Jokers everywhere
Moontower #254
Friends,
It’s been a heavy week. I wrote more up top here so Money Angle is just one section today.
First, here’s one small thing you can do to not feel helpless.
Khe lives in LA (not in the fire regions) and our families both have seen too many pics from friends in affected areas.
Living in the Bay Area you hear your share of fire anecdotes ranging from the Oakland Hills fires in the early 90s to the fires in recent years north of SF. A friend of mine was a top official in Contra Costa County Fire and I’ve listened to some harrowing stories including a time he called his wife from a fire battle on a local mountain with the “I want you to know I love you and the kids”. CA firefighters are a badass breed knowing full well what they’ve signed up for.
There’s a lot of finger-pointing already and the fires aren’t even close to being contained. Getting to the bottom of the pile to find the ball when this is over (sorry to even minimize the current moment with a “when this is over”) is gonna be an ugly mess of scratching, eye-gouging, and nut punches.
If you live here with your eyes open you can see how CA is a devil’s bargain. When I sold my house in 2020 it was under a red sky. PG&E was in the news. Large chunks of people’s net worths being uninsurable just didn’t strike me as sustainable. I was wrong because all home prices did was go up since then.
[Contradicting that thought is my simultaneous hunch that a major natural disaster would super spike the prices of remaining homes when the demand to build devours supply. I thought a widespread disaster in the congested area would have come from a faultline.]
Nothing’s changed. Insurance math ain’t gonna math unless the kindling is cleared. This is a good thread on some ground truth. It’s comforting because physically there are possible solutions. Realistically, it’s TBD. To be doubted.
California’s troubles run generations deep.
1988’s Prop 103 kneecapped the insurance market’s ability to find clearing price for the risk. So the risk is socialized. And when risk is socialized it’s there’s less incentive for its true owners to internalize it. If “crabcakes and football is what Maryland does”, California is sunny weather and price distortions.
Prop 13, enacted the year I was born basically granted landowners a call option on inflation while wage earners were left short convexity via state income taxes required to feed the beast effectively subsidizing landlords. This is not “unintended consequences.” These were obvious second-order effects. Great job all around, direct democracy.
[A side note: I’m not unsympathetic to seniors who don’t want to be displaced because of property taxes but there can be targeted programs for freezing taxes beyond a certain age. But even absent that, you have to look at the problem holistically and in the counterfactual. If you don’t have Prop 13 distorting the cost of living here, people would be forced to plan better. Ya know, like they do in other states. I don’t know enough about what I’m about to say but my guess is the closer the tax receipts are to where people actually live the better aligned elected officials are to the constituents. That compliance usually prohibits hedge fund employees from donating to local officials but not national candidates affirms that intuition. In compliance’s case, the stronger influence is a bad look. In general governance though, it’s better.]
In any case, it’s hard to focus on what happens once the patient is no longer in shock. It’s easier to just fall into the loop…what would you do if you lost your home, your kids lost their school, maybe you didn’t have insurance?
Even if you have insurance it must feel overwhelming. I was chatting with someone yesterday about how 8 years after the Sonoma fires there is so much that is not rebuilt. And that’s not even an urban area.
What if your house is still standing but your neighbors’ houses are gone? At that point you might want to start over somewhere else but your put option didn’t pay out. It makes me think of this dark bit of humor. “My family!!!!”
5 years ago we were, without knowing it, heading to a lost year or more. The fire victims are staring down a similar barrel. The New Year’s resolutions scribbled a week earlier. Literally gone. What’s the difference, no time for that now. Got a full plate for the next million hours just to get back to stable.
[As a matter of commiseration it’s not helpful to relate a story back to yourself. I have no idea how these people really feel. But I’ll share that my apartment burned down in college. Thankfully a roommate noticed the smell and quickly got us to knock on doors…realizing that nobody knew where the smell was coming from we evacuated across the street not knowing what was going on. Until I saw the flames burst out of my bedroom window on the second floor. The fire was in the walls, starting from the take-out joint’s oven below us.
We were fortunate because both the university and Red Cross were able to quickly get us cash and concessions on due dates. And most importantly a friend housed and fed a bunch of us for days as we tried to secure apartment leases elsewhere. Despite the experience, I can’t fathom what it’s like to go through anything like this with your own home and when it happens to everyone around you. But I suspect even small gestures will go a long way.]
I can’t find the link now but someone who lost their house in Hurricane Milton wrote a good thread about how confusing it is. It can take a while to be allowed back to your site (I still remember the day we went back to the building and it does stay with you. And again that was small potatoes). The person explained how you collect little bits of info from everyone as nobody can see the whole picture.
Embodying what it must be like every day for the foreseeable future will hopefully focus the rest of us on being useful right now. But yeah, we are going to need to learn from it.
I hate to say it, but I’m not optimistic.
I don’t wanna be a drag every week in this letter so maybe I just get it all out now so I can get back to sharing educational things.
