently) to meet the requirements of a proper medium of exchange.

What about store of value? Are cryptos a fiat currency similar to the US dollar, as many crypto fans proclaim?  

Here’s economist Brad deLong’s take:

Underpinning the value of gold is that if all else fails you can use it to make pretty things. Underpinning the value of the dollar is a combination of (a) the fact that you can use them to pay your taxes to the U.S. government, and (b) that the Federal Reserve is a potential dollar sink and has promised to buy them back and extinguish them if their real value starts to sink at (much) more than 2% / year (yes, I know).

Placing a ceiling on the value of gold is mining technology, and the prospect that if its price gets out of whack for long on the upside a great deal more of it will be created. Placing a ceiling on the value of the dollar is the Federal Reserve’s role as actual dollar source, and its commitment not to allow deflation to happen.

Placing a ceiling on the value of bitcoins is computer technology and the form of the hash function… until the limit of 21 million bitcoins is reached. Placing a floor on the value of bitcoins is… what, exactly?

Bitcoins lack the essential qualities to make it a viable medium of exchange and store of value. Hence they can’t and shouldn’t be thought of as currencies or valued as such.

The things that make bitcoin a libertarian’s wet dream such as its decentralized nature and the fact that no one has control over the system, also means that it doesn’t have any true intrinsic value.

Its value is based completely off of people’s beliefs… and more importantly, people’s beliefs about other people’s beliefs.

Crypto fans call this the network effect — which is a term used to describe companies whose values increase the more people use their products, like Facebook. But this is a limp comparison.

Network effects when applied to tech companies are important because they lead to greater earnings power and value creation — the more people use a social network, the more others want to join, and the more advertisers will pay for access to the network and so on.

Real network effects actually create more value for the owners of the company and users of the product.

Bitcoin doesn’t sell anything and doesn’t produce any cash flows. It’s a non-currency that doesn’t quite work as a medium of exchange or a store of value.

It’s “value” is based purely off the beliefs of those who buy it. And this belief is that bitcoin is valuable because other people think it’s valuable. “If I buy it now, I’ll be able to profit at a later date by selling to somebody else”.

In trading parlance, this is called “Greater Fool Theory” or GFT.

Wikipedia explains GFT as:

The price of an object is not determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. In other words, one may pay a price that seems “foolishly” high because one may rationally have the expectation that the item can be resold to a “greater fool later.”

The Oracle of Omaha, Warren Buffett, agrees.

He calls bitcoin a bubble, stating “You can’t value bitcoin because it’s not a value-producing asset”. But “people get excited from big price movements, and Wall Street accommodates” making bitcoin a “real bubble in that sort of thing”.

Maybe bitcoin should then be thought of as equity in a pre-revenue biotech startup. A startup with no leadership (it’s decentralized), no product yet of intrinsic value, and a growing number of nearly identical competitors entering the market every single day.

But the shares of the 1,000+ various cryptocurrencies have a total market cap of $176B and growing. New shares are being issued every single day. Many, some, or maybe none, will eventually create intrinsic value somehow… but nobody knows exactly how quite yet.

A better comparison of how to think about bitcoin’s value might be trading cards (think Magic or Pokemon) or in-game artifacts like a flaming sword in World of Warcraft (I don’t know if the flaming sword is a thing but let’s pretend it is).

Unlike a pre-revenue startup that may produce actual value someday, trading cards and in-game artifacts only have value because they have devoted fans and there’s a false scarcity of these objects injected by their makers.

Neither of these have intrinsic value of any sort, but they have a price that fluctuates according to their popularity. So yeah, that’s a better comparison. Bitcoins are like a $6,000 Pikachu card.

Do you want to buy some bitcoin now?

Summary:

  • Bitcoin is neither a good medium of exchange or a good store of value, making it a terrible currency
  • Bitcoin is “valued” purely through its popularity and Greater Fool Theory — making it more similar to a Pokemon card than a real currency

Here’s a quick video explaining how difficult it is to value Bitcoin:

My Take On Investing In Bitcoin

As a long-term investor, I wouldn’t touch any of these with a ten foot pole even if my arch nemesis — you know who you are — was holding.

It’s a total crapshoot and gamble. This market is purely speculative at this point.

But since I am speculator, would I trade it?

Hell yeah, why not?

Traders love this type of positive volatility. And bitcoins have all the right ingredients to drive this trend even higher. It’s really the perfect “asset” for creating a frenzied mania along the likes of the Tulip and South Sea bubbles.

