The Next Narrative Shift: Why I’m Bullish

The Next Narrative Shift: Why I’m Bullish

Nine months into the year it’s hard to imagine how the markets could be further removed from 2018’s initial lofty expectations of global synchronized growth. Per usual the same goes for the narrative surrounding President Trump. As recent as the spring, investors believed the USD was uninvestable because of President Trump’s policies. Tillerson had just been fired and investors were panic selling the USD. From CNBC:

“Trump just removed another voice of reason,” said Keith Underwood, former trader and head of Underwood FX consulting. “Short-term traders took advantage of people’s fears over the tariffs and pushed the dollar lower.”

Yet now we find the consensus narratives to be polar opposites of what they once were just months prior. Investors have to buy the USD because of Trump and his trade policies, and because the USD is going up it’s hurting China, Emerging Markets and global growth. European growth is nowhere to be found. And because we are “late cycle” and private tech valuations are out of control investors are quick to scare. And if that wasn’t enough, the upcoming US midterm elections are weighing on investors belief that Trump will still be President in 2019.

There’s a lot of uncertainty, worry, and fear out there when there wasn’t much just a few months ago. The dramatic shift in the narrative has caught many investors off guard. And yet we must remember that these are still narratives. The future’s not set in stone and if the narrative can shift this quickly in one direction it can just as easily shift in the opposite direction.

In this case, there’s a lot of uncertainty out there and it’s keeping a lid on risk assets, but by the end of the year I expect a lot of these fears to abate.

The odds of a meltdown in China or a devaluation of its currency are much lower than the market has priced in. The same goes for the “EM crises”. With numerous trade deals coming down the pipe, Trump’s trade wars are not going to crush global growth and drive the USD higher, and if all this is true Trump’s odds of holding onto his power are much higher than the market expects as well.

What I believe most investors are missing is the political solution to these many problems. At every turn investors have underestimated and misjudged Trump and continue to do so.

And because investors continue to underestimate Trump’s ability, they have mispriced the timing of a US China trade deal. The consensus view is that China is going to wait out Trump till after midterms where he could be considerably weakened. Which on some level makes sense. Except Trump has all the leverage, and China has a lot to gain by coming to the table.

China and the US can be fierce enemies but they can also be fierce friends and with pragmatic leaders at the helm of both powers I expect the latter to be the more likely case.

Progress on North Korea, a proxy for US China relations, continues to improve.

Furthermore, it’s important to realize who has the leverage in the negotiations. Since Trump started turning the screws on China in March, the equity markets have diverged. (QQQ / US tech in red, CQQQ / China tech in black)

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By the way if we think about the timing of Trump’s actions we will once again find him wiser than the market gives him credit.

Then again the S&P 500 despite all the fear mongering recently broke to all time highs. Perhaps the market isn’t so dumb…

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Stock market intelligence aside, just a few months after Trump started turning the screws on China Bannon came out and said that essentially the US has all the leverage:

“We are winning. They talk about the Chinese government coming back at us but for the first time they don’t know what to do… We can take the whole thing down.

And Bannon said that before the US and Mexico agreed to a new trade deal that would shift US supply chains out of China and into Mexico.

Furthermore the trade deal with Mexico provides evidence that Trump is willing to negotiate fair deals with other nations.

Once again we find that Trump’s twitter feed has to be read with a certain lens.

But to sum up, the US has won this round of the trade wars. A deal between the US and China is coming sooner than the market expects. And this deal will have profound implications for the USD.

Following the US Mexico trade deal Mnuchin said the following (my emphasis added):

One of the top issues we discussed was the currency. As part of any deal, we would want to make sure that they support their currency. We’re not going to have a situation where we pick up gains in trade to only lose them in currency devaluation. And as part of the NAFTA deal, for the first time we have a very strong currency chapter that talks about currency transparency, so this is something we’re very much focused on in all of our trading relationships.

And then speaking on China’s Yuan.

As Worth Wray has been saying for many months (if not years), Trump is aiming for a Plaza Accord type agreement that will lead to a global rebalancing.

Thus if there is a coordinated action to weaken or at least halt the rise of the USD, emerging markets may not be as bad as consensus thinks.

According to the article there is simply no shortage of reasons to be afraid out there.

“Blame it on a stronger dollar, escalating tensions since President Donald Trump came to power, worries over a full-fledged trade war with China or rising interest rates in the U.S., this time around the crisis seems to have entered a new phase.”

