The Crypto Comeback and A Trader’s 7 Figure Payday

Tyler here with your latest Friday Macro Musings…

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

Special Announcement —

 Macro Ops team member Chris D. has officially launched his first course on systems trading called The Consistently Profitable Trader.

As an introductory offer you can grab a copy of this course for $79 until this Sunday 11:59PM EST. After Sunday the price will ratchet higher to $149.

If you want to explore the world of systematic trading then check out this course!

Click here to access The Consistently Profitable Trader.

Recent Articles/Podcasts/Videos —

 Something That Everyone Knows Isn’t Worth Anything — Alex discusses reflexive market dynamics and how this property leads to a pendulum motion from extreme bullish sentiment to extreme bearish sentiment. Using this framework he demonstrates how the bond bear narrative from 2018 was really a false trend.

Market Update: Expanding Cone of Uncertainty — With trade war tensions mounting market volatility is on the rise. Alex explains what’s going on and argues why now is a good time to start derisking your book.

Option Trading With Darring Johnson — Chris D. speaks with Macro Ops Collective member Darring Johnson. Darrin is an independent trader who specializes in options and volatility. If you want to know how an expert option trader views the market then give this episode a listen. So far it’s been one of our most popular podcasts!

Articles I’m reading —

 You Can Now Pay With Cryptocurrency At Whole Foods — Despite the crypto crash, startups have been working behind the scenes to move the technology forward. Cameron and Tyler Winklevoss, founders of crypto exchange Gemini, have gotten a deal together that will allow consumers to pay with crypto on the same scanners that take things like Apple Pay.

I think we need to pay attention to the crypto narrative again. The chart of bitcoin has been moving up and we are starting to see bullish media coverage. Like it or hate it crypto is a great trading market.

The latest Graham & Doddsville letter is out (link here). This quarter’s issue is filled with the usual investment write-ups and interviews, the most notable being their sit down with John Hempton of Bronte Capital (twitter handle: @John_Hempton). Here’s a section from the chat.

G&D: That´s fascinating. How would you describe your investment philosophy?

JH: The first question Kerr Neilson asks on any business is, “What makes you want to own this in the next two years, five years, and ten years?” In my case, it is usually a company that makes a widget that is a small yet important part of a bigger thing, has high switching costs, and has incrementally improved over time. I call this the trifecta. There´s an old saying for this: “There are riches in niches.” Warren Buffett does this all the time. Buffett talks about the six big non-insurance businesses that were about 70- 80% of the non-insurance profits at Berkshire. One of them, International Metalworking Companies, makes tiny cutting tools that go on the end of blades. If you can make a cutting tool that speeds the whole factory up, you can charge a lot of money. You get pricing power from being a small part of the bigger thing, and the switching cost is high because you have to reprogram all the computer-driven blades. IMC has a 45% operating margin, which is almost twice the margin of Apple. It´s an astonishingly good business.

 Lastly, stop what you’re doing and read this awesome post from Melting Asphalt on diffusion and networks.

Charts I’m Looking At—

 Bitcoin is on a tear…

Bitcoin has rallied over 140% from its 2018 lows which makes it the best performing macro asset of 2019 by a mile. What’s even more impressive is the volume numbers coming in. This rally has had higher volume than the Q4 2017 blow off top. (Volume in gray below) Growing volumes is a great sign for crypto!

Finally, the “alt” coins have taken off as well with increased volume from the 2017 bubble highs.

Chris D., our resident systematic trader, has fired up his crypto trading system again to take advantage of the renewed interest. We are working to push out crypto related trade intel because when these things go into bull markets, there is a lot of volatility and therefore a lot of opportunity for a swing trader.

Podcast I’m Listening To —

 Chat With Traders: Opportunity meets experience—defining moments of one traders’ career w/ Nishant Porbanderwalla

Nishant, a prop trader in Austin Texas (also the location of the MO HQ), gave a brilliant interview on Aaron Fifield’s Chat With Traders Podcast.

He talks about how the markets have changed over the years since he first started and how many of the edges he initially employed in his trading, no longer work.

He also has a great story about his single largest trading day ever during the August 2015 flash crash. He along with many other traders at the firm earned a seven-figure payday by buying ETFs and stocks that opened up way lower than what the E-mini S&P 500 contract was implying.

That flash crash part starts at 37:25. I’ve heard this story a few times from some of the traders around town here and it’s pretty nuts. Check it out.

Trade I’m Considering —

Whenever VIX trades into the 20s I like to open my dip-buy playbook and pick out the best trade expression I can find.

Elevated vol makes for good premium sells. And I think if VIX can get back up to 20 selling a SPX put spread 60-90 days out for some premium collection is the play.

That should also coincide with a double bottom test in SPX.

I like the out of the money put spread for a few reasons:

  1. We get to take advantage of elevated implied volatility. When VIX rises put premiums become more expensive and shorting fat premiums makes for a good risk/reward.
  2. At worst I see the market in a choppy range bound environment for the next three months. I believe it’s unlikely we see a retest of the Christmas Eve lows when positioning is as neutral as it is currently.
  3. At best we bounce hard and go to new highs.

The put spread should benefit in both scenarios, if the market goes to new highs we’ll collect the full premium of the short put spreads. Should the market chop we still have a chance at collecting all of the premium as long as spot expires above the 2750 level.

Lastly, by selling one put and buying a put further out of the money the trade has capped risk. If VIX goes crazy again and hits 55, we’re protected from an outsized loss.

Quote I’m pondering —

For eighteen years I followed the sea, took what it offered. It has brought me shipwreck and success, sorrow, danger, and unutterable happiness. ~ Henry de Monfreid

 Sounds a lot like trading!

That’s it for this week’s macro musings.

If you’re not already, be sure to follow me on Twitter: @TylerHKling. I post my mindless drivel there daily.

Have a great weekend.

Standard Deviations

Modern Monetary Theory With Pinot Noir

Tyler here with your latest Friday Macro Musings…

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

Recent Articles/Podcasts —

Lessons From A Trading Great: Linda Bradford Raschke — Tyler breaks down market wizard Linda Bradford Raschke’s best trading advice.

Disney, Memetics, and Markets — Alex updates the Disney growth narrative, a theme we’ve been tracking here at Macro Ops for over a year. On the news of streaming service Disney+, the stock has made its way to 52-week highs.

Breaking Down A Market Edge — Tyler uses Michael Mauboussin’s BAIT acronym to break down what it means to have an edge in financial markets.

Articles I’m reading —

If you haven’t already go check out the Macro Tourist’s latest pieces on Modern Monetary Theory. Part 1 here and Part 2 here.

In this series, Kevin takes the side of the MMT professors and explains how government deficits may actually not matter as much as we all think if the central bank is the one holding the debt. Debt with no consequences sounds blasphemous. But perhaps there’s some truth to this? This question is worth exploring and Kevin Muir does a great job tackling this point.

The most interesting section of part 1 was how Macro Tourist explains bond issuance within the confines of MMT theory (emphasis mine).

Well, let’s think about this bond issuance within the confines of MMT theory. The government did not issue war bonds to finance the spending, but to alter the private sector’s behavior. Recall, the only constraint is in real terms. The government did not want individuals competing by buying goods that were needed in the war. So the government issued War Bonds to change their spending not to finance the war.

The important thing to realize is that governments always spend first and that bond issuance is simply a way of controlling inflation and altering private sector behavior.

That last part was an “ah-ha” moment for me.

Part 2 focuses on how to position if MMT were adopted full stop and the era of fiscal-austerity-monetary-easing came to an end.

Here’s Kein’s favorite trades for an MMT world.

  • Sell US Bonds
  • Put on a steepener
  • Buy real assets
  • Prioritize value over growth.

Read his full rationale here.

Next, I thoroughly enjoyed A Nobel Prize-winning psychologist says most people don’t really want to be happy from Quartz which explains Daniel Kahneman’s theory on happiness.