These ingredients are:

  • It’s impossible to value: Anybody who tries is lying to you and themselves. And this is great, because when something has no intrinsic value, it can be either zero or infinity or somewhere in between since there’s absolutely nothing reliable to gauge it off of.
  • Greater Fool Theory: It’s value relies entirely on what the other fool is willing to pay for it. That’s it and that’s the only thing you need to analyze in this market when making buy and sell decisions.
  • It’s a compelling and complex story and humans love stories: One of the best things that bitcoin has going for it is that nobody really understands the tech and what it’s actual use cases will end up being.
  • It’s anti-government/anti-establishment attributes make it a perfect tech for the times: Populism is rampant as well as distrust in institutions around the globe. The idea of a speculative instrument outside of institutional control has the perfect appeal.
  • It’s a global market: Anybody anywhere can play bitcoin (though in some countries it’s harder than others). This means there’s a huge pool of potential fools who still haven’t bought in.

And to top it all off, we’re in the perfect macro environment for a huge speculative bubble.

We’re coming off a period of horribly negative global sentiment stemming from the Great Financial Crisis. And long periods of negative sentiment are typically followed by the opposite.

Central banks have kept the world flush with easy money by keeping interest rates low and printing billions in new money. In macro terms, we say that global liquidity is flush.

And this creates the perfect environment for asset bubbles. This was perfectly described by 18th century editor of The Economist Walter Bagehot when he said:

One thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money… At intervals, the money of these people — the blind capital, as we call it, of a country, is particularly large and craving; it seeks for someone to devour it, and there is a ‘plethora’; it finds someone, and there is speculation; it is devoured, and there is ‘panic’.

This is why we’re seeing celebrities like Paris Hilton and Floyd Mayweather advertising their own initial coin offerings (ICO’s are alternate coins that typically get split off the ethereum blockchain and become their own separate “currency”).

Since anybody can “fork” off a blockchain network (it’s all open source), everybody can create their own crypto token. And they are. And people, lots of people, are buying them…

Blockchain “startups” have raised a disclosed $1.85B in just the first half of this year.

This is leading to some outrageous scams that are often unwittingly being promoted by these said celebrities.

Take the example of Centra.

Centra was a recent initial coin offering that raised $30 million and was promoted by Mayweather and rapper DJ Khaled.

Centra made big promises of partnering with Visa and creating the first debit/credit card for the crypto market, amongst other grand visions.

The problem is that these were just empty words.

It was found that the company hadn’t even talked to any of the major credit card companies, employed no computer programmers, that the founders previously ran a luxury rental car service in Miami of all places, and their listed CEO was a fictional (as in completely made up) person.

The “founders” of Centra now have $30 million of investors’ money. Of which, they can choose to do anything they want… like buy a bunch of Maseratis or life-sized cheese molds of themselves, and investors be damned….

An “investor” in the Centra ICO posted on Reddit defending the company and it’s crypto tokens saying “What’s important is that Centra is being endorsed and they have a product. That’s what matters to investors”.

This is the type of highbrow “investor” who is now driving prices higher in the crypto market.

Again, the vast majority of the players in this market don’t care about “trivial” things like made up CEOs and not having a real business model. They just want a higher price to sell into, a greater fool than them.

Centra is not an isolated incident. This is happening more and more.

I find this extremely fascinating from a behavioral investing standpoint.

We’re witnessing what may well become one of the largest speculative bubbles in history. And people are becoming full-on punch drinking devotees. The more this zealotry spreads, the more crypto prices will rise, which will reinforce their beliefs and bring in ever more greater fools!

To play this kind of speculative bubble one needs to work off the technicals — which are very good in bitcoin where pure emotion/sentiment dominates price action — and keep a close eye on the liquidity.

Liquidity, which is the availability of money and demand in the global system, always precedes market moves.

A tightening of liquidity means a tightening of credit conditions. This leads to lower future demand and is a sign that investors are discounting greater risks in the market.

When global liquidity starts to drain (the black line moves higher on the chart below), rising volatility (orange line) typically follows.

And when market volatility rises, investors begin to reprice risk. The repricing of risk leads to lower demand and hence fewer fools to sell risky assets to. Fewer fools means less buyers and less buyers in a momo market leads to more sellers. This creates the scenario where you have a bunch of freaked crypto zealots all clambering for a shrinking exit at the exact same time.

This is when a boom leads to bust. And the warning signs will show on the various liquidity indicators beforehand.

(Note: If you want to learn how to track liquidity to get ahead of the bitcoin crash, then check out this guide right now.)

The chart below is from Peter Brandt. It shows bitcoin forming a classic parabola. This is a common technical pattern in a speculative bubble.

We should continue to see the channel narrow and compress as the dips get bought more quickly and prices rise. When the price hits the top of the parabolic channel we should expect a retrace of at least 50%. The current price target is $6,800, not far from where bitcoin is currently trading.

Buyers should beware once they see liquidity begin to tighten at the same time bitcoin is trading near the upper range of its channel. That will be a setup for a large pullback.

This setup is aligning perfectly with the launch of bitcoin futures by the CME. This is a huge deal for the bitcoin trading community because it opens the floodgates to institutions and other participants who can only trade on regulated exchanges.

It also allows guys like us to easily short bitcoin when the eventual bubble pops!

You can read more about the brand new CME bitcoin futures by clicking here.

Conclusion:

  • The Blockchain is groundbreaking technology that, like the internet in the early 90s, will transform industries is ways none of us can fathom.
  • Bitcoins have no intrinsic value and it’s unclear how they develop any. Their “worth” is based purely off having a greater fool to sell to. The market is dominated by punch drunk speculators.
  • Bitcoins and other crypto tokens don’t meet the requirements of a currency and are closer to trading cards or in-game virtual objects that only have market prices due to a devoted fan base and false scarcity.
  • Bitcoin is the perfect asset for a speculative bubble: it has no intrinsic value so it can’t be objectively assessed, it has a complex and compelling story, it’s global, and it’s the perfect anti-establishment tech for the times. Because of this, bitcoin probably still has a ways to rise.
  • Bitcoins should not be bought as a long-term investment but instead traded on a purely technical basis.
  • Liquidity and technicals are the only forms of useful analysis to use on the crypto market simply because they help identify regimes where there’s likely to be increasing or decreasing Fools to sell into.

As for the future of the crypto and blockchain market in general, I think Matt Levine of Bloomberg has the best take. Here it is:

Look, I know I sound like a cryptocurrency/blockchain skeptic. I guess I am one, fine. But Walmart’s mangoes are being tracked throughout the supply chain in an auditable distributed database that makes them much easier to follow than previous methods did. A syndicated-loan blockchain probably will work better than the current system of transferring syndicated loans by, like, faxing signature pages. “Tokenization” of some transactions or ownership interests will probably turn out to be useful, and might change how the markets for digital advertising or cloud storage or housing or whatever work.

But the way I like to think about it is that cryptocurrency might be to the 21st century what stock was to the 17th century: an administrative change in the bookkeeping for ownership of certain assets that over time completely transformed the economy and the world, with a power that the early innovators could hardly have dreamed of. But also, the first like 300 years of the history of stocks were filled with hucksters and hype and bubbles and disaster. Cryptocurrencies and blockchain really could be revolutionary technologies that will ultimately pervade every aspect of the economy, even while almost every individual project could be nonsense.

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

 

 

George Soros, Compounding Machines, and Helen Keller

George Soros, Compounding Machines, and Helen Keller

Alex here with this week’s Macro Musings.

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

Articles I’m reading —

Morgan Housel is a beast of a writer. I’m in awe of the amount of high quality work he’s able to put out week after week after week. In his latest article titled “A Freakishly Strong Base” he manages to tie in the Ice Age, antibiotic usage, smoking rates and WW2, along with how Buffett made so much money; all to explain the power of compounding.

Here’s the link and a quote:

It is so easy to overlook how powerful it can be to take something small and hammer away at it, year after year, without stopping. Because it’s easy to overlook, we miss the key ingredients of what caused big things to get big. How can most of Buffett’s success be attributed to what he did as a teenager? It’s so crazy, so counterintuitive. And since it’s crazy and counterintuitive we overlook the right lessons. So we write 2,000 books on how Buffett sizes up management teams when the biggest and most practical take away from his success is, “Start investing when you’re in third grade.”

Physicist Albert Bartlett put it: “The greatest shortcoming of the human race is our inability to understand the exponential function.”

It’s official, Jerome Powell will replace Janet Yellen as the next Fed Chair. The “Game Masters” (ie, central bankers and government leaders) control the biggest levers on our markets and economies; hence the name. So it pays to know how they operate and the mental models they use to view the world.

