The Market Huddle

Fundamentals Tightening Under The Covers (Guests: Paulo Macro & Kuppy)

Sat Apr 06 2024

FinanceInvestingMarket AnalysisPassive InvestingInflationBrazil's EconomyPod ShopsShort SellingCommodity MarketsGold MarketCopper MarketUranium Market

Description

This episode covers various topics including the background and expertise of Paolo Macro, the importance of music and math in finance, the benefits of temping in the financial industry, career transitions and experiences, the impact of passive investing, inflation concerns, market conditions, insights on Brazil's economic performance, analysis of AMARK stock, trends in the gold market, trading strategies, market dynamics in oil and commodities, investing in China, and personal updates from the hosts.

Insights

Mathematics as a Universal Language

The speaker emphasizes the importance of mathematics as a universal language that plays a crucial role in finance and communication.

Importance of Being a Good Risk Manager

The speaker highlights the importance of being a good risk manager rather than having a special edge in financial endeavors.

Impact of Passive Investing on Market Dynamics

The rise of passive investing has significantly impacted market dynamics, reducing human touch in trading and highlighting the importance of client relationships.

Shift Towards Fiscal Dominance

The shift towards fiscal dominance post-COVID has affected traditional asset relationships like bonds and equities, raising concerns about mispricing and long-term impacts on deficits and generational wealth distribution.

Potential for Second Wave of Inflation

Contrary to the prevailing narrative that inflation is transitory, there is a discussion about the potential for a second wave of inflation.

Brazil's Economic Performance and Market Volatility

The speaker reflects on Brazil's historical economic patterns, suggesting that the last decade was an aberration, and discusses the volatile nature of the Brazilian market post-2012.

Challenges and Bubble Concerns in Pod Shops

There are concerns about potential challenges faced by pod shops as leverage becomes more expensive and returns diminish over time, leading to a potential bubble caused by momentum chasing.

Shorting Challenges and Buybacks

Shorting in the market is challenging due to the math and the presence of motivated buyers like buybacks. Buybacks can help tighten the float and benefit equity holders by neutralizing active managers.

Copper Market Trends and Uranium Strength

The copper market has been tightening, frustrating investors and waiting for a forcing function to drive prices up. Uranium stocks have shown strength despite uranium spot prices not moving much, signaling a possible bullish trend.

Gold Market Sentiment and Investing Strategies

There is a sentiment change in gold, with many missing the opportunity as it makes new highs daily without follow-through. Buying dips is seen as a strategy to build asymmetric trades rather than buying rips for momentum.

Chapters

Summary

Transcript

Background and Expertise

00:04 - 07:26

Paolo Macro, a financial expert, has recently started his own financial newsletter on Substack after being popular on Twitter.
The podcast features discussions on commodities, stock announcements, and market analysis.
Paolo Macro shares his background of being a New Yorker with Brazilian roots and having over 20 years of experience in finance.
Despite not having an economics or finance degree, Paolo Macro pursued music in college and graduated with a BA in music.

Music and Math

06:58 - 13:39

Having a background in music helped the speaker develop skills in math, as they view music as another language.
Learning languages early on, including music and math, can enhance one's understanding and sensitivity over time.
The speaker believes mathematics is a universal language that plays a crucial role in finance and communication.
Being a good communicator is essential in finance, sales, and marketing, requiring basic knowledge of language and math.
The speaker emphasizes the importance of being a good risk manager rather than having a special edge in financial endeavors.
Playing both violin and viola, the speaker shares insights into their musical journey from childhood to high school.

Benefits of Temping

13:11 - 19:26

The speaker shares their experience of temping in a financial firm during the summer of 2000, highlighting the benefits of temporary work over internships.
As a temp, the speaker had the opportunity to shadow experienced professionals and gain valuable insights into the industry.
By taking initiative to organize and clean a senior strategist's office without being asked, the speaker impressed him and gained long-term career opportunities.
The speaker emphasizes the importance of making oneself useful in a job by identifying tasks that others may dislike or neglect.

