Vita Activa: The Future of Earth Lies in the Stars

Humans remain the only species that is capable of taking a relativistic view of our world to imagine others like it. We hold the fate of the world’s species in our hands, essentially playing God with the flora and fauna of our blue marble planet. With the massive amount of information and freedom available, humankind must begin to take an objective view of where we are as a species in the grand scheme of the universe.

I propose there are two avenues that are not mutually exclusive that humankind will follow to create our future: Capitalism and Sustainability.

Capitalism requires a constant cycle of production and consumption, making it necessary for goods to break down (planned obsolesce), so as to stimulate production. As soon as this cycle is broken, our market based society will quite literally collapse. As economic growth slows, wealth is indirectly destroyed as the unemployment rate rises, people lose homes, jobs, etc. Capitalism requires a perpetually growing pool of common wealth (two words). This collective wealth has to continue to grow or the whole system falls apart.

By and large, we work to live, not live to work. Our jobs are a means to surviving; we act as individuals to achieve a private way of life that suits our own personal styles. This way of life grants us freedoms not available to any who have lived before our time. Who would willingly sacrifice these freedoms (think: communication, heat, cooling, light, water)? Our life processes, namely reproduction, cause us to consume ever increasing amounts of goods and services which requires a detachment from the world around us. Those of us who care about the planet still choose to have children, live comfortable lives and travel despite our discomfort with the destruction of the planet.

In Hannah Aredt’s* words:

…the process of wealth accumulation, as we know it, stimulated by the life process and in turn stimulating human life, is possible only if the world and the very worldliness of man are sacrificed. (The Human Condition, 256)

*I’d like to make a note that The Human Condition was written in 1958, long before climate change was a science. Fascinating woman.

On the other hand, sustainability is the idea of consuming goods that last and preserve, so as to limit the production-consumption cycle and reduce our footprint on the world. With sustainability comes a massive decrease in the amount of readily available goods. No more fruits and vegetables out of season; declines in retail shopping; decreases in oil and metal extraction; depreciation of public and private transit systems; and so on.

Again from The Human Condition:

Under modern conditions, not destruction but conservation spells ruin because the very durability of conserved objects is the greatest impediment to the turnover process, whose constant gain in speed is the only constancy left wherever it has taken hold. (253)

Harvard published an article that “looks like a blueprint for catastrophe…” on July 6th (grist). It’s not *super* optimistic and very heavy stuff:

exibit1_steffenetal_aug10.PNG

We argue that there is a significant risk that these internal dynamics, especially strong nonlinearities in feedback  processes, could become an important or perhaps, even dominant factor in steering the trajectory that the Earth System actually follows over coming centuries….these feedback processes include permafrost thawing, decomposition of ocean methane hydrates, increased marine bacterial respiration, and loss of polar ice sheets accompanied by a rise in sea levels and potential amplification of temperature rise through changes in ocean circulation.  (Steffen et al., 2)

What are our alternatives? As I said above, we are the masters of our own destiny. America has seen many massive economic booms under capitalism, but today the youth are largely voting for socialist and environmentalist policies. What happened? Is capitalism suddenly broken?

Young voters are generally for equality among all groups (race, sex, sexual orientation, religion). This is a sign of identifying with fellow humans. They also largely vote for environmental protection laws, such as the Paris agreement exited by President Trump in June 2017. Perhaps this is because of a resurgence of the feeling of “worldliness”, introduced by Arendt.

This socialist movement strikes fear in the hearts of free market conservative capitalists. How can we both win? I stated that capitalism and sustainability weren’t mutually exclusive outcomes above. I propose the alternative to be in space. Yeah, outer space.

We need to expand capitalism, as the explorers of our past did.

Nothing can remain immense if it can be measured.

When explorers set out west from Europe, they had the intention of making the world larger; of discovering new lands in search of profits, expanding economies. By doing this, they unintentionally made the world smaller. They created new markets, but inadvertently capped the long term economic capacity of the capitalistic system. For, as Hannah Arendt states in The Human Condition, “… nothing can remain immense if it can be measured.”

As infinite horizons became finite and the world became acutely mapped, humanity began to realize our place in the universe. In the early 1600’s, Galileo mathematically proved the Earth revolved around the Sun. In 1915, Einstein published his theory of general relativity, proving that revolution is relativistic in nature. Speed, acceleration, weight, time, etc. are all relative to your point of reference.