An unpleasant musing
The “algorithm” knows you can't hate someone so vastly different from yourself.
Our deepest hate is reserved for those similar enough to remind us of ourselves. You find the Taliban, serial killers, and cartel bosses disgusting but they are too far to hate. They didn’t betray you. You were never on the same team.
If 9/11 were to happen today, would we unite?
Not if the algorithm is in charge.
This leads to a haunting question: is Twitter/X or whatever social media you look at real life? The line feels blurry even when I’m “touching grass” with people in meatspace. I’m increasingly noticing convergence between socials. Which makes sense. If the meme works there, copy it here. (Related: playing video games with my son has made me more aware of Twitterisms that are really gamerisms because there’s no way he would know them otherwise). The “memes” start as compressed thumbnails of an idea until they gradually terraform its host’s personality.
Luigi as a vigilante is a meme. That arsons might plausibly flaming the original fire feels like it’s coming from a similar place. The Joker is here. I’m not here to point fingers because as wrong as the Joker is, as unjustified as his actions are they start with pain. Explaining the source of pain will never justify the evil it produces, but pretending it’s gonna just go away as begging for the spiral to accelerate. And we are so far from addressing that pain.
Hey, but I hear SPX earnings are expected to grow 15% this year.
Is Twitter real life? Elon says it is. He says it’s the media now. The truth. Ok, do you know what the “truth” is telling us? It’s telling us you have two years to get rich because capital, not labor, will be all that matters. That soon enough as quickly as you can imagine it an AI army will build it. You just need enough capital to pay the electric bill.
For people who still put gas in their car, this sounds like a death sentence. And if you shrug and say, “Well, it’s the truth,” then okay—Jokers everywhere. Don’t be shocked.
Positional Scarcity and the Human Condition
The accelerationist dream of post-scarcity strikes is a fantasy. It sells itself on utopian visions without addressing the reality of positional scarcity. Status, sorting, and competition are zero-sum. They don’t vanish, even in a world of abundance. These instincts are baked into the human condition.
Nature reminds us of these instincts. My kids have been home sick much of the past week as the plague gets traded in our house like Pokemon cards (this is also weighing on my mood. Sick kids are not themselves and it’s sad, pathetic sight). TV has been on a lot. We were watching a nature vid of male humpback whales chasing a female trying to protect her calf. The males all wanted to do the “humpty dance,” but the mom wasn’t interested in Irish twins. The eventual victor was the male who escorted her to safer waters, perhaps hoping she’d “repay” the favor. The narration projected human motives onto the whales, and as awkward as that felt, it refreshed my sense that our capacity to trade, to make mutually beneficial exchanges, is what holds us together.
To situate this capacity truthfully we acknowledge the tense contexts. There’s social Darwinism. Life is competition. As I alluded to earlier, this remains even if we solve hunger. But we also cooperate at the tribal level. “Tribe” encompasses many scopes. “America” itself is a tribe that contains many tribes. And one tribe that encompasses even “America” is civility. A tribe that believes in inherent human dignity. It’s an ideological tribe. It’s from that tribe that we sense the trade-off between equity and efficiency. Efficiency means it’s important that our surgeons have proven their steady hands and sound minds. Equity means we don’t throw handicapped babies in Lake Tahoe. These are the outer boundaries of the tribe’s beliefs. Within the boundaries, “reasonable people can disagree”.
What’s happening right now is confusion about the boundaries and whether being part of the civility tribe is even desirable. The tribe is very large. Almost everyone starts within it. But the Joker is outside it by choice. Because of the betrayal of either boundaries or usefulness.
This is colliding with another human impulse.
Just Because
Humans do bizarre things. Flip through the Guinness Book of World Records, and you’ll see countless examples of this: we set records “just because.” Why did you climb the mountain? Because it’s there. Why do you want to go to the moon? Or Mars? Why not?
There are instrumental answers to these questions. Justifications or rationalizations depending on your own leaning. But they are beside the point. It’s gonna happen because humans gonna human.
Injecting some chaos and mutation into an evolutionary system is natural. If we survive it, it will turn out to have been species-level adaptive. We stand on the cusp of great acceleration. People trying to literally cure death. The stakes feel massive. Like humanity forking. The rhetoric sounds like something someone committed to the tribe of civility would say. We “need” to do this.
But today and increasing so…
…when the speaker says “we” the listener doesn’t trust the “we” includes them.
At least not a version of them that is dignified.
The lack of trust doesn’t come because the speaker is evil. It’s because we know from experience that humans will do things just because they can. Steve-O is the kinda guy that would have been a Jackass for free. Curiosity drives us forward. But poison is the dose. Morbid curiosity is what we call an overdose.
Society is looking at a group of people at a party and thinking, “Should you be taking that much?” Some dude in the corner funneling beer is egging them on and the normies who have to wake up early to go to work say “You know it’s getting late, I’ve had a bit to drink and if I wait any longer I won’t be able to catch an Uber?”