Career Path and Ski Bumming

18:56 - 25:09

The speaker started in commodity equities after getting assigned a role that nobody wanted to cover.
To take a break from the cubicle analyst work, the speaker became a ski bum in Vale, working at a ski shop for $10 an hour.
The speaker developed a barter system with locals to afford living expenses due to high tourist prices.
After skiing over 100 days in Vale, the speaker returned to Wall Street while their college roommate joined Google.
Before getting sell-side jobs on the trading desk, the speaker spent time on the buy side covering international small mid-cap markets like Australia and New Zealand.

Transition to Buy Side

24:45 - 31:22

The speaker worked in the finance industry covering Australian and New Zealand equities before transitioning to a broader cross-asset commodity equity role.
During their time on the trading floor, they experienced a lively atmosphere with some fun but not as wild as previous decades.
Interns were sometimes subjected to challenges like eating competitions, with one memorable incident involving White Castle burgers.
The speaker's focus shifted towards commodities and international equities during a period of significant M&A activity in the hedge fund sector.

Subprime Crisis and Transition to Buy Side

30:52 - 36:54

The speaker shares a story from 2007 about colleagues losing a billion dollars in a day due to subprime asset-backed securities.
The speaker read a 150-slide deck by Bill Ackman on shorting insurers involved in the subprime market, leading to concerns about the stability of their own bank.
The speaker decided to leave their job on Wall Street after bonus day and eventually transitioned to the buy side, working as a marketer for hedge funds.
Working as a marketer for hedge funds provided valuable insights into different hedge fund strategies and trading practices.
In the last 10 years, the speaker focused on emerging market equities in Latin America, leveraging their commodity equity skill set and language proficiency.

Impact of Passive Investing

36:30 - 43:48

The speaker transitioned into focusing on emerging market equities in Latin America leveraging their commodity equity skill set and language proficiency.
The evolution of sell-side trading jobs over the past 20 years has been marked by the rise of electronic trading, algorithms, and the importance of client relationships.
High-frequency trading (HFT) and algorithmic trading have significantly impacted market dynamics, with predictions about market crashes and shifts in trading behavior.
The speaker reflects on how human touch in trading has diminished with the rise of machines and highlights the impact of passive investing on market dynamics.

Impact of Fiscal Dominance

43:21 - 50:59

Passive investing has become more significant compared to 2010, impacting market dynamics.
Concerns about the bond market being mispriced due to continuous buying despite inflation and Fed's stance.
Shift in economic systems towards fiscal dominance post-COVID, affecting traditional asset relationships like bonds and equities.
Recognition of the long-term impact of political short-termism on deficits and generational wealth distribution.
Emergence of younger generations' increasing political engagement due to economic challenges.

Current Market Conditions

50:35 - 57:44

The speaker emphasizes that the current situation is different from extreme measures like billionaires having bunkers or donating art for passports.
There is a sense of confidence in knowing how to set up a portfolio to take advantage of the current market conditions.
The asset management industry has shifted towards pod shops and long only managers, impacting how money is saved and invested.
The speaker reflects on past experiences in Brazil during hyperinflation, highlighting inefficiencies and resource misallocations caused by inflation.
There is a discussion about the potential for a second wave of inflation, contrasting with the prevailing narrative that inflation is transitory.

Inflation and Central Banks

57:19 - 1:04:13

Inflation is expected to be a chapter in history books as the disinflationary undertow has stopped.
Central banks need to remain hawkish when inflation starts coming down to avoid compromising their position.
The lack of relevant experience among central bankers like Powell may have led to challenges in handling fiscal issues and market dynamics.
Communication and forward guidance from central bankers may have lost credibility due to excessive noise and lack of impactful actions.
Market stability often relies on policymakers showing signs of concern and taking decisive actions.

Financial Crises and Brazil's Economic Performance

1:03:45 - 1:10:28

The financial crisis of 2007-2008 had various significant events like the collapse of HSBC, Warren, New Century Financial, and Bear Stearns.
Brazil experienced a similar financial crisis in 2008 with a sharp collapse in the market followed by a quick recovery.
The speaker reflects on Brazil's historical economic patterns and suggests that the last decade was an aberration in its economic performance.
Brazilians are noted for their expertise in macroeconomics and have been successful in financial markets.
The speaker discusses the volatile nature of the Brazilian market post-2012, emphasizing the need for active trading strategies rather than buy-and-hold approaches.
There is speculation about whether Brazil's market will continue to follow a pattern of shorter cycles with higher amplitudes.

