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!

Biotech Is Not A Bubble

Biotech Is Not A Bubble

With the SPDR S&P Biotech ETF XBI [disclosure: We hold no position in XBI] within 5% of its all time highs, we hear a lot of people calling biotech a bubble. Let’s be clear, biotech is not a bubble. There are may be many bubbles out there, but this is not one. And if that is too much of a leap for you to take, then assume biotech is a bubble but that it will get a lot bigger, so big that Trump is going to have to invent a new word to describe it (my vote is for Yugenormous).

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After falling 50% from the peak the SPDR S&P Biotech ETF XBI has almost fully recovered and is within 5% of the all-time highs. Despite this resurgence, some biotech companies irrespective of the quality of their drugs are still down over 90% from their 2015 highs.

These companies to the community at large are practically untouchable. Fund managers are afraid to touch them because they are too illiquid. And even if analysts understood the science (which they don’t), they won’t bother to cover companies of so little consequence, which means retail investors know nothing about them as well.

In short, these are hated companies, and yet these companies were able to tap the market for funding at an extreme overvaluation back in 2015 allowing them to ride out the storm which we have believe is now over.

We’ve begun to see flows come back into some of these “left for dead” companies. Some of which have doubled and tripled without any news whatsoever. To be clear these are hated rallies, simply for the fact that no one owns them. And for some perspective a company that falls 90% then doubles is still down 80% from its highs. The bull market in biotech is still in its infancy and we think the macro backdrop supports this for three main reasons:

 

1. The regulatory backdrop in the US for bringing new drugs to market has never been better. Meanwhile, big pharma companies, with their dwindling legacy pipelines and boatloads of cash, have a decision to make, develop new drugs, buy new drugs at a premium, or fade away. Gilead’s recent $12B acquisition of Kite Therapeutics is likely to be the beginning of a wave of acquisitions.

2. The 2nd largest and fastest growing market for pharmaceuticals, China, is in the early stages of opening itself to big pharma.

Red tape is being cut in China as well.

“Under China’s new rules, data from overseas clinical trials can be used for drug registrations in the country. “

China’s large population combined with its environmental and pollution problems combined with a poor diet/lifestyle have been a perfect storm for creating massive demand for high quality pharmaceuticals. From McKinsey:

“China faces mounting medical needs—for example, it has 114 million diabetic patients and more than 700,000 new cases of lung cancer diagnosed each year.”

But don’t forget, the rest of the emerging world is growing and gaining wealth.

As the emerging world’s middle class grows, so too will its demand for prescription drugs. Not only will this create profits for US drug companies, but it will also reduce their reliance on overcharging US consumers for access to medicine. This in turn will reduce the cost of health care in the US at the same time quality of care improves…

3. It’s 2017 and we are still using chemotherapy and statins to treat deadly diseases. This is simply appalling. The truth is that advancement in pharmaceutical care since the War on Cancer was declared back in the 1970s has been pathetic, especially when you consider the amount of money thrown at the problem.

But that too is finally changing. Real drugs offering real improvements in patient outcomes are coming down the pipeline. Cancer, alzheimer’s, cardiovascular disease, mitochondrial malfunctions, you name it there’s likely a drug coming to change patient outcomes for the better. And as these drug breakthroughs come to light we believe this sector will experience yet another euphoria driven bubble that could make the 2015 peak look like an ant hill. 


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!

Big Week For The Once Mighty Dollar

Big Week For The Once Mighty Dollar

Be warned, this is a short post.

Janet Yellen and the Fed surprised markets this week by actually doing what they said they would do. Shocking!

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If you could not tell from the tone of my first sentence, I was not in the least bit shocked, and had shorted some EURUSD. What I was not expecting, however, was that despite the Fed’s hawkish surprise, the dollar barely budged.

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The lack of a dollar move is especially concerning when we consider the context of the move. So far this year the DXY has fallen over 11% against the backdrop of consistent Fed tightening.

Meanwhile speculators haven’t been this short the dollar in over 4 years.

The lack of a dollar rally at this juncture given spec positioning and the dollar’s dramatic fall is a bit concerning here for those of us who were trying to catch a bottom in this dollar rout (guilty). Now it’s only been a few days since the Fed indicated its hawkish intentions, but if you were to ask me right now, I’d be leaning towards a continued breakdown in the dollar.

What’s interesting about this continuation of the dollar’s fall is the threat it poses to the low volatility regime we find ourselves in. Large moves in any direction for any major asset class is bound to cause ripples even if the move is initially seen to be as a positive.

The issue here is that the ECB and the BOJ have kept rates so low for so long that the savers in their respective countries have been forced into incredibly dumb trades. For example, being long USDs and long USTs…

Read that number again, and then read it again. European investors bought almost $600B of US debt last year. Perhaps these foreigners are the real speculative position we should worry about. The dollar has fallen 15% against the euro this year alone. At what point does the fall in the dollar become too painful? How many years of income must these foreigners lose to currency effects before they start to hit the sell button?


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!

 

Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

Long Day’s Journey Into Night: A Bear’s Search For Proper Shorts

As a pessimistic China observer (naive western perma bear), I’ve wanted to short emerging markets for sometime. For my sake I’ve been very patient on this trade and haven’t fancied a go on the dark side, unless you count my 2nd failed attempt to short the Superhuman Canadian Banks. Luckily there was an ongoing implosion in US retail industry that has kept me busy. But even that trade appears less appetizing these days. So here I am, a bear without anything to short, which is partly why I’ve turned my attention to the rip roaring Emerging Markets, but I swear I have other good reasons.

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Whatever happened to Brendan Fraser? I guess the same question could be asked about the dollar bulls.

 

Anyway you slice it, USD positioning is not only incredibly bearish, but just 9 months ago incredibly bullish. The shift in investor positioning  is enough to give a person mental whiplash. Why the sudden shift you ask?

Such a shift in sentiment is not without a narrative to support it.

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I’m not mocking the proponents of this theory, although it certainly seems like I am, I swear (see previous Mummy reference) that I’m not. I just happen to sincerely doubt the speculators who switched from net long to net short are capable of such deep thought and will only come to their sense after they realize they’ve overreached.

As the infinitely evil DarthMacro likes to argue the USD will lose reserve currency status eventually but until then there are likely to be a few tradable scenarios in which we don’t have to sell the dollar into oblivion. Now MIGHT just be one of them…

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Because last time I checked, the USD is still THE world’s reserve currency.  As much as certain countries want to shift to a new regime, the high levels of debt and fragilities built into the current system make that virtually impossible. A clear example is the EU and the Euro. Although recently, some rather smart people have started to suggest that in fact the EU can handle a stronger Euro.

The note was from September 5th, but little did I know, 2 days before I made this tweet that in fact the French had begun to protest the much needed labor reform, although not in “great” numbers. There’s a star wars reference in here somewhere…

And yet, despite the mild protests, if your are an exporting economy and your currency strengthens 15% against a major trading partner, it’s going to hit you no matter what. Just look at the German DAX (blue) versus the Euro (black).

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By the way, before I go any further, is there a more bullish sign out there than a heavy exporting economy’s stock market moving up in lockstep with a stronger currency?  I’m sure some really smart macro guys picked up on this, unfortunately I was not one of them. But I digress because right now the DAX is having trouble rallying into this “excessive” Euro strength.

It’s bad enough for Germany, but what about countries like Greece, Spain, and Italy who were already suffering under a currency too strong for their own good. Fellow European exporter, Sweden has seen its economy take a turn for the worse.

Why is this significant?

After doing a little digging (aka a simple google search), I found Sweden’s top ten export markets to be as follows: Germany (10.3%), Norway (10.1%), US (7%), Denmark (6.9%), Finland (6.7%), UK (5.9%), Netherlands (5.3%), Belgium (4.5%),France (4.3%), China (3.8%) and Poland (3.2%).

Sweden mostly exports to Northern European countries. Meanwhile a large part of the resurgent EU story is actually a southern rebound story. Countries like Italy and Spain even Greece have started to show signs of life. Of course the Euro was already too strong for these countries. One can only imagine what the 15% rise YTD has done to their future growth prospects.

It is important to remember that the level of a currency is not as important as the magnitude and direction of change. The last time the dollar was at this level in 2014, emerging markets were undergoing a massive correction, commodity markets were in complete disarray and china was seemingly on the verge of a complete implosion. Once again I reiterate this does mean I think the EU is about to implode under a stronger Euro, just that the monetary union’s economies are about to take a breather…

Speaking of China, the rising power seems to be making trade deals every day to wean itself off its dependence of the US and the USD.

Have any of the dollar bears asked why China needs to do these trade deals in the first place? Oh yeah, because the US is a key trade partner and the USD is an ESSENTIAL cog in global trade as it stands right now. Removing the USD from the global economy would be tantamount to bleeding the global economy dry. Global trade would grind to halt, and everyone would be worse off. No one wants that. But I digress…

Because China’s economy has been running hot on the back of a poop ton (technical term) of stimulus and the weaker dollar.