As I have already suggested, many of these fears appear to be overblown. And what if Emerging markets and China are actually more stable than investors realize?

EM high yield credit spreads are also telling a different story or for the more pessimistic investor how much further this crisis has to go IF things get out of hand.

Korea’s exports to China have actually begun to rebound in August.

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Even the perennial country of the future Brazil is holding up.

Furthermore, Brazil’s leading Presidential candidate was stabbed and seriously injured on Thursday. And yet USDBRL has since fallen. And Brazilian equity markets were actually up on the day. Brazilian ETF (EWZ) is on support with a positive RSI divergence to boot.

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Lastly, the most binary and unpredictable event in markets is the midterms which have turned into the re-election of Donald Trump.

If the Dems win, there will be an impeachment and Trump’s legislative agenda will grind to a halt. This is undoubtedly weighing on markets. Where it stands right now, Trump’s chances of weathering the storm appear murky at best. But given all the geopolitical and economic fears out there investors once again may be missing the bigger picture.

It’s the economy stupid.

Now imagine how much the US economy could rip once the trade deals form into place and businesses have a clearer picture of the geopolitical environment. From the LA Times:

“Several big manufacturers and consumer goods companies have cited growing trade tensions as factors for their lower-than-expected financial results in the just-ended second quarter.”

Which makes the ISM manufacturing index 14 year high even more remarkable.

Trump is also riding a growing wave of support from black voters.

From the 2017 book Bannon: Always the Rebel:

“I keep telling people. Once we get 25 or 30 percent of the black working class, once we get 25 or 30 percent of the hispanic working class, we’re gonna govern for 100 years.”

Trump is converting the Republican party into a worker’s party. By halting illegal immigration he is boosting wages for the poorest Americans. By cutting taxes, and deregulating the economy and attacking unfair trade deals he’s made the US a more attractive place to invest. Jobs are coming back and wages are starting to rise.

By aligning himself directly with the working class, Trump has forced the Democrats into a near impossible position. They either work with him which would help him, or they have to attack him and by proxy the working class citizens as well.

It’s clear which route the Democrats have taken, but the stronger the economy gets the harder it will be for the Dems to fight back. Their political attacks increasingly resonate as hollow and before long I expect Trump to disarm them of their precious Mueller investigation.

In the end, Trump’s chances of holding onto his power are much higher than the market anticipates and it could become clear to the market before the election ever takes place. And as the final cherry on top of this bearish to bullish narrative shift, we could see the market go from pricing in a complete halt of Trump’s legislative agenda to tax cuts 2.0 and a massive infrastructure spending bill.


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely on the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

Donald Trump: Political Alpha Incarnate

Donald Trump: Political Alpha Incarnate

Trigger Warnings: This post contains references to video games, foul language and a positive view on Donald Trump.

As most of you know, I’m a millennial. I don’t have a finance background, but what I do have is a very special set of skills, honed over decades of playing video games of all kinds. I was never all that great at first person shooter games like Halo or Call of Duty. My hand eye coordination was never good enough to compete at an incredibly high level, so instead I relied heavily on strategy.

But with enough strategy you can compete in games that do require some hand eye coordination and fast reaction times because in the end it all comes down to anticipating your opponents next move. If you can do that well enough you don’t need to be fast, you just need to be ready to pounce [inserts clip of shadow word: deathing a blind].

This article was originally supposed to be about Donald Trump, and it is, but it’s also about games, and understanding that in markets we are in the end playing a game with rules.

“I’ve seen an agent punch through a concrete wall. Men have emptied entire clips at them and hit nothing but air, yet their strength and their speed are still based in a world that is built on rules. Because of that, they will never be as strong or as fast as you can be.”

These rules do change, and when they change boat loads of money can be made (and the machines defeated), but what I find most interesting right now is that while investors are so preoccupied with looking for the rules to change that maybe JUST MAYBE they’ve missed the fact that the rules have already changed, and after nine long years a lot of investors still refuse to play by the “new” rules.

Because global markets as “the bears” like to complain are heavily manipulated which destroys capitalism and all that other good stuff, and they are 100% correct, but until they do change we must continue to play by these rules. Full stop.

[Video game life lesson incoming which actually turns out to be self serving attempt to relive author’s glory days]

Fortunately, I learned this lesson while playing World of Warcraft where the game developers would constantly shit on the mechanics and meta of the current competitive PvP scene to suit the masses. Time after time I would get my shit pushed in by an assortment of randos and noobs who despite having no skill were able to absolutely destroy whatever I was doing simply because the new rules suited them much more than my character and team composition (sound familiar?).

