Market Commentary

  • Mindfulness & Exponential Technologies

    Have you noticed that it's easier for most people to identify and solve someone else's problem than it is to do the same for themselves?

    Humans are emotional creatures.  As a result, our decision-making often suffers from fear, greed, and discretionary mistakes. 

    As an entrepreneur, I strive to be objective about the decisions I make. Towards that goal, using key performance indicators, getting different perspectives from trusted advisors, and relying on tried-and-true decision frameworks all help. 

    Combining all three creates a form of "mindfulness" that comes from dispassionately observing from a perspective of all perspectives.

    That almost indifferent and objective approach is also where exponential technologies like AI excel.  They amplify intelligence by helping make better decisions, take smarter actions, and continually improve performance. 

    I shot a video about mindfulness and the future of A.I.

     

    Artificial intelligence is cool. The truth, however, is that AI is still relatively limited. Individual techniques (or algorithms) are good at "something".  The challenge is that they only focus on what they need to come up with their answer, without considering a different perspective. While it is good at what it is good at, it isn't necessarily good at empathetically understanding that a different technique, which comes up with a different answer, might be "right" as well.

    The future of AI likely will be based on swarm intelligence, where many specialist components communicate, coordinate, and collaborate to view a situation more objectively, better evaluate the possibilities, and determine the best outcome in a dynamic and adaptable way that adds a layer of objectivity and nuance to decision making.

    One of the lessons I teach to our younger employees is that an answer is not THE answer. It's intellectually lazy to think you're done simply because you come up with a solution. There are often many different ways to solve a problem, and the goal is to figure out the one that comes up with the best results.

    Even if you find THE answer, it is likely only THE answer temporarily.  So, it is really just a step in the right direction that buys you time to learn, improve and re-evaluate.

    Hope that helps. 

     

  • Here Are Some Links For Your Weekly Reading – April 4th, 2021

    Happy Easter!

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    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

     

    Trading Links:

     

  • Tracking Shipments with Import Yeti

    While I'm not really in a supply chain business, they are interesting to me because they do with physical things, many of the same things I do with virtual things.

    Supply chains use complex systems to achieve "simple" goals.  Figuring out how to streamline processes is both an art and science. 

    Global supply chains remind me of the complicated machinery and gearing that goes into a finely made analog watch … the watchmakers know that even if you don't know how the watch was made or what a mechanism does, it's still interesting to watch it tick and admire the engineering. 

    Recently I found a website – ImportYeti – that tracks over 60 million companies' sea shipment records.   Here is an example showing Tesla.

    Screen Shot 2021-03-07 at 12.19.34 AMvia Import Yeti

    It uses bills of lading and other public information to tell you information about the frequency of shipments, the suppliers, and what they delivered.

    There is a ton of interesting information here.  Hope you find some creative ways to use it. 

    If you are interested in this, I also suggest looking at Eli Goldratt's The Goal, which describes the "Theory of Constraints," which deals with how bottlenecks limit performance. 

     

  • What Are NFTs?

    This month an NFT by an artist named Beeple sold at Christie's for over $60 million. That sentence raises more questions than it answers. 

    To make it even stranger, here's an example of Beeple's art. 

    60537d03fe6a340019acf58bvia Beeple

    Yes, that is Tom Hanks wearing a Bubba Gump shirt punching Covid-19. 

    So, what is an NFT, and why are they becoming so popular?

    NFTs stand for non-fungible tokens, which are unique digital assets on the blockchain. They've been around since 2014, but only recently blew up in popularity.  They're essentially collectibles … but digital.

    An NFT might be an image, a gif, a video, etc. But, because they're given a unique code on the blockchain, the ownership and validity of that item can be tracked. 

    Surprisingly, owning that NFT does not give you copyright of that digital asset. In fact, some images have been made into multiple tokens, and some tokens include multiple pieces of art which have been sold individually. The digital files themselves are still infinitely reproducible … but that code on the blockchain is not.

    In a sense, that means that NFTs are the digital equivalent of an autographed item. 

    In the past, when I've talked about Blockchain, digital art wasn't something I actively considered. Blockchain made sense to me as a way of proving provenance and helping establish the authorship and authenticity of an object – but I assumed it would be high-end physical art. 

    At the end of the day, if someone will pay for it, then you can sell it. That's part of the beauty of Capitalism. Most collectibles don't make sense from a macroeconomic value sense. They're worth something because of their value to their collectors. 

    Think about Beanie Babies, or Pokemon Cards, or even more mainstream collectibles like Sports Memorabilia or Whiskey. 

    While I won't say that "I get" the appeal of NFTs … I get it. As the world becomes increasingly digital, "real" and "tangible" have new meanings.

    Is something not "real" just because it's digital? 

    It reminds me of a painting by René Magritte called "The Treachery of Images."  The painting shows an image of a tobacco pipe. Below it, Magritte painted, "Ceci n'est pas une pipe," which is French for "This is not a pipe."