Kahneman claims that humans, for the most part, are not in search of happiness. Instead, they are looking for satisfaction. Happiness is a fleeting emotion, whereas satisfaction is a long-term feeling of fulfillment and accomplishment. Here’s a snippet from the article.

The key here is memory. Satisfaction is retrospective. Happiness occurs in real time. In Kahneman’s work, he found that people tell themselves a story about their lives, which may or may not add up to a pleasing tale. Yet, our day-to-day experiences yield positive feelings that may not advance that longer story, necessarily. Memory is enduring. Feelings pass. Many of our happiest moments aren’t preserved—they’re not all caught on camera but just happen. And then they’re gone.

So it’s not really the plane ride to Jamaica or that feeling after purchasing a brand new sports car that we are after. It’s about pushing forward our life’s narrative. If the narrative starts to derail and go to a place we didn’t envision we become miserable. If the narrative maintains course than we can remain satisfied on a day-to-day basis.

I think taking a hard look at the narratives we tell ourselves is important and could do wonders for our quality of life.

Video I’m Watching

The Macro View on Gold (w/ Tavi Costa) | Trade Ideas — Tavi’s a macro analyst out of Crescat Capital. In this presentation, he discusses his bullish view on gold and suggests buying GLD with a stop at $111 and a target at $145.

We don’t agree with his thesis, but I enjoyed using the presentation as a Red Team tool.

Charts I’m Looking At—

Check out the performance spread between value and growth.  

We are now over 2.5 standard deviations away from historical averages, which is greater than the dotcom bubble.

Who knows when this trend will reverse (maybe when we finally get a bear market). But this info is useful for those who are allocating capital on a longer time horizon. If you have time on your side it might make sense to start trimming some growth names and putting capital in stuff like this.

Book I’m Reading —

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market

Dark Pools is an informative read for anyone wanting to know the history behind how we went from big guys screaming at each other in the pits to computers executing trades in microseconds. Scott Patterson, in my opinion, is best in class when it comes to making arcane financial concepts entertaining.

Wine I’m Tasting —

I felt like mixing it up this week, so I want to share with you this fantastic pinot noir I tried from the Willamette Valley in Oregon.

It’s called Illahe. I’m not a wine expert but I found myself thoroughly enjoying this one. I confirmed with a few of my sommelier friends that this part of Oregon is famous for pinots. Anywho gives it a taste, you won’t be disappointed!

Trade I’m Considering —

As I was combing through charts last weekend I stumbled upon Zynga Inc. (ZNGA).

I haven’t watched this stock since it’s epic collapse post-IPO. I remember hearing my neighbor constantly complaining during that time. He had put a significant amount of his savings into the stock right when it IPO’d and continued to hold the bag for the entirety of its subsequent 80% collapse.

Anyway, ZNGA is back on my radar as the stock is trending up and out of a long-term base and making new multi-year highs.

A quick dive into the fundamentals tells us that a turnaround looks to be in the works here.

Zynga initially hit it big with their Facebook game “Farmville”. But since the stock crashed, they’ve severed ties with the social media giant and now focus on publishing their own games and apps for mobile devices. Their strategy is now centered around releasing free-to-play games and monetizing via advertising or in-game purchases. A new initiative is to make “watch-to-earn” offers which give players virtual currency bonuses if they choose to watch an ad.

Zynga has also decided to branch out, license IP, and launch some games based on Harry Potter, Game of Thrones, and Star Wars. These titles won’t come to market until late 2019 or 2020.

So far, the new strategy seems to be working. But we still have plenty of digging to do before we put on a position.

Quote I’m pondering —

Talent hits a target no one else can hit; Genius hits a target no one else can see. ~ Arthur Schopenhauer

That’s it for this week’s macro musings.

If you’re not already, be sure to follow me on Twitter: @TylerHKling. I post my mindless drivel there daily.

Have a great weekend.

A Billionaire Horse Gambler and Bubbly Chinese Sentiment

Alex here with your latest Friday Macro Musings…

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

Recent Articles/Podcasts —

Target Hospitality: A Former SPAC IPO With Multiple Ways To Win — Mr. Bean reveals his latest deep value play, a SPAC IPO that focuses on providing temporary housing solutions for oil field workers.  

Investing In Shipping Stocks: Lessons From Walter Schloss — Mr. Bean shares the wisdom of Walter Schloss, a legendary value investor who compounded capital at 16.4% a year for 32 straight years. He then uses Schloss’s stock picking framework to dissect potential value in the shipping space.

Minsky and the Levy/Kalecki Profit Equation — Alex answers the question “where do profits come from?” in his latest high level macro essay. In it he discusses the systematic issues that threaten the stability of the US economy.

Macro Ops Podcast: The Global Macro Picture Is Read To Explode with Alex Barrow — Host Chris D. talks with Alex about the developing trends in the major macro markets.

Articles I’m reading —

Our friend Kean Chan put out a great writeup on the horse-racing gambler who earned nearly a billion dollars over his betting career. Kean’s piece is based off a profile done by Bloomberg last year. I highly recommend you read both. Here’s Kean’s article and the one by Bloomberg.

The gambler in question is Eric Benter, a Pittsburgh native who’s got to be a runner up for The Most Interesting Man in The World title.  

Benter spent his early years hitchhiking across Europe on down to Egypt and even driving across Russia at one point. At 22, after reading Edward Thorp’s Beat The Dealer, he dropped out of college and moved to Vegas where got a $3 an hour job clerking at 7-11 so he could count cards in his off time. He joined a blackjack team which ended up being so successful that they were chased out of town and blacklisted from Vegas casinos for life. From there, Benter and one of his card counting buddies, went to the race tracks in Hong Kong with the goal to do what most said was impossible, quantitatively crack horse betting.

They did… And the two literally wrote the code that would form the base of a new budding industry, quantitative sports gambling. Give both pieces a read, you’ll be happy you did.

Moving onto China. Dinny McMahon, who wrote one of my favorite recent books on the country titled China’s Great Wall of Debt, put out a solid writeup on the Macro Polo site where he discusses China’s NPL (non-performing loan) problem and what it’s doing to address it.

It seems that China is operating on the economic principle that a “rolling loan gathers no loss”. The CCP is carrying out a multi-pronged approach of opacity (no one knows the true level of NPLs in the economy), passing the buck (spreading the bad assets amongst private and local governments), and then providing countervailing liquidity injections to keep the house of cards from cratering in on itself. And so far, it seems to be working as well as one could hope.

Here’s McMahon making an important point regarding China’s most recent stimulus and their overarching objective:

It would be inaccurate to interpret an increase in the debt level as an abandonment of the deleveraging campaign. In fact, the very structure of the current stimulus speaks to Beijing’s commitment to cleaning up the financial system. Rather than a free-for-all, where banks and shadow banks are given the freedom to shovel as much credit as possible into the economy—which is broadly the approach to stimulus pursued repeatedly between 2009 and 2016—the current effort is targeted and limited only to banks (that have been chastened since their freewheeling days) and the bond market. The current effort to stimulate the economy has been designed specifically to avoid undoing the deleveraging of the last two years.

…Unquestionably, Beijing’s long-term goal is to reduce—or at least stabilize—debt levels relative to the size of the economy. However, given that China’s economic model is still dependent upon debt-enabled investment to deliver politically acceptable levels of growth, such a reduction is not likely to be feasible in the short term. Hence, the great success of financial reform has been—rather counterintuitively—to make the system less risky so that it might safely support higher levels of debt, at least for the time being.

If you’re interested in China — which, if you have money in the markets then you should be — this article is certainly worth a read. Here’s the link.

Video I’m Watching —

Check out this interview with Robert Vinall who’s the global value-focused fund manager of RV Capital. Robert has a great track record and in this interview gives some insight into his investment process and how he started his fund. It’s just 26 minutes long and worth a watch. And looks like they have a part 2 coming out soon. (Link here).