This was an unbelievably frustrating but inevitably enlightening experience, because one day I got tired of fighting the rules and I joined the crowd, and started to use the rules to my favor.

So I got a few friends and we built a counter comp (Paladin Hunter Death knight or PHD) to the most popular comp (at the time this was Rogue Mage Priest or RMP) and would run it every time we saw those guys queuing. We ended up reaching the 2nd highest rating on the toughest battle group outside of South Korea. My hunter character also became the highest ranked hunter in the world at the time, despite having rarely played it and being equipped with outdated and inferior gear.

If we look at the bull market post GFC it has been one marked by dumb money absolutely truck sticking (technical term) the “smart” money. That’s because we live in a highly managed economy and the supposed smart money is still playing by the old rules. Whether it be the recent Shanghai Accord, on going trade negotiations or the fact that Central banks have literally PINNED interest rates across the curve, instead of accepting managed markets as a fact of life, investors continue to fight the manipulated markets to their dying breath and last ounce of AUM. Which brings me to the thrust of this blog post…

I think understanding Donald Trump is one of the greatest sources of alpha in today’s highly managed political economy…

As President of the most powerful country on Earth, Trump is seeking to use the tools at his disposal in ways we haven’t seen a US president do since Reagan. Now I’m not saying the rules have changed, but one of the most important players has, and the consensus narrative from day 1 on around this player has been exactly wrong. A huge source of the misconception is that consensus sees the world as it used to be two decades ago, but Donald sees it much closer to how it is and more importantly where it is headed. So does his ex-chief strategist, Steve Bannon.

 

You can belittle them, call them racists, idiots whatever you want but what you absolutely shouldn’t do when it comes to an investment strategy is Fight The Donald.

The article Jawad Mian of Stray Reflections ReTweeted was written in April 2017. It’s title:

Trump is heading for a do-nothing presidency

Whether it’s North Korea, NAFTA and other trade related negotiations, Tax Reform, the overhaul of the Justice system, after just 18 months in office it’s hard to remember a president in living memory who has done more in their entire tenure. This is especially incredible when one considers the majority of the mainstream media apparatus has thrown its full weight against him.

And this is my point. The consensus viewpoint on “The Donald” is so completely and utterly wrong it defies belief. As Scott Adams constantly likes to say “half the country is watching a completely different movie”.

And this is where the true alpha lies, because whether it be political analysts (IYIs)…

Or celebrities…

Or the consensus opinion of macro analysts and investors, there seems to be a complete dearth of intellectual and independent thought coming from a large swath of people. Collectively they’ve lost the ability to objectively reason and analyze political events.

Time and time again, it is important to remember that markets, life, and all things change on the margin. Because the previous US administrations have been complete and utter disasters, whether it be Obama or Bush, for 16 years American presidents have done nothing but attempt to maintain an increasingly fragile status quo.

Both presidents were marked with a catastrophic foreign policy. Bush pushed the US into one massive quagmire in both Iraq and Afghanistan, and then Obama threw accelerant on the fire spreading this disaster across the region which sparked the migrant crisis that continues to tear the European Project apart.

Now that Donald Trump is forging peace with North Korea, a trade deal with China, bringing about the end of ISIS and Iran in both Syria and Iraq, while forging stronger ties with a new (and improved) Saudi Regime, every IYI and geopolitical analyst seems to think the world is getting worse?

I almost wish I were joking, but this the quality of geopolitical analysis going on in today’s world. And at the heart of it is this emotional hatred and fear of Donald Trump and the unknown variables he brings to the table.

Now these are just a few examples, you can look at what’s going on with the US and China or most recently AMLO and Mexico or Trump’s domestic policies (big pharma reform is coming) but the point is the same – the consensus in most cases could not be more wrong if it tried. So stop following the consensus, turn on your brain and think for yourself. Or better yet, don’t, I’m happy to enjoy this edge for as long as possible. Because not only are investors refusing to play by the rules of the game, they’ve refused to understand how the biggest player impacts the game.



DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely on the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

The Last Best Time to Buy Bonds?

The Last Best Time to Buy Bonds?

No, I will not apologize for the clickbait title, or as Arnold always says, “To Hell With You!”

