I was recently asked about China. People talk about the debt problem, the demographic problem, the manipulated data problem, the investor-rights problem, the human-rights problem, etc. After all these problems, why invest?
Because China is the biggest thing happening in the world economy. It’s impossible to ignore. It would be like ignoring the US economy from 1800-2000. As flawed as China is, we must engage, gather data, define frameworks, code algorithms. China will not be our largest position for as far as the eye can currently see. Too many problems. But we must engage.
One can currently engage through SGX (Singapore) and HKSE (Hong Kong) futures, while avoiding much of the specific problems of being a stock owner.
Nothing about this bull market makes sense to me. However, because I do not argue with the market, nor do I pretend to understand things I do not actually understand –I have participated in it. Ultimately, this is the genius of algorithmic trading systems. Every bull and bear market happens at the margins of the largest market-thesis. And it is debated everyday at the bid and the ask. Financial commentators will say this matters, that matters, look at this historical comparison, look at this valuation, etc. The market does not care. Find data that others are not talking about. Then obsess over it until you find the subtle asymmetrical insight that resides inside it. That’s the honeypot at the end of the rainbow.
There is an interesting imbalance in the public and private markets. Private capital will pay substantially more for an inferior company—and hold it longer. Cathie Wood at Ark Invest has pointed this out repeatedly. Listen to her interview with Azeem Azhar. Analysts have become very backward looking in their search to understand valuation. Because, perceiving a different reality in the present (versus the past) is tantamount to saying “it’s different this time.” Let’s postulate a few truths:
- Innovation is happening across more platforms than anytime in history
- Platform level changes (i.e. electricity, transportation) change everything they touch
- We live in a world of excess capital and surging numbers of knowledge workers (more money and more minds to solve problems than ever)
- The vast majority of public money is trapped in capitalistic dead-ends (i.e. funding zombie governments)
- Valuation is always understood backwards, while capital must be invested forwards
- Private markets are closed to the non-wealthy. Public market become the only option for most people.
- But the wealthy are just as vulnerable to herd-behavior is anyone.
How do we profit from the herd-behavior in private equity (that is rightly seeing the stunning changes coming across broad technology platforms and therefore paying wild valuations for inferior companies) while remaining agile and liquid?
We here at ThinkGlobalMacro are doing it by focusing on the indexes that capture that change (Nasdaq and similar) while avoiding or hedging with the indexes that reflect the past (DJIA). Then, we create health monitoring algorithms (that look back) to define the health-zones of the index, the economy is which it is placed, and the government structures that regulate it.
So our risk system for Japan signaled a Risk Off overnight. Since we focus on ETFs and derivatives it is simple to scale-down exposure. Trading single stocks makes it difficult.
This is a deep dive into Artificial General Intelligence. But it is fantastic. Highly recommend. https://www.infoq.com/presentations/general-ai-ml
There are several unique forces shaping the current Federal Reserve. Among them are:
1.) A Chief Executive willing to deny facts as manner of being, not simply for political gain.
2.) The rise of MMT.
MMT states that a government that can create its own money, such as the United States:
Cannot default on debt denominated in its own currency;
Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
Is limited in its money creation and purchases by inflation, which accelerates once the economic resources (i.e., labor and capital) of the economy are utilized at full employment;
Can control inflation by taxation and bond issuance, which remove excess money from circulation, although the political will to do so may not always exist;
Does not need to compete with the private sector for scarce savings by issuing bonds. These tenets challenge the mainstream economics view that government spending should be funded a priori by taxes and debt issuance. MMT asks in effect: “Why not create the money to buy what we think is important, and then raise taxes or issue bonds when we get inflation?”
The first four MMT tenets are not in conflict with mainstream economics in terms of how money creation is executed and inflation works. For example, as former Fed Chair Alan Greenspan said, “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” However, MMT disagrees with mainstream economics about the fifth tenet in terms of impact on interest rates.
3.) A decade of financial repression/distortion
4.) Macro trend change in demographics
We do not know where this is going, but it promises future opportunities in volatility.
Nearly a year ago, I went into the TradeXIV community on reddit and posted this warning. I didn’t know the whole XIV complex would blow up a short time later. I was shouted down by a few folks, as you can read. But here it is… and I should say that it is rare to be really right in this game. Usually, we are mostly right, kinda right, or right but too early, or just wrong. But this time I was perfectly right. I closed out substantial profits and left the casino. Then it burned down. True story.
1 year ago
I just want to say as a reminder if anyone is trading volatility with money they really need–Please stop. Only trade money you can afford to lose! Volatility trading is the most dangerous end of a profession that destroys banks and mocks Nobel prize winning economists. But the Fed isn’t going to bail you out! It isn’t easy or free or sexy. It is simply risk transfer. Someone is paying you to take their risk. Imagine someone paying you to take their risk of cancer or heart-attack. Think of the money you could make! That’s awesome until you cough and your hand comes away bloody. Yes, that’s a dramatic example but it illustrates a truth about risk. You can’t remove risk. But financially, you can transfer it. Taking other people’s risk of ruin is what us volatility guys are being paid the big bucks for. Please remember that.
In an effort to be transparent (and also to create a public record of the TGM proprietary risk systems) I will be posting risk assessments of certain global markets. However, one should note that I am an optimist and believe that one should be invested – so my risk assessment reflects that risk-profile. My version of “acceptable” risk does not apply to you specifically. You should get professional advice.
All great general purpose technology changes produce huge booms and huge busts.
In this view, AI is what economic historians consider a “general-purpose technology.” These are inventions like the steam engine, electricity, and the internal-combustion engine. Eventually they transformed how we lived and worked. But businesses had to be reinvented, and other complementary technologies had to be created to exploit the breakthroughs. That took decades.
The mission of MIT Technology Review is to equip its audiences with the intelligence to understand a world shaped by technology.
— Read on www.technologyreview.com/s/611482/the-productivity-paradox/