Pod Shops and Short Selling

1:09:59 - 1:16:37

Pod shops are harvesting alpha on a short timeframe by chasing momentum and coming up with stories afterwards to justify their trades.
The business model of these pod shops may face challenges as leverage becomes more expensive and returns diminish over time.
There is concern about a potential bubble caused by momentum chasing, leading to intense trends in the market.
Short selling can be challenging due to the need to increase share count on the short side as prices fall, making the math unfavorable for shorting.

Shorting and Buybacks

1:16:11 - 1:22:58

Shorting in the market is challenging due to the math and the presence of motivated buyers like buybacks and short sellers.
Buybacks can help tighten the float and benefit equity holders by neutralizing active managers.
Underinvestment and lack of supply response are affecting commodity markets, leading to substitution effects and rolling crackups.
The current commodity super cycle feels different due to underinvestment causing supply curve movements and substitution effects.

Uranium and Copper Markets

1:22:29 - 1:29:08

Uranium market experienced a period of stagnation despite positive news and catalysts for about 18 months.
Life extension granted to Diablo Canyon in California caused a shift in the uranium market dynamics.
Copper market saw a sudden change in balance from surplus to deficit due to unexpected events like Panama stopping production and Anglo-American missing targets.
The speaker believes copper is poised for a significant move as the market has been tightening and frustrating investors, waiting for a forcing function to drive prices up.
There is potential for copper prices to reach $6-$7 per pound, signaling a new range of price discovery.

Inflation Concerns and Gold

1:28:42 - 1:35:56

Shorting the long end as a trade strategy due to inflation concerns
Expectation of higher inflation and the Fed's approach to managing it
Gold being considered as a prime asset in times of economic uncertainty
Inflationary recessions creating monetary illusions and impacting behaviors in asset markets
The importance of admitting mistakes and forgiving oneself in trading and investing

Forgiving Mistakes and Career Pivots

1:35:32 - 1:42:01

Handling mistakes involves forgiving yourself and being honest about them.
Investing advice shifts from power infrastructure to finding invisible opportunities in the market.
Being open to career pivots and having supportive mentors can lead to success.
Building relationships and communication can enhance experiences, even on long flights.

Reflections and Connections

1:41:32 - 1:48:11

The transcript discusses the importance of forgiving oneself after making self-inflicted mistakes, both in personal and market-related situations.
The speaker emphasizes the need to have a true conversation with oneself to move on and start looking forward instead of backward.
The transition from writing Twitter threads to long-form content on Substack is highlighted as a positive change for the speaker's writing process and clarity of thought.
Engaging with readers through Substack has been a rewarding outlet for the speaker, leading to meaningful connections beyond just financial support.
The importance of networking and meeting people in real life, especially within the markets, is underscored by the speaker's experiences.

AMARK Stock Analysis

1:47:43 - 1:53:56

Two individuals started recording their market conversations and posting them on their substacks.
Harris Kuperman discusses his excitement about a stock, AMARK, as a way to play the gold market without traditional risks.
AMARK is a bullion trader with fully hedged price risk, dealing in gold and silver coins through wholesale and retail transactions.
In fiscal 2023, AMARK sold millions of ounces of gold and silver with thin profit margins but potential for margin increase in trending markets.
AMARK's business has grown mainly through acquisitions while maintaining a stable share count.

AMARK's Role in Precious Metals Market

1:53:26 - 1:59:25

A Mark is a significant player in the precious metals market, owning J.M. Bullion and other entities like mints.
The recent quiet period in gold trading has impacted A Mark's stock price, but there is potential for growth with strategic acquisitions and market conditions.
A Mark caters to both retail and wholesale markets, including high net worth individuals and institutional clients.
There is a shift in the gold market from central bank buying to more retail and institutional interest, potentially driven by recent events and financial trends.
Despite previous downtrends in gold ETFs like GLD and SLV, there are indications of a possible uptick in interest based on observed data.

