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Musings: A Dangerous Idea and an Italian Defense Stock Ready To Launch

Alex here with your latest Friday Macro Musings…

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

Latest Articles/Podcasts/Videos —

Your Monday Dirty Dozen [CHART PACK] — I look at Democratic Primary probabilities, then give a coronavirus update along with potential regional economic impacts, and end with some monthly and weekly charts on major assets.

Articles I’m reading —

This Investor Letter from Tyro Capital Management is one of the best letters I’ve read in a long while. For those of you on the twitters, Tyro is run by Dan McMurtrie (aka. @SuperMugatu) who is one of the funnier personalities in the FinTwit space.

They cover a whole range of great stuff, from the three “triggers” they see driving a major societal confrontation, to some wise words on the theory of investing, as well as a few writeups on a couple of their holdings. It’s really an excellent piece. I suggest you read it in full. Here’s the link and a cut.

“Managers who are dogmatic and eschew securities outside of an overly rigid definition of their style inevitably form emotional and psychological issues as they underperform (“The people making money right now are hacks! This will end badly! These companies are fads!”) or outperform (“I showed those fools! No one listened to me and now they are getting what they deserve! I’d never buy XYZ at any price!”). Instead of viewing the market rationally, they have developed an adversarial relationship and association with certain types of investments and investors, definitionally limiting their opportunity set. It is worth noting that very few of the money managers who made immense sums of money prior to the 2008 financial crisis would listen to bearish views as it approached, and very few money managers who made immense sums of money in the crash have been able to make any money since, largely due to psychological anchoring. And then there’s David Tepper. He owns an NFL team now.”

Charts I’m looking at—

Deutsche Bank (DB) published a good slide deck the other week where they essentially show the diminishing dynamism of the American economy. I’ll share with you a few.

The percent of children earning more than their parents has declined from over 90% back in 1940 to just 50% today.

There are fewer new businesses being created while existing firms are staying in business longer.

Which is helping to fuel widespread discontent and pessimism amongst the younger generation.

Video I’m watching

Here’s 45-minutes of Patrick O’Shaughnessy interviewing Michael Mauboussin on stage at Capital Camp 2019. They talk about how to improve processes for thinking, decision making, and investing. And they also get into complexity theory, information transmission, and competitive advantages amongst many other things. It’s good and well worth your time. Here’s the link.

Book I’m reading —

There’s a killer used book store chain here in Texas called “Half Priced Books”. It’s like a Costco, but instead of 50-gallon drums of olive oil, they just have shelves and shelves of used books. First time I went there I ended up with a literal shopping cart filled with new reads. The place is awesome.

Anyways, this week I started reading one of the purchases that I picked up on my last trip. It’s titled “Zero: The Biography of Dangerous Idea” and it’s written by Charles Seife. I’m roughly 40% of the way through it and got to say I’m really enjoying it. If you’re into math and history then I’d recommend picking yourself up a copy.

Here’s an excerpt.

“Irrationality was dangerous to Pythagoras, as it threatened the basis of his ratio-universe. To add insult to injury, the Pythagoreans soon discovered that the golden ratio, the ultimate Pythagorean symbol of beauty and rationality, was an irrational number. To keep these horrible numbers from ruining the Pythagorean doctrine, the irrationals were kept secret. Everyone in the Pythagorean brotherhood was already tight-lipped — nobody was allowed even to take written notes — and the incommensurability of the square root of two became the deepest, darkest secret of the Pythagorean order.

Trade I’m looking at —

Value focused hedge fund, GreenWood Investors, pitched an Italian defense and aerospace company named Leonardo (LDO) in their quarterly letter a while back (link here). The bull thesis was quite simple. LDO is set to capitalize on their recent heavy investment and their growing backlog would improve their cash conversion profile. In addition, the company had recently won big contracts with the US DoD and is also nearing certification for the first civilian tiltrotor in history.

I’ve had the stock on my watchlist for a while and have just been checking in on the tape from time to time. Well, recently, the stock has started to break out of its year-long + coiling wedge. Admittedly I haven’t done any digging myself into the stock yet but I’m planning to this weekend. Let me know if you’re familiar and have any thoughts on the company.

Quote I’m pondering —

I’ve found this to be true in every domain I’ve operated in — and I’ve lived many lives.

Almost everybody is full of shit. Seriously… it’s true. The vast majority of people who rise near the top are mostly just good talkers, ass kissers, politicians etc… The only professional areas where this isn’t true are MMA’ers as Tucker notes and other fields like military operators, professional poker players, real traders etc…The key differentiator being having serious “skin in the game”.

The finance industry is the worst offender here. Most hedge fund managers are just pedigreed dimwits who went to a good college and are really practiced at spewing Buffettism’s. They don’t actually know what they’re doing. They think they do but that’s because they’ve never really thought about the why or what behind what it is they’re doing. And they don’t need to because they get paid on AUM and trying to not lose much more than their benchmark… which is literally something “dart-throwing monkeys” can do.

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

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

Have a great weekend.

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