     

    The famous pipe. How people reproached me for it! And yet, could you stuff my pipe? No, it's just a representation, is it not? So if I had written on my picture "This is a pipe", I'd have been lying! — René Magritte

     

    If you're still a little lost, SNL had a funny skit last night with an NFT rap song. Enjoy. 

     

    via SNL

     
     
     
     

  • Spotting a Bubble

    I spend a lot of time doing research … not the way data scientists do, but I enjoy keeping an eye on the pulse of things. 

    Recently, I've noticed increasing talk about bubbles. One of the most obvious potential "bubbles" being the relatively stable bullish performance of the markets, despite the lack of a full economic recovery. 

    Interestingly, Ray Dalio's bubble indicator says that stocks aren't at dangerous levels, though it does say the top 5% of the top 1,000 US companies are in an extreme bubble. Many of those companies are emerging technology companies. 

    1614002629495via Ray Dalio

    So, without making a prediction, caution is probably fair, but recognize that people aren't blaring sirens and running with their arms flailing in the air. 

    Instead of focusing as much on today's bubbles, I thought I'd share a great summary on "how to spot a bubble" by Barry Ritholz. 

    He suggests 10 elements: 

    1. Standard Deviations of Valuation: Look at traditional metrics –  valuations, P/E, price to sales, etc. — to rise two or even three standard deviations away from the historical mean.

    2. Significantly elevated returns:  The S&P500 returns in the 1990s were far beyond what one could reasonably expect on a sustainable basis. The years around Greenspan’s “Irrational Exuberance” speech suggest that a bubble was forming:

    1995    37.58
    1996    22.96
    1997    33.36
    1998    28.58
    1999    21.04

    And the Nasdaq numbers were even better.

    3. Excess leverage: Every great financial bubble has at its root easy money and rampant speculation. Find the leverage, and speculation won’t be too far behind.

    4. New financial products: This is not a sufficient condition for bubble, but it does seems that each major bubble has new products somewhere in the mix. It may be Index funds, derivatives, tulips, 2/28 Arms.

    5. Expansion of Credit:  This is beyond mere speculative leverage. With lots of money floating around, we eventually get around to funding the public to help inflate the bubble. From Credit cards to HELOCs, the 20th century was when the public was invited to leverage up.

    6. Trading Volumes Spike: We saw it in equities, we saw it in derivatives, and we’ve seen it in houses: The transaction volumes in every major boom and bust, almost by definition, rises dramatically.

    7. Perverse Incentives: Where you have unaligned incentives between corporate employees and shareholders, you get perverse results — like 300 mortgage companies blowing themselves up.

    8. Tortured rationalizations: Look for absurd explanations for the new paradigm: Price to Clicks ratio, aggregating eyeballs, Dow 36,000.

    9. Unintended Consequences: All legislation has unexpected and unwanted side effects. What recent (or not so recent) laws may have created an unexpected and bizarre result?

    10. Employment trends:  A big increase in a given field — real estate brokers, day traders, etc. — may be a clue as to a developing bubble.

    11. Credit Spreads: Look for a very low spread between legitimately AAA bonds and higher yielding junk can be indicative of fixed income risk appetites running too hot.

    12. Credit Standards: Low and falling lending standards are always a forward indicator of credit trouble ahead. This can be part of a bubble psychology.

    13. Default Rates: Very low default rates on corporate and high yield bonds can indicates the ease with which even poorly run companies can refinance. This suggests excess liquidity and creates false sense of security.

    14. Unusually Low Volatility: Low equity volatility readings over an extended period indicates equity investor complacency.

    via Barry Ritholz, June 9th, 2011

    There are many ways to make money trading … and even more ways to lose money trading.  If it were easy, everyone could do it.  There is a mix of art and science combined with hard-to-quantify factors at play.

    But, survivorship bias is big in trading because hindsight is 20/20. It's easy to look at a popped bubble and say "oh, obviously that was a bubble" … but if it was that easy, trading wouldn't be so hard.

    Trends continue until they don't … but at some point, they don't, and that's where people get hurt. 

    My gut tells me it is time to pay closer attention.

    Onwards!

     
     

  • Streaming Wars

    Streaming services were big winners during the pandemic.  While that wasn't surprising, their subscriber growth and usage surge are impressive.

    VisualCapitalist put together an infographic highlighting the numbers. 

     

    Streaming-Service-Subscriptions-2020

    via VisualCapitalist

    I enjoyed the chart, and had a couple of different takeaways: 

    • Many companies tried to capitalize on the streaming wave by launching half-baked streaming services, but it's clear that the pioneers are still extending their lead on the fast followers. 
    • Despite Netflix already being the industry leader, they saw a 34% increase in 2020. 
    • China's largest provider – Tencent Video – only has 120M users, which is about 8% of China's population. In contrast, Netflix has 74M US users, which is about 23% of the population. 
    • The New York times is the only News subscription source big enough to make the list, yet it's at the very bottom with 6M users. Though, it did see a 61% increase in 2020. 
    • Disney+ grew 95M in its inaugural year, which is a credit to the brand recognition Disney holds.

