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.

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