Here’s a great tool from the WSJ that aggregates all the speeches from policy makers for the big four central banks (Fed, ECB, BOJ, BOE) and allows you to easily search by speaker or keyword. It’s worth jumping in there and reading up on Powell.

My take: Ideologically, he’s not a big departure from Yellen but is somewhat more amenable to rolling back financial regulations.

Video I’m watching —

Remember the short video I shared a few weeks ago of the Tendai Buddhists monks who partake in a brutal 1000-day pilgrimage called “Kaihōgyō”? Where if they fail — which most do — they have to take their life?

Here’s a full hour long documentary on them. It’s somewhat dated but still good (link here).

This clip was doing the rounds on FinTwit this week. It’s from an old “Adam Smith’s Money World” episode — which was a great Wall St. news program that ran from the mid 80’s to late 90s. You can find a lot of the old episodes on YouTube — where the host Jerry Goodman interviews Soros and Druckenmiller.

Soros gave a freezing cold take when he said he thought the world was in a great depression very similar to the 1930’s. This interview was in 94’. I’m guessing he changed his mind — which he was pretty good at — soon after.

Here’s a section from the video where Soros talks reflexivity:

We all work with preconceived ideas and those ideas don’t necessarily correspond to reality so there is this gap between perception and reality and that’s the gap that I have really explored and exploited. All our views of the world are somehow flawed or distorted and then I concentrate on the importance of this distortion in shaping events.

Book I’m reading —

I just picked up Big Money Thinks Small by Joel Tillinghast. Joel is the long-time manager of the Fidelity Low-Priced Stock Fund and a protégé of Peter Lynch.

I’m only a third of the way through it but I like what I’ve read so far. It’s well written and easy to get through. It reminds me of Ralph Wagner’s A Zebra in Lion’s Country which is another value focused investing book that’s worth a read.

Here’s Joel’s five key principles for avoiding investment mishaps which he discusses at length in the book:

  1. Make decisions rationally: Do not invest emotionally, using gut feel / Do invest patiently and rationally
  2. Invest in what you know: Do not invest in things you don’t understand, using knowledge you don’t have / Do invest in what you know
  3. Work with honest, capable management: Do not invest with crooks or idiots / Do invest with capable, honest managers
  4. Avoid competitive industries and seek stable financial structures: Do not invest in faddish or fast-changing, commoditized businesses with a lot of debt / Do invest in resilient businesses with a niche and strong balance sheet
  5. Compare stock prices with intrinsic value: Do not invest in redhot “story” stocks / Do invest in bargain priced stocks

Pretty common sense advice.

I take rule number three to heart in my own process. Pretty much every time I’ve willingly overlooked management’s past indiscretions to shareholders I’ve ended up with a lot more red on my trading statements. Investing in companies with solid management isn’t everything, but it’s pretty close.

Also, here’s a great section from the book:

Instead, shine a spotlight on the evidence that is silent. Lurking in the background are unexamined assumptions about society and institutions. To fix recency bias, study history — the longer and broader, the better. To envision the future, investors need some idea of the normal baseline. Discover which things change and which endure. Statistics, probability, and the outside view are key. History is especially important because people repeat what works, but in the stock market we don’t get timely feedback on our decisions— and what we do get is mostly noise.

The downside of history is the narrative fallacy. In The Black Swan (2010), Nassim taleb wrote:

The narrative fallacy addresses our limited ability to look at sequences of facts without weaving an explanation into them, or, equivalently, forcing a logical ling, an arrow of relationship, upon them. Explanations bind facts together. They make them all the more easily remembered; they help them make more sense. Where this propensity can go wrong is when it increases our impression of understanding.

Big Money Thinks Small

I’ve been on a value investing reading binge lately. If you have any good and more obscure — I’ve read most of the popular ones — value oriented investing books, please shoot them my way. I’m always on the lookout for a good read.

Also, for you Sci-Fi fans, I’m reading Cixin Liu’s The Three-Body Problem — I’m about halfway through it. It’s good. Kind of reminds me of Asimov’s Foundation series but a tad darker. So if you’re an Asimov fan then I suggest you check it out.

And for more of my book recommendations, check out our comprehensive reading list for global macro traders and investors.

Chart(s) I’m looking at —

This is an interesting chart from Nautilus showing how an uptick in realized volatility doesn’t necessarily correlate to a selloff in the SPX. Quite the opposite; uptrending realized volatility from historically low levels (like where we are now) have in the past been accompanied by large advances in the market.

From the way other sentiment and liquidity gauges are looking, I’m thinking we may be entering the beginnings of a frenzied blow off top that will play out over the next year or so. But we’ll see…

And on that note, I’ll be watching this chart of the Barclays High-Yield Bond ETF (JNK). It just closed below its 200-day moving average for the first time since August and the tape is looking heavy. JNK is a useful chart for  gauging the market’s risk-appetite. A continued selloff here would likely portend a retrace in the broader market.

Barclays High-Yield Bond ETF

Trade I’m looking at —

During earnings season I read through maybe 10-20 hedge fund investors letters. I have a stable, of mostly small-cap value funds, that I like to read. It’s a good source of idea generation. If any of the companies fall under a broader macro thematic I’m tracking, I’ll dig in and see if I agree with the author.

I recently wrote about how I’m keeping a close eye on the shipping industry. There’s signs that it might be done putting in a bottom. The Baltic Dry Index is hitting multi-year highs, international fuel regs are set to pinch supply, and the order book as a percentage of fleet capacity is at an all-time record low.

It’s reasonable to expect that we’ll soon enter a supply constrained environment if demand stays where it is.

In light of this, I came across an interesting write-up by hedge fund Cable Car Capital on Pangea Logistics (PANL) which is a specialty shipping company. Here’s a section from the writeup and you can read the entire letter here.

Through a consolidated joint venture, Pangaea owns or operates a majority of the world’s supply of ice-class 1A drybulk tonnage, enabling the company to earn a premium for operating routes that are inaccessible to ordinary vessels. In winter months, ice-class vessels trade profitably in the Baltics and Canada. In the summer, they are the only drybulk ships that can traverse the Northern Sea Route (NSR). The NSR is a route from Europe to Asia through the Arctic that can save nearly two weeks of travel time. When fuel costs are higher and/or day rates are sufficiently elevated, ice-class vessels can justify charging a substantial premium for this savings. The commodity price environment has made the NSR uneconomic since 2015. For now, the ice-class vessels are profitably employed in summer contract business in the region, and PANL has a call option on a potentially lucrative trade route in the future.

At current vessel prices, I estimate PANL nevertheless has a liquidation value approximately equal to its current share price. That assigns no value whatsoever for the long-term contracts or the chartering business. A net asset value approach is imperfect, as it ignores going concern value for activity that is not part of the owned fleet. As discussed before, PANL is unique in the industry in that two-thirds of its fleet is chartered in on a short-term basis. Ignoring this source of earnings is the rough equivalent of valuing a retailer that does not own its real estate at zero! However, it is a good method to assess downside protection.

We have no position and I’ve only done cursory digging into the company. But I haven’t found any major red flags yet. I’ve still got some work to do but there’s a lot of potential asymmetry in this stock if everything checks out.

Quote I’m pondering —

Life is either a daring adventure or nothing. ~ Helen Keller

Not trading related but it’s one of my favorite quotes nonetheless. I have it carved into wood and hanging near the entrance to my cabin. Is that cheesy? Maybe, but I don’t care.

The quote is from Keller’s Let Us Have Faith. Here’s the full paragraph:

Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it. God Himself is not secure, having given man dominion over His works! Avoiding danger is no safer in the long run than outright exposure. The fearful are caught as often as the bold. Faith alone defends. Life is either a daring adventure or nothing. To keep our faces toward change and behave like free spirits in the presence of fate is strength undefeatable.

We’re only here for a short time. We get to choose the games we play and how we play them. We might as well actively make our choices then instead of passively accepting what comes our way. Take some risks and live a little… because, why not?

Qui audet adipiscitur.

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.

Have a great weekend.

Your Macro Operator,

Alex

 

 

Money And The Trader's Paradox

Money And The Trader’s Paradox

Alex here with this week’s Macro Musings.

Just a reminder, we’re releasing the newest issue of our Macro Intelligence Report (MIR) next week. In it we discuss Bitcoin and blockchains. We’re cutting through the hype to show you exactly what the cryptomania is all about. We also have a brand new options strategy we’ll show you how to use on our latest equity picks. With our 60-day money-back guarantee, there’s no risk to come along for the ride. Don’t miss out. Subscribe to the MIR by clicking here.

Our Recent Articles —

A “Marcus Trifecta” Look At Markets: We review the current market through the lense of macro, sentiment, and technicals.

