Friends,
We’ll cut straight to the links today.
The Serendipity Machine (7 min read)
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I started lurking on Twitter about 8 years ago. I didn’t start tweeting until 2-3 years into lurking. I started as a reply guy as one must if they aren’t already a somebody. I joined Twitter with the specific goal of learning how to invest which is different than trading. After getting the hang of it (Twitter not investing) I published my recipe for using Twitter. It’s still valid except I don’t use Tweetdeck anymore.
I included several outstanding guides to getting the most out of Twitter in that post. This new post by Nabeel Qureshi is a tremendous addition packed with smart advice on both what to do and what not to do.
Plentiful, high-paying jobs in the age of AI (18 min read)
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I really like this essay because it grips you with a clickable headline that speaks to common fears but proceeds to not just speculate but teach.
The best part of this post is hinted at in its subtitle:
Comparative advantage is very subtle, but incredibly powerful.
I make the same mistake Noah addresses in the post that most people make: we confuse the concepts of comparative advantage with competitive advantage. The difference is crucial and the engine’s of Noah’s argument.
It’s a great learning post and personally I find the marriage of comparative advantage to opportunity cost the best way to remember its meaning.
The concept of comparative advantage is really just the same as the concept of opportunity cost. If you Google the definition of “comparative advantage”, you might find it defined as “a situation in which an individual, business or country can produce a good or service at a lower opportunity cost than another producer.” This is a good definition.
Money Angle
I follow economist Steve Hou on Twitter. This is a good podcast episode and still relevant despite being over a year old:
🎙️Market Huddle interviews Steve Hou (3 hours)
The theme:
This week we welcome Steve Hou from Bloomberg. Steve recently did a presentation at the Bloomberg Portfolio Conference where he spoke about investing in a new inflationary regime, and it’s our great pleasure to talk about his research.
The interview is long because they step through Steve’s presentation (link to slide deck). Steve believes we have entered a period of structural inflation as many of the forces that came together to create disinflationary growth over the past 40 years have unwound and in even reversed.
He labels:
The “Four Ds” of inflationary undercurrents:
- De-carbonization and commodity underinvestment
- Demographic ageing of working age population
- De-globalization and supply chain re-shoring
- Dominance of fiscal policy over monetary policy
He then shows how various asset classes have responded under the regimes of the 4 quadrant model (inflationary growth, deflationary recession, and the cross-regimes of disinflationary growth and stagflation). But rather than just show us the average returns Steve shows us the distributions of those returns which creates various smiles and surfaces.
The slides are easy to read and worth your time. You can grasp broad, useful heuristics quickly about how asset returns relate to macro drivers. A few ideas that stuck out to me:
- There is a trade-off between assets that have high inflation beta and their Sharpe ratio.
In other words, assets that protect you from inflation are expensive. No free lunch. But his framework does lend itself to a frontier where you can choose your tradeoffs based on how eagerly you want to hedge inflation. I have seen this idea before in research that shows commodities are crappy stand-alone investments but can still improve portfolios by zigging when you need them to. See Diversification Imperative.
- Steve expands on the point I alluded to on Thursday: TIPs are often unsatisfying inflation hedges.
The reason is that TIPs are still bonds. So when inflation is anticipated they should appreciate, but rising inflation often coincides with rising rates which hurt bond prices. If you hold TIPs until maturity then the returns should compensate you for realized inflation but if you’re not sticking around for the long-run then you’ll find the underwhelming as the 2 drivers that set mark its prices can partially offset each other and mute returns.
- Bloomberg created a “pricing power index” to identify equities that should perform well during periods of high inflation.
Contrary to what you expect, it’s not companies that have high-profit margins that comprise the index — it’s companies whose margins are stable. In other words, profit margin volatility is a better proxy for pricing power.
- Bloomberg also applies the bond concept of duration to equities to compute a “low duration index”. That slide points specifically at the FOVL ETF by iShares.
Money Angle For Masochists
There was a confident fellow on twitter a couple weeks ago that ventured into the options section and became a main character (for the healthy readers who need translation — “he stepped in doo doo”.)
He mansplained “I don’t think you know how options work” to a few long-time derivs traders including our dear friend Tina. He argued that by selling deep ITM calls on DJT (the Trump stock) you could short the stock without paying the steep borrow rate. This can be easily disproved by options 101 put-call parity but alas he dug in deeper. The thread is performance art plus an education in why options are the real underlying market.
I didn’t pile on so much as try to point out some of the subtleties that were not part of the main discussion but easy to overlook:
I try to be nice on the internet but Tina and several of the attacked are friends so the need to subtweet the clown got the better of me. I chose the GI Joe “learning is half the battle” PSA format which ties back to using Twitter to improve without the side effects:
From My Actual Life
Recently discovered the comedian Nate Bargatze. This humor leaves me crying. It’s very reminiscent of Sheng Weng — observational humor wrapped in deadpan story-telling. Domestic life as a middle-aged dad and husband, being raised in the 80s…straight in my veins. Nate is totally clean and the jokes are free of politics. Even the 10-year-old was laughing aloud.
Speaking of the 10-year-old…as a 5th grader, he’s camping with his school for the next week. I never did anything like that with my school but apparently this is a thing in CA. In my town, there are 4 public elementary schools that feed into 1 big middle school so it’s a cool way for him to hang out with 5th graders from the other schools as a preview (we moved intra-town during COVID so he transferred elementary schools…between that and sports he seems to know much of the town’s 5th graders anyway).
He’s beyond excited for this trip…meanwhile I need to bring tissues for his mom at drop-off.
I said for his mom. I’m not crying, you’re crying.
☮️
Stay Groovy