Observed unwinding of credit in the market

Priori

  • Federal reserve starts reducing debt bought and brought onto their balance sheet during 2008
  • Federal reserve went on a series of interest rate hike from the period of 2016 to 2018
  • Trump starts Trade war in 2017 resulting in reduced global demand for American exports

Liquidity concerns experienced in sections of the markets around the world

Riots and unrest

Related readings

 

Oil’s relationship with the macro economic environment

Price of OILU jumps 34% following news on 50% Saudia Arabian refining capacity destruction by Iranian drones.
At the height of the Oil crash in 2016, USO traded at USD8.33 per share on 2nd August 2016. It has since recovered

The price of oil has an positive correlation with likelihood of war and a booming economy. It has a negative correlation with recession and oversupply.

The price of oil did not hit zero even during the height of the oil crash.

Observations on how public opinion is shaped in the US

Public opinion is observed to be very malleable and fickle. It’s highly susceptible to reshaping by main stream media.

In an unlikely twist of events, what was once presented as a war by the White House against China over trade and national security has overnight morphed to become a fight for American values like democracy, free speech and human rights.

While the ongoing unrest in Hong Kong have provided ample fuel, the tweet by NBA Houston Rockets general manager was the spark that caused the fire.

Related Readings

Thoughts on excessive use of leverage

One of worst mistakes I made was during the 2015/6 Oil crash. I bought into shares of oil exploration companies instead of buying the oil directly. 

It was a very painful and expensive mistake. While the price of oil made a nice recovery since then, the exploration companies never made it through to the other side. Majority of them filed for bankruptcy during the height of the crisis. Unfortunately they took on too much debt when the times were good and were unable to finance the debts and ongoing operations through the continued sales of their inventory when situations turned south. 

The lesson learned is that when buying the dip, it’s important to make sure that not just yourself but the underlying assets you hold are resilient to the environment shock. Utilization of excessive leverage reduces the resilience. Over expansion into fancy offices and overstaffing is another form of excessive leverage. Tech startup founders are often caught red handed committing these mistakes. 

With regards to oil, until the world stops relying on plastic, chemical lubricants and switches completely to alternative forms of energy, we should not expect the price of oil to fall to zero anytime soon. 

A simple acid test to figure out the intrinsic value of oil is to ask your neighbor for his tank of gasoline for free. The most likely response you will get from him is a suggestion to go f**k yourself…?!?

Chat with Punit

Private one on one chats over dinner and generally more insightful than listening to talks in conferences.

Areas of focus

Core areas of focus

  • enterprise
  • cloud
  • security
  • SaaS

Exploratory areas for growth

  • healthcare technology
  • fintech
  • gaming

Process

Starts building a model about a space before diving in. After diving in with investments further build out the model. Coefficients for the model include areas:

  • Team processes
  • Product performance metric
  • Market growth

Thoughts on FinTech

Betting on consumerization of the space as opposed to enterprise. Recent move by Charles Schwarb will not likely impact revenue of consumer apps.

Looking for startups focused on the vector that will get them into consumer wallets as well as grow to occupy a much larger portion of the consumer wallet.

When baby happens, need to get baby insurance. Then next would be Will. And then next…

Hedge funds are not suitable for VC investments. Hedge fund managers should look for other types of investors.

On security

CEOs has not much time. Prefer to high a company that is specialized in acquiring security solutions and delegate the problem to them instead. If shit hits the fan, gets to delegate blame. Companies do not remove security solutions but keep on adding on new ones. Its like a bandaid approach. Removing solutions runs the risk of causing bleeding, very dangerous. The recurring revenue is very lucrative.

When it comes to security is not a question of ability to deeply penetrate a system. Its a question of willingness to pay to penetrate the said system.

On machine learning

On public web data, building model based that is based around proven correlations – CxOs tend to leave a company before shit happens.

On offline data, putting in boxes in data centers to track traffic volume in and out of data centers to approximate demands on another company’s servers

Words on the street

VCs are increasingly concerned about governance. WeWork’s founder have basically offload USD500million dollars on the secondary market to other hedge fund managers.

On funding

If the core economic of the business does not work before funding, it will only get worst after funding. This is because the company will need to clear an even higher valuation before new investors will be profitable.

On board operations

Having a lot of big brand name VCs does not necessarily mean that you will have a good board. The board needs to be well round.  The founder needs to be able to align all the members of the board.

Expectation of the fund

Calibrate the needs of the needs of the corporate and the needs of the founders.

Expect governance to be intact. For the founders to truly execute upon what they sold when they raised the money.

Would be happy to even just double their money.

 

Book summary: The perfect weapon by David Sanger

Nuclear bombs are deterrents and weapons of last resort. Cyber attacks are tools are massively disruptive tools that could be used with plausible deniability.

White house open the pandora box when they disrupted Iran’s nuclear program with cyber attacks. They now faces challenge of cyber attacks from China, Russia and North Korea.

Types of attacks

  • Intellectual property theft
  • Infrastructure disruption – banks, power plants road, nuclear plants
  • Commercial sector disruption
  • Intelligence leakage leading to compromised safety of field agents
  • Compromised voting process through fake news
  • ransomware
  • venture capital investments to acquire foreign assets

After observing Obama successfully utilizing social media to win the elections and the Arab springs uprising, the west was lead to believe a web that promoted open communications will lead to the spread of democracy around the world . However, it was not long before authoritarian states realized it’s potential use for big brother surveillance.

North Korea

North Korea has the largest and most sophisticated hacker networks. And they have an asymmetrical advantage because most of their systems are not modernized and not probes to hacking. US embraced technology in both the private and public sector. Each wave of technology adoption leads to exposure of new vulnerable loops holes.

