YWR: The Insanity Trades

Everyone loves The Big Short.

Everyone wishes they could go back in time and have done the trade.

But what’s so attractive about the story?

What hooks you is the unfolding realisation as Burry and Eisman pull the MBS thread and discover the supposedly safe US housing market is not what everyone thinks. They meet with slimey mortgage brokers, they meet with the ratings agencies, they meet with the strippers in Florida.

They connect the dots across the financial system and suddenly, they see something nobody else can see.

A new reality unfolds in front of them.

And the trades become clear.

The safest securities, mortgage backed securities, are actually the riskiest.

Everything is priced incorrectly.

Fortunes can be made.

There is a line which repeats itself in the movie.

“These outsiders saw the giant lie at the heart of the economy, and they saw it by doing something the restof the suckers never thought to do: They looked.”

Every trader watches the Big Short and wants to experience that realisation nobody else yet sees. They want to be that person who connects the dots first and puts it all together. They want to be the one who ‘looks’ and predicts the next collapse which is hiding in plain sight.

I see this with the hysteria currently around Private Credit.

Everyone jumping to conclusions, trying to connect one dot to another and hoping it’s another GFC trade. And they are the only one who can see how one dot leads to another and the whole market crashes. It doesn’t matter that none of the other Big Short facts or ingredients support the view. They are trying to recreate the Big Short trade and they want it to be true.

It’s too bad.

Because there is another Big Short hiding in plain sight.

It’s there if you just look.

Dan Rather vs the Algorithm

I was a kid in the 80’s. At 7:30 after dinner you would watch the evening news with your parents. There were only three channels. You could choose between Dan Rather, Tom Brokaw or Peter Jennings. But all three were basically the same. And the news was the news. Reporting with almost no spin. There would be 7 minutes about an international story, 8 minutes about 2 US stories and maybe something at the end sports or a special interest story.

The key thing about back then was everyone watched the same news. There was a common reality. Ted’s family down the street watched the same news we did. And Ted’s Dad might have be a bit more ‘left’ than my Dad, but there wasn’t much difference and we still had dinners together. People talked about politics a bit, but not much. But if we did talk about world events we were’t stuck in quicksand right out of the gate debating what had even happened.

Fast forward to today. We have terms like ‘Fake News’ and concepts such as ‘narratives’ and ‘gas lighting’ are second nature to teenagers. And everything is hyper politicised in a way it never used to be. No one trusts anything they see which doesn’t support their point of view.

Behind all of this is the pernicious innovation slowly turning us insane; the algorithm. The algorithm senses what you want to hear and starts to nudge you down a tunnel. The news isn’t passively there. The algorithm is gaming you. It’s giving you more of what you want to read. It’s maximising for engagement.

Most people also have an existing disposition based on their upbringing (‘the good guy never gets ahead’, ‘the system is rigged’, ‘the problem with most people is they don’t work hard enough’, ‘I feel guilty about my rich upbringing and need to give back to poor people’). The algorithm picks up on this seed and selects the world you see, further reinforcing your existing view. You become more politicised.

You go down your own reality tunnel.

The Collapse of Reality

You are in your reality tunnel, but you look around and realise everyone is in their own reality tunnel too. Which makes question ‘Is what I think really the truth? Or, am I just as crazy as that MAGA guy I hate, but in just a different way.’

The amazing reality of AI images gives you the unsettling realisation you can no longer tell if images are real.

We saw the early stages of this with the 2024 election. Everyone counting the fingers of people in the crowds to see if election rally turnout pictures were real or AI recreations. Do people really like Kamala/Trump that much? Or is it fake?

Who knows.

Think of Russell Crowe’s character in ‘A Beautiful Mind’. He’s insane and he knows it. He has these conspiracy theories and keeps seeing things which seem real, or maybe they aren’t. He’s not sure. After all he’s crazy so maybe he’s just seeing things. But then they seem real. The struggle he has to live with at the end of the movie is he no longer knows what’s real, what’s not, and it’s not going to change.

