Friday Chart Book

March 8, 2024

Let’s start with a very apt Charlie Munger quote I recently rediscovered.

“The model I like to sort of simplify the notion of what goes on in a market for common stocks is the pari-mutuel

system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and

bets and the odds change based on what's bet. That's what happens in the stock market.

Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position

etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if

you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it's not clear which is

statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that

it's very hard to beat the system.

And then the track is taking 17% off the top. So not only do you have to outwit all the other betters, but you've

got to outwit them by such a big margin that on average, you can afford to take 17% of your gross bets off the top

and give it to the house before the rest of your money can be put to work.

The stock market is the same way except that the house handle is so much lower. If you take transaction costs ‑

the spread between the bid and the ask plus the commissions and if you don't trade too actively, you're talking

about fairly low transaction costs. So that with enough fanaticism and enough discipline, some of the shrewd people

are going to get way better results than average in the nature of things.”

“Art of Stock Picking”

The quote nicely homes in on the complexities of outperforming markets. It’s tough. The odds are stacked against us. The probability of wiping out in a continuous investment game is pretty damn high if you have no edge or your select low-risk/reward trades. I have written about it in my Macrobook series if you want more detail.

Much about compounding returns, assuming you have a decent enough strike rate, is to accommodate the inevitability of dealing with a string of consecutive losses. You have to be in the game by applying a rigorous risk management framework. An early warning system helps when assessing overall risk. I have written a thought piece on this very subject (see below). I looked in detail at volatility markets, dissecting correlation and dispersion as a multi-dimensional field where early signs of stresses could manifest. Much of it comes from my belief that volatility, regardless of how it’s measured, reflects the difference between the world as we imagine it to be and the world that actually exists. So, if we do not search for the truth relentlessly, sooner or later, the truth will find us through volatility.

The truth may soon be knocking on the BoJ’s door as the discussion about a possible rate hike intensifies. The Yen has finally given us a few more considerations after putting in a rally over the past few sessions. The BoJ probably hoped for a US slowdown to strengthen the Yen and help ease some of the inflationary pressures, but they are now forced to act. Being the largest funding currency in the world comes at a price.

When trying to find trades with good risk/reward across many scenarios, the JPY certainly stands out. With both central banks meeting on subsequent days in March (19/20), the recent shorts will be nervous about running trades during those events. The Yen unwind could also trigger cross-currents across asset markets. In my recent talk with

Capital Flows

I mentioned that exiting the negative interest rate world could bring more volatility than people think. Check out the entire conversation if you have time.

Meanwhile, Chinese bonds are seeing a massive rally, touching two-decade lows (blue line 10y, orange 30y yields). A stark reminder that disinflationary forces are still very much in play.

Let’s now turn our focus to the charts—the full set of 254 of them. As mentioned last week, I am altering the way I present the book of charts by commenting only on a selection that I find relevant.

You can now use my models in TradingView scripts, which I made available for subscribers to use on their charts for a fee. If you are interested, ping me an email with your TV username.

By now, most of you will be very familiar with the models and their signals. If not, please study the guide I have published. I have now also recorded a brief video tutorial, which you will find further below.

Let’s go!