.Reminiscences of a risk operator. 1.Jan31.21 [1,100 words]
What’s the most resilient parasite?
CUT TO SAME ELEGANT DINING ROOM - NIGHT (YEARS EARLIER)
The speaker, COBB, is 35, handsome, tailored. A young Japanese man, SAITO, eats as he listens.
COBB: What is the most resilient parasite? Bacteria? A virus? An intestinal worm? An_idea.
Saito looks at Cobb, curious.
COBB: Resilient... highly contagious. Once an idea has taken hold of the brain it's almost impossible to eradicate. An idea that is fully formed - fully understood - that sticks; right in there somewhere.
As a reminder, erratic nars is dedicated to future high school students in the late 2020s.
SETUP: During the 2nd and 3rd weeks in January 2020, I traveled deep into the Midwest to a client HQ without any mentions of a pending pandemic. Then left for a 2-stop trip home…with completely normal airports in both developed and emerging markets, regardless of prominent events such as trade agreements or presidential inaugurations. Yet even as stocks kept rallying and Google hit $1 trillion (only 4th company) in market value, ‘interesting’ stories regarding a novel virus started to accelerate.
On Jan. 21, the 1st case of Covid19 hits Taiwan and reaches the US in Washington. WA population of 8M, little Taiwan with 24M (size of Maryland+Delaware) - both rarely at the center of much attention and rarely get headlines. A few days later Wuhan is completely locked down, and cases reach Singapore and Germany, with the death count in China at 25 forcing all sorts of changes for Chinese New Year. You can scroll back through headlines and start to see signals popping up all over, but again markets rolled on. Luckily, smart people began to ring alarms and on Jan. 26th Yaneer and Taleb posted on academia/Twitter "Systemic Risk of Pandemic Via Novel Pathogens”:
Clearly, we are dealing with an extreme fat-tailed process owing to an increased connectivity, which increases the spreading in a nonlinear way. Fat tailed processes have special attributes, making conventional risk-management approaches inadequate…Together, these observations lead to the necessity of a precautionary approach to current and potential pandemic outbreaks that must include constraining mobility patterns in the early stages of an outbreak, especially when little is known about the true parameters of the pathogen.
That bell woke me up and couldn’t be unheard. 3 actions came: 1-start to go deep into complexity 2-test local n95 markets, which showed dwindling supply and broken amzn pricing algorithms (yes, cul-de-sac parents chuckled at our front closet with 3M boxes) 3-get super focused on ignoring headlines and naysayers (remember, political parties hated this problem in an election year and corporates don’t like instability) by going local: new wechat account, re-engaged friends globally, and went back to the markets that tend to go first = bond/rates. As that last week drew to a close, on Jan. 30th the WHO officially declared covid a global “emergency” (not a pandemic).
CAN YOU HEAR ME NOW? What January gave us was enough bread crumbs and some alarms. They were starting to ring and some scream, in this distributed unison. In the west, specially in corporate/media circles, it was nothing to see, move on, turn down the volume on Asia (“they are far away, they eat weird, again it's far away”) and get ready for some Super Bowl. Later on we’ll learn about seeking_out_disconfirming_info. But this post is on understanding what this was. And on that front what we were waking up to was a complex system speeding up. Not sit ‘behind a closed door like a boss’. Not Mediocristan. Not ‘when the HQ newsletter hits your inbox you are safe’. It was a complex system starting to push outward.
COMPLEX THEATER: The background…infrastructure…theatre of what we were walking into was complex and moving toward chaotic. Super smart people years ago began studying complexity at a deep level, with places like the Santa Fe Institute forming with help from a very famous Citi banker after earlier financial crises. A branch of it theorizes that the stock market is an Adaptive System (link to Columbia value investing class) ripe with complexity stretching the molds of rationality - not falling that far away from Robert Schiller’s behavioral economics studies. From decision-making whiz Michael Mauboussin:
From a practical standpoint, managers who subscribe to standard capital markets theory and operate on the premise of stock market efficiency will probably not go too far astray. However, complex adaptive systems may provide a useful perspective in areas like risk management and investor communication
Now there are thousands of papers and books, but at a more basic level there is even a 2x2 framework that you can quickly internalize termed Cynefin. Examples:
Obvious (or simple): do you become a price taker if in a market (masks) there is a tight supply? // Easy -> pay up, even if no free shipping - no regrets.
Complicated: decide between a friend's 40th birthday snowboard trip OR going to another exec telepresence meeting in a basement? // Kind of complicated -> chose detailed metrics vs. dudes mountains, regretfully.
Complex: how to think of hedging Amtrak+DeutscheB+Ikea type risks all rolled into one? // Very complex -> moving targets with confusing information, globally
Chaos: rules break, parabolics run-over policy manuals, there is no “office of those in charge”, what do you first? // Chaos -> un-learning, humility at speed, total transparency.
The lines between complex and chaotic is where Asia descended into post their New Year, what Europe met in February, and what hit the Americas in March.
WRAP-UP: This was all about introducing complex systems in the midst of a virus. The complex is more nerdy/academic, while virality can be more what you feel/taste. No one can pinpoint when/why they fell in love with emo, ska, hardcore, house, folk, jazz, etc. And yet once you do it lodges in there, you don’t let it go, and you find thousands of others that have that same musical virus at shows, fesivals, or online. I’m sure you see plenty in the obvious and complicated…increasingly you will face complexity as you age…and I hope when you enter chaos, you are better prepared.
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Markets Jan. 30 ‘20 // Jan. 29 ‘21:
DOW 28,800 // 30,600; NDAQ 9,300 // 13,340
SP500 3,280 // 3,790; VIX 18 // 30; UST10Y 1.57% // 1.06%
Gold 1,580 // 1,870; Shanghai 3,030 (closed since 1/23) // 3,500
APPENDIX - CURRENT Jan. 2021: They say big shifts happen slowly and then all at once. The 2020 refrain of “tech moved forward years in a few months” is old and over-used now. It is true, but it's a zoomed in view of '20 inserted into bland talking points. The Starlink view of the decade is much more radical.
Many make fun of Microsoft for missing “the internet” and then “mobile” - while vast majority of orgs did the same. And then for 2010 decade, again, most missed “social” - the Yammers, Slacks, Zoomz, Instas, Shopifys, What’sApp, Spotify, GE (industrial internet!), Etsy, and even Tesla had to routinely educate on network economics. And now we have a new resilient idea bacteria that is growing.
Covid19 showed governments, communities, and corporates what an uncontainable, freely organizing virus could do. This one virus idea that surpasses mobile, social or networks is manifesting itself through #truthtellers in covid + remote offices, virtual education, scaled_movement/influencers, deplatforming, new comms (clubhouse/signal/telegram), and this week’s famous gme gamma squeeze:
.Decentralization.
DeXperts, DeWork, DeTeachers, DeMovements, DePlatforms, DeCommunities, DeFi.
One example is that on Thursday night Reddit’s CEO was on Clubhouse with M. Andreesen and hosts discussing wallstreetbets/social media/censorship/new formats - live through my headphones freely listening to an unfiltered, intimate conversation - hours before 'tech journalists' submit copy trying to tell us what to think*.
Going into late Sunday night, that same virtual living room went exponential as the richest person in the world, CEO of $750Bn market-cap SEC-regulated multi-national, and #1 trending topic is on the Good Time Show (no they are not journalists nor have a website) speaking directly to thousands. Unconstrained from Sunday am TV, Monday papers, or nightly news cable. Topics ranging to Mars, monkeys playing video games through implants, biz intensity, and sleeping on the factory floor.
As if that is not crazy enough, Elon then invites the most controversial CEO (of Robinhood) in the planet right now to speak, and HE (Elon) begins to interview Vlad with specific questions. This was way_more_direct than the bloomberg / cnbc interviews Vlad gave on Friday (“the VaR of it”!) - it was Elon 1:1 with Vlad, which no major news outlet was able to “get” and for which plenty of journos were complaining online about not getting an invite.
This is not normal. None of what I mention in this appendix has happened before, but likely will be normal by the time you read this 10yrs from now.
So as 2020s start crawling, ‘adults’ each decide to listen or ignore…Bells are ringing.
In retrospect, it was inevitable <> Few_Understand_This.
END//
3 tales from Jan. 2020 - Jan. 2021:
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APPENDIX - CURRICULUM LINK LIST:
7.Systemic Risk of Pandemic: the blaring bell by Nassim and Yaneer [1pg]
8.The Stock Market as a Complex Adaptive System: nonlinearity and feedback loops wizard Mauboussin [9pg]
9.New England Complex Systems Institute: Yaneer's complexity research platform
10.Santa Fe Institute: the leading complexity research center, incl. free training
11.Cynafin: simple quadrant from 2010 video [8 min]
12.Dalio’s first entry into btc on 1.28.21: largest hedge fund founder, non-fringe
*Reddit CEO openly: “r/wallstreetbets is a deep community with language, culture, inside jokes…they almost relish the losses more than the wins…sharing the glory and the pain together…also, don’t sell your gamestop.”
[[Disclaim: Individual, non-corporate views; not investment advice; may be long/short]]