Musings: Wealth, War & Wisdom and Japan’s Time to Shine

Alex here with your latest Friday Macro Musings.

Latest Articles —

A Monday Dozen  — I take a look at bitcoin’s technicals, small-caps nearing a relative performance 70yr+ trendline, easy Q3 earnings hurdles, spiking global economic uncertainty and more.

Welcome To The Value Hive — Our pseudonymous value expert, Mr. Bean, put out his first of what’s to be a weekly round up of all the interesting value investing related things he comes across each week. Go and check it out and sign up if you want more delivered free to your inbox each week.

Articles I’m reading —

This piece written by Bob Henderson (@RobertH90430077) for Nautilus (one of the few hard copy periodicals I subscribe to) titled “What I Learned from Losing $200 Million” is excellent. It was written back in 2015 but is still a very worthwhile read.

Bob talks about his time working as a derivatives trader during the GFC and a particular pickle he found himself in when an exotic option deal that he put together turned south, in a big way. He uses this story to explore the dangers of the “illusion of control”, why rigid models and complexity don’t mix well, and why we’re neurologically wired to desire both.

Here’s a cut and the link (h/t to @keanferdy for sharing this in our Comm Center).

“In another study, done in 1992, a group of Israeli college students was found to be more willing to bet on dice, and to bet bigger, before they rolled than after, reflecting the belief that they had control over their rolls. Such a preference for prediction over postdiction had been observed before, but this study also found that the preference grew stronger when the students were threatened with an electric shock if they guessed wrong—evidence that stress amplifies the illusion of control.

Langer’s work showed that the illusion is also intensified by “skill cues”: circumstances that make people feel like they’re engaged in acts of skill rather than luck. Such cues include competition, choice, and familiarity with the task at hand. Therefore people will tend to overestimate their prospects in a game of pure chance even more than usual if they face a nervous-looking opponent, or if they pick rather than get assigned a lottery ticket, or if they’re given the chance to familiarize themselves with an apparatus that’s simply spitting out random numbers.”

I’m no Buffett fanboy but is a pretty neat site that somebody (with way too much time on their hands) put together. It’s is a digital compendium of every Q&A ever done by the Oracle and organized by topic. For instance, if you select “Accounting, Corporate Finance & Investing” and then click “Your Thoughts on EBITDA” you get the following sourced quote:

“It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.

We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.

People who use EBITDA are either trying to con you or they’re conning themselves. Telecoms, for example, spend every dime that’s coming in. Interest and taxes are real costs.”

Lastly, give these two short pieces a read. The first is on the economics of podcasting (link here). The author estimates (using conservative numbers) that Joe Rogan is pulling in $60-$235mn a year annually from his podcast. Not a bad gig if you can get it. And the second is a recent writeup from Brent Beshore titled “Investors and Operators: Lessons I’ve Learned from Both Worlds” (link here). There’s some great bits of wisdom in there for both operators and investors. Here’s one of my favorite lines:

“Precise spreadsheets are maps of a world that never existed and will never come to fruition, even if the numbers are hit. Business is about people and people are hot messes, capable of incredible feats of brilliance and stupidity. What’s more, they’re either optimistic or pessimistic, but rarely accurate. Some relentlessly strive to beat the numbers, while others have never hit a projection. Get to know the people and the business and the operations. That’s where the opportunity is. The numbers are the numbers.”

Charts I’m looking at—

Check out this chart from Martin Pring (@martin_pring) showing the commodity to bonds ratio. It’s fallen to long-term support and is now in deeply oversold territory. Martin Pring notes that this sets “the ingredients for an inflationary rally”. I’m leaning in this direction as well…

Video I’m Watching —

Real Vision’s recent interview with Mark Ritchie is fantastic (it’s free to watch on YouTube, here’s the link). For those of you who aren’t familiar with Mark, he’s a legendary old school trader who was profiled in Schwager’s New Market Wizards book. Mark dives into two of the most important aspects of trading — and not surprisingly, they’re the two areas that are the least discussed: losing and position sizing.

Mark Spitznagel wrote in The Dao of Capital that the most valuable lesson he learned from his Chicago trading pit mentor, Everett Klipp, was that “you’ve got to love to lose money.” Learning to lose is one of Ritchie’s favorite topics. It’s also one of the primary reasons he’s been so successful in markets. The video is roughly 45 mins long and is worth every minute. Give it a watch.

Oh and here’s a line I have in my “trading quotes” notebook from Ritchie which must be from Market Wizards.

“Magnitude of losses and profits is purely a matter of position size. Controlling position size is indispensable to success. Of all the traits necessary to trade successfully, this factor is the most undervalued.”


Book I’m reading —

This week I found myself thumbing through Barton Biggs’ Wealth, War & Wisdom. I first read the book a few years ago but cracked it open again to look for some color on ‘a war and markets’ research piece I’m working on.

Biggs is the author of one of my all-time favorite investing related books, Hedge Hogging. While Wealth, War & Wisdom isn’t quite on par with the former it’s still an enjoyable and educating read — especially if you have intersecting interests in markets and wartime history. Plus, he also writes a good deal about one of my favorite subjects; the wisdom of crowds, especially as it pertains to markets.

Here’s a section from the book:

“I first became fascinated with the subject of the wisdom of markets when, by chance, I discovered that the British stock market bottomed for all time in the summer of 1940 just before the Battle of Britain; that the U.S. market turned forever in late May 1942 around the epic Battle of Midway; and that the German market peaked at the high-water mark of th eGerman attack on Russia just before the advance German patrols actually saw the spires of Moscow in early December of 1941. Those were the three great momentum changes of World War II — although at the time, no one except the stock markets recognized them as such. This, to me, confirmed the extraordinary (and unrecognized) wisdom of market crowds.”

Trade I’m considering —

You know what country has a pretty good looking chart?

Wrong, not that one.

The correct answer is Japan.

Here’s a weekly of the Nikkei 225 index (EWJ for those of you who trade ETFs). The index just bounced off its 200-week moving average (blue line) and is consolidating in a tight range.

There’s a lot to like about Japan. It’s one of the cheaper markets at the moment, relative to history.

It’s also one of only two major economies, along with Canada, that’s seeing positive economic surprises currently.

Earnings revisions breadth (average analyst revisions to earnings expectations) is horrendous. But this is actually a good thing because it means that expectations have been fully reset to low levels — the ‘positive surprise hurdle’ is very low. Note the last two times revisions breadth was this bad it preceded major bull runs in the market.

Though I’d like to see the LCI find a bottom first which I think we’ll see when the July and August numbers finally come in.

Anyways, it’s just a potential trade I’m thinking about. I like the technical setup in the Nikkei and will keep a close watch of it. Oh, and also, Michael Burry of Big Short fame recently turned bullish on the country and has been loading up on some Japanese stocks. You can see what he’s been buying here.

Quote I’m pondering —

But if someone could turn their minds from wondering what will happen to them, and make them wonder what they could do, they will be much more cheerful. You know, I am sure, that not numbers or strength brings victory in war; but whichever army goes into battle stronger in soul, their enemies generally cannot withstand them. ~ Anabasis: The March Up Country, Xenophon, 430-355 B.C.

Like good ole’ Henry Ford put it, “Whether you think you can, or you think you can’t — you’re right”. The human will is a powerful thing. Make sure to use it.

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

Have a great weekend.

Musings: Hide Yo Kids… Economists Are Predicting a Recession! Plus, other Fun Facts

Alex here with your latest Friday Macro Musings

Latest Articles — 

A Monday Dozen [CHART PACK] – In this week’s Monday Dozen we take a look at short-term sentiment (still too bullish!), longer-term sentiment (getting pretty bearish), indications of a weakening US economy, credit stress, a long opportunity in the pound, a crowded consensus, and 250-years of stock and bond correlations…

Adaptability Versus Optimization: The Cockroach Approach – I share a passage from an article about risk, specifically that most dangerous kind of risk, that which we cannot see. And then I talk about why you should approach markets like a cockroach.

Articles I’m reading — 

After a long period of silence, Tim Urban, writer and stick-figure artist extraordinaire over at one of my favorite blogs Wait But Why, has returned with the first in what looks to be a long series of posts looking to explore the big question of our time: why is society so damn divided? 

In standard Wait But Why fashion, Tim kicks off the investigation starting way out in left field, telling the story of genes. Here’s the link and a cut from the post. 

