Reminiscences of a risk operator: 5_3.23.2021 / 8:30pm Singapore / 2,500 words, 9mins
Come and look Artificial light. We could be hundreds of feet beneath the sea. And look at that. Sea tulips. They do not grow above 200 feet.
Dr. No: One million dollars, Mr. Bond. You were wondering what it cost.
Bond: As a matter of fact, I was.
Dr. No: Forgive my not shaking hands. It becomes a bit awkward with these. A misfortune. You were admiring my aquarium.
Bond: Yes. It's quite impressive.
Dr. No: A unique feat of engineering, if I may say so. I designed it myself.
The glass is convex, 10 inches thick, which accounts for the magnifying effect.
Bond: Minnows pretending they're whales. Just like you on this island, Dr. No.
Dr. No: It depends, Mr. Bond, on which_side of the glass you_are.
][INTRO: Dear high-schoolers, we only have 2 pandemic letters left and while we’ve been clear on being markets-centric, a huge influence that we benefitted during pre-consensus Covid19 in spring ‘20 came from 1:1s with doctors/specialists in clinics/hospitals. We are already a few weeks overdue due to Sancho Panza deciding to go conquer new regions with a new team and we got behind…but here we go on a foundational aspect of risk: volatility.
So while screens and friends went all blinky red getting into March ‘20, asking deeper business, environment, operational questions from those that swear by a different oath (Doctores) crystalized the potential volatility range of this coming pandemic, specially when we went to the Disney World of healthcare.
There, in a small remote town that regularly has royalty of all kinds show up on the VIP levels, we were faced with an acceleration in preparation that the big 5 in USA (NYC, Miami, LA, SF, Chicago) had yet responded to versus other big cities that had flipped (Shanghai, Singapore, Tokyo, etc). Practical terms? The parking lots started to empty out - later in the spring we we could park in first floor handicap which never happens…masks started to appear…and later “it looks like immigration check-in” appeared for intense covid-checkin.
Now volatility gets the most attention WITHIN markets, yet is is most expressive BEYOND markets.
Let’s reiterate that in starker terms:
It is now March 2021 and in the decentralized world, #DeFi is getting ALL the attention (coins of all stripes, getting issued more than crazy SPACs), but the vast movement, the true disruption will happen to_the_rest of the economy. For now let’s continue on covid path, as the decentralized jungle will probably eat up all of the Fall curriculum.
Analogy #2, near and dear: Napster (pls refer to wikipedia) got a lot of attention for “kids freely, P2P, stealing songs online” back ages ago. That was the skinniest layer.
The true layer was: ALL media - that corporate communication channel that has been guarded for so long? That early book draft? The early cuts of Kanye? Secrets buried in mountains that flew off to Hong Kong/Russia in a snowden storm?
Entire Earth-full’s of media were about to get liberated by the internet and there was no stopping that force. DIS, CMCSA, VZ, T, MGM, FOX, CNN, the beginnings of voip (Skype), youtube, myspace, and all our media senses were going to get rocked. By the time you read this in 2026 you will not even know the word “napster” and probably none of the tickers I mentioned (OK, we do like DIS long-term and MGM will keep roaring - others?).
[WELCOME TO 2021 READERS] We had an influx of new travelers on this AP Finance journey since our last letter so: 1-Welcome 2-these are letters written for high-schoolers in 2026, when we will hopefully have AP Finance at that level (yes we will be putting $$ into getting this approved)
>Read #1-4 letters >> https://erraticnarratives.substack.com/archive
][Tale of 2 Vols: No more personal of a dimension is volatility present in, than in health. Health vol is yuuugee. Look up the GDP breakdown by S&P ratings sector. Or study what happens at the earlies days (birth +8 weeks) or old age (80+ yrs). Same medication, same diet, same neighborhood can lead to completely different results.
What else is volatile? The entire consumer sector. Probably best to call it intra-sector volatility - ie think about the top 500 brands (sales/profits) globally - there is a ton of movement with endless segment permutations - female, athleisure, size 34, spring Milan, etc- let alone Jobs-to-be-Done ala dear Professor Christensen (we will revisit). This vol is reflected in endless swings in stock/cds/debt prices.
][MAIN: Today we focus on the VIX, as it is the U2 or Madonna of Volatility (“vol”) - a celebrity figure, with some weird nuances, entering old age, that when it gets rocking there is still no stopping it. You don’t know those two, OK even better - it is the MGM of volatility - the King of the Jungle, it roars at the beginning of many great market movies. Now the nature, actors & actresses, breadth, scope, sophistication has evolved over the years, there is now even vol of vol and all sorts of derivations (AP Calc - take it!) but it is a central tenet for every risk manager globally.
And once you understand the underpinnings of risk, it’s like understanding the movie business = you can’t ignore it.1
The VIX
Nickname: the Fear Index or the Fear Gauge
CBOE definition: “The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPX℠) call and put options.”
