Weekend Reading #273
This is the two-hundred-and-seventy-second weekly edition of our newsletter, Weekend Reading, sent out on Saturday 22nd June 2024
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What we're thinking.
And so finally Nvidia became the most valuable company on earth. It lasted barely 24 hours as it pulled back the following day, but that box is now ticked. Can we see a frenzy over the summer to culminate in a spectacular blow off top in AI or have we already just seen it after a vertical rally in the past months? I’m afraid we don’t know that. As the market has narrowed considerably and things seemingly look a little less good economically at the very least in America, there may be an opportunity for a nice summer rest as high conviction plays are less easy to find. There’s lots of action coming this year so there is always opportunity for traders like us. But for now, we are rather keen to bank our wins and have a breather. We will run our winners as much as we can but once all the boxes have been ticked it's time to move into a different mode – that of protecting the gains made.
Outside of America, the real fun has been in South Africa. As we intimated last week, a momentous change has swept the country. Time will tell whether the new GNU (government of national unity) endures or not, but markets will always front run opportunity. And this week the SA market rocked for the first time since the glory days of the early 2010s. Long may it last!
What we're watching.
I haven’t listened to the All-In pod for a long time, but I simply couldn’t resist watching them interview President Trump late this week. I’ve learnt over time (as with pretty much anyone I follow) the pros and cons of each “bestie” but this did give a chance once again to see Trump in full flight. And it's far better to watch this with all the body language etc than just listen if you can. I've noticed that President Trump changes his persona depending on his audience and in this conversation, he was in full business mode. He was serious and pointed on most issues despite doing what all politicians do in avoiding answering the questions he didn’t feel like answering. I’d love to hear President Biden in this format too, but it doesn’t seem like that will happen. The CNN debate, with all its strange rules, is next week. That should be entertaining if nothing else. DC
What we're reading.
Back in the first episode of memestonk frenzy in 2021, the world first learnt about “gamma” and how this second derivative of option math (aka one of the “greeks”) could translate into explosive and unexpected moves in markets. We even wrote about it in detail here, but as with all things reflexive and human, the mechanics of how gamma works became pretty well-known over the intervening 3 years, and when “Roaring Kitty” Keith Gill came back onto the scene earlier this year, there was undoubtedly a flurry to recall the heuristics of how to play gamma in the market. Same trick, same outcome, right? Well not really. Behaviours change and adapt – that's what being alive (and human) is all about. An email that landed in our inbox today from the QDS team at MS shed new light on exactly what has changed: that in response to all that has transpired in the markets, the supply of gamma and the subsequent long gamma effects “pinning” markets and preventing violent moves has changed in its nature. No longer is gamma supply a smooth curve – instead, supply comes from two key sources: 1. ETFs that are selling out of the money options aka “overwriting”; and 2. short-term systematic vol sellers that are much more responsive to where spot prices are and tend to step back from supplying volatility when a big move happens.
Translated to English: if price goes up, gamma comes into play, putting the brakes on a violent upside move; but if price goes down, gamma is negative, accelerating the move down.
Today’s (Friday) options expiry is the largest notional roll-off ever, coming to US$5.1tn in notional. Strange things happen when things get reset at such a scale, but the bottom line here is that the resilience we previously could rely on which seemed largely symmetrical is no longer symmetrical, making things that much more fragile. EL
This essay from Niall Ferguson really made me worry. For all the things that I’ve believed since I was a kid was that freedom wins. This is primarily as the result of US hegemony and the spread of capitalism and democracy. But as I am a student of history, I know it has not always been the case. This piece from Ferguson is entitled “We’re All Soviets Now” and it highlights what he believes are the similarities between the US and the late-stage Soviet Union just before its fall. It's up to the reader to decide whether its accurate but the point is there. The US may not win the upcoming global battles whether they be physical or ideological. And that is something scary one way or the other. DC
What we're listening to.
I was introduced this week to a neuroscientist named Mona Sobhani, who after spending most of her life focusing on a left-brained scientific evidence approach, shifted focus to search for answers on the other side. This conversation with Jim O’Shaughnessy was a fascinating preview of what’s to come in her book, Proof of Spiritual Phenomena. The conversation covered everything from psychedelics to quantum physics and from coffee cups to spoon bending! DC