“The problem is that the animal world isn’t really an animal world—it’s a world of trillions of strands of genetic information, each one hell-bent on immortality. And in a universe that wants to turn order into chaos whenever possible, the immortality of anything—let alone a delicate and complex genetic code—is a constant uphill battle. Most of Earth’s gene strands don’t last very long, and genes that weren’t talented enough at the immortality game are long gone. The genes on Earth today are the miracle outliers on both the motivation and talent front—such incredible survival specialists that they’re currently almost four billion years old and counting.”

Also, I highly recommend giving General Mattis’ latest essay titled Democracy and the Threat of Tribalism a read. It was published in the WSJ this last week and offers a thoughtful examination of the sorry state of our current geopolitical environment. Here’s the link and an excerpt.

 “An oft-spoken admonition in the Marines is this: When you’re going to a gunfight, bring all your friends with guns. Having fought many times in coalitions, I believe that we need every ally we can bring to the fight. From imaginative military solutions to their country’s vote in the U.N., the more allies the better. I have never been on a crowded battlefield, and there is always room for those who want to be there alongside us.”

Oh, and Ray Dalio was back this week with more long-term debt cycle and 1930s analogies talk (link here)

Charts I’m looking at— 

So this is interesting… A recent WSJ survey shows that economists are very bearish; more economists are predicting a recession in the next 12-months than at any other time in the history of the survey. 

If you’ve just crawled out from under a rock and don’t know how bad economists are at predicting where the economy is headed then I’d suggest giving this 2018 IMF paper titled How Well Do Economists Forecast Recessions? a quick read. 

I don’t know about you but I’d prefer to fade this growing consensus.


Video I’m Watching — 

This is a great short (sub 8 mins) TED Talk from JP Rangaswami who’s the head quant at Deutsche Bank I think. Anyways, JP talks about the importance of being discerning of the information we allow ourselves to consume, comparing our info intake to eating food.

In a world of 24/7 news, constant social media notifications pinging in our pockets (darn you twitter!!!), and just a general firehose of information swamping us with data, opinions, and cat videos ALL… DAY… LONG… it’s now more important than ever to control the info we ‘eat’. Especially for us traders/investors where 99.9999% of market “reporting” is rotten cabbage and does not serve us in any profitable way. Give the vid a watch (here’s the link). 

Also, go and give Cal Newport’s book Deep Work a read. It’ll change your life. 

Podcast I’m listening to — 

I listened to two fantastic podcasts this week. The first was the latest episode of “The Portal” which is fast becoming my favorite podcast — Eric Weinstein is such a skilled interviewer. In this episode, Timur Kuran joins Eric to talk “The Economics of Revolution and Mass Deception” where they dive into the critically topical concept of “preference falsification” and how it can lead to a breakdown of complex systems; such as a democracy. 

In a world like ours where it’s becoming dangerous to honestly express one’s views with others who may not share similar sentiments, it is incredibly important to understand the reverberating consequences of such intolerance of thought. This discussion complements the Rene Girard essays I shared last week. Kuran’s work is really an extension of Girard’s ideas on mimetic desire and violence. Here’s the link. 

The second podcast I really enjoyed is Tim Ferriss’ latest with conservationist, wolf expert, and Montana Senator, Mike Phillips. Mike comes off as a salt of the earth kind of guy. One who is deeply knowledgeable about the important role that apex predators play in maintaining a healthy natural ecosystem. This conversation was a real pleasure to listen to (link here and h/t to Chase at @pineconemacro for the rec). 

Book I’m reading — 

Longtime MO readers will know that I have a soft spot in my heart for really old trading/investing/market books. Well, this week I’m excited to share a new (well, new to me) old market book that I stumbled across. It’s by a G.C. Selden and is titled “Psychology of the Stock Market”. It was published in 1912 and is still every bit as relevant today as it was back then. That’s because we (as in, us humans) haven’t changed one bit over the last 100 or so years, or the last 50,000 for that matter… I finished it in a day (it’s only 90 pages or so) and it’s a fantastic read.

Selden begins the book with the observation that “Human impulses lead to speculative disasters.” He notes that:

“The psychological aspects of speculation may be considered from two points of view, equally important. One question is, What effect do varying mental attitudes of the public have upon the course of prices? How is the character of the market influenced by psychological conditions?

A second consideration is, How does the mental attitude of the individual trader affect his chances of success? To what extent, and how, can he overcome the obstacles placed in his pathway by his own hopes and fears, his timidities and obstinacies?

These two points of view are so closely involved and intermingled that it is almost impossible to consider either one alone. It will be necessary to take up first the subject of speculative psychology as a whole and later to attempt to draw conclusions both as to its effect upon the market and its influence upon the fortunes of the individual trader.”

Here’s another great section where Selden describes with eye-opening lucidity just how the stock market “works.”

“In a sense, the market is always a contest between investors and speculators. The real investor, looking chiefly to interest return, but by no means unwilling to make a profit by buying low and selling high, is ready, perhaps, to buy his favorite stock at a price which will yield him six per cent on his investment, or to sell at a price yielding only four per cent. The speculator cares nothing about interest return. He wants to buy before prices go up and to sell short before they go down. He would as soon buy at the top of a big rise as at any other time, provided prices are going still higher.

As the market advances, therefore, one investor after another sees his limit reached and his stock sold. Thus the volumes of stocks to be carried or tossed from hand to hand by bullish speculators is constantly rolling up like a snowball. One the ordinary intermediate fluctuations, covering five to twenty dollars a share, these sales by investors are small compared with the speculative business…”

You can find the book on Amazon for less than $10. Give it a read. 

Trade I’m considering — 

Back in March, I was writing about the extremely bullish setup in gold (link here). That move has begun in earnest. In fact, it’s been on a complete tear, going nearly vertical over the last few months. While I believe gold is headed to new all-time highs in the future due to the fact that the global gravity well of negative rates is ultimately inescapable (barring any major shift in mon/fiscal policy) making gold quite attractive. It’s likely we see an extended pullback here in the very near future. 

Sentiment, positioning, and technicals are at extremes. The Sentix Risk Radar Index (chart below) which measures a combo of sentiment, positioning, overconfidence, and relative strength is showing a -2.1std move. According to Sentix, a value of -2 or lower has only occurred five other times. 

This chart shows the average price move and duration following a -2std move in these other instances. 

If you’re long, you might want to pare back your exposure some. If you’re more short-term oriented, gold might be worth a shot at the short side on a technical break. 

Quote I’m pondering — 

“Once your brain has become accustomed to on-demand distraction, Nass discovered, it’s hard to shake the addiction even when you want to concentrate. To put this more concretely: If every moment of potential boredom in your life—say, having to wait five minutes in line or sit alone in a restaurant until a friend arrives—is relieved with a quick glance at your smartphone, then your brain has likely been rewired to a point where, like the “mental wrecks” in Nass’s research, it’s not ready for deep work—even if you regularly schedule time to practice this concentration.”  ~ Cal Newport, Deep Work

Get off your phone and look up!!

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

Have a great weekend.

Musings: Memes and Violence, India on the Ropes, and Vol Talk

Alex here with your latest Friday Macro Musings. 

Latest Articles — 

A Monday Dozen [CHART PACK] – In this week’s Monday Dozen I take a look at anxious markets and discuss the fuss over the inverted yield curve, plus we check in on liquidity, sentiment, and relative valuations and end with a sector that has all three going for it. 

How To Identify The Consensus – I share a passage from one of my favorite little known trading books, The Way of the Dollar, which discusses the process in how which one can work to be an effective contrarian. 

MO Podcast: Bonds, Metals, Value, Politics, NO DOLLAR – This week Chris D. and I sat down and talked macro and stuff. 

Articles I’m reading — 

Earlier this year I discovered the work of French philosopher and former professor at Stanford, Rene Girard. And I fell deep down the Girard rabbit hole, exploring his work on mimetic desire, violence and scapegoating, and differentiation and discrimination. His ideas are literally eye-opening stuff. Peter Thiel describes them as such (quote via David Perell):

“[Girard’s ideas are] a portal onto the past, onto human origins, and our history. It’s a portal onto the present and onto the interpersonal dynamics of psychology. It’s a portal onto the future in terms of where we are going to let these Mimetic desires run amok and head towards apocalyptic violence… It has a sense of both danger and hope for the future as well. So it is this panoramic theory… [It’s] super powerful and extraordinarily different from what one would normally hear. There was almost a cult-like element where you have these people who were followers of Girard and it was a sense that we had figured out the truth about the world in a way that nobody else did.”

