Weekend Reading #317

This is the three-hundredth-and-seventeenth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 31st May 2025

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What we’re thinking.

Has anyone noticed that with each new tariff development from Europe last week to China again late this week the market cares less and less? Usually when an initial development occurs it takes markets by surprise but like an earthquake with aftershocks, usually the effects get smaller and smaller. Markets are STRONG, wherever one looks. The Nasdaq, the poster child of liberation day and the end of American Exceptionalism trade is 3 or so % from its all-time high.

Which raises the question: why isn’t anyone worried? And the answer, we think, lies in market structure. Recall that today, most money deployed in US markets is passive. This means that so long as employment holds up in the main, there is a permanent buyer of equities at whatever the prevailing price is. Which means that unless there is a rapid collapse in employment, this buying is a given. The marginal mover of the market (apart from options which are huge but tend to have shorter term effects), is active money. Most active money is still long only even today. And most of this money is long term. They don’t sell. Rather they sell you the dream of “time in the market” rather than “timing the market”. Which leaves a pool of hedge funds, retail and the remainder of the more trigger happy long onlys around. So, when something like liberation day happens on top of a market that is FULLY POSITIONED, the humans sell. And they sell a lot. The market goes down until each day there are fewer and fewer left to sell. A 20% move in headline indices in very short space of time is a big number.

And what happens is that once all the humans have sold, what remains is still the passive flows. And they continue to buy, only now there is no one really left to sell to them. And so, markets bounce. Then a few drips of news may cause some active humans to buy back. And then suddenly the markets go up a lot. Most people point to the news – “Trump has lost the plot”. “Recession is nigh” etc etc. But the markets keep going up.

Now the sellers are worried. And as the market grinds higher, they begin to return until they are full again. Where are we in this? We have no real idea but we suspect we are still relatively early. Today’s complaint is that retail is driving the market. “It’s not fair, these guys don’t understand value, they just speculate!” True or not it doesn’t matter. Retail has been right. We are waiting for the institutions to buy back. Our base case as we have communicated for some time now, is that we keep going! In 2022 the same pattern unfolded. It’s not about fundamentals. It’s about market structure. And who knows maybe the fundamentals will follow. Maybe they won’t. We watch price to tell us rather than the clever talking heads.

What we are listening to.

Mel Mattison is a new follow I found. To be honest I can’t remember if I wrote about him before but this guy has been spot-on in terms of the market in recent times. And he is VERY bullish. In this pod, he talks through his views on the market and US policy, Trump etc. It’s different to most people’s views and he has been right so if I was you, I’d listen.

As readers will know I (and so should you) get the Dominic Cummings blog which he writes periodically. In the most recent one he continued to write about Uk politics (his extremely negative view thereupon), AI and all sorts of the usual topics he writes about with great aplomb. He referenced a UK professor at Kings London named David Betz, who has been warning about a possible British Civil War. Now this is out there indeed and most people will think it’s crazy. But it’s for sure worth listening to this guy given the consequences if this unfolds. Personally, I am extremely negative on the UK for the coming years and as much as it would greatly sadden me, this is a non-zero tail risk. You be the judge... DC

What we are reading.

Mel Mattison (referenced above in Listening) has also written a novel called Quoz. I have read it and it is absolutely fantastic. It’s advertised as a financial thriller and it is exactly that. It envisions a near future (2027) where a quantum enabled AI supercomputer has been invented and deployed in markets to dampen volatility. But the computer is showing cracks as volatility is quietly increasing leading to a possible market crash. This book has everything. Secret government, central bank cabals, violence you name it. Absolutely rollicking read. DC

As far as the story of Star Wars and how Chancellor Palpatine (eventually the emperor) essentially embedded through the entire political system his version of a deep state that overthrew the old order in one single order goes, it’s almost uncanny that this article showed up on my Perplexity feed (new favourite LLM): The CIA Secretly Ran a Star Wars Fan Site. One literally can’t make this up: a star wars fan page was used by the CIA to communicate with its overseas assets, and when this was revealed by the Iranian authorities over a decade ago, heads naturally rolled. Naturally, given the media site the article was hosted on was called “404 Media”, I went straight back to Perplexity to get it to look for corroborating public news sources and as it happens, this was all a true story. Just goes to say reality isn’t as sensible as we think it to be. EL