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We’ve all seen the chart, that old diagonal line drawn across thirty years of financial chaos. If it all it takes to call the end of the bond bull market is a writing utensil and a straight edge then holy shit what are we paying people 2/20 for?

I tend to believe the US bond bull market is nearing its end. I think owning USTs here for anything more than a trade is a mistake. With that said, I think we have reached a point in time where the risk reward is enormously favorable for entering into a long UST position.

The mechanics I previously described way back in January 2017, seem to be playing out right before our eyes. In that blog post, I posited that a slowing China would catch record speculative positions in a variety of “reflation trades” from short USTs to long commodities like oil and copper offsides.

Since then, these positions have only become more extended, with oil longs out numbering shorts by almost 15 to 1.

Now investors are more terrified of the implication that ever rising bond yields might have on our recently cracked low vol environment. And on a more personal level, I’ve recently noted that even established equity bears do not like USTs here for fear of a replay of a 1987 style risk off event across all financial assets.

Yet if we look at the macro environment, we’ll see fears of rip roaring inflation might be misplaced. Perhaps investors are extrapolating too much at a pivotal turn in the global economy?

Global PMIs led by China have started to roll over.

Since the ascendance of Xi Jinping in the fall, the government has cracked down relatively hard on the shadow banking sector.

The size of Wealth Management Products (WMPs) which are essentially ponzi finance vehicles used to fund speculation in assets ranging from commodities to real estate have not grown in over a year.

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Rather unsurprisingly this has had a negative effect on real estate prices in some of China’s most bubblicious cities.

Falling / stagnant real estate prices comes at an awkward time for developers.

70% of household wealth in China is invested in real estate. Without the wealth effect from rising home prices, spending could slow. And if somehow I still have not managed to convince you yet…


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

 

Would You Like To Know More #3

Would You Like To Know More #3

Forgive me here for talking my book this week. I am long biotech innovation and uranium miners these days and want you to be aware of that before you dig into the third installment of Would You Like To Know More.

1. Biotech Is Back Baby!

SPDR’s Biotech ETF XBI which is weighted to include more speculative small and mid cap biotech companies surged to fresh ATHs. The move came after news that JUNO and BIVV were being bought out for what this author believes are absurd prices. BIVV was bought out for 10x annual sales. Yes the sales are growing and the company will likely do some price hikes once they get their hands on the drugs, but the field in which BIVV’s drugs compete is quite crowded. This kind of crazy deal making has set the market ablaze.

For now M&A may be driving renewed sentiment in the space, but a weaker USD also makes domestic biotech companies more attractive for foreign acquisitions. We’ve already see Chinese biotech companies sign a multitude of licensing deals with US biotech companies and Sanofi, who acquired BIVV, is a French company. But the most important long term of this space, that has yet to fuel a stampede of generalists is innovation, and we think it’s coming, in a big and yugely way.

2. Are US Uranium Producers Set To Benefit In The Trump Era?

Trump announced some minor tariffs this week on solar panels. Mike here notes that this is a boost to domestic US “energy” companies and that uranium could easily fall in this wheelhouse. US imports +90% of its uranium required to satiate its aging power plants. Recently Energy Fuels Inc. a domestic producer of uranium with multiple US located mines ready to go into production, is trying to invoke on the grounds of national security that the US secure a consistent supply of domestic uranium.

Given that Uranium fuels 20% of the electric grid, it’s not unreasonable at all. And more importantly, with uranium supply under contract (shown below) at US utilities falling sharply over the next few years it’s a realistic possibility.

3. Is Microsoft leading the Quantum Computing race?

It’s not too difficult to make a physical qubit these days, D-Wave has strung together thousands of them. The trick which has evaded and continues to evade scientists is keeping the qubits stable throughout the computation and measurement processes.

The man who invented D-Wave’s qubits (classical sized superconducting loops) did not even bother to patent the technology because he believed the interference would be too high. Ironically, the scientist was right about the high levels of interference, but D-Wave was still able to use these qubits, as they put it, “to find a better answer faster.” D-Wave has sold and shipped its systems to the likes of NASA, VW and others.

In order to correct for these massive swings in interference, D-Wave needs to build in orders of magnitude more qubits to error check the other qubits. Or said another way, it takes 100s of physical qubits to create a single logic qubit. Although D-Wave says its system has 2000 “qubits” the majority of these qubits (~99%) are used to reduce the error of the final result. Adding these extra qubits requires more computing resources algorithms and energy to process and still your answer will likely have to be rechecked a few times. In short, the stability of the individual qubits remains a major major problem.