Charts I’m Looking At—

@TN posted a good thread this week on the extremes in sentiment we’re seeing in the Chinese market (link here). @TN notes that according to a recent Bloomberg survey, Chinese fund managers are 74% allocated to stocks — the previous high was 80% reached in Jan 18’, right before a major market peak. Also, China’s margin debt has exploded and is now close to the heights reached in early 18’.

Here’s a chart showing Chinese Consumer Confidence going parabolic via @TaviCosta.

Podcast I’m listening to —

Patrick O’Shaughnessy’s latest podcast with hedge fund manager Geoffrey Batt is stellar. Batt is one of the only US-based hedge funds focused on Iraqi equities. The episode is titled The Nature of Transformational Returns and Batt does a great job of laying out what one has to do to accomplish such.

They cover a wide range of topics, from how the news often does not portray an accurate depiction of what’s really going on on the ground to the importance of raising money in a way that’s conducive to your market approach. Batt’s style of investing reminds me of how the Chandler brothers operated in their early days.

Definitely give the episode a listen if ya get a chance. Here’s the link.

Trade I’m Considering —

To be honest, I’m mainly just biding my time until we see a break in the tightly coiled macro instruments we’ve been talking about (link here). That’s what’s most got my attention at the moment. Oh, well, that and shippers which have been breaking out (link to our write up here).

But I’m also looking at emerging markets which are fairly overbought and may be in for a pinch if we see US rates continue to rise (wrote about that here). Take a look at Chinese tech company Tencent (TCEHY) below. Tencent has the largest weighting in the MSCI EM ETF (EEM).

The chart is a weekly showing that Tencent has retraced up to the fib 0.618 level while piercing its weekly upper Bollinger Band. We’ll have to see if it has a weak close on the week. If so, it may be a good candidate for a tactical short.

Also, check out EM high yield (EMHY). Unlike the US it’s gone nowhere since the start of the year. Could be a sign of exhausted buyers which would not bode well for EM stocks.

Oh and also keep an eye on gold. It may be the tell. If it closes below the significant 1290 level then it’s likely headed much lower and EM should follow suit (and the dollar would move higher).

Quote I’m pondering —

Understand: the greatest generals, the most creative strategists, stand out not because they have more knowledge but because they are able, when necessary, to drop their preconceived notions and focus intensely on the present moment. That is how creativity is sparked and opportunities are seized.

Knowledge, experience, and theory have limitations: no amount of thinking in advance can prepare you for the chaos of life, for the infinite possibilities of the moment. The great philosopher of war Carl von Clausewitz called this “friction”: the difference between our plans and what actually happens. Since friction is inevitable, our minds have to be capable of keeping up with change and adapting to the unexpected. The better we can adapt our thoughts to changing circumstances, the more realistic our responses to them will be. The more we lose ourselves in predigested theories and past experiences, the more inappropriate and delusional our response. ~ Robert Greene, 33 Strategies of War

“Friction” in markets is a constant. Thus, we need to maintain a fluid mindset and not cling to rigid opinions or beliefs. We need to keep a child’s mind and remain open to new experiences and theories that contrast with our own. The continuous ability to adapt and evolve is necessary to one’s long-term survival in this game.

Like Bruce Lee said, “become like water my friend”.

That’s it for this week’s macro musings.

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

Have a great weekend.

Perspectives On Risk and A Rockstar Fed

Tyler here with your latest Friday Macro Musings…

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

Latest Articles/Videos/Podcasts —

Macro Ops Podcast: Tesla On The Brink, Eurodollar, and Uranium with Biren Shah Part 2 — Chris and Biren rehash the $TSLAQ thesis and then hit on some interesting trade ideas in eurodollars and uranium.

Macro Ops Podcast: Global Macro and Value Collide with Mr. Bean — Chris and Mr. Bean talk value, health, lifestyle, wellness and longevity.

Articles I’m reading —

Perspectives on Risk — Euan Sinclair, one of my favorite option specialists writes about risk. Euan mentions how successful risk control is a MUST if you want to walk away from the markets with more than you started with.

But great risk control alone won’t make you money. Risk control needs to be combined with a valid market edge in order to produce profits. Here’s a snippet from the article (emphasis mine)

Risk control is not all you need. A seemingly prudent rule like “only risk 2% on any trade” is both wrong in its arbitrariness and misses the point that if the trade has no intrinsic edge this rule will just lead to bankruptcy one 2% loss at a time. A related piece of stupidity is that discipline is what will lead to success. Executing a trade with no edge in a disciplined manner is worse than executing it in a  haphazard manner. If you are inconsistent at least you will avoid some of the inevitable losses.

Sycophants and Other Party Stories — I think Kevin Muir over at the Macro Tourist has done a great job covering the epic shift in Fed policy we saw between Q4 of last year and Q1 of this year. Kevin points out that Trump has succeeded in beating the hawk out of Jay Powell. And for his next party trick Trump plans to appoint Stephen Moore to the FOMC — someone who thinks the Fed should lower rates by another 50 basis points!

Also as of this writing, there’s rumors circulating that Trump will select Herman Cain to fill the other open FOMC seat. Moore and Cain are two political loyalists that will sit on the board of the Fed. Trump can use them to keep Powell inline and the markets propped until his reelection in 2020.  

Yield Curve Inversion: Maybe It’s Different This Time — SRVN asset management put out a note on how to interpret the recent inversion in the US yield curve. Rather than call for an immediate recession SRVN reflects our recent sentiment, that the inversion we are seeing is no cause for concern.

SRVN writes how the yield curve changes depending on the term premium — the additional yield investors demand for running the risk that short-term interest rates don’t evolve in the expected manner. Here’s more on the term premium in case you need a quick refresher.

The term premium is not directly observable. It is estimated by subtracting investors’ expectations of the future path of Fed policy from the Treasury yield. Most models of the term premium agree that since the early 80s, when inflation and interest rates peaked, the term premium has gradually fallen and in recent years turned negative. (Why is beyond the scope of this post, but may be related to an aging population.)

The Federal Reserve Bank of New York publishes daily estimates of term premia according to a model developed by staff economists Tobias Adrian, Richard Crump, and Emanuel Moench (“ACM”). The ACM model estimates that the 10-year Treasury term premium is -0.8% as of March end. In other words, investors think short-term rates will average 3.2% over 10 years, but will buy a 10-year Treasury yielding 2.4% now to lock in that rate, according to this particular model.

Accounting for the ACM model term premium, the plot of the yield curve actually ends up looking normal. Check out the post for more details!

Podcast I’m Listening To —

Top Traders Round Table with Chris Cole, Matthew Sargaison, and Dan Stone – Part 1 and Part 2

These three hedge fund managers on the roundtable all specialize in long volatility and positive convexity trading. Over the course of both parts the three discuss why trading volatility from the long side has been so tough with overly accommodating central planners. All three of them think the period of central bank volatility suppression will end soon.

Dan Stone has some interesting trade ideas which he talks about around the 15 minute market in part 1 and the 11 minute market in part 2. Here’s the quick summary:

  • Rate volatility and currency volatility is cheap
  • It’s likely that this vol will catch up to equity vol when the cycle turns
  • The term structures are flat and downward sloping on many of these products which means you can buy long-dated volatility that has positive carry. This makes for an extremely attractive trade structure.

Trade I’m Considering  —

I’ve been looking for a shiny new growth name to watch and The Trade Desk (symbol TTD) came up on my search. This stock has been on absolute tear, up over 95% since the December sell-off.

The Trade Desk is where people go to buy and manage data-driven digital ad campaigns. This company is really starting to gain some steam, sales growth increased 56% in the fourth quarter, up from 50% in the quarter before and 42% the year before that. Gross spending on the Trade Desk platform increased 51% to $2.35 billion.

There’s no reason to believe the momentum is over either. Trade Desk specializes in programmatic advertising, which is a small $33 billion subset of the $725 billion advertising industry. As the years progress data driven companies will want to continue steering their dollars into programmatic advertising since it’s easier to measure success.

Chart I’m Looking At—

Chinese stocks have been ripping since the beginning of the year and that’s because the economic data coming out of China has been on a strong rebound. Check out this graph of the Chinese PMI.

It’s above 50 which means the Chinese economy is expanding again.

Quote I’m pondering —

Define a target, a strategy consistent with the target, a set of disciplines to follow, and risk management guidelines. Then trade, track, and evaluate your performance.  ~ Ari Kiev

If you don’t have targets and guidelines set for your trading process you’ll never be able to improve. Evolution requires a consistent measure of your results.

That’s it for this week’s macro musings.

If you’re not already, be sure to follow me on Twitter: @tylerhkling. I post my mindless drivel there daily.

Jim Simons and The Four Sources of Alpha

Tyler here with your latest Friday Macro Musings…

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

Latest Articles/Videos/Podcasts —

A Tactical Short In Rates — Find out why Alex thinks a tactical short in bonds or utilities could score nicely in the next few weeks.

Anchors Away: My Three Favorite Shipping Ideas Our new deep value guy, Mr. Bean, reveals his favorite shipping stocks for 2019.

A Golden Macro Opportunity — Alex breaks down the drivers of the price of gold and explains why a HUGE move is on the horizon.

There’s A Big Macro Move Brewing In Markets — A review of a Druck trading maxim totis porcis and why it might be time to whip out the hog soon in FX.

Yield Curve Inversion: Why This Time Is Different — Confused as to what the inverted yield curve means for global markets? Check this out, Alex explains why it’s not time to run for the hills and go to cash yet.

Article I’m reading —

US rates have gotten killed. Below is a chart of the US 30-year rate which now sits at 2.81%.

If you need an udpate on the drivers then check out this Bloomberg article which summarizes the narrative nicely. (Link here)

Going into the beginning of the year, bond volatility had been sold into the ground because everyone felt that the Fed was in a holding pattern for the rest of the year. But the surprise dovish announcement on March 20th completely derailed that narrative causing rates to break out of their range.

All the traders that sold options, betting that rates would stay range bound, needed to cover their losses quickly causing additional momentum out of the range.

Podcast I’m Listening To —

I’m a fiend for anything Mauboussin does so I was extra excited to see him on the guest list for Invest Like The Best this week. (Episode link here)

Patrick and Mauboussin discuss the four sources of trading and investing alpha represented by the acronym  “BAIT.”

Behavioral — An investor exercising remarkable control over his emotions so he does not fall prey to the extreme pessimism and optimism of the crowd.

Analytical — An investor who can synthesize and interpret public information better than the rest of the market collective.

Informational — An investor who has access to information that other market participants do not have.

Technical — Arbitrage opportunities within the market microstructure.

If your a fan of investing process and meta-process like me be sure to add this to your queue this week.

Video I’m watching —

Andrew Lo had a fireside chat with Renaissance Technologies founder Jim Simons that I enjoyed. (Link here)

Before this interview I had no idea that Jim Simons actually had a background in fundamental discretionary currency trading. He mentions that his performance was good but he couldn’t handle the ups and downs that come with a discretionary approach.

One day he would walk into the office with his positions in the green and feel like he’s a genius. And the next day everything would reverse and he would feel like an idiot. The emotional gyrations wore on him which is why he decided to go full out systematic. With a system he simply did what the computer told him to do.

This speaks to the importance of knowing yourself inside and out if you want to have long-term success in the market. Some people need a system, others thrive with flexibility. The key is dabbling around on small size until you find out what works for you.

Chart I’m Looking At—

The NY Fed’s recession model is forecasting a 29% likelihood of a recession hitting the US within a year. Credit Suisse says when the Fed’s model goes up to 29% there is actually a 71% chance of a recession hitting within a year.

The Credit Suisse number looks a little curve fit to me… Our base case is for recession well into the future.  But we’ll keep a watch on the NY Fed’s model to see how the probabilities develop.

Quote I’m pondering —

A trader who initiates on a breakout from a major chart formation will invariably have more losses due to false breakouts. And each breakout may not get too far, but the trader has to be willing to trail a stop and not bank profits too soon. All he needs is 1-2 huge moves a year, but it takes lots of patience, discipline, and fortitude.  ~ Linda Bradford Raschke

Market’s follow a 90/10 distribution meaning only a few move moves will make your bottom line each year. It’s key to stay in the game and follow and sound process through all the false moves while you wait for the real one.

That’s it for this week’s macro musings.

If you’re not already, be sure to follow me on Twitter: @tylerhkling. I post my mindless drivel there daily.

Have a great weekend.

A “Crazy” Deep Value Play Along With Some Other Stuff

Alex here with your latest Friday Macro Musings…

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

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Now for your latest Macro Musings…

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

Latest Articles/Videos/Podcasts —

Value Ventures: A Prologue — Our value expert Mr. Bean talks a little bit about his value investing philosophy and lays out the plan for all future value based content. If you like deep value make sure to stay tuned to his releases.

Macro Ops Podcast: Shippers – Bottom Fishing With Alex Barrow — Host Chris D. sits down with Alex to discuss his latest shippers thesis. Pop this episode in during your next workout or commute if you want to get up to speed on this bombed out sector of the market.

Articles I’m reading —

Matthew Ball wrote an article titled “Nine Reasons Why Disney+ Will Succeed (And Why Four Criticisms are Overhyped)”. Matthew is one of the most insightful commentators on the media/tech landscape, in my opinion. I try to read everything he does. This article serves as a well-argued bullish overview of Disney’s opportunity (and challenges) in its transition from being a B2B to a B2C company that controls its entire stack. I should note that I may be biased as Disney is one of our largest equity positions.  

Here’s Ball commenting on one of the many benefits of Disney’s owning its distribution channels through its move to SVOD (Disney+, Hulu, ESPN+).

While Disney+ will initially launch as a video-centric offering, I expect it will eventually go far beyond it. Disney’s ESPN+, for example, also includes access to’s paywalled content and coverage (which, in turn, can’t be accessed without an ESPN+ subscription). In time, Disney+ is likely to offer add-ons for everything else Disney – from comics (e.g. Marvel Unlimited), to ebooks, mobile games, music and even discounts to Disney’s theme parks and merchandise. And maybe even theatrical subscriptions and tickets. To this end, analysts need to look beyond the basic question of whether Disney+ will have enough content to sustain a standalone subscription. Video volume matters, but so too do other features and content offerings.  And notably, each additional category expands the bucket of spend that can be cannibalized.

Reminder… Disney, the company with the most valuable content IP and recognizable brands in the world, sells for just 15x earnings. That’s slightly less than Comcast at 15.8x and the market’s average of 21x. Makes sense… Here’s the link.

Our buddy Biren over at Perseid Capital put out two must-read writeups on the whole $TSLAQ debate. The first one serves as a good overview of the evidence-based bear case against Tesla (here’s the link). The second is an excellent analysis of the company’s cash flows — or lack thereof — and some speculation as to when Musk and team will be forced into bankruptcy (link here). We’re short the stock through long-dated puts and will likely be adding to our position sometime in the near future.

Finally, not sure how I came across this site but h/t to whoever shared it with me. It’s named Safal Niveshak, after the author. And it’s a collection of great original illustrations of key mental models, principles, and frameworks. There’s one for the Feynman Technique and another for Bezos’ Regret Minimization Framework. It’s pretty cool. Makes me wish I had the ability to illustrate something more advanced than just hand turkeys.

Here’s the link and an illustration of his framework for stock selection.

