Friends,
I wasn’t planning to publish until Wednesday but ahead of this week I just want to share what’s rattling in my brain.
I shared this in our subscriber discord.
it’s an impressionist painting but ngl i am pondering this
i will look at some prices later but i think the risk reversal could be very compelling to buy put sell call on a wide riskie in equities….or possibly as a calendar where you’d be buying the nearer dated (meaning you will be paying a lot in terms of vol points both in skew and term structure) but my rough heuristic:
Nobody thinks these tariffs are where we settle. He walks back the level of tariffs as countries step forward to deal…but if this doesn’t happen relatively quickly, these tariffs as is are probably an extinction-level event for thousands of businesses if they’re in place for even 6 months.
long aside: i'm stepping through micro-level math just for a sense of proportion on what tariffs mean to unit economics courtesy of
post today (see the end of this post). the actual numbers don’t matter too much to me so much as getting a grasp on proportion. i really feel uncomfortable reading macro predictions and stepping through this kind of boardgame math makes me feel like I at least learned something real. and while i’m not really knowledgeable enough to step thru any multi-order effects having some context at the micro level can help as I do what we all do — listen to the macro arguments and reason about what makes more sense. when everything is in flux, like around the early days of covid, or even the recent election where trump was going to mean a departure from the status quo, the returns to thinking about what’s going on is higher. i say this as someone who doesn’t usually care about news because it’s usually just noise but if you think power laws rule everything around us then it’s a few moments that have a disproportionate impact on total results. we are conditioned to stay the course because of recency bias. 40 years of recency bias sure. but this dude is an agent of chaos. i de-risked as the market bid up optimism when he was elected (I de-risked in late Oct and then bought bonds in January. i’ve talked about that in the letter). i didn’t de-risk because of my distaste for trump, trading on your politics is a good way to go broke, but because I suspected that his stance could be deflationary and the market was totally discounting that possibility
Many years ago I invested in fund with a small manager in Japan who only invests in small companies there. As I was learning about what he did he explained, ‘we don’t have beta here like in the US. There’s no “chart goes up every year” tailwind. A company here grows by either getting market share or increasing exports. Not because the domestic pie gets bigger.‘
It’s never lost on me that US markets have had this privilege of real growth. But it’s not god-given. In this country we ask our 401k’s to do a lot. Hell, there’s that whole FIRE movement that rests on this beta assumption.
I’m not saying that it’s over. But if the common knowledge that it could be over seeps in I don’t want to be too late to realize it. I’m not adding risk back without seeing more cards on the flop. If I’m wrong, all-time highs aren’t much higher than here…i’ll live with not making the delta on the rebound. there’s a lot more at stake if you get the whole assumption wrong about the economy. because this isn’t about individual stocks. this is about the whole economy. i know people like to say things that the stock market is not the economy but longer-term returns absolutely are about the economy.
so if this market reverts it will be soon. the longer this drags the more cooked it’s going to feel. there’s a weird theta component to it. if i’m wrong about not adding i’ll find out soon.
that is my bias. but notice…it’s couched in a way that indicates that options are the tool of choice because it has a timing (and therefore vol) aspect to it. and the distribution feels more binary because it hinges on discrete events rather than the slow drip of business-as-usual incremental news that typically paint pictures that look like they are at least from the family of continuous normal curves.
i’ll be combing thru the option metrics in the tools later today to prep. a one last bit…i find these times worth looking at options in price space not just high level tools like skew percentiles and so forth. you don’t want to be pedantic about metrics that serve you in normal times. this is when the gambling or mock-trading fundamentals show their resilience and when models make you uneasy because you know their assumptions require even more caution than practitioners, who are already aware of their shortcomings, confer to them.
A couple threads of me thinking aloud on market crap:
thoughts on liquid names being sold “first”
[apologies for the messy off-the-cuffness here…i didn’t plan to write today…a typical Sunday letter takes about 7 hours to write in case you ever wondered.]
stay groovy
☮️
From Mike Green’s post:
