Moontower #156

I just got back from vacation and after traveling a big chunk of the summer, I’m looking forward to the steady backbeat of routine. Kids start school this week and that’s my cue to get in front of a computer and start pushing the ball forward on some projects.

For that matter, I’ll write a post, maybe for next week, about how I’m thinking about not just projects but the broader context of what I’m “doing with myself”. It’s almost a year and a half since I left the daily grind and while I’d like to say I have a clear picture of my next steps, it’s more accurate to say I’m just less confused. I had a lot of time to think this summer and I’ll share those thoughts soon enough.

Today, I’ll share a meta-thought.

Open Source Living

Trading culture is secretive. Now all secrets including trade secrets should be vaulted. Loose lips sink ships. But there’s a range of information that is insightful but not under lock-and-key that gets treated as a secret.

I’ve recently been consuming a ton of content by Jamey Stegmaier. He is the founder of tabletop game publisher Stonemaier who put out Wingspan. Jamey is a prolific sharer. His YT channel is outstanding and he talks about everything from nerdy game design topics, to life, to his business. His video A Brief History of Stonemaier Games is, to use that pedo-cringe term, “open kimono”. Even though his company is private he volunteers information that would be impossible to find. See 2021 Behind-the-Scenes Stakeholder Report for Stonemaier Games.

His transparency is alien to anyone from a secretive culture. Jamey has become an ambassador to the boardgame industry. Instead of protecting his turf (he’s not unstrategic of course — I haven’t seen him disclose his own vendors), he is blatantly thinking about growing the pie by promoting the industry. He encourages people to play and design games by boosting competitors’ games, discussing others’ game mechanics that inspire him, and even talking about games he wished he published or games he regretfully passed on.

Being transparent and vulnerable is a risk, but not without reward. If you embrace open-source living and can reasonably filter out selfish opportunists, you have a better chance, in my humble opinion, of “finding the others”. I used to tell myself that I wrote to clarify my thinking and educate. It was a big moment when I realized those were actually byproducts of what was really happening. I was “finding the others”. (It was Paul who I first heard say that. It was a lightning bolt of self-understanding. It’s also why it’s crazy to me that the most common writing advice is “write in your own voice”. This would be like life advice that started with “step1: respirate”. It’s not just obvious but easier).

Cooperation and negotiation are core requirements to get anything done. They don’t need to be warm and fuzzy, but the adversarial nature of spending your day on the phone with option brokers whose loyalties shift like the clay soil around the Hayward fault can grind down even the most extroverted trader’s enthusiasm. And I’m sure they feel the same about dealing with the short list of market-makers they need for liquidity. For all the aggravation, we wouldn’t deal if we weren’t both better off in the long run. But when I look around at other fields, or even my wife’s role on the biz dev side of finance, the dynamics are far less contentious. There’s more of a positive sum spirit.

Technology makes everything including finance more efficient. It disintermediates, improves transparency, and increases legibility. In that sense, technology, at the conceptual not necessarily specific instantiation level, is always a growing business. On the other hand, fields that are being disintermediated shrink. Survivors huddle on the lifeboats. If someone starts sneezing, throw ‘em overboard. A forward-looking firm might try to pull in a fit swimmer to help row, but most lifeboats would prefer to not take the risk and just preserve whatever rations are left for the seniority remaining. This might be totally rational and maximizing.

And that’s the problem.

If you are in an industry where pulling in the perimeter defense instead of pushing out the frontiers is the optimal play, I hope you are good at compartmentalizing. You don’t want that mentality bleeding over to the rest of your life outlook. At least I don’t.

At risk of a superficial analogy, it’s hard to watch boomers hanging on to their gerontocracy in politics without seeing a fearful cling to old ideas somehow wiped of any nostalgia (it’s hard to believe boomers were Flower children unless you think they forgot their LSD years). Every housing development they shoot down is stepping on the neck of someone trying to climb into that boat. Just log onto suburban Nextdoor if you want to eavesdrop on the debate homeowners (survivors is an increasingly fitting analogy here) have when a treading swimmer flails a desperate hand onto the side of the SS Nimby raft.

Morgan Housel likes the phrase “the grass is always greener on the side that’s fertilized with bullshit.” There’s enough grift outside the highly regulated financial world to make the money game seem downright honorable in comparison (a finance friend has told me things about the art market that would earn Madoff’s respect). I’m not pollyannish about life outside trading. But this letter and its #learninpublic spirit have always been a step towards openness and sunlight. The upcoming projects and discussions will lean even harder in that direction. I’ll learn. You’ll learn. We’ll go further together that way.


Speaking of secrecy, Byrne Hobart recently published:

Understanding Jane Street (25 min read)

Byrne didn’t paywall this post and it was his most-read piece ever which is saying a lot, so I don’t have to say more. Go read it.


Related post on information flow from the Moontower archive:

Twitter Reminds Me Of The Trading Pits (7 min read)


Money Angle

  • 5 Ideas by Eric Crittenden on the Mutiny Investing Podcast (11 min read)
    by Moontower

    I jotted a few notes from this terrific conversation between Eric Crittenden of Standpoint and my friend Jason Buck of Mutiny.

    If you read CTA (especially trend-following CTAs) decks about why trend-following works in commodities you will hear stories that sound like:

    • taking the other side of hedgers
    • markets have behavioral biases like anchoring which cause futures to underreact on breakouts

    These are reasonable claims. I traded commodity options for most of my career and a lot of flow is in fact constrained (ie forced and price-insensitive) due to hedging covenants attached to financing arrangements for new projects such as plants and wells. The behavioral bias argument sounds good but I’m not sure to what extent biases like that cancel out (just replace “extrapolators” for “greed” and “mean-reversioners” for “fear”).

    Overall, I think commodity markets are basically zero-sum. They make sense as diversifers because they can act as an inflation hedge at times. But because inflation is diabolically hard to hedge in isolation, I’d expect futures markets to have negative expected returns after fees and taxes (note the similarity to insurance. It’s negative expected return but still makes sense as a diversified and hedge when you consider compounded returns at the portfolio level). The pre-fee/tax return is probably random depending on the term-structure.

    Yet, Eric and Jason’s discussion framed the problem in a way I hadn’t thought of which is more of a risk transfer service. Since the demand to transfer risk is not static the curve shapes and positioning will be key determinants of which way the edge presents itself.

    If CTA positioning is inversely correlated with physical hedger positions you’d expect positive edge. I found this provocative because one of the trades I liked to look for was actually betting against the CTAs but in an asymmetrical way. If CTA’s were all-out long coffee futures (for example the Commitment of Trader’s Report, aka COT, showed that as a percentage of open interest managed money length was in the 100th percentile) then I’d like to look for cheap put skew to buy. My reasoning was that CTAs are actually weak hands in the sense that they just follow price, so if there was a sharp reversal in the market they’d rush for the exits together. CTAs often use similar signals (breakouts or moving averages for entries and stops for exits) so they tend to have correlated flows.

    Now, percentiles are risky inputs to trades. If something is in the 100th percentile today and goes up tomorrow that is the new 100th percentile. But I was betting in a risk-contrained way. Instead of shorting, I was buying puts (and again only if the skew surface presented attractive pricing…the qualitative and quantitative both need to line up, and even then an idea like this is a small edge and small part of a broader portfolio).

    Here is a pertinent excerpt from the interview (bold is mine):

    Jason Buck: You said three return sources, so eliminate the three return sources that you believe you have?

    Eric Crittenden: So, I feel like there’s capital formation markets, like stocks and bonds, which are kind of a one-way street, the risk premia is kind of a one-way street. I mean, the bulk of the risk premia is your long stocks. The futures, whether it’s metals, grains, livestock, energy, these are risk transfer markets and risk transfer markets are different than capital formation markets. I feel like risk transfer markets, you need to be symmetrical, you need to be willing to go long or short, because they’re a zero-sum game. They have term structures, so they’re factoring expectations, storage costs, cost of carry, all that stuff. And then there’s the risk-free rate of return, which used to be a great way to kind of recapture inflation, it’s not so much anymore.

    [Eric continues…]

    This is an important concept to me, because it goes to the point of why I do what I do, or why I think that macro trend-oriented approaches expect a positive return over time, because the futures markets are a zero-sum game or actually, a negative-sum game after you pay the brokers, and the NFA fees, and all that stuff. So, in a negative-sum game, you better have a reason for participating. For you to expect to make money, you better be adding something to that ecosystem that someone else is willing to pay for, because somebody else has to mathematically lose money in order for you to make money. So, in studying the futures markets, and I’ve been on both sides, I’ve been on the corporate hedging side, I’ve been on the professional futures trader side.

    I believe I understand who that somebody is, that has deep pockets, and they’re both willing and able to lose money on their future’s position. A trend-oriented philosophy that’s liquidity weighted is going to be trading opposite those people on a dollar-weighted basis through time. It does make sense that they would lose money on their hedge positions, I mean, in what world would it make sense for people who hedge, which is the same thing as buying insurance, to make money from that? It makes no sense, that would be an inverted, illogical world. So, anyone who’s providing liquidity to them should expect some form of a risk premia to flow to them. It’s just up to you to manage your risk, to survive the path traveled, and that’s what trend following is. I don’t know why that is so controversial, and more people don’t talk about it, because I couldn’t sleep at night if I didn’t truly believe that what we’re doing deserves the returns that we’re getting.

    Jason Buck: CTA trend followers, or whatever, just they don’t really know how they make money. They’re like, “It’s trending, it’s behavioral, it’s clustering, it’s herd mentality, and that’s how we make money.” You’ve accurately portrayed it as these are risk-transfer services, speculators make money off of corporate hedgers. But the only thing I would push back, and I’m curious your take on this, is like you said, zero-sum game or negative-sum at the individual trade level. But when we look more holistically, those corporate hedgers are hedging their position for a reason, and it’s likely lowering their cost of capital for one of the exogenous effects. So, my question always is, is it really zero-sum or negative-sum, or is it positive-sum kind of all the way around? In a sense that the speculator can make money offering these risk transfer services that the hedgers are looking for that liquidity, and then the hedgers are also… If we look at the rest of their business, they’re hedging out a lot of their risks, which can actually improve their business over time, whether that’s cost of capital, structure, or other exogenous effects.


    Eric Crittenden: Absolutely, I wish I had… You did record this, so I’m going to steal everything you just said. In the future’s market, it’s negative-sum. If you include the 50% of participants that are commercial hedgers, it’s no longer zero-sum. But most CTAs, and futures traders, and futures investors don’t even concern themselves with what’s going on outside the futures market. So, but if you pull that in and look at it, you can see, or at least it’s clear to me, we’re providing liquidity to these hedgers. They’re losing some money to us, and the more money they lose to us, the better off their business is doing, for a variety of reasons. Tighter cash flows, more predictable cash flows results in a higher stock price, typically. But you brought one up that almost no one ever talks about, and that is if they’re hedged, their cost of capital, the interest rate that they have to pay investors on their bonds is considerably lower. Oftentimes, they end up saving more money on their financing than they lose on their hedging, and they protect the business, and they make Wall Street happy at the same time, so who’s really the premium payer in that? It’s their lenders. So, by being a macro trend follower in the future space, the actual source of your profits is some bank that’s lending money to corporations that are hedging these futures. So, it’s the third and fourth order of thinking, and you can never prove any of this, which is great, because if you could prove it, then everyone would do it, and then the margins would get squeezed.

  • More commodities stuff:
    • I created a Twitter list to follow commodities folk. I’ll add to it as I learn of more accounts that fit. (Twitter list)
    • The CME has a great tool for charting and studying the CFTC’s COT report. You will need to sign up for their free QuikStrike suite of analytics.

Last Call

  • The 2-Hour Cocktail PartyHow to Make New Friends and Build Big Relationships with Small Gatherings

    Nick Gray wrote a book about how to throw a cocktail party. I’ve read half of it so far and it’s a nice reminder that get-togethers can be much richer experiences if approached thoughtfully and with empathy for guest’s desires and concerns. I will be borrowing key ideas from it for one of the upcoming projects.

    A bit that resonated:

    There’s a concept I often cite from “Moonwalking with Einstein” around memory anchors. The more anchors you can create for a memory, the easier it is to remember. If you can split your parties into 3-4 different activities in different spaces, the party is more memorable because people have a richer more varied memory to look back on. It also has the effect of making the party feel longer. When you stand around nursing tequila sodas and picking at the food for 2 hours, the party is a quick blur. When you move through four different activities and locations in the same time period, the party feels much longer during and on reflection. Time probably flew by, but when you reflect, you are amazed at how much happened in such little time.

    You can check out much of the book before you buy here.

Stay groovy!

Moontower #155

School starts here on August 9th and we are on vacation with friends before heading back to a more regular routine. We finally pulled off Cousin’s Camp last week. I’ll describe it at the end of the letter for those interested.

I’ll keep things short otherwise.

Relentlessly Inspiring

Instead of reading anything I wrote this week, check out these 2 TED talks by Mark Rober. He has one of the most followed YouTube channels and deservedly so.

Watch his YT videos. Watch how he approaches problems. Watch how he communicates. I’ve watched most of his vids with my kids several times. These Ted talks are amazingly put together. The presentation, the ease in which he directs the production, the off-hand humor that breaks up transitions, and the genuine enthusiasm. He’s tirelessly uplifting.

Our culture is buried in irony and memes. I’m not immune. I follow shitposters because it’s an art in itself. If Jonathan Swift or Oscar Wilde were alive today they’d have 7-figure follower counts. But when sound bytes become a sport, it turns the volume down on earnestness and mutes nuance.

Rober is holding the ladder when so many others are trying to kick it. He does it with a smile. He shows you the formula. And he’s honest in a way that distances himself from the saccharine, even toxic, positivity that the crystal woo crowd pushes with not so much as a wink.

I want to point out one more thing. Rober is a scientist. By definition, he’s a skeptic. He must carry a sack of hypotheses he wanted dearly to embrace, but reality forced him to reject. And yet, he wields that skepticism as a tool. A scalpel. Not a personality.

I’m a 44-year-old dude and I still have heroes. You can put your ego aside and have them too. There are people who I try to channel. They are models of how I want to respond to others. How I want to listen. How I want to think. It’s not about wanting to be them. It’s about incorporating what inspires you about others into yourself. If you practice this, you eventually integrate it and give it your own flavor. Just like you play covers to learn guitar before your style develops. Look, most of your personality is modeled anyway. Might as well be conscious about it.

Enough earnestness from me. Go watch the vids:

This vid gives a 3 bullet point answer to an important question that, if you have retained any playfulness in your life, you might still wonder about:


Money Angle

Links:

Don’t Get Squozen: How to structure equity shorts for max profit and min risk of ruin (14 min read)
by Brent Donnelly

Brent’s free Substack series on trading concepts is terrific. The title doesn’t bury the lede. It’s a great discussion of shorting. But this post really stood out because of the decision tree it lays out for how and when to consider using options. I also added the post to the Moontower Volatility Wiki.

I’ve written a bunch on shorting and using options for directional reasons. Please read Brent’s post if you care about this stuff. If you feel like hearing my written voice after that, you can learn more about these topics here:

  • Shorting In The Time Of ShitCos (8 min read)
  • The difficulty with shorting and inverse positions (2 min read)
  • The Gamma Of Levered ETFs (8 min read)
  • Structuring Directional Option Trades (8 min read)
  • How Options Confuse Directional Traders (8 min read)
  • Using The TSLA Price Endgame To Understand Options (12 min read)

I’ve been reading J. Paul Getty’s How To Be Rich: His Formulas which is a collection of essays that was first serialized in Playboy magazine at the behest of Hef in the 1960s. I like the way Getty writes and I liked learning about how he amassed his fortune in oil but it’s not a book I’d say rush out and read. I picked it up from the Getty Museum gift shop because it was short and I knew nothing about him.

Anyway, you’ll recall Moloch was a heavy theme of this newsletter at the beginning of the year. I just liked this:


From My Actual Life

Cousin Camp finally happened. This was one of the best things we’ve ever been a part of. I think the 8 cousins (+2 close friends) will have an amazing memory of this week. The kids ranged from 5 to 12 years old.

Schedule

7:30am-9am: Breakfast, making beds, getting dressed

9am: A chess coach would come teach for an hour.

10am-noon: Our boys amazing preschool teacher Jen came and led the kids through thoughtful activities.

Noon-2pm: Lunch break and play

2pm-4pm: Second session with Jen

4pm-6pm: Swimming pool (lots of Blind Man’s Bluff with Fish Out Of Water rules), Nerf battles, badminton, feeding the neighbor’s cat, and games like Throw Throw Burrito and A Fake Artist Goes To New York.

6pm til bedtime: Dinner, play, and music rehearsals for the open mic we went to in town Friday night. [A piano and group vocal cover of Ed Sheeran’s Perfect and a piano cover of Vanessa Carlton’s Thousand Miles]

A few additional notes

  • The theme of the week was communication. Being an active, empathetic listener, looking out for each other, making sure your tone matches what you want to project into the world. Jen is a master teacher and our first call for behavioral questions. She is another hero I try to emulate. Her touch balances firmness and love. Toughness and understanding. An example is when one child hurts another she doesn’t force them to say “sorry” because she knows it’s an empty sentiment when done at gunpoint. Instead, she facilitates a dialogue between the children that surfaces the “why” of the action and the victim can express how they feel. Most of the time, the offender apologizes genuinely because you can see them really perceive the other person’s POV.
  • Dinner was Yinh’s favorite part of the week. She would lead some pretty thoughtful discussions about how we treat each other and act generally. The kids one by one describe the day’s highs and lows and the reasons for that. They are asked to point out which actions other kids did were helpful or considerate. It’s truly awesome to see what kids notice. If anything, it’s a reminder to give them lots of credit. Their observational skills often surprised us to the upside.

    A moment I want to memorialize in case I read this in 10 years. Maddox thought his treatment was a result of his “reputation” and that was something Yinh really unpacked with him. The gist of it — you don’t need to conform to the expectations of others. It was insanely mature for a 10-year-old best known for bouncing around the room to realize that some of his actions were guided not by what he wanted but by his “reputation” and being freed of that was a moment of unlocking in his eye. And that’s the point. He’s so much more than a boisterous 10-year old and that wildness is a feature not a bug. Maybe some adults could benefit from realizing their reputation doesn’t need to define all aspects of their life. There’s more to existence than expected value or being smart or being able to do X. Maybe allowing yourself multiple identities relieves pressure.

  • Some of the activities:

    Building boxes that they had to drill together and pain before creating a scene inside. Some kids made things like a labyrinth or pinball machine.

    Bridge building contest like you did in science class

    Kids would each pull an “Angel” card in the morning. The card would give them a trait to be extra mindful of for the day.

    Kids would be expected to clean after every module and by Day 2 they were doing this unprompted. They’d close the pool, put away all the toys, set the table, and take out the garbage.

  • Date nights. That’s what the other parents got to do while the kids were with us all week. They were all sending us pics of the restaurants and bars they were enjoying every night. Yinh and I even fashioned our own dates. We’d play Wingspan every night after the kids went to bed. I have yet to beat her. Grr.

Finally, it’s worth remembering it takes a village. My mother-in-law was a saint, prepping all meals. More than half the kids were her grandkids which made the week extra sweet. Seeing all the plates laid out, all the kids crammed into bedrooms on makeshift sleeping arrangements, and those beautiful in-between moments when the kids scattered all over the backyard, front yard or in various rooms just organizing their own fun. Even the oldest cousin’s bunny, Olaf, had a great time getting love from so many little hands.

Cousin’s Camp Year 1 was a massive success and we can’t wait to do it again next year.

Stay groovy and have a great week!

Moontower #154

Before this week’s links, I’ll share a brainworm.

The tweet stood out because it reminded me of a discussion with a friend who acts as my “wall to hit tennis balls off of”. When I was 9 months removed from the daily grind, I confessed how my transition into “explore” mode felt uneasy. It’s hard to ignore my guilt-fueled tropisms towards “productivity” even though on an intellectual level I think that impulse is more operant conditioning than Vaynerchukian virtue. My friend was able to spot symptoms of what he calls “Bay Area disease” in the way I was speaking. For example, I’d talk myself out of doing a project that was obviously fun, useful, and educational for others just because it didn’t scale.

This introduced the question of where motivation comes from in the first place. Is motivation simply nature’s response to satisfying our wants (summer is no time for cynicism so I’m not going to get into where “wants” come from)? Eh, I doubt the scatterplot of “motivation” and “wants” meets at a line. Is it possible that what we call motivation is just an anxiety disorder? Is competition just coping?

There’s a quote usually attributed to the G.O.A.T wordcel, Oscar Wilde, that says:

Everything is about sex except sex. Sex is about power.

When I read that, I hear “everything is about dominance” by the property of transitivity. But this only holds if insecurity is the seat of any motivation in excess of the basic motivation to survive. It wouldn’t be controversial to grant that the motivation to merely survive comes from fear. But if the motivation to be “successful” comes from fear, well that undermines the connotation of big words like “lazy”. If it’s status all the way down, then the “lazy” are the free, no?

In an interview with Ferris, Morgan Housel shares this bit about the billionaire Michael Moritz (Sequoia founder):

[Mortiz] was asked by Charlie Rose, “Why has Sequoia been so successful? And how do you succeed for 40 years?” Which is the amount of time that they’ve been winning in this industry. And what he said was, “We’ve always been scared of going out of business. We’ve always been paranoid. We’ve always thought that what we’ve earned yesterday is not guaranteed tomorrow.” And this is for someone who is a multi-billionaire, who has the most success of anyone in the history of this industry. And that’s what he’s thinking about every day, is paranoia and fear.

And if there’s one person in the industry that deserves to be cocky about their skill, it’s someone like him. And it’s the opposite. He’s terrified. He’s paranoid. I think that idea of only the paranoid survive is another thing that you and I can learn from that.

This is resonant. Paranoia not cockiness was the lifeblood of the trading floors. (Yes, there are some cocksure traders but I’m reminded of the line “There are old traders. There are bold traders. But there are no old and bold traders”. The trader who hasn’t been humbled isn’t a trader.)

Competition and paranoia are peanut butter and jelly. I play NBA 2k23 with my kids and when MJ makes a great play someone always references “angry Jordan” (they recently watched Last Dance). That dude fabricated drama to get himself in the right mental state to destroy forgettable adversaries in meaningless regular season games.

All of this leaves me with unresolved questions:

Are you lucky to be born unsatisfied and want more? Is the itch in any way biological?

If it’s anxiety that propels us forward and leads to progress as a society, does ambition get too much, too little, or just the right amount of credit?

When we lionize ambition and medicate anxiety are we just running the A/C with the windows open?

The same traits harnessed for productivity also mobilize our capacity for atrocities. Is there an alternate timeline where Hitler and Churchill are flipped but retain the same inborn qualities?

These tensions feel like the success paradox I described recently. We must act like we are in control even if we know it’s an illusion without letting the self-deception give in to either side decisively. It’s like watching your autonomy duel honesty on a platform over a lava pit. If your sense of agency wins you become insufferable and no honest people will have you. If honesty wins you are calibrated but paralyzed. Powerless. No sex for you.

Philosophy has wrestled with this forever because we are thirsty for meaning. Nobody would come to a play that was a 1 line soliloquy “Sorry, shit’s random”. Instead, we create art in an unconscious quest to reflect on the whims of atoms. The perceived agency of the inanimate.

And if it turns out that anxiety is a necessary (though insufficient) driver of success and anxiety itself is out of our control…well, maybe enjoy the time you have on this rock hurtling through space. The error bars of everything swamp the signal.

I’ll plant this and leave the room: personal politics either reveal our coordinates on these tensions OR how quietly we can sit with our uncomfortable beliefs.


Book Review: Four Thousand Weeks (6 min read)
Sasha Chapin

This short read is the most clever non-book review book review I can remember. I don’t read Sasha because his writing is useful. I read him because his writing is straight dope. It’s always solid even if the topics don’t always interest me but when it hits, it sticks. I don’t usually like sarcasm (“to tear flesh” according to my HS English teacher and I prefer to not fact-check that) but its use here is probably more satire. If I paid less attention to etymology and more on the stuff that would be on the English tests I guess I’d know the difference.

Excerpts:

  • your life is being devoured by your effort to use it more effectively.
  • For example. You try to answer email promptly, but find that being better at answering email makes people email you more often. You try to fit in a couple of valuable experiences, but then find that experiences seem thin and shabby when you try to value them. You schedule leisure time but are filled with anxiety about whether the leisure will make you more productive.
  • There must be someone who has figured out how to ride this mechanical pony. Surely there are adults who keep up with the news, their careers, their hobbies, their God, their children, their spouses, the other members of their polycule. Surely someone has figured out how to ride the avalanche of current events. Do they use that new browser? That new revolutionary email system? That person should write a book about how you, too, can have the well-ordered life they do.

Overall this piece stung a bit. A couple weeks ago a friend explained how she had zero guilt binging Netflix for a week though her husband was constantly like “let’s go do X instead of wasting time”. She is a highly productive person by any objective standard. A talented overachiever actually. I couldn’t play video games for a week myself, but as she explained “that’s my baggage to deal with.”

I think she’s right.

It always bears repeating: learning is unlearning.


Money Angle

I piggybacked a thread about betting culture in the trading world. It’s not just degen performance art. It’s how you practice calibration.

The thread discusses how this looks in a real-world context and how it relates to trade expression. But for those who have a quota on how many clicks they’ll spare on a Substack I’ll reproduce the difference between 2 popular bet types:

First, suppose someone says they can get drive to some destination in 30 minutes. You overhear the convo and are incredulous. You blurt “I’ll buy 30 minutes” meaning you think they are underestimating travel time.

If the person wants to stand on their assertion, you’ll trade. They will be short 30 minutes, you’re long 30 minutes. It’s common to establish the bet style. Futures style or over/under style

Futures style would be something like $1 per minute. So if the commute takes 27 minutes the original bragger who shorted 30 minutes makes $3.

The second style is over/under (or binary). In this case, it’s assumed the seller is selling 50% probability. Like selling a contract at 50 that can settle to 100 maximum. So the loss is capped. It’s a pure probability bet. You could adjust the odds in a negotiation by saying “hey let’s trade at 40% probability” which means the seller is laying 3-2 (ie 60 to 40).

Because the loss is capped, the difference between these bet styles depends on the distribution of the proposition. In a travel problem, there’s skew to the upside since absent teleportation there’s a lower bound to how long the commute takes.

But the upside is almost unbounded…the person could get in an accident on the way. More realistically there could be a bad accident that causes traffic and turns a 30 min commute into 60 min. So the seller faces more risk selling 30 futures style vs over/under style.

That means they should pad the price they are willing to short at. Say 35 minutes futures style or be willing to trade 30 minutes over/under style.

Over/under bets are focused on the median. Futures-style are more concerned with the mean. The more skew in the bet, the more the prices will diverge.


I enjoyed, as I always do, an interview with Professor Michael Mauboussin. For those, with a trading slant, he is the academic that best bridges mainstream investing concepts (like stock-picking) with the decision and game theory concepts that derivatives firms focus on. It’s value investing concepts married to the pari-mutuel discourse traders are used to.

Reflections on the Investing Process with Michael Mauboussin (47 min read)
Interview by Frederik Gieschen via theManual by Compound

My excerpts and notes:

  1. Most investors act as if their task is to figure out a stock’s value and then to compare that value to the price. Our approach reverses this mindset. We start with the only thing we know for sure — the price — and then assess what has to happen to realize an attractive return…The most important question in investing is what is discounted, or put slightly differently, what are the expectations embedded in the valuation?
  2. Question: Unlike other competitive fields like sports, feedback and coaching is more challenging in investing. The rudiments that lead to success seem more poorly defined and the field has more randomness (esp if investment horizons for individual investments span significant portions of an individual career).One quality that’s important in investing is curiosity and ability to learn and improve and adapt over time. You wrote recently an interesting piece on feedback and how people and organizations can learn and improve. What was your key takeaway from that paper?

    One of the things that I have always observed is that in most fields, timely and quality and accurate feedback tend to improve performance. If you’re a tennis player or a musician, you’re likely to have a coach, even if you’re an elite participant, you’re likely to have a coach to help you in that process. The investment management industry is an industry that draws a lot of really smart people. The remuneration is attractive and so forth. It’s a very competitive, interesting field. It’s remarkable in the sense that feedback is very difficult to attain. In the long run it’s portfolio performance and so on. But in the short run it’s very, very difficult to do.

    The question is, are there any mechanisms to give ourselves quality feedback? That got me going back to the very top. If you study, for example, Phil Tetlock’s work on Superforecasting. Tetlock, a psychologist at the University of Pennsylvania participated, this is probably a decade ago, in a forecasting tournament that was sponsored by the defense department. And they invited people to participate on their team and they found that 2% of them, one in fifty were so-called superforecasters, people making really good forecast that were way beyond what chance would dictate. And they decompose what those people were doing. But if you talk to Phil and you say, well, what is the key? He’s like, well, you gotta get the right people. That’s the key, that’s the first starting point.

    So I opened the piece by talking about what are the right qualities that we would look for as investors? We drew on that superforecasting literature. We also drew on this idea of rationality quotient by Keith Stanovich. I think that’s very powerful work. Stanovich has made this really interesting, and I think provocative, claim that there’s a distinction between IQ intelligence quotient and what he calls rationality quotient, which is the ability to make good decisionsAlong with some of his colleagues he developed a specific test to measure rationality. And if you look at the subcomponents of that test, it seems really consistent with what we would care about as investors.

  3. Question: What is practice in investment management? The other interesting question is, in every domain elite performers tend to practice. Every sports team practices, every musician practices, every comedian practices. What is practice in investment management? How much time should we be allocating to that?

    The individual

    It’s a fundamentally interesting question. What you’re doing is taking yourself essentially offline in order to be more effective when you come back online. That’s what I’m going to say is practice or training. And there are lots of interesting questions that come out of that, topics like skill transfer. If I teach you to be a great poker player or backgammon player or chess player, are those skills going to map over to you as you are in your investing seat?

    The organization

    The second big thing we studied was how people are embedded in organizations. It’s lovely to think that you’re doing all these things by yourself and you’ve got the right attributes and so forth. But the question is once you’re in an organization, does the organization enhance your ability to make decisions or does it detract? The work on this is quite clear that when you’re working in a team, you want to get different points of view. And the biggest problem in teams and organizations typically is that dissenting views tend to get squashed

    Feedback

    Then the last part is the feedback. To bring this back full circle, what we argue is when you have an investment thesis to buy or sell something, that means you believe you’re going to generate an excess return, or there’s a mispricing in the market. And you’re going to have a thesis and that thesis should have sub-components to it that will allow us to create a scoring system. The most common of these or known of these is called a Brier Score. Brier himself was a meteorologist. So you can imagine this was developed first for meteorologists who obviously are predicting rain or sunshine with certain probabilities. And then they observed the outcomes very quickly, to see if they’re right or wrong. So that helps them get better calibrated.

    To have a Brier score you only need three things. You need an outcome that we can agree upon, within a time period that we are finite, with some probability. And if you have those three things, you’re in business to calculate a Brier score. And so my argument is break down your thesis and put it into some Brier score ready predictions. Again they’re embedded there. You just have to surface them and start to keep track. And this doesn’t have to be on a public score board or anything like that, you can just do this for yourself. But what I find is the very discipline of writing those things down will force you or compel you to think more about them and to think more deeply about them. For example, if you’re assigning probabilities, you’re going to immediately start searching for base rates.

    [The analogy to my post on post-mortems is obvious: Being A Pro And Permission To Be Serious]

  4. The importance of a team in calibrating[I’m always emphasizing that trading is a team sport contrary to the perception that it’s some genius alone in a basement who plays the drums to rest his mind.]

    Question: What is an elite team, why are they special? And did you learn anything about how to create one?

    Tetlock and his colleagues, when they did the Good Judgment Project, this forecasting tournament, they did a lot of really interesting things. They would say, well, if we train people well, will it help them or not. If we put them in teams, will it help them or not. And they have controls for everything, so they can compare it to what the other outcome would’ve been.


    Discoveries included:

    • training esp if you focus on base rates works
    • Teams added value relative to even those individuals who were trained.


    3 important features for effective teams:

    Size


    There’s a guy named Richard Hackman, but he was an organizational psychologist most recently at Harvard, who made it like basically a life’s work of the study and found that the optimal team’s size was four to six. He also found that if you were going to make a mistake, three would be preferable to seven. Four to six seems to be the sweet spot. Hackman didn’t really study investment organizations. He studied all sorts of organizations. This is something that’s important for us to think about because it tends to be human.


    Diversity


    Types of diversity

    Social: Age, race, gender, ethnicity, etc

    Cognitive: what makes an individual unique (training, experience, personality) Now I think one can make the case very seriously and quite rigorously that social category diversity contributes to cognitive diversity, but it is cognitive diversity that we’re after.

    Values: The third type of diversity is values diversity. You might think about it as a sense of purpose, and on that you actually want to be low. We want a common mission, even if we are of very different background, we’re pulling in the same direction

    Managing the team

    In most organizations, there are people thinking things that are different than what’s going on around them. But they’re not going to say it. Leaders of teams often stymie this process by indicating what they believe. Here is the leader, he or she leans into one sort of solution, one sort of decision, and everybody else falls into line in the investment or in business.

    It’s truly rare to have consensus. If you have consensus, you should be asking what the heck is going on…The onus here is on the leader. The leader of that group has to make sure that he or she is surfacing alternative points of view, making sure that their people are expressing those views in an independent fashion.

    [This section pairs well with Notes From Todd Simkin On The Knowledge Project specifically the section about a culture of “truth-finding”.]

  5. Implication of fundamental law of active managementThe fancy formula is “information ratio equals the information coefficient times the square root of breadth.” In plain words, it says excess returns are a function of skill times opportunity set. If an investor hopes to generate some sort of an excess return, you might use that as a guideline to break down the fundamental law of active management and ask if they’ve got the components in place.

    Components

    • Information coefficient is a measure of skill. If you project something, does it come true? It’s a measure of calibration in your skill, but you can also break that down in terms of batting average and slugging.

      This goes back to our conversation about Druckenmiller. Batting average is a measure for every 100 investments you make, what percent go up, literally just go up versus what go down. So we’re measuring that. And then slugging is how much money you make when you make money versus how much money you lose when you lose money. And of course you can have a low batting average if you have a very high slugging rate. If you have a low slugging rate, then you need a high batting average. I’d want to understand exactly how they’re thinking about that and that ratio.


      For example, if you have a low batting average, just slightly over 50, and you have very low slugging, you need a lot of opportunities. As a consequence, those are organizations where people have to be constantly churning for new ideas. By contrast, if you have an organization that says, we’re going to be relatively concentrated, we want a high batting average, and we want an even higher slugging average. They’re going to have to find gems of ideas, but they’re not going to find a ton of them. Then just making sure that everything seems to be aligned.

    • Breadth is the other one. One of the ways we measure breadth practically is through the concept of dispersion. How much variation is there in stock price returns. You want to know the dispersion of the asset class in which that investor is participating, and to see if the dispersion is sufficiently large for them to express their skill, and whether that dispersion is widening or narrowing. So that’s one way to have a systematic way to break down what a particular investment process looks like. And then you’re going to focus on the people.

      [Mauboussin has written extensively on when active management makes the most sense: when the dispersion of returns provides an opportunity for skill to reimburse its costs.

      See:

      Looking for Easy Games How Passive Investing Shapes Active Management (CSFB Research)

      Understanding Skill A Paradox Plus Qualitative and Quantitative Approaches (CSFB Research)

      You can find a repository of Mauboussin’s papers here. ]

Moontower #153

Friends,

Well hello.

It’s been 6 weeks since the last post. In that time, my family’s had covid and after recovering we were traveling mostly seeing my side of the family in NJ. We also did a bunch of tourism in NYC which seemed fitting since moving away 10 years ago. We went to a Yankee game, Ellis Island and the Statue of Liberty, walked the Highline, saw the Vessel, wandered Washington Square Park where a Moontower reader recognized me (he didn’t ask for an autograph darn it), grabbed food at Chelsea Market to picnic at the Little Island, met a friend for a drink at Death & Co (pilgrimage), took a boat to a part of Fire Island only accessible by water (thanks Tina and family!), and spent a day at Coney Island.

3 20k step days in NYC with the kids and I could have happily done more. It will always exude “home” to me. But also, I’m sorry I missed so many of you. When I have the kids with me it’s hard to schedule meetups so I’m thinking to visit a bit more just to hang out with you.

I’m back in CA now and just wrapped one of my favorite weeks of the year. Zak turned 9 and I turned 44 (we went to the hospital on the night of my birthday in 2013 but Zak decided he wanted his own day so he dragged his mama through lots of labor). I want to share a quick observation. The most joyous moments in my life occur when I see the kids accomplish something that took bravery and left them feeling empowered. I keep a list of them: the first time they swam across a pool, when Zak got stuck in the treetops ziplining and didn’t panic (even though I did inside), when he rode his first big coaster, and we logged a new one for his 9th birthday…surfing. If you are in Laguna Beach, I highly recommend Goff Tours. They created this awesome video of his session (see if you can spot the leopard shark). Anyway, the joy I feel when I see a person realize they can do something they couldn’t previously do, that moment of unlocking, is an undepletable source of energy. It’s the high I want to chase. It’s a clue for filtering what I want to work on.

A thousand people signed up for this newsletter since I last wrote a post. If you’re new here, know that I’m figuring my life out as I go along. If you came here for answers you’ll be disappointed. I’m a trader according to my resume but I care more about trying to figure out investing for now. I’m a parent. I’m trying to do that better. It raises more questions than it answers. But you get to come along for that ride. I am in a battle with myself about all the things I need to unlearn. The sense of guilt when I’m not driving forward even though I believe slack and space are critical to unfolding in a way that doesn’t spill me into local maxima. The tension between explore and exploit. The skepticism that a career in finance demands grinding against my over-trusting nature.

The teens who climb the Moontower in Dazed and Confused smoke weed and ask questions. This is hardly the trappings of youth. If you recognize that, you’ll be happy here. Thanks for joining.

Having said all that, there’s so much to cover. There are game things, and investing things, and quanty things, and cultural things, and education things, and random things. But…

Right now, it’s summer.

Sitting in front of the computer is not a summery thing to do (I’m an unabashed summer maxi, I l don’t need any other season. I blame Egyptian blood for this). Plus we re-scheduled “cousins week” which means I’ll be playing camp counselor to 10 kids at my house soon then doing 1 more week of family travel before school resumes.

For the next few weeks, I’ll be sharing recommendations of content I’ve been enjoying this summer. Still, if you want to read things I’ve written, who am I to deny you — there’s a “best of” here.


Money Angle

Links:

On Bullshit In Investing (9 min read)
by Benn Eifert

The title says it all. It was a post that needed to be written. If you are reading this newsletter, Benn’s vol wizard status needs no introduction. But this post should be sent to your loved ones who may have been caught up in the investing fever of 2021.

Lifestyles (7 min read)
by Morgan Housel

Morgan’s signature style is to take a generally interesting story and present it as a metaphor or lesson for investing. The power of this approach is the stories make the lessons stick in your mind but there are 2 prereqs for this to work:

  1. The story itself needs to be objectively epic.
  2. The writing needs to measure up to the story’s epicness.

Check and check.

If you have ever heard the terms internal and external locus of control, then you can replace them with “Don” and “Bernie”.

(Not the Don and Bernie you’re thinking of either)


Last Call

I’m really late to this channel. Best watched in the, umm, Moontower if you want to wheeze-laugh.

Stay groovy!

Moontower #152

Very verbose programming note:

For the second consecutive year, I’ll be giving your inbox and me a summer break.

Last summer, I traveled with my family for 10 weeks, staying with friends and family around the US. After getting our vaccines last Spring we wanted to hit the road to reunite with loved ones. It was a summer I hope our boys remember forever. I know I will.

We also explored other places to live and even bought a house in TX on a whimsical overbid which turned into a lucky personal account trade. So much for diligence. But just as some people separate only to discover the grass isn’t greener, we have come back home and reaffirmed that CA is a beautiful place for us. It’s far from perfect but everywhere has warts. It’s the best place we’ve seen…for us. You won’t find me writing an indulgent Substack piece elaborating on that any further. You get enough of my indulgences as it is 🙂

This summer we will be traveling again but only for 5 weeks. In an attempt to be present as possible during my kids’ summer (I’m trying to reign in my Twitter addiction as well), I find unplugging from Moontower to be helpful. I also want to be deliberate about my relationship with public writing. This letter has almost doubled its subs to nearly 5k in the first 5 months of this year even though I’ve been writing for 40 months. Sub count is a vanity metric (I’m more proud of the open rate staying above 50%), but I’m human — it nudges me towards wanting to see “number go up”. That represents a shift from an internal to external locus of control and I’m not cool with that. So taking a break is also a circuit breaker. I’ll come back, growth will have slowed, and I’ll realize this is fine.

Last year when I came back from the break I switched from Mailchimp to Substack and used the opportunity to bounce recipients that haven’t opened an email in 6 months. I will cull the list again when I return. If people want to read this, they’ll find it. If you don’t miss it, that’s totally cool. Attention is precious. Re-allocate it to the deluge of other awesome stuff out there (or other Substacks I recommend!)

Ok, sorry if this sounded self-important. I’m just managing my neurosis out loud. If it helps other writers who may feel reluctantly caught up in “growth” it will have been worthwhile.

You can expect Moontower to be back in mid-July. The list of stuff I want to write about grows about 5x faster than I can write, so there should be lots of fun things to come back to.

As always thanks for reading, y’all give me so much. I write to “find the others” and it’s working. I’m confident writing a free newsletter and blog will be the highest-yielding investment of my non-family time.

Onwards…


Friends,

Last week, I waded into gun control thoughts to demonstrate what kindness by humility looks like to me. That was an unexpected detour given the horrible news from Uvalde. This week, I’ll return to where that post was originally headed.

The post started with Slatestar’s Fake Graduation Speech which I maintain as one of my favorite reads. Graduation speeches are irresistible. They are the prize for beating the final boss in the tightly-tracked 8-bit side-scrolling video game known more colloquially as “school”. A great speech can be used as a compass to the wide-open MMORPG the diploma achievement unlocks. The commencement speaker is the sage shopkeeper in Zelda — “It’s dangerous to go alone. Take this.”

The compass points to a metaphysical place. The destination is meaning. But it doesn’t exist without you. You give your life meaning. So the compass is unique to you. It has a biometric lock, like your phone. Only your eyes can see where it points.

Without a compass, you’d be paralyzed. Overwhelmed by choices. Think of a grizzly bear. It eats, sleeps, socializes, and screws. It doesn’t buy a duplex as the forest gentrifies or join the Peace Corps to help its polar cousins learn to climb trees because the ice caps are melting. You are blessed and cursed to not be a grizzly bear.

Our awareness drives us to ponder meaning. This feels necessary to at least loosely rank our values so we can make decisions. I wasn’t finished referencing Jared Dillian last week. In Memento Mori he wonders:

Even though I am not religious, I tend to believe that there is some accumulated wisdom in organized religion. All major religions believe in an afterlife. Most believe in the concept of heaven and hell. And then we have empirical evidence of tens of thousands of people dying, being reanimated, and describing what seems to be heaven and hell. I don’t think this is a coincidence. So the first question is: what happens to you after you die? And the second question is: how do you avoid going to hell? People get a Starbucks on the way to work, sit in a chair all day, come home, watch some shows, and go to bed, without really pondering this question.

I think about it every day.

So what is the solution?

His answer rhymes with Slatestar’s full-bodied endorsement of kindness.

Jared answers his own question:

The answer is love.

This is where people get confused. Most people equate love with falling in love, or romantic love, but that type of love is a feeling. Real love is not a feeling, it is an action. You see, people reverse cause and effect. They think that you feel love and as a result of that, you act selflessly towards someone. It is the other way around. You act selflessly toward someone, and then as a result, you feel love. [Comment from me: the surprising satisfaction of arranged marriages speaks to Jared’s inversion of cause and effect]

Real love should be given freely and without reservation.

He continues:

Most people love their spouse, their kids, their pets, their family. That is the low-hanging fruit. What about everyone else? What about your dickhead coworkers? What about your grumpy neighbor? What about your enemies? Do you wish for them to get everything you want for yourself? Do you feel compassion and understanding towards them?

Do you strive to ease the burden of everyone you come in contact with?

Do you give people the gift of time?

I’m no saint. But the progress chart is going from the lower left to the upper right. The point is that I am constantly working on it.

That last line is the action dictated by the compass. There’s no right answer, your compass is your own. But in a life where I’m privileged enough to consider more than where my next meal is coming from, I don’t think my compass’ magnetic resonance with this is a coincidence.

YMMV.


Loosely Related Tangents

  • I tend to be more on the introspective end of the thinking-action continuum than I’d objectively prefer. If you lean more towards “doer”, that probably sounds like a weird, possibly pathetic, observation. Like why even waste a thought to put yourself on such a spectrum. But if you are a fellow over-caveating shoegazer you understand. It’s a pernicious form of self-sabotage. You can’t help seeing the tension in every platitude. I literally keep a file in my notes called “Tensions”. If I shared it, you’d quite possibly die of exhaustion. Here’s an example.

    Jared: Real love should be given freely and without reservation.

    Me ankle-biting: What lesson do people internalize when love is unconditional?

    As Jared requests at the end of each letter, I’ll just go f myself now.

    (Mumbling like Milton as I plod away: The thinking-action continuum is a false binary anyway, it’s more like…[Yinh proceeds to gag me])

  • Again this line: Real love should be given freely and without reservation.

    I’m doing a mentorship program this summer where we work with HS students. These kids are defying long odds to even find this program. The training made their circumstances abundantly clear. This is a chance to help kids who may have never had a real conversation with an adult who is not a teacher, parent or coach. The kids are surprised an adult would even find them worth talking to. A story of a prior kid in the program was that he never bothered to learn to read because an adult once told him when he was young that he’d be dead by 19. Today, he’s 26 and regrets listening to that jerk.

    As I prepare for my assignment, we were taught to navigate a too-common situation — the kids have been given paid internships this summer but when they go back home they are going to face tremendous pressure from their families and neighborhoods to share the money. Now there’s nothing wrong of course with being generous, but that’s the point. We are instructed to teach them to: give cheerfully.

    The goal is to help these kids discern exploitation from genuine charity. A skill they have rarely had to practice because the concept of any surplus is foreign. Hearing this is more harrowing than surprising. Part of humility is expecting that we take things for granted, even if we don’t know what those things might be until we hear about them.

    On an intellectual level, I know what the words “love freely” and “give cheerfully” mean. It would be a shame if the meaning stayed arrested at that level. Jared’s post is an invitation for all of us to stretch further.

  • In Professor Kevin Bracker’s essay on college, he explains: a lot of schools are starting to offer — courses on professionalism. Things like showing up on time, table manners at a business lunch, working with others, etc. These are more important skills than many people realize. Grow up in the right environment and you learn it through osmosis. Grow up in a different environment and you probably won’t.

    The mentorship training is highly aware of this. Teaching the kids to carry themselves professionally (i.e. no slang) is a core objective. I can imagine many readers bristling at the conformity of etiquette courses, but that’s a sumptuous degree of naivete. The way we speak and act signals class. Hipsters (my favorite definition of them is “someone who identifies with both the counterculture and the dominant class”) lament that reality without appreciating its ramifications — the cost of non-conformity is much higher for the underprivileged.

    It might not be fair that something akin to “acting white” is required to get ahead, but the change to that is going to come from above. Not below. Being unrealistic is a luxury these 18-year-olds can’t afford.


Money Angle

I was going to write about how to measure implied skew. The post would also have been a nice demonstration of why I write about options stuff in the first place (hint: it’s not because I think you should be trading options). You would walk away from the post excited by a new insight but rattled because it would crack a door you’d definitely prefer to keep closed.

The anticipation is a tad cruel because I’m going to table that post for next time. I didn’t feel like breaking up today’s letter with nerd stuff.

Dazed and Confused transpires over the last day of school. Randy “Pink” Floyd ain’t doing homework in the moontower and I’m not gonna be the cruel teacher who’s gonna put your mind in problem set mode.

Instead, I give you one of my favorite videos. Watch it through to the end. It’s worth it.

As tensions go, it presents one of the most difficult tensions an intellectually honest person needs to contend with. I’ve come to the same conclusion its author does — the “Success Paradox” cannot be resolved without some controlled self-deception1.

You will recognize the same thinking in this 2-part series:

✍️ My Personal Trigger (5 min read)

✍️Why ‘Deserve’ Makes My Skin Crawl (8 min read)

I’ve always been sensitive to the “success paradox”. It informs my politics. My worldview. It’s why I find Freddie deBoer’s views on education impossible to look away from. (I will be writing more about learning in the back half of this year. You can expect Money Angle to get some of that treatment in the context of investing as well.)

For now, watch the video. At worst, you are introduced to a beautiful YT channel.


From My Actual Life

Yinh and I have covid this weekend and the timing couldn’t be worse.

Our first inaugural Cousins Camp was supposed to start today.

We were scheduled to have 8 nieces and nephews staying with our kids this week. We hired a teacher and chess coach to guide enrichment programs from 8 until noon every day. The kids would do crafts, write and perform a song, play games, and present/public-speak. Afternoons were left open for play, sports and pool time. 80’s summer kid mode.

Our plan is to rotate this every year at a different family’s home (the other parents are going on mini-vacations without their kids, so this is a win-win for everyone!). We decided to do this because it will be a great series of memories to gift both the children and the parents.

We had a different version of this idea in 2020. Boardgame Week. A local parent offered their amazing backyard as a site. I was planning a week of PTO to host 14 kids (I wasn’t charging so it was oversubscribed amongst our parent friends before Yinh finished typing the text message) for 3 hours a day of gaming and then play time.

Covid blew it all up and then last year we traveled all summer so I was so stoked that we were finally going to pull this off. Until yesterday when it became clear we had to cancel because we and some of the guests have covid.

[I’ve had chills, fevers and razor blade throat since Friday night but it’s all been manageable. I took a my 3rd covid test in 3 days and finally tested positive. I was getting nervous that my sickness could somehow be not covid and that I was going to get covid too.]

Anyway, I’ll be back in your inbox sometime in July. I’ll still be around on Twitter a little bit and you can always email me.

Enjoy the start of summer. Summer is for memories. Spread kindness. Make joy a priority for someone else and it will just as easily be your own. A little intention goes a long way. Whoever your they is, they will remember.

Stay groovy!

Kris


Postscript

In a crazy coincidence, I just hung out with the family that rented our house before we leased it (they are tight with our neighbors and visited from the East Coast). Apparently, they did this same camp idea with their family and friends at the house we live in now! They showed us a video of the finale performance the kids put on and pictures throughout the week. The mom couldn’t believe we randomly settled on a similar plan. She’s an artist and said something to the effect of “there’s just something about that house”.

Our house is a 1950s 3/2.5 CA ranch that looks straight outta Boogie Nights. Mirrors, bricks, and cabin interior. Everyone would be piled up on each other. I’m too cheap to put the A/C on. And everyone gets chores. If there were movie props on the premises you’d think I was recreating the commune on Spahn Ranch. Without the sex, drugs, and ya know, murder.

Although you might hear some Brian Wilson in the background.

Moontower #151

I want to share one of my favorite Scott Alexander posts while we are still in graduation season.

✍️SSC Gives A Graduation Speech (21 min read)

It’s the commencement speech Slatestar would give if asked.

He caveats the speech as such:

[Trigger warning for deliberately provoking horror about graduates’ real-world post-college prospects]
[Epistemic status: intended as persuasive speech, may somewhat overstate case]

With that warning, go read it.

If you ever want to refer back to its themes, you are welcome to my notes:

Keepsakes From Slatestar’s Fake Graduation Speech (8 min read)

There is a lot to chew on in the speech but I want to zoom in on a bit at the end.

I don’t know how to fix the system, but I am pretty sure that one of the ingredients is kindness.

I think of kindness not only as the moral virtue of volunteering at a soup kitchen or even of living your life to help as many other people as possible, but also as an epistemic virtue. Epistemic kindness is kind of like humility. Kindness to ideas you disagree with. Kindness to positions you want to dismiss as crazy and dismiss with insults and mockery. Kindness that breaks you out of your own arrogance, makes you realize the truth is more important than your own glorification, especially when there’s a lot at stake.

In our household, we have 3 core values we treat as a coat of arms:

  1. Kindness
  2. Gratitude
  3. Curiosity

I could go into each of these and why these 3 values, in particular, stand out to us. The shortest explanation is that I feel that many object-level values like “being hard-working” are downstream of these.

I’ll just talk a bit about epistemic kindness as humility since Slatestar brought it up. Experience tells us that people do not form opinions after weighing all arguments or data and coming to conclusions. Spock is fiction. We believe, then we cherry-pick instances that confirm our beliefs.

I’m sure there are legions of PhDs studying how beliefs form. Don’t worry about that. Instead, let’s just remember the dress for a moment.

In case you suffered an EMP outage in early 2015, you should recall that we couldn’t agree on what color the dress was.

This was a profound moment for me. It messed me up. If we can perceive this dress so differently, good luck agreeing on anything that matters. The keyword here is “perceive”. The horrors of the past week and the various reactions are a reminder that I do not understand many people. I don’t understand their views. Or how they weight their views.

And they probably wouldn’t understand my views. And why I weight them the way I do.

There’s a part of me that feels we need to build bridges. And grimly, a part of me thinks it’s futile. We can’t even agree on the dress because we simply don’t “see” the same way.

This point was further driven home when I read Jared Dillian’s Manic/Depressive (6 min read). I’ve been reading Jared’s professional newsletter Daily Dirtnap for a decade. I’ve read one of his books. I’ve exchanged emails with him over the years. His work is deeply personal. I’m aware of his mental health struggles. Still, that post, like the dress, halted me in my tracks. It reminded me of how limited my lived experience is. In many ways, I see myself in Jared. Some superficial, some less so. But when I read that post I also realized how different we are.

That understates the case. His description of bipolar disorder affirms my sense that the potential distance between 2 people is wider than we can imagine. It’s possible to not have any shared values with a fellow human because their perceptions are different from yours.

There is a wide range in our emotional wiring. There are billions of people in the world so there are tens, perhaps hundreds of millions of people with outlier hormonal balance. If intelligence follows a bell curve there are around 50mm Americans who have an IQ 1 standard deviation below the mean or worse.

Jared worked at Lehman when it went under. He wrote this about its boss Dick Fuld:

You can’t measure the intelligence of animals, but gorillas aren’t that smart. It’s safe to say that he didn’t have the intellectual horsepower to lead a complex financial firm through a decade-and-a-half of lurching from one crisis to the next. Lehman almost went tits up in 1998, then didn’t, and Fuld learned entirely the wrong lessons from that experience. He learned that you could cheat death by having the biggest balls. Hard to believe anyone was willing to own the stock after 1998.

IQ has a mixed reputation, and it’s kind of a political third rail these days, but I think it’s useful to have a discussion about intelligence, and how some people have less of it than others. The average IQ of the population is 100 (by definition), and the standard deviation is 15. If Fuld had an IQ of 115 (which is probably a pretty good guess), and you had an IQ of 145 (roughly 1 in 1000 people do, and there are lots of them at investment banks), then you would be two standard deviations above Fuld. Which is to say that you talking to Fuld would be like an average person talking to an eggplant.

Variations in culture, trust, and mental compute power mediate what we give attention to and how we weigh it. IQ is an incomplete measure of compute and is sensitive to cultural artifacts. But it’s not hard to understand that large differences in it can leave you feeling like you are talking to an “eggplant”. There are things you cannot explain to a mentally disabled person (I’m not calling them eggplants, and Jared wouldn’t either.) This obviously doesn’t devalue them as people. But it does devalue them in certain contexts. For example the context of driving. The public good requires drivers to exceed a minimum bar of cognitive and sensory capacity.

There is a real spectrum of measured intelligence. A person with a 100 IQ (average) would be frustrated dealing with someone with a 70 IQ. The distance between 100 and 130 is just as wide to Jared’s point. My point isn’t that someone who disagrees with a smart person is wrong. Smart people are outstanding at being wrong. They are clever in rationalizing how they are right which makes them especially dangerous and prone to overlearning the wrong lessons (the classic “midwit” meme). The point is that intelligence, like delusions and hormones, constitutes an axis of perception. How that axis intersects with culture, trust, and ambition will find people of all abilities scattered across the political map.

When I disagree with others I do my best to keep the dress in mind. To remember others’ mental and psychological composition may be impossible to relate to without a lot more information. Experience and perception shape our beliefs which we then rationalize. This means our conclusions are slaves to the tyranny of path-dependence. A single draw from a million possible lives. We suck at counterfactuals and we can’t tell the difference between “because of” and “in spite of” (You’ve surely heard justifications that follow this pattern: “There’s nothing wrong with playing video games 8 hours a day, I did it and I turned out fine”. Sigh. See my post Video Game Veto).

So what does humility look like when you vehemently disagree? It looks like more questions and less statements. You must ask questions.

[I’ll issue my own warning: personal takes to follow]

I’ll use the recent gun controversy as an example.

There’s a hardline strand of gun advocacy that prefers to sidestep any discussion of restrictions or background checks by sticking its fingers in its ears and crying “Second Amendment”. This easily devolves into strange debates about what the framers of the Constitution meant and to what extent citizens today should even care about proclamations from the graves of people who never saw a telephone never mind a smartphone.

That debate feels like a distraction. It’s a convenient way to avoid deeper questions when one’s stance is “I can appeal to a document’s authority to justify not needing any justifications”. Instead of getting tractor-beamed into a pointless debate, I’d rather ask questions to understand gun advocates further. It might go like this:

Hey, you were once a 19-year-old young adult interested in dogs, video games, baseball, DJ-ing, cooking, public speaking, and what you were going to do for a living. You remain interested in some of these things but now the 2nd Amendment and guns occupy a conspicuous amount of your mindshare.

  • Perhaps you feel threatened by gun control measures, teach me why.
  • The interpretation of the First Amendment includes prosocial concessions that restrict some freedoms. You cannot yell “fire” in a crowded theater. That’s not your right. You are suddenly put in charge. What prosocial concessions would you build into the Second Amendment?
  • Do you believe your current position on guns is best for society or best for you? It’s ok to say “best for you”. I’m not naive. This country has pursuit-of-narrow self-interest as a higher value than cooperation in its DNA. Whoever you think your stance is best for, teach me why.
  • What would need to be true, or what argument that currently supports your position would need to be false, for you to update your beliefs?

On an individual level, I still believe humility is critical to understand one another.

Regrettably, I’m not sure that view scales.


More Personal Thoughts

For many shooting and hunting are passionate hobbies. Growing up, my dad had a gun in the house, one of my closest friends in HS was an avid hunter. I was always at his house filled with shotguns and compound bows. My dad’s brother had an arsenal. I shot a .22 in Big Bear with that uncle when I was 9 (I turned down the chance to shoot the .45 that day because I was scared of the recoil). Guns provide millions of Americans entertainment and security.

Gun control deserves the same level of oversight we give to driving. Both domains need to square freedom with public health. Speed limits, seat belts, and lines on roads are not especially controversial. If there was an amendment with vague language about automobiles would we be debating the DMV while watching a high-speed chase on an LA freeway? Would O.J.’s right to speed in his white Bronco be as polarizing as his actual murder case?

To me, it feels that the gun debate overreaches suspiciously far into “freedom” discourse. Is there not a lot of room for reform without violating people’s rights in excess of the norms we voluntarily accept in exchange for public health? The debate is a source of power for a circle of politicians. They stand to benefit from scaring voters into making the gun debate about freedom.

These politicians use a sleight of hand — slippery slope arguments. Slippery slope is an argumentative technique for closing a debate before it starts by exploiting common thinking fallacies that make some end state appear inevitable even though it’s a single destination in a garden of forking paths. The user of such an argument is steamrolling you. If slippery slope arguments were universally valid, you would be paralyzed. You’d never do anything new. The left likes to invoke Hitler in every argument while the right pretends any change is a needless inhale that the government boa constrictor seizes to tighten its coil.

There are always people who argue in bad faith. It’s usually in the name of some abstract principle. In some cases, their minds are hacked. Yet there are others who know exactly what they are doing. They already have the Prisoner’s Dilemma boxes filled out in their minds. But we know cooperation is the basis of human flourishing. It would be grim to accept that the majority of people are unable to find mutually agreeable ground and even grimmer to think they have consciously abandoned the pursuit of cooperation. But it also feels like our system is selecting for bad faith leadership that has spawned a negative feedback loop where the most powerful signal you can send is who your enemies are. That’s what cartel warfare looks like. It’s a dangerous step away from principles to “might is right”. Barbarians beg for that world.

What happened this past week was barbaric. I’m ashamed of us. I don’t think it’s purely about guns but something more perverse in our culture. But the guns make the expression of that perversity convenient and amplify the impact. My initial reaction was sadness and anger. I didn’t have kids when Sandy Hook happened. I thought it was ghastly of course, but now I appreciate just how shaken every other American parent felt upon hearing that news.

It’s so disheartening.

The valence of guns seems to have a wider grip on people’s identity than other hobbies. There are so many things to possibly be interested in, how did this galvanize so much of their attention? Something about the discourse wreaks of manipulation. Like sophists with an extreme idealogy managed to successfully implant brainworms into a population. Or is a totally disproportionate minority hijacking us? I don’t study politics enough to understand the dynamic (happy to be educated if someone has a good grasp of it). Is the NRA more powerful than every other deep-pocketed non-psycho organization?

For the people who insist on arming teachers or suggest interventions that don’t explicitly create more friction to the wrong people accessing guns, I want to shout “who hurt you?” But this would be condescending instead of humble and I don’t think we get anywhere by attacking. We need a good-faith debate about the tradeoffs in our laws between freedom and public health.

The idea that more guns is the answer can only come from people who are not used to having their beliefs tested by reality. Imagine a futures contract that settled to 100 if the following were true:

“If we armed every citizen non-suicide gun deaths go down”

I’m a size seller at 50.

Convenience trumps self-control no matter what you tell yourself.

In David Epstein’s update this week:

A common argument, though, is that if those people didn’t shoot themselves, they would have just found some other way [to commit suicide]

Ample evidence (like this, and this) points to the contrary — that easy access to lethal means, like guns, increases the numbers of deaths by suicide overall.

The burden of proof is on the people who argue more gun control won’t help. And if they say you need to crack eggs to make an omelet, my question is how many eggs with baby chicks in them are you willing to sacrifice for that omelet?


Money Angle

This week my friend Khe asked me to join him for a Q&A on investing basics as a way to give some extra value to his Rad Reads community. In this letter and my blog, I write a lot about wonky finance stuff. Despite my best efforts to simplify the brain damage, I realize it’s not exactly basic.

This session was basic and I enjoy taking a shot at helping people learn the essentials. The feedback on this session was glowing and kind:

This is such good information because you’re going through all the things that I read, all the little bits and pieces, and you’re saying, “Well, this is not why this works.” This is very logical, and it makes a lot of sense. I really love how you got deeper into what you’re teaching and saying, to explain how things are not what some people are touting them to be. There’s so many examples here.

You can watch the replay:

🎬Investing Fundamentals With Khe and Kris (1 hour)

📝Transcript (Otter.AI)

This was the list of resources I shared for novice investors to learn:

Introductory

My Favorite Investing Blogs To Learn

Favorite Advanced Blogs

Professors

Following Along On A Regular Basis

  • Matt Levine’s daily Money Stuff column (Link)

    Apply your knowledge and learn how to think from Wall Street’s supreme writer. His supremacy is a fact.

  • Kyla Scanlon (Substack)
  • Link roundups: Abnormal Returns (Link)

From My Actual Life

It’s been an action-packed week. I was in Panama last weekend. According to the guide, the canal saves a vessel 26 days of travel. The toll for container ships is about $100 per container. The largest ship he could remember had 14,000 containers!

The system of locks (“water elevators” because the Caribbean/Atlantic side is higher elevation than the Pacific side) is mesmerizing to view.

This dude helped me level up my classic daiquiri game:

I keep a list of my modest repertoire here: Moontower Cocktails

My kids had their last day of school.

My music teacher helped me infect them with the bug (I dragged them to my jam session and being in that environment sparked their interest without me pushing…the older kid wants to take drum lessons!).

And finally, it’s been a weekend of nostalgia — I saw Metallica at Bottlerock on Friday and Top Gun last night.

I’m sending this from beautiful Big Sur.

Happy wedding anniversary to V&L, M&L, and the many others who tied the knot in late May. Happy graduation to Elijah and the legion of grads celebrating. Seriously, read that Slatestar speech. Or my personal favorite commencement speech — Wooderson (you do understand where the Moontower namesake comes from right?)

Respect and warmth from me to y’all.

Stay groovy this Memorial Day weekend!

Moontower #150

Friends,

I had a trip booked this week, but when one of the kids got Covid last week I expected our whole household to go down with it.

Somehow nobody else got it, so…

I’m in Panama.

I wrote this before I left. I hope I’m alive right now.

Let’s just hop into one of the best posts I’ve read in recent memory.

✍️The Arc Of The Practical Creator (16 min read)
by @moretothat

Lawrence Yeo’s work is a trojan horse. Your mind’s guard thinks “oh what a cuddly cartoon, open the gate”. Then boom. You’re staring into a philosophical mirror. The words belong to a cartoon, yet the sentiment is unmistakably yours.

I’ve been enjoying these posts for years but this felt like an opus tying together many themes I read Lawrence for. The object-level matter is a set of directions leading you towards the path you want to walk. It’s a guided tour of the forks you’ll see along the way, their meaning, and a framework for deciding which way to go.

The meta-lesson has to do with agency. The meaning you create by your choices. And a paradoxically liberating insight — the path is endless.

I took notes as a reference. You can find them in my public Notion: Moontower’s Favorite Posts By Others

The most pragmatic bits are captured in the description of the arc. The deepest bits are timeless wisdom. They are reminders that creativity is important because it’s about agency. The word “creativity” is imbued with impractical or whimsical connotations usually relegated to art, music, performance, or writing. This gives the impression that creativity is rare or somehow reserved for the few.

Creativity resides in each of us. You don’t need permission to unlock it. And it’s not just a plaything. You have a duty to your well-being to unlock it. Lawrence, take us out:

Every stage will be challenging, and that’s the point.

Creative endeavors are inspiring because the scope of the problem often feels bigger than your capacity to solve it. But because you find that problem so worthwhile, you’re willing to put in the effort required to provide the best solution possible. Through this process, you become a more capable person, which allows you to address more worthwhile problems in turn. It’s this beautiful cycle that gives you a sense of purpose and meaning in how you spend your time and energy.

So regardless of which stage you’re in, understand that there is no easier or harder. There is just challenge. And the only way to cultivate a healthy relationship with challenge is to develop the patience required to manage it properly.


Money Angle

For this 150th issue Moontower, I have a confession.

I write this Money Angle section each week but as recently as 6 years ago, I didn’t really care about or understand investing. The delay in learning has cost returns and even shame. I might as well get the most out of that expensive tuition by sharing the story so others can learn from my mistakes.

When I graduated in 2000, the options and still-new ETF trading businesses were a party. The internet bubble led to high volumes and volatility. The volumes were a step-function higher than anything seen before. I’d estimate prop shops made 4-5x the profits they typically expected.

Before the dot-com days, options trading was a cottage industry where a typical trader could earn a low six-figure pay working relatively short hours without having to ingratiate their personalities to either clients or corporate overlords. A roaring stock market and the emergence of electronic trading transformed the landscape. The existing prop shops and sole proprietors had expertise and so-called time-place advantage on the exchange floors. The competition from banks hadn’t arrived because like I said, it used to be a niche industry. Banks were not internalizing flow just yet. In fact, to play catch-up Goldman paid a shocking sum of $6.5B for Spear, Leeds, and Kellogg after acquiring Hull months earlier.

The upshot. Prop shops were hiring like crazy. I snuck into SIG’s largest ever cohort. I started working in August 2000. I was a trader with my own book by October 2001. (Story time: I finished SIG’s class at the end of summer 2001. I took a 1-week vacation visiting my friends in Cupertino before heading back to NY to my assigned pit on the AMEX. During that trip to CA, my mother called waking me up after a 5am bender. 2 planes had crashed into the World Trade Center. She was in Midtown and called because she “just wanted to hear my voice”. I dismissed her as crazy and went back to sleep. Later that morning, when I turned on the news, it was the worst I ever felt in my life. Only to be topped a few minutes later when I tried to call her and couldn’t get through because the phones were overloaded. When I got back to NY the exchanges were still closed and I wouldn’t start trading for a few weeks).

I was 23-years-old, had my own trading account, and making $100k including bonus. It was more money than anyone in my family made. In the next year, I would pay off my student loans but what would I do with my savings next? Growing up, my parents didn’t have extra money to invest. I didn’t learn about compounding and what 100 bps means in the long run.

There was also a perverse combination of influences that kept investing in markets off my radar. First, the bursting of the internet bubble made me feel thankful for not investing in stocks. Second, as a trader we were trained to have no opinions. I thought of option customers as deluded gamblers. Suckers and tourists unless they had inside info. As market-makers, we were always worried about toxic flows. Toxic flow is informed flow. It’s either flow frontrunning a larger incoming flow or straight-up insider trading (I clerked at the post were options on XAL traded. That’s the AMEX Airline Index. Put option action before 9/11 was investigated with attempts to trace profits back to Al Queda. No smoking guns were found). In my model of markets, you either cheated to make money or you were the casino. Otherwise you were just gambling. Pretty dark.

I was starting to accumulate savings with my debts paid off. SIG had 401k matching so it seemed like a no-brainer to put money there. I think I just used a target-date fund. It was a snap decision. Retirement felt really far away so money trapped in a 401k felt fake to me. Later, when I was self-employed I would contribute $50k/year to a SEP IRA and just jam it into stocks. Again, fake money since half of it would have been taxed if I didn’t contribute.

But what would I do with liquid savings if I wasn’t going to invest beyond a 401k? The default was to buy a place to live so I wasn’t “throwing money away on rent” (that’s the wrong framing of rent; learning is unlearning). With this goal in mind, I was focused on saving about $75k for a down payment on an apartment. As a near-term goal it was money I couldn’t afford to lose, so investing didn’t make sense anyway.

In 2005, I bought a coop studio in midtown on 57th between Lexington and 3rd Ave. It was a 450 sq ft fixer that I renovated. (Random: the apartment was above a memorabilia store that had a Guns N’ Roses VMA award presumably from the night Duff and Slash, stumbling drunk, accepted the moon man while slurring their words and cursing on live TV. They were asking $5,000 for it. The most burning missed trade in my career.) Between the apartment and renovations, my savings were now depleted to a healthy reserve. No reason to invest.

2 years later, I score a low seven-figure bonus. So what do I do? I buy a condo in LIC off of plans. Paid the developer’s costs and everything. It was 2007 in NYC. That’s how it was. Toppy.

By the time the place is built and I move in, the GFC is in full swing. I never had great timing. (Not even as a vol trader…that’s why it’s critical to manage risk and size well. Timing is impossible to nail consistently but it’s not as important. Harley Bassman likes to say “sizing is more important than entry level”. Co-sign.)

I was in the midst of taking 6 months off after leaving SIG to start my own trading business with a backer. I’m shopping for an engagement ring, expect to have big wedding expenses in the next year, and embarking on a new venture where I’d have to post cash in escrow with the backer. Plus I’m watching the financial world implode. With all these demands and an apartment that is immediately underwater from its basis, there was no way was I going to stick money in the market.

So here I am, I just turned 30, a trader for 7 years, and I still don’t know a thing about investing.

I won’t drag out the next decade in detail, but I remained apathetic about investing. When we moved to SF in 2012, we started looking for homes. Another imminent purchase, so no point in investing, right? Since I don’t understand investing I figure I’ll just buy a house in cash and at least lock in the after-tax mortgage rate as a return. I know, I know. (Look, writing this is part of the healing.)

We can zoom ahead until about age 36. We just bought our family house in the ‘burbs and have a 1-year-old. This focuses you on the future. While my wife and I enjoy substantial W2 incomes, high taxes and relaxed spending habits make something abundantly clear — the strategy of just outrunning will eventually tire. I’m sitting there without equity in anything except a house.

That’s when I turned to the internet. I started lurking on Twitter. Listening to podcasts. I approached investing with a beginner’s mind. I realized that my trading background actually harmed me but it was because of how I generalized its lessons. It was my own failure. [See: How I Misapplied My Trader Mindset To Investing]

I became swept up in a process of unlearning and reconciling. What about trading applies to investing? The answers are still unfolding for me. When I started this newsletter I was mostly sharing links and concepts I found interesting. Somewhere along the line, I began translating from one domain to the other. The feedback told me that people outside trading could learn from the niche I spent my whole career in if I could peel off the skin to get to the fruit.

The quest to get better at investing goes hand in hand with learning and teaching. Some of the cornerstones from which I approach investing education:

  • Markets, from the perspective of most people, are “efficiently inefficient”. Efficiency is highly seat-dependent. Sitting in the cockpit at my last job, I could see inefficiency. I have no such visibility from my living room. My experience in trading has paradoxically contributed to this view — I’ve spent a lot of time in awe of how something that I thought was clever was actually priced in before I got there. That’s a hint that the relative efficiency of markets is not a paradox.

  • I can appreciate others being incurious about investing (I still consider it a chore…I find finance conceptually fascinating but investing is about a lot more than concepts). So I’m sensitive to people’s preference for simple. Investing is a wicked domain with tremendous luck. One of my favorite statistics comes from my buddy Nick Maggiulli. The dates are cherry-picked but somebody lived them:

    if you had invested from 1960-1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-2000 and underperformed the market by 5% a year.

    The returns to effort dimish extremely quickly. Charley Ellis describes investing as “a loser’s game” like amateur tennis. You win by not losing. Not making giant errors. Not carrying 18% credit card debt. Not concentrating your wealth in the latest shiny rock.

  • Not everyone grows up knowing about compounding. There’s a lot of financial literacy stuff for kids or teens out there. Much of it is impractical unless the youth is specifically interested in investing. Yet the idea of compounding, not just financially, but in relationships, knowledge, and skills is critical. Finding ways to deliver this message so that it sticks is a worthy challenge.
  • Separate what matters from what doesn’t matter. Investing is a playground for decision-making. You can be doubly helpful if you can help map investing rationale to general thinking. A hunch — the best lessons from investing and portfolio theory are more useful outside investing.

My last confession for today. I didn’t really understand where equity returns came from for most of my adult life. I thought that over time “stocks just go up” without any sense of why. That’s just willful ignorance at some point. I wanna believe I knew where returns came from if you pressed me but I’m not sure. Either way, I’m sympathetic to others who don’t get where returns come from.

A non-zero percentage of people who invest in RE fall in this camp. There’s something about them not being able to see the cashflow that makes them think stocks are fairy dust and not businesses. The whole dividend darling marketing spiel is aimed straight at them even though dividends are tax-inefficient.

[The decision to pay dividends or not has nothing to do with whether a company is a good business. It’s a capital allocation decision. Jake uses a simple picture to show they are mathematically equivalent to buybacks. Stock prices fall by the amount of the dividend. If you have ever exercised a call option early you know this. In fact, when you see the “change in price” column in a data vendor after a distribution, that change is net of the dividend. So if a $50 stock pays a $1 dividend and the next day is trading for $49, the vendor will say the stock is “unchanged”.

Dividends, just like the buybacks, reduce the amount of cash on a company’s balance sheet. In the case of the dividend, the price of the stock falls reducing the company’s market cap by the amount of cash they spent. In the buyback scenario, the price of the stock remains unchanged but the shares outstanding falls. Again, the market cap falls by the amount of cash the company spent.]

It’s totally understandable to have mistaken beliefs about where stock returns come from. All of the charts we look at are price charts. How many charts do you see of earnings or FCF in mainstream financial outlets? It’s not nefarious but it makes you wonder. How can financial content be displayed so that it improves our understanding? How can investing education be incorporated effectively into pre-teen and teen education?

I’m a trader and a lot of investing basics managed to avoid me. It’s understandable. People’s asset allocations are not openly discussed. There’s so much financial information online but it’s hard to know what’s trustworthy especially when you are a beginner. There’s no brand that comes to mind as the obvious choice for financial literacy.

As I continue learning, I’ll keep doing my small part to share and educate. There’s work to be done here.

*Special thanks to Nick and Jake. We had dinner a few weeks ago and the seeds of this post fell out of that conversation. We were also celebrating the early success of Nick’s outstanding book Just Keep Buying. I have read nearly all of Nick’s blog posts and when I came to investing it was formative. Now you can get all the lessons in one tidy place. And there’s a kicker — the book is better than the blog. So even if you read Nick regularly, the book is worth buying. It’s also a perfect book to give someone when they are in high school or college or their early 20s.

If I had this book back then, I never would have written this post.

Damn that thought has major Terminator plot vibes.


When I started learning about investing, this post would have been welcome:

✍️Return: Where Does It Come From? (11 min read)
by @kbracker

This is an evergreen post fundamental to investing education. It explains the components of equity returns.

Kevin Bracker is a retired finance professor.

His YouTube channel is epic. In-depth examples of fundamental, quantitative, and derivative concepts. Check it out.

Stay groovy!

Moontower #149

Friends,

Last week I took an uncharacteristic adventure into macro which turned out to be my most popular post ever. Not to be all “Thom Yorke hates Creep” since you can only be that sickeningly self-important if you are actually in Radiohead, but come on. I give you what I got every week and all you really want to know is what happens to inflation when the moon is in Taurus.

Seriously, 400 new subs signed up for Moontower after that post which is 10x my normal weekly adds. There are over 4000 subs now which is up 1k in 6 weeks after getting 3000 in 3 years. On one hand, thank you. On the other, be aware that my commercial instincts are trash. As such I will not feed the ducks and you will still find me meandering into macro often. Annoyingly, my most 2nd most popular post ever was also frickin’ macroMarkets Will Permanently Reset Higher (My Sacrifice to the Delta Gods)

Here’s the best 5 seconds of your day.

Moving on.

Over the past few years, I’ve shared a lot of writing about careers and career transitions. Sometimes you know where you want to go and it’s just a matter of putting one foot in front of the other. For others, they sense what they are doing is not the right fit.

This doubt is especially unsettling at the start of a career. It’s easier to pivot when you are younger and opportunity costs are low. Oftentimes it’s just a matter of fighting through the initial discomfort.

I wanted to quit my trading career my first day into it.

I was 22 years old, hapless in my attempts to understand the language of bids and offers ricocheting from the smelly mouths I was standing next to on the Amex trading floor. “Everyone has to start somewhere” is true but hardly consolation when you feel useless. Fetching traders’ lunch was the only time I felt useful. Useful but stupid. I’m in Cafe World on the corner of Trinity and Rector staring at a diagram of where on the plate my boss wanted his Singapore mei fun noodles while lamenting the wisdom of taking on college debt for this privilege.

Fortunately, the initial learning curve for trading isn’t too steep if you are immersed on an exchange floor. I didn’t have to waste much time figuring out if this was a mistake, because it only took a little persistence to get to a place where I could be useful. I became proficient in Excel in less than 2 months. I stopped “offering for” and “bidding at” in less time than that. I could see that my development was in line with my cohort. These clues were helpful because I’ve always felt some suspicion about grit.

I thought grit was overrated.

It wasn’t a buzzword back then, but I always had a feeling that Venkat Rao put into words when he said “hard equals wrong” in Calculus of Grit.

There’s a bit I want to highlight:

School’s failure to reveal most people’s strengths sets their lives on a needlessly masochistic journey.

Venkat explains:

Why? Think of it this way. The disciplinary world very coarsely measured your aptitudes and strengths once in your lifetime, pointed you in a roughly right direction and said “Go!” The external environment had been turned into a giant obstacle course designed around a coarse global mapping of everybody’s strengths.

So there was no distinction between the map of the external world you were navigating and the map of your internal strengths. The two had been arranged to synchronize. If you navigated through a map of external achievement, landmarks, and honors, you’d automatically be navigating safely through the landscape of your internal strengths.

But when you cannot trust that you’ve been pointed in the right direction in a landscape designed around your strengths, you cannot afford to navigate based on a one-time coarse mapping of your own strengths at age 18.

If you run into an obstacle, it is far more likely that it represents a weakness rather than a meaningful real-world challenge to be overcome, as a learning experience.

Don’t try to go over or through. It makes far more sense to go around. Hack and work around. Don’t persevere out of a foolhardy superhuman sense of valor.

It can be difficult to tell when you should persevere vs cut your losses. I offer some thought and links in On GritTo be clear, I think grit is important. But if anything it’s probably more overrated than ever since an airport book was published on it.

In the years since I read that post, I came across an essay that I think is a perfect companion to the grit discussion. The subtext, at least in how I read it, is to orient your heading so it’s downhill. No matter how you read it, it’s a terrific essay. Since it’s commencement season, send it to a recent grad.

✍️How Will You Measure Your Life? (16 min read)
by Clayton M. Christensen

Here are excerpts I like to return to.

On how Clayton responds to advice-seekers…

When people ask what I think they should do, I rarely answer their question directly. Instead, I run the question aloud through one of my models. I’ll describe how the process in the model worked its way through an industry quite different from their own. And then, more often than not, they’ll say, “OK, I get it.” And they’ll answer their own question more insightfully than I could have.

On remembering why you do something at all…

Over the years I’ve watched the fates of my HBS classmates from 1979 unfold; I’ve seen more and more of them come to reunions unhappy, divorced, and alienated from their children. I can guarantee you that not a single one of them graduated with the deliberate strategy of getting divorced and raising children who would become estranged from them. And yet a shocking number of them implemented that strategy. The reason? They didn’t keep the purpose of their lives front and center as they decided how to spend their time, talents, and energy.

Had I instead spent that hour each day learning the latest techniques for mastering the problems of autocorrelation in regression analysis, I would have badly misspent my life. I apply the tools of econometrics a few times a year, but I apply my knowledge of the purpose of my life every day. It’s the single most useful thing I’ve ever learned. I promise my students that if they take the time to figure out their life purpose, they’ll look back on it as the most important thing they discovered at HBS. If they don’t figure it out, they will just sail off without a rudder and get buffeted in the very rough seas of life.

Not everything that matters is good at giving you prompt feedback. If you fail to appreciate this, you chase what’s easily legible at the cost of things that are hard to measure.

Allocation choices can make your life turn out to be very different from what you intended. Sometimes that’s good: Opportunities that you never planned for emerge. But if you misinvest your resources, the outcome can be bad. As I think about my former classmates who inadvertently invested for lives of hollow unhappiness, I can’t help believing that their troubles relate right back to a short-term perspective.

When people who have a high need for achievement—and that includes all Harvard Business School graduates—have an extra half hour of time or an extra ounce of energy, they’ll unconsciously allocate it to activities that yield the most tangible accomplishments. And our careers provide the most concrete evidence that we’re moving forward. You ship a product, finish a design, complete a presentation, close a sale, teach a class, publish a paper, get paid, get promoted. In contrast, investing time and energy in your relationship with your spouse and children typically doesn’t offer that same immediate sense of achievement.

Kids misbehave every day. It’s really not until 20 years down the road that you can put your hands on your hips and say, “I raised a good son or a good daughter.” You can neglect your relationship with your spouse, and on a day-to-day basis, it doesn’t seem as if things are deteriorating. People who are driven to excel have this unconscious propensity to underinvest in their families and overinvest in their careers—even though intimate and loving relationships with their families are the most powerful and enduring source of happiness.

If you want your kids to have strong self-esteem and confidence that they can solve hard problems, those qualities won’t magically materialize in high school. You have to design them into your family’s culture—and you have to think about this very early on. Like employees, children build self-esteem by doing things that are hard and learning what works.

Give me an example…

The lesson I learned from this is that it’s easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. If you give in to “just this once,” based on a marginal cost analysis, as some of my former classmates have done, you’ll regret where you end up. You’ve got to define for yourself what you stand for and draw the line in a safe place.

Be careful how you strive…

Once you’ve finished at Harvard Business School or any other top academic institution, the vast majority of people you’ll interact with on a day-to-day basis may not be smarter than you. And if your attitude is that only smarter people have something to teach you, your learning opportunities will be very limited. But if you have a humble eagerness to learn something from everybody, your learning opportunities will be unlimited. [Me: This is a powerful prescription to make yourself more teachable]: Generally, you can be humble only if you feel really good about yourself—and you want to help those around you feel really good about themselves, too.

His final recommendation…

Don’t worry about the level of individual prominence you have achieved; worry about the individuals you have helped become better people. This is my final recommendation: Think about the metric by which your life will be judged, and make a resolution to live every day so that in the end, your life will be judged a success.

This echoes the wisdom of another late visionary, Michael Crichton:

“If you want to be happy, forget yourself. Forget all of it—how you look, how you feel, how your career is going. Just drop the whole subject of you. People dedicated to something other than themselves are the happiest people in the world.”

It’s a lot of brilliance in a couple of paragraphs:

✍️Happiness (3 min read)
by Michael Crichton


Money Angle

Greeks Are Everywhere

The option greeks everyone starts with are delta and gamma. Delta is the sensitivity of the option price with respect to changes in the underlying. Gamma is the change in that delta with respect to changes in the underlying.

If you have a call option that is 25% out-of-the-money (OTM) and the stock doubles in value, you would observe the option graduating from a low delta (when the option is 25% OTM a 1% change in the stock isn’t going to affect the option much) to having a delta near 100%. Then it moves dollar for dollar with the stock.

If the option’s delta changed from approximately 0 to 100% then gamma is self-evident. The option delta (not just the option price) changed as the stock rallied. Sometimes we can even compute a delta without the help of an option model by reasoning about it from the definition of “delta”. Consider this example from Lessons From The .50 Delta Option where we establish that delta is best thought of as a hedge ratio 1:

Stock is trading for $1. It’s a biotech and tomorrow there is a ruling:

  • 90% of the time the stock goes to zero
  • 10% of the time the stock goes to $10

First take note, the stock is correctly priced at $1 based on expected value (.90 x $0 + .10 x $10). So here are my questions.

What is the $5 call worth?

  • Back to expected value:90% of the time the call expires worthless.

    10% of the time the call is worth $5

.9 x $0 + .10 x $5 = $.50

The call is worth $.50

Now, what is the delta of the $5 call?

$5 strike call =$.50

Delta = (change in option price) / (change in stock price)

  • In the down case, the call goes from $.50 to zero as the stock goes from $1 to zero.Delta = $.50 / $1.00 = .50
  • In the up case, the call goes from $.50 to $5 while the stock goes from $1 to $10Delta = $4.50 / $9.00 = .50

The call has a .50 delta

Using The Delta As a Hedge Ratio

Let’s suppose you sell the $5 call to a punter for $.50 and to hedge you buy 50 shares of stock. Each option contract corresponds to a 100 share deliverable.

  • Down scenario P/L:Short Call P/L = $.50 x 100 = $50

    Long Stock P/L = -$1.00 x 50 = -$50

    Total P/L = $0

  • Up scenario P/L:Short Call P/L = -$4.50 x 100 = -$450

    Long Stock P/L = $9.00 x 50 = $450

    Total P/L = $0

Eureka, it works! If you hedge your option position on a .50 delta your p/l in both cases is zero.

But if you recall, the probability of the $5 call finishing in the money was just 10%. It’s worth restating. In this binary example, the 400% OTM call has a 50% delta despite only having a 10% chance of finishing in the money.

The Concept of Delta Is Not Limited To Options

Futures

Futures have deltas too. If the SPX cash index increases by 1%, the SP500 futures go up 1%. They have a delta of 100%.

But let’s look closer.

The fair value of a future is given by:

Future = Seʳᵗ

where:

S = stock price

r = interest rate

t = time to expiry in years

This formula comes straight from arbitrage pricing theory. If the cash index is trading for $100 and 1-year interest rates are 5% then the future must trade for $105.13

100e^(5% * 1) = $105.13

What if it traded for $103?

  • Then you buy the future, short the cash index at $100
  • Earn $5.13 interest on the $100 you collect when you short the stocks in the index.
  • For simplicity imagine the index doesn’t move all year. It doesn’t matter if it did move since your market risk is hedged — you are short the index in the cash market and long the index via futures.
  • At expiration, your short stock position washes with the expiring future which will have decayed to par with the index or $100.
  • [Warning: don’t trade this at home. I’m handwaving details. Operationally, the pricing is more intricate but conceptually it works just like this.]
  • P/L computation:You lost $3 on your futures position (bought for $103 and sold at $100).
    You broke even on the cash index (shorted and bought for $100)
    You earned $5.13 in interest

    Net P/L: $2.13 of riskless profit!

You can walk through the example of selling an overpriced future and buying the cash index. The point is to recognize that the future must be priced as Seʳᵗ to ensure no arbitrage. That’s the definition of fair value.

You may have noticed that a future must have several greeks. Let’s list them:

  • Theta: the future decays as time passes. If it was a 1-day future it would only incorporate a single day’s interest in its fair value. In our example, the future was $103 and decayed to $100 over the course of the year as the index was unchanged. The daily theta is exactly worth 1 day’s interest.
  • Rho: The future’s fair value changes with interest rates. If the rate was 6% the future would be worth $106.18. So the future has $1.05 of sensitivity per 100 bps change in rates.
  • Delta: Yes the future even has a delta with respect to the underlying! Imagine the index doubled from $100 to $200. The new future fair value assuming 5% interest rates would be $210.25.Invoking “rise over run” from middle school:

    delta = change in future / change in index
    delta = (210.25 – 105.13)/ (200 – 100)
    delta = 105%

    That holds for small moves too. If the index increases by 1%, the future increases by 1.05%

  • Gamma: 0. There is no gamma. The delta doesn’t change as the stock moves.

Levered ETFs

Levered and inverse ETFs have both delta and gamma! My latest post dives into how we compute them.

✍️The Gamma Of Levered ETFs (8 min read)

This is an evergreen reference that includes:

  • the mechanics of levered ETFs
  • a simple and elegant expression for their gamma
  • an explanation of the asymmetry between long and short ETFs
  • insight into why shorting is especially difficult
  • the application of gamma to real-world trading strategies
  • a warning about levered ETFs
  • an appendix that shows how to use deltas to combine related instruments

And here’s some extra fun since I mentioned the challenge of short positions:

Bonds

Bonds have delta and gamma. They are called “duration” and “convexity”. The duration is the sensitivity to the bond price with respect to interest rates. Borrowing from my older post Where Does Convexity Come From?:

Consider the present value of a note with the following terms:

Face value: $1000
Coupon: 5%
Schedule: Semi-Annual
Maturity: 10 years

Suppose you buy the bond when prevailing interest rates are 5%. If interest rates go to 0, you will make a 68% return. If interest rates blow out to 10% you will only lose 32%.

It turns out then as interest rates fall, you actually make money at an increasing rate. As rates rise, you lose money at a decreasing rate. So again, your delta with respect to interest rate changes. In bond world, the equivalent of delta is duration. It’s the answer to the question “how much does my bond change in value for a 1% change in rates?”

So where does the curvature in bond payoff come from? The fact that the bond duration changes as interest rates change. This is reminiscent of how the option call delta changed as the stock price rallied.

The red line shows the bond duration when yields are 10%. But as interest rates fall we can see the bond duration increases, making the bonds even more sensitive to rates decline. The payoff curvature is a product of your position becoming increasingly sensitive to rates. Again, contrast with stocks where your position sensitivity to the price stays constant.

Corporations

Companies have all kinds of greeks. A company at the seed stage is pure optionality. Its value is pure extrinsic premium to its assets (or book value). In fact, you can think of any corporation as the premium of the zero strike call.

[See a fuller discussion of the Merton model on Lily’s Substack which is a must-follow. We talk about similar stuff but she’s a genius and I’m just old.]

Oil drillers are an easy example. If a driller can pull oil out of the ground at a cost of $50 a barrel but oil is trading for $25 it has the option to not drill. The company has theta in the form of cash burn but it still has value because oil could shoot higher than $50 one day. The oil company’s profits will be highly levered to the oil price. With oil bouncing around $20-$30 the stock has a small delta, if oil is $75, the stock will have a high delta. This implies the presence of gamma since the delta is changing.

Games

One of the reasons I like boardgames is they are filled with greeks. There are underlying economic or mathematical sensitivities that are obscured by a theme. Chess has a thin veneer of a war theme stretched over its abstraction. Other games like Settlers of Catan or Bohnanza (a trading game hiding under a bean farming theme) have more pronounced stories but as with any game, when you sit down you are trying to reduce the game to its hidden abstractions and mechanics.

The objective is to use the least resources (whether those are turns/actions, physical resources, money, etc) to maximize the value of your decisions. Mapping those values to a strategy to satisfy the win conditions is similar to investing or building a successful business as an entrepreneur. You allocate constrained resources to generate the highest return, best-risk adjusted return, smallest loss…whatever your objective is.

Games have mine a variety of mechanics (awesome list here) just as there are many types of business models. Both game mechanics and business models ebb and flow in popularity. With games, it’s often just chasing the fashion of a recent hit that has captivated the nerds. With businesses, the popularity of models will oscillate (or be born) in the context of new technology or legal environments.

In both business and games, you are constructing mental accounting frameworks to understand how a dollar or point flows through the system. On the surface, Monopoly is about real estate, but un-skinned it’s a dice game with expected values that derive from probabilities of landing on certain spaces times the payoffs associated with the spaces. The highest value properties in this accounting system are the orange properties (ie Tennessee Ave) and red properties (ie Kentucky). Why? Because the jail space is a sink in an “attractor landscape” while the rents are high enough to kneecap opponents. Throw in cards like “advance to nearest utility”, “advance to St. Charles Place”, and “Illinois Ave” and the chance to land on those spaces over the course of a game more than offsets the Boardwalk haymaker even with the Boardwalk card in the deck.

In deck-building games like Dominion, you are reducing the problem to “create a high-velocity deck of synergistic combos”. Until you recognize this, the opponent who burns their single coin cards looks like a kamikaze pilot. But as the game progresses, the compounding effects of the short, efficient deck creates runaway value. You will give up before the game is over, eager to start again with X-ray vision to see through the theme and into the underlying greeks.

[If the link between games and business raises an antenna, you have to listen to Reid Hoffman explain it to Tyler Cowen!]

Wrapping Up

Option greeks are just an instance of a wider concept — sensitivity to one variable as we hold the rest constant. Being tuned to estimating greeks in business and life is a useful lens for comprehending “how does this work?”. Armed with that knowledge, you can create dashboards that measure the KPIs in whatever you care about, reason about multi-order effects, and serve the ultimate purpose — make better decisions.


Last Call

✍️Notes From C.Thi Nguyen Interview About Games and Society (14 min read)

This is a re-post from one of my favorite all-time interviews.

C. Thi Nguyen received his Ph.D. in philosophy from the University of California, Los Angeles. He is currently associate professor of Philosophy at the University of Utah. He has written public philosophy for venues such as Aeon and The New York Times, and is an editor of the aesthetics blog Aesthetics for Birds. He was the recipient of the 2020 Article Prize from the American Philosophical Association. His recent book is Games: Agency as Art.

But here’s the most fun part:

Nguyen’s Board Games: so many recommendations

I’ve played several of these. The list and descriptions are glorious.

 

Stay groovy!


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Moontower #148

Here’s a rarity for this letter. Let’s play macroeconomics.

I don’t usually write about “macro” because it feels like astrology. You can look at any bit of data (the “current thing” as they say on the internet is inflation) and see it molded to be the cause or result of whatever axe a speaker is trying to grind. People who just learned what inflation was on Tuesday have incorporated it into their pre-existing worldview so seamlessly that by Friday their updated narrative is more coherent than ever.

Macro is the raw material for story-telling. For marketing. It’s a political battering ram for both sides. But macro is a ball of yarn. The discourse that’s consumable is reduced so much to aid absorption that the logic, by necessity, ends up sounding unassailable. It must. The logic is solving for convenience. Not understanding.

So I don’t write about it because I don’t think it’s especially useful. It’s more likely to give you brainworms by beefing up your priors. It will calcify hunches into commandments when the evidence only merits “things to learn more about”.

“Buy Potatoes”

While I don’t write about macro, I’m hardly immune to the animal urge to read about it and pretend I understand how the world works. My mind’s sentry just keeps me from taking it too seriously. [I suspect the sentry has saved me many times and cost me many times and I can’t tell if it’s worth the free rent it gets in my head. The question is moot, since I can’t evict it anyway. It’s like SF up in there.]

My first macro boner happened (was searching for the right verb here and “happens” is the most fitting action word to apply to boners) while reading Michael Lewis’ Liar’s Poker when I was 21. When Michael was a junior salesperson on the Salomon trading desk, he was taken under the wing of a senior trader named Alexander:

The second pattern to Alexander’s thought was that in the event of a major dislocation, such as a stock market crash, a natural disaster, the breakdown of OPEC’s production agreements, he would look away from the initial focus of investor interest and seek secondary and tertiary effects.

Remember Chernobyl? When news broke that the Soviet nuclear reactor had exploded, Alexander called. Only minutes before, confir mation of the disaster had blipped across our Quotron machines, yet Alexander had already bought the equivalent of two supertankers of crude oil. The focus of investor attention was on the New York Stock Exchange, he said. In particular it was on any company involved in nuclear power. The stocks of those companies were plummeting. Never mind that, he said. He had just purchased, on behalf of his clients, oil futures. Instantly in his mind less supply of nuclear power equaled more demand for oil, and he was right. His investors made a large killing. Mine made a small killing. Minutes after I had persuaded a few clients to buy some oil, Alexander called back.

“Buy potatoes,” he said. “Gotta hop.” Then he hung up. Of course. A cloud of fallout would threaten European food and water supplies, including the potato crop, placing a premium on uncon taminated American substitutes. Perhaps a few folks other than potato farmers think of the price of potatoes in America minutes after the explosion of a nuclear reactor in Russian, but I have never met them.

But Chernobyl and oil are a comparatively straightforward example. There was a game we played called What if? All sorts of complications can be introduced into What if? Imagine, for example, you are an institutional investor managing several billion dollars. What if there is a massive earthquake in Tokyo? Tokyo is reduced to rubble. Investors in Japan panic. They are selling yen and trying to get their money out of the Japanese stock market. What do you do?

Well, along the lines of pattern number one, what Alexander would do is put money into Japan on the assumption that since everyone was trying to get out, there must be some bargains. He would buy precisely those securities in Japan that appeared the least desirable to others. First, the stocks of Japanese insurance companies. The world would probably assume that ordinary insurance companies had a great deal of exposure…

If you are 21 years old today, how can you not hear “buy potatoes” and not think of trading as Settlers of Catan? Trading is the ultimate boardgame. It’s just that now, an algo sweeps all the call offers on Brent futures before Alexander finishes reading the headline. [Actually, the market-makers’ streaming call offers have a “panic” setting that gets triggered if they get hit on more than couple related strikes at a time and pull their co-located quotes before they get picked off by the news-reading algo. So prices can gap to something closer to fair value on very little trading volume. The graveyard of backtesting signals that don’t appreciate this would occupy every blade of grass on the planet if it were a physical place].

The blessing and curse of our frontal lobes is a desire to understand how the complex world works. Macro brings the romance of chess to investing. It lures mandate-dodging pros and tourists alike with scalable p/l if you can:

a) make accurate predictions

and

b) identify mispriced lines with respect to those predictions.

In reality, it’s more like 3-card Monte where you have no chance of guessing where the card is and if you get lucky the reward is the false confidence to wager more next time. [I highly recommend the Wikipedia for 3-card Monte. The analogy of “marks” and “shills” to the finance marketing machine writes itself].

My personal relationship with macro is as follows:

  1. I’ve got some mental model of how things work
  2. Stuff happens — none of it was predicted by that model
  3. Backfit new models to explain the strange stuff
  4. Repeat

Seriously, the meme never stops giving.

With that, in this week’s Money Angle, I’m going to go full-Tobias [narrator: you never go full Tobias] and share some macro takes I found resonant in explaining the past several decades.


Money Angle

Since this is macro story-telling I’d consider this entertainment. I’m just picking a story that feels right. These are the re-factored views of Lyn Alden and Cem Karsan.

In Lyn’s March newsletter, we start by rewinding the clock.

  1. The globalized labor arbitrage begins


    Starting in the early 1980s, China began to open its economy to the rest of the world. And then starting in the early 1990s, the Soviet Union collapsed and its various former states also began to open their economies to the world. This combination brought a massive amount of untapped labor into global markets within a rather short period of time, which allowed corporations to geographically arbitrage their operations (a.k.a. offshore a big chunk of their labor force and various facilities) to take advantage of this. This was disadvantageous to laborers and tradespeople in developed markets, and advantageous to executives and shareholders, particularly in the US where we shifted towards massive trade deficits in the 1990s. But it did also help hundreds of millions of people rise out of abject poverty in these developing countries, and created hundreds of millions of new global consumers for those global brands as their wealth grew. China experienced a massive increase in the average standing of living, and so did many former Soviet states.

  2. Bean counters then optimized on the back of this arbitrage

    All sorts of management approaches regarding “lean manufacturing” and “just in time delivery” became popular among corporations and MBA programs during this era. Some of these had their roots in the early 20th-century manufacturing revolution (via Ford, Toyota, and others), but they were basically rediscovered, expounded upon, and brought to a new level in the 1980s, 1990s, and 2000s across the entire manufacturing sector.

    Moontower readers will recognize the MBA mindset of selling options. Engineers build beyond spec, or “overengineer”. Biologists know our redundant kidney is an insurance policy.

    We constantly trade slack for efficiency as Moloch whistles by. The balance between efficiency and slack (or efficiency and fairness for that matter) is hard to find. So we can count on overshooting until the “gotchas” show themselves.

    Of course, this was somewhat of an illusion. Companies basically traded away resilience in favor of efficiency, while pretending that there was minimal downside, and yet this type of approach only works under a benign global environment. Outside of the Middle East and a few localized regions around the world, the 1980s through the 2010s was generally a period of limited war as far as supply chains were concerned, with significant global openness and cooperation. Extremely efficient and highly complex supply chains, with limited redundancy or inventory, could thrive in this stars-aligned macro environment. Any company not playing that game would be less efficient in this environment, and thus would be out-competed.

  3. As we enter a new regime, comparisons to recent history are breaking

    Going forward, any back-tests about inflation or disinflation that only go back twenty or thirty years are practically useless. This whole 1980s-through-2010s disinflationary period (with one substantial cyclical inflationary burst in the 2000s) was during a backdrop of structurally falling interest rates and increasing globalization, with the sacrifice of resiliency for more efficiency. The world is now looking at the need to duplicate many parts of the supply chain, find and develop potentially redundant sources of commodities, hold higher inventories of everything, and in general boost resilience at the cost of efficiency.

  4. The 1940s as the reference point

    I’ve been making a macroeconomic comparison between the 2020s and the 1940s for nearly two years now, and the similarities unfortunately continue to stack up. For the most part, I was referring to monetary and fiscal policy and the long-term debt cycle for that comparison, with charts like this that my readers are quite familiar with by now.

    This unusually wide gap between inflation and interest rates is one of the key reasons I regularly compare the 2020s to the 1940s (rather than primarily the 1970s, despite some other similarities there), and I have been making that comparison for nearly two years before the gap became as wide as it is now.

    Since debt was so high in the 1940s (unlike the 1970s where it was low), and the inflation was driven by fiscal spending and commodity shortages in the 1940s (rather than a demographic boom and commodity shortages as in the 1970s), the Fed held interest rates low even as inflation ran hot in the 1940s (unlike the 1970s where they raised rates to double-digit levels).

  5. Will Russia’s latest adventure hasten the broader movement to diversify away from USD reserves?

    Diversification of global reserves and payment channels into a more multi-polar reserve currency world, with a renewed emphasis on neutral reserve assets. Much like how COVID-19 accelerated the practice of remote work, I think Russia’s war with Ukraine and the associated sanction response by the West will accelerate that diversification of global reserves and payment channels…In a world where official reserves can be frozen, some degree of reserve diversification would be rational for most countries to consider, and as investors, we should probably expect this to occur over time. This is especially true for countries that are not strongly aligned with the United States and western Europe.

  6. The conundrum facing US policymakers

    Unfortunately for the Fed, the US economic growth rate is already decelerating, and basically the only way to reduce supply-driven inflation with monetary policy is to reduce demand for goods, which is recessionary.

    Credit markets are already weakening, the Treasury market is becoming rather volatile and illiquid, and the Fed has ended quantitative easing. The Fed is likely to continue monetary tightening until financial markets get truly messy, at which point they may reverse course to the dovish side yet again.

    Stagflationary economic conditions are inherently hard for central banks to deal with; stagflation is somewhat outside of their expected models. In fact, the Fed might end up being forced to tighten liquidity with one hand and loosen liquidity with the other hand.

    This is another reason why countries may shift towards gold and other commodities for a portion of their official reserves. Not only can fiat reserves (bonds and deposits) be frozen by foreign countries that issue those liabilities, they also keep getting devalued with interest rates that are far below the prevailing inflation rate because debt levels are too high to raise rates above the inflation level.

We now shift to Cem Karsan. In an interview with Hari Krishnan, Cem discusses how policy in the aftermath of the GFC is misunderstood. This is important because policy is changing, and if you failed to interpret the effect of policy in the last decade, you may be caught flat-footed as the policy changes.

I don’t want to be subtle about the potential problem.

Popular investment strategies have been fit to recent decades. Roboadvisors, 60/40, “model portfolios” and target-date funds are now the default. Once you tell an advisor your age and risk tolerance they strap you into an off-the-shelf glide path and go looking for their next client. And it’s hard to fault them. They have no edge in the alpha game. 60/40 and similar approaches are low-cost, commoditized solutions that allow an advisor to (correctly) not spend time stock-picking. With fee compression in advisory, FAs can defend their net profits by outsourcing the investing portion of the job while focusing on planning and sales. To further cement their incentives, the prisoner’s dilemma of advisory means they can’t stray too far from popular asset allocation prescriptions because the advisors are the one short tracking error volatility.

Lyn believes the macro world is changing sharply. Cem has been beating this drum for the past year at least. Let’s see what he says.

  1. Monetary policy came to dominate because it’s relatively free from political stand-offs

    My mental model of macro involves essentially monitoring the Fed (ie monetary policy) and then fiscal policy. We’ve essentially had one of those two major pipes sealed shut for 42 years. Our founding fathers in the US created a system that was purposely made to not change laws quickly or easily. That was fine until the economy became more dynamic and quicker. Congress decided they couldn’t act quickly enough to economic crises. So they created the Federal Reserve but they wanted to control its mandate, to not give it broad latitude. So they created a clear mandate of price stability and maximum employment, and only gave them one tool, — monetary policy. Essentially, there’s only been one game in town because the only way things would ever get past from a fiscal perspective is in a crisis. The monetary solution was faster, so monetary policy has been the only game in town for 42 years.

  2. The nature of loose monetary policy is to encourage investment

    Monetary policy is free-market economics, right? It is empowering nature to go about and, and create kind of optimal outcomes. From a growth perspective, that is GDP-maximizing. We have created a technological revolution, almost unintentionally, but by being monetary policy supply-side dominant. We’ve created the Ubers and Amazons and Tesla’s of the world, companies that never would have existed in previous periods because they wouldn’t have had the cash flow to survive. But infinite cash flow ultimately led to longer duration bets. And this is why growth has outperformed value because cash flows haven’t mattered when money is free. If there’s no need to make money, the need is to capture market share and get bigger, to ultimately make money in the long run. You send money to corporations, corporations make more money. Ultimately, that leads to more globalization. If you send money to corporations, what is the corporation’s mandate, by definition, they have to maximize profitability, maximizing profitability means lowering costs of their goods, right and capturing more market share. So that’s the power of competition.

    [This echoes Lyn’s discussion of globalization]

    Remember Moloch’s main trick for fanning unhealthy competition, is to reduce our values to narrow optimizations. When an institution is highly specialized its incentives become perverse from a society-level purview.

    Let’s see why.

  3. Monetary policy didn’t appear to have side effects because the Fed’s narrow mandate failed to consider wider signs of economic vitality

    If you look at incentives, you’ll see the results. The incentives have been to these two simple ideas of price stability and maximum employment. Greenspan realized that the economy had somewhat changed. And that more monetary policy wasn’t causing inflation. It took the natural rate of unemployment down from 6% to 4%. And kept doing more monetary policy, which led to the tech bubble. Without having to worry about inflation their mandate was basically maximum employment. If that’s the case, right? Why wouldn’t you just do more, it’s a free lunch, right. And so the world has had a free lunch now, for 40 years, interest rates have gone lower and lower. Maximum employment has been more and more sticky at the lower end.

    But there was a catch. And it wasn’t the Fed’s job to address it. (In fact, you could argue that thru the “wealth effect” the catch was intended.)

  4. It’s not really the Fed’s fault. The problem is they didn’t have a mandate for inequality, or a lot of other issues.

    The Fed is permitted to neglect growing gaps in equality. These gaps finally caught up to us during Covid, but this time the government responded. We ran a giant fiscal deficit with PPE loans, extended unemployment benefits, direct transfer payments, rent moratoriums, and general forgiveness. Support for these measures was broad enough to get them passed.

    But perhaps the most important result was the recognition that inequality itself is stark. The keyboard class just hummed along on Zoom, often getting paid more, while having less opportunities to spend. They built up massive savings which if I didn’t know better seems to be conspicuously spent on house overbids and jerking the ladder up with renewed and unprecedented force.

    Let’s turn to Cem’s framing of inequality and why it’s a value we cannot ignore.

    Ultimately this goes back to Socrates. Do you give the best violin players the best violins? Or do you give the worst violin players the best violins? At the end of the day, we’ve given the best violin players the best violins. And Socrates would argue that that’s what you should do, because it creates infinitely beautiful music. But there are a bunch of violin players that don’t get to make music anymore. So we start talking about inequality about 10 years ago, and it’s really built up in five years, and COVID accelerated that trend. Again, all of a sudden, COVID happens. We get that populist kind of reaction, which had been building, what created Donald Trump and created Bernie Sanders. This is not a political statement. The world has become more populist, because of this inequality that’s essentially been created by monetary policy for two generations. And so now the fiscal response is where we are.

    This policy shift is noteworthy for investors. Especially if you have mistaken beliefs about how loose monetary policy affects supply and demand. In the aftermath of the GFC, with the monetary spigot open, the consensus was it would lead to broad inflation.

    Cem offers a counterintuitive explanation that fits what we actually witnessed since the GFC.

  5. The important difference between fiscal and monetary policy — fiscal is inflationary. Monetary, counterintuitively is not.

    This whole thing is important in terms of the pipes and how everything works. That fiscal policy piece that’s been sealed shut for 40 years now has $12 trillion in fiscal policy. $12 trillion in Fiscal policy is an order of magnitude in real terms bigger than the New Deal. It is about the same size as the new deal when adjusted for the size of the economy. The New Deal filled a hole over a decade, which was called the Great Depression. This is not the Great Depression. We spent about one and a half trillion of that $12 trillion, there’s about $10 trillion still in the pipe to come, and we’re about to reopen.

    So it is not a surprise that we are having inflation. Fiscal policy has a velocity of one, it goes directly into people’s pockets, sometimes even more with things like infrastructure spending. Monetary policy has a velocity of almost zero, it goes directly to “Planet Palo Alto”. And Palo Alto creates new technologies. They’re sophisticated, futuristic people. They provide new self-driving cars and things getting delivered to your doorstep. They create supply. That’s the thing that people don’t understand — monetary policy actually increases supply, it does not increase demand. And so it is deflationary.

  6. The role of the Fed today

    When the Fed was created, the economy was very different. It was dependent on labor. The trickle-down effects of a laborer getting paid more was enough to counteract those inflationary supply effects. That is no longer the case. So ultimately, the Fed has a mandate, which is completely unreasonable — to control price stability. With supply-side economics, the only way that they can control this ultimately is to pull back. And slow capital markets decrease via the wealth effect. Ultimately, there’s a significant lag, so they are not in a position to ultimately control inflation without bringing down markets.

Cem is saying that raising rates is a blunt tool. It’s a monetary solution to a fundamentally non-monetary problem because it only works on one side of the ledger. Demand. Rate hikes can only reasonably expect to slow the economy by decreasing demand. It doesn’t address the main problem which is a lack of supply to absorb the demand. In fact, it aggravates it. If you believe inflation is a purely monetary phenomenon this is a belated prompt to unlearn that.

How I relate this to MMT

MMT discourse gets lambasted because it appears irresponsibly profligate. Consider the Investopedia definition of modern monetary theory:

Modern Monetary Theory (MMT) is a heterodox macroeconomic framework that says monetarily sovereign countries like the U.S., U.K., Japan, and Canada, which spend, tax, and borrow in a fiat currency that they fully control, are not operationally constrained by revenues when it comes to federal government spending.

Critics of MMT read that as “these crazy MMTers think you can print as much money as you want and spend it”.

This is a strawman. MMT supporters think it’s not useful to think a government is like a household that has to pay its debt back. This isn’t because they are irresponsible. It’s because they recognize that any discussion of whether a certain amount of debt is reasonable, depends on what it is backed by. Debt is neither good nor bad. Its merit depends on what is productive assets back it.

So an MMTer believes you can run a deficit (so government expenditures do not need to be matched with revenues) as long as the expenditures lead to investments in productive capacity. In other words, is the spending creating projects and jobs that will generate a real return? This is hardly unfamiliar logic. When students enroll in medical school, their loans are collateralized by the expectation of increased earnings power that comes with getting “M.D.” after your name. Constraining their current ability to spend by their current earnings would be a horrible loss of economic efficiency.

MMT is deeply focused on inflation

In the MMT world, inflation is a serious topic because a highly inflationary environment is evidence that the spending was not wise. Inflation is a test.

I direct you to my notes on Jesse Livermore’s Upside Down Markets paper on the mechanics of inflation:

Jesse, in a nod to Adam Smith’s invisible hand, calls the inflation the”invisible fist”. The requirement to return principal and interest to a lender constrains the expansion of credit and therefore spending power. Unproductive spending will lead to the destruction of financial wealth. If I borrowed money for a lemonade stand but then spent it on a vacation, my deficit spending will have created new financial wealth for the system, but it won’t have created any new real wealth. I won’t receive future cash flows to repay the loan.

The first place where the invisible fist will destroy financial wealth will be on my personal balance sheet. I originally accounted for the business as a new financial asset that offset the new liability that I had taken on. If that new financial asset never comes into existence, or if it turns out to be worthless, then it’s going to get written off. I’m going to end up with a new liability and nothing else—a negative cumulative hit to my net worth. The next place where the invisible fist will destroy financial wealth will be on the lender’s balance sheet. The loan will get defaulted on. In a full default, the lender will suffer a hit to his financial wealth equivalent in size to the financial wealth that I added to the balance sheets of the people that I bought the vacations from. The lender will experience an associated decrease in his spending power, compensating for the increase in spending power that my unproductive vacation expenditures will have conferred onto those people. In the end, the total financial wealth and spending power in the system will be conserved. The invisible fist will not allow them to enjoy sustained increases, since the real wealth in the system—its capacity to fulfill spending—did not increase. In this way, the invisible fist will prevent an inflationary outcome in which the supply of financial wealth overwhelms the supply of real wealth.

One of the leading MMT theorists, Stephanie Kelton, explains that, if anything, the MMT crowd takes inflation more seriously than mainstream economics. This makes sense if inflation, not the size of the deficit, is the true cause for concern.

In We Need to Think Harder About Inflation, she writes:

It’s the typically cavalier way of thinking about inflation that has come to dominate mainstream economics. Keeping a lid on inflation is the central bank’s job, not something Congress, the White House, or anyone else really needs to waste time thinking about. If inflation accelerates above some desired target, the Fed will knock it back down by tightening monetary policy. Easy peasy. (Unless, of course, the Fed “falls behind the curve,” allowing “inflation expectations to become unanchored” and other mumbo-jumbo.)

All you really need is an “independent” central bank that is deemed “credible” by market participants, and you can sit back and relax. There’s a one-size-fits-all way to deal with any inflation problem. To dial inflation down, simply dial up the overnight interest rate. You might throw in some “forward guidance” to help shape “inflation expectations” but that’s really still about managing inflation via adjustments in the short-term interest rate…

It’s this sort of cavalier attitude and reverence for monetary policy that troubles me. We’re supposed to accept—as a matter of faith—that the central bank can always handle any inflation problem because mainstream economics says so?

The “invisible fist” today

So have we plowed too much money into unproductive projects? Have we overpaid for the projects and startups? The market tries to sort the question out every day.

In keeping any sense of proportion we should recognize that crypto is a tiny portion of the overall economy. But as a metaphor, it poses an interesting question. Have we dumped too much money into cat gifs, figuratively speaking? Are a few becoming insanely rich while society holds the bag?

I’m partial to Michael Pettis’ idea of the bezzle. In Minsky Moments in Venture CapitalAbraham Thomas explains how bezzle conditions emergeThe key insight is that high prices create a positive feedback loop because prices themselves tell you something about risk. High prices signify safety. This is a paradox because a high price is also an asymmetric risk to reward. The paradox tends to resolve itself abruptly:

One way to understand Minsky cycles is that they’re driven by the gap between ‘measured risk’ and ‘true risk’.

When you lend money, the ‘true risk’ you take is that the borrower defaults3. But you can’t know this directly; instead you measure it by proxy, using credit spreads. Credit spreads reflect default probabilities, but they also reflect investor demand for credit products. A subprime credit trading at a tight spread doesn’t necessarily imply that subprime loans have become less risky (though that could be true); the tight spread may also be driven by demand for subprime loans. Measured risk has deviated from true risk.

Similarly, when you invest in a startup, the ‘true risk’ that you take is that the startup fails. But you can’t know this directly; instead you measure it by proxy, using markups. Markups reflect inverse failure probabilities (the higher and faster the markup, the more successful the company, and hence the less likely it is to fail — at least, so one hopes). But markups also reflect investor demand for startup equity. Once again, measured risk has deviated from true risk.

During Minsky booms, measured risks decline. During Minsky busts, measured risks increase. The flip from boom to bust occurs when the market realizes that true risks haven’t gone away.

Squaring all of this with my own priors

We started with Lyn and Cem’s analysis of how we got to today. If the world de-globalizes many of the deflationary headwinds that convolved with loose monetary policy will reverse. The new regime would be inflationary. How inflationary is anyone’s guess. Is the floor for the foreseeable future 2%, 4%, higher?

If bubbles pop and bezzles recede, would that make inflation worse as we discover that spending was wasted and economic supply did not grow where it needed to (ahem housing and energy)?

Or will deflation come roaring back as drawdowns push wealth effects in reverse and higher borrowing costs on huge loan balances crowd out future growth?

My prior is torn between:

a) inflation will fall in a way that surprises people. Low inflation is actually the default because wealth inequality acts as what I call an “inflation heat sink”. Here’s my explanation using the boardgame Monopoly:

Unfortunately, if you think inflation is going to fall the trade is probably not to buy treasuries since real rates are already quite negative. The related insight is more concerning. Bonds can keep falling as inflation falls and nothing would be glaringly mispriced. Ouch, 60/40.

and

b) Stimulative fiscal policy is inflationary in the short-run (and in the long-run if the spending is unproductive) and while fiscal policy is highly political, neither party is afraid to run big deficits at this point anymore.

If inflation accelerates (or at least fails to abate) it’s not clear what investments it would be good for. People like to promote real estate as an inflation hedge. Given the low affordability already built into prices, outpacing real rates is hardly a given. Maybe that’s where you lose the least? What inflation expectations are already embedded in commodity prices? How to invest for inflation from current prices is a hard problem.

Unwinding imbalances

I tend to believe Lyn and Cem’s story about how the forces that brought us to today are unwinding. If we have spent the past 40 years building a giant imbalance between capital and labor this reversal is ultimately a good thing. But it’s not going to make capital happy. If you have been an outsize winner for the past decade, you’re probably going to moan about it when the imbalance narrows (hey it’s understandable that we respond to marginal changes to our situation, but it’s not reasonable to miss the big picture that prior wins have been out of proportion to contribution). What was given to you easily by the Fed’s support of high duration bets, can be taken away. Don’t expect sympathy.

The most direct way to correct the imbalance would be to heavily tax high earners and the rich but it’s not politically viable. But there’s a backdoor. The combination of fiscal stimulus, especially if done in a progressive way, will bolster the economy while we raise interest rates. The net effect will offset labor’s pain in an economic slowdown. But it will still be inflationary since we are supporting demand (by giving $$ to those who actually spend it) while constraining supply (by raising hurdle rates on capital expenditures). To a rich person invested in growth and expensive real estate, this will feel like stagflation as labor’s slice of the pie increases relatively while demand for the rich person’s assets slows (opposite of how loose monetary conditions created inflation for homes and stocks but not labor and importable goods). It would be a shadow progressive tax using inflation to take back financial wealth while creating conditions for lower-wage earners to keep up with the price of goods and services.

No matter how the economic picture unfolds, the theme that feels alive under the surface is imbalance. It doesn’t matter that the average American lives better than a 16th-century king. We relentlessly compare and that’s never going to stop. The imbalance matters. We have accumulated massive amounts of debt. If the debt isn’t truly backed by the collective wealth of the individuals who make up the economy, eventually a catalyst will shatter the illusion that we can continue rolling it over.

Mechanically, that debt is of course backed by the sum of our assets. But when push comes to shove, how is it apportioned? What is the fair attribution? Do our anti-trust laws and tax policy divide the risk and rewards fairly (whatever that means from an equitable and efficiency perspective)? It’s not as easy as saying “the market gets this right”. The rules are political. Power is not accorded solely due to merit (whatever that means). So sure, the debt is backed by our assets, but good luck calling the loans back in.

I recently re-watched Ray Dalio’s How The Economic Machine Works. I assigned it to some young teens who are trying to learn about the economy. The video shows how the macroeconomy is built up from everyday transactions. A loan (ie credit) is one such transaction. The credit cycle is endemic to the economy itself. Dalio overlays the short-term credit cycle (small squiggles) on the long-run cycle.

(credit: the hatchfund.com)

The end of long-term debt cycles are times of massive upheaval. Historically this has meant violence, currency devaluations, and victors dividing the spoils regardless of who was previously listed as a creditor.

Dalio, uses a highly understated word for this adjustment. Deleveraging. The default process (whether outright or via inflation) is redistributive. Politics determines the winners and losers. It’s always been give and take. But we need to keep talking.

If we cannot find a way to cooperate, the problem of imbalance and feelings of injustice don’t just disappear.

Redistribution finds a way.


Addendum

I realize MMT is a polarizing topic. I have a cursory understanding of it, so feel free to correct me: I think the core insight that a government doesn’t need to run like a household is correct mechanically. The problem is how the debt is allocated to the citizens in the form of taxes and transfer payments. So from a policy point of view, I don’t know if MMT frameworks lead to effective practical policy. Effective is always a matter of debate and depends on your constituency’s perspective. In that sense, MMT is no different than any other framework that claims to have good reasons for how it grows and splits the pie.

The great personal dividend of MMT is how it popularized the sectoral balances approach to understanding the economy. Similar to Dalio’s video, it views the economy as a collection of small transactions. Since every buy is someone else’s sell, we can use a giant T account of credits and debits to understand the economy from basic accounting. Those credits and debits flow through the household, government, corporate and “foreign sectors”. Economists associated with this approach include Godley, Pettis, Kalecki, and Levy.

To demonstrate the power of this lens, I encourage you to read Jesse Livermore’s Upside Down Markets paper. It completely reshaped my understanding of macro into something that I believe is closer to reality. Whenever I hear a macro argument, I at least try to place it within the sectoral balances framework to see if it is at least self-consistent. The advantage of basic accounting identities is they are identities. They are tautologically true and that’s a useful razor for an initially evaluating an argument.

Jesse’s paper is a beast. Many people won’t read a 40k word paper. I encourage everyone to read this one. While it’s a dense exploration of timely macroeconomics ideas, Jesse’s rare ability to tackle the complexity in an approachable, step-by-step progression is an amazing opportunity to learn.

Having said that, I realize many people still won’t read the paper. So I decided to try my hand at creating this explainer. I completely re-factored it to turn it into a personal reference. You can use it too:

✍️Moontower Guide To Jesse Livermore’s Upside Down Markets (link)


Be groovy to the mom’s out there!

-K

Moontower #147

I exhausted my writing energy in this week’s Money Angle, so today you get a grab bag.

🏫Schoolhouse.world (check it out)

This is the latest initiative by Sal Khan (definitely a hero). It’s a peer-to-peer live tutoring service focused on HS math and test prep. If we know anything about KhanAcademy then we can expect this is just the beginning.

Schoolhouse.world is a platform for free, peer-to-peer tutoring–where anyone, anywhere can receive live help, build their skills, and pay it forward by becoming a tutor themselves.

I happened to be browsing the list of donors to KhanAcademy and was heartened to see how bipartisan it was. Their mission transcends our differences.

Elon’s Giant Package (12 min read)
by @ranjanxroy

Some background before reading Ranjan’s post.

Earlier this week Matt Levine wrote:

Twitter is a strange company; it has enormous influence on politics and culture but is not great at making money. It has a lot of power as a venue of public discussion, and there is a lot of debate among Twitter’s employees and users, and among politicians and regulators, about how it should use that power. Elon Musk certainly cares about this stuff, and has explicitly said that he wants to buy Twitter not for economic reasons but for “free speech.”

The narrative is “free speech”, but I’m personally a bit skeptical because my impulse is buying Twitter seems more coherent as Elon:

1) secures distribution. It’s like marketing capex that also happens to have vanity value.

And it makes sense for things that have vanity value to be uneconomic. Indulge me:

2) wants cover to diversify from TSLA shares. If Twitter is run like a “clown car that crashed into a goldmine” then presumably it has potential upside independent of vanity.

Ranjan’s mini-grand theory on what Elon’s up to with Twitter was resonant with my prior. After reading that, consider something I’ve mentioned before. Portfolio theory asserts that things which don’t make sense in isolation can be brilliant when paired with the right strategy or synergistic buyer. Especially today. It’s spelled out further in:

Portfolio Theory And The Invisible Option On Hobbies (7 min read)

Twitter is more useful to Elon than anyone else on Earth. Whether it’s useful enough to him to justify the price is another matter, but it’s not shocking that he’d be the most justifiable high bid for it.

Let’s end with some housing talk. I think comparisons to 2007 are off base. Lending standards are tighter and people are flush with cash right now. It’s not to say I’m bullish exactly, but I think the downside in nominal terms is fairly contained. I suspect RE will be dead money in real terms for a while but then again, everything might be. It could be the tallest midget for the foreseeable future. I’m also the ass who sold his house in late 2020 so maybe discount everything I just said by 200%.

Read Calculated Risk instead:

Don’t Compare the Current Housing Boom to the Bubble and Bust (4 min read)
by Bill McBride


Money Angle

In the past few years, I’ve written several posts about option greeks.

If you are familiar with them, you know my goal is to explain things like you are 5 years old (well more like 12…my kids don’t know how an option works yet). I struggle to read technical finance papers because I’m, like a human being and stuff. I assume others feel that way about option greeks.

My latest post occured to me as I was falling asleep Tuesday night, so I spent Wednesday in a fever of writing that reminded me why I don’t write technical posts all the time. Even a concept I feel very comfortable with took about 10 hours to write about.

Check it out:

Moontower On Gamma (15 min read)

Gamma is a concept that maps perfectly to acceleration in physics which is an intuitive and familiar concept we encounter in daily life. We can use that analogy to see why p/l is the same idea as “distance traveled”. From there, it’s delightful to see why option profits have a squared term.

If you want the krisnotes with less of the math:

Just a reminder, I maintain the Moontower Volatility Wiki with the help of the online nerd community. It’s a collection of resources for quant finance with a focus on options. I curate what goes into it, but it’s a community effort ultimately:

👽Moontower Volatility Wiki


Last Call

I’ve been following and chatting with Adam Butler and his teammates Rodrigo Gordillo and Mike Philbrick from ReSolve Asset Management for a while. They are a super-smart, thoughtful group of guys that I learn from. They asked me to come on their show which could have been very intimidating (these guys talk to people with way more things figured out than I ever will), but they made me feel comfortable enough to just riff.

I sound like a meatball. You can take the kid outta Jersey but, well let’s just say I prefer to hide behind print for a reason. It’s mostly stories with some risk managment ideas sprinkled in.

ReSolve Riffs on Exploring Life Under The (Option) Surface (YouTube)

If you prefer audio only (you don’t have to watch me gesture like a crackhead) here’s the Spotify link.