Book I’m Reading —

I’m currently reading Trading Sardines – Lessons in the markets from a lifelong trader by Linda Raschke. This also happens to be the monthly pick for our MO Book Club. Linda was nice enough to send the team and I an autographed copy and we’re hoping to get her on the podcast sometime here in the near future. For those of you who don’t recognize her name, Linda is an uber-successful trader who was featured in Schwager’s The New Market Wizards.

I’m about 2/3rds of the way through the book and really enjoying it so far. It’s filled with tons of humor, great stories about her time spent on the floor, and lots of practical trading advice. Here’s one of her shared lessons learned following a lucky break (random freak weather event) on a soybean trade that resulted in her first big money win.

I adopted the philosophy that trading has little to do with brains because overthinking mucks things up. Instead, it was about positioning yourself so that, once in a while, you might get lucky.

Charts I’m Looking At—

Here’s an interesting chart from Deutsche Bank showing how a cyclical increase in inflation has led prior recessions by an average of 3-years (h/t @macronomics1). I think it was PTJ who said something along the lines of every bear market has basically occurred because of a rise in inflation and an uptick in rates. The lack of much of a cyclical rise so far helps explain why this cycle has gone on for so long. And why it may go on much longer still…

Trade I’m Considering —

We’re currently bullish on oil and have been buying some energy names as well as going long the underlying. Well, this week, Kuppy, who authors one of my favorite investing blogs Adventures in Capitalism, put out a good write-up on Antero Resources (AR) (one of the companies we’ve been looking at).

You can see from the chart that AR has had a tough go as a public company. But, as Kuppy argues quite convincingly, the storm may or not be passing anytime soon but the value to be had is “getting crazy here” to use his own words.

Here’s the link and a cut from the piece.

At Friday’s closing price of $7.81, the company had a market cap of $2.411 billion. It owned 98.87 million shares of Antero Midstream (AM – USA) with a value of $2.335 billion (at Friday’s closing price of $23.62). You are also promised roughly $300 million in cash from the mid-stream simplification in Q1/2019 and a $125 million payment in early 2020 related to the earn-out on the sale of the water business. Add it all up and the market is valuing AR’s upstream business at a residual equity stub of NEGATIVE $349 million (it’s worth noting that the EV is less extreme as AR does have $3.8 billion in standalone net debt). So what sort of toxic equity stub is the market paying you $349 million to take off its hands?

Note: The thesis has changed since the recent kneecapping of AM (down 40% over the last week) so those shares in AM are worth closer to just over a billion dollars. But it’s still interesting nonetheless and there are a number of other energy names trading for very low multiples of current cash flows. Plus, oil has a tendency to spike in the latter stages of the cycle.

Quote I’m pondering —

You must learn to allow patience and stillness to take over from anxiety and frantic activity… The good player is patient. He is observant, controlling his patience, and organizing his composure. When he sees an opportunity, he explodes. ~ Jim Lau, martial artist

That’s it for this week’s macro musings.

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

Retail Sanity, Wholesale Madness, and Texas Tea

Tyler here with your latest Friday Macro Musings…

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

Latest Articles/Podcasts/Videos —

Shippers: The Most Bombed Out Sector of the Market — Alex reveals his latest deep value thesis on the shipping sector. If you’re looking for dirt cheap stocks to buy check out this writeup.

Bear Markets and Liquidity Conditions — Tyler shows why liquidity conditions are the most important macro fundamental. The best macro traders in the world all obsess over liquidity conditions. Make sure you are too!

Latest Podcast: Macro Moves in Metals, Bonds, and Currencies — Operator Chris explains how his quantitative global macro system is interpreting the latest price action in gold, bonds, currencies, and equity indices.

Articles I’m reading —

Spinning Gold — Broyhill Asset Management put out a blog on spinoffs. Investing in them has been extremely lucrative for the managers that became specialized enough to separate the good from the bad. When someone says “spinoffs” most of us immediately think of Joel Greenblatt and his You Can Be A Stock Market Genius book.

But a relatively unknown man by the name of Bill Stiritz has actually been crushing the spinoff game well before Greenblatt ever released his book. By focusing on spinoffs, Stiritz was able to return 6100% to his investors over his 35-year career. $1 invested with Stiritz would’ve turned into $57 by the end of it all…

He did it by exercising time-arbitrage, or as Munger would put it “sitting on your ass.” By extending holding periods well past the average investor you can realize returns that many just don’t have the patience for.

What Is Amazon? —  I stumbled across this piece by Zack Kantor on Fintwit. It’s a short essay on the history of Walmart, what made them great, and ultimately what led them to give up the retail throne to Amazon. It’s a highly engaging piece about the inner workings of a large retail company and what it takes to succeeds in that business.

These days there’s a lot of talk about regulators coming in and breaking up the big tech companies under antitrust laws. But Zack shows that this threat is minimal for Amazon because it has such a good track record of anticipating regulatory destructing and changing course proactively.

We’ve seen the strategy that Amazon takes when it sees a regulatory threat looming on the horizon; it voluntarily started collecting sales tax in many states before states could force it to do so, and adopted a $15 minimum wage before it drew the full ire of a populist movement. With multiple headquarters distributed across multiples cities and outside access provisioned for all of its key products and services, Amazon seems more likely to break itself up – along its own preferred lines – than it is to be forcibly disassembled by regulators.

I also liked his final summary for what Amazon has become and what it must do to survive and remain king of the retail hill for the decades to come.

So, what is Amazon? It started as an unbound Walmart, an algorithm for running an unbound search for global optima in the world of physical products. It became a platform for adapting that algorithm to any opportunity for customer-centric value creation that it encountered. If it devises a way to keep its incentive structures intact as it exposes itself through its ever-expanding external interfaces, it – or its various split-off subsidiaries – will dominate the economy for a generation. And if not, it’ll be just another company that seemed unstoppable until it wasn’t.

Podcast I’m Listening To —

Alex here. Just jumping into Tyler’s Musings this week to share with you a killer podcast I listened to the other day. It was recommended to me by one of my old Marine buddies and I was hooked for the full 2+ hours of the chat. It’s the Jocko Podcast episode 89 titled “The Critical Importance of Taking Care of Your People” with Frogman and Medal of Honor recipient Mike Thornton.

Thornton is a Vietnam Veteran and a legend in the Teams. He shares the leadership lessons he learned during his storied career as well as recounts the incredible mission for which he earned the MoH. The dude is one bad mamma jamma. Give it a listen. You will not be disappointed. Here’s the link.

Charts I’m Looking At—

Here’s an interesting chart I found while reading a BoFA report this week.

The delay in tax refunds started two years ago when the IRS passed a law requiring further verification for those claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC). For the last two years, refunds were delayed until Feb 15th for this population, but this year they were delayed until Feb 27th because of the timing of the President’s Day holiday

The lower income cohort is disproportionately impacted by this law. Households earning less than $50K a year saw a meaningful delay relative to before the law was passed, but those earning more than $125K saw little change.

The good news is that the cumulative amount of refunds caught up by the end of the month. However, there was still less time for consumers to spend their refunds in February. We think this creates a downside bias to retail sales, which is confirmed when looking at the income level spending data.

Bottom line: although there were good reasons, the consumer cut back spending at the turn of the year after a period of robust activity in 2018. We believe that once these special factors reverse, the reality of healthy fundamentals will set in, supporting spending in the spring.

That means we should see the next retail sales number tick up and support this bid in US equities.

Trade I’m Considering —

The US government shutdown earlier this year actually caused some huge data issues for our beloved COT reports. We haven’t been able to look at reliable positioning data because the CFTC had stopped releasing the data during the shutdown.

But finally they’ve been able to catch up and we are back in business!

The Crude Oil Spec chart caught my eye this morning as I was going through the latest data.

You can see that specs aggressively sold crude during the end of 2018 creating a historically extreme short positioning. And of course, when you check out the price action in crude it’s about to break out to 50-day highs and squeeze the hell out of all of these specs.

