Chinese Bombshell, Aikido, and a Long Natural Gas Trade

Alex here with this week’s Macro Musings.As always, if you come across something cool during the week, shoot me an email at alex@macro-ops.com and I’ll share it with the group.Recent Articles/Videos — The Principle of Bubble Rotation — Alex comments on The Principle of Bubble Rotation which states that whatever outperformed last cycle will not outperform in the next cycle. Trade Wars? Who Cares — AK explains why the trade wars with China don’t matter to the market right now. The Fed Hates Emerging Markets — Liquidity is getting drained from emerging markets. Find out why in this video.Articles I’m reading — First off, take 3 minutes and read this thread from @Fritz844 (link here). He talks about the Chinese deleveraging, renminbi deval, trade war impacts and what all this could mean for the rest of the world. It’s a topic we’ve been writing about over the last few months but it’s something that is strangely getting little attention. I get the sense that the market has been lulled into the false comforting belief that China will just inject credit again if things get too bad. But there’s the real possibility that that won’t be the case this time around. And lest we not forget that China makes up more than half of global demand for many commodities… There will be major 2nd and 3rd order effects if this ends up playing out. @Fritz844 concludes with the following.I read a lot of quarterly investor letters. Mostly from fundamental value managers that I respect. Bill Nygren of Oakmark Capital is high on that list. He’s one of the rare breeds of managers that has been able to successfully evolve and adapt as markets and the investing landscape has changed over time. You can learn a lot from reading his letters, which are filled with insight into his thinking and investment process. Here’s his latest (link here) where he talks about how his thinking on ‘value’ has changed over the years and how one should go about valuing a company’s assets in a way that GAAP accounting fails to account for. It’s a short and worthwhile read, here’s a cut from the piece.

But, as the economy has become more asset-light, intangible assets—such as brand names, customer lists, R&D spending and patents—have become more important. Today, the relative importance of tangible assets compared to intangibles has completely flip-flopped from what it was 40 years ago. Intangibles now account for over 80% of the average company’s market value. But much like Graham, GAAP doesn’t even attempt to value those assets.

For those “exceptions,” true value investors should be able to explain how they’re calculating their margin of safety: What are they getting that they don’t think they’re paying for? As an example, let’s look at the largest holding in both Oakmark and Oakmark Select, Alphabet, a stock that is primarily owned by growth managers. Alphabet’s 2018 P/E is 26 times consensus estimates, which to us seems to be in the right ballpark given the expected growth from its search business. However, the company’s $115 billion in cash, YouTube and other bets (including Waymo), in total, contribute nothing to our estimate of current earnings, despite having tremendous value. That’s what we’re getting for free, which creates our margin of safety.

Michael Mauboussin shared an awesome library containing famed capital allocators writings that was put together by Austin Value Capital. You’ll find all the letters from Munger, to Fairfax, Constellation, Michael Burry and more. Check it out, there’s some great stuff in there (link here). Lastly, here’s a great slide deck from Hayden Capital pitching the long case for iQiyi (IQ) which is China’s version of Netflix. Podcast I’m listening to —Patrick O’Shaughnessy’s latest Invest Like The Best with guest pseudonymous private fund manager @modestproposal1, was one of the best podcasts I’ve listened to in a while. Patrick’s podcast has become hands down my favorite market related podcast. The guy is continuously putting out fantastic content and this week’s was no different. Modest Proposal gives a master class on value investing while also diving deep into the major trends in media, retail, and tech. You can find the link here, give it a listen, you won’t be disappointed. Here’s some great notes on the interview shared by @victoriouscake.Chart I’m looking at —I’m sure you’ve all been seeing plenty of doom and gloom pieces in circulation, calling for an imminent recession because the yield curve is flattening. Well, here’s a tweet and a chart from @OddStats that will hopefully help you sleep better at night.Plus, it’s also quite likely that the shape of the yield curve is less of a reliable recession indicator this time around. There’s a few reasons for this, but they all come down to supply and demand — as all market pricing does. QE plus low/negative rates in Europe and Japan have led to a dwindling supply of long-dated safe assets and as a result, a persistent bid for greater relative yielding US paper from insurers and pension funds who need to match their liabilities with long duration safe assets. So unless we see German bund yields rise significantly, it’s tough for US 10yr yields to get too high off the floor; which is actually bullish for stocks. Trade I’m looking at — H/T to Mark Dow for first alerting me to this stock. It’s a beauty of a chart… The company is Energy transfer Partners (ETP), which is a midstream natural gas player (chart below is a weekly).Insiders have been buying a good deal of company shares over the last year.I’m just starting to look into the company but the chart is so cheery, I might throw on a small starter position soon. Book I’m reading —I’m nearly finished reading The Spirit of Aikido by Kisshomaru Ueshiba. I picked this one up in a used bookstore a few weeks ago because I liked this quote on the back cover:

When I grasped the real nature of the universe through budo, I saw clearly that human beings must unite mind and body and the ki that connects the two and then achieve harmony with the activity of all things in the universe.  ~ Morihei Ueshiba

The book’s about the philosophy and artform of Aikido, as well as some color and history on the founder, Morihei Ueshiba. It’s similar to The Book of Five Rings by Musashi and The Unfettered Mind by Soho. It’s got a lot of Zen Buddhist wisdom and discussion on the history of Japanese martial arts. I’ve enjoyed it and would recommend it if you’re into this type of stuff. Quote I’m pondering —

In all matters related to the arts, including martial arts, superiority is determined through training and practice, but true excellence is dependent on ki. The grandeur of heaven and earth, the brilliance of sun and moon, the changing of the seasons, heat and cold, birth and death, are all due to the alternation of yin and yang. Their subtle working cannot be described by words, but within it all things fulfill life by means of ki, Ki is the origin of life, and when ki takes leave of form, death ensues. (Tengu geijutsu ron) ~ Morihei Ueshiba

Work on harnessing and focusing your Ki… I’m not completely sure what that means but it sounds cool. That’s it for this week’s Macro Musings. If you’re not already, be sure to follow us on Twitter: @MacroOps and on Stocktwits: @MacroOps. I post my mindless drivel there daily.