Think Macro Doesn't Matter Anymore? Think Again!

Let me explain...

And while I ploughed pretend money into the commodity sector, only to see it whittle away, the story never changed. We were always on the cusp of something HUMMASSIVE. God himself was going to come down and make it happen. And if not him, Pope Francis would come lend a hand. In fact, I figured (and still do) that for some it's a bit like going to church. On any given day something ishty happens to us and the men of the cloth will tell us it's God's will. And then on the other hand, when your gorgeous sexy wife wakes you in the middle of the night for a bit of... oh never mind... let's just say good thingshappen. Well, then you're blessed... which is to say that investing in an idea becomes a religion. And investing shouldn't be a religious activity. I knew this because I was having a lot of "God's will" and it sucked. The red ink on my paper portfolio said so.

If I'd had actual money on the line, no doubt I'd have been more than miffed. But instead I was simply intrigued. What were these guys missing? Macro. I just didn't yet know it. And it was around this time that I got a job in the City at Lehman which, aside from introducing me a treasure trove of institutional research, actually paid me pretty well. As for the research... Well, I had everything from the fixed income guys to equities, derivatives, and a means to learn about emerging markets, capital flows, and much more all right there in front of me. Curiously, nobody seemed to take advantage of it. You know what they say about how we bipeds value free? We don't! I was odd that way because I did. Later I moved to a couple of other firms ending up at JPM but access to institutional research was always there, and I guzzled it up like Charlie Sheen would cocaine while on a weekend bender in Vegas. The original newsletter now became interesting to me, not for the recommendations but purely as a tool for me to analyse what narratives existed in the marketplace. And so I began reading a helluva lot of psychology books. Jung, Dostoevsky, Nietzsche, and dozens you'll find on any study list of psych grads. That helped me explain to myself how it is we bipeds can so easily delude ourselves... and keep doing so, which in large part explains what Keynes was getting at.

Piecing together the multiple research reports completely changed the way I viewed everything. Markets, politics, war, peace. They're all the manifestations of billions of humans pushing and pulling against one another, and those humans push or pull, dependent on their collective psychology. And as Soros points out in The Alchemy of Finance, this can take the form of a reflexive process which feeds on itself and at times can alter the underlying fundamentals. So we need to watch out for such things. And so, not unsurprisingly, that newsletter kept up the same narrative (and still does to this day). But between 1999 and 2002, the commodity markets hammered out a bottom and then took off. Here's the CRB from 1998 through to late 2005:

And here's gold over the same period.

Now, as you can imagine, the recommendations of this newsletter did well over this time. I, on the other hand, had snagged myself some super useful contacts directly in the mining and resource industry and looked at the world from a macro view where commodities either fell into favour... or out of favour. THAT began to drive decision-making, not the other way around. I began to realise that the best fund managers, some of whom I had the pleasure of working with, had the foresight to seek out experts in any given sector when it was needed... and only when it was needed. We need experts: "Experts are very useful. But we need to be careful WHEN to use them and rely on them only for what we need. Because, let's face it, without their knowledge we're worse off." That was a good few years ago now. And here we sit over a decade later and signs are there for us once again. Much of what we discuss in these little missives. In conclusion, here are 4 of heuristics I think worthwhile... at least with respect to any sector. Doesn't have to apply just to commodities. Is sentiment euphoric, pessimistic, or somewhere in between? If commodities: facts, supply, demand. Econ 101, which you'd think would be obvious. But one look at history tells you that just ain't so. What, if any, major shifts are taking place? This can be technology driven, political in nature, though often they affect one another. What knock on effects will there be? Think it through. Diligence the affected sectors. Then go back and be a devil's advocate. Find people who disagree with you. Why? Reassess. Re-analyse. Never stop. Bankruptcies. The more the better. Sector wide, not company specific. That doesn't count. Either the industry or sector is going away (like the horse and buggy) or something else is happening. Gold lives here. And when you're going through the process, you'll sometimes find something that's really great only to dig deeper and realise that executing on the idea diminishes favourable risk/return dynamics. Bugger! Major bugger. What then? Ok, well if X happens, what else happens to related sectors/components? Sometimes the best way to short a sector is simply to go long something else. Oh, and lastly... when you've found your "gold", one thing to look out for nearing the top is when our friends, the bankers, begin offering "structured products", making it super easy for us all to get invested in the hottest sector over the last half decade. For the love of Zeus, don't be one of them!

Is This Why Tesla Executives Are Fleeing?

