“Marcus Trifecta” Look At Markets

A “Marcus Trifecta” Look At Markets

Over the last few months I’ve written about how we expect growth and inflation to pick up and surprise to the upside in the coming quarters.

This belief is built on positive pressures we’re seeing within the economy as we move into the ‘overheat phase’ and the world benefits from the wealth S-curve tipping point. And with the market holding consensus expectations for continued low inflation, we find this contrarian hypothesis an interesting and potentially lucrative one should it unfold.

But we never wed ourselves to a trade hypothesis because it’s just that, a hypothesis.

Cognitively we’re wired to latch onto single or binary outcomes when thinking and planning for the future. Reality is much messier than that. “Man Plans and God laughs” as the saying goes, which is why we prize mental flexibility above all else.

A favorite trading quote of mine that I often refer to comes from Bruce Kovner. He explains how one should think about markets:

One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong — that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.

The overheat phase is just one alternative scenario that we’re “trying on”. But there are many potential catalysts, such as a China crackdown on leverage or a large illiquidity impact from Treasury cash balance normalization, which could derail this narrative.

This is why we have to routinely turn to the data to see where we are and to get a better idea of where we may be headed.

So let’s take a look at the Marcus “Trifecta” of Macro, Sentiment, and Technicals of the market to get a sense of where the risks and opportunities lie over multiple timeframes.

Macro: Global reflation picking up steam

Global GDP is hockey sticking higher and the world economy is now growing at 4.3%; the highest level in 7 years.

This growth is matched by global trade which is also growing at its fastest pace since 2011.

The pickup in global growth is routinely beating estimates and trailing twelve month global GDP forecast revisions are at their highest levels in over 7 years and trending higher.

The global manufacturing PMI is trending upwards and hitting new cycle time highs. And the latest Markit PMI report suggests growth and inflationary pressures are building. Here’s a few highlights from the report:

National PMI indices signalled expansion in almost all of the nations covered by the survey… Manufacturing production rose at the quickest pace in six months, underpinned by further increases in both total new orders and international trade volumes. 

The continued upturn in new order inflows exerted further pressure on capacity, leading to one of the steepest increases in backlogs of work over the past three-and-a-half years. This in turn encouraged manufacturers to raise employment to the greatest extent since May 2011.

Staffing levels were increased in almost all of the nations covered by the survey… Price pressures intensified in September. Input cost inflation rose sharply to a seven-month high, a key factor underlying the steepest increase in selling prices since May 2011. Companies linked higher purchasing costs to rising commodity prices and increased supply-chain pressures (reflected in a steep lengthening of average vendor lead times).

Global oil demand is routinely beating estimates. We’ve noted over the last few months that demand forecasts were overly pessimistic and low balling likely demand growth. This still remains the case.

Global liquidity is extremely loose and the trend is still towards more easing though this trend should begin to slow at the start of next year.

The data isn’t all great though. In the US corporate buybacks have rolled over. This is typical late cycle behavior. Companies are diverting money from buying back their stocks and using it to invest in new capacity to meet rising demand and increasing competition.

While this sounds good for the economy it’s not good for the market. This acts as a liquidity suck as demand for stocks is pulled and that money goes into CAPEX which will lead to increased capacity and hence lower margins 1-2 years out.

In the US, the ISM is at its highest level since 1987.

This means the economy is running hot but it also suggest things might be a bit overextended in the short to intermediate term. The chart below marks every time over the last 35 years that the ISM has crossed 60 (vertical yellow lines). Each time has coincided with a short-term market top.

According to Goldman Sachs, the average return for the S&P 500 following over a 3 and 6 month period after the ISM has crossed 60, have tended to be weak.

The sample size for this is small. But something to keep in mind.

Sum up: Overall, the data is constructive for the global economy on a cyclic timeframe. Increasing global growth should continue to push economies up against capacity constraints bringing greater cost pressures and leading to rising inflation.

The macro environment remains supportive of risk assets.

Sentiment: A tale of two tales

This market has been a tough read sentiment wise.

There’s definitely pockets of wild speculation, such as in the cryptocurrency market. And equity prices are becoming somewhat richly valued even though there’s still plenty of room for appreciation on an equity risk premium basis.

Depending on what sentiment gauge you look at, market sentiment reads as either extremely frothy or mildly complacent.

I think the case here is that the psychological scars from the GFC run deep and these are just now starting to be overcome.

This market has acted as bad news teflon to everything from dumpster fire politics to the threat of all out nuclear war. And market participants are beginning to read this as an all-clear to up their risk exposure while many perma-bears who’ve missed out on the rally continue to gripe from the sidelines and look for a top that refuses to appear.

Here is the more interesting sentiment and positioning data that I’m tracking at the moment.

According to the latest BofA fund manager survey, the dominant market narrative has shifted from that of “secular stagnation” to “goldilocks” where participants expect continued above trend growth and below trend inflation.

The latest Investors Intelligence sentiment survey has net sentiment (bull – bear) at the survey’s highest level since 1987’.

Fund managers have been upping their exposure to equities.

The global equity net overweight reading is now 45%. The 40-45% zone has historically coincided with equity underperformance versus bonds and cash over the following 3-6 months.

S&P 500 futures sentiment is extended and near a level that typically coincides with reversal points.

And the SPX multiple conditional analysis chart below via Nautilus shows that the probabilities over the 1-3 month timeframe have shifted bearish.

Under this backdrop, positioning appears to be the most crowded in financials and the eurozone. While bonds, energy, and the US are some of the more underweighted assets, according to the BofA survey.

But despite these signs of frothy sentiment and increasing exposure to risk assets, fund managers cash balances remain fairly high and nowhere near the levels that typically mark a cyclical top.

Morgan Stanley’s net leverage ratio paints the same picture. Investor leverage remains muted and stands in stark contrast to the picture of exuberance that the other sentiment/positioning indicators paint.

Sum up: Sentiment and positioning are telling two different stories. It seems that over the short to intermediate term, sentiment and positioning are excessive and will act as a headwind for stocks.

This seems to be particularly true for financials and the eurozone where positioning and expectations appear to be stretched on a short-term basis.

But on a bigger picture basis, I’m not seeing signs of the leverage and low cash balances that indicate investors are overextended and which typically marks a market top.

So over the short-term, sentiment and positioning puts odds on a market pullback. This would reset crowded positioning in long financials and European equities.

Technicals: All Signs Point Up

The market remains technically strong. The trend is up, breadth is good, and credit is bid.

The only negative factor on a technical basis is that the short-term trend is overextended. But this is not a condition for a selloff by itself. Trend persistence is powerful and overextended moves have a tendency to become more overextended.

One thing to watch out for is the current breakdown in bonds. If yields rise significantly over a short period of time then that will likely lead to equity volatility.

Bonds and stocks compete for capital flows. When yields move higher it makes richly valued stocks less attractive to hold. So one indicator we like to track is the 26 week percentage change in Moody’s Baa bond yields.

When yields rise fast over a short period of time and cross the top red dotted line, a market selloff tends to follow shortly after. The change in yields currently remain well below that mark.