    Interesting stuff and large numbers!

    How will the world re-opening impact those numbers?  How about 5 years from now? What do you think?

    Will virtual reality and augmented reality start to impact these numbers?

    With that much money and on the line, I expect this to remain an industry segment primed for innovation, growth … and a few surprises.

     
     

  • The Power of Naming Things

    I remember when my son finally got smarter than our dog. For the record, it took longer than I thought it would.

    With respect to human intelligence, language is likely the first domino. It allows "chunking" and makes learning new things more efficient, effective, and certain.

    Language is powerful in-and-of-itself. Using language consciously is a multiplier. Today, I want to focus on one such use of language – the power of naming things. 

    The Power Of Naming Things

    “I read in a book once that a rose by any other name would smell as sweet, but I've never been able to believe it. I don't believe a rose WOULD be as nice if it was called a thistle or a skunk cabbage.” – L.M. Montgomery, Anne of Green Gables

    Before I go into detail, I shot a video on the subject, with a few examples from our business. 

     

    Having a shared language allows you to communicate, coordinate and collaborate more efficiently. But it's hard to have a shared language when you're discussing something intangible. 

    That's where naming comes in. When you name something, you make the "invisible" visible (for you, your team, and anyone else who might care). 

    I've often said the first step is to bring order to chaos. Then, wisdom comes from finer distinctions. Naming is a great way to create a natural taxonomy that helps people understand where they are – and where they are going.

    I like thinking of it in comparison to value ladders in marketing. 

    Value-ladder

    Each stage of the value ladder is meant to bring you to the next level. By the time someone gets to the top of the value ladder, they're your ideal customer. In other words, you create a natural pathway for a stranger (meaning someone who doesn't know you well) to follow, to gain value, trust, and momentum onwards … ultimately, ascending to become someone who believes in, and supports, what you offer and who you are. 

    Ultimately, successful collaboration relies on common language. That is part of the reason naming is so important.  The act of naming something makes it real, defines its boundaries and potentialities, and is often the first step towards understanding, adoption, and support. 

    Creating "Amplified Intelligence"

    There are always answers. We just have to be smart enough. – John Green

    Here is an example from our business.  When we first started building trading systems, all we had was an idea. Then we figured out an equation (and more of them). Next, we figured out some methods or techniques … which became recipes for success.  As we progressed, we figured out a growing collection of useful and reliable ways to test, validate, automate and execute the things we wanted to do (or to filter … or prevent).

    For someone who didn't understand the organizing principles, it probably seemed like a mess.  Compounding the problem is that fear, uncertainty, and doubt are inhibitors to potential customers and stakeholders (like the employees working in a business).

    Coming up with the right organizing principle (and name) makes it easier to understand, accept, and adopt. For example, many traders and trading firms want to amplify intelligence – meaning they were looking to make better decisions, take smarter actions, and ultimately to perform better (which might mean making and keeping more money).  To help firms amplify intelligence, we created the Capitalogix Insight Engine (which is a platform of equations, algorithms, methods, testing tools, automations, and execution capabilities).  Within that platform, we have functional components (or modules) that focus on ideas like portfolio construction, sensible diversification, alpha generation, risk management, and allocation strategies.  Some of those words may not mean much to you, if you're not a trader, but if you are it creates an order that makes sense and a path from the beginning to the end of the process.

    It makes sense. It explains where we are – while informing what might come later.

    The point is that naming things creates order, structure, and a contextual map of understanding.

    It a compass heading that we can use to navigate and guide in uncertain territory.

    Hope that helps.

     
     
     
     
     

  • Here Are Some Links For Your Weekly Reading – March 7th, 2021

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    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

     

    Trading Links:

     
     

  • Top 20 Most Visited Websites (In The US)

    I saw a chart looking at the top 20 most visited websites in the U.S. last month. It's only mildly helpful, but it is interesting and a little funny. 

     

    Luuuf1mif0l61SEMRush via Reddit

    From a functional perspective, the most interesting data point to me is that Zoom has cracked the top 20 … but only barely. I would be interested to see this broken up into time-per-visit to see how that tips the scales. 

    From a humorous perspective, only three sites weren't US-based … and they're all porn sites. 

    As an aside, one of my more popular posts has been on how much time people spend on Pornhub. I don't know what this says about society, but it certainly says something.

    Have fun … and safe surfing.

     

  • Here Are Some Links For Your Weekly Reading – February 28th, 2021

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    Here are some of the posts that caught my eye recently. Hope you find something interesting.

    Lighter Links:

     

    Trading Links: