50% Recession Probability and Munger on Inverting

Alex here with your latest Friday Macro Musings...As always, if you come across something cool during the week, shoot us an email at alex@macro-ops.com and I’ll share it with the group. Latest Articles/Videos — Emergent Properties of the Market Collective — Alex explains what starling murmurations and financial markets have in common. After he discusses how we can use intermarket analysis to interpret what’s next to come on the global macro chessboard. Trading During 9/11 Attacks and Why I Became A Systems Trader — Chris D. recounts what it was like to hold a short position in the market as two planes crashed into the World Trade Centers. A must read.Play To Win or Go Out Like Broomcorn’s Uncle — Tyler talks about why going through the motions isn’t enough. True trading success relies on pushing hard when it counts. Articles I’m reading — This week I read Louis Li’s (of Himalayan Capital) forward to the chinese edition of Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, which is one of my all-time favorite books. The forward is a fun read and will give you some insight into the mind of Charlie Munger (my favorite of the Berkshire duo). Here’s the link and an excerpt:

For example, when Charlie thinks, he always starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable. To examine how businesses become big, strong, and successful, Charlie first studies how businesses decline and fail. While most people care only about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. His way of thinking comes from the saying in the farmer’s philosophy: “All I want to know is where I’m going to die so I’ll never go there.”

Throughout his life, Charlie has been constantly collecting and researching the notable failures in each and every type of person, business, government, and academic research. He then arranges the causes of failures into a checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision making over his life and career. The importance of this on the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized enough.

I came across another great post on the subject of thinking written by Russell Ackoff titled A Lifetime of Systems Thinking. Russell boils down the system level “truths” he’s learned over his 80-years on earth. It’s a great piece and well worth the 10-minutes it’ll take for you to read through it. Here’s the link and an excerpt:

Here’s a second revelation that I’ve really enjoyed exploring: Most large social systems are pursuing objectives other than the ones they proclaim, and the ones they pursue are wrong. They try to do the wrong thing righter, and this makes what they do wronger. It is much better to do the right thing wrong than the wrong thing right, because when errors are corrected, it makes doing the wrong thing wronger but the right thing righter.

Also, it’s that time of year for Investor Letters! Here’s some of of my favorites so far:

• Christian Ryther’s Curren Capital (link here)
• Steven Wood’s GreenWood Investors (link here)
• Robert Vinall’s RV Capital (link here)
• George Livadas’ Upslope Capital (link here)

Charts — Here’s some chart porn for those of you with a more bearish bent. The following indicators look to credit spreads and yield curves to derive recession probabilities (charts via GS). The combined model currently indicates a 50% probability of recession this year.Book I’m Reading — This week I’ve been reading Deep Work by Cal Newport. I’ve had this one in my Kindle library for a while and was finally able to get around to reading it. I’m only a little more than half way through the book but I can already say it’s excellent and well worth picking up.The book is about the importance of cultivating the practice of doing deep work, otherwise known as getting in a state of flow. These are long stretches of time where you singularly focus on a task with no distractions or interruptions. Developing the ability to work in these hyper-focused sessions for meaningful periods of time has become ever more difficult today with the pervasiveness of technology in our lives; tech that’s marketed as “productivity tools” but are really just distraction enhancers and are optimized to steal our attention away from doing deep work and instead lazily focus on the more shallow kind… Here’s a section from the book.

Once your brain has become accustomed to on-demand distraction, Nass discovered, it’s hard to shake the addiction even when you want to concentrate. To put this more concretely: If every moment of potential boredom in your life—say, having to wait five minutes in line or sit alone in a restaurant until a friend arrives—is relieved with a quick glance at your smartphone, then your brain has likely been rewired to a point where, like the “mental wrecks” in Nass’s research, it’s not ready for deep work—even if you regularly schedule time to practice this concentration.

Trade I’m looking at — I came across this writeup on Air Lease (AL) by Chris Mayer the other day that seems interesting.Chris does a good job of laying out how the leasing business works and why AL is a standout name in the industry. I haven’t dug into the name myself but it seems worth a look. Here’s Chris summarizing the bull case for the stock.

In summary, Air Lease has a good business model. It uses its balance sheet and purchasing power to buy new aircraft from Airbus and Boeing at a discount. It runs a lean operation. (SG&A/Revenue is only 7.5% vs. more than double for its peers). It gets a tax break from Uncle Sam because of the depreciation and 1031 exchanges. The end result is one of the highest net profit margins in the industry.

I think Air Lease combines great upside with not a lot of downside at today’s valuation. It’s one of my highest conviction ideas. And it is a business I plan to own for years. The stock should, uh… fly higher!

Quote I’m pondering —

When you grow up, you tend to get told that the world is the way it is and your life is just to live your life inside the world, try not to bash into the walls too much, try to have a nice family life, have fun, save a little money.

That’s a very limited life. Life can be much broader once you discover one simple fact, and that is that everything around you that you call life was made up by people that were no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use. Once you learn that, you’ll never be the same again.

And the minute that you understand that you can poke life and actually something will, you know if you push in, something will pop out the other side, that you can change it, you can mold it. That’s maybe the most important thing. It’s to shake off this erroneous notion that life is there and you’re just going live in it, versus embrace it, change it, improve it, make your mark upon it.

I think that’s very important and however you learn that, once you learn it, you’ll want to change life and make it better, cause it’s kind of messed up, in a lot of ways. Once you learn that, you’ll never be the same again. ~ Steve Jobs via Jonathan Tepper’s excellent write-up on life advice (link here).

I love this… Now go and get after it. If you’re not already, be sure to follow me on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.