And you realise to some extent we are all starting to have that problem.

We live in our digital reality tunnels and are slipping into an insanity where we no longer know what is true. While it looks real, but we are still aware enough to know it might not be. What if it’s all a simulation? And that is a very disorientating condition.

As a result you see the rise of skepticism. Doubt everything. In contrast believing in anything is seen as being naive and vulnerable.

This is the Breakdown of Reality.

If you really want to go down this rabbit hole, and there are many more layers, I recommend The Sorcerer’s Apprentice by Be Water.

The Collapse of Society

This state, where we live in our own hyper politicised digital reality tunnels, with no common truth, makes it hard to have a democratic society.

We are losing the bonds to our neighbours and friends. The first thing we want to know when we meet someone new is ‘Do they support Trump’, because it tells us everything we need to know about that person. It sums up everything. If they ‘support Trump’ then there is something wrong with them. ‘How can they think that?’ They might seem nice, but if they are a Trump supporter you will likely always argue and will never want to go on a fishing trip together. They seem nice, but better to be polite and move on. Stick to your clan with people who think like you do.

Whole families and friend groups are fracturing over politics in a way I’ve never seen before.

And I trace it back to our growing insanity.

How do a people govern themselves peacefully when they no longer respect each other, have no common reality, and can’t even agree anymore on whether events have happened or not.

It undermines the operating system necessary for a voting democracy.

Let’s connect a few more dots.

The Collapse of Money

Money is a social construct.

And it is becoming increasingly abstract.

First there was physical gold.

Then there was idea of gold backed by paper currency.

Then there was the idea of government issued paper currency not backed by anything at all. That was a major mental shift.

Then the physical paper in your wallet went away and money became digital 1’s and 0’s.

Then the ‘government’ part of money went away and money could be anything. Money could be a token manufactured by a computer program on the blockchain.

This was another important cultural inflection point.

Money can be anything. It can be a Bitcoin or USDT.

People joke in memes about the full change of the financial system over to a dog token. It’s funny, but real damage is being to the traditional concepts of money.

People chased Bitcoin for FOMO, but that chase entailed obligatory hours spent watching YouTube videos about the history of fiat currency. The young traders of today understand fiat currency in a way we rarely questioned when we were younger. We grew up in the Strong Dollar Era. They grew up in the Bitcoin Era. It’s a societal shift.

Observe another societal shift. Now it’s natural to ridicule central bankers. ‘Everyone knows’ central bankers are charlatans. Yet, not so long ago Greenspan was a highly respected maestro who carefully pulled complicated monetary levers and kept our economy on the rails. Today traders sends around memes of central bankers and their money printers. Money printer go Brrrr…….

From maestro to joke.

It’s a collapse of trust in our monetary institutions and in the value of money.

The Collapse of Fiscal Discipline

Notice also our cultural shift around fiscal discipline. It’s another tether to reality getting cut.

Back in the Dan Rather days it was common in politics to talk about balancing the budget. Usually, it was a Republican ideal. Fiscal conservatism. Now post-COVID no party talks about balancing the budget.

After the election Elon’ DOGE initiative tried to use technology to identify wasteful government spending. You would think that would be a helpful initiative and we would be grateful. Surely, there are efficiencies we can find. Nope. People hated it.DOGE didn’t last 10 months.

Think on that. He was hated for trying to cut spending.

It’s a sign of the times and the deluge to come.

We don’t care anymore if the spending is wasteful or not, just keep spending.

Snip.

In Europe Germans use to be adamant about fiscal discipline. Now that’s gone. Germany, once the policeman of fiscal discipline and enforcer of the Maastricht Treaty, is going to run 4% deficits for the foreseeable future. Europe is also sliding down the slippery slope where nothing matters anymore.

Trump has suggested we increase the defence budget by 40% to $1.5 trillion.

$1.5 trillion. Why not $3 trillion?

We used to talk about hundreds of billions. Now we talk about trillions.

