Patterns in the Numbers

Ray Dalio emphasizes credit cycles as integral to his firm’s investment strategy. Watch this video on how the economy functions:

While we can be sure the pattern will repeat itself in some form or another, we can only be sure how the pattern played out in the past and play the game of averages. With the benefit of hindsight, we can analyze how the past few crises have shown up in the numbers.

Debt Cycle Visualized


The above data, sourced from the Federal Reserve, are growth rates for the public US debt market broken down by sector. When the heat map is green, that denotes fast growth in credit. Unemployment and inflation are in the last two columns. When unemployment/inflation are low, green is shown; when unemployment/inflation are high, red is shown. High unemployment and inflation are intuitively bad for financial markets. Stability is paramount for economies to grow.


By visualizing the different portions of the credit market on a heat map, we can see how each crisis evolved.

In 2008, the Great Deleveraging, as Dalio calls it, revolved around too much credit growth in the Home Mortgage segment. In 2002-06, there was massive growth in these markets, shown in green in the heat map above. In the aftermath of the Great Deleveraging, we can see how the Home Mortgage segment growth was demolished, leading to collapsing home prices and economic disaster. This crisis spilled over to the Household Consumer credit market (credit cards, personal loans, etc.), the Domestic Financial Sector credit market (banks deposits, interbank loans), and into unemployment.

In 1984-86, we see massive growth in the overall credit market; this led to the crashes in 1987 and 1990. The market couldn’t sustain the amount of debt Americans were taking on. We have seen an uptick in growth in the most recent quarter. However, the growth is most concentrated in US Federal government debt. If fiscal stimulus spills over, and we actually see trickle-down economics work, we will get a rise in inflation which is historically a boon to equity markets.


A data analyst’s job is to make a story out of numbers. Using hard, factual information data analysts must try to predict the future. It’s like trying to drive using only the rear facing mirror. As such, it’s difficult to make predictions based on past data.

That being said, most of the mainstream media attention has been drawn to inflation and to the US Federal Government budget deficit. Unemployment is the lowest we’ve seen in decades, yet the Trump Administration is throwing oil on an already raging market. This goes against classical Keynesian economics, which states fiscal policy should be aimed at keeping markets stable (fiscally conservative near the highs, fiscal stimulation during the lows). The current US equity market situation is anything but sustainable. We’ve seen massive growth in big tech equities, fueled by stock buybacks and cheap credit (see: Get Paid to Take Risk).

A lot of focus is put on inflation and unsustainability of credit market growth, but the Total Credit Market growth column of the heat map tells a different story. We have had an uptick in the total debt market growth, but it is nowhere near the same levels as before the 1987 & 1990 crashes or the 2008-09 crash.


The danger lies in rising interest rates. As US interest rates rise, debt becomes harder to pay back. This means more defaults and bankruptcies. It’s a cycle that feeds on itself and can turn into a death spiral without proper regulation. There has been a recent push for less regulation from the Trump Administration, which is a cause for concern. Emerging market dollar-denominated debt is also a cause for global growth concern.

I highly recommend reading Howard Marks’s most recent memo on debt markets, The Seven Worst Words in the World. Spoiler alert: those words are “too much money chasing too few deals.” The heat map above definitely doesn’t tell the whole story.

Bottom line:

Upon reading Marks’s memo, I am cautious as private debt seems to have grown beyond sustainable levels. United States and European equities are at or near all-time highs. However, unemployment is low, inflation is sustainable, and public debt market growth looks mild. Banking sector debt looks stable and manageable. I see no reason to predict a deleveraging in the coming years given the above heat map.

I am cautiously optimistic about the next few years.

Thanks for reading,


Further Reading:

  1. Fed Rethinks How to Define a Big Bank – WSJ

  2. The Seven Worst Words in the World – Oaktree Capital Management
  3. Why is a High Rate of Inflation Bad for the Economy – Sciencing

Disclaimer: A journalist’s job is to make the stories that data analysts tell us emotional. Reporting is a sales profession. Be wary of what you read, because everyone in the news is selling something. This article is not to be taken as investing advice. Consult your financial advisor before acting on any of the opinions set forth.


Friday Thoughts: Motivation

Find a scalable profession.

While re-reading the The Black Swan by Nassim Taleb I came across the idea of scalable professions. These are professions where you can add zeros on your productivity and income without adding zeros onto your hours worked. By adopting a profession of this sort, you decouple your hours worked and income.

Deploying capital in a way that allows your money to work for you instead of the other way around will give you more freedom to pursue your interests. If you’re like me, you’re interested in all aspects of life, not just your chosen profession. Instead of working for a living, you can work to internally resolve how you view the world around you. Ray Dalio, a famous hedge fund manager, attributes his success to developing an understanding of how the world works and how you can fit in to solve the world’s problems. If you’re solving everyone else’s problems, how can you find out what problems you care about, personally? Passion breeds success because you can’t sell something you don’t believe in.

Riskiness of Scalable Professions

It’s hard to predict when you’ll get your break in a scalable profession.

Taleb describes two different distributions of populations: Mediocristan and Extremistan.

Mediocristan distributions are such that the outliers don’t affect the average. Think: Height of Yao Ming vs population; inclusion of a few outliers won’t change given a moderate population size because the numbers are subject to mean reversion.

Extremistan distributions are heavily influenced by one or several members of the population. Think: Books sales (J.K. Rowling vs Average), Incomes (Warren Buffet vs Average).

Extremistan professions are more subject to accidents or black swans. As he puts it, they produce a “a very small number of giants and a large number of dwarfs” (p. 29). It’s harder to compete in a scalable profession because of this distribution. Some writers we consider today as wildly successful lived out their lives in poverty, being ahead of their time or before the information could spread like wildfire through the internet or spoken word (telephones).

In Chapter 3, Taleb goes on to explain these professions are subject to Black Swans:

Matters that being to the Extremistan…: wealth, income, book sales per author, book citations per author, name recognition as a celebrity,  number of references on Google, populations of cities, uses of words in a vocabulary, numbers of speakers per language, damage caused by earthquakes, deaths in war,… size of planets, sizes of companies, height between species, financial markets, commodity prices, inflation rates, economic data.

Extremistan distributions are subject to a high level of risk. Remember: more risk, more reward. Once society gets a hold of an idea, it could spread quickly. As long as you continue to produce at a high level, you made it. Serial inventors may never find an invention that catches on, and others hit it in the first try.

Don’t give up.

How do you make yourself scalable? Think, “what doesn’t exist that should?” It doesn’t have to be ground shaking, just what you are passionate about. You have to know yourself before you can make your ideas scalable.

People want what works, but ideas are sticky. Once a popular company or group of people get a hold of a revolutionary idea, there’s no stopping it. There are countless examples in Taleb’s text.


Keep working. Those who deserve it will be rewarded in a capitalistic economy. Hustle and people will respond. Make mistakes, you get stronger because of it.

Move fast and break things. Unless you are breaking stuff, you are not moving fast enough. – Mark Zuckerberg.

Thanks for reading. Have a great weekend!


Get Paid to Take Risk

Is the risk-reward trade-off broken? Historically smaller companies have higher stock price returns, but this relationship has faded since 2008. What happened and why aren’t investors being compensated for taking more risk?

Table 1.1 shows how small-cap stocks have performed relative to large-cap stocks since the Great Financial Crisis in 2007-08. There is more volatility associated with small caps, but only a small amount of return compensation. What’s going on? For contrast, I provide the same metrics before the GFC in Table 1.2 and Chart 1.2 below.

Table 1.1: Small vs Large Cap Since the Great Financial Crisis (GFC)


Small-cap barely outperforms and has more volatility (measured by standard deviation of stock returns). This reinforces the risk-reward dynamic. Chart 1.1 below shows this graphically. Note: SPY is the S&P 500 Index ETF (Large Cap proxy); IWM is the iShares Russell 2000 Index ETF (Small Cap proxy).

Chart 1.1: Small vs Large Cap Since the GFC


Table 1.2: Small vs Large Cap Pre-GFC


Over this time period, small cap outperforms significantly with the same difference in volatility. You were rewarded more for taking risk in the pre-crisis era. Chart 1.2 below shows this graphically.

Chart 1.2: Small vs Large Cap Pre-GFC


So what gives?

Why aren’t investors being rewarded as they were before the GFC in 2008?

The answer boils down to how companies raise money. When a firm is going to undertake a new project (called capital budgeting in the biz), the top brass has to decide whether to sell bonds to raise cash or to give up portions of their company (called equity) to raise cash. To do this, they need to weigh their options, so to speak.

Companies can minimize their cost of raising cash (called the cost of capital) by optimizing the following equation with respect to the weights of equity and debt.

Table 2.1:


Cost of equity = f(company size, business risk, reputation)

It should be noted that if a company goes bankrupt, they have no obligation to pay their shareholders anything. Period. The investor accepts the risk that his investment may go to zero in exchange for a bit more return. Investors in stock take risk and are paid in stock returns or dividends. Because of this, the cost of equity is always greater than the cost of debt.

Cost of Debt = f(credit conditions, company size, debt outstanding, business risk)

Debt holders are the first to be paid back should a company default. In exchange for this assurance, the company gets to borrow at a lower rate. Lenders, or buyers of the debt, receive less in return. Less risk, less reward.

In the case of both debt and equity, long-established companies, like IBM or Exxon Mobil, will have a lower cost of raising capital than a recently established tech start-up. This can also be called the Size Premium. This is why you should be compensated more for owning a small company’s debt or equity.

Large Scale Asset Purchases aka Quantitative Easing:

Chart 2.1: Treasurys and Mortgage Backed Securities owned by the Fed


When financial markets began to fail in 2008, the Federal Reserve of the United States stepped in and started buying up mortgage backed securities (MBS) and US Treasury Bonds in order to stimulate the economy by artificially lowering interest rates to allow easier borrowing for companies. Cheaper debt means more companies can borrow to finance new projects, growing consumption of capital goods; at least that was the plan.

They did this in several stages known as QE1, QE2, & QE3. Some were even forced to borrow cash from the Fed to send a signal of stability.

Borrowing from the [Fed], even on a confidential basis, has long been viewed as a sign of weakness, to be avoided if at all possible. … [The Fed] arranged for four of the nation’s largest banks — Bank of America, Citigroup, JPMorgan Chase and Wachovia — to take what were described as symbolic loans of $500 million each. (Sauce)

Lion’s Share

Where did this liquidity go? Big banks lent it out to the nation’s largest institutions, doing what they do best, making money. They borrowed from the Fed at wicked cheap levels and lent to corporations at a higher rate which was still well below historic borrowing rates. Everyone wins, right? But who were the biggest winners?

The amount of debt a bank is willing to lend a company is directly related to the size of their operations. The bigger the firm, the more they can borrow. So who got the lion’s share of the injected cash? Big business. Think Apple, Microsoft, Amazon, Berkshire Hathaway, Facebook, JP Morgan, Johnson & Johnson, Google, Exxon Mobil, Bank of America, Visa, etc.

To lower their cost of capital (WACC), companies took out debt, which was now the cheapest it’s ever been since at least 1962 (see Chart 2.1). But instead of financing investments in brick and mortar or research and development, they used it to purchase their own stocks.

This shifted the weights of debt and equity.

Returning to the Cost of Capital Equation:


  1. Cost of debt falls.
  2. Companies raise more debt.
  3. They use the debt to purchase equity
  4. Lower Cost of Capital

Chart 2.1: US Treasury 10-Year Yield since 1962


Through stock buybacks, companies were literally purchasing their own stocks to lower their weight of equity. The more stock they purchase, the more their stock prices rise. This brings me to the punchline: large caps are performing the same as small caps because of Quantitative Easing. This isn’t guesswork, it’s precisely what’s happening in financial markets worldwide. Until interest rates behave as they did in pre-crisis, pre-QE times, I don’t expect small caps on average to perform much better than large caps given the elevated level of risks.

Further, “the top 1 percent of Americans control 50 percent of the financial wealth, [thus] they gain the most when these asset prices boom” (Sharma, p. 108). In 2014, The Fed issued a statement, “our goal is to help Main Street, not Wall Street” (WashingtonPost), yet the Fed has been feeding inequality since. I don’t mean to be critical, but the Fed has to have realized that it had this effect.

Don't pretend to be something you're not.

I think the Fed did the best with what it had. When all you have is a hammer, everything looks like a nail. They saved many in the aftermath of the crisis, which I believe would have been much deeper without Federal Reserve intervention.

Bottom Line (TL;DR):

I’m long large-cap, high dividend stocks, for reasons stated in this article, as well as the tendency for high dividend stocks to outperform in rising interest rate environments. Here’s the source for that last statement: GlobalXFunds.

Thanks for reading, this was a fun one to write.



  1. NYT: The Fed’s Crisis Lending, Mar. 31, 2011.
  2. Sharma, Ruchir. The Rise and Fall of Nations. 2016.
  3. FRED
  4. Bloomberg

Government vs. Free Market: Crashes of the Past 100 Years

Were the most significant drops in financial markets a function of unstable free markets or government intervention?

Nassim Taleb, author of bestseller The Black Swan, often speaks on the danger of putting abnormal events in tidy boxes.  Readers should be aware that there are many factors influencing markets at any given time, and by assigning a narrative we discount the role randomness plays in downturns. That being said, in the following I attempt to outline the causes of largest market crashes of the last 100 years. (Scroll to bottom for TL;DR for all you ADHD kids.)

1929: The Great Depression


“During the four days of the crash [(Oct. 24 – Oct. 29, 1929)], the Dow Jones Industrial Average dropped 25 percent and investors lost $30 billion. That was 10 times more than the 1929 federal budget. It was more than the United States spent on World War I. ” (TheBalance)

Investors back then had to write on physical paper to execute trades. Following several red days of trading, at the stock market open on October 29 traders began selling, with the opening print signaling the Dow down 8 points or 3.2%. Within “a half hour, they sold three million shares and lost $2 million… the ticker tape that announced stock prices was hours behind.” (TheBalance) This caused investors to panic sell, with no one knowing exactly where the price was; everyone was trying to sell at once. Large banks stepped in to stem the damage, but investors took this as a sign that the banks themselves were worried about their liquidity, triggering further selling.

The Federal Deposit Insurance Corporation (FDIC) didn’t exist at the time (insurer for banks), so banks became insolvent as everyone rushed to take out their savings. Massive amounts of wealth were destroyed.

The Fed had no idea what it was doing either, nor could it, with available information, technology, and monetary dynamics. The gold standard was still in force, so investors began to exchange dollars for gold; the government began to worry it would run out or gold reserves. To protect the dollar, the Fed increased interest rates into 1930; this had the secondary effect of making borrowing money much harder (less borrowing = slower growth).

Overnight Loan Rates 1920’s:


At the same time, they cut the dollar’s value relative to gold from $20.67/oz. in to $32.32/oz.  in 1933, then $35.00/oz in 1934 (onlygold). That’s a depreciation of the dollar on a global scale of 41% in two years.


Directly impacting purchasing power of US consumers, what used to be good for $100 of goods in 1932 was good for $59 in 1934. Imports dropped off a cliff while internal business starts were choked by high interest rates. The economy was crushed by governmental inadequacy.

The modern day policy of fiscal stimulus during recessionary times was introduced by Maynard Keynes; “What distinguishes Keynesians from other economists is their belief in activist policies to reduce the amplitude of the business cycle, which they rank among the most important of all economic problems” (IMF). This school of thought advocated government intervention to stem the highs and curb the lows of the economic cycle, creating a more stable environment. This idea stems from Keynes’s collection of works published from 1930-1936, after the Great Depression.

Sadly, no one had thought of governmental stimulus to save the economy yet in 1929, instead opting for monetarist policies based on the value of currency.

Nobel Prize winner Milton Friedman writes in Capitalism and Freedom, “… the severity of each of the major [economic] contractions… is directly attributable to acts of commission and omission by the [Federal] Reserve authorities and would not have occurred under earlier monetary and banking arrangements. There might well have been a recession on these or other occasions, but it is unlikely that any would have developed into a major contraction.”

Conclusion: The spark of the Great Depression was caused by market inefficiencies in esoteric trading systems, but the Depression itself was caused by incompetent knowledge and use of power following the collapse of the stock market. Thus both free markets and governmental regulatory bodies are to blame for this economic crisis. The Dow lost 89% of its value over 846 trading days from Aug. 30, 1929 to July 7, 1932.

1937: New Deal Recession of 1937-38


Franklin Roosevelt signed the string of New Deal reforms from 1933-1936 in response to the Great Depression. Programs like the Civil Works Administration and the Works Progress Administration designed to stimulate the economy by bringing the unemployed back into the workforce, funding projects like the San Francisco-Oakland Bay Bridge, and LaGuardia Airport. (Wikipedia)

Keynesian economists argued he didn’t do enough for the economy and ran too tight a budget. In order to curb spending, the US Government cut funding to some of these social programs. Perhaps accentuated by the normal business cycle, lack of commitment from the US Government is widely accepted to be a cause of the market collapse.

Conclusion: This was only a few years after the 1929 crash, and was a bit of a hangover from the pain of the early 1930’s. While the US Government caught on that fiscal stimulus was a good idea, they didn’t do enough. The Dow Jones lost 49% of its value over 321 trading days from March 3, 1937 to May 31, 1938.

1962: Kennedy Slide


“‘The stock market careened downward yesterday,’ reported The Wall Street Journal on May 29, 1962, ‘leaving traders shaken and exhausted.’ The Dow Jones Industrial Average fell 5.7% that day, down 34.95, the second-largest point decline to date.

‘The drop took place on volume so heavy,’ added the Journal, that the ‘ticker wasn’t able to finish reporting floor transactions until 5:59 p.m., two hours and 29 minutes after the market closed.'” (WSJ)

It seems as though this crash was caused by a blend of investor psychology and messy trading strategies/regulations. Market “specialists” were required by regulators to intervene when markets were behaving irrationally, but according to the SEC’s investigation report, “‘At no time during the day did the specialist intervene in sufficient volume to slow the rapid deterioration of the market in IBM.'” (WSJ) There was also a degree of herd mentality going on in large tech stocks.

“…In 1961, stocks had risen 27%, with leading technology stocks like Texas Instruments… trading at up to 115 times earnings.” This was not without reason; reports, “By the mid-1960s, nearly half of all computers in the world were IBM 1401s.”

This was the era of the Kennedy Assassination (Nov. 1963), and the Cuban Missile Crisis (Oct. 1962); the automatic pinsetter was introduced in bowling in 1961, leading to massive popularity of Brunswick stock. “All of this ebullience was reflected in the stock prices of bowling companies such as Brunswick Corporation, which according to the Wall Street Journal increased 1,590% between 1957 and its 1961 peak.” (Quartz)

What a time to be alive.

Conclusion: Investor behavior was responsible, thus irrational market behavior prevailed. This was a function of the free market. The DJIA lost just under 26% of its value over 72 trading days from March 15 to July 26, 1962; notably, the market recovered to former levels by May 1963.

1987: Black Monday


This crash was caused by three factors: Portfolio Insurance, Algo Trading, and Investor Sentiment.

Portfolio insurance is popular with institutional investors. Large institutions that hold index futures (i.e. are long the market) sell index futures to hedge their directional risk, meaning their profits are not driven by a certain directional movement in the index. This is called “shorting” index futures to hedge, aka shorting the market to hedge a long exposure. Mutual funds operate under this framework. They promise the value of your portfolio won’t drop below a certain level in exchange for a fee. These were popular before the time of the 1987 crash, and are still in use today (albeit with more regulatory scrutiny).

Investors also widely use what are called stop-loss orders that automatically execute a sale of the stock or index once a certain price level is hit. These help to protect gains or against losses should a sell-off occur.

In the days leading up to the crash (Oct. 5th – Oct. 16th), the DJIA fell nearly 15%. As prices began to drop preceding Black Monday, portfolio insurance trigger levels came into play and set stop losses came closer and closer to execution. Once the selling started, many of these levels were hit, causing further selling.

Automatic computer driven trading was still a new idea at this time. Never had such high-frequency trading been used, as it is today. Algorithmic trading hadn’t been tested in a fast falling market. Sell orders flooded markets as algo strategies hit their loss limits and caused a domino effect as stop-losses were wiped out. The automated strategies were also programmed to take away their bid orders once certain limits were hit, so buyers seemingly vanished from markets, causing more panic.

The nasty combination of free market inventions such as portfolio insurance and algo trading and investor panic caused the Black Monday crash; Nobel Laureate and Yale Professor Robert Shiller predicted at the time that it could happen again. Portfolio insurance and stop-loss orders weren’t a new invention at the time, so Shiller concluded that the selling was fueled by investor sentiment i.e. panic selling.

This was a function of free markets. The DJIA lost just over 34% of its value over 12 trading days from October 5th to October 19th, 1987.

1990: Iraq invades Kuwait


By 1979, “inflation was running at an annual pace of about 9 percent”, compared to just over 2% today. Paul Volcker “explained the FOMC would shift its focus to managing the volume of bank reserves in the system instead of trying to manage the day-to-day level of the federal funds rate (Lindsey et al. 2005). It was an approach that would lead to more fluctuation in rates and, Volcker hoped, rein in inflation.” (FedReserveHistory) This marked the dawn of bond trading, as it is today. The bond market exploded, as investors could profit from swings in interest rates in the shorter term rather than just buying and holding to maturity.

“American governments, consumers, and corporations borrowed money at a faster clip during the 1980s than ever before; this meant the volume of bonds exploded… The combined indebtedness of the three groups in 1977 was $323 billion, much of which wasn’t bonds but loans made by commercial banks. By 1985 the three groups had borrowed $7 trillion.” (Michael Lewis, Liars Poker, Ch.3).

In the late 80’s, consumers began to feel the weight of their excessive borrowing. The Fed had risen it’s Fed Fund’s Rate to 9.75% in 1988, trying to curb the rate of inflation in the US economy (TheBalance). This slowed borrowing, then consumption, then inflation. Markets responded. Consumer and business confidence began to flounder in the face of high interest rates. Markets continued to fall through July into August.

On Aug. 2nd, 1990, Iraq bombed the Kuwaiti capital, Kuwait City. This caused oil prices to skyrocket, rising 65% between August 3 and October 11th (chart below). Perhaps coincidentally, the date of the oil price top was also the low of the Dow in 1990.


This was a function of free market business cycles as credit became overwhelming for the US economy. Consumers and business lost confidence in future growth prospects and geopolitical factors deepened the crash. The DJIA lost just over 21% of its value over 63 trading days from July 17th to October 11th, 1990. The market recovered to previous levels within 6 months of the crash.

2000: Dot-com Bubble


Unsurprisingly, this crash doesn’t show much in the Dow Jones, as it is composed of an arbitrary selection of the largest companies in the US, few of which were technology based.

“Between 1990 and 1997, the percentage of households owning computers increased from 15 percent to 35 percent.”  ( This explosion in ownership of personal computers fueled a speculation bubble. Anything with a domain name was getting funded (publicly or privately) and spending gobs of that cash to accumulate a following, offering discounted or free product in exchange for clicks.

For example, “On November 9, 2000,, a much-hyped company that had backing from, went out of business only 9 months after completing its IPO.” (CNN)

These tech companies would cash out via a quick IPO, then spend, spend, spend to gain a consumer following in hopes of turning a profit sometime in the distant future. Many failed, but sentiment was such that the public ate it up.

This crash was caused by investor sentiment, a derivative of free markets. The massive amount of speculation by the public looking for a get rich quick scheme caused the Nasdaq to fall just under 75% in the years following the excessive speculation from March 2000 to October 2002.

Also, see Enron and WorldCom, notable accounting scandals/bankruptcies declared in 2002.

2007-08: The Great Financial Crisis


Ahh the GFC. Check out Too Big to Fail, the documentary covering the crisis and causes. Wildly entertaining.

The crisis was caused by investor speculation in real estate fueled by:

  1. Easy money (i.e. low interest rates).
  2. American Dream Downpayment Assistance Act which was signed into law by the Bush Administration in 2002; this allowed for homeowners to borrow more than the value of their homes (canceled in 2008).

  3. Incentive structures of investment banks, which were paid for the amount of loans they issued regardless of credit rating; they could then sell those mortgages to the Fannie Mae and Freddie Mac for a guarantee, making them effectively backed by the AAA-rated US Federal Government which has never defaulted…
  4. Structure of the mortgage credit derivatives, which, when appropriately used, allowed risk to be spread through the economy (note: still widely in use today).
  5. Wonky incentive schedules of mortgage brokers, similar to those of investment banks.

This one was caused by lack of regulation and well meaning but faulty incentives set by the Federal Government, which allowed for excessive speculation in real estate by global consumers. The rise began with the American Dream Downpayment Assistance Act, continued with wild investor sentiment and concluded in financial ruin worldwide.

The DJIA fell just under 54%, or 38% annualized, over 356 trading days from October 9th, 2007 to March 9th, 2009.

Summary Table (TL;DR):


For all you diehard libertarians, free markets cause both booms and busts, with investor exuberance having a hand in EVERY market crash of the last 100 years.  Mark Twain said, “history doesn’t repeat itself, but it does rhyme.” Understanding market conditions surrounding crises gives us an idea of what to look for, i.e. variables to watch. Let this be education rather than a guide for the next financial crisis.

Thanks for reading.


Thoughts or questions? Comment or send ’em over to


  1. Dow Jones Industrial Average Data:

Options Basics

Note: Updates to follow (8/22)

An Option is a vehicle for traders to bet on price movements without having direct exposure to the underlying security; these allow traders to buy or sell a certain stock at a certain price at a certain time in the future. All of these you can choose to fit your desired exposure.

Terms for reference as you read through the text:

  • Long = pay for exposure; i.e. pay premium.
  • Short = get paid for giving someone else exposure; i.e. collect premium.
  • Premium = cost or price of an option.
  • Underlying price = price of the stock that the option is written on i.e. attached to.
  • Strike price = price you choose; value of the option at expiry is strike price relative to underlying price.
  • Intrinsic value = Absolute value of  (Strike price – Underlying price); can never be negative
  • Option value = intrinsic value + time value; can never be negative
  • Time value = a function of time to expiry; time value is zero at expiry
  • Time to expiry = time period you choose; life of the option, can be from a week to many years. It’s August, so a December option has 4 months to expiry.

Greeks: Delta & Gamma

The Greeks are metrics or variables used by option traders to assess their risks when trading and analyzing options trades. They are: Delta, Gamma, Theta, Vega, and Rho.

Delta is the probability of your option being in the money. Ranges from 0.00 to 1.00. Traders drop the decimal and just say 0 to 100. An equity security has a delta value of 100. Always. Options have a delta value between 0 and 100.

50 delta options are at the money (ATM), meaning strike price = underlying price. 50 Delta options are the most sensitive to changes in the underlying; i.e. they have the highest gamma, which brings us to our next Greek.

Gamma is a measure of how fast an option changes it’s directional characteristics.” (Natenberg, 105); i.e. it is the sensitivity of delta to changes in the underlying price. Gamma is largest in at the money options. Both calls and puts have positive gamma. Buying a put or call gives you positive gamma exposure. Selling a call or put gives you negative gamma exposure.

Delta or Directional Hedge:

If you want directional exposure, i.e. you have a feeling that a stock will move in a certain direction, you can either trade the underlying or buy/sell options outright. If you’re not sure of direction, or want to profit in some other way than the directional move of stocks, you can use what’s called a delta hedge.

Delta, recall, is a probability; it’s computed from a complicated formula (called Black-Scholes**). As your delta rises, probability of actual purchase or sale of the underlying upon expiry becomes more likely, thus to delta hedge, you need to buy or sell the underlying to stay directionally neutral.

Note: greeks are additive, which makes the math easy.

Example: If you buy a 50 Delta option, you’re long 50 deltas. You’ll sell 50 deltas in another market (underlying) to become directionally neutral. You can accomplish this by selling short 50 shares of the underlying’s stock. Long 50 deltas in the option, short 50 deltas in the underlying = net zero delta exposure.

Long Gamma = Short Theta

You pay for owning options in theta. When you’re long options, you’re long gamma. If you’re long gamma, you’re short theta.

Theta is time decay. You have to pay for exposure to options. More time to expiry means more time value. As time passes, this time value decays. When short an option, you get paid in theta, the value of the option will decrease as long as volatility, price of the underlying, and interest rates stay constant.

Being long gamma means you’re short theta.

Sell High, Buy Low:

Selling into strength and buying on weakness is what we strive to do as traders.

When you’re long gamma, and you readjust your delta hedge, the strategy forces you to sell high and buy low. Seems like easy money? Remember our old pal theta. When long gamma, you’re short theta, meaning your options lose value over time. As long as your delta hedging provides enough small profits to outpace time decay (theta), you can make money.

Buy weakness, sell strength:

If a trader is long gamma, he will correct his hedge against the market momentum. In other words, the trader will sell short the underlying when the underlying rises in order to maintain his delta (directional) hedge.

This goes against a momentum trader’s dogma. If you subscribe to school of “Trend is your friend”, consider a short gamma strategy.

Trend is your friend:

If a trader is short gamma, he will correct his hedge with market momentum. I.e., the trader will buy the underlying when it is rising, and sell when the underlying is falling. One can be short gamma by selling options outright, or though spreads.

If you take in money (premium) when initiating a strategy, you’re short gamma.


**Black-Scholes takes in strike price, underlying price, time to expiry, volatility, and an interest rate and shoots them through a normal distribution to spit out your greeks, which are easy(er) to quickly understand.

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:


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,



  1. The Human Condition. Arendt, Hannah. 1958.
  2. Trajectories of the Earth System in the Anthropocene. Steffen et al. July 6, 2018.

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!


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.” ( 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:


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).


Elemental Symbol: Co

Price today: $69,750 per Metric Ton

Uses & Projected Market:


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


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:


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


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


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


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



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)


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:


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.


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:


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:


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:


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:


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


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:


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,



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


  1. Featured Image: Bolivian Salt Flats:
  4. Mauger. Julien. Critical review on lithium-ion batteries… July 2017.(
  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.