Here’s your latest Friday Macro Musings…
As always, if you come across something cool during the week, shoot us an email at email@example.com and I’ll share it with the group.
Latest Articles/Videos —
Making Better Decisions — Chris explains his morning routine which primes him to make the highest quality decisions during the trading day.
The Fed Is Against You: AK explains how the Fed turned against markets and what that means for equity prices.
Articles I’m reading —
Check out this interview the CFA Institute did with Robert Shiller — I especially liked Shiller’s discussion around narrative economics, Traditional economic theory completely overlooks the impact of humanity’s thoughts, mood, ideas, and values on asset prices. And that’s a large reason why economists and the Fed are notoriously horrible at predicting financial market movements. Robert Shiller explains below how he thinks narratives shape economic decision making.
The theme of my book is that there are new ways of thinking that are encouraged by stories that people tell. We communicate through stories that are salient or that appeal to us in our thinking. Typically they have a human interest component and often a political component. They often affect our thinking and our moral judgment. The one thing I don’t hear from economists very often is that people feel that their expenditure patterns or their investment patterns are related to a sense of proper or moral behavior. A lot of curtailments of spending have nuances of boycott in them: “I’m going to boycott these companies.” It’s part of the emotional tenor that companies may face in bad times.
Even though I’ve been studying narratives and changes in human thinking, it’s still relatively new. I believe that economics and finance research will need to be more real‑world oriented and more willing to use information — digitized texts, for example — about how people are thinking and how their thinking changes. We’re not all there yet.
The full working paper on the topic can be found at this link. Here’s the abstract (emphasis mine):
This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned towards narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920-21 Depression, the Great Depression of the 1930s, the so-called “Great Recession” of 2007-9 and the contentious political-economic situation of today, are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future.
Understanding and dissecting the macro narrative is how Macro Ops generates an investing edge. Because as Shiller says in his abstract above “these narratives are deeply human phenomena that are difficult to study in a scientific manner.” By focusing on interpreting the macro narrative we can play a game that the machines can’t.
The chart below shows a collection of US Regional Fed surveys graphed along side the widely watched ISM number. It’s suggesting that the ISM number has further to fall in February’s release.
What does that mean for equity markets? We could be in for a few more months of sideways chop and vol a la’ 2016. It’s time to exercise patience.
Music I’m listening to —
If you need help focusing at work I recommend giving this a try. It’s a 2-hour long youtube video that plays binaural beats and other soothing sounds. While listening I felt a deep sense of relaxation that allowed me to reach a flow state during some deep work sessions this past week. Our new team member Chris D’s a big fan of binaural beats as well. (Check out his newest post here on the subject.)
It’s not for everyone, but I recommend giving it a try the next time you need to crush through some mentally taxing work.
Podcast I’m listening to —
Dr. Peter Attia and Tim Ferriss had an interesting chat about mental health that I found enjoyable. (Link here) They dive into the world of psychedelic drugs and how these compounds have been shown in the newest research, spearheaded by the John Hopkins Psychedelic Research Unit, to dramatically alleviate depression and anxiety. Ferriss has pledged over a $1,000,000 dollars towards this effort.
Both Tim and Dr. Attia have used psychedelics for therapeutic purposes, and they go through why they think these experiences have helped them immensely in the show. This type of stuff isn’t normally talked about by high profile people. Their candidness was refreshing.
If you want more advice on health and longevity techniques I, recommend checking out Dr. Peter’s website here.
Trade I’m looking at —
The short vol trade has popped back up on my radar. VIX dropped from a high of 36 on Christmas Eve all the way down to 20. And realized vol in the S&P has started to contract as well. This trend change has me stalking the volatility products for a setup.
I noticed that VVIX — or vol of vol has been trading in the bottom of its range which is unusual. When VIX rips and SPX tanks usually options on the VIX derivatives become more expensive. But that didn’t happen in this latest sell off.
This makes buying optionality on the volatility complex attractive. My ideal entry would be on a retrace of the current leg down in VXXB. (VXX is getting delisted at the end of the month and VXXB will take its place.)
If price shot back up to those levels I would look at the buying the June 41 puts in VXXB. Going long VXXB puts allows us to short volatility in a risk defined way. And if the market stays propped up from here until summer, vol will contract nicely and these puts will show a hefty gain.
Quote I’m pondering —
Bulls make more money than bears, so if anything being an optimist about life and about things in general is a great attribute to have as an investor. You just can’t be starry eyed and naive. ~ Stanley Druckenmiller
I thought this was a pretty strong statement coming from someone who’s made a lot of money in bear markets. It’s okay to get bearish from time to time, just don’t stay that way for too long. Economies, nature, and mankind are naturally wired to grow, don’t fight that trend.
Have a great weekend.