Trifecta Conclusion:

  • The macro data points to a continued strengthening cyclical global recovery but with some potential short-term headwinds.
  • Most signs point to increasing growth and inflation in the months ahead.
  • Sentiment and positioning tell two different tales. Sentiment and equity positioning is currently excessive and will act as a headwind for stocks and increase the likelihood of a market pullback. But in the bigger picture, cash balances are not excessively low and leverage is not at levels that are indicative of a top.
  • Technically the market is in a strong uptrend. Over the short-term the market is overextended but trends can remain overextended for a long time.

Looked at holistically, I’d say that the odds are increasing for a nearterm market selloff in the 3-10% range. But bigger picture, we remain in a strong bull market that’s unlikely to end anytime soon. A selloff should be viewed as an opportunity to add to positions, but not something to over react to.

One of the most common errors investors make is to fret too much over the potential for a correction and then chase the trend higher from a position of weakness. This leads to buying and selling at inopportune times.

Instead, we’ll sit long and add positions as opportunities present themselves.

If you’d like to dive deeper into the positions we’re targeting and how we’re playing them, then check out the Macro intelligence Report (MIR).

The MIR is our monthly report that cuts through the noise to alert you of the largest macro trends and how you can profit from them.

In November’s report (which we will release next week) we’re covering all the latest large macro events and how they’ll affect the markets and economy, including:

  • The conclusion of China’s November Congress
  • Shinzo Abe’s win in Japan
  • The new Fed chair
  • And more

If you want to know what these macro shifts mean for you and your investments, 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!

Our November issue will also have a special in-depth look at the mania that is Bitcoin. At this point I’m sure you’ve even heard your Uber driver talk about it…

Is it all hype? Should you buy in? Or is a spectacular crash coming?  

We’ll give you an Operator look at exactly what’s going in the cryptocurrency markets.

And of course, as always, we’ll show you a few of the stocks we’re targeting that are close to rocketing higher.

You won’t want to miss out on these plays… especially with the new option strategy we have to play them!

Remember, there’s no risk to try the MIR. Your subscription comes with a 60-day money-back guarantee. If it’s not right for you, we’ll return your money immediately.

Click Here To Learn More About The MIR!



More Than You Know

Blind Central Bankers and Quantum Overlords (Macro Musings)

Alex here with this week’s Macro Musings.

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

Our Recent Articles —

The Global Macro Renaissance: A paradigm shift is coming that’ll bring the resurgence of global macro trading.

The Randomness Of Return Distributions: Being aware of the randomness embedded in the distribution of markets returns keeps us from falling for the ego trap where we mistake skill for luck, or information for noise.

Precious Metals Are Coiling: Precious metal stocks are coiling in a tight pattern and look set for an explosive move in one direction or another.

Articles I’m reading —

I’m a big fan of the Financial Times Alphaville blog. It’s one of the few sites I check daily. And one of my favorite writers there is Matthew C. Klein. He’s a former Bridgewater analyst and always has some interesting takes on markets and economics.

In his latest article he talks about just how bad central bankers are at their ONE job. He’s referring to price stability (i.e. inflation) and the completely ineffective models (like the Phillips curve) central bankers use because they really don’t know what they’re doing.

Even the most basic of things, such as how to measure inflation, seem to trip up our Game Masters. Here’s a snippet from the piece and the link.

There is at best a tenuous connection between what most people think they spend on and what makes up the bulk of the inflation index. About half of what’s in the Fed’s preferred price index is divorced from actual consumer spending decisions.

(Around 21 percent of America’s personal consumption expenditures deflator is health care and pharmaceuticals — even though most of that spending is done by opaque intermediaries rather than price-conscious consumers. About a sixth is “owners’ imputed rent” plus “financial services furnished without payment”. Groceries and energy prices are more affected by changes in global supply and demand for commodities than domestic wage factors. All data come from table 2.4.5 of the National Income and Product Accounts.)

This is pretty cool. Take 10 minutes and complete this survey (link here). Don’t worry about getting the questions right, just be honest in your confidence levels for each question given.

The results will tell you how confident you should be in your confidence levels. The experiment was created by Andrew and Michael Mauboussin (Michael is one of my favorite market thinkers/writers) and they were inspired by the work of Philip Tetlock, of Superforecaster fame (which by the way, is an excellent book and worth reading).

Over a 1,000 people have now taken the test and the results backup what much research has shown, that we humans tend to be way overconfident in how right we are. Here’s some of the reasons given on why that is, in a Medium post written by Andrew (link here).

Confirmation bias is the tendency to reduce our mental costs by focus on information that confirms our existing hypothesis at the expense of information that might provide evidence against that hypothesis. Our default mode for estimating the validity of a hypothesis is seeing how many facts we can think of in support our view, rather than carefully considering alternative views.

Researchers can exploit this disposition to guide their subjects into logical contradictions. For instance, in one experiment people tended to say they were happier when asked, “Are you happy with your social life?” (this question brings to mind positive examples, such as the fun party you went to last weekend) than when they were asked the complement, “Are you unhappy with your social life” (which directs your attention toward less cheerful thoughts) (Kunda et al. 1993).

In the case of True/False questions, we fall prey to confirmation bias by taking “ownership” of the first answer that comes to mind after a split and then favoring evidence that supports it (page 164 of Stanovich, West, and Toplak 2016).

Think the same things don’t affect our judgement in the market and in picking stocks or latching onto a narrative? Think again…

Lastly, here’s Greenwood Investors latest quarterly letter (link here).They’re a value focused hedge fund and on my *must read* list for HF letters. They talk about their holdings, and mention one of their favorite investments of the moment, which is Trip Advisor (TRIP) — which happens to be one of my favorite trades as well, but I’ve been waiting for stronger tape before building into a larger position.

And lastly, for reals…. here’s a fascinating WSJ article on the progress being made on quantum computing, specifically by Google whom appears to be the leader in the field. FYI it’s paywalled, but here’s the gist of the piece (link here).

That dynamism allows qubits to encode and process more information than bits do. So much more, in fact, that computer scientists say today’s most powerful laptops are closer to abacuses than quantum computers. The computing power of a data center stretching several city blocks could theoretically be achieved by a quantum chip the size of the period at the end of this sentence.

That potential is a result of exponential growth. Adding one bit negligibly increases a classical chip’s computing power, but adding one qubit doubles the power of a quantum chip. A 300-bit classical chip could power (roughly) a basic calculator, but a 300-qubit chip has the computing power of two novemvigintillion bits—a two followed by 90 zeros—a number that exceeds the atoms in the universe.

Not everyone is eager for large-scale, accurate quantum computers to arrive. Everything from credit-card transactions to text messaging is encrypted using an algorithm that relies on factorization, or reverse multiplication. An enormous number—several hundred digits long—acts as a lock on encrypted data, while the number’s two prime factors are the key. This so-called public-key cryptography is used to protect health records, online transactions and vast amounts of other sensitive data because it would take a classical computer years to find those two prime factors. Quantum computers could, in theory, do this almost instantly.