For those of you interested in digging into Girard’s work (and I highly suggest doing so) I recommend starting with the book Rene Girard’s Mimetic Theory by Wolfgang Palaver. It’s a good overview of the meat and potatoes of Girard’s philosophy. And before ordering that you can start with this excellent summary by Alex Danco, which is one of my new favorite blogs. It’ll take you at least 30-minutes to get through but it’s a half-hour well spent, trust me. Here’s a section from the piece and h/t to @jposshaughnessy for alerting me to this one. 

“Human beings are creatures of mimicry. We are evolutionarily supercharged to do one thing better than anyone else: learn by watching and copying others. And the most important thing we learn is how to want.  

As we grow up and live our lives, we watch others and learn what it is we ought to want. Aside from the basics, like food, water, shelter and sex, our desire for any particular object or experience is not hard-coded into our DNA; we’ve learned to want it by watching other people. But what is hard-coded into our DNA and hard-wired into our brains is the desire to be; and to belong. The true root of all desire, Girard and others argue, is never in the objects or the experience we pursue; it’s really about the other person from whom we’ve learned to want these things.”

Another favorite blog and twitter follow of mine is Macro Charts by @MacroCharts. If you like charts then he’s a must follow. His latest post on a potential bottom forming in emerging markets is a good short read. Here’s the link and his summary from the post. 

I agree. While I’ve noted that EM faces structural growth challenges (explanation here), positioning and sentiment suggest there’s real potential for a decent bull rally. We just need the dollar to crack… 

Lastly, for those of you interested in staying abreast on where the high level monetary and policy discussion is headed, give this recently published whitepaper written by Blackrock and Stanley Fischer a read (link here).

Charts I’m looking at—

If a recession is indeed around the corner as all the major newspapers and financial pundits would have us believe, well then someone should tell the labor market because it seems to have not gotten the memo yet. 

Video I’m Watching —

This is a really good Ted Talk given by Jeff Bezos all the way back in 2007. It’s titled The Electricity Metaphor. Bezos lays out the similarities and more importantly, the dissimilarities, between the late 90s internet bubble and the gold rush. He goes on to explain that the creation of the internet is a lot more like the invention of the electricity, which spawned decades of revolutionary “apps” such as the washing machine and toasters. Also, notice how much dweebier he looks then versus now. It’s amazing what $100bn will do for you. Here’s the link. Oh, and h/t to Patrick O’Shaughnessy’s book club for the find. 

Podcast I’m listening to —

I gave a new podcast a try this week and I’m glad I did. Corey Hoffstein’s Flirting with Models latest interview with volatility trader Benn Eifert is excellent. If you’re at all interested in options or vix trading then this interview is a must-listen. Here’s the link.

Book I’m reading —

I just got Alchemy: The Dark Art of Creating Magic by Rory Sutherland in the mail so I’ve only recently cracked it open. But after seeing a number of people on the twitters call it the best book they’ve read this year, I’m excited to dive in and see what all the fuss is about.

Trade I’m Considering —

I shared this chart of India’s NIFTY 50 parabolic rise a while back. Well, it looks like its trendline is about to crack for the first time in 16-years (chart is a weekly). 

In addition to the growing geopolitical risk in that corner of the world, the data has also been coming in extremely weak. Our Composite Leading Indicator shows that India’s economy is clearly is downturn territory.

And earnings momentum has taken a nose-dive.

I have no position yet but watching this one closely.

Quote I’m pondering —

Traders in all markets are divided into those who know what they are doing and those who do not. That doesn’t mean that those who know what they are doing are right: they just know what they are doing. The rest operate by chance; and, it must be said, the rest are in the great majority. Those who have a system to which they adhere consistently know what they’re doing. Of this small knowing minority, a largish proportion are chartists, or at least rely more or less on price history. ~ John Percival, The Way of the Dollar

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

Have a great weekend.

Musings: President Ivanka, Recession Hysteria, and How Honeybees Make Decisions

Alex here with your latest Friday Macro Musings.

Articles I’m reading —

“The year is 2030 and the S&P just broke the 1 million level following an algo-induced short squeeze after Trump tweets, “President Ivanka headed to China to negotiate an even better deal for USA. Chinese seriously intimidated because she’s hot.” It has now been 12 years, a trade deal is nowhere in sight and despite a global economic collapse, the market still rallies 2% every time Trump tweets that a deal is close—which happens just about every day. The occasional down days are the result of rumors that the UK has scrapped yet another BREXIT plan.” Is how Kuppy, writing at his blog Adventures in Capitalism, kicks off this dystopian (or Utopian, depending on your politics and positioning) satiric look of the world and markets in a decade’s time. Give it a read, here’s the link.

I used to really enjoy reading a weekly digest of earnings calls from Avondale but then they just stopped, sometime last year, I think? Well, it looks like they’re back, but with a new name and site, now going by the moniker The Weekly Transcript. Here’s the link and a Succinct Summary from their most recent post.

“Succinct Summary: We are deep into the expansionary cycle. The persistent global uncertainty is unnerving investors who are choosing to adopt a wait-and-see approach as they look for clarity from the central banks. The market anticipates rates to go lower and the central banks seem to point to a similar direction. Such accommodative policies will spur this cycle on.”

I’ve been knocking big tech stocks in these pages over the last few months. I shared here how global internet adoption is nearing its limits, which implies that the low hanging secular fruit has but all been picked for these richly valued hedge fund hotels. The smart people over at Aoris Investment Management seem to agree… This week they put out a report titled “FAANGs: The sun has set on their days of dominance”.

They lay out the case on why the easy growth days are over for these behemoths and how cannibalization and market maturity are set to drive their profits lower. Here’s the link and a cut from the piece.

“Apple’s core business is facing the challenge of maturation, while Amazon’s core business is being challenged by competition. Google, Facebook and Netflix are challenged by both. For all FAANGs the profitability of their core business is threatened. All five are searching for their ‘next big thing’. The problem is their expectations are based on their past success. A very few, extraordinarily large industries have been created in the last decade or so – online search, social media, digital advertising, smartphones, streaming video and online commerce. Repeating these successes on such a scale is simply very unlikely, and attempting to do so can, counterintuitively, be harmful. By way of analogy, after the Watergate investigation, which won a Pulitzer Prize and helped remove a president, the quality of journalism at the Washington Post went into a long decline. Why? Post reporters all wanted their own Pulitzer and went searching for the once-in-a-generation story and neglected good, day-to-day reporting. The frontier markets that the FAANGs are entering create a sense of excitement and are full of potential, but the cost of participation is high and the probability of success for any one participant is low.”

Oh, and lastly, for those of you interested in learning more about where the gaming industry may be headed in the not-so-distant future. Go ahead and give this interesting piece from Alex Danco a read (link here).

Charts I’m looking at—

As part of my process in trying to decipher the market tea leaves, I like to see what the news considers important (ie, what they’re putting on the front page) as a kind of sentiment check when I think things are getting a little extreme. Here’s a great website that aggregates the front pages of all the major newspapers from around the world. And here’s a compilation I put together showing what the front pages of some of the major US papers were talking about yesterday.

Lots of doom and gloom out there. When you start to see this type of broad based consensus plastering the front pages of all the major newspapers, it’s usually time to start taking profits on your shorts and looking for opportunities to get long again.

Also, the leveraged positioning that was one of the data points which made up our market “sell signal” last month, has completely washed out and is now at 0%, levels which usually coincide with a tradeable bottom.

Video I’m Watching —

I despise the tech and science venture capitalist Josh Wolfe (@wolfejosh). No single man should be allowed to be that intelligent, eloquent, AND have perfectly quaffed hair to boot… I’d throw rocks at him if I saw him walking down the street. Anyways, if you’re not familiar with the amazing work that that jerk and his team are doing over at Lux Capital, well then you’re in luck. They’ve got a new short video series showing off the companies, leaders, and the tech they’re invested in. You can find them all here.

Podcast I’m listening to —

I’ve been travelling this last week (Austin to Cuba to DC and back) so I had plenty of time to do some podcast listening. Here’s the top ones I came across.

Patrick O’Shaughnessy’s recent talk with Brian Christian on AI (link here). I thought their discussion around the concept of the “Explore/Exploit” tradeoff which mathematically breaks down the optimal balance between when one should explore new areas or exploit existing ones was fascinating. I ordered one of his books “Algorithms to Live By” after listening to this one.

I really enjoyed Tim Ferriss’ latest chat with Charles Koch, the CEO of Koch Industries (link here). Now I know me saying that probably triggered half of you, just like any time I write an article where I quote George Soros, saying something about trading no-less, I get bombarded with emails and comments calling me a commie global new order liberal shill and other fun stuff.

