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Maybe. But we always have to be careful when assuming that markets are acting rationally, especially in the very short term. The speed of the oil decline can easily have caused some panic among market participants (many of whom care tremendously about momentum, TA, sentiment, etc). Couple that with margin calls for those invested heavily in the sector (who then sell indiscriminately and affect people who aren't invested in the sector...), and you get a lot of babies being thrown out with the bathwater, including companies that will benefit from lower oil prices. To me the macro is entirely confusing, as it usually is. Some places look weak, some places look strong.. Then you have everybody looking at this landscape and reacting accordingly, so the outcome will vary depending on perception (reflexivity)... Who can know? So I buy good businesses that should do well and deploy capital well regardless. For me, this is not a question of "either … or". I also try to buy good businesses (apart from one or the other special situation) but I want to know or at least try to know where we stand. This is not a short term issue. When Gundlach is right, and I think he is, this is going to be important for the next couple of years. Which "places" do look strong? There is one single place that looks strong at the moment: the US. Now, what is going to happen when the US weakens, either because the FED raises rates prematurely or a strong USD is importing deflation? EU, Japan, EM – everything else is slowing down or downright in recession. Most importantly: China is slowing down, too (China might have been the trigger for the oil price imploding, after all). If the US economy weakens now, there is a very high probability for a worldwide deflationary recession. Ray Dalio has been saying for a few years that what keeps him up at night is this: What can central banks do when they are at zero interest rates worldwide and there is an economic slowdown? Well, the oil price decline is suggesting: here it is. I completely agree with Gundlach that this oil price movement is incredibly important right now. Not because oil is important in itself, but because it's one indicator of the global economy severely slowing down. This is not the usual media hype (like e.g. "the sequester") – there are a lot of signs for real problems if you want to see them.

Thanks, very interesting. I agree with almost anything he says, apart from this statement: I don't think this is the market's message. In my opinion the message is: Fuck, there seems to be no demand at all for this oil anywhere in the world right now! This is a very bad sign for the health of the global economy as a whole. All the while, equity markets jump around all time highs – even if you adjust for inflation. There is something severely wrong with this picture.

I think some groups of market participants have been realizing it but it's not a widespread opinion, yet. However, there are signs of a change in common sentiment everywhere. Maybe I'm suffering from confirmation bias since I've been thinking about this question for a few weeks now. Yet, look at the 10y treasuries – are they supposed to look this way in expectancy of rate hikes by the FED? Why is the market reacting negatively on the oil price movement when "conventional wisdom" dictates that this should be a boon to the economy? In my opinion, people are beginning to ask the right questions. You have to be very cautious with your equity investments now, because what Mr Market hasn't realized yet is that high dividend yields don't protect you from a deflationary scenario. Assets with high constant yields are about the only protection; but, to be effective, yields have to be there and they have to stay there (how about XOM's dividend yield, for example, in case those oil prices prevail?).

Jeffrey Gundlach gave his market outlook for 2015 on December 9: https://event.webcasts.com/starthere.jsp?ei=1026699 I always enjoy his idiosyncratic views. He will do another presentation on January 13.

Jeremy Grantham in GMO's latest quarterly letter: http://www.gmo.com/websitecontent/GMO_QtlyLetter_3Q14_full.pdf I have no opinion on the "fair" level of oil prices and (therefore!) on the right price levels for the stocks of the oil majors. However, I think that Jim Chanos is absolutely right: If you take a look at both, the price movement in oil vs. in stocks of oil majors, at least one of the two price levels has to be seriously wrong. His long/short trade (already posted here) seems to me to be a great risk/reward bet – much, much better than buying/selling one of the two asset (classes) outright.

Sounds like a very reasonable thing to do.

This is a great chart ;D

My way of "playing" it is preparing for an economic slowdown. I raised my net cash position by shorting the Russell 2000 and even thought about buying treasuries (in the end I didn't consider it a good enough risk/reward bet, so I haven't done it).

+1 So true. Having a nuanced view is almost always the way to go, I guess.

What was first, deflation or lower oil prices? Well in Japan they had deflation even with rising commodity prices. We're not seeing deflation here yet, but we are seeing lower commodities. Real purchasing power is rising as is employment. So far anyway :-X I have been thinking about it a lot lately and I'm still not sure about it. Why did we have high(er) oil prices in the face of the whole shale gas revolution only a few months ago? To me, it seems more probable that the prices are reacting to deflationary pressures from all around the world (but the US). I'm really curious whether we will see this working out as economic stimulus for the US economy or more as importing deflation. Gundlach talked about this lately: http://video.cnbc.com/gallery/?video=3000333313 He is using oil as a leading indicator for the CPI.

What was first, deflation or lower oil prices?

I really love Kahneman's book Thinking Fast and Slow. However, I think, his thoughts on human behavior don't add up when it comes to the markets. Kahneman et al have proven in countless experiments that humans make systematic errors when it comes to pricing. To me, this seems to suggest that there will be more or less large inefficiencies in markets that can be exploited by people who behave differently from the consensus. Yet, Kahneman suggests in his book and in talks that thinking this is foolish because nobody can beat the market. While this is certainly true in the aggregate, this is false for individuals even based on Kahneman's own assumptions. EMH suggests constant risk adjusted returns with concentrated portfolios. In the aggregate I think this is correct. Yet, keep in mind that "risk" in the EMH sense is defined as volatility. So, constant risk-adjusted returns in concentrated portfolios mean higher returns with higher volatility. That means that even the average manager is expected to outperform the market on the long run with a highly concentrated portfolio while, at the same time, adding volatility. I think this is correct, but only on average.

What's your best guess what would happen if the developed world slipped into a few months or even years of deflation? What would happen to stocks, bonds and commodities? Until recently, I was quite optimistic about equities and bearish about bonds. Now, however, I just can't see equity markets staying at these levels in case of worldwide deflationary tendencies.

Leaving aside the impact on single stocks for a moment, this decline doesn't make me bullish at all for the world economy. First and foremost I think of deflation spreading to the U.S. depending on how China develops. If China's financial crisis expands there seems to be quite a risk for a deflationary spiral developing.

I'd ask him why he gave up on the Kelly criterion as a rough guideline for position sizing. He once answered that he takes not enough bets to apply Kelly, but I think this doesn't make sense. I'm also interested in his reasoning behind the switch in philosophy from being 100% invested to having a huge cash pile like e.g. Seth Klarman does. I don't think Buffett would side with him in this regard (considering Pabrai's AUM). Lastly, I'd ask him why he invests into TARP warrants but not into LEAPS (as far as I know but I don't track him that closely).

I really don't understand why Ray Dalio embraces volatility as a risk measure. Jim O'Shaughnessy calculated the stock/bond part of the portfolio back to 1926:

+1, too.

Had to think of this article about Paul Singer that Barry Ritholtz linked to last week:

Uh oh. Maybe someone isn't capitalizing operating leases? But then again, I wonder if his back-testing capitalized operating leases when it got its market beating returns?... What's the point in doing this for a simple formula? Don't forget that operating leases are not only a liability. There is an RE asset against them that you'd have to capitalize too.

Barry Ritholtz has some good thoughts on it: http://www.bloombergview.com/articles/2014-09-16/california-earthquake-for-hedge-funds

ask google? because they've already done it in 3 markets and have plans drawn up for 9 more... and people in those cities are praying for google to get started. in many ways google offers a better product. and better products usually find success. the fact is there needs to be more competition at the local level. I live in a county where comcast has virtual monopoly. and they price accordingly. part of it is regulatory---but cmcsa does not offer me a good value proposition for video and broadband. comcast is a Great business. Google fiber in every one of their markets would probably take them down to merely being a "good" business. we're lucky goog is taking the long view and not focusing on profits in the short term. it's good for everybody. I don't buy that GOOG is building a nationwide network. IMO this is more kind of a message to the cable cos to take their speeds up.

In practice, this means the one who's first keeps his monopoly (leaving aside regulators stepping in). I'd recommend every interview with John Malone within the last 5 years. He offers so much insight into the economies of the cable industry. He told Walt Mossberg back in 2009 that Netflix taking over cable was and is a pipe dream: http://www.wsj.com/video/liberty-media-chairman-john-malone-the-full-d7-session/0DF26270-8D40-40F0-B9F3-61893BEFBCFA.html He certainly is not underestimating Netflix but he knows the power of the cable economies of scale.

It's quite simple: How could a company that has to dig up all the streets to put their fibre lines exactly next to the cable pipes become as profitable as the cable company (that paid for this infrastructure 20 or so years ago)? This would only work if the fibre company offered vastly superior speeds so that people were willing to pay up for it. Building what is essentially a second cable network is such a capital intensive undertaking that fibre companies would have to subsidize their prices for years and years with billions of dollars only to keep up with the cable companies. Maybe Google with their vast advertising cash flow could do it. The question is: is it a sensible for them to do it? With regard to net neutrality: Would there even be enough capacity to essentially guarantee everybody unlimited TV access via the internet? How about 4K video bandwidth needs? If not, is it sensible to expect that you can keep paying 30 or 40 bucks a month for your internet connection when everybody and their mother use it to consume TV?

I think looking at it this way doesn't make any sense. You're ignoring the largest lever the cable companies own: their pipes. Cable can command a premium because they bundle content and distribution. NFLX might have lower content cost, but their total cost is artificially low because, momentarily, they get distribution more or less for free because of net neutrality. And, boy, do they profit from it. I think to assume that cable cos are going to watch while over the top TV is reaping all the benefits by using their network is completely naive. NFLX and other OTTs are utterly dependent on the cable companies for distribution.

Totally agree. It all comes back to the price you pay. As Howard Marks says: "What matters most is not what you invest in, but when and at what price. There is no such thing as a good or bad investment idea per se." VC has the kind of attention and glamour factor that drives up the prices and that you shouldn't like as an investor – in this way it's very similar to most IPOs.