Real or plastic: Like most things in finance (just saw a post on creating tranches for NFTs which means CDO-land again) many were replicating “synthetically” a certain product or mechanism way before it became an official product or service. Simplistically, you can take option prices as Legos and make your own index similar to you creating you own S&P500 basket or ETF (exchange traded fund). I have a friend who used to create his own VIX and he will make normal reappearances in these pages given he is a doctor in vol. For now let’s keep him out of it and us out of the ditch.
Real world application: While prices are bound by 0 (IBM will keep trying hard to keep dying, QoQ, YoY, but won’t go below 0), if you expect prices to go up OR down you will Buy the VIX. If you expect normal or just medium so-so vol you will sell it to buyers of vol and collect some $.
FAQs: official from the CBOE - https://www.cboe.com/tradable_products/vix/faqs/
For long periods the VIX remains below 20, implying that millions believe there will be_some vol in future, but not much. Above 30/40 and the alarms go off.
>> Reaching 80 has only happened in ‘08/‘09 GFC and COVID-19 spring ‘20. Note most charts in finance revert to “closing” levels, which can dampen real price swings - below is a good example - the 80 does not show because it happened intra-day (within the same day).
][VISUAL LEARNERS: A- Chart 1990-2021 / B-Summary Slide / C-4min Video
A) The VIX charted since its official beginning in 1990 - now in March ‘21 = ~19
B) 1 slide is all it takes - use it as rule of thumb:
C) 4minute lesson on youtube from above slide linked below:
][UNDER THE SEA, UNDER THE SEA: The concept of volatility is inherent in your life and mine - school yards, traffic, malls, tourist traps, etc - so I’d invest 15 minutes trying to understand at a high level what it is as it will affect you. Volatility of desired vacation times affect how much you pay from LGA to MIA or MIA to GRU. The issue is that many times we don’t pay attention to what’s lurking under the water. So what was lurking in Feb/March of 2020?
Doctors were starting to talk. Some were whispering things of the type - “hey b/n you and me this is what I think but, there are policies and etc”. Here is a hand scribbled chart from one of our dearest physicians:
Note the date = 3.9.2020. He was starting to formulate his own theory of Covid, which I happily benefited from and we could try to poke holes in each others views since he’s an expert on the physical/mental while we tend to stay on paper/screens.
The main problem with this sheet is that it was 1 sheet, 1 conversation. But what would happen if you asked 500 doctors to put down their Covid trajectory on March 9th 2020? And matched them up with a “concerned, semi-educated, curious parent” and then did that dance across each state in the USA, let alone the world?
Permutations galore: Endless board of directors, school boards, city councils, governorships all drawing their 1 pager. And while in the S&P500 you can visually feel, tell, almost smell “fear-rising” through the VIX, it is much more opaque in the real world.
We got a taste of it because we_did_speak to many nurses and doctors in the spring…and they all had their views - again from which we benefitted immensely on a professional and personal level (note the only place we have seen 100% mask adoption by all workers and guests at all societal hierarchy levels is at Mayo).
Now we have very little advice for the real world and for that AP Physics, Bio, Chem, Western Civ, Spanish, and American History will help you more. But for the numbers world of markets we give you the Top 10.
][TOP 10 MONEY-SHAKERS: If we went into hibernation for 6 months and come wake-up time someone wanted to talk markets, they’d probably start talking and all I’d hear would be '“blah blah blah” until they gave me an answer in 10 numbers (yahoo finance is OK):
USTreasury 10 year (most important interest rate globally)
VIX (S&P500 vol)
DOW30 (most widely quoted equity index)
Gold (most widely quoted inflation hedge, sometimes tied to “fear”)
Oil (please explore differences b/n Cowboy WTI and Sir Brent)
Bitcoin (digital gold)
Bovespa (the Brazilian equity index - emerging market gauge)
SSE - ie “Shanghai” (Chinese equity index)
“The Agg” = Barclays/Bloomberg bond index, old Lehman Agg (a measure of risk, or spread, over US govt rates comprised of variety of fixed income)
Fed Funds Rate (what the FOMC targets - the rate banks charge each other for overnight borrowings of extra cash)
That’s it, that’s the tweet = 10. If none of these are familiar, hit up investopedia.com or your favorite public library.
][REAL SPRING WAKUP: As we got into the first week in March, walking up and down the crowded streets of Manhattan you could tell something was in the air. Unclear, unknown. Something.
Example: true conversation at a lovely Indian restaurant in the big apple with a pretty packed room for a Wednesday night, where the full unrestrained brain power of University of Chicago Econ grads, plus a mix of 3G, JPMorgan, Warburg Pincus, Bridgewater, Harvard Business School, GTCR, KFT-HNZ, a secretive conglomerate, and some lesser known firm alums are intensely debating markets and money:
Us: How bearish are you smart guys out here in NYC? You ready? What are your Investment Committees saying? Risk?