Companies and governments are scrambling to prepare for what some call Y2Q, the year a large-scale, accurate quantum computer arrives, which some experts peg at roughly 2026. When that happens, our most closely guarded digital secrets could become vulnerable.


Video I’m watching —

In spirit of the 30th anniversary of Black Monday during the crash of 87’, I went googling for the infamous Trader documentary about Paul Tudor Jones (PTJ). You can watch it here.  

The video is an hour of documentary gold and I don’t say that lightly. But PTJ hated it and bought up all the VHS copies after its release. Online versions pop up from time to time but then quickly disappear. So watch while you can!

Book I’m reading —

This week I’ve been reading two books: SPQR which is a history of ancient Rome by the talented Mary Beard and I’ve been revisiting More Than You Know by Mauboussin.

I’m only a quarter of the way through SPQR so I’ll save a review for when I’m finished. But I can say that like Beard’s other work, this book is excellent so far.

I always enjoy reading More Than You Know. It feeds my “curious about everything” needs by looking at markets from a multidisciplinary perspective. The following from the book’s publisher sums up the work well:

More Than You Know

“More Than You Know” is a unique blend of practical advice and sound theory, sampling from a wide variety of sources and disciplines. Mauboussin builds on the ideas of visionaries, including Warren Buffett and E. O. Wilson, but also finds wisdom in a broad and deep range of fields, such as casino gambling, horse racing, psychology, and evolutionary biology. He analyzes the strategies of poker experts David Sklansky and Puggy Pearson and pinpoints parallels between mate selection in guppies and stock market booms. For this edition, Mauboussin includes fresh thoughts on human cognition, management assessment, game theory, the role of intuition, and the mechanisms driving the market’s mood swings, and explains what these topics tell us about smart investing.

Here’s a cut from the book:

Paul DePodesta, a former baseball executive and one of the protagonists in Michael Lewis’s Moneyball, tells about playing blackjack in Las Vegas when a guy to his right, sitting on a seventeen, asks for a hit. Everyone at the table stops, and even the dealer asks if he is sure. The player nods yes, and the dealer, of course, produces a four. What did the dealer say? “Nice hit.” Yeah, great hit. That’s just the way you want people to bet-if you work for a casino.

This anecdote draws attention to one of the most fundamental concepts in investing: process versus outcome. In too many cases, investors dwell solely on outcomes without appropriate consideration of process. The focus on results is to some degree understandable. Results, the bottom line, are what ultimately matter. And results are typically easier to assess and more objective than evaluating processes.

But investors often make the critical mistake of assuming that good outcomes are the result of a good process and that bad outcomes imply a bad process. In contrast, the best long-term performers in any probabilistic field-such as investing, sports-team management, and pari-mutuel betting-all emphasize process over outcome.

Jay Russo and Paul Schoemaker illustrate the process-versus-outcome message with a simple two-by-two matrix (see exhibit 1.1). Their point is that because of probabilities, good decisions will sometimes lead to bad outcomes, and bad decisions will sometimes lead to good outcomes-as the hit-on-seventeen story illustrates. Over the long haul, however, process dominates outcome. That’s why a casino “the house” makes money over time.

And for those of you who can’t read good… (10pts if you know this half vague movie reference) here’s a video where Mauboussin talks his book at the Santa Fe Institute (link here).

And for more of my recommended books, click here.

Chart(s) I’m looking at —

This chart shows the nominal expected return of the S&P over the next decade. According to this chart, we can expect an average of 3.5% in NOMINAL returns, on average, over the next 10 years. To this I say, thank God I’m not a constrained long-only US fund manager.

Also, this cool chart from Morgan Stanley. It shows risk premiums per asset classes going back 30 years. Everything is pretty tight, except equities which looks like the only +EV bet left.

Trade I’m looking at —

I just wrote about this in the Strat Brief that goes out to our Collective members, but I’m looking at shippers again. Below is the Baltic Dry Index. It’s making four year highs.

I’m seeing some strong tape developing in a few shipping stocks. And there’s a confluence of factors coming together that suggest there might be trade here:

Here’s the quick skinny on my take

  • Number of environmental regs will boost demand as well as constrain supply.
    • The demand side is coming in the form of stricter Chinese regs on steel production that will require cleaner burning inputs from overseas destinations (ie, Australia and US etc.) to try and combat pollution.
    • The supply side is due to new international fuel standards which aim to reduce the sulfur content in marine fuel. This is going to result in slower shipping speeds which will have the same effect as if the total fleet was cut by up to 20%.

Plus, things like fleet idle capacity are at multi-year lows, scrapings are high, and the order book as a percentage of fleet capacity is at an all-time record low.

Seems to me that we’re headed for a supply constrained environment in the coming years, especially if demand keeps growing like it has been.

Quote I’m pondering —

Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build. ~ Paul Tudor Jones

I think now is a good time to keep this quote front of mind.

In a market that seems to just slowly melt up, where every little dip quickly bought, it behooves us to remember that the Turkey is the fattest the day before Thanksgiving…

This low vol period will someday end and a lot of investors have become complacent and overextended. And just like the turkey, one’s portfolio is the most vulnerable when it’s the most exposed with leveraged longs and paper gains.

This isn’t me being bearish (I’m not). Just a friendly reminder that volatility, like everything else in this game, is cyclical.

So keep your head on a swivel and stay frosty my friends.

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,




The Gold and The Silver Index

Precious Metals: A Coiling Spring

Daily Speculations are for me (Alex) to share some quick thoughts on charts/trades I’m looking at, books and articles I find interesting, or maybe just some photos of my dog Mars. As the name states, I’ll be sharing something daily except for some days when I don’t.

I’ve been keeping a close eye on precious metal stocks. They’re coiling in a tight pattern and look set for an explosive move in one direction or another.

Below is XAU the gold and silver index on a weekly basis.

The Gold and The Silver Index

Here a quick rundown on how I think about precious metals.

  1. Like Ray Dalio has said, “Over the long run, the price of gold approximates the total amount of money in circulation divided by the size of the gold stock. If the market price of gold moves a long way from this level, it may indicate a buying or selling opportunity.”
    1. We can view gold and silver as anti-dollars. Since they are priced in US dollars they tend to move inversely to the greenback. And the fundamentals that drive the dollar higher tend to drive them lower.
  2. A big driver then is the relative changes in the cost of money or the real rate of interest (interest rates adjusted for inflation).
    1. Real interest rates move off of growth and inflation; both realized and expected.
  3. The performance of precious metals over cycles is largely dependent on whether we’re in a “core” driven rally or “periphery” driven rally.    
    1. A core driven rally is when the US (and typically other DMs) are the market leaders relative to emerging markets (periphery). This typically coincides with a global risk-off view where EMs are deemed too risky so capital pools into safer DM markets. This helps drive the dollar higher and keeps inflation low, both of which are bearish for precious metals.
    2. A periphery led rally is the opposite. It’s where EMs are seen as more stable and an attractive investment, at least on a relative basis to core markets. In this case, capital flows into EM countries which leads to a lower dollar, higher commodity prices, higher inflation, and thus lower real rates which is bullish for precious metals.
  4. So much of the movement in precious metals is centered around beliefs about the future value of the dollar. And as a result, beliefs and resulting actions about the risks in holding assets that are priced in currencies other than the dollar.
  5. One of the largest influencers on these beliefs is of course the Game Masters (the Federal Reserve).
    1. Since they control the cost of money and by extension the value of the dollar, what they do and what they signal they’re going to do, matter for precious metals.

