plur daddy

Nihilistic speculator

[plur daddy @plur_daddy]

What if we are in the foothills of the greatest bubble in history?

I see a strong case that we are. We have the convergence of three powerful factors.

The first is passive flows. This has been the biggest shift in financial markets over recent decades. We have roughly $6-7bn entering the US equity markets every day in the form of passive flows, through retirement accounts, corporate buybacks, and other sources. This transformative force has added an upward bias to the equity markets, which also means lower downside sensitivity to negative events such as geopolitical issues, economic weakness, or monetary tightening.

This broader theme is well known but the incremental thesis here is it also drives a cumulative snowball effect. Passive flows eventually crowd out the free float, as any equities absorbed by passive flows have left the market permanently (other than specific conditions, such as mass job loss). A smaller free float reduces liquidity and makes price more sensitive to discretionary flows.

The shrinking free float combined with an upward sloping character increases the odds of a parabolic blowoff in equity indices. The trading liquidity in the largest stocks (such as Mag7) has not proportionally increased with their market caps. As they get larger, the stocks get more sensitive to flows on a % basis, and price-agnostic passive flows continually jam more capital into them as they get progressively less liquid and more inelastic, which then further increases concentration and strengthens these effects in a loop.

The second is behavioral training. As the passive flows paradigm has continued over time, equity market participants have become increasingly relaxed, more convicted in the idea of continual upside, and reluctant to sell in response to volatility or exogenous negative events. Naturally, this behavior shifts begets more upside-biased price action, which further shifts behavior, in a reflexive loop. This has to break at some point, but leading up to the apex, you could see how this would encourage a complete lack of selling and thus vertical price action on any incoming flows.

The idea of a central bank put, in addition to a Trump put where he will find ways to influence the market higher, are key pillars of the market’s conviction to never sell equities. Many investors sold and got left behind during the tariff saga last year, and that traumatic memory was evident in the way the market has reacted to the Iran war. Despite a lack of resolution, the markets have powered higher and are now meaningfully above where they were sitting before the conflict. This is driven by the fear of missing out being greater than the fear of losing. This episode was instructive in that memetic consensus around buying every dip and never selling is only strengthening.

It is easy to assume that any given amount of flows entering the market will have equal impact. One of my variant views is that this is highly untrue. The price impact of any given flows is highly connected to the psychology of those incremental participants: how urgently the buyer is trying to buy, and how convicted the potential sellers are. If the sellers have no motivation to sell, and will only part with their shares for a much higher price, and meanwhile the buyer is desperate to buy, then those flows can have a massive price impact, multiples of what it would be in a more relaxed scenario. When you combine this market training, with the shrinking free float, you have an evolving market structure that has greater odds of explosive upside.

Now, take this highly leveraged market structure, and throw in the most transformative technology cycle the world has ever seen. The potential upside from AI is inherently non-linear as it will be applied to itself to recursively self-improve. I believe there are many ways AI can create value that we cannot comprehend and dimension yet.

For a while I had been more ambivalent of the impact of AI on equities due to the potential for mass layoffs negatively impacting passive flows and disrupting aggregate economic demand, but it is now looking more likely that we see gradual job loss as businesses focus on holding headcount flat and harvesting productivity enhancements to capture more revenue.

This increases the odds of a goldilocks scenario, where we see significant earnings growth as AI drives increases economic activity (both from AI capex and by increasing the capacity of all business), while disinflation allows rate cuts. These factors create a scenario where we get a late 90s-like bubble in the equity market. Why wouldn’t we? We have created the god machine, the greatest technology ever, and it is starting to drive real and tangible benefits to businesses today – why wouldn’t we get a huge move higher in the equity markets?

This right tail outcome looks significantly mispriced in the QQQ LEAPS market, where favored strikes with Dec 2028 deep OTM expirations would 17x if the Nasdaq would double by the end of 2027. The asymmetry here comes from the market pricing in a normal distribution of outcomes. Given what I know and believe about AI and the evolving market structure, a normal distribution is not possible.

