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!

 

Biotech Year One: A Year of Trials Tribulations and Discovery

Biotech Year One: A Year of Trials Tribulations and Discovery

This was our first year investing in the biotech sector. We had no idea how companies would respond to news, positive or negative. We had no idea what the market understood and how it interpreted data. We had no idea.

The market is its own beast, derived of the aggregate opinions and knowledge of the mainstream thought. And despite incredible advancements, the mainstream’s understanding of biology, physics, and biotechnology remains rooted in early 20th century ideology that has long been disproved.

We understand it is a bold statement to say the vast majority of PhDs, MDs and investors that make up this industry are wrong due to a fundamental flaw in their analysis, but after a year of investing in this space, we have been convinced of this simple yet powerful truth.

Even in the 21st century, with the amount of computing power and algorithms and modern tools available to companies, researchers and analysts, pharmaceutical development remains a trial and error based process. This is because they do not understand biology and physics’ role in biology. Anyone who has done a bit of research into quantum computing will also realize how poor our understanding of physics truly is but that’s a story for another time.

The point is that this trial and error approach and the mental models that support it have far reaching consequences to how biotechnology developments are interpreted by the market.

The market has incredible difficulty trusting new data that does not fit into these preconceived mental models. And because those models are so poor and so fuzzy even reasonably well understood trial results have to be proven again and again over larger patient populations.

The mainstream believes life is dumb and random, that cells are a liquid soup of biochemicals and seawater governed by nothing more than chance encounters driven by Brownian motion.  This is no more evident in the hubristic subsector of gene therapy. These trial and error gurus believe it is life that has made the mistake that only they can correct. When in fact life (and in this case our bodies) are responding to environmental conditions. We hold the exact opposite view of the mainstream; we believe that life is intelligent and coherent down to the cellular level or as we like to say:

“Life does not play dice.”

Life uses natural genetic engineering, a complicated and remarkably intelligent system that far surpasses our artificial means of doing, in order to adapt to changing conditions of existence. Natural genetic engineering is specifically activated, targeted, and precisely executed. Living systems are quantum coherent and therefore “know” more information about themselves than we are capable of knowing through outside measurement.  Artificial genetic modification invariably interferes with natural genetic modification. In fact, it depends on disrupting and overriding the cell’s own precisely regulated natural genetic modification, which explains its total lack of precision, with many uncontrollable and unpredictable effects.

We believe our edge in understanding biological processes and how it translates into biotechnology developments is peerless. But as it turned out, our sharpest sword was double edged. We could accurately predict trial results in our chosen companies but we could not predict how the market would respond. As if some sort of sick irony, our best results were the least rewarded and often penalized while our worst results (although still positive) were rewarded beyond our wildest expectations.

“To fight the bug, we must understand the bug.”
~Sky Marshal Tahat Meru

This has required us to go back to the drawing board in how we approach investing in this space. It is not enough to identify mispricings in the market. It is not enough to understand with near 100% conviction which drugs are breakthroughs, and which aren’t. The market might be stupid, but it is also right and must be respected. We cannot disagree with price and we must adapt to the market if we are to increase our returns over the long run.

At the start of the year we based position sizing primarily around 2 major factors:

  1.  The price of the drug relative to its long-term value
  2.  The timing of the next news release.

We naively believed that once the results were in, it would be “obvious” to the market that certain drugs offered breakthrough potential. Boy, were we wrong.

“Any sufficiently advanced technology is indistinguishable from magic.
~Arthur C. Clarke

Breakthroughs by their very nature are without precedent. And without a precedent the analysts, the company executives, and the market in totality are unable and incapable of accurately pricing in such information.

In our view, the market has a binary, linear, and overall simplistic approach to trial results ignoring the context in which each trial is conducted. Either the drug works, or it doesn’t. If the drug was believed to have “failed” once, it’s more likely to be seen as a failure going forward. If the drug does not show promise at the interim results, the final results are more likely to be discarded despite any promise.

What this means is that in lieu of just sitting in our favorite drug companies and waiting some five to ten years for them to pay off, we have to incorporate the limitations of the market into our process.

“And so, without further gilding the lily and no more ado…”
~Jeffery Chaucer, A Knight’s Tale

Biotech Overview:

Back in October,  we auspiciously called the the top in biotech back in October with the blog post titled “Biotech is not a Bubble“.

Oops.

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But we also identified a few long term structural trends that suggested the bull market in biotech was just beginning.

  1. China, the largest growing market for pharmaceuticals has begun and continued to open up itself to foreign pharmaceutical companies.
  2. The world in particular the emerging world is getting richer and will be able to afford more pharmaceutical drugs.
  3. Populations due to pollution and poor lifestyles are getting sicker.
  4. Innovation drives renewed sentiment – Drug development over the last 50 years has largely been stagnant, that too is changing and will drastically improve sentiment.

