Articles I’m reading —

This article was published last week but it’s such an important topic that I wanted to share it here. It’s written by Urjit Patel, the Governor of India’s central bank. And it’s about two significant trends (the Fed’s tapering and the ballooning US deficit) that, if left to continue unabated, will have cascading effects throughout emerging markets and the rest of the world. Here’s an excerpt from the piece (emphasis mine).

The upheaval stems from the coincidence of two significant events: the Fed’s long-awaited moves to trim its balance sheet and a substantial increase in issuing US Treasuries to pay for tax cuts. Given the rapid rise in the size of the US deficit, the Fed must respond by slowing plans to shrink its balance sheet. If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the dollar bond markets is inevitable.

Consider the scale of both events. Starting in October 2017, the Fed began reducing reinvestment of the coupons it receives from debt securities holdings. That shrinkage will peak at $50bn a month by October and total $1tn by December 2019. Meanwhile, the US fiscal deficit is projected to be $804bn in 2018 and $981bn in 2019, implying net issuance by the US government of $1.169tn and $1.171tn, respectively, in the two years.

This unintended coincidence has proved to be a “double whammy” for global markets. Dollar funding has evaporated, notably from sovereign debt markets. Emerging markets have witnessed a sharp reversal of foreign capital flows over the past six weeks, often exceeding $5bn a week. As a result, emerging market bonds and currencies have fallen in value.

This is set to become a dominant macro trend over the coming year. It will pay to stay on top of this development. Here’s the link to the article.

For another great explanation on what’s driving EM volatility take 5 minutes and watch this clip of @teasri on Bloomberg talking EM growth troubles and investor flight — if you’re not already you should follow @teasri, he’s one of my favorites on the twitter.

Podcast I’m listening to —

I’ve listened to this podcast twice this week. It’s one of Tim Ferris’s latest and it’s with VC/engineer/futurist Steve Jurvetson. They cover a wide range of topics from quantum computing, to AI and deep learning, space and terraforming Mars, to Elon Musk and Steve Jobs (Steve worked closely with them both). The section on quantum mechanics and computing is absolutely mind blowing. Give it a listen, you won’t be disappointed (link here).

Book I’m reading —

I watched the movie Molly’s Game a few weeks ago. It’s about the real life story of a failed Olympic skier who by chance got asked to run an underground poker game which eventually became the highest stakes game in the US — apparently, she once saw someone lose $100m on a single hand… That’s effing nuts! She was eventually taken down by the Feds and narrowly avoided having to spend years behind bars. It’s a really good movie.

Anyways, in the movie they talk about an old play called The Crucible by Arthur Miller. And since I have an Amazon book buying addiction, I naturally ordered it on my phone as soon as they mentioned its name.The play is closely based on the actual events of the Salem Witch trials that occurred in 1693. It’s a short and fascinating read. It’s a wonderful example — with many parallels to investing and markets — of just how bat crap crazy people can become when they get riled up by a belief and then sunk costs and herding behavior totally consume their faculty for reason.

You can read it in a day or two. I highly recommend it.

Chart I’m looking at —

I think this is an interesting chart via WSJ’s Daily Shot. It shows the S&P 500 (purple) and the most shorted US stocks (gold). I’m not sure how much, if anything, we can infer from this chart other than the most hated stocks have been outperforming — by a lot. It could be that the market is losing its collective mind. Or maybe, it’s just that investors haven’t smartened up to the powerful network effects of some of these tech companies and they’re shorting because of high P/Es when they should be paying more attention to FCF growth. I don’t know…

Trade I’m looking at —

Going long Spotify (SPOT) is a trade I’ve been thinking about for a few weeks now. The tape continues to look great but I haven’t pulled the trigger for any other reason than my book is near full and I see so many opportunities in this market that it’s tough to choose what I like most.

For a good overview of the value thesis for SPOT check out this thread from @emilio_gold.

SPOT’s success, and the success of music streaming platforms in general, rests on their ability to lower content costs which is currently very high. There’s two ways that SPOT can gain better control of this and boost their operating margins (1) is they attract enough users and become a dominant enough player giving them more leverage over the music labels in negotiating content costs and/or (2) they cut out the music labels entirely and go directly to the artists. SPOT is working on both. Here’s a recent article on how exactly SPOT is trying to accomplish this.

I think at current prices, the stock isn’t properly valued to reflect its probability of success nor the potential size of the opportunity should SPOT succeed. It seems rather asymmetric, in my opinion. But I plan on doing some more digging.

Quotes I’m pondering —

This company looks cheap, that company looks cheap, but the overall economy could completely screw it up. The key is to wait. Sometimes the hardest thing to do is to do nothing. ~ David Tepper

…It goes to show that when you are confused it is best to do nothing. You are just going for a random walk and that is when you are liable to get mugged because you don’t have staying power. You are likely to be faked out by some stray fluctuation because you lack the courage of your convictions. ~ George Soros

The key is to know when to do nothing. Most people, even if they have a winning strategy, will not follow it because they lack discipline. ~ Mark Minervini

I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, ‘I just lost my money, now I have to do something to make it back.’ No, you don’t. You should sit there until you find something. ~ Jim Rogers

The powerful concept of doing nothing has been re-cemented into my cranium this cycle. Livermore’s advice to just sit on your hands is so simple, so valuable, and yet so so so…. hard to do.

Relearning this has kept me from making many mistakes over the last few months and has benefited my P&L tremendously. I suggest you give it a try. Here’s to doing nothing….