NVIDIA (NVDA) will report its fourth quarter results after today's closing bell
NVIDIA (NVDA) will report its fourth quarter results after today's closing bell
Alphabet, (GOOG/GOOGL) will report fourth quarter results this afternoon.
Microsoft (MSFT) is set to announce second quarter result tonight after the bell.
Facebook (FB) will report fourth quarter results this afternoon (4:05).
Tesla (TSLA) will report fourth quarter results on its website soon after the bell.
Boeing (BA) is set to report Q4 results tomorrow before the open.
Chinese internet giant Alibaba (BABA) is set to report Q3 results tomorrow before the market opens.
Apple (AAPL) will report first quarter results tonight after the close.
The whole goal in trading/investing is to make money.
Netflix (NFLX) will report fourth quarter results after the bell.
Our fathers were our models for God.
When we broke down in February we were at the highest RSI reading in history.
The exception to the bright green market today was the financial sector (-0.5%).
2018 was a “difficult” year for most investors.
Since 1950, there had never been a down year for the market when the S&P 500 has gained at least 4.0% in January until this one.
The FOMC decision and the Federal Reserve's updated summary of economic projections and dot plot, will be global capital market movers on Wednesday afternoon.
The internet is a weird fuckin’ place. Perhaps no weirder substrata of the internet exists (outside of being a furry?) than the world that lives on FinTwit.
If you don’t know my story I’m just going to run through it very quickly to give you a little insight. I’m in my early 30’s, I’ve been trading for 13 years, full time for five years now. I in no way shape or form consider myself a “guru”, coach, expert, or adviser. I am an individual investor/trader and do it full time. Prior to trading full time, I was a co-founder of a tech company that ended up acquired by a major tech company. I worked for said company for a couple of years after acquisition. Prior to that I dropped out of grad school at UC Berkeley, and prior to that I was a college athlete. Beyond the list, I’m super competitive, OCD, sleep about four hours a night, hate losing, and quite honestly I don’t know how my friends even put up with me. I’m also pretty minimalist and most my decisions are math driven. Speaking of math, my dad was a nuclear physicist, and I took a lot of it in school. I literally do math “for fun” just to stay “fresh.” Im a big believer in data and analytics (Analytics was a big function of what I did at that major tech company that bought us out) and use data analytics to get better at what I currently do.
I bring all of this up to give you a little bit of an understanding of “who I am.” Give you a little “life” behind the curtain (screen). I also do this as a precursor to the following statement. As “qualified” as I may seem with the above resume, I’m no where near as qualified as the actual market movers.
One of my best friends in LA is a “financial professional” who was a D1 and pro basketball player from Ivy League roots. His firm manages an incredible amount of wealth here in Los Angeles with a clients list that you would not believe. He is more neurotic and competitive than I am on my best day. I only bring this up to give you the following insight and reminder. If there is one thing that I have learned from the financial/tech worlds it’s that the elite are just that, elite.
Secondarily, why are most of these clowns online under the ripe age of 27 and/or uneducated? I’m not saying there aren’t exceptions, the best trader I know used to pump gas for a living before striking it big in the .com boom and preserving his capital long enough to amass a $40,000,000 fortune. But, the abundance of those types online is similar to the abundance of 19 year old “instagram models” that all have yacht photos. Reality is, in both cases, the Yacht’s likely owned by a 63 year old dude named Esteban, and the two posing on it are gonna head back to their shitty apartment, or worse, their mom’s house.
If I told you that you had to give your money to someone who was in charge of managing it for the rest of your life and it would be your only source of income wouldn’t you ask to see their bonafides? Wouldn’t you rather give it to the dude that went to Princeton and has been in the industry for 15+ years as opposed to the chick that drove for Uber and allegedly turned it around without ever showing you her transactions? Or the other dude that’s 20 and didn’t even go to college? Or how about the other dude that is 85% accurate but doesn’t quit his day job and can’t answer your questions in real time sometimes because his boss is around? How about the guy who tells you his losses today were actually a good thing regardless of how the market did because he could have been down a lot more? Or, my personal favorite, the dude that’s not a programmer nor has the mathematical prowess to understand a basic question about regression but somehow has developed an AI algo that you should pay hundreds of dollars for?