North Korea hacked Sony to prevent the release of “The interview”. It fell under the grey area where the US government did not respond.

China

Chinese hacks were initially targeted at acquiring intellect property to further their own technological advancement. Chinese government hack knowledge and pass them to Chinese companies.

This was the chief reason for Google’s exit from China.

China has recently positioned itself to be a source of venture capital funding to acquire Silicon Valley technology knowhow. By not outright acquiring these companies they were able to fly under the radar.

Russia

Hacked into US government system to figure out the agenda of each future presidential candidate.

Bought Facebook and Twitter ads to influence 2016 US elections. It also used Fake News to muddle facts from the truth.

It’s agenda is to ensure former USSR territories do not join Europe.

It’s team disrupted Ukrainian elections by causing critical systems to shut down.

White house challenges

White house struggles between determining if a hack should be considered a attack to the state or simply an act of vandalism that should be handled by the courts.

Exposing a hack without an accompanying comprehensive solution will only alert hackers to alter their approach while causing public hysteria.

It is hypocritical to condemn another country for cyber attacks if your own country is undertaking the same type of hacks. HuaWei is a classic example. If the entire world switches over to HuaWei, US intelligence’s ability to do surveillance will be compromised in favor of China’s ability to do surveillance.

Silicon Valley giants are reluctant to acknowledge their platform can be a vector for compromising democratic process.

General thoughts

Technology is value agnostic. The way its applied is predicated by the value system of the user.

Mentioned companies

  • Crowd strike
  • Google
  • Facebook
  • Twitter

 

Fluid dynamics within the markets

Approximately 10% of all companies listed on Nasdaq and NYSE fell by more than 10% over the past week. Its like a magnitude 5 earthquake happened and the entire market goes into panic mode.

During this occasion, it is fascinating to observe at a macro level the flow of money within the system.

Sources of liquidity

  • the white house administration has cut taxes over the past 2 fiscal years between 2017 and 2018.
  • the Federal reserve increase money supply through the repo market and by lowering interest rates
  • Central banks around the world lower interest rates
  • the high US dollar signals that money from around the world is flowing into the US market

High pressure areas

  • the price of gold moves steadily upwards
  • the price of US Treasury bonds signaled by the fall in US Treasury yield moves steadily upwards
  • the SnP hovers near all time high
  • Companies classified as value stocks are trading at all time high multiples

Anomalous vacuum

  • Companies classified as growth stocks are trading at huge discounts versus all time highs

Once the psychological impact of the current set of stimulus wears off and assuming the supply of money stays constant within the US market, it is very likely money will start flowing from high pressure areas to fill up the anomalous vacuum described above.

https://trends.getdata.io

Chats with Ilya on hedge funds

  • Management fees are too high to be sustainable for funds sized below 300 million
  • Funds sized above 300 million tend to have a shelf life of 10 years
  • staying motivated and dedicated to the business is hard when you already have a lot of cash
  • funds that last for a long time have founders who are absolutely focused on building up an institution that will sustain beyond the founder
  • it is much more lucrative to build and own the system than to be working in the system
  • Sharpe ratio above 1.5 is acceptable
  • SnP Sharpe ratio tends to be really low
  • important to figure out how to still generate returns in a down market
  • qualitative assessment of the business model is what drives outsized investment returns

Evening out watching Rambo, last blood

From Sujit on trading

  • not necessary to get numbers further back than six months
  • stock market subjected to fractal distribution
  • it is possible to generate returns of up to 140% per year by trading on stocks that are moving within a range
  • going all in on each position each time leads to a very low Sharpe ratio
  • Sharpe ratio should be calculated separately for method and for SnP benchmarked against US treasury interest rates. The difference is the actual returns

On Rambo Last blood

A movie is a reflection of the culture and attitude of an age. Rambo was a very popular cultural icon during the eighties and the early nineties when memories of the Second World War and the Cold War against the communist were still very fresh in the minds of the people in America.

If you looked at the world today through the eyes of someone like Rambo, you would have been able to easily draw facts to back the narrative painted by Trump prior to being elected president.

When operating in an environment of uncertainty, a decision maker formulates multiple often competing narratives in the head that best explains majority of the facts presented. He calibrates the weightage assigned to the probability of each narrative as new pieces of data become available. He simultaneously utilizes multiple ones that are assigned high plausibility in his decision making to strive for the best possible expected outcome . It is a cognitively demanding iterative activity that goes on indefinitely.

  • common themes between movie and Trump’s narrative
    • Mexico drug cartels
    • Mexico prostitution rings
    • The world is a dark place
    • illegal border crossing
    • poor border fence
    • white male
    • Rust belt
    • Protagonist is in his 70s
    • Freedom fighter who fought the communist in Vietnam and Russia
    • guns and lots of blood
    • man of steel
    • manifest destiny
  • Cognitive biases
    • Narrative fallacy
    • Framing bias
    • selective bias

Related readings

  • Expert political judgement, Philip Tetlock

Chat with Yi

  • Building user profile data set for machine learning purposes can be a lucrative business
  • getting an MnA guy involved to manage relationships with acquirer is helpful to tweak the company features for eventual acquisition. Once an acquirer signals intent other competitors will follow along
  • enterprise business
    • Once software is complete is about solidifying business model and supply chain
    • High revenue but potentially low margin business
    • once u get into this it’s hard to crawl out
  • Finance
    • Benchmarking negative momentum across entire industry
    • company with the slowest negative momentum in a negative environment is the one with the most resilience