We can see on the charts below via Deutsche Bank the relationship between the market’s pricing of future Fed rate hikes and the resulting moves in precious metals; which move inversely to these expectations.

Rate Hike Expectations and Gold

Where are precious metals likely headed from here, then?  

Well it depends on the market’s perception of the Fed’s aggressiveness in hiking interest rates during this tightening cycle.

If the Fed signals a return to a more dovish approach then the dollar will continue to sell off, EMs will continue to outperform DMs, inflation expectations will increase (and expectations over future real rates decrease) and precious metals will perform well; perhaps breaking out to the upside of their large coiling pattern.

If the Fed sticks to its current commitment of tightening in December and the market’s belief in this commitment grows, then the dollar should strengthen, DMs should outperform EMs, and precious metals should perform poorly.

What makes the immediate future of precious metals even more difficult to discern is the coming announcement of Trump’s pick for the next Fed chair. Who it ends up being and how the market reacts could have a dramatic impact on precious metals.

So for me, I’ll continue to watch from the sidelines and wait for more clarity or a strong signal from the market, in the form of a technical breakout, before I take a position.

Drop any questions/comments in the comment section below. And if you’d like to get my thinking, ramblings, and occasional trade ideas, then just put in your John Hancock along with your email below.

Thanks for reading,




Global Macro Renaissance

The Global Macro Renaissance

John Curran was the former head of commodities at Caxton Associates — the hedge fund founded by market wizard Bruce Kovner.

He wrote a great article in Barron’s titled The Coming Renaissance of Macro Investing. In the piece, John writes about what he sees as the coming paradigm shift in markets and how this shift will lead to the resurgence of macro investing. Here’s a snippet from the article:

In meetings with fund managers, asset allocators, and analysts, I have found a virtually universal view that macro investing—investing based on global macroeconomic and political, not security-specific trends—is dead, fueled by investor money exiting the space due to poor returns and historically high fees in relation to performance. This is what traders refer to as capitulation. It occurs when most market participants can’t take advantage of a promising opportunity due to losses, lack of dry powder, or a psychological inability to proceed because of recency bias.

It’s a great article and I suggest you read it. I agree with his main points, especially that we’re on the verge of a macro renaissance (I’ve written about this quite a bit recently) and how the market is ill-positioned for this. In other words, the consensus is wrong.  

Consensus’ in the market has a long history of being wrong. There’s good reason for this.

Expectations become embedded in price. And due to the common knowledge herding tendency of the market, dominant narratives (consensus) eventually become over-embedded in that price. The market becomes priced for a very narrow outcome set so any deviation from this predicted future leads to large price swings.

So while consensus narrative adoption can be self-fulfilling in the short-term (ie, it drives the trend the more popular it becomes) it’s ultimately self-defeating in the end. Because the consensus is built off looking at the past while the future is always changing. And even more importantly, market consensus today always changes the future set of outcomes due to the reflexivity inherent in markets (ie, beliefs today change outcomes tomorrow). Thus we get the boom and bust cycles that George Soros so often talked about.

This is why we want to identify consensus embedded in market prices along with alternative future outcomes and potential catalysts that could shatter this consensus. Popular narrative changes equate to profit opportunities.

The famous hedge fund manager, Michael Steinhardt, wrote about how he and his firm went about doing this in his book No Bull:

I defined variant perception as holding a well-founded view that was meaningfully different from market consensus. I often said that the only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit. Understanding market expectation was at least as important as, and often different from, fundamental knowledge.

As a firm, we soon found that we excelled at this… Having a variant perception can be seen benignly as simply being contrarian. The quintessential difference, that which separates disciplined, intensive analysis from “bottom fishing,” is the degree of conviction one can develop in one’s views. Reaching a level of understanding that allows one to feel competitively informed well ahead of changes in “street” views, even anticipating minor stock price changes, may justify at times making unpopular investments. They will, however, if proved right, result in a return both from perception change as well as valuation adjustment. Nirvana.

I’ve been writing lately about how the budding market consensus is that inflation will remain low… and that this low inflation is due to structural reasons (even though no one’s sure exactly what these structural reasons are). The asymmetry to the inflation trade is to the downside; meaning any surprises to inflation will lead to lower numbers.

This is why bonds are priced so high (and yields so low) and volatility is nonexistent because no one is expecting inflation to rear its ugly head.

But I’ve also written how our intellectually advantaged disparate view, as per our Investment Clock framework, is that inflation is set to materially pick up going into the end of the year as we enter the Overheat phase of the investment cycle.

The inflationary pressures that come with this phase will be exacerbated by the largest increase in the global middle class that the world has ever experienced (+$4 billion people will move up in income over the coming decade). We call this the Wealth S-curve Tipping Point and it’s being primarily driven by India and will result in exponential increases in commodity demand in the years ahead.

Not only are the inflationary pressures building but the skewness of the inflationary trade is building, and not in favor of the market’s narrative. And that’s because of the many political developments around the world that could result in inflationary shocks. (Think the scrapping of NAFTA and the increasing use of tariffs or breakout of war.)

So we have a consensus market view of lower inflation for longer. This narrative is driving the financial news cycle, where journalists consciously or unconsciously cherry pick the data to confirm the market belief while ignoring disconfirming evidence. And this further drives the narrative adoption which is being overly reflected in market prices — and these market prices are likely to be wrong.

This means that it will only take a couple prints of higher inflation numbers to shake the consensus view and drive a large repricing of market assets. This means an asymmetric profit opportunity for global macro traders like us who are positioning on the other side of the market.

And I’m seeing many asymmetric opportunities at the moment. Some we’re in and some we’ll be getting into shortly.

John Curran concluded his Barron’s article with the following:

As my mentor, Bruce Kovner [the founder of Caxton Associates] used to say, “Nobody rings a bell at key turning points.” The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision.

Winners anticipate changes before the market. Right now the market expects low inflation and low volatility for longer. We’re anticipating and positioning otherwise.

If you’re interested in seeing how we’re positioned, check out the Macro Intelligence Report (MIR) here.



Dr. Dre and SiFy

Dr. Dre and SiFy (Macro Musings)

Alex here with this week’s Macro Musings.

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

Our Recent Articles

The Best Trading Podcasts For Global Macro Investors: The list of podcasts we listen to each month. We’ve got both process and news/commentary listed. If you have any suggestions, be sure to list them in the comments!

Articles I’m reading

I loved this piece in the New Yorker where a guy recounts his experience as an investor in the money burning pit that is the New York restaurant business. It’s a great lesson in the competitive nature of business and what differentiates the few winners from the many losers. Lot’s of overlap to successful stock picking.

Here’s an excerpt and you can find the link here.