The point of this isn’t that I wanna bash people or tell you that everyone sucks and I’m better or anything like that. In fact, the opposite is true. You should be skeptical of me. You should be skeptical of everyone online. You should ask as many questions as you can and you should know your risks.
I was only 20 the last time the market started to roll like this and at first blush I was shocked. The best trades I made at that time were either no trades or sells. The take away from this for me was in blind bull markets everyone’s a “genius.” Everyone’s a prodigy. Everyone makes bank. And I was one of the “smart ones” at the time. I shorted the banking stocks and the housing stocks as the economy crumbled. I warned my parents to save their nest eggs and get out of equities. I was the boy “who cried wolf”, except I did it at the right time.
I will be the first to tell you that it was undoubtedly mostly blind luck. What wasn't blind luck however was knowing when to step away. For me personally, that date came September 18 2008. I’d been making a “killing” (by my standards back then) by shorting the same bank stocks that were running wild during the housing boom. Specifically I was shorting $C. The SEC put out an emergency cease to shorting of bank securities on that day and I learned the most valuable lesson in my trading career. The game is rigged, and you better learn to accept it, quickly. I’d been short from the 200 level on $C and watched as whatever gains I had were nearly all wiped out quick fast and in a hurry. The stock traded from a low of around $130 to north of $220 in a matter of a day.
FinTwit did not exist back then, and I did not have any friends that understood my plight. I was forced to absorb my emotions, take out my frustrations elsewhere. Unfortunately for me, the only things that existed back then were CNBC talking heads. And contrary to what I’d believed during my entire young trading career, I learned first hand, those guys on tv had no fucking clue what was going on.
In my case, I closed up shop shortly after seeing that entire rally in $C, and then some, evaporate less than a month later without the ability to short it. The obvious trend was down, and I was not allowed to bank it the way I’d learned how. With that understanding, I packed my bags and turned to tech. The market continued to fall for another year or so and I was able to save my nuts. Sure, I’d missed the start of the “next great bull run” by over a year. But I did not lose my worth in the process. I’d also learned another valuable lesson along the way.
There is an old adage that trading peeps love to throw around in times of crisis; “Cash is a position.” I used to hear it a lot back in 2008 on TV when people didn’t know what the fuck is going on, and I’ll admit, I’m guilty of using it as well. It’s catchy, effective, and makes you look like you know what you’re talking about. It becomes a “hot button” go to in times of volatility about as much as “BTFD” became a staple household during the bull run. Cash is in fact more than a position though. Cash is a peace of mind during volatility that doesn’t make sense. Last week, we witnessed a +1400 and -1400 TICK reading during the same day. That is something that I’d never seen before. You have to be a degenerate gambler to want that kind of action. After the dust settled however, you could find actual trades. So it’s important to note, cash is in fact a position, but when the time is right, you got to know where to deploy your cash. I’ll be frank, if your “guru” wasn’t telling you to sell rips, or was telling you to buy dips during that period, get rid of them.
Cash has benefits beyond saving it. Cash doubles as peace of mind and clear thoughts. having your money in cash when you don’t know what’s going on allows you to think clearly when you do. I can’t tell you the number of times I’ve lost money simply because I had an overnight bad position and felt I had to “recoup” losses.
This is the first time in quite some time that I write something about the markets that is not rooted in data or technicals. I did this as I saw more and more former members who I wouldn’t fucking trust to balance my checkbook start to post that they are “starting up a service.” I’m not going to name names but I will be frank enough to say that I found it more than alarming.
