Trader War Stories, The Green Lumber Fallacy, And Bitcoin Short Sales

Tyler here with this week’s Macro Musings.

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


Recent Articles/Videos —

Buy Gold?  — AK reviews what’s happening in the precious metals space.


Articles I’m reading —

There’s a brand new website out called Where Is Beeks? that has a hilarious collection of old trader war stories. Kevin Muir from the Macro Tourist has been working on the project — so you know it’s good.

If you need a break from the daily grind check this site out. Each story takes about 2-5 minutes to read — a perfect break from the day.

Here were the last two I read:

Behavior Issues

Soros’ Worst Trade

They are also taking submissions, so if any of you guys have some fun trading war stories hit them up!


Video I’m watching —

Raoul Pal and Real Vision recently put out a youtube video going through Raoul’s latest macro views. (Link here)

Even though I disagree with much of what he had to say, I still watched to the end as a way to Red Team my current market assumptions.

Here are the highlights:

Raoul thinks Google is one of the most important charts in the world — and if that chart cracks it will send all the other high flying tech stocks down with it.

He’s also closely watching the LIBOR/OIS spread and claims that its recent rally is a harbinger for dollar strength.

Finally, he’s been looking at the Goldman Sachs Financial Conditions Index which shows that liquidity is starting to tighten.

All of these signs entrench him firmly in the deflationary camp i.e. long bonds and USD paired with falling equities.


Book I’m reading —

I picked up Nassim Taleb’s latest book, Skin In The Game, and have thoroughly enjoyed it. If you liked his first three books, you’ll like this one as well.

My favorite part of the book so far was a rehash of the green lumber fallacy from Antifragile.

A fellow made a fortune in green lumber without knowing what appears to be essential details about the product he traded –he wasn’t aware that green lumber stood for freshly cut wood, not lumber that was painted green. Meanwhile, by contrast, the person who related the story went bankrupt while knowing every intimate detail about the green lumber, which includes the physical, economic, and other aspects of the commodity. The fallacy is that what one may need to know in the real world does not necessarily match what one can perceive through intellect: it doesn’t mean that details are not relevant, only that those we tend (IYI-style) to believe are important constitute a distraction away from more central attributes to the price mechanism.

It’s a great reminder as to why a macro trader must honor his stops. Price is king and we have to respect it regardless of how good our thesis looks on a slide deck.


Chart(s) I’m looking at —

I’ve been tweeting this chart out all week. (If you want to follow me in real time here’s a link to my twitter account)

SHY/HYG is a rough proxy for credit spreads. Credit spreads and the VIX are highly correlated so we can use this time series as a way to get a jump on the direction of future volatility as well as the direction of the SPX.

So far the spread has failed at resistance and has broken its short-term uptrend. That’s good for equity bulls.

But if this chart turns around and decisively breaks out of that grey box then it will be another 3-months or so of high volatility chop. If that’s the case then we’ll have to wait until fall for a nice risk on move in equities.


Trade I’m looking at —

I dipped my toe in the water on the short side of bitcoin using the XBT future traded on the CBOE. It’s a pretty small contract, $1.00 per point, so it’s a nice way to get your feet wet if you want to play in this new market.

I’ve been shorting into these new lows.

The nice thing about BTC is that since the market is so young, super basic trend following rules work pretty well. I’m using a simple 20-MA/50-MA cross right now to get me short. The first short signal that occurred in January of this year worked out really well. And so far this second signal has paid too.

I think bitcoin will continue to go down as crypto bros sell off coins to pay the IRS. The risk-off action in conventional markets also puts a huge headwind on something as speculative as bitcoin.

My target for this short is right around the $4,000 area.


Quote I’m pondering —

Real knowledge is to know the extent of one’s ignorance. ~ Confucius (551- 479 BC)

Taleb would agree.

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 posts his mindless drivel there daily.

Here’s a link to our latest global macro research. And here’s another to our updated macro trading strategy and education.

 

 

Skin In The Game

Related Posts

Subscribe To Our Newsletter

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.

AK

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.