Huh?
Bruh, don’t you know that Waymo never sleeps?
A thought that didn’t fit
“Just because” isn’t always “just because”. Doing anything unusual has an algorithmic incentive. My kids watch YouTube basketball channels constantly. I saw an episode where they were record-book maxxing. Just trying to set records for various things like “dunks in a minute”. These videos get tons of views, but I find something deeply unsettling about them.
Making money is a reasonable proxy for “created value”. But you’d have to be pretty far up your own rear to think that there aren’t people who have gotten rich destroying value via deception, excessive rent-seeking, or simply getting away with crimes.
But there’s a wide swath of activity (think legal grifts) that always has at least a few redeeming stories that end up whitewashing the whole enterprise in the eyes of its few satisfied customers. (The rest of the customers churn because grifts are usually short-sighted, constantly hungry for new marks).
And then you have things stuff like Mr. Beast videos.
I just don’t know. It feels really dark in the same way I couldn’t watch more than one episode of Squid Games.
Sure, people point out all the good he does, but here’s my problem: attention is zero-sum. If everyone spends hours watching him instead of a diverse range of other creators. Many of those people will give to charity too. At a macro level, there’s no additional good being done here. It’s just more noticeable when it’s a single ticket.
Maybe this is my “old man yells at clouds” moment. There’s always been nonsense content. But when I see these videos, I feel like I’m staring into Palpatine’s horrific face: “Oh I’m afraid the deflector shields will be quite operational when your friends arrive.”
We’re entertaining ourselves to death.
Related reading
Money Angle
On Friday I tried a little experiment.
I opened a voice channel in our Discord called The Moontower Subscriber Hoot.
[Back in my floor days it was common for traders on the floor wear a headset to be on continuous conference with the traders streaming quotes upstairs in the office. At the fund, we also had an open conference line on our turrets to be able to talk to other traders on the team. I don’t know the origin of the term in the industry, but these conferences are called “hoots”.]
I wasn’t writing or working on something that needed deep attention so I figured why not open the hoot and chat while I tried to sell some TLT puts. [I didn’t get filled because I was cheeky with a limit a penny above the bid.]
I narrated what I was doing which I though could be a nice “over-the-shoulder” way to explain what I’m thinking as I do it plus enjoy the banter, something I miss from the old job.
Regarding TLT, I decided to toe into some bond delta with TLT being down more more than 2 st devs over the past month, more than any other liquid name in the Cockpit view.
I decided to express the delta through short vol as TLT vols in the belly of the term structure look attractive enough to sell on both our DASHBOARD and REAL view.
I chose a 35d put...skew is a bit elevated and the strike vol on the options were up a lot that morning.
We talked about several other trades on the hoot and I got to explain a juicy rev/con trade that turned out to not be a real opportunity but people came away with a better understanding of how synthetic futures work!
In narration, the group was able to see how I use greeks to make sense of what's going on in real-time. Makes a topic that seems abstract super practical and useful. For example, if I sell .30d puts at $1.85 vs stock at $65 and buy them back at $1.88 when the stock drops to $64.50 why that’s a big winner if I traded them delta-neutral.
You can also use greeks to discuss vol changes from tick to tick.
“See how the option is offered at $1.80 again 20 minutes later even though stock is a dime lower? The option only has a penny of theta, so it wasn't erosion. It has a .30 delta and .15 vega so that means IV is down .2 clicks"
Overall a great experiment that I’ll make a trend. Not committing to a schedule but when I host them it will be on a Thursday and/or Friday.
A few weeks ago Nick Pardini had me on his podcast Analyzing Finance.
I know Nick from his days as a researcher for Parallax, we sat a few desks from one another.
It was fun to catch up. We cover options, volatility, and how options theory principles are found in all kinds of life or business decisions. The options stuff is really perfect for people trying to learn, it's not heavy, and touches on a lot of practical questions around when you should consider using them or not and why volatility behaves the way it does.
Stay Groovy
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This was a great read, thanks. The section on scarcity is something I've been thinking about a lot as well.
For the longest time, talent and outcomes were roughly linear: you put in a certain amount of work in your CS degree, and even if you're not the best engineer, you still get a job in Big Tech and enjoy a middle-class life. But in a world with autonomous systems (ChatGPT, robots doing surgery, whatever), the relationship becomes more of a step function. Either you're below the threshold (e.g. you're worse than GPT), and you can't add value through your "white-collar" labor -- so the value you can add lies in the things GPT can't do (e.g. the trades, like building HVAC or plumbing). Or you're above the threshold (e.g. you're a Google L10 who can spot GPT's mistakes), and you add value by using these systems to solve thousands of tasks at once. (I'm using CS and GPT as an example, but I think the same relationship applies everywhere.)
And when outcomes are polarized (either you're plumbing, or you're a mentat creating billions in value), wealth and status will follow.
Phenomenal writing.