Microsoft, it seems, has figured out a way to create much more stable qubits than anyone else can. Researchers at the company have developed topological qubits which are much more stable than any previous iteration. Many scientists have actually questioned whether or not these qubits are even real…  Here’s an excerpt from the article which was written in 2016 (my emphasis in bold):

“IBM, Google and a number of academic labs have chosen relatively mature hardware, such as loops of superconducting wire, to make quantum bits (qubits). These are the building blocks of a quantum computer: they power its speedy calculations thanks to their ability to be in a mixture (or superposition) of ‘on’ and ‘off’ states at the same time.

Microsoft, however, is hoping to encode its qubits in a kind of quasiparticle: a particle-like object that emerges from the interactions inside matter. Some physicists are not even sure that the particular quasiparticles Microsoft are working with — called non-abelian anyons — actually exist. But the firm hopes to exploit their topological properties, which make quantum states extremely robust to outside interference, to build what are called topological quantum computers.”

And actually if you go back to 2014, Microsoft researcher, Krysta Svore, talks about all the challenges they will have to overcome in the next few years. To see how far they’ve come in such a short period of time is truly remarkable.



DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

 

Would You Like To Know More #2

Would You Like To Know More #2

Two weeks in a row. Let’s not make a big deal of this.

1. China leverages technology to postpone a debt deleveraging.

“I have lived in Beijing for more than 20 years, yet only in the past year have I felt on returning to London or Silicon Valley that I’m going backwards in time. For urban residents, China is increasingly a study in frictionless living. Hopping on a bike, ordering a meal from a huge range of restaurants, paying for utilities, transferring money to friends — all can be done at the touch of a button. Internet services in the west offer increasing convenience no doubt — but nothing beats the experience in China.”

China is leveraging technology more effectively than any other nation on earth apart from perhaps Latvia. China’s ability to leverage technology to engineer growth and delay a “beautiful deleveraging” becomes clearer by the day. Chinese workers have started to vote with their feet. Despite the chemically toxic atmosphere (which by the way is slowly improving), Chinese workers are returning home to participate in China’s booming innovation.

2. Technology, technology, technology

Tech is one of the most important and overlooked macro factors today.
*Pounds the table*
Within 10 years, autonomous vehicles will unlock a multi trillion dollar industry that had not previously existed. Autonomous interconnected vehicle fleets will dramatically lower the cost of driving, reduce traffic accidents, etc. you get the point, it’s fantastic and it’s not here yet but one of the things that will get it there cheap LIDAR already is or will be in a few years. The cost has already fallen 10x in the past 2 years and is expected to fall by another factor of 10 by 2020.

3. Doom and Gloom at the World Bank

You got to love this headline:

Permanently lower your hopes for the global economy, the World Bank says

Despite global GDP in 2017 beating the IMF’s expectations for the first time since the crisis, institutions remain incredibly bearish on global growth. Like the so called “goldilocks” narrative, experts are not looking at the underlying drivers that have contributed to the current environment. There’s not enough focus on the technological innovations, and improved global governance that has contributed to our increasingly positive economic environment.

4. Falling North Korea tensions defy pessimistic experts’ expectations and the “dumb Trump” narrative.

I have little doubt people are skeptical of a millennial who pontificates on geopolitics, yet you can’t argue with the ongoing positive developments. I am willing to wager my relatively high opinion of Trump further fuels those skeptical opinions. But in the end, that’s just your opinion. The facts continue to support my thesis, at what point will you change yours?

5. Wondering when not if this will scare the dollar bears?

On Friday last week, EUR/USD speculators increased their record long position even further. Despite agreeing with it, “the hot money leaving the US” narrative has become so overextended here that I now find myself joining the reluctant dollar bull camp. This is still an opinion and not a position yet, but if we see EURUSD at 1.25 soon or DXY at 87, then it will very likely become one.

And despite whatever doomsday narrative the Democrats are trying to spin, the tax cuts combined with Trump’s deregulation spree have created a much more favorable business environment. Increased investment, rising growth, and a weaker USD should spur growth in the US making capital think twice about leaving the US, at least this year.