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

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

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

Oh, and if you’re at all interested in learning how the global funding eurodollar system works, which, if you’re a macro trader, then you should be, then check out the series on the subject written by Biren Shah over at Perseid Macro. Biren’s a member of the MO Collective and is a super smart dude. Here’s the link and to the right is a useful 2D credit matrix from the piece.

2D Model Of Credit

Video I’m watching

The Defiant Ones

I don’t watch much TV. I don’t have time for it and I hate sitting on a couch staring mindlessly at a picture screen. Plus I live in the mountains and don’t have cable.

But, a couple of buddies talked me into watching The Defiant Ones on HBO. It’s a four part mini-doc that recounts the rise of two legends from the music biz, producer Jimmy Lovine and Dr. Dre.

It’s fff’ing good.

I LOVE learning about people who are driven by obsession to create and build difficult things. And I love people who work maniacally to get something just right and hold themselves to a standard that most people can’t fathom.

The doc is full of gold, from a young Bruce Springsteen spending weeks in the recording studio working tirelessly to get the sound of a single drum beat just so… to an early U2 wearing out the tape on the recorder doing version after version of what became their first hit album.

It’s obviously not trading related but it gives you a sense of what it takes to become the best at whatever field you’re in. And in the trading game there’s no real point in actively trading the markets unless you’re trying to be the best.

Like I said, it’s on HBO, go and watch it now. You won’t be disappointed.

And in a similar vein of obsessed people doing extraordinary things, check out this six minute video titled Endurance Test: The 1000 Days (link here).

It gives a preview of “Kaihōgyō” which is a 1000-day pilgrimage performed by Tendai Buddhists. The pilgrimage is so difficult that it’s been completed by less than 50 monks over the last 100 years. And any monk who starts and fails must then take their own life. The pilgrimage involves routines such as 100 consecutive days of 52 mile runs.

That’s nuts… I get shin splints just thinking about it.

Book I’m reading

Fooled by Randomness

This week I’ve been revisiting Nassim Taleb’s Fooled by Randomness. I first read the book maybe 7-8 years ago and thought it a good time to pick up again as I’m working on a piece involving randomness, markets, and trading.

I’ve read all of Taleb’s books. They’re all good and worth reading. But I think this one is my favorite with Antifragile a close second.

Taleb’s a skilled writer and he packs many powerful ideas into a reasonably short 250 page book.

I tab and highlight things I find noteworthy while reading. And this book is one where it seems like every other page is tabbed. There’s too much good stuff to properly summarize. If you’re a trader or are involved in markets someway or another then you just have to pick it up and read it.

Here’s a section where Taleb comments on the “usefulness” of reading financial news.

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

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

Also, go and check this out (link here). Derek Sivers, who’s written some great books, is putting together an enormous collection of book notes on his site. It’s killer.

And if you want a comprehensive reading list for global macro traders, go here.  

Chart I’m looking at

This chart is from the KKR report that I shared up above. It shows what I think is THE most important big picture macro event in markets today. And that’s the “wealth S-curve” as we call it, hitting it’s tipping point. Over the coming decade were going to see the largest increase in the global middle class that the world has ever experienced.

This has huge implications for markets. For example, commodity consumption begins to rise exponentially once populations cross the GDP per capita tipping point. And with commodities trading near secular lows and future capacity cut at record amounts over the last three years… well, things could get interesting.

KKR Report Chart

Trade I’m looking at

Orange bars = stock price, Grey bars = TTM revenue, Green line = TTM EPS, Blue line = Price to CF per share

Trade Chart

SiFy Technologies (SIFY) is an Indian tech conglomerate. It was dumped like a burning turd by institutions back in the early 2000s because of issues with management, abuse of shareholders, and poor capital allocation decisions.

But management was replaced back in 2012 and the company has since pivoted its focus and is now expanding its reach in one of the world’s fasting growing markets.

Over the last five years SIFY has grown revenue at an annual CAGR of 20%. This growth is accelerating. It’s also profitable on an earnings and cash flow basis. It’s even paying a small dividend now. But it’s only trading at just over 1x sales.

I first came across this company a few weeks ago and have been slow to dig into it (I have a lot on my plate at the moment).

It has since climbed over 70+%. But at first look, it seems to me that this could just be the beginning of a much larger move. If everything checks out then there’s no reason why this stock shouldn’t be trading at at least $3+, and probably much more.

But there’s a good chance I’ll come across a major red flag.

A member from our Collective is based out of India and is fairly connected there. So he’s taking a look into the company and management for us. If he gives us the green light then we’ll put on a starter position next week.

Quote I’m pondering

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

This is such an important concept to understand. News lags the narrative and narratives lag prices and prices move off perceptions over future fundamentals. So you’re not going to get your trading signals from reading the news. It’s worthless!

Unless, you approach it from a purely contrarian perspective and skim the news to see what’s priced into the market, already. But either way, news is mostly noise or just old and outdated by the time it gets to the journalist. Markets are priced off the future 12-18 months out. Not what’s happening today or this week.

A trader’s precious time is much better spent reading a book, looking at charts, and working on their process.

So spend less time reading the paper, blogs (except this one!), and fintwittersphere and more time working on the things with high high ROI (ie, process, study, process, study, process, study…).

And almost forgot this one, but here’s a fantastic interview with Daniel Kahneman on the On Being podcast. The site also has a written transcript worth skimming if you don’t have time to listen (link here). And of course if you’d like more trading podcast recommendations, click here.

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

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

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



Driving Current Global Macro Trends

The Wealth S-Curve That’s Driving Current Global Macro Trends

Standard Logistic Sigmoid Function

The graph above shows a logistic function that maps out a sigmoid curve… otherwise known as an S-curve.

This function was popularized by mid-19th century scientist Pierre Francois Verhulst who applied it in his study of population growth.

Verhulst found that population growth follows a certain S-curve. It grows at a steady state until it hits a certain point where it grows exponentially. This exponential growth sustains until the system hits a saturation point where it slows and eventually stops.

The S-curve is one of those strange universal laws that shows up all over the place. Similar to how power laws, as put forth by Pareto, dominate nature and the law of entropy permeates the universe, so to does the S-curve show up time after time in natural systems.

The S-curve has been successfully used in projecting growth in new technology adoption (we used it to analyze Apple’s business and iphone adoption rates), to biological systems, nonlinear geoscience relationships, economics, demography and the list goes on.

You’re probably wondering why I’m talking about some 19th century Belgian scientist, logistic functions, S-curves… and all this jazz.

Fair question.

Here’s the reason:

The S-curve lies at the foundation of what I think will be one of the largest global macro forces driving markets over the next decade.

We’re about to begin seeing its effects very soon.

Put simply, THIS WILL BE BIG.

Let me explain.

French philosopher Auguste Comte, rightly said that “demography is destiny”.

He was referring to national power. But, if you take demography and combine it with rising wealth, then you have economic and market destiny as well.

The IMF wrote recently that, “History has shown that as countries become richer, their commodity consumption rises at an increasing rate before eventually stabilizing at much higher levels.”

The more wealth people have, the more nonessential goods people buy, and the more commodities they consume.

