The Game – Dave Newman

Nov 26, 2021 | Daily Note

It is the week of Thanksgiving, and of course, the week of the GAME!  For Yale or Harvard readers, no, not that game.  I was driving to JFK to pick up my daughter Saturday night for her break from college, and I stopped in Greenwich on the Merritt Parkway and asked a grad with a Yale sweatshirt who won the game, and she disappointedly said: “not us.”  I have nothing against the Yale-Harvard rivalry, but it does strike me as a relic to think this brand of football is worthy of any emotional energy.  Save that for sports where the kids are truly amongst the best and the stakes are the highest.  I have seen Ivy football, have close friends who played at Brown, and I admire the kids that play because they don’t have the academic tutoring resources afforded to even places like Notre Dame, Stanford, Michigan, Northwestern.  But, it’s truly borderline awful to watch.  

Now, Ohio State fans could remark that the GAME these days isn’t really what it once was since Ohio State hasn’t lost to Michigan since 2011 and has won 18 of the last 20 games.  The real question is what changed in the past 10-20 years in college football whereby the OSU-Michigan game has become lopsided.  And, of course, it is that it has become much more commercial and that some schools have built and maintained powerhouse brands, and are factories for sending kids to the NFL.  

Of course, as we are noticing with Clemson this year, things can change a bit, but the combination of a good in-state HS football + excellent coaching + unbelievable facilities + extraordinary recruiting + results on field + players with success at next level + max exposure / NIL opportunities = virtual cycle of success, and the changing landscape is merely moving along commercial lines.  Some schools (and administrations) are all in.  Others – like Michigan – try to balance football with academic excellence, and the struggle to stay competitive at the highest rungs of the sport is real.  This weekend, a recent USC 5* de-commit is visiting Michigan as he makes the choice between Michigan and Alabama.  Obviously, a Michigan win would go over well, but he and his family are expected to get a presentation on NIL opportunities.  I highly doubt any recruit family is asking Yale or Harvard coaches about NIL. That is how the game is played now.  You either adapt, or you don’t.  OSU has adapted.  They have more 5* talent.  In the Bo-Woody days, talent was more even.  Given the current point spread – (OSU -7.5) , I may just bet on OSU as an emotional hedge.  

The reason I bring this all up is that it is so important to understand the game that is being played, and about how much different it is than it was prior.  Naturally, in markets, economics, politics, there are cycles.  Studying them is important.  But, appreciating structural and secular shifts – things that are unlikely to revert – those matter as well.  They are all around us, and they engender a lot of noise and opinions.  I have been buying some metaverse stocks – Unity and Roblox – not because I can get my head around what that is all about and predict or even believe in that future (it just seems weird – see Iceland spoof on it, just because I have to hold out the possibility that my way of thinking about portfolio management is well, too “boomer-ish”.  The same thing with crypto as I wrote last week, I have to be involved as an adjunct to my normal macro/value-oriented investing approach.  I have studied enough economic history to know hyperinflation is not easy to get, but one cannot rule it out entirely and I am using crypto (and gold) to prevent this. 

A sign of the (crazy) times!

Things that caught my attention this week:

Are we getting closer to the end?  

The first is a chart I snagged from Crescat Capital presentation.  We all know things are pricey, but always good to have some context.  And, the cyclically adjusted earnings yield (inverse of P/E) is well, quite low.   But, what is also interesting, is that long-term earnings growth expectations are at extremes as well, as shown by the chart from BAML.  

Cross border Equity Flows

From my friends at Ex Ante.  I have written prior about what it is that makes US equities a magnet for equity flows, but it is not just US retail, it is the rest of the world – institutional and retail.  For a country running current account deficits, inflows are required.  But, this chart also indicates that inflows don’t last forever.  As written prior, flows matter greatly, and they can be fickle.  Note the US outflows in 2013-15.  

Synthetic Shorts

The retail game (maybe with some bigger institutions playing in the sandbox) has been to identify high short interest, develop a narrative, and press hard.  It has worked wonders.  This past week, for whatever reason, a short basket of mine which includes DoorDash, Wayfair, Carvana, ARKK, Robin Hood, TSLA performed reasonably well.  I took most of the position off and will look to reload.  The game there is to be very nimble.  

As is obvious with the Short Interest in Tesla chart, if actual shorts are not there, you synthetically create it via call option purchases and hoped for gamma squeezes as is evidenced below.  Fwiw, my ARKK position is Jan 21 100 puts, and I took some off this week, but it pretty much goes hand in hand with the non-profitable tech chart and looks eerily close to breaking down.  My rate views – which worked well this week – are no help for these names.  

Debt Trap?

Although I recognize the somewhat secular nature of the new market structure amidst super-easy money conditions that many believe will persist given the “debt trap” all nations are in (so Japan example remains dominant until debt jubilee), it is still highly plausible that we get a material washout and “teachable moment” to all the Apes that think trading is easy with tapering, rate hikes (3 now priced in 2022) and dollar strength.  As we saw with the idiotic SPR release, comments about Turkey vs Tofu for Thanksgiving, Biden/Yellen/Powell/Brainerd doing their thing to talk/drive down inflation concerns and commitment to act (at some point), the market is not yet throwing a tantrum, but as mentioned before, flow seasonality still trumps.  This snippet from the FT speaks to the debt trap scenario. 

As this chart shows, there are a lot of firms that are in a tough spot as it relates to being able to cover their interest expenses.  PLEASE, take the time to read this Fortune article about some of the challenges Yellen/Powell face in normalizing that this chart below


How to think about valuing bitcoin and crypto assets?

I ran across this and thought it was a somewhat useful way to internalize the range of possible values of these things.  

Central Banks and Climate Risks

I, and many others, have remarked how the Fed is expanding and changing its mandate.  The bits that I understand are the challenges central banks faced after the GFC and limits of the zero lower bound to prevent bad left tail risk outcomes.  The bits I struggle with are attempts to further handicap an already struggling to handle its primary mandates well (inflation, employment, financial stability) given what was done (and not done) post-GFC.  Adding climate change, subcohort employment, diversity, are just well, INSANE.  That Biden mentioned climate as a critical job of the Fed was just mind-numbing.  

Here is a blog post from Professor John Cochrane at Hoover that makes the points much better than I ever could, with a snippet from the piece as an appetizer.