Market Mutations

recently described markets as biology not physics in recognition of how players adapt. Let’s discover 2 more opaque examples and their causes.

1) Structured products

Historically your bank would happily sell you an investment note which guarantees your principle (insofar as you are ok with your bank’s credit risk) and earns you a return which is linked to return of an equity index. To manufacture this investment product the bank would invest in bonds and a portion of the interest income would be directed to buy call options on the index. There are more shortcuts they use to create the product (for example, the investor typically doesn’t capture the dividends which are a significant portion of the expected return), but the important thing to understand is these notes require enough interest income to finance the call options. With interest rates near zero in most of the world, banks have had to get more…creative.

To keep these notes promising attractive rates of return, the issuers buy insurance against a sell-off from the investors. Not explicitly of course. Instead they embed a feature that “knocks” your note out and exposes you to the losses if the reference index falls far enough. Yes, the prospectus spells this out. But for whatever reason, retail investors fail to wonder why an investment product can offer seemingly attractive returns in a low risk-free rate environment. They continue to gobble them up, not realizing they are self-financing these returns by underwriting catastrophic risk.

Here’s where it gets interesting. Since interest rates have never been this low and the aging developed nations have never been this large, there is unprecedented demand for these notes. These products are intensely popular in Asia and Europe (a friend once quipped you could buy them at a 7-11 in Italy. I want to believe this because it sounds so ridiculous so I refuse to fact-check it). The issuing banks, who are not in the business of taking directional or outright volatility risk, must recycle the optionality that these notes spit off. The associated option flows from these popular products are correspondingly massive.

From a “market is biology” perspective, it’s useful to remember that anybody using historical data to make their case may not be fully appreciating that our current landscape includes a bunch of dormant, non-linear payoffs that kick in only when the market has already made a large down move. An extreme analogy would be like comparing NFL wide receivers through time without noticing that they got rid of pass interference rules.

Although the bulk of these notes have historically been tied to Asian indices like Korea, they are becoming increasingly linked to the SP500. Will the tail wag the dog? Let options fund manager Benn Eifert explain on his latest appearance on the Bloomberg Odd Lots episode titled How To Create Havoc In The U.S. Options Market. (Link)
2) How corporate governance responds to the age of passive indexing
Consider these points taken from Farnum Street Investment’s latest letter. (Link)

  • In 1965, the CEO-to-worker pay ratio was 20-to-1. By 2018, it had jumped to 278-to-1. How did pay structures get so lopsided? Shouldn’t someone have stepped in? Yes, someone should have stepped in: the owners of the companies. But if you’re a passive index holder, you abdicated that responsibility to Vanguard, Blackrock, State Street or Fidelity. It wasn’t a custodian like Vanguard’s job to mind the henhouse. It was the job of the owners of the company.

Hard Truth: If you own an index fund, you waive your right to complain about CEO compensation.

  • In 2019, Lyft went public. With the increased transparency of SEC filing, it was discovered the company had 46 million restricted stock units (RSU) outstanding. RSUs are a way to incentivize employees, but they can become a big bill for owners. In the case of Lyft, the RSUs would cost owners $2-4 billion, depending on the IPO price. This represented a 20-25% ownership stake of the company being granted to employees. Corporations who grant extravagant stock options do so at the expense of the owners. There are no free lunches.

Hard Truth: If you own an index fund, you waive your right to complain about option dilution.

  • From 2008-2017, the pharmaceutical giant Merck distributed 133% of profits back to shareholders via dividends and share buybacks. Yes, they paid out more than they took in. Those resources could have gone toward research, saving lives, and the next blockbuster drug. The strategy seems obviously shortsighted. How come no one stepped up to tell them to think long term? Analysis initiated by SEC Commissioner Robert Jackson Jr. revealed that in the eight days following a buyback announcement, executives on average sold five times as much stock as they had on an ordinary day. Management is effectively cashing out at the owners’ expense when they know the price will be supported by internal buybacks. How come no one is stopping them?

Hard Truth: If you own an index fund, you waive the right to complain about myopic corporate strategy and share buybacks.

  • Sir Winston Churchill once said, “Capitalism is the worst economic system, except for all the others.” That remains true, but proper capitalism requires thoughtful stewards, meritocratic outcomes, and engaged owners. If we all abdicate our responsibilities, we risk perversion of the system that’s created more positive effects for humanity than arguably any other single phenomenon. Hope is not lost as history tends to move in cycles. We’re in need of the pendulum to change direction.

Hard Truth: This too shall pass.

On Grit

99th percentile.

That’s what it takes to get into the “gifted and talented” program. The specific tests may differ by state but the goal of this tool is universal. To detect an elite mix of mental alloy in K thru 12th graders. Verbal, quantitative, and visual reasoning. My friends’ 4th-grader just got accepted into the program. It didn’t surprise me, he’s a smart kid across the board.

What follows after he gets the news of his acceptance is surprising. It involved his 2nd-grade sister who missed the score cutoff. She doggedly chased down the advice of her friends who did get in. “How do I prepare so I can get in too?”

(my head explodes)

I’m not sure how much time you spend with 2nd-graders but this is 99th percentile behavior of a different breed.


This is one of those buzzy social science ideas that took off like 2018 cannabis IPOs. Like ‘10,000 hours’ or ‘growth mindset’, ticker GRIT got too far ahead of its fundamentals because the story was so disruptive — talent doesn’t matter if we can just instill stick-to-it-iveness. Angela Duckworth is credited with popularizing “grit”. A simple web search will enumerate the exaggerated claims (here’s a screen of my summary of David Epstein’s measured critique of the studies).

Let’s not be too harsh.

Consider the price of BYND. It’s down 50% from its peak. It’s still trading for a price that affirms durable importance. It’s forgivable if our ability to measure that value is low-resolution. The same goes for grit. The scantron score can accurately identify talent in math and reading. But this 2nd-grade girl reminds us that “not everything that counts can be counted”.

That fact makes life more fun anyway. Anything easily measured will be correctly priced. Alpha resides in what is illegible.

The Calculus of Grit

While we approve of grit when we see it, there is a difference between being persistent vs just stupid. Sometimes it’s obvious. Like if you’re 5’9 and want to play in the NBA. You should direct your #MambaMentality elsewhere. But you have no doubt faced times when it was a close call to give up vs carry on. When is grit bad strategy?

Venkat Rao has written a contrarian take on the idea of grit. He advocates for taking the path of least resistance.

He explains:

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

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.

  • If the one size-guide you have been equipped with is not in sync with your strengths you will bash your head against a wall in vain. You need to figure out your path, not trust the guide you were given. This requires introspection. Once you recognize this, logic will point you to an unfashionable conclusion: hard equals wrong.

If it isn’t crystal clear, I am advocating the view that if you find that what you are doing is ridiculously hard for you, it is the wrong thing for you to be doing. I maintain that you should not have to work significantly harder or faster to succeed today than you had to 50 years ago. A little harder perhaps. Mainly, you just have to drop external frames of reference and trust your internal navigation on a landscape of your own strengths. It may look like superhuman grit to an outsider, but if it feels like that inside to you, you’re doing something wrong.

This is a very contrarian position to take today. “

“Exhortation is pointless. Humans don’t suddenly become super-human just because the environment suddenly seems to demand superhuman behavior for survival. Those who attempt this kill themselves just as surely as those dumb kids who watch a superman movie and jump off buildings hoping to fly.

It is the landscape of your own strengths that matters. And you can set your own, completely human pace through it.

The only truly new behavior you need is increased introspection. And yes, this will advantage some people over others. To avoid running faster and faster until you die of exhaustion, you need to develop an increasingly refined understanding of this landscape as you progress. You twist and turn as you walk (not run) primarily to find the path of least resistance on the landscape of your strengths.

The only truly new belief you need is that the landscape of disciplinary endeavors and achievement is meaningless. If you are too attached to degrees, medals, prizes, prestigious titles and other extrinsic markers of progress in your life, you might as well give up now. With 90% probability, you aren’t going to make it. It’s simple math: even if they were worth it, as our friend Friedman notes with his characteristic scare-mongering, there simply isn’t enough to go around”

  • The path of least resistance does not mean lazy. Or easy. He calls you to consider your efforts in the framework of his 3 Rs: reworking, referencing and releasing. Depending on your goals or field these words may mean different things but they are the blueprint for excellence.

I’ve read the essay a few times over the years. The advice is resonant. Since Rao’s writing style might be an acquired taste I’ll share the link with my highlights. (Link)

Jerry Seinfeld (look, I’ve already told you I basically memorized SeinLanguage so you’ll need to endure these references) has some life efficiency hacks. Always put the bowl away with a spoon. If you ever find yourself needing a bowl without a spoon cross that bridge when you come to it. When you bend over to make your bed and tuck in the corners, stay bent over at the waist as you move from one side to the other. The seconds add up.

Taylor Pearson’s The Subtle Art of Reaching Your Potential could be the efficient, practical companion guide to Rao’s Calculus of Grit. He explains when to substitute the 80/20 rule for 10,000 hours. We all have the same 24 hours. The essay will help you discern how to allocate your time. (Link with my highlights)

Movies For Your 60s Nostalgia Fix

First, thanks for all the well wishes after last weekend’s plague ripped through our house. Both kids are back to normal and back to raising hell. Max had his follow-up with his regular doctor this week who said he’s seen bad luck like having strep and the flu. But never seen those plus pneumonia. I’ll remember that age 3 was when we discovered Max is Wolverine.

I’ve been under the weather this week so gym time has been exchanged for couch time. Zak and I just beat Untitled Goose Game (Link)It’s available on every platform and it’s just so ridiculous. Wikipedia describes it as a puzzle game where players control a goose who bothers the inhabitants of an English village. That’s pretty much it. You have a mischief list that this goose must fulfill, but requires lots of planning, strategizing and trial and error. It’s full of frumpy, slapstick humor that had Zak and I laughing throughout.

As far as movies, I watched 2 music documentaries featuring the 60s:

Woodstock: 3 Days That Defined A Generation (Link)

Besides the great footage, the documentary showed how Woodstock overcame impossible logistics to materialize. It’s a well-told dramatic story so I won’t ruin it. The film was also a comforting reminder that as crazy as we think times are now, the 1960s took the volume to 11. Vietnam, civil rights, assassinations. A heavy decade.

Echo in the Canyon (Link)

From Wikipedia: “A look at how musical groups such as The Byrds, The Beach Boys, Buffalo Springfield, and The Mamas & the Papas birthed the beginnings of the Laurel Canyon music scene and how the echo of these artists’ creations reverberated across the world.”

It follows Jakob Dylan, Regina Spektor, and Beck as they record classics with the artists like Michelle Phillips, Stephen Stills, and Brian Wilson.

I have a bit of a fetish with the Hollywood Hills which includes Laurel Canyon. It started when I read Helter SkelterEcho may have saved me from reading about 4 books that I found on the music scene in Laurel Canyon during the 60s. In general, I have anemoia for the 1960s and 1970s and especially in California. My Instagram is a shameless parade of old muscle cars, 1970s fashion, and vintage guitars. With some Million Dollar Listing LA mixed in. Total id.

Pumping IronBoogie Nights and the more recently made Once Upon A Time In Hollywood are some of my favorite movies just because the sound and feel of those eras come through. For OUATIH, Tarantino had freeways closed so they could change the billboards. The attention to detail in re-creating Hollywood in the 60s pays off. And it was this nostalgia for an era I never knew that prompted me to read Inherent Vice last year. California-noir-stoner-detective-novel set near the beach in 1970 with the Manson stuff still dominating the public consciousness. Right. Up. My. Alley.

You know too much about me now.

Doctors To Advocate Fasting?

One of my closest friends is a distinguished MD and researcher who hit me up this week to share a very recent review article from the New England Journal of Medicine.

The topic: intermittent fasting.

At this point, everyone has either tried it or made fun of people who won’t shut up about it. You know what those people sound like.

“Breakfast is the most important meal of the day” is the slogan of the American capitalist propaganda machine used to cell more Fruit Loops.

You’ve never felt real biological hunger.

It’s a great way to lose pounds before a show.

Wait that last one was Hansel from Zoolander talking about eating disorders. Kindly ignore him.

By any rate, fasting has surged in popularity in recent years. I have been doing an 18/6 schedule 5x a week for almost 3 years. It’s certainly crossed-over from fad to lifestyle change. My favorite benefit is actually mental. It’s de-cluttering. It means fewer decisions. It means never feeling like you’re supposed to eat something because N hours have passed. But most people who fast are interested in its promise for their health or weight loss.

So what about this review article?

Wikipedia says a review article is where “journals analyze or discuss research previously published by others, rather than reporting new experimental results.” The NEJM review of the studies on intermittent fasting was very positive. A few bullets that stood out to me that confirmed my own reading about IF.

  • Many studies have indicated that several of the benefits of intermittent fasting are dissociated from its effects on weight loss. These benefits include improvements in glucose regulation, blood pressure, and heart rate; the efficacy of endurance training and abdominal fat loss.
  • In humans, intermittent-fasting interventions ameliorate obesity, insulin resistance, dyslipidemia, hypertension, and inflammation. Intermittent fasting seems to confer health benefits to a greater extent than can be attributed just to a reduction in caloric intake.   
  • Repeated exposure to fasting periods results in lasting adaptive responses that confer resistance to subsequent challenges. Cells respond to intermittent fasting by engaging in a coordinated adaptive stress response that leads to increased expression of antioxidant defenses, DNA repair, protein quality control, mitochondrial biogenesis and autophagy, and down-regulation of inflammation. These adaptive responses to fasting and feeding are conserved across taxa.
  • Intermittent-fasting regimens reduce tissue damage and improve functional outcomes of traumatic and ischemic tissue injury in animal models. Preoperative fasting reduces tissue damage and inflammation and improves the outcomes of surgical procedures… Emerging evidence suggests that intermittent fasting may enhance athletic performance and may prove to be a practical approach for reducing the morbidity and mortality associated with traumatic brain and spinal cord injuries in athletes.

Why is this important?

The NEJM is not Men’s Health or Cosmo. It’s the gold standard of medical journals.

My friend writes:

Being published in NEJM is often considered the equivalent of becoming “textbook” in medicine and it’s rare that NEJM would comment on this type of subject.

My Commentary

I’m not qualified to evaluate any medical study. We need to rely on experts for that. This is an uncomfortable truth in a complex world. A world in which people devote their life’s work to incremental findings. For a layperson to understand these tiny advances would be, to borrow a Seinfeld metaphor, like trying to hear the sound of cotton touching felt.

To navigate such a world, we put our energy into curating who we listen to. We have heuristics for doing this as we try to separate reliable sources from charlatans. One of the most useful heuristics is considering incentives. We don’t take Big Tobacco’s scientists at face value.

Supporting intermittent fasting passes the incentives heuristic easily. The work on it is relatively recent and nobody has a commercial incentive to push it (ie food companies) so in a Bayesian sense, it takes less to convince me. Said otherwise, I don’t have to discount some profiteer’s incentives in the findings.

Feels like a rare spot where truth and interests align.
Here’s the link to the NEJM but there’s a paywall. Might need to google around to see if you can backdoor it.

My prior research on fasting

The majority came from a book called Eat.Stop.Eat by Brad Pilon. It also does an extensive literature review and digs into what we know and don’t know about fasting durations, performance in athletes, and lots of interesting studies about Muslim athlete during Ramadan which provides natural experiments in calorie restriction. (Link)

I was also highly impacted by Dr. Peter Attia. You can start with my notes from his interviews.

  • Invest Like the Best Podcast notes (Link)
  • Notes from his livestream with Patrick O’Shaughnessey (Link)

A Simple Diagram to Remember

Attia has a  simple framework for how to manage your diet.

You have 3 levers to pull:

Calorie restriction
Time restriction
Diet restriction

Always pull 1. Often pull 2. Occasionally pull 3.

Markets Will Permanently Reset Higher (My Sacrifice to the Delta Gods)

The US stock market rallied 30% in 2019. A blow-off performance punctuating a decade long bull market.

Professional money managers are pissed.

The Most Hated Rally

“Smart” money said we were in the late innings. Any bit of caution in the portfolio means you are now staring at a poor comparison to the benchmarks. I suspect the quant managers who might be evaluated on risk-adjusted returns are no happier. The rally has been steady. Low volatility. The SPX has won gold in both the absolute return and Sharpe ratio Olympics.

Relative Pain

Active managers are getting rocked. The Fidelity/Vanguard/Schwab race to the bottom on fees and the merit of indexing has been delivering brutal blows to the relative return crowd (mutual funds) and risk-adjusted return crowd (hedge funds) alike. Throw in a dose of market reflexivity and you can imagine the flight to passive strategies accelerating.

Absolute Gain

If you are an individual investor, you probably underperformed, but at least you are winning. And probably a lot more than you imagined. Your investments are an extension of your savings which you’d like to see grow to meet your future liabilities whether it’s a retirement or college fund. Measured against your realistic needs, you are sitting pretty. You would have happily locked in a guaranteed 10% return for 2019 if offered the chance on Dec 31, 2018.

Even More Expensive

Now what? If smart folks, you included, thought markets were expensive last year, you can only feel more dissonant today. We’ve all seen the CAPE charts reminding us that the stock market hasn’t been this expensive since 1999. Well, that was true one year ago as well, and look how 2019 turned out. I could compile a bunch of links showing how CAPE is a useless timing tool on any sub-10 year horizon and perhaps even longer than that.

You can drive yourself crazy and get nowhere asking how long expensive markets will march higher. No serious market observer pretends to have a high confidence answer to that question. If there was an answer it is tormenting allocators and money managers alike. Like Poe’s raven call “nevermore”.

How about the question of why are they rallying? To say more buy volume than sell volume is correct, but not especially useful. Going beyond that, you will not find a shortage of theories. The most popular, based on my state-of-the-art NLP analytics (otherwise known as browsing #fintwit), is the Fed. Central bank easing, best embodied by zero or negative interest rates in Europe and Japan, seems to be public enemy number one. Another alleged culprit has actually been passive indexing itself. This makes intuitive sense as a driver of marginal demand for shares since pulling money from active managers to allocate to say the SP500 is almost certainly going to be increasing the beta of investors’ portfolios if it is done on a dollar neutral basis. Michael Burry, of Big Short fame, has even called passive indexing a bubble.

But What If We’re Wrong

I borrowed the heading from the title of Chuck Klosterman’s book urging us to soften our attachment to the premises upon which we have built conventional wisdom. If this were easy to do he wouldn’t have needed to write a book. Blind spots are so-called for a reason.

Consider the central bank recklessness and passive indexing arguments. These appear to be reasonable explanations for how the market can be artificially or irrationally expensive. They even appear to have endpoints.

Consider these un-timeable reckonings for the central bank argument:

  • Asymmetric, short term nature of political incentives leads to hyperinflationary pressures climaxing in eventual fiat heat death. Creditors destroyed.

or perhaps…

  • A conservative central bank, inspired by the still-vibrant ghost of Volcker, tightens in response to creeping inflationary pressures. Since soft landings don’t exist, the market crashes and our record outstanding debt now teeters on a severely marked down asset base. A deflationary spiral.

How about the “bubble in passive investing” argument?

  • Eventually the inflows to passive will tip so far that active management’s price discovery process will fail to function. There won’t be enough wolves to keep the deer population in check and nature’s equilibrium will breakdown. A litany of price distortions from faulty signals will mirror how natural disasters’ can stem from unintended sequences. It’s like a climate crisis for asset pricing.

These arguments are promoted by many smart people. I’m in no position to falsify them. But I don’t think they necessarily warrant high confidence. First of all, a persistently expensive market is a complex phenomenon so there is a major burden of proof on any reductionist take that I don’t think either of these arguments has satisfied. Furthermore, the incentives of its promoters are enough to cast reasonable doubt on these arguments. To open ourselves to new reasons for the market’s relative expensiveness let’s loosen the grip on the above explanations.

Opening Our Minds

We can attack the central bank and passive indexing arguments on common ground. Both rely on a belief that the market is distorted by significant flows (whether central bank support or migration to passive). They invoke limits to liquidity and arbitrage as reasons for market inefficiency. The argument is compelling. But it’s also epistemologically diabolical in the same way that conspiracy theories recursively gnaw at the logic which allows you to dispel them in the first place.

As mathematician Jordan Ellenburg1 puts it:

“If you do happen to find yourself partially believing a crazy theory, don’t worry — probably the evidence you encounter will be inconsistent with it, driving down your degree of belief in the craziness until your beliefs come in line with everyone else’s. Unless that is, the crazy theory is designed to survive the winnowing process. That’s how conspiracy theories work.”

Those blaming passive indexing and central banks are almost certainly believers in efficient markets. Their arguments follow as so:

  • “Markets are mostly efficient.”
  • “My strategies exploit the few inefficiencies there are.”
  • “My strategies don’t work anymore.”
  • “The markets are inefficient because of X and Y”.

Well, the final conclusion is unmistakably self-serving. Building the argument in steps, the null conclusion should be, “the market, perhaps partially thanks to my work has ironed out the inefficiency I was exploiting.” The prize for this win is an incremental gift of price discovery to the world. And the checks they already cashed. But so much for their future prospects. They can ruminate a bit more on that on their yacht with all their newfound free time.

This Hurts All Investors Not Just Active Managers

If the market is indeed searching for a much higher setpoint then anyone young or who cares about someone who’s young should be concerned.

Investor Lyall Taylor 2 explains:

Most stock market investors worry incessantly about the risk of a potential market melt down. I don’t. I worry about the risk of a market meltup.

For anyone trying to grow their capital; make a living off their investments; or build a business around managing (and making money for) other investors, the absolute worst thing that could happen would be if markets everywhere were to surge and become (and remain) extremely expensive. Imagine, for instance, a world in which stocks traded at 50x earnings. If you invested, you would be offered a poultry 2% earnings yield in exchange for considerable risks.

If markets were to melt up to 50x, it would feel good for a while (if you were invested). However, your future stream of dividends would not have increased, so in truth you would be no wealthier, and furthermore, you would be confronted with the reality of poor reinvestment returns on dividends and corporate stock buybacks. In the long run, this would make you worse rather than better off, despite feeling wealthier in the short run. Bond investors understand reinvestment risk, but most stock investors do not seem too. But it works the same way for stocks as it does for bonds. 

If you’re invested, you are hedged somewhat against the risk of a melt up (a risk most people don’t identify). You can lock in a reasonable return at today’s reasonable prices, and would suffer only on the reinvestment side (an unhedgeable risk). The disaster situation would be to be sitting in cash while watching markets surge all the way to 50x.

If this scenario sounds implausible, consider that we are already facing zero or negative yields in large segments of the bond and real estate markets (reports of easing cap rates in coastal US cities notwithstanding).


  • Compared to history the market is expensive.
  • The most popular explanations rely on some market- distorting mechanisms to justify valuations.
  • The implication is there should be some reversion.

But as investors, we know that markets have a habit of choosing the path which causes the maximum pain for the most people. And it’s pretty clear that valuations ripping higher from here and pushing risky yields even lower would be a world of pain for investors and owners of capital.

Towards New Explanations for Expensive Markets

Option market makers use the expression “make a sacrifice to the delta gods”. In the course of market-making, option traders, despite trying to maintain a flat delta, may end up short an underlyer. When it goes against them, in a misguided effort to not lock in a loss, they will often cover a small portion of the position hoping Mr. Market makes a fool of the most recent purchase by pushing the underlyer back down thus minimizing their loss on the entire position. “I covered a part of the short at a high price but made a lot back on the rest”. Hence, the sacrifice to the gods.

Save me the lecture on investor bias. I’m just sharing what amounts to trader gallows humor. In an effort to make a  sacrifice to Mr. Market, let’s see if there is a case for markets to revalue much higher. Even from here.

For such a justification to be considered, I suggest it:

  • Not rely on significant claims of market inefficiency.

For starters let’s interpret central bank behavior as symptomatic, not causal. It’s not a stretch to believe this.   Many believe demographic-induced secular stagnation stalks developing economies starting with Japan, China, and Europe before coming to the U.S. It’s not impossible to see accommodative policy as being correct given the perceived determinism of shrinking workforces. Taylor actually warns us that focusing on central banks may obscure what is happening. A classic red herring.

Indeed, the ability to blame central banks for any and all bubble-ish behavior may have created a blind spot in markets, and resulted in investors overlooking the other contributory factors I discuss below.

After all, rates that are ‘too low’ are supposed to end in inflation, not deflation. So far they haven’t – in almost a decade – resulted in inflation, which suggests rates may not have been too low after all.

  • Incorporate observations of current market dynamics.

For example, seeing how money managers are throwing in the towel, which is what you would actually predict as they are compared to the market’s amazing risk-adjusted returns. A process that deepens as Soros’ reflexivity sucks remaining investors into passive indexing.

Let’s try to understand what the market is telling us with these high valuations.

Expensive Markets = Cheap Capital

The flip side of lower rates of return is a low cost of capital. Instead of asking why the market is so expensive, let’s ask why is the price of capital so low? For the same reasons that prices are ever low. Some mix of weak demand and ample supply. Capital is subject to the same economic forces as anything you can touch and feel.

Taylor explains:

In short, a combination of a growing supply of savings/capital, and falling demand for the usage of those savings. The scarcity of capital is falling. Scarcity is the foundation of returns in capitalism.

Historically, capital has been scarce (sometimes more than others), and high returns/interest rates have therefore been required to ration it to its most productive uses. However, there is no guarantee that will continue. There is no rule of the universe that says capital is entitled to a decent return (or any return).

Let’s start with the weak demand for capital.

Reduced Demand For Capital

The nature of the real economy has been changing which has reduced the capital intensity of industry. The term “data economy” is often used to signify how we have shifted from moving atoms to moving bits. Back to Taylor:

The world (or the developed world at least) is heading into something of a post-industrial era, where a lot of tangible capital is no longer needed to drive growth in productivity. Innovation is instead happening in technology, software, and services, etc, while incremental consumer demand is for relatively intangible services/experiences/entertainment, rather than ‘stuff’. These two factors are together reducing the demand for new tangible capital stock.

Productivity gains are poorly accounted for justifying the valuations. The growing power of technology is all around us. The only place it is invisible is in the productivity statistics – in my opinion because rapid productivity growth is deflationary, and because new technologies are now resulting in whole industries being demonetized. However, corporations are investing less and less in hard assets because there are comparatively limited opportunities or need for them to do so vis-à-vis the past – particularly with slowing population growth. In short, the ways in which capital can be usefully deployed has been declining, and it is probably structural.

Increasing Supply Of Capital

Taylor provides some economic explanations for the surplus of capital invoking what might be expected from mature economies that have had a good run.

Meanwhile, savings are at elevated levels, and have been for quite some time. This may be for merely cyclical reasons, but it could be partly or wholly due to structural reasons as well. One of the reasons is that wealth and income inequality have been rising rapidly over the past 30 years (something that could be cyclical, structural, or both). The more one earns, the higher one’s propensity to save, and wealthy individuals seldom consume their capital (as opposed to a portion – usually small – of the returns from their capital). Consequently, rising inequality has been increasing the world’s private-sector savings stockpile. In addition, savings-heavy economies such as China have been integrated into the world economy over the past several decades, which has further added to the world’s savings surplus (which was arguably a major contributor to the build up of economic imbalances prior to the GFC).

A Lower Discount Factor

If it weren’t enough that both the supply and demand forces were coordinating to cheapen capital, a lower perception of risk is boosting investment demand. Greed and performance-chasing are timeless behaviors that we would expect a decade into a bull market. Beware. Those explanations, like the Fed excuse, can blind us from looking further. We needn’t look far. The explanation can easily hide in plain sight.


Markets are becoming more efficient. There’s a saying that information wants to be free. It wants to get out. It takes energy to keep useful information private. And if a group has an edge in information, it will be difficult to scale since achieving anything grand requires more people. More people means more leak points. So when we combine information entropy with an explosion of interconnectivity and permissionless platforms, is it any wonder that data, intelligent analysis, and best practices become table stakes?

Increasing Efficiency

  1. Charley Ellis3 of Greenwich advisors on the evolution of investment analysis:

The number of people involved in active investment management, best I can tell, has gone from less than 5,000 to more than 1 million over 56 years. A major securities firm might have had 10 or a dozen analysts back in 1962. What were they doing? They were looking for small-cap stocks and interesting companies that might be interesting investments for the partners of the firm. Did they send anything out to their clients? No, not anything. Goldman Sachs didn’t start sending things out until 1964 or 1965, and there was just one salesman who thought it might be an interesting idea to put out. Today, any self-respecting security firm is worldwide with analysts in London, Hong Kong, Singapore, Tokyo, Los Angeles. 400, 500, even 600 people trying to come up with insights, information, data that might be useful to clients. Anything that might be useful. Demographers, economists, political strategists, portfolio strategist and every major industry team. Every major company will have 10, 12, 15 analysts covering that company. And of course, then if you go to the specialist firms, there are all kinds of people and then there are intermediaries with access to all kinds of experts in any subject you might like. We’ve got 2000 experts. And anytime you want to talk to any one of them, just let us know. Glad to provide an unbelievable, flourishing amount of information of all kinds, all of which is organized and distributed as quickly as possible. Instantaneously, everybody.

2. Now combine this transparency with what pseudonymous writer Jesse Livermore 4 refers to as “networks of confidence.”

Valuation is a function of required rate of return to which liquidity is an input. Imagine a pre-Fed wildcat bank. You would not accept such meager real rates of return because you do not have the confidence in the liquidity of your deposit. So much of our required rates of return come down to confidence. The progress of finance has been towards greater networks levels confidence which creates downward pressure on required rates of return.

3. Finally economist Ed Yardeni 5 describes how capital is so efficiently dispersed throughout the system that distressed funds are on standby waiting to provide liquidity as quickly as opportunity emerges. This private version of plunge protection is like a Nasdaq level 2 bid below the current NBBO. He thinks that absent a broad recession, the market may be able to quarantine sector downturns. Instead of a great recession, we simply adapt to “rolling recessions”. When the US energy sector collapsed in 2015 the fallout was limited as capital was callable on relatively quick notice. If the risk of spillover from sector downturns is limited we can expect fewer recessions, which is what Yardeni attributes any sustained bear market to.

  • Ease of Diversification

First, we need a quick aside on the fact that stocks have historically been a good investment. The excess return of stocks over risk-free rate is known as the “equity risk premium”. The fact that stocks are volatile is used to justify the excess return. Academics often refer to this equity risk premium as a “puzzle” since the return has historically been in excess of what their models would predict. Breaking the Market 6 actually shows that the puzzle is simply an artifact of a false comparison. Academics use index returns as a proxy for “equity returns”. But an index is actually a weighting scheme that rebalances. It’s not the same thing as “stocks”.

“Stocks” and the “Stock Market Index” are not the same thing and never have been. One is an asset class, the other is a trading strategy of that asset class. They don’t behave the same and don’t have the same properties, return, or standard deviation. You can’t use one to replace the other.

When you compare the geometric return of stocks, not a stock index you do not find an ERP!

Ok, with that out of the way, is it now crazy to think that the passive indexing trend which became popular because of its post-fee performance (Ellis reminds us that less than 20% of active managers have beaten passive allocations) will lead to lower excess returns? If they were too high to begin with, increasing access to that strategy should lead to yet lower yields going forward. But here’s the critical point — there’s no reason to expect the yields to revert to the excess levels of yesteryear. Indexing is a  simple word for a weighting strategy that periodically rebalances. The strategy is cheap to implement AND happens to generate an excess return that academics consider excessive. So excessive they call it a risk premium.

So if it’s not stocks that have an ERP but the strategy of stock indexing that actually holds the premium, how is it persisting? The mass adoption of passive you are witnessing is the invisible hand wringing the equity index risk premium out of the market. The lower forward returns the hand leaves behind will be its proof-of-work. According to Vanguard7, in the early 1950s, 4.2% of the population held stocks, and the median number of stocks held was two. The delta from today’s level of investment adoption, especially on a cost-adjusted basis, is a degree of progress more typically associated with tech or medicine.

While democratizing indexing seems like a gift to investors its euphoria will be short-lived. Indexing, by lowering risk discounts, is a more permanent boon to companies and those who need capital. Financial innovation reduces financing friction. Livermore 8 sees this as the march of progress we expect in any other industry. It’s just that the efficiency has been accruing in the direction of those who need capital. Those who supply capital were earning an inefficiency premium. They lacked information, means to diversify, and bore high transaction costs:

The takeaway, then, is that as the market builds and popularizes increasingly cost-effective mechanisms and methodologies for diversifying away the idiosyncratic risks in risky investments, the price discounts and excess returns that those investments need to offer, in order to compensate for the costs and risks, come down.  Very few would dispute this point in other economic contexts.  Most would agree, for example, that the development of efficient methods of securitizing mortgage lending reduces the cost to lenders of diversifying and therefore provides a basis for reduced borrowing costs for homeowners–that’s its purpose. But when one tries to make the same argument in the context of stocks–that the development of efficient methods to “securitize” them provides a basis for their valuations to increase–people object.

Those who need capital ate the cost of the inefficiencies that the underwriters sought payment for via fatter WACCs. The ironing of those inefficiencies is a permanent asset to borrowers and equity issuers.

  • Privilege of Knowledge

If technology has subsidized indexing from the supply side, the “privilege of knowledge” is sparking demand. This privilege, a term coined by writer and data scientist Nick Maggiulli, recognizes that the dominant strategy of buying and holding a rebalanced index was not known until the past 30 years. As Maggiulli explains9:

From 1871-1940, the U.S. stock market grew at a rate of 6.8% a year after adjusting for dividends and inflation. No investor in 1940 could’ve known this, because the data going back to 1871 wasn’t compiled by Robert Shiller and his colleagues until 1989…[if] buy and hold might seem obvious now, that’s only because we have the benefit of hindsight, ubiquitous data, and modern computational resources.

Those same resources that lowered the costs of diversifying also helped spread the word of its efficacy. Indexing is like a technology all its own. Better and cheaper. When you put a product with those features into the world, you are not surprised when it’s pulled not pushed. 10

Expensive For A Reason

The prospect of a sustained reversion in investment yields likely extends beyond the horizon of bargain-hunters’ binoculars. We may look back at historical returns and wonder why investors ever got to have it so good. We will look back and think how inefficient it once was. Can you believe people earned 8-10% in stocks and thought it should last? We may look at equity returns for the past century the way people now look at home prices. Remember when a house only cost 3x annual income? That was cute. As you look ahead, keep Taylor’s scoffs in mind:

Indeed, when you think about it, why should an index fund holder be able to lie on a beach all day and earn 10% a year? If the world needs savings, sure, that’s fine, but if it does not, then those savings ought to earn a materially lower return, if any return at all. And that is the direction the world has been going in.

What can you do about it?

If you have you participated in the re-pricing thus far, congratulations. Now what? Just as adding a 20th pound of muscle takes significantly more energy than the first, the next thousand basis points are going to require way more risk than you’ve endured until now. But to participate in the melt-up scenario the market demands you accept more risk for the same rewards. And if you abstain, Taylor reminds you of the reinvestment risk:

The disaster situation would be to be sitting in cash while watching markets surge all the way to 50x. What would you do then –particularly if the alternative was zero (or negative) rates in the bank? You’d be pretty much stuffed. If you kept holding cash, you’d have to settle for watching your capital slowly dwindle, and if you capitulated and invested, you would risk a major and permanent loss of capital if markets eventually did resettle at lower levels. I have never seen anyone worry about this risk. But they should.

If you are restricted to passive, vanilla strategies you may choose to hold your nose and stay long. I’m not qualified to advise you. But I’ll say that this is a fairly blunt hedge for a melt-up. It’s like tenting your house to get rid of ants. Consider the distribution more closely. If the market is expensive but the price of capital still has ample room to fall, it feels as though both the left and right tail are fatter. This is the solution options were built for. I don’t need to fumigate my house, I just need to shell out for some ant baits.

Evaluate Your Options

1) First the bad news. Listed financial options are probably not the answer. Why?

  • Listed call options maturities don’t match up with long term investors’ horizon (unless you consider 3 years long term). That means this type of hedge requires you get the timing right. The last thing you want is more ways to be wrong.
  • The upward-sloping volatility term structure would ensure premium pricing for the options.
  • While being long the index outright is a blunt hedge, call options, for all their extra hassle, are still not a surgically precise hedge. The right tail we are concerned with is risk premiums shrinking. This can still happen if earnings fall while multiples expand. Imagine earnings falling by 20% and the index only dropping 10%. Multiples will have actually expanded by 12.5%. I admit this sounds unlikely. But we are talking about this as a right tail event. In that context, the forces which are driving the price of capital lower may even accelerate in a recession. The financial option you actually want to buy needs to be struck on the index multiple, not the index level.

So unless a liquid market develops for the SPX 10yr 40 P/E Strike Call, I don’t see a simple financial options hedge.

2) Trend-following the index to replicate an option-like payoff. This strategy has been explored extensively with many variations incorporating momentum and dual momentum. Again, not investing advice, but these are outstanding sources to learn about trend strategies:

The strategies come in many forms but the gist is they keep you invested until the tide turns thus limiting your drawdowns.

Be warned. Trend is not a miracle-drug. You pay for this parachute in transaction costs, both explicitly and via the bid/ask spread of the signal’s entry and exit points. You can think of this whipsaw as the premium you pay for the option-like payoff. While in a financial options contract your premium is known at the outset, the trend whipsaw is a function of the asset’s future volatility and path which are unknowable. Livermore, who has also advocated for trend, makes his own disclaimers. During an interview on Invest Like the Best 11, Livermore cautioned that he is “agnostic” on trend. His creeping doubts about its future efficacy stem from his observation that in recent years there have been more whipsaws and less trend formation, possibly due to the so-called “Fed put”.

3) The last option is the most adventurous and the largest hassle. But it is the option that most directly addresses the root cause of this melt-up scenario. Start a company. If capital is cheap, the market is begging you to be an entrepreneur. I’ve written about this before in The Peace Dividend of Overvaluation.

No More Escape Velocity

So who has the most to gain from hedging the right tail?

The rich.

That it’s so difficult to hedge the right tail may even be a source of comfort for those given to schadenfreude. If the thought of a rentier class that sits back and compounds their wealth advantage for generations rubs you the wrong way then you are rooting for the melt-up. To arrive in a place in which there will be no return without substantial risk. Nassim Taleb12 has argued that the true measure of wealth inequality is the degree to which people are capable of rising or falling from classes. In a world where riskless investments yield zero or negative, nobody’s place is cemented forever. A low-yield future flattens everyone with the rich having the most to lose. Like inflation, the melt-up is a market imposed wealth tax.


In his January 2020 letter, investor Jake Taylor 13 remarks,

The return for the stock market in 2019 was quite odd. The price went up by 30%, yet earnings didn’t budge. All of the change was attributable to “valuation adjustment”.

The market is expensive by any historical measure. We talked about how painful the prospects for re-investment might be if the market marched to higher structural valuations permanently. Like you sprinted out of the gate only to discover you signed up for a marathon, not a 400m dash.

It’s popular to blame central banks, performance-chasing investors, and the rise of passive indexing. But it’s dangerous to presume that these factors are not perfectly rational. If the true equity risk premium is due to re-balance and diversification and that strategy, more commonly known as indexing, is democratized then it should reduce forward expected returns. And without any expectation of reverting to times when we didn’t know better or when that strategy was expensive to access. If capital is less scarce and in less demand it’s price must decline as capital is subject to the same economic forces that set the price of pizza or airfare. If technology cycles 14 and demographics are conspiring to suppress the cost of capital how certain are we that this is irrational?

Like Taylor15, I suspect this melt-up scenario is a tail-risk. As such the proper hedge is some very dirty combination of financial calls, equity trend exposure, and plain vanilla entrepreneurship.

I will leave you with this reminder. I am probably wrong. In fact, if this story ever took hold, sucked everyone in, and instead of the market climbing a wall of worry, ripped higher in a bull capitulation, you can thank me.

My sacrifice to the delta gods brought the rain.

Concussions and Santa Claus Amnesia

This crazy weekend reminded me of my frequent visits to the ER as a kid. I had 4 concussions by the time I was 12. Two of them happened on vacation. My concussions are part of our entire family lore. Yinh claims, based on her independent interviews with my family, that it was actually 5. I maintain it was only 3. Mom says 4 which is the number that has stuck. We’ll never know. This was in the day that you’d bump your head and everyone would try to keep you awake for the next day as if you were now a Seal trainee during Hell Week.

Family oral histories are dotted with apocryphal stories. Playing telephone as a kid could have told you that. The dubious nature of old stories is actually a narrower instance of a rule that says most of what you know is actually bullshit. Your parents told you things their parents told them. And parents are constantly lying to their kids. But this really becomes obvious when you become a parent and realize how many untruths you say just to get through the day. I had my fair share this weekend as I told Max we were going to “get some medicine” as I pack an overnight bag to head to the hospital. It didn’t hurt that Zak, 6, was in the audience.

It’s almost impossible to not want to re-examine every fact that has calcified in your mind since youth once you accept this. And you can’t not accept it without suffering some version of what I will call “Santa Claus amnesia”. The analogy is clear if you follow Michael Crichton’s explanation of Gell-Mann amnesia:

Briefly stated, the Gell-Mann Amnesia effect is as follows. You open the newspaper to an article on some subject you know well. In Murray’s case, physics. In mine, show business. You read the article and see the journalist has absolutely no understanding of either the facts or the issues. Often, the article is so wrong it actually presents the story backward—reversing cause and effect. I call these the “wet streets cause rain” stories. Paper’s full of them.

In any case, you read with exasperation or amusement the multiple errors in a story, and then turn the page to national or international affairs, and read as if the rest of the newspaper was somehow more accurate about Palestine than the baloney you just read. You turn the page, and forget what you know.”

Somehow we suspend our disbelief that our longest-running pieces of knowledge aren’t from our most dubious sources: our parents. Don’t begrudge them. It’s not their fault. It was truly out of love.

Zak and Max if you read this one day, know that that you shouldn’t die on any hills for anything I’ve ever said to you. Other than the fact that your parents love you.

And to my own parents. I don’t believe a lot of what I was told. But I love you. Thanks for taking me to the ER a lot. I know what that was like now.

Investing Is Biology Not Physics

Since the 1980s, there has been a tradition of Wall Street luring physicists from academia. Option math has more in common with the laws of thermodynamics than it does with accounting. But if the nature of markets themselves resembled any science it would be biology. Markets are governed by predator-prey dynamics. Models are adaptive. The actors learn. Doublethink and tradecraft.

In physics, the rules are fixed. No matter how many of us use the laws of gravity to keep firmly planted on planet Earth, gravity doesn’t get crowded. It keeps me just as bound to its surface as it did the Neanderthals. In markets, if I raise a bunch of money by showing people that selling volatility “harvests” a risk premium and the strategy continues to work then people will give me money to do it even more. So the strategy’s assets will grow both via inflows and via returns. The only problem is that to continue delivering the same performance on the larger asset base the strategy needs to sell ever more options. Assumptions of market liquidity when a strategy manages X will not hold when the strategy manages 10x or 100x. That’s about as close as we get to a physical law in finance.

The nature of liquidity is biological. It is subject to the whims of masses. It is the physical point where the backtest meets reality. Reality is a recursive, perma-learning system, with constraints and desires whose steers are pulled by investors, politicians, and corporations.

One of the best discussions I’ve ever listened to about what this looks like in practice is investor Andy Redleaf on Ted Seides’ Capital Allocators podcast. Redleaf has been in the game for over 40 years and was an early options market maker when they were listed in the 1970s. Since then he has followed opportunities that present themselves as markets change. A true agnostic on the hunt for profitable niches. Especially niches with structural reasons for being extra profitable. The advantage of this approach is that when the reasons go away, you know it is safe to cut and run. The disadvantage is that you cannot be a one-trick pony. You need to keep finding easy games.

For the full discussion of market history, where sources of edge often lurk, investing challenges today, and why he bought a bank check out the episode including my notes. (Link)

Susquehanna took their understanding of markets as biological to a logical recruiting conclusion — hire game players. Poker, Magic, chess, sports bettors. All games that require multi-order thinking and adapting to your environment. If you know anyone with a strong game background (and ideally some programming chops) check out Moontower reader Metaling Mage’s call for an intern. He’s a former Susquehanna PM.

You can reach out to him for details but it’s safe to say based on where he is now that this is could be one of the most selective Wall Street internships on the markets side of the business.

A Note From The ER

Since I don’t really write nor overly care about current events I’m gonna postpone what I was gonna write about this week and thank you in advance for indulging something a bit off-the-cuff and personal.

The last 2 months my family Whatsapp chat has been an emergency room on a full moon night. No less than 6 surgeries or hospitalizations ranging from an eye surgery on a 6-year old to my 85 yr old grandmother’s emergency hip surgery this week. This is close family. Every person shares 1/4 to 1/2 my dna (this expression is probably not biologically true but just as we gloss over misspelled words, you can identify what relations this refers to almost perfectly). It’s been a bit of bad luck clustered around the start of 2020.

On Friday, I called my house shortly after getting to work. I wanted an update from my mother-in-law on Zak’s fever. He was home from school Thursday and Friday. Turns out he was still asleep at 8am, but now Max (3.5 yrs old) was sick. With Yinh just getting ready to return from Japan, I was calling the workday early and heading home to pitch in. When I got home Zak was awake and on the mend but now Max was pathetic and clearly having a rough go of it. Earlier in the week, his preschool closed for 2 days because all the teachers got strep. It was an easy decision to take him to the pediatrician for some antibiotics.

At the doctor’s office, they run some tests and see he also has flu ‘A’. We didn’t do flu shots for the kids. Bad us. And since his breathing is a bit strained we head home with albuterol as well as antibiotics and Tamiflu. Parents will relate.

At home the Tamiflu makes him vomit but even more annoying is the nebulizer sessions don’t seem to slow down his rapid breathing. I call the after-hours line and the doctor on-call tells me to count his breaths in one minute. Around 60. At 50 or more she’d recommend going to the ER. So we pack a bag and off we go to John Muir in Walnut Creek. Now there isn’t going to be a scary reveal otherwise I wouldn’t write about it, so let’s diffuse that now. However, his chest x-ray shows budding pneumonia as well.

While he’s battling on 3 fronts, he is doing well. They administer oxygen and IV. Standard stuff. Parents of kids with asthma can double relate. He’s responsive to the treatments. But all things considered, we are staying the night. Actually, at least 2 nights and as I write this I’m not sure if there will be more. The ordeal started Friday so it will take a few days to peak and since pneumonia might be viral the antibiotics can’t kill two birds with one stone as they are already indicated for strep. By staying in the hospital, his immune system can get some extra support. He’s doing fine and just needs time.


As you can imagine, this is a very long day. And from the moment we checked into the ER until we were in our room for the night it was about 4 hours. There was a lot of downtime in that period. A few hopefully constructive takeaways:

1) Find a positive angle 

When I texted Yinh that I was in the ER I knew she wouldn’t open the texts until she landed for her layover in Japan. No matter how unalarming I write this text, the facts of the matter are going to induce panic. While the parent that’s present has to make realtime decisions and actually deal with logistics, the parent thousands of miles away, in my opinion, is in a worse emotional situation. She feels helpless and there is no amount of female empowerment that can suppress “working mom guilt” in a moment like that. I have the benefit of seeing that Max seems to be doing ok which is hard to believe when you are across the world and hear he has strep, flu, and pneumonia. I also have the advantage of seeing the staff’s composure and methods firsthand. I can see their reassurances firsthand and enjoy the impression that they are in control. My words, no matter how calm, are not going to stop her otherwise routine-ish flight from being the longest one of her life.


I only needed to imagine being in her shoes to reframe the ordeal as one in which I was thankful to be present. I felt fortunate to have the role I was dealt which sure beats self-pity or any other useless emotion. Every bit of uplifting perspective you can seize during emergencies is worth striving for.

2) Bedside Manner

The care at John Muir from the nurses, to the pediatrician they called in, to the overnight doctors on the peds floor was outstanding. As far as tactics, transparency, and explanations they seemed supremely competent. I felt Max is in great hands. But that feeling comes from more than competence. It’s the way they present themselves. The bedside manner. I feel invited into the process but more as a board member. While I have ultimate say, it’s clear that the folks in the trenches know what’s best. Despite that, they are never arrogant or dismissive of my thoughts yet also firm about what is called for. Combine this with the composure and even-handedness that they exhibit and it’s a masterclass in communication.


Crisis or simple brushfire, when dealing with non-experts, mind your bedside manners. Be a pro. How would an ER doctor act?

3) Focus

With a long weekend coming up and no travel plans, we were looking forward to a hike with friends, some downtime, and a chance to cross some chores off the list. Max had other plans. From the moment you decide you are going to the time warp known as the ER, you know your plans are over. More than that, all external stimuli fade to the background. The contrast is unreal. Chat messages, your reading queue, obligations, and whatever you were kind of working on in your brain’s standby mode simply fades to grey. The only thing in bold colors is the task at hand — get Max what he needs. It’s a very focusing experience. Circumstances aside for a moment. It was a state of presence I felt good in. I don’t think it’s quite the same “flow” that silent-mode advocates strive for. It’s almost the sense that nothing but what’s in front me matters. It’s the same feeling I had the day my kids were born. I think it’s a healthy feeling but it might also be irresponsible or nihlistic. I suspect that people who climb or surf big waves have found a way to bottle it. Interested in your thoughts on this.


Your “presence” capacity has headroom. Find ways to access it.

How You Say It > What You Say

It’s date night. You’ve been wanting to try the new spot. It’s crowded. The reward for a wait would be a cozy table pressed against your neighboring diners. Hmm. Nothing is more grating on the ears than the courtship ritual of hipsters on a date whose evening insurance policy is just a right-swipe away. Makes for feckless banter.

But you’re both feeling good. Showered. About as groomed as you’ll be on a weekend. The kids are watching iPad at home, grandma’s on sentry duty. The radio dealt Billie Jean on the way over. So you play it cool. Take the seats at the bar. Your cocktails arrive in front of you. Pause to cheers and snap an “ussie”. In the time it takes to upload it to the ‘Gram, Google settles your question — Elvis sold more records than MJ.

Phones down, back to one another. You’re discussing “who is the real king of pop”. Units-sold is just one aspect and you aren’t the types to waste time arguing facts so you deferred to the internet. More back and forth. You’re sparring with pads on. Exchanging taps. “Good point”. “True”. It’s a dance of its own. If only the hipsters could hear you. I imagine they’d cringe like a psychiatrist hearing the words “life coach”. Nevertheless, the playful dispute stays smooth until Kris responds, “Actually…”

End scene right there.

Here’s a happiness hack for you:

Read the damn room.

This date night debate is for zero stakes. It’s not about truth. It’s not the setting for a Juilliard-level surgery of pop music psychohistory. There’s nothing to gain from appealing to expertise. To invite the feeling of resignation that says every matter is already solved. How many fights could have been avoided if this moment were re-imagined? Why should the verbal monopolize the focus? There are so many other stimuli serving the moment. It’s a tyranny of intellect that the words are mistaken for the real communication that was going down.

If you can read between the lines, you’d know that I blew up a date-night by being a jerk. I was dense. Now I’ve been married too long to have done this obstinately. I hope I don’t have an insecure need to be “right”. I’m quite aware there’s a broad plane across which reasonable people can disagree. This was second level stuff.

This was about subtlety in the way I made her feel during a benign disagreement (it wasn’t about Elvis). If you are actively trying to be agreeable but come off condescending you might be mansplaining. Even if you are correct, assuming it’s a matter that has a correct, what’s the point? Reason is a slave to the passions as David Hume put it. Action springs from feeling not logic. To be effective, whatever that means in context, remember that how you say is often more important than what you say.

It’s no secret that body language and tone are tells. Non-verbal communication is an “honest” biological signal because it’s hard to fake. This week I have some fun links to help you think about how we communicate.

70% of how you look, 20% of how you sound, only 10% is what you say

  • Check out Eddie Izzard from one of my favorite all-time comedy specials Dress to Kill (Link; start at 2:20)

The Scariest Accent

  • Another from a favorite comedy skit. Trevor Noah breaks down the scariest accent. He makes a clever insight on how we perceive a foreign language vs a foreign accent. (Link)

How Not To Sound Like An Evil Robot

  • I can be so guilty of this. A short and funny guide to word choice by Slatestar. (Link)

Ecological Rationality 

  • Ecological rationality is defined as knowing which heuristic works in which environment.  Professor Kahneman is rightly lauded for being the father of behavioral psychology. It’s a field that points out all the failure modes and blind spots in our shortcut thinking. You’d think the field was settled given how large Kahneman looms. But the work of Gerd Gigerenzer says otherwise, redeeming our so-called biases in real-world settings. His disagreements with Kahneman are often quite technical and therefore less polarizing than some would like to portray. I most like how it exposes a false paradigm where rationality is pitted against mental heuristics.

Many smart, successful people fail in rationality tests inside a lab because rationality is defined rather narrowly. It’s logical rationality – about not violating some law of logic or probability. But, outside the lab, in the real-world, we cannot do well with just with logical rationality, we need ecological rationality – the kind of thinking that helps us get what we want in an environment that’s uncertain and dynamic. (Link)


  • The single biggest problem in communication is the illusion that it has taken place. — George Bernard Shaw
  • Never offend people with style when you can offend them with substance. — Sam Brown

Podcast Episodes

  • One of my top 10 podcast episodes ever is Patrick O’Shaughnessy interviewing Eric Maddox, the US interrogator in Iraq whose work led us to Saddam. Must listen. (Link)

This week we explore a rare and underappreciated skill through the lens of an incredible story. My guest is Eric Maddox, whose name you probably don’t know but won’t soon forget. Just trust me that you need to listen to this entire episode, and listen carefully—because that is what the episode is ultimately all about: how to listen to others, with care and empathy, in the age of distraction.

  • How To Improve Your Speaking Voice. World-renowned voice coach Roger Love goes on Art of Manliness (Link)

Roger explains why having a clear, confident, pleasant speaking voice is important for success in your career and your life, the biggest ways people sabotage their voice, including voice fry, uptalk, and being nasally, and how these issues can be addressed and eliminated. Roger also shares how to speak in a more masculine way, and why you’re probably not speaking loudly enough. 


  • Why singing and speaking are basically the same
  • Why the voice you have is not necessarily the voice you were born with
  • The reason so many people dislike hearing their own voice
  • The most common vocal bad habits
  • The rise of uptalk (valley talk), and how it’s different from going up in melody
  • What role does anatomy play in our speaking voice?
  • Why men try to artificially lower their voice, and the physical risks of doing so
  • Brass tacks tips for improving your voice
  • What is voice fry? Why are people doing it?
  • How to avoid sounding angry
  • Why people almost always speak quieter than they should
  • Why you mumble and how to fix it
  • Why your voice is more important than your words

Hands On Resources to Teach Kids About Business

A friend asked me if I knew of any podcasts geared towards teaching kids at middle school ages about business or money. I was surprised that while there are tons of articles online about how to teach kids there is very little directed at kids themselves. Here’s what I could find.


  • Warren Buffett’s Secret Millionaires Club (Link)

A video series inspired by value investing’s most famous practitioner.

Videos, blog, and games

  • Hands-On Banking (Link)

Their tagline is “Money Skills for Life”. Videos appropriate at youngsters from elementary through high school.

  • Finance In The Classroom (Link)

A collection of resources from lesson plans, videos, and exercises covering K-12. The activities by grade are especially worth a look.

  • Flocabulary (Link)

Hi-quality video lessons. Seems directed towards teachers and has a paywall but there’s a free trial

  • Khan Academy (Link)

I’ve watched all the Khan Academy finance vids. It’s is a great source but probably out of reach for a middle schooler.

  • Two Cents by PBS (Link)

A weekly series about personal finance.

  • Camp Millionaire: A Money Workshop For Children (Link)

A game and activity-based financial education program for children 8 to 16 years. This site is one of my favorites for learning about value investing and mental models. The camp sounds awesome, just not sure if it will be in your area.

  • Children’s Business Fairs (Link)

An organization that helps towns create local business fairs operated by kids. These fairs look like flea markets or science fairs. They are nationwide and you can even bring one to your town.


A note on games

I would credit a lot of my reasoning about business and money from playing games. While actually investing is the ultimate game to learn from here are some of my recommendations to get kids and teens starting to think about investing.

  • Extremely incomplete information games: Poker and Magic the Gathering

As a trader trainee, our curriculum included lots of poker. There is no better controlled environment for  learning to make decisions under uncertainty. Many fellow trainees had extensive Magic the Gathering backgrounds for similar reasons.


  • Fantasy sports and sports betting

Point spreads and draft positions are valuable early lessons in market efficiency


  • Tabletop games

Catan (Link)

Richer than Monopoly and less antagonistic. I’ve never met anyone who didn’t enjoy playing this game. Lessons in negotiation, market dynamics, odds, and planning.

Acquire (Link)

A cool intro to stocks using a real estate theme

Power Grid (Link)

A bit higher on the complexity scale. Auctions, networks, optimization, opportunity costs, replacement costs, and cutthroat market dynamics.