WM 31 October 2021

Quotes

"Life is risky. People die from it!"

Happy Halloween

Lessons & Thoughts

Paradox: predicting the short term is harder than the long term. Focus on trend lines over headlines

Robert Wilson is one the best long short equity investors of the 1970s and 1990s and died in 2013 with a USD 800m fortune

Classic shorts: Fads. Example of Crocs

To ape is our nature

How to please your client?

So you want to write a book?

Average non fiction books have 70000 words spreads over 246 pages with c. 250 words per pages.

Mental health

Childhood traumas

It's ok to fail

Bob Farrell's Rules to remember

As the Cop 26 starts in Glasgow, worth remembering a few facts about energy

Untaxed negative externality = hidden subsidy

A good example is wind energy. Denmark went for massive wind energy investments and subsidies. The problem is when too much wind, need to export electricity at depressed prices. When no wind, must import electricity from Norway produced with natural gas. The biggest advocate of wind energy are nat gas producers. Denmark has now stopped subsidising wind.

So expect the following

Since 1900 GDP has grown 50x in real term while population has grown five fold. So 10x fold increase in real productivity. At the heart of that miracle, there was oil. Oil is what made both the population growth possible (fertiliser, transport and cold storage of food, chemicals, medicines etc) and fuelled the machines / electricity that made productivity possible. If oil made the XX century, the question now should be asked what will make the XXI century?

If we look at the world economy as energy then, one can see that a modern man consumes 20000 KWh of energy per year

One hike in the mountain would consume 100W or the equivalent of a light bulb. To replace all the machines that help you have your standard of living (say if tomorrow there is no more oil to produce the energy to propel those machines) you would need 200 slaves to do the job instead. Talking about slaves may shock you, but remember that the US civil war was not so long ago and coincided with the regime change that was enabled by the replacement of slaves by machines. The industrial north who promoted machines won the war. The question now is what new regime will dominate? Will it be through the promotion of lower or even negative growth (no more cars in city centers)? Will it be through the mandated decline of populations? Will it be through massive changes of habits (plant based replacing meat and dairy?) etc

Do not believe what you read. Make sure your facts right, check the source and beware of the narratives and biases

Words and stories are weapons of mass distraction

And since it's halloween, let's show how scary these markets are: these are the guys who happen to be on the other side of your trades

Financial astrology

If the moon influences your moods, if the Sun influences crop yields and if everything is interconnected in the universe, then perhaps there is something to be learned from the study of planetary cycles and how these coincide with big turning points in financial markets.

Financial astrologists do such work and split the cycles in two: short cycles made by the 4 smaller planets to consider (Moon, Mercury, Mars and Venus) and long cycles made by the 4 big planets (Jupiter, Saturn, Uranus and Neptune)

Each planet have been associated with particular moods and trends. For example, if Jupiter is greed, Saturn is fear

In market it pays to be a lunatic: Moon is known by traders and every trading almanach would show the influence of full moons (tops) and new moons (bottoms) as short term turning points

Sun spots too for agricultural commodities, the current low point marked the turning point of the current agri commodity cycle, like it did in 2010-11

SPX vs Venus-Mercury cycle

EURUSD vs Venus

The Mars Vesta cycle is a 3.9 year cycle that tends to match the 4 year presidential, it is calculated by the crossing of Mars with a comet using this synodic cycle calculation

Jupiter (Greed) is the key planet for long cycle turning points.

Saturn vs Jupiter 20y secular cycle

Saturn - Uranus appear to show major bear market lows

Study of cycles are as old as man being kicked out of paradise. Joseph warned the pharao of a 7 year cycle that still holds to this day. Beware that 2022 is 7 year after 2015 (tapper tantrum, china correction), itself 7 year after 2008 (financial crisis), itself 7 year after 2001 (internet crash), itself 7 year before 1994 (bond rout), itself 7 year before 1987 (crash) etc..

Macro news

Money in the new "gilded age"

Printing money has no use if it does not serve productive purposes

The excess money only ends up in increasing inequality.

USD 100bn is 10 million times USD 10k. If you are 20 years old and happens to have 10k, you would need to compound 31% for 60 years to reach that club. Even if your parents are smart enough to invest 10k in stocks when you are born and lock it for 80 years, your portfolio would still need to compound at 22.3%. If you get the 10% historic average of the SPX, you would get USD 20.5bn at 80, while our 20 year old investor would "only" reach USD 3bn at the same age. That being said, there is a powerful lesson from all this. You do not get rich by sitting on cash or as an employee. You get rich from being invested in wonderful companies over the long term and then let the power of compounding do the rest.

Long dollar

Short EM currencies

Gold & Precious metals do not like a strong dollar, but do look very cheap relative to the monetary base and other commodities, especially considering the fact that there has not been major discoveries for a very long time

Crypto is taking the shine off gold right now. In a sense, this is the macro call of the decade

Imagine if all the banks accepted Bitcoin accounts?

Facebook becomes Meta

Ethereum reaches ATH

Fixed income

What is the Fed waiting for?

Look at what happens when Canada stops QE

Next piece of news: expect trouble in Canadian property

The US yield curve is steepening: growth seen up

In Europe and Asia, the shape of the yield curves are different and pointing to a downturn!

The 30 y yield spread is contracting too

One possible explanation: the US economy relies on consumers, while Europe relies on exports?

The end of a 35 year old cycle

In the long run the 10 y yield should be equal to Real GDP growth + CPI

Can rates go up when debt to GDP so high?

But as long as yields are low, there is more debt

So the way to get rid of debt is to monetise it

Corporate debt service ratio good but for how long

Real estate

In Switzerland, mortgage rates have risen by 0.2%. What does it mean for real estate value? Basically = -7% drop in "fair value" from 43.5x to 40x gross rental yield. Another 0.8% move would imply another 25% drop in real estate values to 30x. Indeed, it is all a matter of leverage.

But when inventories are tight and a new generation wants buy... value may fall, but prices may still go up

If you decide to buy in a city near the sea, make sure you take that into account

Equities

The same logic applies to stocks, the main difference being that real estate depend on income that mostly rising over time with CPI, while stocks have earnings that tend to grow 2-3x faster than CPI

In the short term, we know a lot of the appreciation above trend line is the result of monetary excesses

New all time highs

SPX as inflation hedge? Note that since 1975, appreciated by 10%, while world index has delivered 13.3% CAGR

The main issue now is that valuations need very strong growth in sales and earnings. Otherwise, the internet bubble or 1929 crashes will look like walk in the park

Indeed margin debt (liquidity) is falling in line with tappering and inflation eating into savings

It matters because speculative retail investing is behind the buying

Liquidity matters also because buy backs have accounted for 40% of this bull market

So what about earnings? So far so good, but margins may have problems in 2022

Sentiment is bullish

No more puts!

It comes with the season. Yet, seasonality is not as bullish as usual in a post presidential year

Divergence: Who is right, discretionary or systematic?

The breadth has recovered in the SPX, but not in the Nasdaq. In fact, we note many stocks being beaten up badly, not least both Apple and Amazon (two major leaders of the bull market have fallen hard last week)

Remembering 1987: the parallels are there

Volatility reached an all time low!

Such that bonds are now more volatile than equities!

Commodities

Commodities are no longer in a bull market. In five years, the real bull market will start. Commodities are moving in 30 years cycles. 10 year booms, 10 year bust, 10 year sideways

Oil

Two trades if oil rises = oil services + CAD

Is Copper is the new oil?

Agricultural bull

Beware of V shaped tops in commodities: nat gas, lumber, coal. Enjoy the rides, but when it tops, get out quick

Freight rates next shoe to drop?

Alternative assets: modern art

GDP

China credit stimulus drives economic slow down: the key lead indicator?

The world economy is slowing =

Germany is heading to recessionary conditions

Recession in the US too?

US consumer does not like the current economic situation

Biden's USD 1.7bn stimulus to the rescue?

Inflation

What can we learn on inflation from this chart? Basically, that deflationary trend happen in free global markets where technology produces massive scale effects, while inflation takes place is service (labour intensive sectors subsidised by the state). Big governments love inflation. People prefer lower costs of living.

Real disposable income per capita in the US

Wages are about to rise in a big way in the US, but not in Germany...

and yet

Financial repression in Switzerland. Interest rates -0.75%, wealth tax -0.5-1%, inflation -0.9% = -2-3% negative return before even starting to trade...All of this to keep the Swiss Franc in check with USD

Why big governments are making a come back

What has worked year to date in this inflationary world: not surprisingly commodities, value, while treasuries have suffered. This is classic stagflation stuff. Next move? Either return to reflation if supply chains reopen or deflation, in which case 30y treasuries, gold AND USD cash could shine.

Themes, Sectors & Corporate news

It was a busy week for earnings.

Twitter peak?

Facebook (now Meta)

Metaverse theme = second life online, crypto, video games and esports, virtualisation tools etc.. A new continent and economy is opening. Facebook needs it to stir growth and is gonna spend a lot of money in it

Video games and e-sports theme (olympic discipline soon): ready player one? Video games is already a USD 129bn market growing at 6% a year, but the global esport, which now accounts for 1% of the total should outpace this growth rate by a factor or 1.5x to 3x, especially in the wake of sponsor money keen to tap into the wallents of a 500m global audiences (some e-sports competitions are now more watched that NFL games) and due to the fact that it will be olympic discipline in LA.

Meanwhile GOOG and MSFT beat