There’s a very interesting and well documented relationship between rising GDP (as noted by GDP per capita) and commodity intensive consumption. In other words, once a country hits a certain level of GDP per capita (ie, wealth) they begin to consume a lot more oil, gas, wheat, copper, livestock etc… This consumption grows exponentially.

Can you guess what type of shape this gdp/commodity consumption relationship takes?

That’s right, an S-curve.

The chart below shows the S-curve (on top) and per capita energy consumption on the bottom.

wealth s-curve

When a country’s GDP per capita hits the ‘Tipping point’, energy consumption begins to rise at an exponential rate.

The same S-curve dynamics occur in agricultural consumption too.

Once a country passes the GDP per capita tipping point, they begin to eat significantly more protein.

Raising livestock is over seven times more grain-intensive than producing for a simple plant based diet. The resulting impact on the agriculture sector is significant.

Keeping track of where the world’s population sits on the GDP per capita S-curve, or let’s call it the wealth S-curve, is important.

If a large portion of the global population is transitioning from the turning point to the zero-growth point (refer to the chart above), or tipping point to turning point, it would have far reaching impacts on not just commodities but global markets as a whole.

For example, one of the largest drivers of the last secular commodity bull market which started in the early 2000s and ended in 2011 was the rise of China.

China, the most populous country in the world with 1.4 billion people, crossed the tipping point of the wealth S-curve in around the early 2000s.

GDP Per Capita S-Curve Tipping Point

From our global macro research we know the tipping point on the wealth S-curve that signals more intensive commodity consumption is in the range of $2,300 to $3,300.

Once a country crosses this point its commodity consumption begins to rise exponentially over the following decades.

Goehring & Rozencwajg Associates (GRA), a commodity fund, explained in their latest quarterly letter how this commodity intensive growth works. Excerpt below:

The average Chinese citizen in 2001 consumed 1.4 barrels of oil over the course of the full year. Total vehicle sales in 2001 averaged 2.2 vehicles per thousand Chinese citizens, while the airlines carried approximately 57 out of every thousand Chinese citizens. In many respects, 2001 was a typical year for Chinese per capita oil demand growth: it grew by 0.02 barrels per person that year, very much in line with the average rate it had grown over the prior 25 years of 0.03 barrels per person per year.

But shortly after it hit its “tipping point” in the S-curve….

The average Chinese citizen consumed 2.2 barrels of oil over the course of the year. Instead of two vehicles being sold per thousand citizens, by 2008 this figure reached nearly nine vehicles. Similarly, total passengers carried by airlines increased from 57 per 1,000 Chinese citizens to nearly 100. Before most analysts realized what had happened, Chinese oil demand growth had quadrupled from 0.03 barrels per person per year to 0.12 barrels per person per year in only seven years.

We can see the S-curve dynamic play out on the chart below.

A 20-year bear market in the Thomson Reuters equal weighted commodity index bottomed in 02’ and began a 11 year secular bull market right as China and its billion plus people crossed the tipping point.

China S-Curve Tipping Point

If you bought the commodity index in 2000, right as the tech bubble was bursting, you would have compounded your money at over 20% annually over the following decade.

Wealth + demographics = market and economic destiny.

Now that you know the massive impact shifting populations along this curve can have on global markets, here are some excerpts from a recent — and widely unnoticed — research paper put out by the Brookings Institute. It’s titled The Unprecedented Expansion of the Global Middle Class (emphasis mine).

There were about 3.2 billion people in the middle class at the end of 2016. This implies that in two to three years there might be a tipping point where a majority of the world’s population, for the first time ever, will live in middle-class or rich households.

The rate of increase of the middle class, in absolute numbers, is approaching its all-time peak. Already, about 140 million are joining the middle class annually and this number could rise to 170 million in five years’ time.

An overwhelming majority of new entrants into the middle class—by my calculations 88 percent of the next billion—will live in Asia.

The implications are stark. By 2022, the middle class could be consuming about $10 trillion more than in 2016; $8 trillion of this incremental spending will be in Asia.

By 2030, global middle-class consumption could be $29 trillion more than in 2015 . Only $1 trillion of that will come from more spending in advanced economies. Today’s lower middle-income countries, including India, Indonesia, and Vietnam, will have middle-class markets that are $15 trillion bigger than today.

We are witnessing the most rapid expansion of the middle class, at a global level, that the world has ever seen. And, as Figure 7 makes clear, the vast majority— almost 90 percent—of the next billion entrants into the global middle class will be in Asia: 380 million Indians, 350 million Chinese, and 210 million other Asians.

Brooking’s definition of global middle class income is approximately the same as our wealth S-curve tipping point. And as the chart above shows…

The new S-curve driver of this commodity intensive growth trend is going to be India.

India is nearing the tipping point on the wealth S-curve. It’s GDP per capita is exactly where China’s was in 2001, right before the last commodity bull market began. India has a population of over 1.3 billion people. Just 60 million shy of China’s.

GRA also shared the following in its quarterly letter (emphasis mine).

From 1970 to 2000, the average number of people going through the S-Curve tipping point globally was relatively stable at approximately 700 million. If we are correct, then we are on the verge of having four billion people globally all going through the S-Curve tipping point together. Simply put, we are potentially entering the largest period of commodity demand growth the global economy has ever experienced.

And as we’re about to enter the largest period of commodity demand growth the global economy has ever experienced, how exactly are commodities fairing?

Commodities have only been priced this low, relative to financial assets (as represented by the Dow), two other times in the last 100 years.

100 Years of Commodity Valuation

This is one of those things that makes you go “hmm….”


The market is clearly not seeing the forest from the trees in the commodity market and it’s about to be caught offsides.

And remember our discussion from last month’s Macro Intelligence Report (MIR) about how we’re in the third phase of the Investment Clock cycle, otherwise known as the overheat phase, where commodities are the best performing asset?

Here’s a quick refresher from that report.

Four Phases of Investment Clock

Phase 3 – Overheat phase: Productivity growth slows and the GDP gap closes causing the economy to bump up against supply constraints. This causes inflation to rise. Rising inflation spurs the central bank to hikes rates. As a result, the yield curve begins flattening. With high growth and high inflation stocks still perform but not as well as in phase 2. Volatility returns as bond yields rise and stocks compete with higher yields for capital flows. In this phase, commodities are the best asset class and cyclical value the best equity sector.

We have MASSIVE secular tailwinds lining up with third phase drivers plus commodities at 100-year lows relative to the stock market.  

Am I missing anything?

Oh, yeah, there’s sentiment. It’s negative…  

Not surprising given the horrid price action in commodities over the last five years. The BofA fund manager survey has hedge funds holding very low levels of commodities relative to historical positioning.

Morgan Stanley recently shared that the long/short equity managers they broker for have rarely had lower exposure to energy stocks than they do now. And the ratio of longs to shorts is in the bottom decile of the past seven years!

Energy Long/Short Ratio

As a contrarian, I love situations like this.

Finding and executing great trades is about peeling back the curtains of time and peering into the future and putting the pieces of the puzzle together better and faster than the market.

This is one of those times, where the market’s narrative has been carried to an extreme and is based off a past that’s no longer relevant and differs completely from the coming future.  