We’ve started to nibble on the long side here. Alex has a more in-depth fundamental note on crude that we released to Collective members yesterday. If you’re interested in checking that out, shoot us an email.

Quote I’m pondering —

We might describe our world as having retail sanity, but wholesale madness. Details are well understood; the big picture remains unclear. A fundamental challenge… is to integrate the micro and macro such that all things make sense.~ Peter Thiel

Indeed. That’s the hardest part about picking stocks, making sure the micro thesis also fits the “general conditions” of the market.

That’s it for this week’s macro musings.

If you’re not already, be sure to follow me on Twitter: @tylerhkling. I post my mindless drivel there daily.

Have a great weekend.

Global Disunion and a DEEP Value Industrial Mining Play

Alex here with your latest Friday Macro Musings…

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

Articles I’m reading —

Someone shared this on the twitter, @chriswmayer maybe? Anyways, it’s a good read about a little known but highly respected value investor by the name Norbert Lou who runs Punch Card Capital.

The writeup, done by Santangel’s Review, covers Norbert’s investing career from start to present along with his framework and approach to markets plus a few case studies of his best (and worst) investments thrown in for good measure.

Norbert’s origin story is a unique one. You should read the article for the full scoop but he started out investing $60k of his mother’s nestegg which he turned into a few million dollars in less than 9-years. All while working a full-time job. He was then seeded for his fund by Joel Greenblatt because Joel liked Norb’s investment write ups on the Value Investor’s Club so much. Not bad. Give it a read, here’s the link and a section I like from the piece:  

A few years before he started Punch Card, Norbert had read a speech in which Charlie Munger reverse engineered the success of the Coca Cola Company. Even though Munger did not intend it as a stock pitch, Norbert later called the speech “the best stock write-up ever.” Unlike almost everyone else on Wall Street, Munger spent no time focusing on the balance sheet, income statement, or earnings multiples. Rather, he spoke almost exclusively about qualitative factors, such as economies of scale, universal appeal, and a strong brand that helped turn Coca-Cola into the world’s most dominant beverage company. “You can identify certain business momentums in the real world that aren’t necessarily in the financials and allow for sustained returns on capital,” Norbert learned.

He had already seen business momentums at work in some of his biggest winners: economies of scale in NVR, for example, and network effects in NII Holdings. Norbert also realized that the qualitative factors that drive sustained returns on capital are not always obvious at first. “NVR’s management didn’t even know how great the company was,” Norbert noted. “There is no universal test for a great company.” Another lesson of Munger’s speech: on those occasions when several of these qualitative factors occur together, the results can be outstanding. “Supernormal results are usually achieved through the combination of multiple forces working together,” Norbert said.

Twitter thread I’m thinking about —

Check out the following short Twitter thread from one of my favorite follows @teasri (link here).

He comments on a recent CLSA report regarding China’s weakening credit multiplier and notes that two forces are at work, these being (1) A liquidity trap where monetary easing fails to kickstart credit growth and (2) The “pushing on a string” effect. Dalio often talks about this and its impact on DM economies currently but @teasri notes how when new marginal credit fails to boost economic activity it typically flows into bidding up asset prices, instead.

I shared in last week’s Musings a section from a Nomura report which showed their indicators of sentiment for local investors in China had reached euphoric levels. Given the incredible year-to-date run up in Chinese equities, that sentiment is understandable. The fundamentals behind the move though are not due to an improving economy (see next section) but rather a consequence of China pushing on a string (also, perhaps MSCI planning to raise their China exposure levels).

Charts I’m Looking At—

All signs point to a continued slowdown in the Chinese economy. Charts via Morgan Stanley.

Podcast I’m listening to —

You should give Patrick O’Shaughnessy’s latest podcast a listen. It’s good. Really good. Here’s the link.

Patrick talks with Geopolitical Strategist Peter Zeihan. Here is Peter’s website.

The theme throughout the interview is the unstoppable march towards “Global Disunion”. The antithesis of Globalization. Peter talks about how this trend will vastly reshape the world as we know it; China will fall apart (again), the eurozone will dissolve, and self-sufficient countries like the US will weather the new epoch the best. He also covers the changing landscape of the energy market as well as where he thinks we’re likely to see the next major war pop up (hint: Russia moving back into Eastern Europe).

Peter used to work for Stratfor and it shows. He uses a similar geopolitical framework for understanding the world as the one developed by George Friedman, Cofounder of Stratfor. The framework is one that focuses on constraints rather than possibilities. Here’s a section from Friedman’s book “The Next 100 Years” which outlines this framework.

Geopolitics assumes two things. First, it assumes that humans organize themselves into units larger than families, and that by doing this, they must engage in politics. It also assumes that humans have a natural loyalty to the things they were born into, the people and the places. Loyalty to a tribe, a city, or a nation is natural to people. In our time, national identity matters a great deal. Geopolitics teaches that the relationship between these nations is a vital dimension of human life, and that means that war is ubiquitous.

Second, geopolitics assumes that the character of a nation is determined to a great extent by geography, as is the relationship between nations. We use the term geography broadly. It includes the physical characteristics of a location, but it goes beyond that to look at the effects of a place on individuals and communities. In antiquity, the difference between Sparta and Athens was the difference between a landlocked city and a maritime empire. Athens was wealthy and cosmopolitan, while Sparta was poor, provincial, and very tough. A Spartan was very different from an Athenian in both culture and politics.

If you understand those assumptions, then it is possible to think about large numbers of human beings, linked together through natural human bonds, constrained by geography, acting in certain ways. The United States is the United States and therefore must behave in a certain way. The same goes for Japan or Turkey or Mexico. When you drill down and see the forces that are shaping nations, you can see that the menu from which they choose is limited.

Kind of reminds me of the “psychohistory” used by The Foundation from one of my all-time favorite sci-fi series of the same name.

Trade I’m Considering —

I’ve been following US iron ore producer Cleveland Cliffs (CLF) for a while now. The long-term chart has a lot going for it and I noticed that Michael Burry (the value investor profiled in The Big Short) recently took a large position in the stock.

Revenues and cash flows are trending in the right direction: up and to the right. And yet the stock is trading for less than 3x earnings.

Maybe the market is scared off by the company’s debt? I don’t know… A cursory look at its balance sheet shows they shouldn’t have any problems there. The vast majority of CLF’s debt isn’t due until 2025. The company has an EBITDA-capex/interest expense coverage ratio of 4.6x, which is plenty. And this is near the bottom of a long cyclical bear in iron ore / steel pricing.

Insiders seem to think the stock is a good buy. They’ve been gobbling up the stock over the last two years.

I’ve gotta dig into it more. But on first take, it seems like quite a bit of disappointment is already baked into this cake.

Quote I’m pondering —

Theory cannot equip the mind with formulas for solving problems, nor can it mark the narrow path on which the sole solution is supposed to lie by planting a hedge of principles on either side. But it can give the mind insight into the great mass of phenomena and of their relationships, then leave it free to rise into the higher realms of action. There the mind can use its innate talents to capacity, combining them all so as to seize on what is right and true as though this were a single idea formed by their concentrated pressure—as though it were a response to the immediate challenge rather than a product of thought. ~ Carl Von Clausewitz

Clausewitz would have been a good trader.

That’s it for this week’s macro musings.

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

Have a great weekend.

A Contrarian and a Calculator + The DEEP Value Case For Shipping Stocks

Alex here with your latest Friday Macro Musings…

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

Latest Articles/Podcasts/Videos —

The Fed Put Is Real and China Stimulates — Alex updates us all on China’s surprise stimulus and the Fed’s epic flip from hawk to dove.

Macro Ops Podcast: Alex, Tyler, Chris, and Mr. B — Chris hosts a monster 2.5+ hour Macro Ops roundtable with Alex Barrow, Tyler Kling and Mr. B.