I’ll follow that statement up by saying this; I’ve been trading in front of an audience for four plus years now. I’ve never stopped anyone from leaving the group, and I’ve never asked anyone to join. I’m also very explicit to everyone who signs up that I AM NOT giving advice. I am sharing my own personal opinions and my own risk tolerance. The goal I had and have is to share actual information that I have accumulated over the course of my career and provide in depth (opinion) analysis about market conditions. Secondarily, it is my goal to share how it is that I do what I do. I want to be very clear about the next couple of messages. It is important that anyone who is reading this understands them.
The reality is, trading and investing is just leveraging probabilities in your favor. The better you are at maximizing the probabilities in your advantage the better your overall outcomes will be. The worse you are at this (taking a bunch of long shots for example) the worse you will be.
In all honesty, most people won’t make it trading. Typically, and this is just my own experience, when an individual signs up, I’m able to tell whether or not that person will make it within three days. If I feel they are not fit, I ask them to take a refund and explain why. Secondarily, if I believe someone will be a detriment to my ability to perform, or others’ ability to perform, I remove that individual. I find it incredibly valuable that in environments such as a “trading group” that everyone is on the same page.
With any “trading service” the bread and butter of what you are paying for is an individual’s ability to know when to go in, when to sit out, when to go big, and when to get out. You are not paying for anything else other than that. The returns are (mostly) arbitrary when it comes to these “services.” That’s not to say that returns don’t matter, they do. I’m just saying more important than the “returns” are their consistency and loss prevention associated with keeping them. Any idiot can go on a heater and show you how well he once did. Most can’t keep the gains from that heater and end up pissing their money away.
You notice how more and more people are starting to tell you they’re gonna help you beat the markets now that it’s gone to shit? That’s not a coincidence. You notice how more and more people are “taking breaks” because they’re “worn out” now that the market has gone to shit? That’s also not a coincidence. You notice how the dudes that got used to buying the f’n dip are suffering some of their worst losses of their trading careers? That’s not a coincidence.
As I’ve said, the above is the focal point for why I felt the need to write this. I’ve seen more shit-heads who have no business trading, let alone taking your money for it, offer up “services” as of late. I’ve also seen a shift in the FinTwit environment (though I’m not really buddy buddy with the majority of those totem heads on it) that doesn’t want to be caught “wrong.” You can ask any of my ex girlfriends, I am the poster boy for making mistakes. It is okay to be wrong, and it is okay to make mistakes. So long as being wrong doesn’t cost you and your mistakes are small, you’ll be okay.
I don’t follow fin twit like most of you. I use it primarily for trending topics and to share ideas. I’m not “buddy buddy” with most on there and I don’t really care to be. I made the mistake of letting one person know real details about my life in 2011 and the dude showed up to my office in Santa Monica (he was from Miami). Since then, I’ve take strides to veil my life from the digital world. For example, every account I have is registered in my lawyer’s name or my best friend’s name. I have my own life and don’t really care to have a virtual one as well. Since 2012 however I’ve been able to get to know 1SimpleTrader pretty well (by virtual standards) and he’s been as close to a friend as I’ll ever have on here. It got to a point that people believe(d) that he and I are the same person. We are not. I’ve never met the dude.
The fundamental difference between he and I, at least online, is that he’s actually a nice dude and I couldn’t give less of a shit of what “Sheldon” from Biloxi Mississippi thinks of me or what he has to say. In terms of the internet, if you’re not adding value to my monetization goals, or aren’t clever enough to understand sarcasm, go away. I don’t care for your hot takes. That’s not to say I can’t be cordial, I just don’t care, everyone online is just text on a screen.
I bring all of this up because many have of you have slid into my DM’s asking me about him. He is alive and well. He’s been around in our group charting, trading, and bullshitting with us daily. This morning he nailed LULU and PG. I sat idly and watched for once.
To answer the questions, he’s taking a break from FinTwit to avoid a lot of the negativity out there and criticism that caused him to second guess his ideas. In this environment none of you idiots know what is really going on and the attitude doesnt help. I bring this up because that dude has always been super helpful to many of you and the “thanks” he got once shit started to turn is trolling, disrespect, and unnecessary criticism. He could very easily misrepresent himself like many of the fucking twats on FinTwit but chooses to be kind and transparent (I happen to choose “fuck off” but that’s just me). For his helpfulness and transparency, he’s left with the cantankerous, cave dwelling, entitled attitude that does him, or anyone for that matter, no good.