Mark Sellers On Becoming A Great Investor: Do you possess the seven traits required to become a great investor?

Stanley Druckenmiller Video: A quick video on what we can learn from Druck. Let us know if you like these videos and we’ll make more!

Articles I’m reading —

Dalio wrote a fantastic piece on the growing disparity between the ‘Haves’ and ‘Have Nots’ in the US. He does a great job of disaggregating the data to show the economic plight faced by a large and growing group of Americans.

Here’s a (depressing) section from the piece:

  • Now, the average household income for main income earners without a college degree is half that of the average college graduate.
  • The share of whites without college degrees who describe themselves as “not too happy” has doubled since 1990, from 9% to 18%, while for those with college degrees it has remained flat, at around 7%.
  • Since 1980, divorce rates have more than doubled among middle-age whites without college degrees, from 11% to 23%.
  • Prime working-age white males have given up looking for work in record numbers; the number of prime-age white men without college degrees not in the labor force has increased from 7% to 15% since 1980.
  • More broadly, men ages 21 to 30 spend an average of three fewer hours a week working than they did a decade ago; most of that time is spent playing video games.
  • The probability of premature death for whites without college degrees between the ages of 35 and 64 is nearly three times higher than it is for whites with college degrees, and the rate of premature deaths is up by about 25% since 2000 (while it is down for virtually every other demographic group). The US white population is unique among large groups in the developed world for seeing increases in their death rates. Below, we show premature deaths among working-age whites between the ages of 35 and 64. Again, the average obscures the picture. America’s non-white population isn’t seeing such a rise in premature deaths.

Here’s the link. It’s worth a read.

Now onto something not so dour.

This is an awesome write up on the beginnings of Amazon and a sort of ‘survival guide’ for competing retailers put together by Brent Beshore and the team over at Adventure.es. It’s also got some great Bezos quotes with some filters to use when analyzing companies that compete with the 800lb gorilla. Here’s the link along with some words from Bezos:

There’s no rest. We can’t rest on our laurels. Over the last twenty years, there has never been a time when we looked into the future and thought it was clear sailing. We look into the future, and we see always an intensely competitive environment, a world awash with high rates of change and new technologies, all kinds of disruptive influences. It never looks like smooth seas to us from the inside, no matter what it might appear from the outside.

Customer obsession… competitor obsession… business model obsession… product obsession… technology obsession… There are many ways to center a business… Many of them can work. I know and have friends who lead very competitor-obsessed companies and those companies can be successful… I like customer obsession.

Unenumerated is my new favorite blog. It’s written by Nick Szabo, a smart polymath who writes about history, money, law, philosophy, and sometimes completely random but interesting things. Check out this post on the history of metal, money, and odd shiny things (link here).

Video I’m watching —

Here’s a pretty good, short presentation given by Jeff Macke at Stocktoberfest this year on the Golden Age of Retail (link here).

The key takeaway is that retail is not dead, it’s just changing, which is something it’s always done. And the winners will be those who reinvest into their business and products and build/capture customer loyalty. Some of the names he likes are Walmart (WMT) and American Eagle Outfitters (AEO).

And he thinks Macy’s (M) and Victoria’s Secret (LB) are going out of business.

Book I’m reading —

This week I read Money by Eric Lonergan who’s an economist and macro hedge fund manager.

Money And The Trader's Paradox

It’s an excellent book. And it’s short (only 178 pages) which I like because I finished it in a couple of days and that makes me feel super productive. The book is a philosophical take on the nature of money. And while I don’t agree with some of his points (one being that he fails to truly differentiate between both cash and credit which is a very important distinction, imo) it’s a worthy read for his novel takes and insights into the functions and purpose of money.

Here’s an excerpt from the book:

The least obvious function of money is control of the future. We strive to reduce uncertainty in our lives. Life is unlivable if we act and reason in a manner wholly consistent with the truth of how little we know. The future is particularly uncertain, and fraught with risk. Money is the means by which we try to control it. But this property is also paradoxical: human beings crave certainty, but are excited by risk. Money fulfils this desire benignly through inventive and experimental risk-taking, but also facilitates leveraged gambling. Surprisingly, it is this relationship to uncertainty and risk that money shares with religion. Religion also seeks to satisfy these desires. At times it provides the promise of certainty about our purpose or future, but it also pursues the intrinsic appeal of mystery and risk-taking.

And for more of my book recommendations, check out our comprehensive reading list for global macro traders and investors.