Here’s something you should know about me. I don’t care about anybody’s political views. I don’t find any difficulty in gauging the worth of what someone has to say outside of what politics they adhere to. I am politically homeless, I think all politicians and political parties are in a sorry state, and I jump easily and freely across the political divide depending on the issue.

With that said, I found that Charles had a lot of really insightful things to say about how to think about and run a business, how to help out the most disadvantaged in our society, as well as how corporate rent-seeking is rotting the very core of our system.

After listening to this one I did some searching and also found that he was on the a16z podcast with Marc Andreesen not too long ago (link here). In that one, the interview ended with him citing off a number of key essays and books that were essential to informing his “operating model”. I’ve gone ahead and annotated them here for those of you interested in some not-so-light weekend reading.

Charles turned his father’s dinky oil and gas company into one of the largest private companies in the world, doing over $110bn in revenues last year, employing more than 120,000 people across six different industries, and growing the value of the company over 7,000% since he took the reins in 1967.

It might be worth listening to what the guy has to say, regardless of his politics.

Book I’m reading —

This week I started reading a fascinating book by Thomas D. Seeley called “Honeybee Democracy”. I can’t recall how I came across it (maybe a tweet from Michael Mauboussin?) but thanks to whoever recommended it.

Anyways, Thomas Seeley is the leading authority on all things bees. He’s also a professor of biology at Cornell University. As an amateur beekeeper myself, I have long been amazed by the collective decision making abilities (aka, swarm intelligence) of these simple minded insects. The book explores decades of Seeley’s work into how exactly the “hive mind” operates and teases out some lessons we humans can maybe use to improve our own group decision making.

On a somewhat related note, I think in the future, democracies will operate along similar principles. We’ll have policy proposals created by anyone with access to a keyboard and then all citizens will be able to upvote or downvote them like a Reddit post in real-time. Policies that hit a certain critical mass will be implemented by our technocratic civil servants.

This may seem like a bit of a pipe dream but in a world of frictionless information and communication flow, I see it as an inevitability. Collectively we are far smarter than we are individually. Having a handful of elected politicians running a $20trn economy and controlling a 2mn+ man/woman strong nuclear armed military, is insane — or at least that’s what I believe  the people 100-years from now will think looking back at this time.

Here’s a quote from the book.

“By operating without a leader the scout bees of a swarm neatly avoid one of the greatest threats to good decision making by groups: a domineering leader. Such an individual reduces a group’s collective power to uncover a diverse set of possible solutions to a problem, to critically appraise these possibilities, and to winnow out all but the best one.”

Trade I’m Considering —

No charts or single trade recommendations in this week’s Musings. I would just like to point out that there are now E&P stocks, with solid balance sheets, trading at well below 1x FCF… That’s all. If you don’t hear from me again it’s because I went to an early grave refusing to give up trying to pick bottoms in energy stocks.

Quote I’m pondering —

“‎What color is a chameleon placed on a mirror?

The chameleon responding to its own shifting image is an apt analog of the human world of fashion. Taken as a whole, what are fads but the response of a hive mind to its own reflection?

In a 21st-century society wired into instantaneous networks, marketing is the mirror; the collective consumer is the chameleon.” ~ Kevin Kelly, Out of Control: The New Biology of Machines, Social Systems, and the Economic World

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

Have a great weekend.

The “Renewable Energy” Misnomer and Bond RSI Lower Than 08′

Alex here with your latest Friday Macro Musings. This week’s Musings are shorter than usual as I’m currently on a plane to Cuba for a 3-day trip. It’s my first time visiting the small commie island. If any of you have suggestions for things to do or restaurants to eat at, shoot me a reply to this email and let me know!

Articles I’m reading — 

Give this WSJ article titled If You WantRenewable Energy”, Get Ready to Dig a read (link here) h/t to @wolfejosh for the find. It’s written by Mark Mills, an engineer/physicist that currently serves as a senior fellow at the Manhattan Institute and a faculty fellow at Northwestern University’s McCormick School of Engineering and Applied Science.

Mills does a persuasive job of dismantling the “renewable energy” misnomer by laying out the very real environmental costs of these “green” technologies. Mills writes: 

A single electric-car battery weighs about 1,000 pounds. Fabricating one requires digging up, moving and processing more than 500,000 pounds of raw materials somewhere on the planet. The alternative? Use gasoline and extract one-tenth as much total tonnage to deliver the same number of vehicle-miles over the battery’s seven-year life.

Building one wind turbine requires 900 tons of steel, 2,500 tons of concrete and 45 tons of nonrecyclable plastic. Solar power requires even more cement, steel and glass—not to mention other metals. Global silver and indium mining will jump 250% and 1,200% respectively over the next couple of decades to provide the materials necessary to build the number of solar panels, the International Energy Agency forecasts. World demand for rare-earth elements—which aren’t rare but are rarely mined in America—will rise 300% to 1,000% by 2050 to meet the Paris green goals. If electric vehicles replace conventional cars, demand for cobalt and lithium, will rise more than 20-fold. That doesn’t count batteries to back up wind and solar grids.

I worry that the climate change debate has become so politicized and dogmatic that the solutions we’re turning to are ill thought out and suboptimal to other existing and practical options such as nuclear and natural gas. For a longer read on Mills sobering take on our current energy dilemma, check out this paper he authored here, where he “highlights the physics of energy to illustrate why there is no possibility that the world is undergoing—or can undergo—a near-term transition to a ‘new energy economy’.” 

 Lastly, Europe may be going fiscal… Check out this Reuter’s exclusive on Germany announcing a potential u-turn in their fiscal policy (link here). Keep an eye on this story, it’ll be a big macro development if Europe starts boosting its government spending. 

Charts I’m looking at— 

This move in bonds has been something else. 

Video I’m Watching — 

Ray Dalio of Bridgewater put out a 30-minute video this last week where he shares his thoughts on China, the rise of nationalism globally, and some of his biggest worries for the economy going forward. It’s a good summary of some key things to stay abreast of, though I’m not nearly as bullish on China long-term as he is (link here). 

Also, if you’ve got another 8-minutes to spare then go ahead and give this video from commodity fund Gorozen a watch where their head PM lays out his fundamental bull case and why he thinks the yellow metal is going to $2,500 this time around. I’m a fan of their work and find them to be some of the better commodity researchers out there (here’s the link). 

Book I’m reading — 

This week I’m finally starting Neil Stephenson’s Snow Crash. As a dedicated sci-fi fan I have to say that I’m embarrassed that it’s taken me this long to get around to reading Snow Crash, let alone any Neil Stephenson book. I’ve heard from countless others over the years how amazing this book is so I’m excited to finally get around to reading it.

I’m only just cracking it open and hope to finish it over the weekend. I’ll let you guys know what I think.

Quote I’m pondering — 

[Horse] Racing is simple. Everything about the game is logical and common sense and elementary. All the figures and the mathematics and the mechanics of racing can be understood by a child in junior-high school. But the game is decked out in an endless number of minor contradictions and open switches and deadfall traps, in order to lure the average player into doing everything wrong. ~ Robert L. Bacon

Replace Horse Racing with trading/investing and it’s just as true… 

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

Have a great weekend.

Musings: Internet Growth Hitting its Limit, A Teetering Tech Stock, and Some Bear Porn

Alex here with your latest Friday Macro Musings…

Latest Articles —

A Monday Dozen [CHART PACK] – I take a look at CROWDED trades, some of the worst earnings guidance in a decade, the US joining in on the manufacturing recession and more…

There Are No Limits — I share a story about Bruce Lee and his belief that a “man must constantly exceed his level”.

John Burbank Explains How to Trade Eurodollars —  AK gives a breakdown of the eurodollar and lays out Burbank’s big eurodollar macro bet.

Articles I’m reading —

If you own any of the big tech stocks (AMZN, MSFT, CRM etc…) then give Horizon Kinetic’s latest Investors Letter a read (link here). If you don’t own any of these names, then, well, still give it a read because it’s that good and serves as a healthy counterbalance to what’s being passed around as accepted wisdom in mainstream investing circles today.

The letter starts with a rehash of the nuttiness that was the 90’s TMT bubble and discusses the underlying extrapolations — the collectively accepted lies — we all told ourselves to make the insane valuation cases more stomachable. It then goes into a major extrapolation that’s underpinning nearly all big tech valuations today; the continued strong growth of internet adoption. They write (emphasis by me):

If you recall the earlier table that showed global internet usage in 1999, the figure was 4.1%, up from near zero in 1995. But a critical line was crossed just two years ago. In December 2016, 49.5% of the world’s population used the internet, and sometime in the ensuing months, it exceeded 50%. Well over half the world is now on the internet: as of this March, the figure reached 56.8%.