Unsurprisingly none of these trends have diminished over the past 2 months. Price may have changed but the structural trends remain firmly in place. The world is getting wealthier and sicker at the sametime. Or said another way, our ability to afford the drugs we increasingly need is also increasing. China has continued its drive towards reforming its pharmaceutical market. The US remains the bastion of pharmaceutical development making biotech potentially one of the best short USD trades over the next 5-10 years.

And yet sentiment towards the space is incredibly negative. Despite XBI and IBB being up ~40% and 25% respectively inflows turned negative for the year.

Despite the solid returns in 2017, biotech remains historically cheap to the broader market.

The low vol, ever rising broader equity markets might be partly to blame. High vol biotech equities remain a difficult place for investors to allocate capital when every equity market around the globe rises in lockstep to the tune of record low and falling volatility.

Perhaps it is not a coincidence that biotech’s best period relative to the broader market came after the broader market had stagnated (from late 2014 to mid 2015) and appeared to have topped out. SPY (orange line, LHS), IBB/SPY  (black line, RHS).

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We note that the previous 3 times biotech has been this cheap to the broader market marked a buying opportunity.

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XPH, SPDR’s S&P Pharmaceutical ETF has lagged the XBI, and IBB, but may be key to showing renewed sentiment towards the space. These large cap pharma companies have struggled since Q1 2016 but we believe that may finally be changing.
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We attribute a lot of the sideways chop to the growing divide between the winners and losers in this space. The FDA has approved drugs at a record rate this year which has gone a long way to increasing competition in the space.

This increased competition from new drugs has put a burden on the incumbent drug makers who have gotten fat off annual price hikes and patent trolling. TEVA’s generic drug business model has been decimated.

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AGN appears to be having similar problems with its generic drug business.

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While names like JNJ are probing new highs.

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Some medium size names have taken some heavy licks but appear to have bottomed or in the process of bottoming. MYL.

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Biogen, Merck, Incyte, Pfizer and BMY are other possible examples.

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In our view, we’ve seen a good amount of creative destruction in the space. The initial damage has been done to some of the weaker components of the sector. The stronger ones have continued to thrive, and the middle of the pact may have already suffered the worst.  Thus we could see some more consolidation but believe that with the benefit of tax cuts and time the trend should be higher from here. After all, it’s not like our population is getting younger or healthier.

Merry Christmas and Happy New Years to all my readers! 

 


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!

ADDITIONAL DISCLAIMER: We hold no position in any of the stocks and ETFs discussed here and have no intention to do so in the next 72 hours. 

The Unholy Union: The Marriage of Technology and Geopolitics

The Unholy Union: The Marriage of Technology and Geopolitics

The world economy is undergoing a technological revolution that resembles the dotcom bubble on steroids, gamma rays, and LSD. From AI to biotechnology to quantum computing to renewable energy to energy storage, the number of fields undergoing rapid advancement are beyond counting. We have reached the point when the sheer vastness of these trends creates a sort of network effect – an innovation in one area can lead to rapid advancements in other areas.

Due to the improvement and efficiency in hardware and computing power, launching a startup has never been easier. There are now thousands of startups around the globe working on applying AI and ML to various aspects of our lives.

Innovations in battery technology are powering a second transportation revolution which is separate but further enhanced by the autonomous driving revolution. Within a few years electric powered drones will be capable of flying people across cityscapes reducing the travel time by 90%. Cheaper more durable batteries are enabling grid power that can solely rely on renewable energy.

This accelerative and widespread technological revolution stands in stark contrast to the fears of a global depression just beyond the horizon that sends the world’s nationalist elements into conflict against each other. Instead, the global economy is a non-zero-sum game and for the first time in my life time, from Trump in the US to Xi in China to Abe in Japan to Modi in India to Macron in France to MbS in Saudi Arabia to Macri in Argentina the world’s largest economies are headed by pragmatic deal makers set to make their mark.

Which brings us to our favorite macro theme, The Unholy Union: The Marriage of Geopolitics and Technology.

These big players have just begun their dance, with each one jostling for a bigger share of a growing pie. This competition is incredibly positive for global growth. Already we’ve seen Japan and India form a partnership (The Asia Africa Growth Corridor) to offer an alternative to China’s Belt and Road Initiative (BRI). At the same time, Japan is not shunning China entirely. Abe and Xi have renewed their countries commitment to each other.

‘“At the end of the meeting, President Xi said this is a meeting that marks a fresh start of relations between Japan and China. I totally feel the same way,” Abe told reporters.’