Articles I’m reading —

I don’t recall how I came across this piece (Twitter maybe?) but it’s a terrific interview in Logic Magazine with an “Anonymous Algorithmic Trader” about the trends, dangers, and future of quantitative finance. Anybody who is anybody is now using “machine learning, AI, and BIG data” to run their hedge fund. Why you ask? Well, because it’s the future… Or, at the very least, it helps one raise large amounts of AUM which is really what this game is all about, at least for most.

One of my favorite sections from the interview was when the Algo Trader covered a number of the dangerous fallacies embedded into practically all machine learning/AI/quant trading models — this is a subject near and dear to our heart and one that we covered in our latest wide-ranging (and wine-fuelled) group podcast discussion (link here). But, anyway, here’s a clip from the interview after Mr. Anonymous was asked about what new vulnerabilities are being introduced to the financial system from the rising popularity of quant investing (emphasis by me).

The way that mortgage-backed securities precipitated the financial crisis is very much applicable here. One of the fallacies behind that phenomenon was the assumption that the world would behave in the future the way it had in the past. For instance, housing prices would go ever upwards.

That fallacy is intensified in the case of quantitative investing, because all quantitative models use historical data to train themselves. As these techniques become more widespread, the assumption that the world will behave in the future the way it has in the past is being hard-wired into the entire financial system.

Another fallacy in the lead-up to the financial crisis was the assumption that financial markets were so efficient that participants didn’t need to do the underlying work to figure out what the securities were actually worth. Because you could rely on the market to efficiently incorporate all available information about the bond. All you need to think about is the price that someone else is willing to buy it from you at or sell it to you at.

Of course, if all participants believe that, then the price starts to become arbitrary. It starts to become detached from any analysis of what that bond represents. If new forms of quantitative trading rely on assumptions of market efficiency—if they assume that the price of an instrument already reflects all of the information and analysis that you could possibly do—then they are vulnerable to that assumption being false.

Give it a read. Here’s the link.

I don’t think we’ve shared this one in our Friday Macro Musings (if we have, then sorry for being repetitive) but Mauboussin put out a killer research paper the other week titled “Who Is On The Other Side?” which delves into the following problem-set:

If you buy or sell a security and expect an excess return, you should have a good answer to the question “Who is on the other side?” In effect, you are specifying the source of your advantage, or edge. We categorize inefficiencies in four areas: behavioral, analytical, informational, and technical (BAIT).

Anything Mauboussin puts out is worth a read but this one, in particular, is a must… Here’s just one of the many great tidbits from the paper as well as the link to the full thing (link here).

Overextrapolation. Overextrapolation, the excessive projection of recent experience, is one of the key ideas behind the psychology of belief formation. For example, financial economists have shown that investor expectations for future stock returns in the next year are highly correlated with returns in the past year. Exhibit 3 shows the percentage of household equity and fixed income investments that are allocated to equities and subsequent five-year stock market returns. Investors expect high returns after realizing high returns and expect low returns after realizing low returns.

Because stock prices are more volatile than corporate earnings, valuations tend to be higher following a period of strong price advances and lower subsequent to price declines. In contrast with expectations as the result of overextrapolation, high valuations are associated with low expected returns, and low valuations with high expected returns. This relationship holds for asset classes beyond stocks, including bonds, real estate, and sovereign debt.

Avoiding this type of overextrapolation demands the ability to “disregard mob fears or enthusiasms and to focus on a few simple fundamentals.” Seth Klarman, founder, chief executive officer, and portfolio manager of The Baupost Group, captured the concept beautifully when he said, “Value investing is at its core the marriage of a contrarian streak and a calculator.” The “contrarian” part demands an examination of the other side of the popular view. The “calculator” part ensures that valuation is sufficiently extreme to generate excess returns.

A contrarian streak and a calculator. I love that…

Also, here’s some links to a number of great quarterly writeups that have recently hit the webs:

  • Coho Capital Q4 Shareholder Letter: Jake Rosser, Managing Partner at Coho, always puts out an insightful letter and this quarters is no different. Jake pitches the value case for Netflix (NFLX) and gives a masters class on the unique business advantages of combining subscription economics with massive scale.
  • KKR “Global Macro Trends: Tons of great macro charts in here with a focus on slowing global growth, changing Chinese trade dynamics, and a structurally/politically weak Europe.
  • Crescat Capital Q4 Shareholder Letter: Crescat is bearish. I mean reeeaal bearish. I don’t necessarily agree with their views but I appreciate their point of view and I always enjoy hearing what those on the other side of the trade are thinking.
  • Broyhill Asset Management Q4 Shareholder Letter: A measured take on the market along with an update on some of their core holdings (DLTR, OAK, MCK, WBA, AGN). They also use one of the more interesting analogies I’ve heard to describe the deflating of an asset bubble, which is:

“They say that gradually letting the air out of a bubble is like trying to gradually let a fart out at a cocktail party. It’s a risky move with a blemished track record—for party-goers and for the Fed. As a result, like those uncomfortable moments at the cocktail bar, bubbles have a tendency to linger longer than anyone expected and surprise everyone by how magnificently they burst.”

Charts I’m Looking At—

China’s A-shares market is up 26% ytd. Not a bad start to the year, though the market still needs to rally another 27% just to get back to its most recent high reached in 18’. Either way, Nomura research says the Chinese market is getting frothy and investors there are now “euphoric”, at least according to Nomura’s sentiment indicators. 

Euphoric investors don’t typically bode well for the short/intermediate returns of the market in which investors are so worked up in a frenzy over. But, if you pull back some, Chinese stocks and tech stocks, in particular, have taken quite a drubbing over the last year (see below chart from KKR). Does this mean we should sell Chinese tech stocks now and buy later? or hold now and buy more later? or do neither and fuggedaboutit?

I don’t know. I’m torn to be honest. On the one hand, some Chinese tech companies are amazing innovators and are dominant businesses. On the other hand, companies like BABA and Tencent are really just corporate arms of the CCP and are vulnerable to the whim and wishes of the Party. And I’m not sure how I feel about that.

Podcast I’m listening to —

After a brief hiatus, I’ve found myself getting back into podcasts again. And over the last two weeks, I’ve listened to a number of different ones but two that really stood out for me were both Tim Ferriss productions. One was his interview with Shopify (SHOP) CEO Tobi Lutke (link here) and the other was with Business strategist and all-around Polymath, Jim Collins (link here).

From the Lutke interview, two things really stood out at me, or rather three things (1) was the best definition of hell I’ve ever heard which is “The last day you have on earth, the person you became will meet the person you could have become” (2) Lutke’s discussion on his uncomfortableness with being comfortable because being comfortable means stasis (ie, not growing) and (3) I really wish this interview could have come out in early 2015 so I could’ve learned how impressive Shopify’s CEO is and then bought in its IPO for around $26.

And then the Collins interview is just all-around fantastic. He has this habit of tracking where his time is spent throughout his day and then assigning a number evaluation to each day (-2 for a crappy day and +2 for a great one). This has helped him to quantitatively optimize his time usage and ergo his happiness. The result is he spends a lot more time doing distraction free creative work and less time caught up in shallow busy tasks. I’m thinking of implementing the same.

Trade I’m Considering

Tyler wrote about Nintendo I think in last week’s Musings. We’ve been digging into this one and really like what we see. @HardcoreValue shared a good pitch deck outlining the long thesis on the company this week (link here).

On an unrelated note, another area of the market that I’m looking at is Shippers. Below is a chart of the Invesco Shippers ETF (SEA) which has been in a bear market since its inception nearly 9-years ago.

Kuppy, who’s behind the excellent investing blog Adventures in Capitalism, has been pitching the long case for shippers for a few months now (here’s a link to his latest).

