Market Commentary

  • 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

    249288

    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

    248980

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

    Lighter Links:

     

    Trading Links:

     

  • What The Perseverance Rover Reminded Me About

    Last week, the Perseverance rover landed on Mars. It's not the first time we've landed a rover on Mars, but it's still incredible to see. 

    via NASA Jet Propulsion Laboratory 

    It's a feat of engineering and human will. It's also a good reminder. 

    History is littered with tales of once-rare resources made plentiful by innovation. The reason is pretty straightforward … scarcity is often contextual.

    Imagine a giant orange tree packed with fruit. If you pluck all the oranges from the lower branches, you are effectively out of accessible fruit. From that limited perspective, oranges are now scarce. But once someone invents a piece of technology called a ladder, the problem is solved.

    When we first went to the moon, calculators referred to people charged with doing the complex math needed for the Rocket to make it into Space (rather than the device that could do the math instantly with no errors) and the computing power it took to get to the moon took up many rooms at NASA. 

    In comparison, you now have dramatically more computing power in your pocket than NASA used to get to the moon. 

    Likewise, we now have people living in space, posting videos from the ISS, and the ability to stream high-resolution images (and even movies) of space and galaxies near and far. 

    What was once scarce and unobtainable has become abundant and accessible.   It is a story repeated countless times.

    Still, as humans, we're wired to think locally and linearly. We evolved to live our lives in small groups, to fear outsiders, and to stay in a general region until we die. We're not wired to think about the billions and billions of individuals on our planet, or the rate of technological growth – or the minuteness of all that in contrast to the expanse of space. 

    Nonetheless, we have created better and faster ways to travel, we've created instantaneous communication networks across vast distances, and we've created megacities. Our tribes have gotten much bigger – and with that, our ability to envision and enact massive change has grown as well. 

    Our quest to conquer Space became the poster child for a type of innovation we now call "moon shots".  While 'moon shot' originally meant "long shot," it's increasingly being used to describe a monumental effort towards a lofty goal — in other words, a "giant leap."

    Today, with technology as a catalyst, we see those leaps happen in many areas (like A.I., medicine, longevity, space exploration, etc.). 

    It's hard to comprehend the scale of the universe or the scale of our potential … but that's what makes it worth exploring.

    Pretty cool!

    Onwards!!

     
     

  • Who Can You Trust?

    Information is Power.

    Consequently, your choice of information source heavily contributes to your perceptions, ideas, and worldview.

    Coincidently, news sources are a lightning rod for vitriol and polemic.

    I am still a little surprised by the abject hatred I hear expressed towards a particular news source by those who hold an opposing bias.  This often leads to claims of fake news, delusion, and partisan press. Likewise, it is common to hear derision toward anyone who consumes that news source.

    Perhaps the reality is that that most sources are flawed – and the goal should simply be to find information that sucks less?

    It's to the point where if you watch the news, you're misinformed; and if you don't watch the news, you're uninformed. News sources aren't just reporting the news, they're creating opinions and arguments that become the news.  And many don't care enough to think for themselves – or to extract the facts from the opinion.

    Here's a chart that shows where news sources rank on various scales. You can click the image to go to an interactive version with more details.

     Adfontes

    via Ad Fontes Media

    I once spent fifteen minutes in an argument about how you know whether the information in this chart is true.  If you're curious about their methods, click here. 

    Distrust toward news agencies, big companies, the government, and basically anyone with a particularly large reach is the "new normal." 

    Perhaps even more dangerous is the amount of fake news and haphazard research shared on social media. Willful misrepresentations of complex issues are now a too common communication tactic now on both sides … and the fair and unbiased consideration of issues suffers.  

    Social media spreads like wildfire, and by the time it has been debunked (or proven to be an oversimplification) the damage is done. People are convinced … and some will never go beyond that. 

    The reality isn't as bleak.  People agree on a lot more than they say they do.  It is often easier to focus on "us" versus "them" rather than what we agree upon jointly.  This is true on a global scale.  We agree on a lot.  Most Democrats aren't socialists, and most Republicans aren't fascists … and the fact that our conversation has drifted there is intellectually lazy.

    This idea that either side is trying to destroy the country is clearly untrue (OK, mostly untrue). There are loonies on the fringes of any group, but the average Democrat is not that unlike the average Republican. You don't have to agree with their opinions, but you should be able to trust that they want our country to succeed. 

    I don't know that we have a solution. But there is one common "fake news" fallacy I want to explain at least a little. 

    It's called the Motte and Bailey fallacy. It's named after a style of medieval castle prioritizing military defense.

    Launceston_Castle_-_geograph.org.uk_-_22242

    Launceston Castle via Chris Shaw, CC BY-SA 2.0

    On the left is a Motte, an artificial mound often topped with a stone structure, and on the right is a Bailey, the enclosed courtyard. The Motte serves to protect not only itself but also the Bailey. 

