Just got back from a lovely nature walk along the Sydney Harbour with a friend from overseas who has been an incredible friend and mentor to me while starting Signal2Noise. Paul thanks!
S2N Spotlight
I mentioned yesterday that coffee futures were up 53% year to date. Let us sip on that for a while.
The Arabica coffee futures, the high-quality coffee used for espresso, are currently trading at 12-year highs. In case you never knew (I didn’t) Arabica makes up 60% of the coffee market.
It is interesting to see the Robusta bean used for instant coffee is trading at 45-year highs.
The obvious question is why. The simple reason is that weather disruption has played havoc on supply. There is, however, a demand factor you may not have been aware of. The Chinese have started drinking coffee. Crack that market, and you have your caffeine high.
My last shot. China is now the 7th largest consumer of coffee in the world. I am pretty sure Australia is in the top 3 highest per capita coffee consumers (that is just a guess as it is definitely the national drink).
S2N Observations
I noticed a hedge fund manager I met in Singapore 12 years ago signed up to the newsletter yesterday. You probably don’t remember me, but if you are reading, you exposed me to a money management technique I was not familiar with and have used successfully with a tweak for many years. By the way, I walked out of the meeting at your office in awe. You were managing a sizeable fund with incredible risk-adjusted performance, and you knew your stuff. I was inspired to up my game.
The classic portfolio allocation method is Harry Markowitz’s mean variance optimisation technique. He was the Nobel Prize winner in economics who said diversification is the closest thing you will get to a free lunch. I am not going to go into the details now; it is a powerful and complex technique and not without its weaknesses.
The technique I was exposed to, which was new to me at the time, was one where every strategy internally was allocated to based on its individual Sharpe Ratio. I had naturally seen that as an allocation method across different hedge funds, but never within a single hedge fund. I will leave it there for now.
The Russian Central Bank unexpectedly raised rates on Friday by 1% to 19%. The expected inflation for this year-end is 7.3% so the central bank is trying to get on top of it. Would you believe GDP is expected to end the year at 3.9%, up from 2.8% last year.
I am not sure why this popped up on my radar today because it was released 2 weeks ago, but the ISM Purchasing Managers Index reported a 47 print. So the engine of the economy sure seems to be weak.
This hasn’t stopped the S&P 500 equal weight index from making new all-time highs. There is quite a lot to unpack in this chart, but I will leave that to you.
Finally, a look at how some of the crypto heavyweights have travelled year-to-date. Ethereum is quite surprising given its progress with regulators and ETF launches. I gave up on Cardano for what its worth, which isn’t much. I am too old and too bald to be a cheerleader.