The main point I’d like to make here moving forward is that a majority of what you see on the internet is not real. It doesn’t take a genius to tell you this, and frankly, many of you know this. Ask questions, be critical, and be selective. Don’t expect anything for free and don’t expect anyone to owe you anything. If someone’s nice enough to try to help you, don’t be an asshole. If someone’s super young and “super great” be careful. If someone’s not quitting their job to do it full time, ask why? Hope this helped.
S&P futures higher by 1.7%: Trump and China President Xi agree to trade war truce; will delay rate increase to 25% from 10% on $200 billion tariff tranche for 90 days.
Trump will not raise the 10% tariff rate on $200 billion of Chinese goods to 25% on January 1 in order to allow further time to negotiate a settlement of structural trade issues between the two countries. If an acceptable deal is not struck in the next 90 days, then the tariff rate will reportedly go to 25%.
The press has pointed out this morning that there are different narratives in the U.S. and China surrounding the Buenos Aires "agreement." For instance, China has not publicized a specific 90-day time window.
The different narratives, it has been said, underscore the fundamental differences between the two sides that could make it extremely difficult to resolve the trade differences in the next 90 days. Accordingly, there are contentions that the "agreement" is just a kick-the-can-down-the-road approach and that the stock market's positive takeaway from the "agreement" is an overreaction.
In the end, it will be actions -- or the lack of -- that speak louder than the hopeful-sounding words out of Buenos Aires. It’s fair to say now that investors are relieved at least that things didn't go further south at the dinner meeting with respect to trade issues.
That relief is reflected in the futures market. The S&P futures are up 40 points and are trading 1.3% above fair value. The Nasdaq 100 futures are up 148 points and are trading 2.1% above fair value. The Dow Jones Industrial Average futures are up 437 points and are trading 1.7% above fair value.
There is a risk-on mindset for sure, which has also underpinned foreign markets. China's Shanghai Composite surged 2.6% and Germany's DAX Index is currently up 2.1%.
The strong indications are apt to be fueling a FOMO on further gains and specifically a year-end rally, the prospects of which have seemingly been given new life in the past week with some seemingly dovish-sounding remarks from Fed Chairman Powell and Trump's characterization of the closely-watched dinner meeting.
It is important to realize, however, that nothing has actually been settled on the policy path or China trade fronts, which is why the market could see a STFR mindset down the line.
Secondly, there is a good bit of attention being paid to the oil market today as well. WTI crude futures are up 4.7% to $53.34 per barrel, bolstered by the risk-on mentality and news that the Canadian province of Alberta will be cutting its production by 325,000 barrels per day in an effort to curb excess supply. On a related note, Qatar has announced plans to withdraw from OEPC.
Alberta's move comes just ahead of this week's OPEC+ meeting where it is thought an agreement will also be struck to lower production targets.
That meeting is just one of several important events that will take place this week. Fed Chairman Powell will appear before the Joint Economic Committee on Wednesday to provide his semi-annual testimony and the Employment Situation Report for November will be released on Friday.
In a statement from the White House:
"Trump has agreed that on January 1, 2019, he will leave the tariffs on $200 billion worth of product at the 10% rate, and not raise it to 25% at this time. China will agree to purchase a not yet agreed upon, but very substantial, amount of agricultural, energy, industrial, and other product from the United States to reduce the trade imbalance between our two countries. China has agreed to start purchasing agricultural product from our farmers immediately."
"Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture. Both parties agree that they will endeavor to have this transaction completed within the next 90 days (deadline March 1, 2019). If at the end of this period of time, the parties are unable to reach an agreement, the 10% tariffs will be raised to 25%."
Food ingredients, auto parts, art, chemicals, paper products, apparel, air conditioners, toys, furniture, and electronics (iPhones, smartwatches excluded).
Members at the G20 summit supported the idea of WTO reforms in official communique. This stance was echoed in the minutes released from the summit:
“We welcome the strong global economic growth while recognizing it has been increasingly less synchronized between countries and some of the key risks, including financial vulnerabilities and geopolitical concerns, have partially materialized. We also note current trade issues. We reaffirm our pledge to use all policy tools to achieve strong, sustainable, balanced and inclusive growth, and safeguard against downside risks, by stepping up our dialogue and actions to enhance confidence. Monetary policy will continue to support economic activity and ensure price stability, consistent with central banks' mandates. Fiscal policy should rebuild buffers where needed, be used flexibly and be growth-friendly, while ensuring public debt is on a sustainable path. Continued implementation of structural reforms will enhance our growth potential. We reaffirm the exchange rate commitments made by the Finance Ministers and Central Bank Governors last March. We endorse the Buenos Aires Action Plan."
In addition to the above commentary, in a statement from the White House, China President Xi is open to approving previously unapproved QCOM -NXP (NXPI) deal should it again be presented to him. This potential M&A headline will likely spark the semi’s as the overhead risk appears to have subsided.
Wednesday, December 5, has been declared a national day of mourning. Per tradition, the market will be closed that day.
The downfall in oil prices has not been beneficiary to the transports.
Market Volatility has been fueled by a changing landscape for the larger management models and has been aided by political, fundamental, and technical factors.
Oil has been pressured by compressing crack spread readings, but OPEC and Shale production cuts could help to forge support.
Sentiment data around extremes in hedging suggest the there is a potential for a “Max Pain” rebound into year-end.
China may not want a trade agreement?
During this bull market, because of an overextended period of historically low interest rates, and concerns about deflation rather than about inflation, more and more “managed money” has migrated into a “risk parity” model. That is, stocks and bonds are presumed to be mutually protective hedges for each other, and risk covariance remains under 1.00 for those diversified in both asset classes.
With the breakout higher in interest rates at the long end of the treasury curve in late September (a move that was not caused or accompanied by a breakout of higher equity prices), this risk parity approach (typically a 70/30 Stock and Bond portfolios) was hammered mostly due to model-based managers having to raise their guards about risk on the bond side while and decreasing their confidence in the belief of negative risk in their overall portfolios. The way to actually prepare for circumstances like this one is to increase the cash on hand.
In simple terms, when the yields on the long end broke out and equity prices did not, the traditional stock/bond portfolio model that a majority of fund managers have been using as their bread and butter had to be altered. The viable way to remedy the risk appetite in an instance like that is to increase cash levels.
Given that there’s near a half-trillion dollars managed in the above risk parity strategy, the impact of a widespread failure of the model has relatively dramatic consequences for equity prices. My belief is that this is the primary driver behind the initial downside momentum we saw in early October.
Another major factor likely contributing to the downward momentum is the rising expectations for direct supply in the bond market in 2019. Currently the supply is around $1.5TRILLION. This comes as a consequence of “yuge” anticipated budget deficits and the Fed’s plan to roll $500 billion off its balance sheet during that same time. These issues suggest to managers that the failure in the model for risk parity is likely not going to be “quick fix.”
In addition, likely helping to undermine the market over the past 6 weeks are two other big factors.
Q2-Q3 of this year is a strong candidate for cycle highs in both earnings and economic data due to the initial psychological impact of the sense that fiscal stimulus measures “are having a greater impact than anticipated” as noted by the Fed earlier this year.
Now that the elections are over, Democrats are taking over leadership in the House of Representatives. The implication is such that if the market was counting on Trump to push for further stimulus next year to inflate the market and economy into the campaign season ahead of the next presidential election. With the House in control of the Dem’s, Pelosi and Democrats will likely present obstacles on that path that will be difficult to hurdle. This further suggests rough comps ahead, as argued above.
As we know, the market does not simply move on the economy being great, reports of what has happened, or random upgrades/downgrades. The market is a function of future earnings growth relative to expectations. In order for sustained moves to continue, the growth has to maintain up and to the right relative to the risk and expectations. We also know that the higher the bar is, the more difficult it is to jump over it. So with this insight, we know how difficult 2019 could be.
Some weakening in Q4 guidance from big-cap tech over recent weeks has certainly done nothing to temper this new bearish tone in the tape.
We may be in a pattern currently that acts as a doppelgänger to the fall of 2015, where we see a beta chase into the end of the year, but a swift resumption of risk-off activity in Q1 2019. This time around however, we likely won’t have a massive safety net of fixed income money coming over into the stock market as we did in early 2016 when 70% of global sovereign debt in the developed world was trading at negative yields.
One reason it’s possible to see “Max Pain” type upside into year-end is due to something called the “Equity Hedging Index” put out by SentimenTrader.com. This measure takes into account six different hedging factors:
Inverse ETF buying
Inverse mutual fund buying
Short interest in equity index futures
Long interest in CDS markets
The Equity Hedging Index compares each of those six factors to its historical average, and then constructs an overall score from those relative scores. It has been a good guide over the years, marking points when too much cash is saved due to a concentrated belief of sudden bearishness.
Right now (as shown below in the chart) this index is scoring at levels that have marked major bottoms during the bull market. The last time it scored this type of level and the market did not immediately move to new large timeframe trend highs was in early 2008 (when it hit 85 in mid-March 2008 on the Bear Stearns collapse).
Just to be clear, only this measure and the “Hulbert Stock Newsletter Sentiment Index” are showing significant bearish consensus extremes right now.
It is important to note however, at that time in mid March 2008, it did mark a low that was followed by a strong two-month rally that saw over 13% in upside for the S&P.
Recent sharp selling in crude oil is likely the product of the build-up of a glut in gasoline levels at major refiners. The best way to see this is in the contraction of the gasoline crack spread – the difference between the input cost of crude oil and the output selling price of gasoline (The margin for gasoline refining).
Below is a chart of the price of a barrel of gasoline minus the price of a barrel of oil, which approximates this idea very well. This suggests that oil prices have been falling in anticipation of a big drop in demand for oil from refiners on the way.
Russia is also allegedly buying Iranian oil and selling to the world. This is softening the “supply-destruction” impact of the Iran sanctions being enacted and enforced by the Orange Man. OPEC is attempting to curb this as talks of production cuts have surfaced.
As far as key levels, the stars have aligned very nicely and we’ve seen a sharp puke down under $60 on aggressive selling. The $58 area, where we found support in February, has been breached. As of now we are on “oversold levels” and hanging on to a small uptrend.
That $58 area represents extra importance because it also lines up with what’s widely understood as the common line in the sand for whether or not US shale producers can profitably operate. That industry has become the most flexible in terms of shutting off and turning on supply centers. Therefore, it represents the potential to cut US production if the threshold is taken out to the downside. (A takeaway here is that the longer we stay under $58 the easier it is to short/sell US Shale stocks)
If Italy exits the EU and “redenominates” its debt into Lira, the actual value of that debt will plummet in spectacular fashion as it will no longer be supported by the stool of the EU and the far stronger economies up north. Those holding that debt will only be able to hedge the risk of this event by owning the 2014 minted Italian debt CDS contracts. This is akin to the 2008 MBS crisis.
As of yet, we haven’t seen a big divergence in these contracts, which suggests the world is not yet taking the current spat as a risk to Italian membership in the EU.
The Trump/Xi meeting is set to take place in Argentina toward month end at the G-20 summit. Trump has suggested that the meeting holds “great potential” for a trade deal with China. Trump is likely full of shit, per usual.
China wants a long-term change in the protectionism rhetoric and China-hawkishness in the US. The only way to accomplish this is to sit through the storm and use stimulus and currency devaluation until the Trump administration is out (potentially) of office in two years.
The important factor here is that Xi is a "Leader for Life" in China. The power structure in Beijing is not remotely vulnerable at this point. In other words, the people making the calls are not suffering in the least and will remain in charge long after the 2020 US presidential election barring any “accidents.” Unlike the Orange Administration, the Chinese don’t have to worry about public perception or public approval politics, they can sit out as long as they deem necessary.
