YWR: The Insanity Trade
Pt. 1 Trading an Idiocracy
It was Clipper calling….
I was late for my lunch meeting and really should ignore it. But with Clipper it’s always something interesting, so “Hi Clipper.”
In Quantum Horse Girls I told you about Bruno the pony and the quantum physicists at his stable. But I didn’t tell you about Clipper, the riding instructor.
Clipper is 35’ish, athletic and popular with the Quantum Horse Girls. When he’s not teaching vaulting, or dressage he likes to make a ‘cuppa’ and chat crypto in the tack room. That’s how we became friends. He always wants to talk crypto and give me trading advice. So I expected this call would be about crypto, not horses. And it was.
“Erik!!!! Did you see XRP??? OMG!! Did you buy some like I told you?”
“No….., but you were totally right.” I sheepishly responded. I had just missed a 5x move from 50cts to $2.50 on the news SEC Chair Gary Gensler would step down in January. Gensler had been hounding XRP in the courts for years as an unregistered securities offering. And Clipper had predicted XRP would be a be a big beneficiary when Trump won the election (which he also been predicting).
“It’s OK. There is more to go. XRP is going to replace the SWIFT system. The token was originally designed to run at price of $10,000 so that’s where it’s eventually going. They’re going to launch a stable going too. RLUSD.”
“And what about Bitcoin? Did you buy it back like I told you?”
“No…. I’m sorry. I didn’t do that either. I sold it on the highs back in 2021 and never got back in….”
“Erik!!! You gotta do these trades when I tell you! It’s alright. Don’t feel bad. There is still more to go with BTC too. It’s going to $1 million. This is just the warm up. The real bull market doesn’t even start until Jan 20th when Trump is inaugurated. Maybe buy some MicroStrategy too. Michael Saylor says Bitcoin is going to $13,000,000 by 2045. And Trump is going to add BTC to the US Treasury reserves. This means the 4 year BTC cycle is over, it’s just pure bull market now.”
“Gold will do well too. Trump is going to make the $ gold backed.”
“I can’t believe how exciting this is. For seven years I was the crazy guy talking about crypto and now it’s all happening.
I made £165,000 in the last 3 months on my crypto. I think I might buy a lambo. Only problem is they only have 2 seats.”
His previous dream car had been a Tesla so he must be doing well.
“What should I do?” I asked. “What about ETH? Should I buy that? It’s kind of lagged….” This was embarrassing.
“Yes, ETH is good. It’s going to $10,000. But just do it.
Erik. The problem is you are trying to be clever. The market has changed. Now it is run by idiots. It’s an idiocracy, so you have to start thinking like an idiot.”
“OK. Thank you. Let’s talk later. I gotta go.”
Pt.2 The Insanity Trade
I was meeting one of my favorite investors for lunch at an Italian restaurant on High Street Kensington. She’s Italian, runs a hedge fund of funds, and it’s really fun to talk markets with her. She’s run her fund since the late 90’s and seen/heard everything.
For example, the first time I met her she had just come back from the US and was complaining about a fund manager who had decorated the shelf behind his desk with photos of him coaching his kids soccer team. I imagine he was proud of these photos. Probably thought he was signalling what a good, trustworthy dad he was.
But my friend had the opposite reaction.
“What is up with American PM’s and pictures of their kids and soccer teams?” she asked.
“This guy’s performance is terrible, I’ve flew all the way to NYC to find out what’s going on, and I see he is cutting out at 4:30 to coach his kids soccer team. Where’s his head at? Why isn’t he thinking about my money?”
So you see why I love her.
Today she wanted to talk about 2025 and my outlook.
Ooof….
“Look. Naturally, it’s easy to be bearish, expect mean reversion, and think 2025 will be bad. Valuations… 90% straight line move in the NASDAQ. Record inflows into equities. Trumpamania. Etc, etc.”