And we don’t argue anymore about the deficits. We just argue about who gets the money.

This is the collapse of fiscal discipline.

One more dot.

Collapse of Rule of Law

I leave this for last.

Because this is the most dangerous collapse of all.

It’s what takes us down.

Here also we’ve had a shift in culture.

There is a growing societal perception the system is rigged. In the Dan Rather days it was commonly assumed we had equal opportunities. If you worked hard you could get ahead. That view has shifted.

Now our government is a ‘Swamp’ where politicians band together regardless of party to milk the regular people. The Epstein case shows us elites party together, and do what they want with no consequences. Everything can be swept under the rug. One rule of law for the rich. Another for everyone else.

This cynicism about the ability to get ahead and frustration that the rich get away with things regular people don't is bad, but in my view, by itself not that inflammatory. To some extent this has always been the case through history. It’s a known thing.

There is something much more inflammatory to the common man and woman.

The previous collapses in reality, society, money and fiscal discipline are gas soaked rags compared to what happened earlier this year.

The Somali welfare fraud uncovered by Nick Shirley.

The Somalis in Minnesota started a fire which is going to burn everything.

Having grown up in a rural town in Montana I think I see this in a way my financial peers don’t.

It’s one thing if Bill Gates breaks the law and gets away with it. I’m not saying it’s right at all! I’m just saying to the common man Bill Gates is a software genius who invented Microsoft. To the common man, it’s bad, but it doesn’t turn your world upside down if he committed a crime and got away with it.

What enrages you, what makes you question why you put your boots on in the morning, what makes you never want to pay taxes, what makes you question everything about the system is when an entire Somali community can collectively engage in welfare fraud with sophisticated fake businesses which steal government money in the hundreds of millions of $’s with impunity. Now they live in better houses than you, drive better cars than you and their kids get into Harvard.

That frustrates you. That pulls society apart.

And to make matters worse to the common man, is that the whole scheme is exposed on the internet and nothing happens. No SWAT team swoops in. No widespread arrests. No justice.

Instead mainstream media says it’s not true. You’re in a digital reality tunnel. You’re crazy. Nick Shirley is fake news. It’s all a misunderstanding. These are actual businesses. See. Here is a staged video days later with some kids walking into daycare centers.

Go back to work. Go back to the grind. Go back to paying your taxes so we can steal some more.

The whole story gets exposed and little/nothing happens.

What frustrates the working man and woman more than rich people cheating, is when your neighbour cheats, gets rich, and gets away with it. While you don’t.

THAT turns your world upside down.

Everything breaks and the mentality shifts from how do I work hard to get ahead to how do I steal too? Because everyone is doing it.

That is the break down of the rule of law.

A German friend noticed this at his karate dojo back in Germany. His karate class is mostly working class students. Two years ago he would overhear them complain about people who were cheating the system and getting extra benefits. Now after class the students share cheating secrets amongst themselves. Where before they criticised it, now they are all in on it.

There is another significance to the Somalis in Minnesota.

It’s ‘Minnesota’.

Think about it. Minnesota is known for its Scandinavian heritage. The Scandinavians came to Minnesota and Wisconsin to farm. The football team is The Vikings. There is a whole stereotype around people from Minnesota and Wisconsin. They are the salt of the earth. The people are normal, middle class, and trustworthy.

But if ‘Minnesota’ has changed and is capable of this level of corruption, what does it tell you about New York, Chicago and California?

It tells you the whole system is broken.

It tells you everyone is doing it and if you aren’t in on the stealing then the joke is on you.

That’s why Minnesota breaks us.

It’s the final collapse. The collapse of the Rule of Law.

Now let’s connect the dots and figure out how to make money.

What’s the Crash? What’s the Trade?

So what’s the thing that’s there to see if you just ‘look’?

What do you see if you connect the dots?

What trade seems crazy?

What’s The Insanity Trade?

Or, should I say ‘Trades’ because I see more than one.