2023 Year in Review: The Curious Case of Cranial Correlation (pt. 4)
Malt Liquidity 124
It takes a nearly alien genius to explain the simplest, truest things in the most distilled fashion. The intermediate value theorem is intuitively so obviously true, yet it’s the essential underpinning of mathematics. Similarly, the entirety of finance can be understood by framing it around two central thoughts:
An arbitrage only exists if it is profitable to capture it
Minimizing hold time minimizes risk
On a mundane level, this explains why markets trend towards the highest frequency. Abstracting a bit, we realize that basically all trading is “insider trading” in some manner — it just reflects information asymmetry. Pre 2008, this was pretty much how all hedge funds made money. Activist investing is just knowing what you are going to do before the market realizes it. Post 2008, when the “rules” were enforced, the meta had to change (as I’ve noted before.) Information leakage is necessary to make insider edge work — what’s the point of realizing something if the market is unwilling to make it profitable enough to capture the edge? Hence the whole theory that shorts need catalysts (and why shorting is a fool’s game — betting on reality righting itself when the entire fiat system depends on denying reality is delusional. I always say this about that Big Short scene because it’s so true: investors are right to get mad when you’re betting against the forces that manipulate reality. 99.9% of the time you just blow up.) Thus the best trades became the simplest ones. Buy big tech. Buy what everyone else is doing. The market will go straight up due to the nature of ETFs and passive inflows. In Berkshire’s entire history, somehow their period of best returns came when they did what everyone else did: buy AAPL. What is the point of having novel research or information if the market is going up anyway? The forces of ZIRP and the devaluation of the dollar (philosphically) inherently results in trading being a recursive activity in and of itself, a simulacrum of how “the market” works:
…the concept of a “traded security” might be outdated due to how high-tech markets have gotten. While AAPL shares were obviously registered as a security before trading on public markets, are all the intraday speculators really “investing” in Apple? Are their expectations of profits derived from the day-to-day work of employees who build Apple products or the fact that the market volatility just might work out in their favor? On a higher frequency level, is anyone that is market-making the stock or arbitraging a basket of stocks to their combined ETF value profiting “primarily from the efforts of others”? The original intent of securities regulation was to prevent systemic risk due to massive losses in volatile markets by reducing the number of suspect offerings available to speculate on through heightening standards and increasing protections for products that met those standards. But now, speculation occurs while knowing there is nothing to an offering other than the liquidity and the volatility — this is a feature, and if one product is clamped down on by the SEC stretching to fit Howey to it, another will take its place. The SEC has no authority over the desire to speculate, after all, and the purposelessness of a market is not something people are demanding any protection from. Is securities regulation also supposed to extend to a rapper’s purchase of a Charizard card for $220,000?
(As such, the only insider trading that really needs to be enforced is preventing literal company employees from doing something, as this would probably nuke the business and violate fiduciary responsibility.)
A curious thing happened in lit markets this year: everything just kind of went straight up. A financial journalist might talk about rate hikes, a quant might talk about following the market, but this is largely immaterial. The fact of the matter is, while the actual government structure implodes (and constitutionalism fails to actually protect the unpopular minority), everyone needs the US to work. It’s the old joke: if I owe you $1000, I have a problem. If I owe you $1 billion, you have a problem.
As I like to say, fiat is the original ponzi. You need everyone to buy into the collective delusion of money and magically economics starts to work. You can do as much math as you want, but it relies on that collective “trick” to kickstart liquidity. I ask this all the time: “why do things trade?” The only correct answer is because other people are trading it. This is the root of “postmodern markets” as I call it, or “simulacra” as Baudrillard does:
First, you have the core business. It creates a product that is valued by society. Next, the abstraction of money comes in. This allows liquidity creation — if I sell socks, what am I going to do with unlimited socks? After currency comes the cap stack. We “value” the business to allow ourselves to offload risk on others. There’s no real way to properly value this risk: “fundamentals and valuations” exist as marketing, as every banker knows you price the deal at what you have to to get it done. Finally, we have the security as it’s traded now, where the activity is totally abstracted away from any sort of reality whatsoever and collectively trades in a manner that resembles a toy model GTA stock market rather than as a reflection of reality: a pure simulacrum. Is it any wonder when, in the high skill meta where you have to have extreme technical skills to be valued highly from a “salary” point of view, normal people obsessively buy crypto and trade zero days? How else is a median individual supposed to exponentiate their wealth?