Can a growth limit be calculated? Yes, quite easily; no Excel spreadsheet necessary. If growth were to continue at a 12% rate for five years, the global internet usage rate would equal 100%. It should be self-evident that it cannot reach 100% within five years. At some point during the next 60 months, investors will realize that growth will cease or at least slow markedly from the historical rate.

This is basic arithmetic with big implications… The letter also covers a number of their portfolio holdings, which is dominated by oil & gas, gold, and shipping stocks (looks like we have a lot in common with them). Check it out.

Tech and Media writer Matthew Ball has been writing a great series on private equity and the scourge it’s wrought on our capitalistic system. The first piece in the series is bluntly titled “Why Private Equity Should Not Exist”. Here’s a clip from the article.

While the movement is couched in the language of business, using terms like strategy, business models returns of equity, innovation, and so forth, and proponents refer to it as an industry, private equity is not business. On a deeper level, private equity is the ultimate example of the collapse of the enlightenment concept of what ownership means. Ownership used to mean dominion over a resource, and responsibility for caretaking that resource. PE is a political movement whose goal is to extend deep managerial controls to a small group of financiers over the producers in the economy. Private equity transforms corporations from institutions that house people and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and leave the rest behind as trash.

That’s actually one of the more subtle paragraphs. He also gives a really good overview of the origins of PE and how it became so powerful and intertwined in our political system. Here’s the link.

And finally, Massif Capital’s latest Investors Letter provides a good working overview of the Capital Cycle along with some of their personal additions to the framework + a great overview of the mining sector. Here’s the link and a clip.

The key question for investors is thus not one of demand (which drives short term price action), but rather of competition and supply (which create structural price floors for commodities). As such, we ask: is capital flowing into the industry and flowing into projects that are going to bring on significant supply, depressing industry returns.5 On a timeline of several weeks to years, this flow of capital is positive for equity investors as it is positive sentiment about the industry made real. Balance sheets expand, and asset values get bid up. In the long run, excess supply creates structural changes within an industry that will drive down the industries base rate of return and results in liquidity flows out of an industry.

Charts I’m looking at—

So Trump just jacked up tariffs on China (announced through Twitter, of course) before his negotiators were even done with trying to negotiate, apparently. We have a theory that Trump is escalating the trade war because he wants more rate cuts from the Fed. If he keeps it up, he’ll certainly get those cuts but they’ll come with the cost of recession. The MNI Chicago Business Barometer Index (which leads capex and ISM) is cliff diving. Watch your six out there.


Podcast I’m listening to —

Last week I shared Peter Thiel’s interview on Eric Weinstein’s podcast, The Portal. This week I gave episode 3 a listen, where he interviews filmmaker Werner Herzog (link here).

It’s a super interesting interview and makes me want to go back and watch Werner’s earlier works, like Fitzcarraldo. The dude is a total nut. He’s been shot (with a gun) while filming and refused to go to the hospital because he wanted to finish the scene. He’s trecked through the amazon for months on end, eating worms and navigating dangerous rapids just to make his vision come to life. The guy is obsessed and tells some fantastical stories. Give it a listen.

Trade I’m Considering —



Because it’s a $100B+ market cap company that trades at over 8x sales. It buys nearly all of its growth, as one of the most active and aggressive serial acquirers of tech companies. Often doing zero due diligence, just going off the CEO — who has a major God complex —  Marc Benioff’s “gut feel”. It’s also one of the most crowded hedge fund hotels in the market; CRM’s average weighting amongst funds is more than twice its weighting in the S&P. Plus they built the tallest tower in San Francisco and the stock just broke down out of a rising wedge. Also, a million other reasons.


Video I’m Watching —

This “Five Transitions in Energy Happening Now” RealVision video with Rob West is a must-watch (this clip is the 6 minute summary of the longer interview on the site). There are soooo many moving pieces in the energy space right now. Change is happening and this change is only going to dramatically accelerate over the coming decades. Large dislocations like these usually mean large mispricings, which mean large profits opportunities. It pays to stay abreast (literally). Here’s the link.

Book I’m reading —

This week I found myself rereading sections from Drobny’s book Inside the House of Money for a piece I’m writing. If you haven’t read it, House of Money and Drobny’s other book Invisible Hands, are basically Schwager’s Market Wizards books but focused on primarily macro traders.

Both are great reads. I’d highly recommend picking them up. Here’s a quote from the interview with “The Currency Specialist”.

Markets are just a compilation of information we know and information extrapolated from information we think we know. As such, the collective knowledge of a group of people is always higher than the individual parts, even recognizing for experts. Price action tends to confirm that, and price action never lies.

Quote I’m pondering —

In trading, like golf, it’s how you play the bad shots that really matters. How you play the really crap shots is the difference between the good guys and bad guys. When the shit’s hitting the fan, you don’t pull out a 1-iron. You just don’t — you play defense. ~ The “Currency Specialist”, via Inside The House of Money.

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

Have a great weekend.

Musings: An Economy Full of Valeants, Values Time to Shine, And a Platinum Prospect

Musings: An Economy Full of Valeants, Values Time to Shine, And a Platinum Prospect

Alex here with your latest Friday Macro Musings…

Latest Articles —

A Monday Dozen [CHART PACK] – I ask the Q: Is FX volatility going to be the last shoe to drop? Plus, take a look at wage growth, margins in the eurozone, and fund managers fleeing EM.

Trader Vic’s Market Methods – I share some of my book notes from an old classic, Trader Vic — Methods of a Wall Street Master.

Articles I’m reading —

Give this short twitter thread from Bloomberg journalist, Tracy Alloway, a read (link here). She posits an interesting theory — one that I agree with — which is that Valeant’s use of leverage to buy growth in order to lower its borrowing costs so it could buy more growth etcetera… is a “microcosm” of what’s going on in the broader market.

US corporate debt to GDP is at record highs. When you make the necessary adjustments to strip out the EBITDA add-backs that’s been a popular gimmick in many of these syndicated loan deals, you get EBITDA/Interest coverage levels that are at their lowest levels since 05’ — meaning, the cash flows to pay for these ballooning debt costs are not as robust as they appear. This is Soros’ reflexivity at work. A standard boom/bust feedback loop, which means we may have a corporate sector that’s full of Valeants…

Campbell Harvey of Research Affiliates published a piece that looks at total stock market and value factor returns following the inversion of the yield curve. He points out that while the return for the broader market following an inverted yield curve is poor (cumulative -8.1% over 3-years), the performance of value is quite different (cumulative 19% over 3-years). Something to keep in mind since the yield curve has been inverted for over a full quarter now (here’s the link) and there’s LOTs of beaten down unloved deep value out there.

And, lastly, give Morgan Housel’s latest article titled “The Psychology of Prediction” read if you haven’t already. It’s too good (link here).

Charts I’m looking at—

 The latest NAAIM Stock Market Exposure data shows leverage positioning in equities is running hot. My perfectly drawn circles highlight the other times the indicator hit these extremes over the last two years. Be careful out there.

Podcast I’m listening to —

Regardless of what you think of Peter Thiel’s politics, the guy is a brilliant Outsider thinker, and his latest podcast with Eric Weinstein on The Portal is excellent.

The two talk about our current era of stagnation, stifling regulatory capture, the disaster of our higher education system, and much more. Here’s the link and one of my favorite lines from the chat.

If 51% of people believe something, it’s probably right

If 75% of people believe something, it’s almost certainly right

But if 99.99% of people believe something, at some point you shifted from democratic truth to North Korean insanity

Trade I’m Considering —

 Platinum just completed a 9-week horn bottom on the daily. That’s a classic bullish/bottoming pattern.

Spec positioning and sentiment are muted, which means there’s plenty of potential trend believers to be converted by price (chart on right via Consensus Inc).

Plus, platinum has a lot of potential catching up to do to gold. The platinum to gold ratio is at its lowest level ever.

Book I’m reading —

I’m working on building out a course on FX — while also looking for evidence to confirm my USD bearish bias which is likely to be the thing that finally does me in — at the moment and so I’ve been turning a lot to the definitive bible on exchange rates, creatively named the “Handbook of Exchange Rates” by Jessica James and team.

If you’re at all interested in trading FX then this book will have you covered. It literally has everything (history of FX, technical analysis, carry trades, fair value models, exchange rates in a stochastic discount factor framework etc…). Plus, the book can double as a weapon or a nighttime sedative; it’s about 800 pages long, weighs 5Ibs, and is dry as woodchips but has a TON of good knowledge on the currency markets. Definitely worth owning if you play in those thorny fields.