Is Tesla The New Theranos

I originally started following Tesla as I felt it was a structurally unprofitable business nearing a cash crunch as hundreds of competing products were about to enter the market.

As I've studied Tesla more closely, I've come to realize that Elon Musk appears to be running a Ponzi Scheme disguised as an auto-manufacturer; where he has to keep unveiling new products, many of which will never come to market, in order to raise new capital (equity/debt/customer deposits) to keep the scheme alive. The question has always been; when will Tesla collapse?

Tesla's Bullshit Conversion Cycle is the key financial metric underlying this scheme (from @ProphetTesla)

As part of my research on Tesla, I decided to read Bad Blood by John Carreyrou, the journalist who first uncovered the Theranos fraud. It is the story of how Elizabeth Holmes created Theranos and then lurched between publicity events in order to raise additional capital and keep the fraud going, despite the fact that the technology did not work. The key lesson from Theranos for determining when a fraud will implode is that there are always idiots willing to put fresh money into a well marketed fraud - so you need a catalyst for when the funding dries up.

The other salient fact was that most senior employees actually knew that something wasn't quite right, but feared losing their jobs or getting sued if they did anything about it. Therefore, employee turnover was off the charts but no one was willing to risk their career by saying anything publicly. However, when Theranos started risking customers' lives, the secret got out pretty fast. This is because most people are inherently ethical - especially when they know that their employer is doing something immoral, like releasing flawed lab results to sick patients. Eventually, some employees felt compelled to become whistle-blowers and started to reach out to journalists and regulators. This started a cascading event.

First, one intrepid journalist took the career risk to write about the Theranos fraud. Then other whistle-blowers felt emboldened to step forward and contact this first journalist, as they also wanted their story told - especially as they had already reached out to government regulators who were too scared to investigate a politically powerful company.

Once a few good articles had been written about Theranos, the dam broke open and the feeding frenzy began. Other journalists, smelling page-clicks rapidly descend on Theranos; more workers spoke out, more incriminating evidence came to light and then there was a sense of voter outrage. Finally, the regulators who were first contacted by the whistle-blowers many months previously, felt compelled to act - at which point the fraud collapsed and the money spigot shut off.

Executives Fleeing Tesla Is A True Bull Market "Up And To The Right"

We've already seen the mass exodus of senior Tesla executives. When they say they "want to spend time with their family," it really means they "want to spend less time in prison." Next, we have the first whistle-blowers—there will be MANY more. Currently there are at least 3 different ones feeding information to journalists. Using past frauds as a guide, once we get to this point of the media cycle, the fraud usually unravels pretty fast.  Given the perilous state of Tesla's finances, they are in urgent need of new capital. The question is; who would want to invest new capital when Tesla is now admitting to knowingly selling cars without testing the brakes in order to hit some arbitrary one week production target? When a company admits that it will sacrifice vehicle quality and even risk killing its customers to win a twitter feud and start a short squeeze, regulators must step in. The question is; what else has Tesla done illegally to hit its targets? We know that Tesla long ago passed over the ethical threshold of selling faulty products that have killed people—what other allegations will soon come to light? Elon Musk demanded that Tesla stop testing brakes on June 26. Doug Field, chief engineer, resigned on June 27. Is this a coincidence? Of course not—Doug Field doesn't want to be responsible for killing people. I think Tuesday's article will speed up the pace of Tesla's bankruptcy quite dramatically and I purchased some shorter dated puts after reading it.

Tesla is the fluke stock-promote that found a way to address society's fascination with 'green technology' and the 'next Steve Jobs.' Elon Musk eagerly stepped into the role of mad scientist and investors gave him a free pass. It now increasingly seems that everything he's done for the past few years was simply designed to keep the share price up, keep the dream alive and raise more capital - as opposed to creating shareholder value. Along the way, customer safety has been ignored in order to hit production targets and appease the stock market. In addition to not testing brakes, a recent whistle-blower has accused Tesla of installing over 700 dangerously defective batteries into Model 3 vehicles.

I suspect there will be many more allegations as whistle-blowers come out of the woodwork. It really is the Theranos of auto makers. I suspect it will all end soon.Theranos and Enron both collapsed within 90 days of the journalists getting up to speed. The reporters now know the right questions to ask and Tesla will be out of cash by the time they are all answered.

Stock Promotion In Overdrive Lately. What's Elon Trying To Distract People From?

Besides, Elon Musk isn't even all that innovative. Hitler already tried this same automotive customer deposit scam 80 years ago (From Wages of Destruction)

Disclosure: Long various put spreads and puts. Various strikes and expirations.