Market Commentary

  • Coronavirus Relief: US Foreign Debt Holders

    In response to COVID-19, the U.S. Government has tried numerous things to bolster the economy. 

    In Q2 alone, the U.S. Treasury borrowed a record $3 trillion dollars for coronavirus relief. It's already the largest-ever borrowing for any fiscal year, and it brings our total above $26 Trillion (over $80,000 per citizen).

    The concept of "Debt" can be confusing to a layman. Most people understand what it means to take on debt with a local bank, but it can be harder to understand the role debt plays in global economics. Debt often enables governments to run smoothly. But sometimes you can have too much of a good thing.

    Many worry that our "excessive" government debt levels impact economic stability, the strength of our currency, and unemployment. For all the potential, it's certain that our debt with a country affects the relationship. So who "owns" most of our debt?

    Foreign_Debt-0c2evia HowMuch

    Japan holds more U.S. debt than any other country but is followed closely by China. Both countries hold more than 6% of total foreign-held debt. 

    The chart focuses on foreign debt – but only about 30% of the national debt is held by foreign countries. The rest is held by investors, the Federal Reserve, and the government. 

    Taking a step back, how does our debt compare on the world stage? An important metric of debt is the debt-to-GDP ratio. It is a key indicator of the sustainability of government finance.

    Screen Shot 2020-07-12 at 4.34.57 PM

    via OECD 

    Ultimately, we're in the highest bracket, but also have a historically strong GDP to back it. It's also worth noting that lower debt levels don't necessarily translate to safety on a global scale. Yugoslavia had very low government debt until its breakup. 

    In some ways, it seems like paying-off our debts seems insurmountable. Yet, our economy is reliable so we're allowed to continue borrowing. Debt is also an important part of the economic machine – it can be argued that we wouldn't have money without debt. 

    While this doesn't mean we can go on borrowing forever, it does mean we have options. 

    If you want to see an updated, interactive version of the U.S. Debt Clock, just click here.  It is worth spending a little time watching the pace the numbers turn.

    Actions have consequences.

    Something to think about. 

  • The Intelligent Investor

    There are many different methods of investing – and I've experimented with quite a few of them (fundamental, technical, statistical, quantitative, machine learning, etc.).

    Ultimately, I believe most trading techniques work until they don't. 

    I don't believe that any technique always works … but I do believe that there is always something that works. 

    Likewise, I believe that there is always a best next step.

    Evolutionarily, the strongest or smartest doesn't necessarily survive … The quickest to adapt and adjust to its changing environment is the one that gains advantage.

    Consequently, it makes sense to be on the lookout for sources of new learning (even if they are old).

    In the same way that reading news from an opposing slant can inform your decision – studying other beliefs may help you find the underlying truths (or spark the insight you needed).

    Warren Buffet is a famous value investor. He does immense research on companies, attempts to buy them at a discount and then hold on to them for long periods of time.  On some levels, our approach to the markets is radically different.  On the other hand, it would be crazy to ignore the brilliance of what he "knows" and what he does.

    One of his favorite books on investing is titled The Intelligent Investor by Benjamin Graham. It's a great introduction to the basics of value investing (versus speculating) and the role of inflation, margin of safety, etc. 

    It's worth a read … but if you want to watch a good summary, here's a six-minute video. 

     

    via Financial Freedom

    If you aren't learning, you're dying.

  • What’s In The Box?

    “Words can be twisted into any shape. Promises can be made to lull the heart and seduce the soul. In the final analysis, words mean nothing.
    They are labels we give things in an effort to wrap our puny little brains around their underlying natures,
    when ninety-nine percent of the time the totality of the reality is an entirely different beast.
    The wisest man is the silent one. Examine his actions. Judge him by them.”
    ― Karen Marie Moning

    The current sociopolitical climate has me thinking about the consequences of labeling things, creating boxes, and simplifying ideas into news-ready headlines.

     

    Whats-in-the-boxvia Se7en

    With more news sources than ever and less attention span than ever, you see ideas packaged into the attention-grabbing parts. The focus isn’t on education on issues anymore, but getting the click, making you stay on their page longer, sending you to a new article completely unrelated to the reason you clicked to the page.

    Complex issues are simplified not even into their most basic forms – but instead into their most divisive forms because there's no money in the middle.

     

    200705 Einstein's Simplicity Quote

    via Quote Investigator.

    The amplified voices are those on the fringe of the average constituents' beliefs because those are the ones who are often the most outspoken.

    Issues that should be bipartisan have been made "us" versus "them," or "liberal" versus "conservative," or "right" versus "wrong."