Quote I’m pondering —

The world is full of people looking for a secret formula for success and power. They do not want to think on their own; they just want a recipe to follow. They are attracted to the idea of strategy for that very reason. In their minds strategy is a series of steps to be followed toward a goal. They want these steps spelled out for them by an expert or a guru. Believing in the power of imitation, they want to know exactly what some great person has done before. Their maneuvers in life are as mechanical as their thinking. To separate yourself from such a crowd, you need to get rid of a common misconception: the essence of strategy is not to carry out a brilliant plan that proceeds in steps; it is to put yourself in situations where you have more options than the enemy does. Instead of grasping at Option A as the single right answer, true strategy is positioning yourself to be able to do A, B, or C depending on the circumstances. That is strategic depth of thinking, as opposed to formulaic thinking. ~ Robert Greene, The 33 Strategies of War

There is likely no place where this is more true than in markets.

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

Have a great weekend.

Musings: Soros’ Total Detachment, Permanently High Valuations, and a DEEP Value French Holding Company

Alex here with your latest Friday Macro Musings…

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All purchases come with a 30-day money back guarantee, so there’s no risk to checking this out!

Latest Articles —

A Monday DozenCharts, Charts, and some more Charts; 12 to be exact. There’s all sorts of stuff in this edition: liquidity, sentiment, monetary policy, the peso and more.

Rough Seas Ahead — I explain why we just went to over 50% cash and share the indicators/data points that tell us there’s a high probability of a market selloff in the coming weeks.

Articles I’m reading —

MoonTowerMeta put together some good notes on @Patrick_Oshag’s interview with @Jesse_Livermore (here’s the link). One of the more interesting takeaways from that chat, in my opinion, was Jesse’s theory that markets may permanently become more expensive. Here’s a cut from the notes explaining his point.

Why is it plausible that markets get permanently more expensive? 

  1. Valuation is a function of the required rate of return to which liquidity is an input. Imagine a pre-Fed wildcat bank. You would not accept such meager real rates of return because you do not have the confidence in the liquidity of your deposit. So much of our required rates of return come down to confidence. The progress of finance has been towards greater networks levels confidence which creates downward pressure on required rates of return. The Fed put is an example of this. 
  1. With low growth and inflation (demographics follow Japan, Europe), volatility will be to the downside but the Fed can also act more aggressively without fear of inflation. Higher structural valuations may be reflecting this market understanding.

I don’t necessarily agree but I don’t disagree either. It’s possible and some good food for thought as we move into this next decade which will almost assuredly look nothing like the last.

Ray Dalio published a paper this week titled “Paradigm Shifts” where he talks about the major economic transition points throughout history along with the one we’re approaching now. It’s a good article and I’m sympathetic to much of what he has to say. Like Dylan said “the times are a changin’” and what’s worked well in the current paradigm is unlikely to work well in the next.

Dalio, in reference to equity and equity-like investments, wrote: “ I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold.” Again, I agree. Here’s the link to the piece, it’s worth a read, along with an excerpt.

I have found that the consensus view is typically more heavily influenced by what has happened relatively recently (i.e., over the past few years) than it is by what is most likely. It tends to assume that the paradigms that have existed will persist and it fails to anticipate the paradigm shifts, which is why we have such big market and economic shifts. These shifts, more often than not, lead to markets and economies behaving more opposite than similar to how they behaved in the prior paradigm.

Lastly, if you’ve got time I suggest giving this Chuck Akre speech titled “An Investor’s Odyssey: The Search for Outstanding Investments” a read. It’s an oldie but goodie. I’ve mentioned Chuck in these here pages a number of times. He’s a value investing OG and spits salty wisdom befitting of his long and successful career in markets. Here’s the link and a cut:

At our firm we have this quaint notion that in certain economic environments and in certain stock market environments both of which we have an abysmal record of predicting, we are well served by owning things which were a modest valuation, at least to start. There’s an old Wall Street ad agent attributed to Goldman Sachs…which says, “Something well bought is half-sold.” Taking a completely different tact, if we had properly identified the compounding in machines and had bought them at modest valuations, we would be set up for the famous Davis double play. That is, the business… will compound our capital at an above-average rate, and we’re in line for an increase in market valuation, but double play indeed.

Charts I’m looking at—

Check out the following chart showing Sentix’s “Current Economic Sentiment” on US data (dotted red line) and the S&P 500 in black. Sentix’s survey data comprises the opinions of over 5,000 investors around the world. Typically, survey data like this should be viewed from a contrarian’s perspective. But, the economic sentiment data is a little different. It usually follows the market, which makes sense, people buy risk assets when they’re optimistic on the economy and vice versa.

What’s concerning is the growing divergence between the survey data and the market itself. The last time there was a divergence like this was in the run-up to the GFC. I’m not saying a crash is around the corner, but we did just recently turn a lot more defensive (over 50% in cash). This market is being propped up by buybacks and passive inflows while the marginal investor is taking his money out as the deteriorating macro data accelerates.

More food for thought…

We at MO have been pounding the table about precious metals for the last two months, saying a major regime change was afoot. And I’ve been noting (aka: tweeting) over the last two weeks about the fantastic looking technical bottom setting up in silver. Well, this week the market finally gave us an answer and it looks like this cyclical bull in precious metals is just getting started.

Even sweeter, is that sentiment for silver is kicking off from really low levels (meaning people have been very bearish on it). So there’s plenty of positioning fuel to boost this trend higher. On a side note, the above chart is from Consensus Inc.

Consensus Inc. has been in the game since 1971. Their sentiment/charting data is similar to DSI but works on a longer time horizon and their subscriptions are a fraction of the price. If you’re interested in checking out their offerings then just follow this link. My friend Richard, who runs the show at Consensus is offering all MO readers a free 4-week trial. The data is also available for those of you with terminals (Bloomberg and Reuters).

I get no monetary benefit from pitching their wares. I’m just a fan of the service and want to get their name out, so check them out!

Video I’m watching —

This is a good and short (18 minutes) presentation from Bill Nygren, CIO of Oakmark. Bill gives an overview of his investment process and talks about the evolving value investing landscape. Here’s the link.

Trade I’m Considering —

This is one of the best looking charts in macro at the moment. It’s a monthly of the Mexican peso. I’m a dollar bear who’s already short USD versus CAD and CHF but will be adding this to my basket very soon. The peso is one of the highest yielding currencies right now. I’ll probably be long by the time this goes out.

Evan Tindell put together a good writeup laying out the bull case for French holding company, Bollore (BOL). I know a number of smart value-focused fund managers who really like this name. I haven’t taken a deep look at it yet myself, but the thesis is compelling and the chart is bien fait.

Book I’m reading —

This week I found myself rereading some passages from Schwager’s Hedge Fund Market Wizards. The entire Market Wizards series is a must read for anybody serious about the game of speculation.

Here’s one of my many highlighted passages from the book (this is from the chapter with hedge fund manager Colm O’Shea in response to what 90% of profitable trading comes down to):

Implementation and flexibility. You need to implement a trade in a way that limits your losses when you are wrong, and you also need to be able to recognize when a trade is wrong. George Soros has the least regret of anyone I have ever met. Even though he will sometimes play up to his public image as a guru who knows what is going on, it is in no sense what he does as a money manager. He has no emotional attachment to an idea. When a trade is wrong, he will just cut it, move on, and do something else. I remember one time he had this huge FX position. He made something like $250 million on it one day. He was quoted in the financial press talking about the position. It sounded like a major strategic veiw he had. Then the market went the other way, and the position just disappeared. It was gone. He didn’t like the price action, so he got out. He doesn’t let his structural views on how he believes the market will play out get in the way of his trading. That is what strikes me about really good money managers —- they don’t get attached to their ideas.

Watch out for the fintwit proselytizers who use ten-dollar words and complex intelligent sounding narratives to tell you why something has to happen. Nobody knows anything, we’re all just playing a game of possibilities. Manage your money accordingly.

Quote I’m pondering —

While the M.P.C. continued to talk about traders in terms of their specialties, most of our traders were becoming generalists, which meant they followed and traded a wide variety of commodities. This type of trading made sense because a trader could shift his attention to the commodities that were active and offered the opportunity for profitable trades. A generalist had to know something about the fundamental aspects of each commodity and combine that knowledge with the appropriate use of technical analysis, which meant that he had to have the ability to interpret chart patterns of the price movements of each commodity. The ability to read charts is more an art than a science. I began to realize that trading was an intuitive process rather than an intellectual one. All traders were privy to the same information. Some had more sophisticated methods of analyzing the markets, but that didn’t seem to make a difference. The people who made the most money had the best money management skills and a good sense of market timing. ~ Irwin Rosenblum, from his book “Up, Down, Up: My Career At Commodities Corporation”

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

Have a great weekend.

