Alex here with this week’s Macro Musings.
As always, if you come across something cool during the week, shoot me an email at firstname.lastname@example.org and I’ll share it with the group.
Special Event Tomorrow, Don’t Miss It! —
Tyler’s hosting a special event this Saturday, April 14th at 2PM EST. He’s going to show you guys exactly how we use our DOTM (Deep Out of The Money) call strategy to generate massively convex returns — all while keeping risk contained in this dangerous late-stage bull market.
Make sure to register and show up on time because there will not be any recordings!
Our Recent Articles/Videos —
A Coming Bear Market? — AK analyzes the market’s current risk premium spread.
Let Loose The Dogs of War — Alex talks about the late-cycle bull market and how to play it.
Articles I’m reading —
Ben Hunt of Epsilon Theory put out a good read this week. It’s titled The Narrative Giveth and The Narrative Taketh Away. I enjoy Ben’s work but I’ll admit, sometimes (or often?), his writing goes over my head. That’s not that hard to do… but this one I understood, I think.
He talks about the budding inflation narrative in the context of Game Theory and the Common Knowledge Game. Basically, he thinks inflation is coming. And the likely catalyst that will wake everybody up to the fact that inflation is here (ie, our Emperor has inflationary clothes moment… am I doing this right?) will be a higher print in wage growth in the coming months.
Here’s Ben in his own words:
The “not yet” is now. The stage is now set for an explosive market re-evaluation of inflation and its impact on the price of money and the real return on invested capital.This is no longer a complacent crowd. This is now a highly focused crowd. The crowd is now watching the crowd in regards to inflation. Everyone knows that everyone knows that inflation is an important issue. The only thing missing is the Missionary statement, the little girl crying out that the Emperor has no clothes. That’s when common knowledge crystalizes into behavior. That’s the freak-out moment for markets.
What is the crystalizing Missionary statement? I think it’s wage inflation in a future jobs report.
He also includes some pretty natural language process (NLP) charts that show the evolution of the Narrative Machine at work. Here’s one below. I can’t for the life of me tell you what this graph means, but I feel smarter just sharing it with you.
Anyways, it’s a quick and somewhat easy read. Here’s the link.
In a similar vein, EastWest Investment Management put out a worthy post this week that also covers inflation, but through the lens of the 30+ year bond bull market and how they think it’s now ending and what you should maybe do about it.
The post has some great charts, like this one. Here’s the link.
I’m not currently sitting in the inflation is here camp.
The cyclical pressures are certainly building, as is typical in the later stages of the debt cycle when the economy is operating at full capacity. But there’s a number of secular disinflationary forces at work and plus, even the cyclical pressures aren’t showing any major strength yet.
Bloomberg economist @Boes_ did a good breakdown of CPI yesterday on What Did You Miss? You can watch the five minute clip here.
And last but not least, Chris Mayer shared a treasure trove of really well taken notes from a class Joel Greenblatt taught on investing. There’s over 300 pages of quality stuff in here that I’m just starting to go through. He had a number of guest lecturers, like Bill Miller, come in and teach as well. I’m a big fan of Greenblatt and the notes are definitely worth checking out. Here’s the link.
Oh… and one more thing. This is for you sci-fi fans. Here’s a great sci-fi short, titled The Last Question, written by Isaac Asimov (one of my favorites) that I came across this week. It’s a really fun read.
Podcast I’m listening to —
I listened to two great podcasts. The first was Patrick O’Shaugnessy’s chat with Nikhil Kalghatgi of CoVenture Partners, a VC firm. Patrick has become one of the best podcasters out there, in my opinion. And this episode was another outstanding listen. They cover a wide range of topics; I especially liked Nikhil’s description of Moonshot Investing (I’m thinking about writing a macro trader’s equivalent piece on the topic soon). Here’s the link, give it a listen!
The second podcast that I really enjoyed was Russ Roberts (of EconTalk) discussion with Mayo Clinic oncologist, Vincent Rajkumar. Russ and Vincent talk about the high costs of cancer drugs — and pharmaceuticals in general — along with the reasons why, and some things we could maybe do to fix it. The episode is as infuriating as it is enlightening (only government could screw up the pricing mechanism/market this badly). Here’s the link.
Book I’m reading —
I’m usually reading 3-4 books at any given time. I like the mix to be something like (1) market/investing related (2) one that’s philosophy or history related (3) and a sciency type book. The 4th one would be a fun sci-fi/non-fiction type book. This mix keeps me interested and I like it because you often find that two very different books, like one on science and one on markets, will talk about the same core fundamental truth; just through a different context.
Anyways, I read (actually, I listened to on Audible) a fantastic book this week titled Coming of Age in the Milky Way by Timothy Ferris (not that Tim Ferriss, a different one, only one S).
It’s an older book, published in the late 80’s. I first came across it while I was traveling through Guatemala last summer. It was on the bookshelf of an Airbnb I stayed at. I read a couple chapters and fell in love with the writing — the book reads like poetry. But then left the Airbnb and so I didn’t get a chance to finish it. I eventually downloaded the audio version and finally got around to listening to it. I enjoyed it so much that I ordered a hard copy of it.
It’s a book about the arc of science and the major discoveries, and the people who made them, from Science’s humble beginnings to today.
The audiobook is also excellent and it’s short. Under 3 hours.
I’m also working on finishing Ed Yaredini’s beast of a book, titled Predicting The Markets. I’ll do a full writeup on it when I’m done in next week’s Musings.
Chart I’m looking at —
I’ve got two charts for ya this week.
The first one is from @teasri showing an interesting correlation between the year-over-year change in the gold to silver ratio and the trade weighted dollar. This is not one I’ve come across before. Any of you have thoughts on why this correlation may exist?
But anyways, the correlation has broken down and the last time this happened was in 07’-08’ and it led to the dollar eventually rallying back to converge.
And for you history buffs, here’s an awesome timeline of the different empires/nations that have existed throughout history. Pretty cool…
Trade I’m looking at —
The trade I’m looking at this week is probably one of the more disliked stocks in the world. It’s a UK energy producer. Anything with to do with the UK or energy have been, well, somewhat out of vogue with the market for a while now.
That’s probably why the stock, Noble Corporation (NE), is down nearly 90% from its 2014 highs. This chart is a monthly.
We’ve been bullish on oil and related plays since last summer.
The gist of the bullish argument is that the oil market is back in balance and global demand has been consistently overshooting forecasts (largely due to Asia hitting the Wealth S-curve). And there’s absolutely no geopol risk premium being priced in at the moment.
While at the same time, energy stocks are trading at record low discounts. This is because the “Rise of the EV and Death of the ICE” narratives have become popular. That narrative might end up being true, or it could be true but early, or maybe it’s just flat out bananas.
As macro traders we don’t need to predict the future. We just need to assess what’s priced in (what the embedded expectations are) and weight those against the possible outcomes, to see if there’s any expected value (EV) to the trade. And in select energy stocks I think there most definitely is…
Free cash flow in the space is improving and you can find many stocks in the space that trade at deep value levels and that have strong balance sheets and increasing FCF.
NE has long-term DOTM call options for dirt cheap — though the company has its issues, like a high debt load. But the sentiment is so one sided here and the chart is setting up nicely. Not a bad way to play further upside in the energy space, imo.
Quote I’m pondering —
The financial markets, as anyone familiar with them knows, are deeply paradoxical. They have a logic of their own which is in a way the opposite of normal logic; Hence the market adage “sell on the news” applies to good news not to bad news. Hence other bits of market lore like “a bull market climbs a wall of worry: a bear market flows down a river of hope”. Markets do whatever they need to do to confound the greatest number of people.
This happens because prices reflect expectations. If everyone expects unemployment to rise, or a trade balance to fall, or inflation to remain steady, there is no intrinsic reason why they should be wrong: the expectations doesn’t affect the outcome. But if everyone expects share prices to fall, or the dollar to rise, there is every reason why they should be wrong: because current share price levels already reflect the expectation of lower prices, and the current level of the dollar already discounts a rise. In other words, the expectation vitiates the outcome. ~ John Percival writing in The Way of the Dollar
I love this excerpt. So much truth in here. The interaction between expectations and prices is one of those things that nearly everybody acknowledges but very few actually understand, or make use of in their analysis. And they do so at their own detriment because playing the player is what this game is all about…
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