      

    Neitzche

    via BrainyQuotes.

    In psychology, heuristics are mental models whose purpose is to help you make decisions easier. They’re a starting point to save mental bandwidth, allowing you to spend more brain cycles on the important stuff.

    That’s a great use of "boxes" and "simplification" … but shouldn't preclude deeper thought on important issues.

    In an ideal world, we would all have the bandwidth to view each individual case of an issue as a whole issue within itself. Most things in this world are various shades of grey, and when you change your vantage point, you can change your answer.

    I recognize that’s not realistic.

    Instead, I encourage you to remember to continue to think and learn … even about things you already know.  Confirmation Bias is one of the more common forms of cognitive biases.  Here is an infographic that lists 50 common cognitive biases.  Click to explore further.

     

    200705 50 Cognitive Biases Small
    via VisualCapitalist.

    Important issues deserve extra research. New insights happen in between the boundaries of what we know and what we don't.  Knowledge comes from truly understanding the border between what you are certain and uncertain about. 

    I challenge you to look beyond the headlines, slogans, and talking points you like most. Look for dissenting opinions and understand what’s driving their dissent. Are they really blind or dumb (or are their value-systems just weighted differently)?

    Not everything needs to be boxed. Not everything needs to be simple.

     

    Applying This Lesson  

    “I am ashamed to think how easily we capitulate to badges and names, to large societies and dead institutions.”
    ―     Ralph Waldo Emerson, Self-Reliance

    I love learning a lesson in one space and applying it to other spaces. It’s one of the cool things about AI. An algorithm can learn rules in the construction space that may help in the medicine or trading space.  Everything’s a lesson if you let it be.

    In that vein, the lesson on labeling also applies to yourself and your business.

    Many things are true because we believe them to be, but when we let go of the past beliefs, the impossible becomes possible, and the invisible visible.  

    The past doesn’t define the future, and your personality isn’t necessarily permanent.

    We are our choices … and you can make choices today that change who you are (and what you or your business is capable of) tomorrow.

    Hope that helps – Onwards!

  • Learning From the Renaissance (No, Not That One…)

    Jim Simons is a mathematician and cryptographer who realized that the complex math he used to break codes could help explain financial patterns – and he made billions because of it in his notoriously secretive hedge fund firm called Renaissance Technologies.

    He is famous not only for the duration of his success and the size of his results … but also for the way he made his money (with much lower volatility and risk than his peers and competitors).

    His flagship – the Medallion fund – has averaged a net return of 39.1% and has been closed to new investors since 1993. Even more impressive is that those results are on top of their 5% management fee and a 44% performance fee.

    To put that into perspective, if you had invested $1,000 into the Medallion Fund in 1988 when it launched, your money would have grown to in excess of $23MM at the end of 2019.

    His background is impressive. Simons taught at Harvard and MIT and worked with the NSA. Here is a video where he shares some thoughts in a 2015 TED talk interview. It's worth a watch.

     

    via TED

    Interesting stuff … I hope you got something from it. 

    His success exists at the nexus of vast amounts of data, next-level technological infrastructure, and intellectual property built by various flavors of mathematicians. A good place to be in the coming world, and a reminder that if you don't know what your edge is, you don't have one. 

    Despite advanced math still being a mystery to many,  most rely on it more than ever … for example, look at what we're seeing with the growth of machine learning and AI.

    The Heartbeat of AI is Still Human

    The Heartbeat of AI is Still Human_GapingVoid

    Today, the best algorithms are autonomous. They don't rely on inventors to derive novel insights from the ingested datasets. They take whatever data they can get their hands on, process it, and extract decision signals. Some don't even form hypotheses, they simply look for correlations – the data is an abstraction to be solved in the purest sense. 

    You don't have to understand why the models do what they do – simply, what it's doing, and that you trust it's construction. 

    Regardless of how autonomous the systems get, humans are still vital. 

    Simons built a team of mathematicians whose motivation was doing exciting mathematics and science (rather than hired guns who could be lured away by money).

    That doesn't mean money wasn't a motivator, but it hits on something important. 

    The heart of good math and good AI will always benefit from the quality of the humans around it. You still have to champion integrity, culture, and purpose.

     

    Better Math as a Competitive Advantage

    We stayed ahead of the pack by finding other approaches and shorter-term approaches to some extent … but the real thing was to gather a tremendous amount of data – Jim Simons

    If you've been to our office, or heard me speak, you know how important I believe those ideas are to continuing prosperity. 

    Constant innovation on a massive scope and scale creates more ways to win.

    Onwards!

