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 pets.com 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.

A Byte Future

1 Nov

Finally, you probably are thinking, a bitcoin based futures market. Bitcoin miners the world over are at long last able to hedge out their production and distribution risk. We were all wondering that with such an active forward cash market (a requisite for an active futures contract) why does there not already exist such an animal. The legitimization of price discovery in the ether world is now complete. Advocates of this product have pointed out that the highly volatile nature of bitcoin lends itself perfectly to  a futures based product. The ultimate question however is: has there ever been a futures based contract derived from something that may not have a future itself?.  If you are looking for the perfect contra-indicator we just saw it with famous “value” investor Bill Miller waxing poetic on the merits of bitcoin (an asset for which he has devoted 30% of his funds assets) when he recently stated ” I that believe there is a nontrivial chance it goes to zero, but every day it does not that chance goes down as more venture capital flows in and people become more comfortable buying it”.

Driverless Fed

19 Oct

If historical correlation means anything, then President Trump would be best served by appointing either Peter Dinklage or Robert Reich as the next Fed chairman. The perfect correlation between the Federal Funds rate and the height of the sitting Fed Chairman/Chairwomen is  incontrovertible. While one might argue that this relationship is spurious at best, you can’t argue with the numbers and as we all know, numbers don’t lie. In fact, as the world moves toward more autonomous modes of transportation, it would make complete sense to move towards a Central Bank that is purely driven by data, with no human interface or objectivity. Under this new Central Banking model, all monetary policy would be derived from a model (dot plot?) with the input derived from the usual suspects of: consumption, inflation, capital market environment, etc.. The advantages of such a model are many, not least of which is that such a model reinforces the political neutrality of the institution. We find it curious that with all the advances in AI and process technology, no real conversation has taken place regarding the mechanization of monetary policy decision making. Trillions of dollars slosh around capital markets daily driven by highly sophisticated algorithms, but we suspect that the public takes some false comfort in the fact that there are 12 people that are “in control” of the domestic and global financial system. Driverless cars- sure, Driverless Fed- too risky.


10 Oct

The advent of crypto-currencies and ICO’s and other various forms of ether fairy dust should provide at least some fodder for questioning the viability of hard currencies. As we all know from Economics 101, a nations currency represents a claim on the full faith and credit of a particular nation state. Unlike bitcoin however, the trillions of dollars of currency trades that take place daily do not involve a real concern as to the ultimate financial stability of the underlying sovereign itself. Two recent events should give dollar holders pause when it comes to U.S. credit stability, namely the decision by Congress to eliminate the debt ceiling and President Trumps off hand comments regarding Puerto Rican Debt. These two seemingly unrelated events both represent efforts by Government to escalate their influence in the bond holder/sovereign creditor relationship. In plain terms, the congressional action tells bondholders “The Sky’s our limit”, while Trumps remarks tell creditors “Don’t expect much”. While some would say don’t read too much into this, it may prove to be a foreshadowing of things to come as the worlds largest debtor is now led by a President known to treat debt repayment as merely one option.

Paradigm Lost

24 Sep

Headlines touting driverless cars, the death of the combustible engine and other various forms of industry killing technology, reveal the difficulty in discerning what is simply an overly zealous capital market and a real paradigm shift. While the distinction may not appear overly important at first glance, we would argue that the distinction between investments in innovative concepts and ideas born of “free”access to capital often are divorced from long-term permanent shifts in structural paradigms. We can again look to the oil market as a current example of the blurred lines between the structural/secular and the cyclical.

While the concept of peak oil is not new to the investment nomenclature, the excitement surrounding alternative vehicles has given birth to the concept of peak demand. The current line of reasoning shows oil demand slowing drastically going forward as alternative vehicles make aggressive inroads into the combustible engine vehicle markets. This kind of simplistic forecasting fails however to take into account a whole host of real-life practical considerations.  It is no great surprise that Governments, at both the local and National level, have latched unto this Muskmania with Governments in Europe calling for the end of combustible engine sales by the mid-century. What we did not hear from any of this rhetoric was a well thought out, well designed plan to deal with any of the aforementioned real-life practical issues.  But, that is what you get in periods of capital mis-allocation, the cost of capital is not the only thing that is being suppressed; reality is as well.