Chart(s) I’m looking at —

I don’t know who put this together (someone sent it to me). But the chart serves as a good example of how the market always climbs a wall of worry.

Not trying to disparage any of the names on the chart. Being wrong, often, is an integral part of this game. I’m wrong all the time. But… and this is a big but… I often wonder about some of the more vocal market commentators who keep giving the same biased — and wrong — take on the market year after year after year….


It’s one thing to be wrong and change your mind. But how can you be wrong for years and still give the same take… with the same amount of conviction? Shouldn’t you question your models and assumptions at some point?

Why be an ideological zealot and fight the market versus… maybe… trying to actually understand it?

I have a feeling the answer has nothing to do with wanting to be right and a lot more to do with selling newsletters. Peddling doom and gloom sounds smart and responsible and pays the bills I suppose.

On a completely unrelated note: Sign up for our monthly market report (MIR) where we talk about our secret “X indicator” that’s giving a rare market signal indicating total portfolio violence ahead… the only other times this alarm has triggered was in 08’, 99’, 29’ and the day before the asteroid wiped out the dinosaurs!

Trade I’m looking at —

We first pitched Fiat Chrysler (FCAU) back in April to readers of our MIR. It was part of our European reflation thematic that we were tracking.

Not only did the European reflation thematic work out but so did the bullish call on Fiat — it’s up near 80% since.

Despite such a quick appreciation in the stock’s price, I still think the company is a great value and has the potential to rise much much further. Here’s Scott Miller (who’s one of the best small-cap value fund managers in the game, imo) writing about Fiat in his hedge fund’s (Greenhaven Capital) latest quarterly letter:

In 2014, the company’s five-year plan outlined significant investments that would lead to the accumulation of a significant (€5B+) net cash position by the end of 2018 plus the generation of €9B in EBIT, up from €7B this year and €3.8B in 2014. Sergio has had dozens of chances to walk back the 2018 plan and push it out a year or two. However, he publicly confirmed the forecasts as recently as two weeks ago at a Ferrari event. One reason he may have reconfirmed the plan is that it was built on the U.S. new car market of approximately 16M units (SAAR), which will likely prove conservative for 2018 given the current run rate and the replacements from hurricanes. Sergio has also indicated that Fiat is working on spinning off the parts business, which grew revenue in excess of 10% last quarter and generated a full-year run-rate EBIT of in excess of €500M. If we put an 8x multiple on the parts business, the spinoff should be worth €4B. Add that to the anticipated net cash of €5B, and we are left with a core auto business that, according to the plan (which may be conservative), will generate €8B+ in EBIT next year. FCA’s share price is currently below €15. At the end of 2018, the cash and parts business should represent €6+ per share of value and the core business should add a bit over €5 EBIT per share if it generates €8B in EBIT overall. So, if the plan and the share price both hold, Fiat’s core business, ex-parts and cash, will be trading below 2x EBIT. Of course, the plan may not hold and this math exercise may prove useless, but if they come anywhere close, there remains an enormous amount of value in Fiat Chrysler. Additionally, as the balance sheet strengthens, buybacks or dividends become real possibilities and the company would be an accretive acquisition to any number of manufacturers.

Fiat’s CEO Sergio Marchionne is the best capital allocator in the auto industry. He’s a good jockey to back and Fiat’s current valuation gives one a pretty good margin of safety to do it.

Quote I’m pondering —

The speculator’s chief enemies are always born from within. It is inseparable from human nature to hope and to fear… The successful trader has to fight these two deep seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.     ~ Jesse Livermore

The costliest belief that a speculator can have is that they’re different, they’re special, and were somehow born with the ‘right’ stuff for trading. It’s total nonsense, but it’s part of our human hardwiring. It’s an evolutionary hangover that makes us eternal, albeit illogical, optimists.

This leads to what I call the ‘Trader’s Paradox’, which is: To speculate in markets is to believe that you can outsmart millions of other people, some who are backed by billions of dollars, have the most advanced technology and the smartest researches in the world. But, to survive and win in this game, over the long term, you have to be extremely humble, be aware of and acknowledge your shortcomings, and accept your fallibility.

One has to be both arrogant and yet extraordinarily humble. Tough circle to square.

Becoming a successful speculator is as much about developing self-awareness as it is about studying markets.

So get your zen on and practice some self-reflection.

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.

Have a great weekend.

Your Macro Operator,

Alex