Cracks in the “Singularity Trade”?
Moontower Munchies #161
Friends,
Cracks in the “Singularity Trade”?
In The Singularity Trade I explain that the low index correlations (ie avg pairwise correlation of SP500 components is low) are responsible for the relatively subdued index volatility despite single-stock volatilities being on the upper end of their ranges.
A fundamental story you could project on this is AI and its related hyperscaler counterparts act like they’re eating the rest of the economy. Not quite in a zero-sum way since stock market is still rising. Maybe, like a married couple fighting on the up escalator.
Wyatt, who was at the event where we discussed this, just sent me this piece from economist Jim Paulsen:
FOMO with NBO? | 6 min read
He shows the S&P 500 Low Vol index doing something it hasn’t done since 1990: rising on down days for the broad market and falling on up days. If low-vol was simply underperforming on up days that would be easily explained by beta. Low vol moves less than the higher weight names in the index, so even if it’s strongly correlated, that would be the case. But low vol is actively falling when the index rises. This is indeed unusual.
Paulsen interprets this as investors have simultaneously become worried about both missing out (FOMO) and of not being out (NBO). If you substitute the low-vol index for everything that isn’t AI then you get my Singularity trade “game-on”/”game off” interpretation, but I don’t think the 2 interpretations stand in opposition.
Paulsen points out that this is behavior we’ve seen in less extreme forms before prior market crashes, but we all recognize that those kinds of observations are circumstantial evidence at best. But for those inclined, it could inspire an investigation of the mechanisms by which it might signify a durable underlying shift. Happy hunting!
Overconfidence
My friend Taylor once wrote:
Most people suffer from overconfidence bias. They tend to think that they know more than they really do. But surely you, in your infinite wisdom, are not one of these people? Surely you have a good understanding of your own knowledge. Let’s find out, shall we?
On a scale of 1 to 7, how well do you understand how a can opener works? Got a number? Good.
Now, take out a piece of paper and try to draw a diagram of a can opener. If you can’t draw well, write out an explanation, piece by piece.
Take out a piece of paper and do it. (Doing it in your head doesn’t count and it will take 30 seconds). Got a diagram or a written explanation?
If you are thinking “of course I know how a can opener works” then, seriously, try to draw the diagram or write out an explanation.
After you’ve done it, read this description of how a can opener actually works or look at this diagram and re-rate your understanding on a scale of 1-7.
I have tried this and seen other people try it and so far I haven’t seen anyone who has accurately evaluated their own understanding of how a can opener works.
Everyone is overconfident.
Yea, pretty much. You can do a fun quiz next time you’re on a road trip or stuck in line at Disneyland with a group to show this. It replicates every time as the group will almost always score between 40 and 70%, when calibration would require a 90%.
It turns out the can opener example (I’ve seen versions of this where you are asked to draw a bicycle) is a callback to the idea that “reality has a surprising amount of detail”. Taylor links to the John Salvatier post that inspired his own:
Reality has a surprising amount of detail | 9 min read
That blog post is 9 years old, but I just read it for the first time. It deserves all the credit it gets. A brilliant read and, dare I say, foreboding as we race towards automation.
The Odyssey
We're going to see The Odyssey on 70mm IMAX and bringing earplugs (we’ve been warned about the sandstorm scene).
I hear a lot is left unexplained. Understandable. The medium of the original story is an epic poem and it’s adapted to a film. Even for a 3-hour experience, I presume the compression ratio for plot details and mythological context would be denoted in scientific notation.
If you don’t care about spoilers for a story that’s over 2,500 years old, then a great prep is this detailed 2-part synopsis from The Rest Is History podcast (I’ve been binging their pods all summer).
The Odyssey: Hero of the Trojan Horse (Part 1) | 1 hr 9 min listen
The Odyssey: Return of the King (Part 2) | 1 hr 3 min listen
Stay groovy
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