Macro trading legend and former Soros compatriot, Jim Rogers, said the key to his success was that he “waits until there’s money lying in the corner, and then all I have to do is go over there and pick it up.”

Well, right now, I see a big pile of commodity backed money lying over in the corner. And all we have to do is start picking it up!

We did this last month, by initiating our long position with an energy basket. In that report we recommended RIG, CRR, and COG. We bought those and also threw in WTI and ESV which our Collective members were notified of.

The basket is off to a good start. Since the MIR’s publication RIG’s up 27%, CRR +18%, COG +0.5%, ESV +30%, and WTI +57% (climbing as high as 90% at one point).

We believe, for the reasons stated above, that this is just the start of the run in the commodity market.

We expect a lot of up and down action in our holdings. This is usual at the start of a new bull market. But we’ll hold through the volatility, while respecting our risk points of course. And we’ll look to build on our energy plays as well as other commodities we’re stalking and which I will talk to you about next.


  • The S-curve lies at the foundation of one of the largest macroeconomic forces driving markets over the next decade.
  • When a country’s GDP per capita hits the ‘Tipping point’ on the S-curve, commodity consumption begins to rise at an exponential rate.
  • The new S-curve driver of this commodity intensive growth trend is going to be India.
  • We have MASSIVE secular tailwinds lining up with third phase drivers (Investment Clock) plus commodities at 100-year lows relative to the stock market. This will propel a commodity bull market forward.

If you’re interested in learning more about the Macro Intelligence Report (MIR), click here.



A.I. Bets & All-Time Low Bond Volatility

A.I. Bets & All-Time Low Bond Volatility (Macro Musings)

Tyler here with this week’s Macro Musings.

Just a reminder, we’re releasing the newest issue of our Macro Intelligence Report (MIR) early next week. In it we’re covering a basket of agricultural stocks that are ready to rip just like our IPI play (if you don’t know what I’m talking about, read our article below). Phase 3, the Overheat Phase, is a target rich environment. There’s a lot of profits to be made. If you’d like to come along for the ride, make sure you subscribe to the MIR by clicking here.

Our Recent Articles —

The Overheat Phase: We review the Investment Clock theory and discuss how we’ve already used it to score huge profits on various commodity plays.

Mid-Year Performance Reviews (Part 1 / Part 2): If you haven’t seen them already, we published the mid-year results of our two portfolios — Strat Ops and Spec Ops. As part of our 100% transparency promise, you see all our results… the winners… and more importantly… the losers as well.

Article I’m reading —

The Massive Hedge Fund Betting on AI

I go through bouts of extreme interest in AI followed by extreme disinterest of it. I agree that AI will only become a larger and larger force in finance, the field is perfectly suited for it. But at the same time it’s probably not going to make as big of a change in the industry as some are predicting.

This article gives a good update on how the technology is weaving its way through the industry including multi-billion dollar funds once scared of it.

Of course AI is only as good as the amount and quality of data you can feed it which is why we’re in the middle of a data renaissance.

The article says, “An estimated 90 percent of all the data in existence today were created in the past two years.”


Podcast I’m listening to —

Chat With Traders Episode 141: Software millionaire fooled by ‘the dream’ and saved by global macro

This pod starts off exploring the backstory of Erik Townsend, the producer of the MacroVoices podcast.

Erik made millions during the tech bubble, cashed out, and bought a super-yacht only to discover that “ballin on a boat” gets incredibly old and unfulfilling after a while.

He ditched the Caribbean lifestyle and from there devoted his life to financial markets.

Erik has some interesting big picture theories on how he thinks the next 30 years will play out, as well as a grim prediction for the future of cryptocurrency.

Chart I’m looking at —

Information already known by the market is priced in so there is no profit opportunity. Instead of blindly looking at historical data we need to anticipate future scenarios that can surprise markets.

Surprise indices help us find what has been surprising markets right now so we can better understand the dominant narrative.

Global GDP has been consistently surprising higher which tells us that the market has still not gone all in on the “reflation” trade. There’s plenty of market strategists out there who can’t let go of their bearish bias.

Trade I’m looking at —

Bond volatility is currently at all time lows as seen in the chart below.

This is extremely counter-intuitive since we are about to enter one of the most uncertain periods for bond markets since the GFC. The Fed will begin Quantitative Tightening next month and I have a hard time believing that it won’t cause some degree of volatility.

No one knows what it’s like to trade bonds without the perpetual Fed bid. There’s going to be some volatility until people figure out how to cope without the punch bowl.

Quote I’m pondering —

“Whether you like it or not, radical transparency and algorithmic decision-making is coming at you fast, and it’s going to change your life.” – Ray Dalio

I think we’re going to see a huge shift in how companies organize and decide over the next decade. Ray Dalio has proven through his success that algorithmic data backed decision making is more effective than a boss or manager making all the decisions.

Companies won’t be able to compete at the margin if they rely on a single biased human with a tiny memory to make key decisions on how to best allocate time, energy, and money.

There’s two paths ahead I see for anyone wanting to win big from this transition rather than lose big.

Either you,

  1. Learn to program the machines or
  2. Focus on relationship building

Obviously all these new algos will need to be serviced, improved upon and maintained. But if that’s not your thing, there will always be a need in business for putting a smile on someone else’s face and creating that client connection.

Thanks for reading.

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



Preparing For The Macro Regime Shift To The “Overheat Phase”

Legendary speculator, Jesse Livermore, credits the following realization with transforming his trading game and turning him into one of the greats. He said:

Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities.

A man must study general conditions, to size them so as to be able to anticipate probabilities….

This truth was realized by market wizard Michael Marcus over half a century later when he came up with the “Marcus Trifecta of technicals, fundamentals, and market tone.” Both traders, like all the greats, were aware of the importance of macro and keeping a finger to the wind to anticipate major changes in general conditions.

The importance of understanding general conditions is why we always start from a top down perspective. We know the majority of our market returns will be driven by macro factors.

And more importantly, we need to be white on rice focused on the inevitable changes in these conditions. It’s in correctly anticipating these large transitions — or what we refer to as inflection points —  ahead of the market where the macro speculator makes his beans.

We’re seeing one of these macro inflection points play out right now. The market is not prepared for it. This means it’s time for aware macro traders to reap their harvest.

I’m referring to the turning of the Investment Clock. And the return to higher trendline growth and inflation, as the business cycle progresses to the later stages and economic capacity tightens.

This is the dominant macro thematic we are tracking and which will play out over the next 12-months. It’ll have numerous and drastic impacts on every area of global markets.

It’s going to change the trend in currencies, precious metals, commodities, big tech stocks, bonds, emerging market stocks and so on. It’s a straight up macro regime change; the era of low volatility and subsequent melt up in equities is coming to an end.

For those of you not familiar with the Investment Clock concept you can read a full rundown from one of our earlier articles, here. And here’s an overview of the idea.

The Investment Clock splits the business cycle into four phases. Each phase is comprised of the direction of growth and inflation relative to their trends. You can see these four phases in the chart below via Merrill Lynch.

Here’s a breakdown of each phase.