As we saw in the mid-term elections, the ability of the GOP to generate powerful support from its largest donors was hampered. The likely the reason for this is because its largest donors hate the trade war and want the tariffs to end. The GOP is a split party, with some of it following the populist tradition of Trump's lead and some of it belonging to a more corporate, free-trade philosophy that has been offended by the trade war from day one.
My belief is China may well believe that it's “one down and two to go” with respect to the House, Senate, and White House over 30 months of withstanding the tariffs -- given that the White House hawks will need Congressional support to enact domestic policies capable of painting a positive narrative into the 2020 campaign to garner enthusiastic support from the same base that drove them into power two years ago.
The price to be paid over this 30 month stretch is the toll that comes with potentially avoiding decades of US hawkishness against China. This US hawkishness is a real danger that may follow if they “reward” the White House tariff strategy with a big win.
If any of this is occurs or has the potential to occur, then at some point, the Orange Administration sees the threat and starts to look for a way to make its biggest potential donors happy well ahead of the next election by backing out of tariffs.
This feeble attempt could come in the form of one last very hardline attempt to force its preferred conclusion with China. Likely a dramatic increase in tariffs packaged with a compromised trade deal offer. A bogus “Art of the Deal” move that the Chinese would likely balk at. Seeing how there has been no true “plan” at some point the bluster will be forced to reconcile with action.
As a final thought, I want to visit an argument I read about and suggest it may be a real factor in the mix going forward.
Imagine a mountain top Lake. The water collecting in the lake is entirely salt free. The life that has evolved to live in the environment of this lake would be life evolved entirely around the premise of an aqueous environment containing no salt. Everything that evolved into the niche of that environment would be of a physiology predicated upon no salt.
Now compare that with a fringe environment that exists on the border of freshwater and saltwater – something like a tide pool just inside of the contours of the saltwater beach.
Life forms there that have evolved to live in this environment would have a physiology predicated on withstanding a dramatic variation in salt levels over time.
The question here is what would happen if you take a fish from the mountaintop lake and release it into the estuary.
The metaphor here relates salt to the cost of money, or interest rates. Our current market cycle and business cycle was very slowly baked with unprecedented artificial suppression on interest rates.
Typically, there is always a stage of a market cycle that is like the mountaintop lake (interest rate suppression). But it’s normally over quickly as the salt volatility of the estuary leaks into the picture with strong signs of early cycle growth.
This time around though, the mountaintop lake remained in place for nearly a decade. This has been enough time for someone in high school to go to college, join a frat, get a girlfriend, get blackout drunk and get alcohol poisoning, cheat on his girlfriend, join a rock band, contract an STD, break up with his girlfriend, get a DUI, decide to change his life, get into a finance program, talk to his rich uncle in investment banking, get an MBA, go to Wall Street, intern at a fund, get good at networking, raise enough capital to start a small fund himself, and get a few years under his belt sending out investor letters as though he’s a professional. Whole funds have risen and fell all inside the mountaintop lake context. The STD, however, remains. Sorry Chad.
That is extremely strange historically. It suggests a compounding development of “fragility” as we now migrate clearly into the fringe environment. The fact that over $500 billion has been in the hands of risk parity managers (and much more if you take into account those managing their 401k’s with robo-advisers which use basically the same strategy) is a testament to this odd evolutionary situation we now face in global finance.
There are plenty of people cumulatively managing massive amounts of money who don’t have any direct experience in anything other than the mountaintop lake. To suddenly be dropped into the fringe environment is a truly dramatic moment.
For the sake of clarity and for the sake of fun, I will be releasing a podcast soon. If you have any ideas for topics or names please message me using the contact page on my site.
If you'd like to follow my trades in real time click the "Join Now" button at the bottom of the page. For those that will and have asked, use the code GUEST on checkout for a discount on your first three months with no commitment beyond one month.