The bull thesis essentially boils down to this:

  • Shipping stocks are insanely cheap with many selling for less than half and even a third of NAV using values from the secondary sale and purchase market. And many of these stocks have stable balance sheets and positive free cash flows.
  • Tighter financing and an aging global fleet mean less tonnage coming online and an increasing scrap rate in the years ahead.
  • Regulation, particularly IMO 2020, which states that as of 2020 all ships must either use 0.5% sulfur or lower fuel or install a scrubber to remove exhaust. There are a number of ways for shipping companies to adhere to this rule and pretty much all of them are bullish for charter rates and ipso facto shipping stocks.

So we have below asset liquidation valuations, positive future trend in supply/demand dynamics, and a coming near-term catalyst to further drive profitability. Throw in a decade long bear market and a completely forgotten/disregarded sector and you’ve got yourself a pretty decent trade setup. You know, the whole Klarman contrarian streak and calculator thing works out pretty well here.

I’m going to continue digging into this space and will be putting out a report in the coming week to those of you in our group.

Quote I’m pondering —

I am by nature warlike. To attack is among my instincts. To be able to be an enemy, to be an enemy—that presupposes a strong nature, it is in any event a condition of every strong nature. It needs resistances, consequently it seeks resistances…. The strength of one who attacks has in the opposition he needs a kind of gauge; every growth reveals itself in the seeking out of a powerful opponent—or problem: for a philosopher who is warlike also challenges problems to a duel. The undertaking is to master, not any resistances that happen to present themselves, but those against which one has to bring all one’s strength, suppleness and mastery of weapons—to master equal opponents. ~ Friedrich Nietzsche, 1844–1900

A GREAT life requires GREAT opponents, GREAT challenges, and GREAT obstacles. It’s these powerful external pressures that force us to grow, adapt, and evolve. Stress and struggle is our greatest teacher and the most valuable gift we can receive. Seek out the hard and sharp edges of life and turn from the siren calls of the crowded comfortable complacency of normalcy…

That’s it for this week’s macro musings.

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

Have a great weekend.



How One Man Traded His Way To Billions, Cold Showers, and The Freedom Dividend

Tyler here with your latest Friday Macro Musings…

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

Latest Articles/Videos —

Using Political Prediction Markets For Fun And Profit — Tyler shows how to use political prediction markets to calculate the implied probability of a candidate becoming elected. With the right strategy you can even arbitrage these markets against a pesky political acquaintance and make some guaranteed money on election night!

Portfolio Review — AK reviews trades from the Fallible equity portfolio.

Costco — AK explains why Costco’s business model makes them so successful.

Options — AK explains why position sizing is key to options trading.

Articles I’m reading —

An optometrist who beat the odds to become a billionaire — Herbert Wertheim built himself a $2.3 billion fortune by using Warren Buffett style investing principles. He has an extraordinary investment track record but isn’t widely known because he never managed outside capital. His fortune was built by finding companies he felt had quality intellectual property and then holding onto those stocks for decades.

Instead of concentrating on the metrics in financial statements, Wertheim is devoted to reading patents and spends two six-hour blocks each week poring over technical tomes. “What’s more important to me is, what is your intellectual capital to be able to grow?” Thanks to his engineering background, the technical nature of optometry and his experience as an inventor, the patent library is Wertheim’s comfort zone. Stocks he invested in based on their impressive patent portfolios include IBM, 3M and Intel.

Cold Showers Lead To Fewer Sick Days — Harvard Business Review writes how cold exposure can improve your health and build mental toughness.

Participants who took the cold showers actually reported feeling ill just as many days, on average, as the people who showered normally. But either their symptoms were less severe or they felt more energetic, so they were better able to push through the sickness and function anyway.

The article says that even a 30-second cold blast at the end of each shower has benefits. I personally have been implementing this in my routine over the last few months and have noticed the benefits. I’m able to power a little bit harder through workouts, arduous work projects, and other things I don’t enjoy doing. My general energy levels also feel higher.

I started off with a simple 30-seconds of cold at the end of each shower. But now I’ve worked up to a 1-minute start and a 1-minute finish of cold water.

Fighting that urge to skip the cold blast each day I find empowering. It’s a small mental win that subtly boosts my confidence and mood.

Charts I’m Looking At—

I saw this in a BofA report this week. Around 40% of their clients think that the key to getting the Eurozone out of its current growth funk is via China stimulus supporting German exports.

Whether the transmission mechanism of China’s easing will be effective this time remains to be seen, especially with high China total debt levels, and in particular rising Chinese household debt/GDP.

Yet, there’s no denying that China is serious about fighting its growth wobbles: the chart above shows that January’s Total Social Financing number of CNY 4.64tr. was around 5.5% of Chinese GDP…the biggest monthly liquidity injection ever registered.

I think the Chinese stimulus we saw in the first chart was a large reason for this v-shape recovery in equity markets.

But the other obvious key driver is the epic backtrack in central bank hawkishness. In 2019, the Fed has already pivoted to being on-hold, the ECB has moved the balance of risks to the downside, Australia has stopped hiking and India has delivered a surprise rate cut.

When the most important central bank in the world changes course, others must follow…or risk unwanted currency appreciation. True to form, as the above chart shows, the number of global central bank rate cuts over the last 6m is now greater than the number of central bank rate hikes. And when central banks flip-flop, so do markets. With interest rate vol at record lows now in Europe, this means a green light for carry trades and a return of the thirst for yield.


Video I’m Watching —

Charlie Munger Speaks at Daily Journal Annual MeetingMunger stays true to form and delivers yet another epic speech on the art of investing. It’s crazy how much wisdom this guy can spit out still at the age of 95.

If your short on time, fast forward to 23:30 in the video and listen to his spiel on diversification. He talks about how the key to beating the indices is to have a few times when you know a play is better than average and then betting big on that play.

Conviction + Edge + Big Bets = Outperformance

Podcast I’m listening to —

For all of my life, I’ve never been able to get fired up about politics. Candidates rarely inspire me, I don’t like to waste energy thinking about the pointless hot topic battles they spend their time talking about. And it annoys me when they go on and on about how bad everything is. To be honest, for the last 8 years or so I’ve tuned out unless it impacted a trade I was making in the markets.

Well recently the nihilist in me has been slain. On Joe Rogan’s pod, he interviewed democratic candidate Andrew Yang (Link here). I’d never heard of Andrew until this interview and I came out of the episode a huge fan. Yang talks clearly, approaches problems logically, and leaves out all of the identity politics that plague our system.

Yang is pushing hard for a universal basic income — a $1,000 monthly check to every American over 18 years old. You can check out his logic for why he likes UBI here on his website.

And I highly encourage a listen to his interview with Rogan so you get a feel for his personality.

Trade I’m Considering —

Long Nintendo

We’re long Disney partly because of its booming theme parks business. Nintendo, the creator of video game hits Mario, Super Smash Brothers, Legend of Zelda, Donkey Kong, and Pokemon has decided to do something similar which has got us interested.

Nintendo is working with Universal Studios to open three theme parks at existing Universal properties in Florida, California, and Tokyo, starting in 2020.

I think this is largely an IP play, one Herbert Wertheim from the beginning of this Musings would look at with excitement.

The titles and characters that Nintendo owns are timeless and ingrained into our culture. In my opinion, there is a tremendous amount of value that is still locked up inside this $32 billion company, even before considering its $8.7 billion in cash and nonexistent debt.   

Quote I’m pondering —

If you are a beginner, trade with an amount of money that is small enough so that you can afford to lose it, but large enough so that you will feel the pain if you do. Otherwise, you’re fooling yourself. ~ Mark Minervini

Yep, I couldn’t agree more. In order to survive for the long haul in this game you have to know yourself emotionally inside and out. And you can’t do that unless you have an amount of money on the line that makes you slightly uncomfortable — something in between no feeling and can’t sleep at night.

That’s it for this week’s macro musings.

If you’re not already, be sure to follow me on Twitter:@tylerhkling. I post my mindless drivel there daily.

Have a great weekend.