Phase 1 – Reflation phase: Growth is sluggish and inflation is low. This phase occurs during the heart of a bear market. The economy is plagued by excess capacity and falling demand. This keeps commodity prices low and pulls down inflation. The yield curve steepens as the central bank lowers short-term rates in an attempt to stimulate growth and inflation. Bonds are the best asset class in this phase.

Phase 2 – Recovery phase: The central bank’s easing takes effect and begins driving growth to above the trend rate. Though growth picks up, inflation remains low because there’s still excess capacity. Rising growth and low inflation is the goldilocks phase of every cycle. Stocks are the best asset class in this phase.

Phase 3 – Overheat phase: Productivity growth slows and the GDP gap closes causing the economy to bump up against supply constraints. This causes inflation to rise. Rising inflation spurs the central bank to hikes rates. As a result, the yield curve begins flattening. With high growth and high inflation stocks still perform but not as well as in phase 2. Volatility returns as bond yields rise and stocks compete with higher yields for capital flows. In this phase, commodities are the best asset class.

Phase 4 – Stagflation phase: GDP growth slows but inflation remains high (sidenote: most bear markets are preceded by a 100%+ increase in the price of oil which drives inflation up and causes central banks to tighten). Productivity dives and a wage-price spiral develops as companies raise prices to protect compressing margins. This goes on until there’s a sharp rise in unemployment which breaks the cycle. Central banks keep rates high until they reign in inflation. This causes the yield curve to invert. During this phase, cash is the best asset.

This was pulled from our September Macro Intelligence Report (MIR) that went out to subscribers on Sep 1st.

In the report we detailed how the data is indicating we’ve reached a macro inflection point and are transitioning to Phase 3, or the Overheat phase, of the Investment Clock.

This means that both GDP growth and inflation will begin to pick up in the coming quarters. We also noted how the market, or central bankers, weren’t positioned for this inflection point at all. In fact, we’re seeing this phase shift at the sametime that the popular narrative of “secular low inflation for longer” has become consensus.

Here are two examples, out of many, of the data we’re tracking that tell us both higher growth and higher inflation are around the corner.

In market terms, this is called a FAT PITCH.

Are you ready to swing?

In Phase 3, the Overheat phase, commodities and cyclical value stocks outperform. This is because these asset classes both benefit from tighter economic capacity plus stronger growth and inflation.

In our September MIR, in true contrarian fashion, we recommended loading up on a basket of unloved energy stocks.

This basket consisted of RIG, CRR, COG, ESV, and WTI (one of the largest positions in our portfolio). It’s been on a tear, with some of the stocks up 20 to 50+% (in WTI’s case). We believe this is just the beginning of the move.

In our October MIR which we’ll be putting out next week we’re going to discuss another trade basket that we think has even more of a runway than the our energy play — agriculture.

Similar to energy, agriculture has suffered from a long multi-year bear market and is now trading at secular lows relative to stocks, last seen in 2000 — right before Ags took off on a 12 year bull run.

There are many reasons to like this space.

Sentiment is horrible. Investors won’t go near it with a 10-foot pole and a friend holding.

A number of formerly established commodity trading shops have been shuttering their doors and letting people go — another tell-tale sign of a bottom.

Plus, there’s some new macro developments, in addition to the coming pickup in growth and inflation that will spur the Ag sector off its lows and to new highs.

Some of these have to do with coming ethanol fuel blends in China and other forces that will significantly boost demand. We’ll cover those in the coming MIR.

Like all extreme contrarian plays, the long Ag theme will take some serious sifting through the chaff to get at the golden wheat — there’s a lot of landmines out there.

Instead of playing the underlying commodities in the futures market, we’re excited about a basket of related equities which will run significantly higher once soft commodities gain their footing.

An example of one of these plays is Intrepid Potash (IPI) — a stock that our readers are familiar with.

IPI, along with the rest of Ag related stocks, experienced a soul crushing bear market over the last five years. At one point, IPI had fallen over 98% from its 2012 highs.

But… one investor’s trash is another’s treasure.

We first recommended IPI last November, when it was trading at $1.29 a share. It’s since gone up 220+% to over $4.20 a share and counting. It’s one of our largest portfolio holdings.

There are a number of things to love about this stock.

Not only does it benefit from the macro transition to the Overheat phase which will pull certain commodities higher. But it has exposure to two horribly beaten down sectors that will outperform over the coming year. These being agriculture, of course, but also energy.

And this is because IPI is also a secret water play.

The company has the largest private water rights in the state of New Mexico. Fracking is extremely water intensive work and generally takes place in areas where water is scarce. IPI is situated on the southern portion of New Mexico… along the Permian Basin… which is the most profitable shale field in the country.

Management expects to be pulling in around $30M next year on just water sales alone. This is an extremely high margined revenue source because it cost the company virtually nothing to sell.

So with IPI you get the sole US based producer of potash in a commodity that is bottoming but with the downside protection from its water rights. Owning the stock is essentially like holding a call option on the Ag market with no expiry.

Huge upside, limited downside.

These are the kinds of plays we really like here at Macro Ops. And we’re seeing a number of them at the moment.

Phase 3 is a target rich environment, as we like to say.

The Ag basket that we’ll be writing about in next week’s MIR will cover, in detail, the other names that we’re buying and which we believe have IPI like potential.

“To the victors go the spoils!” and to collect spoils in this environment you have to follow Livermore’s advice, heed the “general conditions” and anticipate the major moves.

The phase shift and commodity rebound is just beginning… so if you’re ready to collect the spoils with us, make sure you subscribe to the Macro Intelligence Report (MIR).

The MIR is our monthly report that cuts through the noise to keep you informed of the largest macro trends and how you can profit from them.

From what you’ve already learned about the Overheat Phase and its effect on commodity stocks, you understand how effective our top-down macro research process is. You see how we source our trades and why they are so profitable.

If you’re interested in joining our team to continue finding lucrative plays like IPI, subscribe by clicking the link below and scrolling to the bottom of the page:

Click Here To Learn More About The MIR!

Our October issue will be released early next week. Make sure you’re subscribed so you don’t miss your chance to enter the basket of agricultural stocks poised to take off as the Overheat Phase ticks forward. There’s a good chance these plays will make our bottom line this year…

Your subscription also comes with a 60-day money-back guarantee. That means there’s zero risk for you to give the MIR a try. If you feel it’s not right for you, we’ll return your money immediately.

Click Here To Learn More About The MIR!



Spec Ops Performance Since Inception

Macro Ops 2017 Mid-Year Performance Review Part 2 – Spec Ops

(You can read Part 1 of our performance review here.)
Spec Ops Performance Since Inception
Return Metrics *Through last full trading week of July

YTD: 23.41%

12-Month Return: 35.58%

Inception: 41.84%

Annual Vol: 7.50%

Sharpe Ratio: 3.00

Max DD: -1.92%

Tyler from Macro Ops here.

Spec Ops has been crushing it since inception. It’s made over 40% with a max drawdown under 2%. Read more

Strat Ops Composite Performance

Macro Ops 2017 Mid-Year Performance Review Part 1 – Strat Ops

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