  • Here Are Some Links For Your Weekly Reading – June 28th, 2020

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

    Lighter Links:

     

    Trading Links:

  • A Look At the Highest-Valued Startups in the World

    Statista put together a list of the ten highest-valued unicorn startups in the world based on numbers from CBInsights. To see more information on these startups, click here. 

    A unicorn startup is a private company with a valuation of over $1 billion. As of June 2020, there are more than 400 unicorns around the world. Variants include a decacorn, valued at over $10 billion, and, soon, a hectocorn, valued at over $100 billion.

     

    19317via Statista

    China had the two highest-valued startups on the list.  Both the U.S. and China each have four companies on the list of the ten highest-valued startups. The U.S. companies are easily recognizable – Stripe, SpaceX, Airbnb, and Epic Games. The Chinese companies may have slipped under your radar (but they would probably be easily recognizable to you if you lived in China). 

    1. Bytedance uses machine learning to tailor newsfeeds for users on various platforms, including Toutiao in China and TikTok in the US. In May, Disney's head of streaming came on as CEO of TikTok and COO of Bytedance.
    2. DiDi Chuxing provides various app-based transportation, including taxis, on-demand services, bikes, and more. They're a competitor to Uber and Lyft that has dominated the Asian market and is using AI to optimize dispatch and route planning for its services.
    3. Kuaishou is a video sharing app with over 200 million active daily users. It has unusually strong support from users outside of "tier 1" cities and has received massive support from multimedia conglomerate Tencent.
    4. DJI Innovations is (by a large margin) the world leader in drones and quadcopters, accounting for over 70% of the civilian market. They're also used extensively by militaries, police forces, and even terrorist groups. 

    According to CB Insights, there are more than 400 unicorn startups (companies valued at US$1 billion or more) in the world as of May 2020.  Meanwhile, 24 of the companies in the ranking were valued at US$10 billion or more. 

    The top 10 list of decacorns also includes Indian e-commerce platform PayTM and Singaporean ride-hailing app Grab. Further down the list, UK data center provider Global Switch (rank 19), Indonesia’s answer to WeChat, umbrella app Go-Jek (rank 20), Brazilian fintech provider Nubank (rank 21) and a second player from India, hotel startup Oyo (rank 22), make appearances.

  • Lessons From 2020’s Markets

    The idea that the market is not the economy has been made very clear over these past months. While businesses continue to shutter or (if they're lucky) slowly re-open, the stock market has rallied immensely since the initial crash – in large part due to governmental efforts. The markets are so confusing right now that CNBC has given up and created a new type of market – the kangaroo market … I assume implying "jumpy" volatility. 

    IMG_3657

    The rally has only served to increase the uncertainty as people hold their breath waiting for the drop… For all that waiting, "dumb money" has been beating a lot of "intelligent" investors.

    I found an interesting visualization that shows the performance of the S&P through the performance of its underlying stocks. 

     

    via Chartfleau

    As you watch the video you can see that most of these underlying stocks are struggling – but they're being propped up by a relatively small number of stocks, including the likes of tech giants, the gold mining company Newmont Corporation and the HVAC company Carrier Global. 

    While many funds still struggle, novice investors and day traders listening to the advice of "buy low, sell high" have made staggering gains. 

    I'm not encouraging a back-to-basics approach to trading, but I think it is a good reminder that sometimes, as Da Vinci said, "simplicity is the ultimate sophistication." 

    Being in Fintech, I'm always paying attention to the newest "sophisticated" technologies, looking for a new edge – and that's valuable – but you can't throw out the baby with the bathwater. 

    So, I find myself looking for what's timeless (instead of timely) in what others are doing. 

    At a Genius Network meeting recently, Brian Tracy mentioned two key questions he asks himself (before writing a book) that I think are very insightful. 

    Would this work 20 years from now? Would this have worked 20 years ago?

    Tools and techniques change… why often doesn't matter.

    The truth is, if you don't know what your edge is … then you don't have one.  

    On a related note, if nothing is working … doing nothing is an option!

    Hope that helped. 

  • Talking AI, Analytics, and Trading With IBM

    I'll be speaking at an IBM Webinar on June 18th. The focus is on using AI, analytics, and advanced computing to improve trading research. Click here to sign-up. 

    IBM_BSFS_Webinar_SpeakerSocialTiles_LinkedIn_1200x628_Howard Getson

  • Here Are Some Links For Your Weekly Reading – June 7th, 2020

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

    Lighter Links:

    Trading Links:

  • Here Are Some Links For Your Weekly Reading – May 31st, 2020

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

    Lighter Links:

    Trading Links: