In this issue:
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gerrymandered thoughts
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Levine brain
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commodity index
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“stock pickers” market?
Friends,
In light of midterms, or really the midterm avalanche on social media from all sides, I feel like I can say some stuff that will just be forgotten in the inevitable refractory period of “take” fatigue.
Politics are as old as Cain, the world’s 3rd person.
The game and tactics evolve alongside our technologies and ideological fashions. I’ve never cared about politics despite it having these game-like qualities. I think my disinterest in it is related to why I also don’t consider myself a businessman.
In when quitting is ambitious, I said:
I don’t really see myself as a businessman. As someone who would spin something up just because they see an opportunity… I don’t care about solving a problem just because it exists. There are infinite problems, and I have one attention span. To a businessman, profit helps them filter. But more money than I actually need is not motivating enough to do work I don’t care about.
The bold bit sums up my apathy about politics. I vote. Otherwise I’m an NPC and don’t care to put the effort into not being an NPC in this realm of life.
So I’m not particularly informed about politics. I don’t follow news on it. The job is fundamentally about persuasion, but on matters that are always composed of challenging trade-offs. Like any sales gig, there’s no obligation to present those trade-offs in a way that weakens your case. I don’t find this offensive because I’m a grown-up. But I’m also not drawn to listening to motivated arguments any more than I care to listen to timeshare pitches.
Unless I’m strongly affected by a matter, I will not prioritize becoming sufficiently educated on the topic to the standard of competent debate with a worthy adversary. And if I’m not to that standard, who cares what I have to say beyond entertainment value anyway. [I’m not discounting entertainment value as frivolous…I enjoy hearing takes from people good at making them even if I suspect gaps in their knowledge.]
I’m restraining myself from giving advice on this because I can’t do it credibly. Maybe when you sit on the toilet poasting about what so-and-so said while your legs fall asleep makes a difference in the same way that voting makes a difference in aggregate, even though your singular vote makes no mathematical difference. I can only share what I think, and that is to be taken with you or left behind without prejudice as to what I would prefer.
So here are a smattering of thoughts that you will make what you want of:
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When I look at political discourse, I see games as well as their necessity. It is serious business. Life and death, joy and sorrow depend on it. I don’t hold my non-participation with pride just as I don’t justify not exercising as much as I should. I recognize that personal failings are themselves trades. Every choice has an opportunity cost.
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Much of our thinking is gerrymandered, not coherent. Your beliefs are darts that you then draw a bullseye around. I’m ok with this because it’s reality. But I warn you that to internalize it means many chains of logic you encounter, both earnest and propaganda, are not wrong because of how they stick together, but because they fundamentally don’t map to anyone’s reality. There is no normative. It’s just what’s allowed or what’s not. Which brings us to power…
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In the film Nuremberg, Russell Crowe, playing Nazi leader Hermann Göring, delivers this ditty during his interrogation: “You have your freedom and I am a prisoner because you’ve won and we lost. Not because you are morally superior!” The great tension society must balance is that he’s right, but to maintain order we must all aspire to prove him wrong, which we knowingly do in vain.
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You want what you want and only then do you retrofit coherence. A trader would notice this before a commentator because a trader’s greatest battles are with p/l. P/L is an agent of Reality over enough trials.
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The relationship of logic and conclusion is flipped everywhere where reality isn’t the judge. If you need a bridge to stand, you need logic. If you want to cut taxes, logic is a luxury, a tool at best. Remember, the conclusion was born before there was a logic to it, and it will survive once the logic has been refuted, rehabilitated, repackaged, and refuted again.
Anyway, this is what I think our nature is. It’s not evil, it’s just a neutral adaptation. It survives because it works. I don’t care about, nor recommend, your adoption of this perspective. For all I know, it’s a form of self-protection, while I tell myself thinking it comes from observation. Either way, it does explain why political disputes just sound like people arguing over their favorite color.
Figuratively. But you never know these days.
Money Angle
a Levine index for commodity nerds
Thought I’d share an idea that you can recycle for your own custom needs.
If I’m drafting a commodity piece and vaguely remember (or I’m not even sure if he’s covered the topic or something adjacent to it) Matt Levine’s take, I don’t want the friction of searching years of email to find it.
I had agents (Grok + Claude) build an index from my Gmail archive of the newsletter. They went through 1,533 daily columns section by section, 8,845 sections in all, read 277 candidates in full, and kept 160. A section makes the cut when a market, a mechanic, or a company story has commodities at its core.
Each entry has the date, the column it ran in, theme tags, a short summary, and one verbatim passage. It lives as flat files in git, one file per entry, and Claude adds new columns every Monday.
When I’m working in my Writing Projects folder, I can then call upon Matt Levine’s brain when needed.
Breakdown:
The problem with commodity investing | 15 min read
Bruno Schwalbach’s points out a flaw commodity traders understand well. The big commodity indices are oil bets. Energy was over half of the S&P GSCI’s weight in 2026 and has carried about 85% of its risk over history. BCOM caps any sector at 33% but still gets roughly half its risk from energy.
He also points out the brutal variance drag: the GSCI averaged 5.1% a year but compounded at 2.7% and how it feels like wasted diversification since across 26 commodity futures, correlation averages 0.14 across sectors s 0.53 within a sector.
His fix, Balanced Commodity, splits risk equally across the six sectors, tilts toward markets that are trending up, and goes to cash when everything trends down. Long-only, unlevered. Backtest from 1996, after costs: 8.2% a year vs 2.8% for the GSCI, max drawdown 35% vs 88.5%, 0.29 correlation to global equities. It made 1.1% in 2008 and 7.5% in 2022.
As you might expect, it will underperform when energy rips. From January to mid-October 2026 the GSCI returned 60% and Balanced Commodity 16%. But I think this is not so much disappointing as a misguided prior on the role of an allocation. If you’re looking for broad exposure to commodities, you’re looking for a well-constructed index. It’s also reasonable, given oil’s chokepoint status in the global economy, to acutely care about a a strategic allocation to that much like you would with gold. You don’t buy gold via its meager weight in an index but consider it separately. There’s no shortage of vehicles for concentrated oil exposure, so there’s no reason to mix your motivation towards it with the broad commodity index motivation.
Bruno’s article is both interesting and educational. It also reminded me of an interview RCM did with Jim Rogers back in 2021. If you traded commodities, you know Jim. He co-founded Quantum Fund with Soros and foresaw the rise of China in the early 2000s. Making a bet not just financially, he moved there with his family to make sure his kids learned Mandarin and is just an adventurous fellow, having been the first person to ever make some notable motorcycle journeys off-beaten paths across various continents.
Before his move and knowing he wanted to get long commodities in a set-it-and-forget-it way, he also found the GS and BCOM indices to be lacking. He fashioned the Rogers index (RICI), but to be blunt, it feels merely incremental with respect to the indices he tried to get around. It’s still 40% energy by weight, better than the GSCI on oil weight, worse than BCOM. But it does have a little wrinkle that always appealed to us floor trader types.
Its roll dates intentionally front-run the much larger GSCI rolls.
Money Angle For Masochists
Dispersion Is No Excuse | 7 min read
If you want to play Where’s Waldo, you can search all my letters for backhanded parentheticals about how the relentless low correlation regime must be a boon to “stock pickers”. It’s backhanded because, of course, it hasn’t. As a cohort, active managers aren’t doing any better than they did in higher correlation regimes where they were always sulking that there was no opportunity for differentiation.
Elm Wealth, instead of being snarks like me, decided to write about this puzzle. I love learning new shit, this is just very enlightening and a neat example of applying portfolio construction knowledge to form predictions. If I was great at that, I might have realized this isn’t quite the puzzle I originally thought.
I’ll let Victor’s quotes carry:
Active managers are conventionally judged against a benchmark, and they manage their tracking error, which is the volatility of their return relative to that benchmark. Clients, consultants and in-house risk managers expect tracking error to stay within a fairly narrow band. When dispersion rises, the same positions generate more tracking error, so managers tend to shrink their bets.
Our LSE friend Dimitri Vayanos has written about this behavior, and its impact, in several excellent papers. If tracking error stays constant, the share of managers who underperform is approximately:
Share underperforming ≈ N(Costs / Tracking Error)
where “costs” include fees and trading costs and N is the cumulative standard normal distribution function.
With a cost disadvantage of 1.5% (fees of 1% and trading costs of 0.5%) and tracking error of 3%, about 69% of managers should underperform. That is close to what we observe. As tracking error shrinks toward zero, the formula gives 100%, the lockstep case from Sharpe’s arithmetic. Dispersion does not appear in the formula because managers holding their tracking error steady make it irrelevant.
Active management is also a negative-sum game on risk, even before costs. Because active portfolios add up to the market, the average active portfolio is riskier than the market. That extra risk is uncompensated, idiosyncratic risk. Even a manager who matched the index return would, on average, deliver a worse risk-adjusted result.
High dispersion sharpens the dilemma. A manager who keeps position sizes unchanged takes on more uncompensated risk. A manager who cuts them gives up whatever help dispersion offered, and pays trading costs to do it. Either way, the investor loses.
Basically, the urge to keep tracking error low is a constraint that makes you unable to take advantage of the increased dispersion between stocks. So long as asset management is fixated on benchmarks like the SP500, disappointment is not actually a puzzle at all.
My timing could not have been (accidentally) better on the topic of dispersion. I scheduled what if the “singularity” trade cracks? to go out Thursday am which happened to be after a giant rally and before a giant bloodbath which was accompanied by:
From My Actual Life
A thought I shared on Instagram (follow) now that my mother is taking an online options course.
Here are the questions for the first homework I gave here:
And finally, we finally got our chance to see Gary Gulman live as he performed his “Grandiloquent” theater show in San Rafael Saturday night.
Gary’s style combines a unique pacing, a performative vocabulary, with rare mix of high-brow literary references + pop culture-infused storytelling.
This show had a long bit about early 90s rock which is immediately one of my favorite comedy sketches.
There are still lots of dates on his current tour, but the tour is actually 2 different shows. Grandiloquent is only being performed once more. We got lucky because when I booked the show, I didn’t realize he had 2 different shows, and this one felt uniquely special. Yinh and I love to be inspired by live performances, and as we walked out of this, we were just filled with respect for the talent and execution on display. Inner voice admonishing me: “work harder, be better”.
Stay groovy
☮️
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