    As a form of argument, an arguer conflates two positions that share similarities. One of the positions is easy to defend (the motte) and the other is controversial (the bailey).  The arguer advances the controversial position, but when challenged insists they're only advancing the moderate position. Upon retreating the arguer can claim that the bailey hasn't been refuted, or that the critic is unreasonable by equating an attack on the bailey with an attack on the motte. 

    It's a common method used by newscasters, politicians, and social media posters alike. And it's easy to get caught in it if you don't do your research. 

    Conclusion

    As a society, we're fairly vulnerable to groupthink, advertisements, and confirmation bias. 

    We believe what we want to believe … so it can be very hard to change a belief, even in the face of contrary evidence. 

    But, hopefully, in learning about these fallacies, and being aware, we do better. 

    I will caution that blind distrust is dangerous – because it feels like critical thought without forcing you to critically think.

    Distrust is good … but too much of a good thing is a bad thing. 

    Not everything is a conspiracy theory or a false flag.

    Do research, give more credence to experts in a field – but don't blindly trust them either.  How well do you think you're really thinking for yourself?

    It's a complicated world, and it's only getting more complicated.  But, hopefully, it encourages you to get outside your bubble and learn more about those you disagree with. 

     

  • Here Are Some Links For Your Weekly Reading – February 21st, 2021

    Click here to see some cool photos and videos from the Perseverance rover. 

    248790

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

    Lighter Links:

     

    Trading Links:

     

  • When Texas Freezes Over

    As I write this, Texas has already cleared up and is warm again … but the effects of a week spent below freezing (with temperatures reaching below zero) will be felt for a long time. 

     

    210221 Texas Freeze_1via Joe Raedle/Getty Images

    Even though it had not snowed here in for several days, the Rolling Blackouts continued through the end of the week.  It is hard to believe Texas does not know how to handle six inches of snow.  Having grown up near Boston, I recognize that with no plows, no sanding, and no salt … you stand little chance of keeping the roads clear. At some level, it is just idiots slipping, sliding, and waiting for the sun to come out.  But who would have thought that would describe top leaders of the State and its ability to provide basic human needs like power, water, and heating (let alone WiFi and battery power)?

     

    210221 WiFi and Battery Power on Maslow's Hierarchy of Needs

    The ice storm and cold snap weren’t so bad for me (compared to some of the stories I’m hearing from other people in our office). Yes, we lost power, water, and the Internet … but only for a few isolated hours.  I was lucky (and so was our data center), but millions (including several Capitalogix employees) suffered due to lack of water, electricity, or heat, and to add insult to injury – burst pipes. 

    Despite the fact that the temperature is back in the high 50s, here is a photo I took at our local supermarket this weekend.  Let's say things aren't quite back to normal yet.

     

    210221 Empty Store Shelves

    I've seen a lot of political mudslinging from both sides trying to avoid blame.  The reality is that this mess is a disaster that doesn't need to be politicized (and should be used as the raw material to make sure that something like this doesn't happen again). While Texas rarely sees weather like this, this wasn't the first time we have, and it won't be the last. 

    Two major factors came into play.

    First, Texas chose to stay off the national grid to avoid federal regulation. The Texas grid is called ERCOT, and it is run by an agency of the same name — the Electric Reliability Council of Texas. We joke about Texas seceding from the Union, but the reality is that many Texans are fiercely independent and crave less federal regulation (which is a discussion for another day) so the choice resonated with constituents.  Especially since Texas is a very energy-rich state.  Unfortunately, not being on the national grid means that when our grid is overtaxed, we're mostly on our own. In the winter of 2011, when our power sources couldn't keep up with needs we imported energy from Mexico to keep up, but this year much of Northern Mexico was struggling as well. 

    Second, Texas chose not to winterize its power sources. After 2011, a proposal was floated to winterize energy plants by adding insulation, heating pipes, etc. but it was very costly and wasn't adopted.   Many Texans (including politicians) were quick to blame it on the underperformance of renewables, but in this case, according to ERCOT,  natural gas, coal, and nuclear were affected. 

    All of these energy sources can be winterized, and renewables work fine even in Antarctica. This isn't an argument for renewables or for joining the national grid. Just an acknowledgment of the current situation. 

    ERCOT claimed that they were ready for the storm, and warned their plants to "winterize" how they could, but clearly, it wasn't enough. With more preparation locally and on the state level, Texans should be fine to handle these types of episodes in the future. With that said, it shouldn't take episodes like this to enact change. 

    Regardless, crises like this are opportunities to come together, and I've been very happy to see how many people have offered food, water, and their homes to people in need.

    Thank you to all who reached out to check in on us.