Them: Well, humm. Yes stuff is starting to move…but, well, we not sure.
Us: not sure? humm ok. well you better get ready.
Them: [wheels are turning - why is he going off about this, what’s his deal, what about spring break Insta-worthy trip we are going on?]
Me: [wheels are turning - why they not going off about this, what’s their firms’ deal, what spring mega-risk Insta-worthy trip are we all going on?]
Well, things did start to get even more “Insta-gram worthy”: Within hours of paying our bill Jamie Dimon, CEO of JPM, get some chest pain and goes into emergency surgery (that did not help a new long that was “too early”). The Dow makes a massive 1,000 point move that Thursday. Overnight markets light up like fireworks, again.
Open Friday March 6, 2020:
https://www.cnbc.com/2020/03/06/5-things-to-know-before-the-stock-market-opens-march-6-2020.html
We were flying from the city that never sleeps to the most important political city in the world so were up who knows - 3:45am. On UBER to LGA things were beginning to rock. Asia knows they better stay awake Friday night though most were at home quarantined already and the Euros that truly have paper hands (no offense, it’s just track record) start to get jittery. By the time we land short time later, it’s full on and Treasury curves are doing the macarena, oil is get obliterated, and equities are reaching for the Tums.
And the VIX is beginning to climb Mt. Parabolic climbing to 40-42 before retaking higher ground the next week.
Close Friday March 6, 2020:
CNN closing comments: https://www.cnn.com/2020/03/06/investing/dow-stock-market-today/
][DIARY: Back in the early 00’s as a trading apprentice, good ol Jeff leaned over:
Take your notebook every day, every_day write the levels you care about. I won’t tell you what’s relevant - it’s your notebook, but think of what matters. And keep track, every_day.
Once you fill up your first 99c spiral notebook with daily levels one day per page, it becomes a Dear Diary of the ups and downs. And so apart from the Top 10 we advised, the other thing which long-time students like Uncle WarrenB and Ray Dalio advise is: write_it_down. You will be wrong, it’s part of the game. But when you write things down (and from time to time, publish), you start to learn about your OWN volatility - that is as real as it gets. The last extra-curricular topic we worked on took us 9 months of reading and we distilled it to 1 page - fall curriculum will unpack that 1 page and it will be full on Matrix 1, 2, and 3.
][CLEAR EYES, FULL HEARTS, CAN’T LOSE: Since I was a college freshman the S&P500 has been like a jar full of cards, or marbles, or trinkets…all special in their own way, hard to understand from afar until you get up close and personal. But watching Dr. No explain the aquarium hit dead on with a better analogy - hundreds of fishies living, swimming, eating. If the aquarium is the S&P500, well the VIX measures the motion, speed, and commotion in the tank. Stepping back though, the tank creates a distortion - enhanced by your own particular viewing angle.
*It is not right to say those closest see clearest*
Because the market ultimately replays for us in live and living color not only the volatility we think exists inside the tank full of fishies (Intra-tank), but is most reflective of the historical, present, and future volatility of those watching and investing in the tank (Extra-tank) - and that Extra-tank world is full of lions, bears, caring doctors, fancy charts, commotions, mentors, napkin drawings, and hero nurses, as far as the eye can see!
>> Here in spring of ‘21 there are so many distortions going on that only time (like a good Howard Marks letter - or the podcast now) will tell - SPACs, Direct Listings, Negative rates, Printing presses, Triple Cs trading like BBBs, Panamax ships full of money with JPow and Yellen firmly ROARING: all aboard…we go to new waters.
What does Don Q (and Dr No and Dr. S) recommend if you so choose to board the ship, and once in a while lean out over the edge to feel the cool glistening ocean?
DIAMOND_HANDS!
//END = Visit us with your friends at: erraticnarratives.substack.com
][ @ErraticNars ARCHIVE} #0 1 yr later [] #1 It was inevitable [] #2 JLo’sSuperShakiraBowl [] #3 My Word is My Bond [] #4 YOU are not a Doctor!
/Disclaim: Individual, non-corporate; not investment advice; may be long/short\
][APPENDIX Curriculum:Erratic Nars are late-2020s AP Finance letters—
James Bond meets Dr. No - original in 1:55:
***Around 10 years ago we were trying to help MGM go public (an “IPO”, today they’d do a SPAC and get it over with it) and so we dutifully showed up to talk to the senior management about their “financial plan" and “projections”. As you can imagine it went swimmingly well. Movie biz is one of most fickle with the move variability from year to year. IPO never happened, all for naught. LA Times coverage click here (note the ownership structure!).
But as you walked into the lobby the big, beautiful, roaring MGM lion stared at you - it almost gave you goose bumps…and upstairs encased along a huge wall were Oscars of yesteryear when award shows mattered and well as of now who knows when they’ll come back. I will never forget the lion - the King of the Jungle!