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Apocalypse How

18 Apr

It feels like every day we are faced with the end, beginning, and or continuation of, some new kind of threat. Credit, or blame, can be apportioned to any number of things: surfeit of social and traditional media outlets, politics with its inherent catastrophic leanings, or a speed of technological change which necessitates constant transformational shifts. However, rather than becoming traumatized by the constant apocalyptic announcements, it would seem that we have become almost anesthetized to it, particularly in the geo-political realm. We know that the noise around skirmishes involving trade pacts, border security and proprietary technology have always been present. We wonder however whether the information gleaned from the current noise has been also ignored, and as such the imagined becomes more in danger of becoming the unimagined. In more mathematical terms, are we more and more living in a world where we are under-estimating (and therefore under-pricing) multiple std. deviation events, even though the “noise” might suggest otherwise.?

Improv Investing

9 Apr

Everyone knows the first rule of improv is the concept of “and then”. Simply put, the idea is never to stop the dialogue between characters by introducing qualifiers into the conversation. Free flow of ideas and association is the name of the game and if so we are all living in a Second City world. The great thing about improv, and free association, is that it unlocks creativity and allows performers to think outside of their normal patterns of thought. The problem with carrying this concept into the investment realm is that pure free association purposely loses the anchor of reality. Lets get up on stage: Performer 1: Tax cut.. Performer 2: good, more money in everyones pockets Performer 1: good for business and wages Performer 2: good for business good for stocks Performer 1: good for stocks, good for everyone. That was fun lets try again: Performer 1: Fed Increases rates Performer 2: rate increases are bad, will hurt everyone Performer 1: pain will lead to recession Performer 2: recession will be painful Performer 1: Fed will need to fix. This type of anti-analysis lends itself perfectly to the algo-driven world we have lived in over the past 6-8 years. We suspect however that a more nuanced strategy involving more second and third level thinking will ultimately prove more profitable. Actions have consequences, however in an algo driven world consequences are mere noise.


Finding A Bottom

16 Feb

Alcoholics and addicts have a saying that says ” a bottom is reached when your behavior is deteriorating faster than you can lower your standards”.  The important thing about bottoms in the recovery community is that they represent the critical point at which the addict experiences real consequences.  If we use the well worn analogy that the Economy/Capital Markets are the addict and the stimulant/substance is easy money, the latest tax package combined with a proposed infrastructure spend would indicate that the addict is a long way from rehab. Such behaviors on the part of lawmakers, aided by Central Bankers, would  indicate that consequences are for another day, sobriety can somehow wait for tomorrow. Tomorrow is closer than one thinks however as we have mentioned on several occasions, the math simply begins to become onerous, even assuming only a return to trend-line rates of interest(interest on the debt triples). There is simply no way to grow your way out of the kinds of federal deficits that the U.S. is experiencing and will experience. But for now, we say to Capitol Hill and Wall Street, BOTTOMS UP!

Stockholm Syndrome

8 Feb

The unhealthy symbiotic relationship that exists between Central Banks and the Capital Markets is starting to become more and more pronounced. We might even hint that there are distinct signs of Stockholm syndrome at play, the only problem being we are not sure who is the captor and who is the hostage. This blurring of the lines between whom is beholden to whom has accelerated of late, particularly as it relates to the yield curve and the latest tax reform bill. Typically, we would see some kind of Treasury or Fed response to such a blatant deficit-blind package, but in fact the Fed and the “bond market vigilantes” have chosen to leave their pitch forks at home. One would have expected more than a 20 bp rise in Treasury rates with such an imbalanced tax package, particularly in light of continued steady global growth.


6 Dec

Kudos to the commodity research group over at TD securities for their most recent analysis of the Aluminum market. What struck us most about their analysis, was the inclusion of a “behaviorally adjusted supply” curve. This supply curve, in effect, makes adjustments for those firms, primarily SOE’s, whose production levels are not solely driven by profit motives. I really like this type of analysis as it typifies so many commodity sectors where  a variety of non-profit maximizing entities operate whether it be SOE’s or quasi SOE’s,(codelco?),  or de-facto SOE’s (anyone operating in South Africa).  We might take this a step further however to include any firms beholden to the capital markets for their very survival, because as such their ability and hence willingness to produce is not driven by profit and loss, but rather by their ability to finance operations, think last years shale bust. The sharp down move in oil prices would have indicated to the market that the marginal barrel of production needed to be rationalized. However, what we saw evidenced in the shale market, was a very temporary shut in of production rather than a permanent shaking out of the marginal producers. We posit that the shale landscape in the U.S. would look vastly different today, if producers faced a dry well in the bond markets during 2016. As we have said, the mis-allocation of capital extant in capital markets today not only causes sub-optimal decision making at the investor level but in the real economy as well.

Gullibles Travels

30 Nov

If was the poster child for the irrational and exuberant naivety of the late 90’s early 2000’s, then most assuredly Bitcoin would fit the bill for this most recent period of gullibility. I just read a piece on a new crypto-currency which involves a bitcoin backed by gold, nowhere in this article did it explain the advantages of this creation over simply owning gold. This gullibility is not however simply relegated to the crypto space, we see it in a number of other areas as well: Deficits don’t matter: Well, you can put this one in the column of things that don’t matter until they do. In a world where Global Central Banks  have monetized deficits as far as the eye can see, this may be true, however there is a point quickly approaching where math and physics  will take hold, particularly when we are talking about a tax cut Central Banks have permanently dampened volatility: While they may have lowered the risk free rate of return, the flip side of that is a massive mis-allocation of capital which has manifested itself in an environment of return free risk  This time its different: Industries are only sustainable to the extent that they can turn a profit and lengthy credit cycles do not negate this fact. Multiple resurrections across a number of industries would suggest that the reach for yield has blinded investors to this reality.

Details, Details

9 Nov

In a world best confined to 280 characters there is not room to trifle with details, we therefore should not be surprised at Bill Ackmans latest description of his travails with Herbalife in which he states “We’ve been entirely right on our Herbalife investment in terms of the fundamentals of the business. We’ve been wrong on the share price”.  Unfortunately, being right in theory doesn’t mean much in the real world, perhaps he should point this out to Elon Musk and Tesla, where recent production snafus highlight the fact that manufacturing cars is actually difficult business. The transition from concept to production to production with scale is something that legitimate car companies have struggled with since inception. So, as much as Tesla fans would tout that Tesla is not a car company,  but rather a technology company( afforded the appropriate multiples we might add) there is a difference between an automotive vehicle and an iPad. If one would need further convincing that Tesla is not a car company, one automotive engineering expert who has seen automotive production processes across a number of different companies commented on Tesla, stating ” I have never seen so much manual labor on a line”. Not only is Tesla not tearing up the Detroit playbook, turns out they are using the same playbook, the one from the 1920’s.