The intentional deception
There is a continuous feed of disorienting news that is intentionally desensitizing you to the signal in markets, or even worse, manipulating your perception so you can’t tell what is true or what is false. All of us experience this to varying degrees as we navigate WHERE we are in the cycle. Monitoring the situation has become the new way to orient oneself to a world where extreme outcomes are building under the surface but then reveal themselves in a moment of volatility. But the dark side of being terminally online is the endless doomscrolling that comes as an unintended consequence of monitoring the situation.
As a result, the closer you look, the less you see.
The biggest problem I see today is that there is such a massive divergence between what people are focusing on and how the system actually functions. This divergence grows with every day that passes because AI’s retooling of every aspect of reality has converged with a surplus of liquidity, so the speed of the system is increasing, which in turn creates greater disorientation as attention and the psyoping of people become an actual form of liquidity in themselves.
Many CEOs and fund managers have recognized this new environment and understand how to pitch themselves as the new meta that will change everything in the world. If you can control the way someone views the world, they will only anchor to positive developments that confirm their view and chalk up anything negative to “short-termism and impatience.” As a result, operators in financial markets are actively trying to create psychological distortion fields around their shareholders under the guise of “education” or “freedom” in order to create premiums they can use to their advantage.
The end result is that we have a world where not only are people focusing on the wrong questions, but everyone around you is actively trying to misdirect you and harness your attention on the device that constantly sits in your pocket and is the place of safety you turn to when you are uncertain about the world.
Compressing the risks into a single moment in time
The biggest risk in this market is that everyone has been desensitized and so misled that they don't even acknowledge the largest risks that are building under the surface. Risks are building in the equity market, interest rate complex, and FX market that are fundamentally unsustainable (I’ll cover these below), and no one even recognizes them because they have been so desensitized to how black swans actually function.
No one sees the risks because they are too busy “monitoring the situation.” As I said, the closer you look, the less you see.
Stack on top of this the fact that the microstructure of the market has turned into a highly inelastic mechanism that has never seen a true market correction with this amount of 0dte volume and leveraged products.
Ask yourself how in the world $3B in weekly volume in betting markets has been normalized. And this is only a fraction of the prediction markets that exist. Kalshi and Polymarket have become natural parts of everyday conversations despite the fact that the overwhelming majority of users lose all their money.
We have institutionalized and normalized a wealth transfer from the poor to the rich and called it “the freedom to hedge your risk or express yourself.” The newest billionaire class is being made under this guise of “freedom.”
While the younger generation is being lulled into gambling, boomers are being sold the lie that the market is as safe as it’s ever been because index funds will always outperform. Conviction in the market strengthens as passive flows take a larger share of the market and concentration into Mag7 intensifies.
As the concentration of risk intensifies and gambling is normalized, the largest equity indices in the world are ALL at the highest valuations in human history. When asked to justify valuations, AI narratives are immediately put up as smoke screens even though the high valuations are across indices that have the least exposure to AI disrupters.
The price to sales ratios for the Russell 3k and Topix are also at all-time highs, which indicates that the higher valuations are not just in a single sector but pervasive across industries.
The highest risk companies in the system are outperforming the entire S&P500 index in a manner similar to the 2021 melt up.
The entire point is that all of these factors represent real risks in the system, but everyone has been normalized to their existence instead of understanding that volatility is compressing. The famous saying goes, don’t be a turkey.
The same dynamic exists across the interest rate and FX markets where we have had central banks pretend that the excess government spending in the system doesn’t exist and have allowed short-end real rates to fall for years now.
1-year real rates in the US have been flirting with negative territory for a while now, and as the Fed pauses into an oil shock, we are seeing additional pressure on the system as the policy error pushes long-end rates up.
The same dynamic exists in Japan right now where the BoJ is allowing real rates to sit in negative territory as long-end rates rise:
Long-end rates across every major country are now moving in a single coordinated fashion because of how cross-collateralized every economy has become due to global trade. Central banks are forced to track in lockstep with the Fed in order to export their goods to the United States. Every country has now linked arms and it’s all one trade.
And the US current account has been moving to an extreme we have never seen before. This is a real-time reflection of the impact of Chinese economic warfare as they suppress the value of their currency to export cheap goods to the entire world.
As social media has taken a dominant stance in financial markets since COVID, it has used attention as its currency. The result is that everyone has become desensitized to the actual systemic risks building under the surface as clickbait headlines constantly flash across the screen. AI has taken this environment and amplified it so that the news is tailored exactly to your cognitive biases and delusions are handcrafted for each person.
AI is creating unparalleled progress across every domain, but the unintended consequence of this is the compressing of the tails. AI functions as a form of leverage in the system that empowers those with specialized knowledge but can amplify unintended risks.
My entire point here is that AI is both speeding up the entire system and desensitizing people to the underlying risks. We are seeing the impact of this in real time across social media, financial markets, and the economy.
The economy is beginning to get retooled with a fleet of robots that work 24/7:
And one of the largest universities in the world just booed the CEO of Google off stage for talking to them about AI.
Volatility and risk are compressing across culture, social media, technology, the economy, equities, interest rates, FX, and even down to the intraday ranges in markets with option flow. Small changes transmit through the system with a nonlinear impact in a way that has never been seen. The same driver that is compressing volatility is also creating a continuous feed of disorienting news that is intentionally desensitizing you to the underlying risks. The narrative that is sold is to “monitor the situation.”
The closer you look, the less you see.
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Will come back and reread this one a few times. Parts of it are very eerie
Well said! So, where to park for the coming storm?