This is the magic of US treasury debt. Ownership of an individual corporate bond is surely my problem if they default. Can you imagine what China’s situation would be if the US stopped paying on its debt and the entire risk-free rate concept vanished? Starting with Nixon and ending with Kushner, the US has meticulously securitized every country’s interests to align with the fact that the dollar must exist and built the military to soft-stick the world into understanding this. Go look at how much of the stock market Saudi Arabia and its shadow investments own: is it any wonder they’re mad when the Middle East erupts and the US soft power is increasingly exposed? With the further concentration of investment into fewer and fewer stocks (right now it’s “magnificent seven”, but it used to be FAANG) and more and more passive funds, there’s no longer trading that resembles anything like an organic market: it must go up because it must go up. It trades because it trades. This is a warped version of the “there is no alternative everything bubble” of pandemic stimulus and QE. I’m consistently asked what I would do investment-wise and my answer is always the same: I’m just an individual, the market dictates you do what everyone else does. There is no doubt in my mind that ZIRP broke the central banking regime by totally untethering “dollars” from “productivity”. The system is at the point where it solely works to preserve itself — the markets must be backstopped and the number must go up. But what’s the alternative? On a long enough timeline, everything goes to zero, but that timeline is likely longer than any of the people who see the writing on the wall could ever accurately estimate. People who can’t see the big picture take the big short. Ironically, all of this further entrenches the illusion of the dollar. But it doesn’t make it comfortable to observe. Perhaps all of this writing is just a method to distract myself from doing something stupid like calling the top or betting on zero.
This year was sort of a watershed for Malt Liquidity. I managed to write more and (I think) better than I’ve ever done before. I had some hiccups here and there, but hitting the 100 post milestone was certainly notable. As is now an annual tradition, here are some predictions for 2024:
The first rate cut will come in May, and we will end the year at 3.5%. Rates likely shouldn’t drop more than this, but practically (to pump the markets), we will probably go down further to 3%, though this will bleed in to 2025.
Donald Trump becomes president unless he is physically restrained from doing so (jail, assassination.)
SBF gets over 25 years, but some major scandal breaks about the decision to not charge him with campaign donation violations (which furthers Trump’s campaign)
Bitcoin won’t drop below 28k again due to being absorbed into the passive flow complex, but there’s a 10% chance we find out the US government was behind it the whole time.
It will continue to become cheaper to travel to Japan: the poor Yen!
Assessing the predictions from 2022, I don’t think I did that badly given that I definitely put out low delta statements:
20% chance that one of the major remaining stablecoins (The likeliest of which is DAI, then USDC, then USDT) will blow up.
Rates will not fall during 2023, but inflation will end under 4.5%
The flippening will happen…
…but it will be due to both BTC and ETH trading down from their current prices
Value stocks will outperform growth, though AAPL, AMZN, and MSFT in particular will outperform both. GOOGL will lag the aforementioned 3
SBF gets over 25 years in gaol (if sentenced by EOY), while Caroline and Gary Wang get under 7
Bullish: Twitter, SpaceX — Bearish: Tesla, ChatGPT
Bullish: Substack, Discord — Bearish: TikTok, BeReal, Mark Zuckerberg
Malt Liquidity Over/Under: 124.5
I am currently upping the stablecoin blowup probability to 40%. Tether has effectively become the decentralized central bank and is likely immune to this. I must admit I didn’t see ETH faltering this badly, it’s kind of sad how much everyone focuses on transactions instead of the abstract concept of liquidity. Perhaps a reader can forward some of these ideas to someone in charge. Ima fix wolves.
I’m updating “Tesla” to bullish because they control the entire EV infrastructure and the union/mandate math works out in their favor, as I wrote about prior. I am even more bearish on ChatGPT as I firmly believe the LLM structure attempts to overfit to reality, something that violates the core principle of any sort of “learning” (defined input, verifiable output.) However, I am even more bullish MSFT as this much capital investment is certainly likely to result in “new math”, though I don’t think this comes anytime soon. I’m also bearish Discord, as the search function and the mobile app has been completely bricked. Seriously, who came up with that? What was the point?
That Malt Liquidity Over/Under was spot on. Great writers cover, though, and this year I was not great enough. Next year’s O/U is 199.5.
Thanks for reading, I always love seeing the emails, DMs, and discussion that fuels all this. Something greater is on the horizon, but it’s more fun to do it with a crowd.