Musings: The Man Who Farted in the Great Mosque, a Short-Selling Legend, and a Hidden Value Play

Musings: The Man Who Farted in the Great Mosque, a Short-Selling Legend, and a Hidden Value Play

Alex here with your latest Friday Macro Musings…

Articles I’m reading —

I don’t remember how I came across this one but I’m glad I did. It’s a killer interview with the late salty short-selling money manager, Robert Wilson, from way back in April of 2000 at the height of the TMT bubble. Wilson isn’t as much of a known name as he once was, but back in the day, he was considered one of the best in the game. According to The Street, Wilson “turned $70,000 into $225 million over 26 years before retiring in 1986 at age 59”. Not too shabby…

The interview covers everything from Wilson’s investing strategy, to how the game evolved over his career, to stories about both Julian Robertson and George Soros when they were just starting out. Go and give it a read. The interview is in two parts, here’s the links (part 1 and part 2) and some quotes.

TS: Talk to us a little bit about your basic investing style.

RW: Well, it was a hedge fund, as it’s now well known. I used to go short a lot of stocks. Let’s say I’m worth a hundred dollars and I couldn’t buy more than a hundred dollars worth of stocks. But I could borrow an extra $100 on margin in order to go long $200.

But if the market went down, 30%, 40% with the kind of growth stocks I owned, I could be rendered worthless, whether I was worth $100 or a million dollars. If you own 50% margin and the stock goes down 50%, you don’t have any money left, no matter how much you started with.

So the way I dealt with that was instead of being long $200 worth of stocks with a $100 net worth, I would be long $150 worth of stock, and short $50.

TS: So you were always net long.

I was always net long. When I was bearish, I was maybe 25% net long, and when I was bullish, I might be 125% net long.

Why did you never go net short?

Because I never wanted to get up in the morning hoping that things would be getting worse. All intellectuals, I think — and I don’t use that as a particularly flattering term — but all intellectuals tend to have a pessimistic streak.


TS: What is, while you’re at it, tell us what our investors, our readers want nothing more than to hear what the future will be.

To just show how modest I am, I’m going to quote myself. A couple of years ago I was interviewed in Barron’s, and I said I’ve been bearish for so long I no longer have any respect for my opinion. Unless you believe that the lessons from the Garden of Eden no longer apply, things just don’t stay really good indefinitely. They never have, and the only reason I’m bearish is that things have been so glorious for so long, it will end. If I knew how it would end, then the market wouldn’t be where it is. All good things come to an end. I’m talking Original Sin. And that’s the only reason; forget multiples and valuations and all that. If something outside the market, if there isn’t some adversity in the economy or in foreign affairs, I think the market will continue on its merry way, but something will happen. At least it always has in the past.

I remember Bob Rubin was interviewed in “Newsweek” I think it was and somebody asked him — I can’t quote it exactly — somebody asked him what about the market, and he said, you can take either two attitudes: that we are now in a new economy, in a new era, or you can look at 2000 years of past experience.

Wilson was also featured in John Train’s classic book Money Masters Of Our Time. His was the chapter that included the footnote about the “Ahmed who farted in the Great Mosque” allegory. If you don’t know what I’m talking about, then go and get yourself a copy. Here’s one of my short book notes from that chapter.

The major difference between Wilson’s approach and that of most of the investors in this book is that a Graham, for instance, always sought situations where there is little risk of loss, the Margin of Safety. Wilson. On the other hand, says that he insists on stocks in which there is a major risk, because only such a stock is likely to go way up. “Unless there is fear in a stock, it probably doesn’t have a great capital gains potential,” he says, adding, “I’d be scared shitless if my portfolio consisted of only ten out of my seventy stocks.”

I see the distinction as being more a matter of semantics since you need there to be major “perceived” risk to create a Margin of Safety in the first place. But, it’s still a good line.

Next, I came across this new blog (at least it’s new to me) on the twitters called Thoughts Across The Bow. They recently published a fun post called Institutional Memory and the Neuralyzer that talks about, well, institutional memory, but also inflation in Weimar Germany, George Orwell, and a bunch of other stuff. I don’t necessarily agree with the extent of their conclusion but enjoyed the read nonetheless. Here’s the link and a section from the piece.

This describes the natural decay of institutional memory. This can happen at different rates with different consequences depending on the type of organization and exogenous environment. With each passing year since the GFC, less PMs, risk managers and even CIOs have experienced risk management in a non-centrally planned environment. Talk about modeling errors being institutionalized! As with each passing generation of Germans, the power of the cautionary tale of the destructive nature of hyperinflation is gradually diluted and slowly fades away. It is not ‘deleted’ from history, instead is subject to the human phenomenon of rationalizing resources to a threat that hasn’t materialized in generations.

Lastly, for those of you who really want something to geek out on, give this Sci-Hub paper titled Accelerating Learning in Active Management: The Alpha-Brier Process a look. It’s written by Joseph A. Cerniglia and Philip E. Tetlock. They discuss the number of ways investors can improve by implementing some form of the Alpha-Brier Process. This is a topic I’ve been mulling over for a while and hope to formally insert it into my own process in the coming months. Here’s the link and h/t to @mjmauboussin for the find.

Charts I’m looking at—

Not a chart but a good sentiment check by @MacroCharts.

Video I’m watching —

For fellow Bruce Lee fans out there. Give this a watch (link here).

Podcast I’m listening to —

We had vol trader Darrin Johnson back on the podcast this week (link here).

This is a must listen and I’m not saying that because I’m biased because it’s our podcast. It’s really just that good. Our first podcast with Darrin was insanely enlightening and this one is even better, partly because it’s twice as long which means more time to peer inside the mind of this super-talented options and volatility trader.

Even if you have no direct interest in either of those types of trading — though you should, since we all trade vol in one form or another — you still need to listen to it, because Darrin is just soooo good (am I saying good too much?) at breaking down the practical principles of successful trading and how it needs to be approached from a business standpoint. I’ll be listening to this one at least 2-3 more times.

For the macro nerds, this recent Levy Institute interview with Paul McCulley is top-notch (link here). Paul talks Minsky (the economist you should study most if you want to understand how economies really work), the flatness of the Phillips Curve, and a number of other important relevant topics to today. Give it a go.

Trade I’m Considering —

I’m going to be digging into a number of companies this weekend. One that I’ll be revisiting is Bluelinx Holdings (BXC).

I first wrote about BXC in early 18’ after reading a number of pitches from a few small-cap value hedge fund managers I follow (Adestella Management, Laughing Water Capital, and Greenhaven Road). I then briefly covered BXC again in Jan of this year (link here) but have just been watching, waiting for a technical setup to take a swing at it.

BXC is a wholesale distributor of building products with distribution centers across the Eastern US. Previously, BXC served as the captive distribution arm of Georgia Pacific (GP) which is the country’s largest producer of plywood. In 2004, BXC was spun out of GP by a private equity buyer who did what PE firms do, they saddled the company with lots of debt. This wasn’t great timing of course, with the housing crash just around the corner and all. And in 2017, the PE firm was forced to liquidate its holding in the company at bargain prices.

The company has been actively deleveraging its balance sheet by selling off some of its valuable large land/real estate portfolio. And it’s improving its competitive profile by making some smart acquisitions. The housing sector should benefit from lower mortgage rates and BXC looks like it may have bottomed.

I’ve still got some digging to do but BXC seems to have a number of things going for it.

Book I’m reading —

Last year I spent about a month reading everything I could about the legendary US Airforce pilot, and one of my favorite military strategist, Col. John Boyd. While tumbling down that rabbit hole I came across this book by Thomas Cleary titled The Japanese Art of War. It’s a short read (only 121 pages long) but jam-packed with insights into early Japanese military strategy and especially Zen philosophy — two favorite topics of mine.

I dog eared practically every third page of this book. It’ll probably take me a full day to write down all my notes from it. There’s just so many gems in here such as the following:

You need to realize that when you practice from the state of the beginner all the way to the stage of immutable wisdom, then you must go back to the status of the beginner again. Let me explain in terms of your martial arts.

As a beginner you know nothing of stance or sword position, so you have nothing in yourself to dwell on mentally. If someone strikes at you, you just fight, without thinking of anything. Then when you learn various things like stance, how to wield a sword, where to place the attention, and so on, your mind lingers on various points, so you find yourself all tangled up when you try to strike. But if you practice day after day and month after month, eventually stance and swordplay don’t hang on your mind anymore, and you are like a beginner who knows nothing.

