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Markets And The People Who Trade Them
Markets and the people who trade them (that could be a soap opera: "Last time, on 'Markets and the People Who Trade Them"...) appeared pretty sanguine ahead of the latest inflation update out of the world's largest economy.
It wasn't so long ago when equities were 5% off the highs (jump off a bridge, I know) and traders were perilously close (~5bps) to pricing even one 2024 Fed rate cut as something other than a sure thing.
But that was then. This is now. And the selloff was canceled for lack
The k-shaped economy is alive and well.
Exhibit 1 (for the lower half of the K) is the pending Red Lobster bankruptcy filing due to its “All-you -can-eat shrimp promotion” that led to an $11M loss in Q3 last year and due to lower foot traffic. Landlords be prepared for incoming lease renegotiations!
Exhibit 2 (for the upper half of the K) just go out to any nice restaurant and try to get a table at 6:30pm without a reservation for 3, even on a Tuesday night. It isn’t a “sure thing” that you will get a table.
Identifying and evaluating tail risks is an important part of what makes a market function. The nature of a hedge is to reduce the probability of the event transpiring in the worst possible form. That goes for active hedges as well as those planned actions. Thus evaluating and hedging reduces the overall severity of the risk, benefitting all. I am sure you know this but I think the point is important enough that some color should be added.
Jesus Christ, Dan. This is supposed to be a lament for the inherent pointlessness of everything we do every day as human beings. Read between the lines. You’re over here reading me the first paragraph of a training manual for new traders. You forgot this: “Also, the bathrooms are just down the hall to the left. If you’re going to do coke in there, be courteous: Don’t leave your dirty straws on the counter.”
That’s very courteous of you to not leave your dirty straws. I also appreciate you writing about things that bore you and adding that wonderful flare of “i don’t give a f***”.
Finally! Someone who participated in the survey!
(I didn’t realize the market was functioning….)
I think of the “tail risk” survey as a sign of positioning. Investors being more prepared for the #1 tail risk (inflation), if that risk manifests they may not react as violently, while if the #6 tail risk (AI bubble) manifests, more investors will be unprepared and scrambling. In that sense, the #1 tail risk is less of a risk than #6. Or something like that.
That makes sense, sir. Speculators and the few remaining real investors out there have become 110% obsessed with the dot plots and Fed policy in general so they are well-attuned to various inflation narratives.
Gotta say the low percentage of concern over election risk surprises me.
The lack of concern about Trump being elected is indeed surprising. But I guess it’s like learning that a meteor is going to swing by Earth and may or may not hit it. All you can do is ignore it.
Not everyone is blissfully ignoring the meteor:
https://www.marketwatch.com/story/ray-dalio-believes-theres-a-35-40-chance-of-a-civil-war-in-the-u-s-and-would-vote-taylor-swift-for-president-736f5653?mod=mw_more_headlines
Not that surprising considering the population surveyed.
The S&P 500 was up 0.3% on January 6.
Your logic is correct, IMO, but the other half of the analysis is to multiply the perceived odds of the risk (45% for inflation) by the cost of its occurrence. My suspicion is that although the AI risk is perceived as lower, the cost is likely to be much higher, justifying your sense of the situation.
“Roaring Kitty” should’ve been a philosopher instead of a day trader. He understands that all of this — stocks, companies, etc. — are things we made up, and are thus completely beholden to our whims. Stocks trade where we decide they trade. Risks (“tail” or otherwise) are only relevant if we decide they are. A left-for-dead physical video game reseller with virtually no sales can be the most valuable company in the world if we want it to be.
Back in the day when market makers reigned supreme in what would later become the NASDAQ, my number one mentor would come to work on Mondays and everyone on the faculty would be asking him about his best idea for the week. He always had one, complete with a very plausible elevator pitch. The previous week he would have bought a few thousand shares of this tiny baby and by Monday he had a killer position and would start selling his theory. Friday, after a nice rise in price he would sell his position and bank the cash. In those days 300-500 shares would move the market so ten or 15 of his colleagues could easily push the market up 5% or more. Rinse and repeat. He and Roaring KItty were probably related. I loved to watch it. Unfortunately, I had no money in those days so I couldn’t do much about these opportunities. I also didn’t know which stock until that magic Monday.