The idea of relativity is older even than Galileo himself. In philosophy, a so called Archimedean point is defined as “a reliably certain position or starting point that serves as a basis for argument or reasoning” (Merriam-Webster). The more you can see, the more you know about the world around you; similar to climbing a mountain to scout your surroundings. The further removed you are from a specific situation, the more objective knowledge is available to you.

The ability to remove ones self from a difficult situation and view it objectively will lead to more logical conclusions. I suggest we take a worldly view, and expand to the heavens as a single society competing for profits, without all the red tape and “he said, she said” of modern politics.

This type of expansion would create a feedback loop of its own (expansion-innovation). Based on current information, there’s nothing on Mars worth bringing home. The elemental composition of Mars makes it viable for human colonization, but the expense of shipping goods between planets is still far to steep to be economically viable. Instead, Elon Musk says he plans to finance his Mars colonies through patent exportation. These patents can be used to create a more sustainable economy on Earth, while continuing capitalism’s own vicious cycle of planetary exploitation on Mars and beyond. Think: water preservation, oxygen recycling, renewable energies, sustainable power systems, new types of engines.

I believe future human enterprise lies in our system’s planets, moons and asteroids.

ESA and NASA are both actively pursuing moon mining as our next phase as a stage for future deep space exploration. Planetary Resources is scouting asteroids for water for future extraction. Stockholm based Umbilical Design and other “space brokers” are working to transfer space tech into every day lives. There are many, many more private and public companies exploring and scouting the skies for potential candidates for exploration/exploitation: Blue Origin, SpaceX, Breakthrough Starshot, Shackleton Energy. The list goes on and on.

Further, upon reading Michio Kaku’s The Future of Humanity, I am optimistic about our future. Science and technology are progressing to the point that other worlds don’t seem quite so far away.

Thanks for reading,

/tommander-in-chief

Sauces:

  1. The Human Condition. Arendt, Hannah. 1958. http://avalonlibrary.net/Collection_of_193_EBooks/Hannah%20Arendt%20-%20The%20Human%20Condition.pdf
  2. Trajectories of the Earth System in the Anthropocene. Steffen et al. July 6, 2018.  https://liverman.faculty.arizona.edu/sites/liverman.faculty.arizona.edu/files/2018-08/Steffen%20et%20al%202018%20Trajectories%20of%20the%20Earth%20System%20in%20the%20Anthropocene_0.pdf
  3. https://www.esa.int/Our_Activities/Preparing_for_the_Future/Space_for_Earth/Energy/Helium-3_mining_on_the_lunar_surface
  4. http://theconversation.com/mining-the-moon-for-rocket-fuel-to-get-us-to-mars-76123
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Long Electric Vehicles or Long EV Inputs?

The following is an investigation into who owns the inputs into Electric Vehicle (EV) batteries as well as other uses and recent price movements. This is a fast growing market, and it would be beneficial to every investor to get in early. But where do you put your hard earned money?

“…the market of the lithium-ion batteries that raised to US$ 11.7 billion in 2012 is predicted to increase to US$ 33.1 billion in 2019.” (Mauger, Julien)

That’s a 23.1% annualized rate. The industry will double twice in just over 6 years!

Overview:

A Lithium-ion cell is made of the following:

1) Anode
2) Electrolyte
3) Cathode

Basically, “Anodes and cathodes are the endpoints or terminals of a device that produces electrical current.” (thoughtco.com) The movement of ions within a battery is what produces a current, which powers devices. (Correct me if I’m wrong). Those ions move through an electrolyte which acts as a catalyst for movement; this is the battery acid in layman’s terms. (Popular Mechanics)

The anode and electrolyte in lithium ion batteries don’t differ for the most part from brand to brand; the innovation is happening in the cathode.

Here are your four groups of cathodes in production today, courtesy of Business Insider:

BIcathodesfigure_Jul31.PNG

Your main inputs are: Cobalt, Nickel, Manganese and, obviously, Lithium. Note: Cobalt, Nickel, and Manganese are all transition metals, and Lithium is an alkali metal (highly reactive).  Nickel and Manganese are heavy inputs into the steel industry, and their prices are largely dictated by Big Steel, thus I’ve only outlined Cobalt and Lithium in this exercise, Nickel and Manganese can be found in a following post (link o follow).

Cobalt

Elemental Symbol: Co

Price today: $69,750 per Metric Ton

Uses & Projected Market:

globalenergymetaslcobalt_graphicAug6.PNG

Total cobalt demand to exceed 120,000 tonnes per annum by 2020, up approximately 30% from the 93,950 tonnes consumed in 2016 (Darton Commodities, 2016).

Graphic and text via: Global Energy Metals

cobaltuses_jul31.PNG

Besides serving as a cathode material of many Li-ion batteries, cobalt is also used to make powerful magnets, high-speed cutting tools, and high-strength alloys for jet engines and gas turbines. (Battery University)

World Supply:

Cobalt_reserves2018.PNG

Nearly 75% of the world’s cobalt reserves are located in three countries: Congo, Australia, Cuba.

There was this massive explosion in the price of Cobalt over the last two years (63.56% annually!!). See Chart 1.1.

Chart 1.1

cobalt_jul31.PNG

Chart 1.2: Congolese Franc (currency of the Dominican Republic of Congo):

usdcdf_jul31.PNG

The above represents a depreciation of the Congolese currency. In November of 2016, you could buy 923 Congolese Francs (CDF) for 1 US Dollar. Now you can buy 1621 CDF for 1 USD.

Chart 1.3

cobalt to USDCDF_ jul31.PNG

On the chart above, the purple line is the price of Cobalt in CDF. Local suppliers and miners are getting paid less CDF in relation to dollars despite this massive rally of Cobalt prices. The local currency has depreciated faster than Cobalt prices have risen, meaning local miners are making less per kg than they were before!

Chart 1.4: The Elon Musk Effect

cobaltsincemay_jul31.PNG

See the depreciation of the price since May in Chart 1.1? On May 3, Bloomberg published this article, about how Tesla is planning to use less cobalt in their Lithium-ion batteries. The chart above shows the change in Cobalt’s price since the article was published. Coincidence?

“We think we can get cobalt to almost nothing,” the [Tesla’s] chief executive officer said in response to a question on reducing battery costs. (Bloomberg)

To go long Cobalt, Glencore seems like the best way to get exposure. Absolutely MASSIVE company with $205.5 bil in revenue in 2017. To give you another metric, they paid a base $1 billion in dividends last year plus a variable dividend based on cash flow. Unreal big.

They recently (Feb ’17) boosted their presence in Congo Cobalt mines via a $960 million acquisition of two new mines. You’ll gain exposure to a ton of other segments as well as cobalt. You’re gaining macro exposure to huge mining company if you buy this… the environmentally conscious might be a bit hesitant to invest in such a large company.

Chart 1.5: Glencore

GLEN_Aug6Price.PNG

Lithium

Elemental Symbol: Li

Price today: $290 per Metric Ton

Projected Market, 2019: $1.7 bil. (roughly 5% the size of the Cobalt market)

[By 2019], ….the value of the global lithium market is projected to reach $1.7 billion. (Freedonia Group)

Uses:

The most important use of lithium is in rechargeable batteries for mobile phones, laptops, digital cameras and electric vehicles. Lithium is also used in some non-rechargeable batteries for things like heart pacemakers, toys and clocks.
Lithium metal is made into alloys with aluminium and magnesium, improving their strength and making them lighter. A magnesium-lithium alloy is used for armour plating. Aluminium-lithium alloys are used in aircraft, bicycle frames and high-speed trains.

Note: Emphasis mine.

World Supply:

Chart 2.1:

LithiumReserves_2018.PNG

Argentina, Bolivia, & Chile hold nearly 60% of the world’s reserves. The below image was taken from Google Earth. The white area in southwestern Bolivia is a salt flat, containing a vast majority of the country’s lithium resources.

boliviagoogleearth.PNG

At a projected global growth rate of 13% (USGS), the industry will double in size in about 5.5 years. This lithium goes into cell phones (“spoonful of lithium”), cameras, EV’s (“10-15 kilos of lithium”, power centers, rockets. (Bloomberg)

South America is notorious for their unstable politics. It will be interesting to see who invests and how EV producers will hedge their political risks given the concentration of global resources in this area.

SQMTicker: SQM

This Bloomberg video gives a tour of Chile’s major mining company SQM’s salt flats. Here they are seen from space via Google Earth.

Chile Salt flats.PNG

This area is roughly 16 km x 14 km; and the employee in the Bloomberg video says he would estimate a 100% (!) chance that some portion of your smartphone battery passed through their lithium lakes.

SQM’s Revenues from Lithium & Derivatives are exploding. In 2015, Li & Deriviatives accounted for 12.9% of revenues; in 2017, they accounted for nearly 30% of revenues:

lithiumrevs_SQM.PNG

Lithium revenues’s in bright yellow; COGS in darker yellow.

Here’s the stock price of the SQM US ADR; looks interesting at these levels:

SQMADR_Aug6.PNG

FMC Corp: Ticker: FMC

Total revenue for the massive Philadelphia based company for 2017 was $2.9 billion. FMC company derives 88% of revenues from Agricultural products (herbicides, insecticides, and Fungicides) and 12% from Lithium production as of 2017, but over 20% of their profits are derived from Lithium production. Their Lithium operations are based in Argentina. The company recently acquired Dow Chemical, and Reuters reports:

U.S.-based FMC, which is primarily a pesticides maker, is planning to sell off around 15 percent of its lithium business in the IPO late in the third quarter or early fourth quarter, CFO Paul Graves said in an interview.

In their 2017 Annual Report MD&A, the company stated:

On a long-term basis, we are a technology-driven company with low-cost operations, a world class research and development organization that balances short-and mid-term developments with long-term innovations, and global scale with strong regional expertise to support local customers.

FMC price chart:

fmcprice_aug6.PNG

Might be something worth looking into…

Albemarle Corp: Ticker: ALB

Based in North Carolina, 2017 annual revenue amounted to just under $3.1 billion, with Lithium production accounting for 44.5% of revenues. Price chart:

albprice_aug6.PNG

35.7% of long term assets are held in Chile, and 12.2% in Australia, so they’re (kind of) geographically diversified. See below.

albgeo_Aug6.PNG

Bull case: (Taken from 2017 Annual Report MD&A)

Our long-term outlook is also bolstered by our successful negotiation of long-term supply agreements with a number of strategic customers, reflecting our standing as a preferred global lithium partner due to our scale, access to geographically diverse, low cost resources and long-term execution track record.

Relative Valuation:

RV_Lithium.PNG

ALB looks to be the best investment on a relative value basis, with a good entry point and good Capex (long term growth). SQM has received a lot of media attention recently, so maybe overvalued, but they have the highest dividend yield for income investors, also has a lot of exposure to the Chilean Peso. Keep in mind FMC is mostly a fertilizer company, with plans to divest some of their Lithium assets, so might be a more diversified play with solid dividend income. I would wait for the IPO (Q3 or Q4 2018) if I had plans on investing in FMC.

However, comma:

Chile’s SQM predicts,

If production levels are equivalent to current ones, confirmed reserves of the Salar that belong to SQM, will last at least for 30 more years. (SQM)

Note: Emphasis mine.

That’s assuming a constant production! Keep in mind these companies always have to be prospecting new natural resources to stay in business. Tough, tough, tough to project future supply levels.

30 Years??? THEN WHAT!?

I take to the skies in my next post in this series to identify what celestial bodies have been identified as resource heavy and available for mining.

Thanks for reading,

/tommander-in-chief

 

Read/Watch this:

  1. Cobalt Mining for Lithium Ion Batteries
  2. Awesome Article. Further reading on Lithium Ion battery types.
  3. Bloomberg Video on Chile’s Lithium salt flats
  4. 2016 Documentary on Bolivia’s salt flats
  5. Asteroid mining: Planetary Resources

Sauce:

  1. Featured Image: Bolivian Salt Flats: https://awol.junkee.com/satellite-image-of-bolivian-salt-flats/48655
  2. https://www.businessinsider.com/materials-needed-to-fuel-electric-car-boom-2016-10
  3. http://batteryuniversity.com/learn/article/bu_310_cobalt
  4. Mauger. Julien. Critical review on lithium-ion batteries… July 2017.(https://link.springer.com/article/10.1007/s11581-017-2177-8).
  5. https://www.bloomberg.com/news/articles/2018-05-02/tesla-supercharging-its-model-3-means-less-cobalt-more-nickel
  6. https://investingnews.com/daily/resource-investing/critical-metals-investing/cobalt-investing/glencore-drc-copper-cobalt-mines/
  7. https://www.globalenergymetals.com/cobalt/cobalt-demand/
  8. http://phx.corporate-ir.net/phoenix.zhtml?c=117919&p=irol-sec&control_selectgroup=Annual%20Filings
  9. https://www.reuters.com/article/us-mining-bmo-fmc/fmc-plans-500-million-ipo-of-lithium-business-on-nyse-in-the-fall-idUSKCN1GA2VO
  10. Google Earth
  11. Bloomberg

Disclaimer: These opinions are my own. I do not provide any financial advice. Seek advice from an accredited financial advisor before acting on opinions presented. At the time of writing, I do not own equity in any of the companies mentioned above.

Money vs. Time: What’s the Point.

Both time and money can buy you experiences.

Money can buy you freedom to experience what you want in life, but often the experiences aren’t as organic. Money can give you a whirlwind tour of what is possible in many different cultures, but won’t give you the experience of being part of the culture itself. You can buy exotic trips, afford fancy foods, and see the world; but how real is the experience?

Becoming part of a culture and experiencing it from the eyes of a local isn’t possible without investment of your time. Some professions require a massive amount of time investment to get to the money. This is also an experience. If money is a means to an end, think about what goal you’re trying to reach, and if you can achieve that end with investment of time instead.

Maybe your goal is to provide economic freedom to your children, in which case, the money is the goal. But if you want to do literally anything else with your life, find a way to immerse yourself into the culture you want to be a part of. The people who seem the most happy are those that aren’t living for a paycheck, but have a goal in mind when each paycheck comes in. Find something to always look forward to and you’ll never feel stuck.

Money comes and goes, but the amount of money you make is a function of time and how you spend your resources and access to resources like education, basic necessities, etc. If you can find a way to earn money while spending your time in a way that allows you to achieve your goals, you’ll achieve them that much faster and be happier in the process.

Moral of the story, keep learning. Stay hungry. Don’t settle.

Thanks for reading.

/tommander-in-chief

Followup: “Quick Thoughts on Markets: May 24”

Reflection on how my predictions panned out from my May 24th article:

1. Multiple expansion thru 2019; bull market to continue or trade sideways with lower earnings estimates, lower guidance. P/E forward and trailing, P/S, P/CapEx, all rising thru 2019.

Over the last two months, we’ve seen multiple expansion in the S&P 500 (SPX) and the Nasdaq Composite (NDX), but not in the Dow Jones Industrial Average (INDU) or the Russell 2000 (RTY). CapEx continues to rise across the board, signalling positive business sentiment. (Notes on the indexes in footnotes).

Table 1

Multiples_Fungible_Jul24.PNG

2. Small cap debt expansion as small business owners feel more wealthy when tax season comes around in 2019, combined with rising defaults on personal debts.

As seen in Table 1, Capex has risen the most in small cap stocks (RTY), signalling the most enthusiasm for investment in the small cap space. Still to early to see how defaults on debt has changed. 

3. Slower housing as a result of more expensive mortgages, less refinancing; further consolidation of wealth to middle class that bought single family homes in the early 2010’s.

Too early to tell…

4. Flat real rates as inflation rises mildly along with gasoline prices this summer into higher nat gas prices into winter. More expensive imports (fiscal policy)

Import Prices have risen the last two months:

ImportsYoY_Jul24.PNG

Crude Oil flat:

CL1_Jlu24.PNG

5. Flatting yield curve on long end, steeper on short end with the infection point decreasing signalling decreased optimism on future growth, end of existing govt bond purchases by central banks.

Mild flattening yield curve  on long end, parallel shift on the short end, meaning a flatter yield curve. inflection point around the 7 year range. We will see how this progresses. Sticking to my original predictions on the short and long ends. 

YC_Jul24.PNG

6. Emerging market yields will continue to rise to combat the rise of the dollar; currency flows important to watch to determine winners/losers in coming debt restructuring (2019-20?) Might see some runs of EM ETF’s, which cause some liquidity issues in smaller markets.

The biggest currency losers over the last three months vs the US Dollar are the:

  • Argentine Peso: -26.6%
  • Turkish Lira: -16.2%
  • Chilean Peso: -9.15%
  • Notables include:
    • Brazilian Real (-8.8%)
    • Hungarian Forint (-8.4%)
    • Polish Zloty (-6.7%)

fxc_Jul24.PNG

No ETF runs that have made headlines since the VXX and XIV in Feb ’18.

7. No ETF liquidity worries, unless markets stop functioning properly for several days. No way to call another vol spike like Feb. ’18. VIX continues to stay bounded around the 12-16 range on average, gone are the single digit vol days, with less Central Bank purchasing (of course, barring a significant change in geopolitcs).

The VIX rose above 16 twice in the 2 months since my post: 

  • May 29th turned out to be a non-event after Bloomberg published the headline, “Volatility almost doubles for the quarter as concerns mount”.
  • June 25th Bloomberg also published the headline: “Stocks suffer worst day in weeks as Trump’s trade threats rattle…”. Recently, Trump has been the principle risk to the VIX.

VIX_Jul24.PNG

8. Swedish market may see some M&A activity with weak krona, especially from the eurozone.

Telia Company acquires Bonnier Broadcasting

SSAB divests Ruukki Construction’s business operations in Russia

  • Note: Ruble flat relative to the SEK, business driven, not currency.

Volvo Will Move XC60 Production From China To Europe

  • Not M&A, but maybe currency driven…

cnysek_jul24.PNG

  • … but maybe not:
  • Moving XC60 production back to Sweden will help Volvo avoid a 25% tariff on Chinese-built goods, though Volvo hasn’t announced if it will do the same with the Chinese-built S90 sedan. (sauce)

Multiples are such that I retract my prediction for M&A here in the Nordics. Any activity will be business driven rather than currency driven.

9. Watching cryptos for more use case adoption. Right now only diehards believe it is a store of wealth, only use case that’s fully developed is black markets.

Still watching… probably buy some more Bitcoin.

xbtusd_jul24.PNG

10. Big tech led markets up so it will lead markets down.

… so far so good; +8.64% over the last 2 months.

fangplus_jul24.PNG

NYFANG Index includes: Facebook, Amazon, Alphabet, Apple, Baidu, Twitter, Nvidia, Netflix, Alibaba, and Tesla. Sticking to my bet: big tech goes first, then market follows.

-thanks for reading

/tommander-in-chief

 

SPX: S&P 500 Index is a cap weighted index of 500 stocks. Selection is designed to represent the performance of the broad domestic economy, representing all major industries. (BBG)

INDU: The Dow Jones Industrial Average is a price weighted average of 30 blue-chip stocks that are generally the leaders in their industry. (BBG) Note: Selection is arbitrary.

RTY: Russell 2000 is comprised of the smallest 2000 companies in the Russell 3000 index. The Russell 2000 represents approx. 8% of the total Russell 3000 total market cap. The Russell 3000 is composed of the 3000 largest us companies determined by market capitalization. (BBG)

NDX: Nasdaq 100 Stock Index is a modified cap-weighted index of the 100 largest and most active non-financial domestic and int’l equities listed on NASDAQ. (BBG)

Sauces:

  1. https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2018
  2. https://www.bloomberg.com/news/articles/2018-03-29/vix-up-81-shows-extent-of-stock-market-pain-in-jarring-quarter
  3. https://carbuzz.com/news/volvo-will-move-xc60-production-from-china-to-europe

Quick Thoughts on Markets: May 24

Quick thoughts on where markets will be/are:

  1. Multiple expansion thru 2019; bull market to continue or trade sideways with lower earnings estimates, lower guidance. P/E forward and trailing, P/S, P/CapEx, all rising thru 2019
  2. Small cap debt expansion as small business owners feel more wealthy when tax season comes around in 2019, combined with rising defaults on personal debts
  3. Slower housing as a result of more expensive mortgages, less refinancing; further consolidation of wealth to middle class that bought single family homes in the early 2010’s
  4. Flat real rates as inflation rises mildly along with gasoline prices this summer into higher nat gas prices into winter. More expensive imports (fiscal policy)
  5. Flatting yield curve on long end, steeper on short end with the infection point decreasing signalling decreased optimism on future growth, end of existing govt bond purchases by central banks.
  6. Emerging market yields will continue to rise to combat the rise of the dollar; currency flows important to watch to determine winners/losers in coming debt restructuring (2019-20?) Might see some runs of EM ETF’s, which cause some liquidity issues in smaller markets.
  7. No ETF liquidity worries, unless markets stop functioning properly for several days. No way to call another vol spike like Feb. ’18. VIX continues to stay bounded around the 12-16 range on average, gone are the single digit vol days, with less Central Bank purchasing (of course, barring a significant change in geopolitcs).
  8. Swedish market may see some M&A activity with weak krona, especially from the eurozone.
  9. Watching cryptos for more use case adoption. Right now only diehards believe it is a store of wealth, only use case that’s fully developed is black markets.
  10. Big tech led markets up so it will lead markets down.

/tommander-in-chief

 

Opinions are my own.

Fall of Empires

Sir John Glubb wrote an essay regarding the rise and fall of empires and the corellaries between them. The essay, titled Fate of Empires, has a lot to digest so I won’t be able to cover all of it here. I highly recommend you read it and draw your own conclusions with what is happening in the world today.

Glubb speaks on certain defining eras, deemed ‘ages’, that are common to all empires:

  1. Age of Pioneers
  2. Age of Conquest
  3. Age of Commerce
  4. Age of Affluence
  5. Age of Intellect
  6. Age of Decadence

I’d like to begin in the Age of Intellect:

The dawning of this age gives rise to the thinking (wo)man, who believes problems can be solved through intellectual horsepower alone. This stage involves the influx of capital into universities and research institutions, accompanied by a boom in scientific and intellectual discovery. Philosophical and democratic debate ensues, as in ancient Athens with Plato and Socrates.

However, Glubb argues, “Amid a Babel of talk, the ship drifts on to the rocks.” Thus gives rise to the anti-intellectual “school of thought”.

In the 2016 US Election, the populous elected a man of action rather than words.

The 45th President, Donald Trump, has made no secret of his disdain for learning and specialized knowledge, sneering at a campaign rally in 2016, “You know, I’ve always wanted to say this—I’ve never said this before with all the talking we all do, all of these experts, ‘Oh we need an expert’—the experts are terrible!” (2)

The notion of anti-intellectualism perhaps will change the trajectory of the United States empire. The citizens may find that the brainpower of the intellectuals cannot solve the problems created by inaction, frivolity and greed. The intellectuals may wake up to the desire for action over words; creating a new type of leader, both dynamic and capable, which will meet the demands of the populous. People want a nation they can believe in, one that stands for the ideals they strive to emulate.

I’m not saying intellectualism is inherently “bad”, just that argument often leads to more disagreement until hubris is cast aside (and there is no lack of hubris in Washington at the moment). If action does not replace words, patriotism continues to decline, and internal political rivalries continue to deepen, I fear for the fate of the United States.

Religion as a solution:

… it was inevitable at such times that men should look back yearningly to the days of ‘religion’, when the spirit of self-sacrifice was still strong enough to make men ready to give and to serve, rather than to snatch. (Glubb, 18)

Born-again, fundamentalist Christians overwhelmingly voted for and approve of our current president. As a nation, we should be wary of the path this may take us. (7)

At the height of their intellectual era, the Arab empire (roughly 800-1100) was the richest nation on earth, with Baghdad as its capital. The intellectuals of the nation discovered the earth was a sphere a full five hundred years before Galileo. They also were on the brink of discovery of flight, nearly 1,000 years before the Wright Brothers. Experimental physics, algebra, cameras, astronomy, and chess were all products of this era (5).

Academics have long maintained that the great Islamic theologian, Abu Hamid Al Ghazali, who lived from 1055 to 1111, single-handedly steered Islamic culture away from independent scientific inquiry towards religious fundamentalism. In a remarkable intellectual shift, he concluded that falsafa (which literally means philosophy but included logic, mathematics and physics) was incompatible with Islam.

After writing his book, The Incoherence of Philosophers, Algazel as he was known in medieval Europe, is said to have “stabbed falsafa in such a manner that it could not rise again in the Muslim world”. Thanks to his unparalleled mastery of falsafa and Islamic law, he injected repugnance among Muslims for science that ultimately led to its decline and, in the process, the decline of Islamic civilization. (6)

In 1203, the largely uneducated and illiterate Mongol empire under Ghengis Khan was established as a major power in Asia. In 1258, Baghdad was sacked and pillaged by Ghengis Khan’s son, Hulagu Khan, definitively marking the end of the Golden Age of Arabic intellectualism.

I leave you with the following from Glubb:

[The] spirit of dedication was slowly eroded in the Age of Commerce by the action of money. People make money for themselves, not for their country. Thus periods of affluence gradually dissolved the spirit of service, which has caused the rise of the imperial races.

In due course, selfishness permeated the community, the coherence of which was weakened until disintegration was threatened. Then, as we have seen, came the period of pessimism with the accompanying spirit of frivolity and sensual indulgence, by-products of despair. It was inevitable at such times that men should look back yearningly to the days of ‘religion’, when the spirit of self-sacrifice was still strong enough to make men ready to give and to serve, rather than to snatch.

But while despair might permeate the greater part of the nation, others achieved a new realisation of the fact that only readiness for self-sacrifice could enable a community to survive. Some of the greatest saints in history lived in times of national decadence, raising the banner of duty and service against the flood of depravity and despair.

Thanks for reading,

/tommander-in-chief

What I’m Reading: Bonfire of the Vanities – Tom Wolfe

Sauces:

  1. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  2. https://www.opendemocracy.net/transformation/nicholas-baer/american-idiot-rethinking-anti-intellectualism-in-age-of-trump
  3. https://www.thebalance.com/current-u-s-federal-budget-deficit-3305783
  4. http://people.uncw.edu/kozloffm/glubb.pdf
  5. https://www.independent.co.uk/news/science/how-islamic-inventors-changed-the-world-6106905.html
  6. https://www.thenational.ae/opinion/comment/how-the-decline-of-muslim-scientific-thought-still-haunts-1.382129
  7. http://www.pewresearch.org/fact-tank/2016/11/09/how-the-faithful-voted-a-preliminary-2016-analysis/

Knee Jerk Vol & the Fed

 

The Fed is now shrinking its balance sheet; they are no longer buying new securities as they mature. Below is a bit of analysis on if the Fed’s recent activities in shrinking its balance sheet is the cause of the recent rise in volatility.

Quick note: Data is at a weekly tenor, from Jan. 8, 2014 to April 4, 2018.

vixtreasurysspApr6.JPG

The thinner vertical line denotes when the Fed began to shrink their balance sheet last October; the thicker vertical line denotes when we had that massive vol spike in February of this year.

On the surface, the Fed’s action doesn’t appear to be the cause of all the hullabaloo, i.e. the shift from risky assets to safer assets.

If we turn to bonds, we see the following.

vixtreasurys10yrApr6.JPG

Rates on 10-Year Treasurys have moved higher since the Fed began shrinking it’s holdings of US Treasurys. Recall, bond prices fall as rates rise. Less buyers = lower prices = higher rates.

It appears these movements aren’t directly related to the recent rise in volatility.

However, there appears to be an inverse relationship between bond rates and the VIX Index.

A simple linear regression would see if the markets follow each other and if there was any preditcability between the markets. The equation is as follows:

eqnvixbondsApr6.JPG

Regression Summary:

reg summary apr6.JPG

We see a significant coefficient, with a value of -8.545, and an insignificant alpha. Therefore your new equations is:

eqnvixbondsnewApr6

If you predict a 25 bps rise in bond rates, we would expect to see a 2.3136% fall in the VIX Index, with 95% confidence:

eqnvixbondsnew2Apr6.JPG

The VIX is crazy volitile and the regression has a small R squared, so take the results with a grain of salt.

 

Thanks for reading,

/tommander-in-chief

Sauces:

  1. http://www.statisticshowto.com/probability-and-statistics/f-statistic-value-test/
  2. https://www.cnbc.com/2015/09/25/what-happened-during-the-aug-24-flash-crash.html
  3. https://fred.stlouisfed.org/series/TREAST
  4. Yahoo Finance
  5. Bloomberg

 

Note: The VIX and the 10-Yr are already percentages, so they’re calculated in absolute terms.

Delta VIX = VIX Value Today – VIX Value Yesterday

Delta 10-Yr = 10-Yr Today – 10-Yr Yesterday