The Li Keqiang Index, Machine Learning, And Some Advice From Munger

Tyler here with this week’s Macro Musings.

Article I’m reading —

Last week Alex talked about the developing weakness in the Li Keqiang Index and what that means for the macro environment in the months ahead.

The CME group wrote a fantastic article about this index that dives into its components, its history, and its uses. (Link here)

What they found was the the Li Keqiang Index does a much better job at cueing moves in industrial metals and other commodities than the official Chinese GDP number. Here’s a snippet from the study they did on copper.

The most important point, however, is that copper prices demonstrate a much higher correlation to the Li Keqiang index (as much as +0.55, four quarters, or one year, later) than it does with China’s official GDP.  The latter achieves a peak correlation of only around 0.25, with a lag of 1-3 quarters.

The rest of the article goes on to talk about what the Li Keqiang and the Chinese yield curve imply for today’s commodity and currency markets. Definitely check this out if your wondering how China currently fits into the macro puzzle.

Podcast I’m listening to —

My favorite vol trader in the game, Euan Sinclair, made an appearance this week on the Futures Radio Show. (Link here)

If you do any trading in the VIX and options space this is a must listen. Euan’s a veteran no-bullshit derivatives trader who got his start on on the floor before computers took over. He now runs a volatility hedge fund called Talton Capital Management.

I like Euan’s approach to trading because it blends scientific rigor (he has a PhD in physics) with floor trader practicality and simplicity.

I’ve made a lot of money over the years following some of his ideas on how to trade VIX products. Listen to this podcast if you want further detail on how he approaches the VIX space.  

Video I’m watching —

If you’re like me you’re always reading “machine learning this” or “machine learning that” — especially if you monitor the quant crazed financial industry.

Quant funds now use machine learning to develop trading strategies that a human can’t even understand. That’s a really scary thought for someone who’s not familiar with the technology.

But after watching this video, I’ve since warmed up to the idea. It’s the best piece of content I’ve seen on machine learning because it’s easy to understand even if you’ve never seen a line of code in your life.

I have no doubt that this tech will continue to integrate and take over certain parts of human workflow and I think it’s important that everyone has a conceptual understanding of how it works. Give it a look.

Trade I’m looking at —

I’m keeping a close eye on crude oil futures because the price action looks terrible and there’s still a record spec long position built up according to the latest COT data.

I think it’s likely we get a washout of the bull move to reset the positioning before the trend resumes higher. Here’s how I think the current price action plays out.

A tactical short position here is interesting if you’re looking for a quick counter-trend trade.

Quote I’m pondering —

How do you learn to be a great investor? First of all, you have to understand your own nature. Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology. If losses are going to make you miserable and some losses are inevitable – you might be wise to utilise a very conservative pattern of investment and savings all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one size fits all investment strategy that I can give you. ~ Charlie Munger

They’re a thousand ways to skin the cat in the speculation game. We all must do what fits our psychology best. Follow others for new ideas and inspiration, but make sure you’re still eating your own cooking. It’s tough to stick with an approach you haven’t designed yourself from the bottom up.  

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

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



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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.