By working together, Japan and China can fill gaping holes in each other’s economy. Japan wants to weaken its currency, and invest in projects that return more than 0.4% yielding 40 year JGB. China has the projects and the factories to make it happen but needs help with financing. Japan can shift its savings to Chinese bonds, weakening the Yen against the RMB, propping up China’s economy and currency which in turn would boost the rest of the emerging world which so heavily depends on China’s ongoing economic expansion. As a net exporter, Japan would gain an increased benefit from positive global growth. In this scenario, a key barometer of success will be the CNY/JPY exchange rate.

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But this is just one example. There are many new deals forming, under the surface between global powers. Did you notice that MbS announced a major turning point in US Saudi relations months before he purged his political enemies?

Do you think Trump’s bid for Aramco the very moment MbS had purged his government of political enemies was a coincidence?

Or that some of those caught in the purge just so happen to have funded some of Trump’s political enemies as well?

The good thing about these deals, is that they cannot be fully obscured for the players are too big to hide their hand. The bad news is that the financial risks have never been greater. The debt has never been this high. The demographics whether it be our aging populations or the deteriorating health of those populations has never been worse. And the wealth divide has never been this large. The cost of failure is very high and very very real.

On our current trajectory, inflationary pressures that send shockwaves through the OECD bond markets may be less than 2 years away. At the sametime, central banks have embarked on tightening monetary policy in earnest for the first time since the crisis. But with the help of accelerative technological trends and improving geopolitical relations world leaders still possess the tools and resources to prevent or at the very least delay any significantly bad outcomes for years to come. Which means, that for the foreseeable future, the biggest risk to global economic stability is not economic, but geopolitical.

 


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!

Vanadium: The Next Commodity You’ll Pretend To Know Everything About

Vanadium: The Next Commodity You’ll Pretend To Know Everything About

Ever since China arrived on the global stage at the turn of the 20th century, front running the rising juggernaut has been an incredibly lucrative strategy. In the early 2000’s this meant buying exposure to common elements like copper and iron ore, but more recently emerging technologies have shifted the focus to more niche and illiquid elements like cobalt and graphite (carbon) making the trade harder to put on. The next link in this chain is Vanadium, which is fast becoming a key component to many technologies and industries.

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Vanadium is used to make steel and aluminum stronger while reducing the weight. Lighter and stronger metal alloys are increasingly important in our modern society where we strive for lighter more fuel efficient vehicles. From WSJ:

“By 2025, the amount of lightweight, high-strength steel in a car or light truck in North America is projected to rise to an average 483 pounds, 76% above the 2015 average, according to industry consultancy Ducker Worldwide.”

“Aluminum content in cars and light trucks in North America is expected to reach an average of 520 pounds in 2025, a 31% increase from 2015, according to Ducker Worldwide. More than two-thirds of closure components, such as hoods and trunk lids, on light vehicles are expected to be aluminum by 2020, double from 2016.”

More recently, Vanadium has found its way into the energy storage business. Vanadium redox batteries may not have the same energy density as lithium ion batteries, but they make up for it in terms of reliability, durability and robustness. As renewables create more demand for grid storage we should see yet another source of demand for vanadium. Here’s a link to cool visualization for all the uses of vanadium.

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All else being equal before I even take China into account, there is a very bullish backdrop for vanadium demand. Vanadium’s global annual inventory change is shown in the chart below.

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As for supply, the vast majority of vanadium comes from a byproduct of iron ore mining, which like every other commodity industry in the past 6 years has undergone heavy consolidation. Russell Clark of Horseman Capital wisely notes, capex from the four largest iron ore miners has fallen off a cliff.

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As part of China’s movement to deleverage parts of its economy and reduce environmental damage, potentially 1/3rd of iron ore mining licences in China will be revoked. This policy also extends to some pure vanadium mines that will be forced to shutter as well. But that’s not all, because China recently banned the import of low grade vanadium scrap metal reducing vanadium supplies further.

At the same time, China is moving up the value chain and will need to create high quality products that are worth of the “Made in China” and OBOR brand names. So this summer, China announced a new policy that raised the standard tensile strength of steel rebar from 335MPa to 600MPa, which could boost China’s demand for Vanadium by 30%, bringing it more in line with western levels.

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Note India at the low end of the consumption spectrum is planning a massive infrastructure overhaul of its own country. Obviously roads aren’t made of steel, but the point is clear, India is serious about upgrading its poor infrastructure.

Also worth noting the last time China upped its vanadium demand through similar policy was in 2005.

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To quickly sum up, supply of vanadium is falling or stagnant. Demand is seeing notable increases from a wide range of sources. And the two world’s largest countries by population are set to supercharge these imbalances through new policies. Unless Earth is about to be hit by a bug meteor full of vanadium it seems to me that prices have only one direction to go.


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!