What is often missed in this post Jan 2016 correction world is that China has gone from an exporter of deflation to an exporter of INFLATION, and given the fall in the USDCNY this should show up in the US in a big way towards the end of the year catching a lot of people off guard.

Can rates in Europe and Japan going to follow the US higher? With the NIRP and QE programs still in place I’m not so sure. Draghi certainly has the potential to tighten, so I won’t count the euro out. But the yield curve controlled Yen in this scenario?

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At the very least, it seems like we are setting up for a bit of 2016 Q4 redux, where rates in the US rise higher than they do in the EU and Japan and the dollar strengthens. Given investor positioning, rising rates and a stronger dollar could set up for quite the pain trade. Not only are investors very bearish the USD, they are also very long UST duration.

Retail investors going hard in the paint for that $TLT.

Should probably ask some of my millennial friends what they think of dividend stocks.

And just so we are clear on the size of the potential tinder available to such a pain trade…

 

If you’re an EM investor it might even get worse, because China’s economy due to base effects and waning stimulus is set to slow into the end of the year.

Did Klendathu find his desired short trades? Perhaps. It seems that higher US rates are in the cards, and given USD positioning, we could see a rebound in the USD, but I wonder if we have in fact seen the highs for the USD this cycle.


 

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!

 

Buy Low: Cripples, Bastards and Broken Things

Buy Low: Cripples, Bastards and Broken Things

I’ve struggled to write this article for over a month now. Thinking about the most clever way to talk up the bull case for oil. With the potential breakdown in the USD I thought about just saying dollar bear market = commodity bull market. But let’s face it, that’s far too obvious and I’ve already done that

” I believe on a cyclical basis that commodities have bottomed or are in the process of bottoming. Maybe oil retests the 2016 lows, but overtime it should head higher, US shale be damned.”

Then I thought about incorporating the oil bull case with the fiat bear case. Because when every central banker is behaving like the Mad King Aerys Targaryen, shorting fiat in terms of real assets is a no brainer (maybe some other time though).

Instead, I thought it important to focus on something Opa used to tell me:

 “Buy low.”

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RIG, a company we own through the ETF OIH, is down over 95% from its ATHs and was recently trading at the lowest point in its 23 years. To put that in perspective, RIG fell 50% FOUR times. The multi year trend of rising RSI momentum and repeated failure to mark a new low is reminiscent of the pattern in the Euro we saw at the in December of last year. To be clear this trade is not without risks.

But as contrarians we welcome such news. If we look at the broader OIH ETF which includes as basket of these names. We’ll see a similar pattern bottoming pattern to RIG’s.

OIH123.pngThink about what this chart is telling you. Think about the statement the market is making in regards to the oil industry. Offshore oil drilling is dead.

If US shale is really a technological revolution, why have the producers underperformed the commodity since the bottom in 2016?

And yet we are led to believe that oil prices will be contained in a 40-60 range. As Jawad Mian recently noted, complacency towards this mythical range is reminiscent of the view from 2011-2014 that oil would remain above $100 in perpetuity. And with the largest cut in capex since 1998, this seems unlikely to say the least.

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Meanwhile, it’s been up to US shale to make up the difference in capex. I’ve recently read a couple of skeptical reports on the technological revolution that is the US shale industry. One of which comes from my friend @IndiePandant who makes a strong case that the shale revolution is not all it’s cracked up to be.

Then there’s a man who is as smart as he is skeptical, Russell Clark, who brings up a number of key questions in a recent piece such as the rapid decline rates of US shale, the heavy concentration in the Permian and Eagle Ford plays, and the incredibly poor returns on capital. And then of course there’s the plateauing US rig counts.

If the rig count is plateauing, why are predictions for US oil production growth continuing to rise?

 

And if the bearish oil case was only a bullish US shale case, that might be enough, but it gets better much better…

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In case you haven’t learned to zig when The Economist zags yet…

The “Electric Vehicle crushing oil demand” story is completely overblown. Mass adoption, or even marginally higher rates of adoption continue to be pushed further and further out into the future. Meanwhile oil demand is booming baby.

It is likely that the weaker dollar combined with China’s fiscal stimulus have reawakened global oil demand. Although Emerging markets are not booming like they used to, they are still growing, and require more and more energy to fuel their growing economies. So not only is it likely that have we overestimated future oil supply, it’s likely we have underestimated future oil demand as well.

At a time when the all knowing oil gods cannot survive,
perhaps it is time for contrarian millennials who know nothing to thrive.


 

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!