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.
- The Republic of Science by Michael Polanyi
- Science as Falsification by Karl Popper
- Competition as a Discovery Procedure by F.A. Hayek
- The Use of Knowledge in Society by F.A. Hayek
- How the West (and the Rest) Got Rich by Deirdre McCloskey
- In Pursuit of Happiness and Good Government by Charles Murray
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.