Gold Market Trends

1:59:00 - 2:05:15

J.M. Bullion is experiencing delays due to increased sell orders, indicating a shift in sentiment towards selling gold coins for other investments.
There is a sentiment change in gold with many missing the opportunity as it makes new highs daily without follow-through.
The lack of interest in gold products may continue until 'wise guys' show up to drive trends.
Gold's rise could be attributed to concerns about US fiscal solvency and global players like Xi shifting from treasuries to gold.
China's increasing interest in gold is evident by their tiny position compared to FX reserves, leading them to constantly bid for more gold.
Chinese willingness to pay a premium for gold and their preference for taking physical delivery contrasts with Western traders who typically trade futures or ETFs.

Investment Strategies and Market Watch

2:04:51 - 2:12:25

There have been mini short squeezes in the gold market due to Chinese demand for physical gold.
AMRK is suggested as an alternative investment option in gold, offering high returns and dividends.
Top three things being watched include the US dollar movement, jobs numbers, and MAG 7 stocks performance.
Earnings season and central bank announcements are upcoming events to monitor for market impact.
Inflation numbers are expected to be released next week, potentially affecting market volatility.

Market Conditions and Sector Rotation

2:12:02 - 2:19:37

The stock market is showing signs of a potential topping formation, with the need for bulls to push through 5,300 to maintain a bullish trend.
Sector rotation, particularly in energy stocks, has been impacting market flows and vulnerability.
The NASDAQ has been struggling with lack of participation and breadth issues compared to the S&P 500.
Biotech sectors like XBI and IBB are showing signs of potential topping formations, indicating caution in trading them.
Currency markets, especially the US dollar yen pair, continue to be important to watch for potential moves.

Currency Markets and Gold

2:19:16 - 2:26:57

The US dollar yen is at a crucial level and could trigger a short squeeze if it breaks out above 152.
The Euro's movement ahead of the ECB meeting could impact the markets, potentially leading to a risk-off event.
Gold's behavior has defied traditional correlations, with a short-term overdone move but a significant bull breakout in the long term.
There is confidence in gold's upward trend despite general fear and lack of retail interest.
Strategies for trading gold include buying dips instead of buying at current levels.

Oil Market Dynamics

2:26:33 - 2:34:07

Discussions on factors influencing the oil market such as surplus, capacity, geopolitics, and demand surprises
Consideration of different perspectives on what drives oil prices including inventory levels and sentiment analysis
Observations on market dynamics and potential impacts on inflation from commodities like gasoline and grains
Reflections on historical patterns of economic expansions ending with spikes in oil prices

Trading Strategies and Market Trends

2:33:48 - 2:41:40

Silver and gold are currently overextended but still considered good buys on dips.
Buying dips is seen as a strategy to build asymmetric trades rather than buying rips for momentum.
Chasing momentum in the current market leads to further price increases.
Using an option overlay strategy can help hedge positions without selling core holdings.
There's a discussion on fading copper while considering moving some gold investments into copper.
Uranium stocks have shown strength despite uranium spot prices not moving much, possibly signaling a bullish trend.

Agricultural Stocks and Market Analysis

2:41:10 - 2:48:56

A discussion on agricultural stocks and the possibility of them bottoming out.
Analysis of Nikkei's price action and potential pause in the bull run.
Comparison of EWW (iShares Mexican) chart against S&P and positive outlook on Mexico thesis.
Diverging opinions on investing in China stocks due to perceived risks.

Investing in China and Market Insights

2:48:31 - 2:55:43

The speaker expresses skepticism about investing in China due to potential risks related to geopolitical conflicts.
There is a discussion about selling US equities and buying Mexican equities based on technical analysis.
The podcast hosts thank the listeners for tuning in and engage in a conversation about beer ratings.

Personal Updates

2:55:15 - 2:57:17

Patrick is in Lisbon and flying to Mexico for his 50th birthday party.
Daniel is in the Spanish Pyrenees and driving back from Lisbon to the UK.
There was a snowstorm in Toronto recently despite unusual weather patterns.