BONUS: Get some f&*^ing sunlight.

https://twitter.com/BiotechBrainBug/status/953352665513119744

This article touches upon what my brother, the Biotech Brain Bug (and others), figured out a little while ago, sunlight is critical to human health. The nobel prize in medicine last year was awarded to the discovery of circadian rhythms which is driven primarily by our daily and seasonal exposure to sunlight. Proper signalling is critical to a well functioning body.

On top of helping with weight loss and fighting cancer sunlight exposure improves mood, and reduces stress and blood pressure. Humans don’t have a lot of hair for a reason. Get some fucking sunlight.


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

 

Would You Like To Know More #1

Would You Like To Know More #1

I read a lot of articles every week (virtue signal much?) and sometimes the overall message of what I read (and tweet) can get lost and cluttered in my brain (and on my twitter feed). So I came up with a brilliant idea (I actually stole it from a load of other people) to share some of the most interesting, overlooked and-

-Sorry that’s a lie. I just want to create a platform for me to share some of my more unconventional and controversial ideas. Each week, I’ll include four or five developments/articles as well as a special bonus link that is sure to be controversial. I would include a trigger warning, but I hate that phrase. The only question that you need to ask yourself is this: Would you like to know more?

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1. Hold Your Horses: USD is Still King

China’s emergence over the next decade will be one of the biggest themes in macro. At times the narrative though will get ahead of itself and other times it will lag behind. In this case it is the former as Brad Setser nails the media’s and twitter’s overreaction to the news that China was considering slowing or halting its purchases of USTs altogether. China hasn’t bought much in the way of USTs lately anyways.

What no one felt like talking about (probably because it didn’t fit into the narrative) was that South Korean officials felt compelled to intervene in the FX markets to weaken their currency versus the USD. As much as people like to talk about the end of the USD’s reign and position for it…

They neglect to say how important it is to the current system of trade. China is certainly working to change that, but perhaps we should wait and see how successful its Yuan denominated oil contract is before making any judgements.

2. Macron: The EU’s New Deal Maker

Keeping in the theme of geopolitics, Macron remains a very underrated politician. He has already made great strides to revamp the French system. Continued global growth will help the French people tolerate the much needed reforms. The French dealmaker was in China this week and is also Trump’s key ally in Europe. Watch what he does and where he goes. This man is set to make France play a bigger role in global affairs.

3. China’s Growing Role in Africa:

I’m going to keep pounding my fist on the table when it comes to geopolitics. If the Chinese Yuan is going to gain market share in global trade, China will have to expand its sphere of influence. Africa the fastest growing, fastest urbanizing and youngest population on earth is a great place to target. The continent is ripe with resources and opportunity which China is not only taking advantage of but also in this case, is acting as a force for good. In a 2017 Realvision interview, Andrew Nevin argued that for Africa to succeed, its largest city, Lagos, had to succeed. China’s growing investment and presence will be an essential piece to Lagos and Africa’s success.

4. Biotech is off to a great start.

A trio of Chinese deals (notice a theme yet?) to start the year should help light a fire under M&A which in 2017 hit a paltry 25% 2015’s record. Tax cuts and profit repatriation are expected to further juice M&A action in 2018. On Thursday, $XBI marked its highest daily close since the bubble burst in the summer of 2015. And it even looks like $IBB is about to start out performing the rip roaring Nasdaq.

5. The Fire of Technology Can Also Burn Us.

It has been (re)discovered that the electromagnetic fields produced from wi-fi routers can harm life processes. In this case, the seeds that were put in a room with two wi-fi routers not only failed to grow but started to mutate. This applies not just to wi-fi routers but all forms of man made or non native EMFs from cell phones to electric motors; any form of electromagnetic radiation life on earth has not encountered on a consistent basis over the last few billion years will cause likely harm. The roll out of 5G and the electrification of our vehicle fleets are global health crises in the making. I don’t have any expectations that these technologies will be fought with any vigor until it’s too late which in the end just gives me yet another reason to be long biotech.

BONUS:

As a pseudo intellectual who constantly opines on things he has no business opining about (macro, geopolitics, biotech etc.) this is the kind of analysis I love most. When you can take simple, well understood and well supported ideas and apply them to entirely different fields it can be truly illuminating. After all who doesn’t like telling experts that they’re wrong. In this case, the authors show that dinosaurs and other historic creatures could not possibly survive under current gravitational forces which leads to some difficult questions about our understanding of the earth’s development and possibly even gravity itself.


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

2018 Predictions: Party On

2018 Predictions: Party On

Let’s see if we can beat 2017’s illustrious track record.

My thesis this year is quite simple, central banks have been and will continue to be overly accommodative, geopolitical risks are low and falling which will continue to provide a wide and clear runway for the ongoing and very underappreciated technological revolution to accelerate and spread. All of this is very bullish for risk assets, particularly ones that are levered plays on a continued global expansion that investors remain highly skeptical of.

World leaders have realized that the path to world domination (and prosperity) is through technology. Maybe this ends badly ala a Terminator style judgement day, but the space race of the 50’s and 60’s led to some pretty wonderful advancements in technology along the way.

But for as much as technological innovation is being under appreciated, ongoing geopolitical developments are being completely misread by investors who are either farming out their all too important geopolitical analysis to the MSM or are too preoccupied with latest Trump tweet (which by the way was purposefully designed to distract you) to muster any semblance of a coherent analysis.

The “Trump is dumb and reckless” narrative is an important distraction from the ongoing positive geopolitical developments, such as progress on North Korea…

And other major geopolitical realignments.

These developments fly in the face of fears that Trump will either launch a major trade war with China, launch a kinetic war with North Korea or be impeached (current oddsmakers have him at an over 50% chance in the next three years). To be clear, this is a massive gap. Massive and with no chance of being resolved anytime soon. So despite bullish positioning, euphoric sentiment and the US economic expansion entering its 9th year, I am and remain bullish on both economic growth and risk assets globally.

Momentum is highly in the bulls favor.

Perhaps nothing says “risk on” more so than the Nikkei surging +3% in one day to 27 year highs.

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For the past 9 years the world’s central banks have been overly accommodative and by all accounts will continue to be so. Sure the Fed is slowly reducing its balance sheet and the ECB and BOJ will very likely tighten policy this year as well but it’s important to recognize that relative to future global economic performance, central banks will remain overly accommodative for the foreseeable future, else they risk popping their own systemic bubble.

“Investors really do understand now that we will be there to prevent serious losses… Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum that will result in big losses when rates come up down the road.” ~ Incoming Fed Chairman Powell in 2012

Do you think Trump would pick this man to come back and pop the stock market bubble he has anointed as his report card?

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If you think he’s as dumb as his twitter account suggests then that answer is probably yes.

Maybe, Powell does pop the bubble. Certainly things have gotten away from central bankers in the past. Actually every time the US 10 year interest rate has been at the top range of this channel, something rather explosive has happened.

Worth noting that five year yields are also near the supposed danger zone.

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It’s also been a few years since central banks commitment to financial stability has been tested, and the markets have a habit of testing new Fed Chairs. From Ned Davis Research:

“The median correction in US stocks in the first six months of a new Fed chair (starting Feb 1) is 10%. Yellen’s 3.8% pullback, when she took over from Bernanke in 2014, was the smallest to date as the market expected a smooth transition.”

Anyways, I’ve rambled on long enough. Sorry (not sorry) for discussing politics. You get the point, I’m very bullish but I have one eye on the bond market. Let’s get to what you guys really came for, my 0% prediction accuracy:

1. What is dead may never die. Investors remain woefully under positioned for a continued global expansion. 2018 may not be as good as 2017 but it’s still going to be good enough to pull some left for dead assets back to life. (Shipping, uranium, oil service co’s, high SI shale etc.)

2. US growth positive surprise. The weaker USD combined with tax cuts and millennial might will give the US its best economic growth in the post GFC era.

3. Republicans handily win the 2018 elections. Trump has consolidated his power in the DOJ and FBI and will go after his political enemies sending the Democrats and DNC into disarray and the strong economy won’t hurt either.

4. USD trades sideways. Speculators arrived way too late to take advantage of the first down wave in the USD. They will have to contend with a year of chop much like 2015 before the dollar makes its next move lower. Domestic political turbulence and a hawkish ECB should keep any USD rallies in check.

5. Gold goes up, but under performs virtually every other major commodity. Sorry bugs, but you are my sworn enemy.

6. Cryptocurrencies go wild. The combined market cap of cryptocurrencies hits $3 Trillion sparking a temporary spike in energy prices and a sell off in developed market bonds as speculators rush to participate the world’s most obvious example of monetary policy run amok.

7. In regards to future events, I know nothing. This was my most accurate prediction last year, and I wager it will be no different this year.

Super Bowl Prediction: The Battle For Pennsylvania – The Philadelphia Eagles soar over The Poopsburgh Steelers.


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!