“But let’s first imagine the unimaginable. Let’s imgine the whole thing goes even further. Internet 2000 style. The P/E on the S&P goes to 35x. Inflation goes to 1%, the Fed cuts all through 2025, and another trillion $ of money market funds pours into the NASDAQ. Maybe we are underestimating the retail traders and how excited they are. That’s what’s unexpected.”
Then I told her about my call with Clipper and how excited he was about BTC going to $1 million. She asked me what I thought of that.
“I have three reactions.
First, I want to kill myself for not buying back the BTC.
Second, he makes me want to fade it.
Third, in the longer term I wonder if he’s right. Is there something to what Clipper is saying about trading like an idiot? Has the market structure changed. We saw this is in 2021 and now it’s back in 2024 again. So it’s recurring.
And how is it that this guy in horse stable spouting complete nonsense is catching the biggest trades in the world and out performing all of us?
And it reminded me of a quote from Fiat inflation in France (Bad is Good) about the rise of the retail traders in France during the hyperinflation. Retail trading could be symptomatic of Project Zimbabwe.
For at the great metropolitan centers grew a luxurious, speculative, stock-gambling body, which, like a malignant tumor, absorbed into itself the strength of the nation and sent out its cancerous fibres to the remotest hamlets. At these city centers abundant wealth seemed to be piled up: in the country at large there grew a dislike of steady labor and a contempt for moderate gains and simple living.
Maybe the key to success is we should stop trying to sound like Wharton MBA’s and think more like Clipper. Focus on the stories, the memes, etc.
Or is this all symbolic of peak nonsense?”
She agreed the rise of the retail trader was changing the market structure. She had seen her managers getting messed up by this.
“Let’s try another tack” I said as my lasagne arrived.
“What got us here? Why is the market +30% ytd when nobody expected it? Remember how we started the year. We started the year expecting a recession, which never happened. That was Positive surprise #1.
Then in August at Jackson Hole the Fed surprised everyone by deciding to cut rates even though inflation is still 3%. Positive surprise #2.
Finally, for Positive surprise #3 we had the best possible US election outcome, an election which everyone feared would end in civil unrest, assassinations, and a disputed result. But none of that happened. Instead, we had a landslide Trump victory with a team of billionaire entrepreneurs running the White House and the market loves it.”
“OK. Stop it.” she said. “I can’t take it anymore. The more you talk the more I’m sure 2025 is going to be a deleveraging event. I just need to figure out which assets nobody owns and can do well. Shorting the S&P, or buying puts, can be tricky and sometimes doesn’t work because that’s what everyone uses as their hedge.”
“You are probably right. What about gold?” I suggested.
“No. People like gold. In a real deleveraging they will get shaken out.
“What about China? That’s pretty uncorrelated?”
“Yes, maybe. China could be one. And I think another one is oil. Everyone hates oil. It’s almost impossible to make a bull case for oil anymore. Yes, you can say there might be a war in the Middle East, but other than that, there is no bull case.”
One of her worst managers in 2024 had been long energy.
“The key is the CTA’s.” she continued.
“They are long US equities, and long some fixed income. But where they are REALLY long is the US dollar. They are long the dollar against everything. If there is a shake out, it will be there. In the $.”
“Then what about the Yen? A surprise yen rally? And it’s kind of a safe haven currency.”
“Maybe. But I’m not sure about the yen. People kind of like Japan. US investors always want to have some international exposure and always default to Japan. They are comfortable with Japan. The other reason I’m not sure about the Yen is the CTA’s got slightly shaken out of their JPY positions in July. They aren’t as big in the Yen anymore.”
“I have something else in mind. Something everyone hates.”
“What? What is it?” I asked.
“It’s a trade so crazy, that when you ask your broker to buy it, instead of executing it, they will strap you to a bed and roll you away to a mental institution.
Nobody in the world is long.
It’s a trade with absolutely no bull case.
The bull case is there is no bull case and that’s why it will surprise everyone.”