This is the sense in which it is said that the beginning and the end are the same, just as one and ten become neighbors when you have counted from one to ten. It is also like the highest and lowest notes of a musical scale becoming neighbors below and above a cycle of the scale. Just as the highest and lowest notes resemble each other, since buddhas are the highest human development they appear to be like people who know nothing of Buddha or Buddhism, having none of the external trappings that people envision of buddhas.

Therefore the afflictions of unaware lingering in the beginning and the immutable wisdom in the end become one. The cogitating side of your brain will vanish, and you will come to rest in a state where there is no concern. Completely ignorant people don’t show their wits, it seems, because they haven’t got any. Highly developed intelligence doesn’t show because it has already gone into hiding. It is because of pseudo-erudition that intelligence goes to one’s head, a ludicrous sight.

So good…

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. ~ Richar D. Wyckoff

See European Banks (DB, SAN, UBS).

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

Have a great weekend.

Jesse Livermore, Lunatic Horseplayers, and Charles Dickens

Jesse Livermore, Lunatic Horseplayers, and Charles Dickens

Alex here with your latest Friday Macro Musings…

Latest Articles/Podcasts/Videos —

A Monday Dozen — Alex’s latest macro chart storm! Complete with the 12 most interesting macro charts out there plus commentary.

Podcast: The Return of Vol Trader Darrin Johnson — Darrin, a volatility/option specialist and fellow MO Collective member has returned back to the podcast to talk about how to approach the market as an independent trader.

Articles I’m reading —

I’ve got a handful of great reads for you this week, from horse handicapping to earnings deep dives to the workings of Kepler’s mind. Let’s dive in.

Our friend Kean Chan @keanferdy shared this great piece from Albert Bridge Capital which includes a chapter from the book Bet with the Beset: Expert Strategies from America’s Leading Handicappers. We like to write a lot about horse betting and other forms of skilled gambling, such as poker because there are a number of vitally important mental models that can be carried over to the game of markets. Here’s an excerpt from the piece which shares one of these models (here’s the link).

The point of this exercise is to illustrate that even a horse with a very high likelihood of winning can be either a very good or a very bad bet, and the difference between the two is determined by only one thing: the odds. A horseplayer cannot remind himself of this simple truth too often, and it can be reduced to the following equation:

 Value = Probability x Price

…If every horseplayer but you were a certifiable idiot, betting at random on names and colors, you would win every day. Conversely, if the only people betting into the pool were the small number of professionals who make a living this way, your chances for long-term victory would be slim.

Either way, what would make you a loser or a winner would not be a change in the number of winners you bet, but solely the odds that these horses would return. To put this another way: Your opportunity for profit at the racetrack consists entirely of mistakes that your competition makes in assessing each horse’s probability of winning. In that first happy scenario, where the escaped lunatics are betting at random, you would win because you would bet on high-probability horses at fat odds. Every horse in a seven-horse field would be 5-1 (after takeout) and you would just bet on those with a better than 20% chance of winning. Playing purely against the pros, every horse would be bet in accordance with his true chances, and takeout would reduce each return below an acceptable price. You would be taking the worst of it every time.

Expected value or EV is the name of the game. Know your odds and look to exploit other’s errors.

Kuppy put out a short but important read this past week on how index rebalancing creates opportunities. The gist of it is that indexes, like the Rusell small-cap, are the dumbest money out there. They are forced buyers and sellers, who buy more of what’s gone up and sell what’s gone down and do so on a fixed and completely telegraphed schedule. It’s not hard to see how this produces opportunity for those who are aware of the mechanics (again, exploit the errors of others).

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

The Russell indexes all re-balanced on Friday. Starting early in the second quarter, you had a pretty good idea of what they needed to sell. These stocks started collapsing as arbs pressed their shorts and longs stepped away. Who would buy before the index was finished selling? Look at some of the charts below—it’s just gruesome. I’m not saying that some of these businesses aren’t challenged, but they didn’t all get dramatically worse sometime in April. Index funds may have worked fine when the index owned a few percent of the company. Now the index fund is the largest shareholder and cannot enter or exit without wrecking the chart. It’s like the good old days of clean-up prints. Even worse, they tell you exactly how to make money off them. The pension fund I traded against may have been run by the coked-up son of the union boss, but he still knew enough to keep his mouth shut about the trades he was executing. Not the Russell, I’ve had the list for weeks. Are they asking you to front-run them?

Give this recent Ned Davis Research piece titled “Will Value ever outperform again?” a read. There’s a ton of interesting tidbits in there on what macro drivers have created the current growth vs. value performance gap, what conditions are needed to flip this trend, and how this relative performance compares to past cycles. Here’s the link, two charts, and an excerpt.

Stock repurchases are another means of returning capital. By reducing the number of shares outstanding, the remaining shares own a bigger stake in the business. At $250 billion in 2018, Technology was by far the biggest share repurchaser in the S&P 500.

The combination of dividend yield and net repurchase yield is the net payout yield. Technology’s net payout yield is nearly 6%. As long as Technology companies are committed to returning capital to shareholders, they should be able to find an investor base. The risk to Tech, and in turn Growth, is if buybacks disappear.

The anonymous fintwitter @Jesse_Livermore teamed up with OSAM on another beast of a research paper. It’s titled “The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors”. I’m still digesting this one and plan on putting out some notes on it in the coming days. Here’s the link.

Finally, here’s KKR’s latest macro outlook (link here). Lots of great charts in there.

Charts I’m looking at—

Here are two charts that caught my eye this week.

The first one is from that NDR piece and it shows the aggregate net repurchases of shares in the S&P 500, which hit a new record last year. And the second is from Business Insider and shows that after decades of dormancy, labor strikes are on the rise (here’s the link to the article).

Podcast I’m listening to —

I should just name this section “The latest Invest Like the Best Podcast I’m listening to” since the podcast is in here nearly every week. It’s not that I don’t listen to other podcasts, I do. It’s just that Patrick O’Shaughnessy is playing the podcast game at a whole other level. His last two episodes being prime examples.

His episode with @Jesse_Livermore (link here) last week was killer. I especially enjoyed his dissection and cost-benefit analysis of the three subcategories of the analytical process: intuitive, analytical, and statistical inference. It both scares me and motivates me that there are people as smart as him playing this game.

And then this week’s chat with VC Bill Gurley is just an absolute master class on tech business models, network effects, and a million other things. For those of you who don’t know of Gurley, he’s the Stan Druckenmiller of the VC space 🐐. Here’s the link.

Book I’m reading —

My book reading has slowed over the past two weeks. I’ve found myself reading more long-form blog posts and journal papers instead. I’m hoping to catch up on some new books that have recently arrived over the holiday weekend.

But, I have made some progress on Range by David Epstein; I’m roughly ⅔ of the way through and highly recommend picking up a copy. If you enjoyed Colvin’s Talent is Overrated (Range refutes much of its core thesis) and Newport’s Deep Work, then you’ll love Range. Epstein is a research machine as well as a lucid story-teller, the combination of which make for a fast and engaging read. You learn a lot about how we learn in this book.

Here’s an excerpt:

In an age when alchemy was still a common approach to natural phenomena, Kepler filled the universe with invisible forces acting all around us, and helped usher in the Scientific Revolution. His fastidious documentation of every meandering path his brain blazed is one of the great records of a mind undergoing creative transformation. It is a truism to say that Kepler thought outside the box.

But what he really did, whenever he was stuck, was to think entirely outside the domain. He left a brightly lit trail of his favorite tools for doing that, the ones that allowed him to cast outside eyes upon wisdom his peers simply accepted. “I especially love analogies,” he wrote, “my most faithful masters, acquainted with all the secrets of nature. . . . One should make great use of them.”

And if you’d like to read a bullet-pointed summary of the books main points then check out this site (link here), which has an awesome library of really detailed book notes.

Quote I’m pondering —

‘It is only half an hour’– ‘It is only an afternoon’– ‘It is only an evening,’ people say to me over and over again; but they don’t know that it is impossible to command one’s self sometimes to any stipulated and set disposal of five minutes — or that the mere consciousness of an engagement will sometime worry a whole day… Whoever is devoted to an art must be content to deliver himself wholly up to it, and to find his recompense in it. I am grieved if you suspect me of not wanting to see you, but I can’t help it; I must go in my way whether or no. ~ Charles Dickens, rejecting an invitation from a friend (h/t @paulg)

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

Have a great weekend.