These 3 factors above coming together to drive an explosive bubble upwards is not a guaranteed outcome, but I believe the odds are much greater than what is being currently priced into these LEAPS.

A double in the Nasdaq is not necessary to get paid on these LEAPS, but it wouldn't be as crazy as it sounds. One way would be aggregate earnings going up by 50% over 2 years, which at +22.5% per year is what it already has been doing, and then multiple going up by 30%. This is arguably conservative on earnings given the thesis, and assumes a multiple around 31x, which is the range high over the last few regimes, and about half of the 60x+ at the peak of the dotcom bubble.

The missing ingredient is monetary easing. You may ask, how can we get a crazy bubble without liquidity expansion? I would characterize the current liquidity environment as being in the middle, certainly not abundant. One answer would be that equities have shifted character to need less liquidity to move higher, because of the passive flow dynamics described above. Equities used to trade more like crypto does now, as a direct expression of liquidity conditions.

Another would be that I believe liquidity will eventually expand, one way or another. I don't think it is imminent, but we have good odds of it happening at some point within the next 2 years, and that is what kicks off the vertical phase.

Given Trump’s appointment of Kevin Warsh and the certainty that he extracted a promise to cut rates, there are forces brewing in that direction. Kevin will still have to convince the rest of the FOMC, and given the inflationary pressures created by the Hormuz closure, no easing is likely in the near term. What is more likely is that post-Hormuz the inflationary impact gradually eases, we start lapping the tariff headwinds from last year, and the disinflationary impact from AI starts coming in as well. In the goldilocks scenario, we could see employment being flattish and preventing wage growth, while the capacity of the economy expands from the use of AI.

We also have had meaningful banking deregulation already, with more to come. This is mostly within Trump's power and doesn't necessarily require full control of the Fed, up to a point. This has already had some impact, and there is a lot of upside still, it's an underrated driver for more liquidity.

There are also left tail outcomes possible, such as an explosion of job loss and unwind of passive flows. In these scenarios, the market structure described above offers leverage to the downside, it cuts both ways. I view the right tail outcome as much more likely than the left tail, as history shows that when productivity improvements are made, usually businesses will still hold onto employees until a recession forces their hand.

This divergence in outcomes is why I am focused on owning the right tail upside through leaps, instead of simply getting levered long stocks and holding them for a couple of years. There will also be significant volatility along the way. I believe these LEAPS to be the best risk/reward way to express this view.

While semiconductors/SOXX would be a more levered and direct view on the AI bubble, as passive flows are a key pillar of the thesis, I want to align my expression with the flows. I also like that the broader Nasdaq contains many businesses that will be able to enhance their margins and accelerate earnings growth through the use of AI. It is harder to bet on individual companies for this thesis, and the ideal expression is through the index as I believe AI will be a tailwind on broader earnings growth for many companies, not just direct beneficiaries. Given the nature of the thesis, I want to isolate my bet to as few variables as possible. I prefer QQQ LEAPS over NQ due to tax reasons (QQQ get full LTCG after a year vs. NQ would have 60/40 LTCG/STCG treatment for any time horizon, and also gets marked-to-market for tax purposes at year end) as I intend on holding these for a long time, and want to encourage myself to stick with this trade.

I usually don't like to pitch specific trades because it can influence my level of objectivity and attachment. In this case, I am trying to psyop myself into holding these no matter what, so thought that sharing it publicly would be beneficial. Do your own research, this is not financial advice, etc.

[plur daddy @plur_daddy]

@chumbawamba22 First disease to be cured by AI will be bearishness

[plur daddy @plur_daddy]

@toptickcrypto Especially the E&Cs being way higher multiples vs. memory is insane, E&Cs are literally a bunch of contractors, vs. memory being a high technical oligopoly.

[plur daddy @plur_daddy]

Good stuff bro, that makes sense to me. Easy to be influenced by hope when you join late. Could stack some bids in the book in stuff like you like. Clearly we've had this pattern in equities over the last year of rolling alt szn like windows and then choppy periods, summer-Sep 25, Jan 26, April-May 26 were all hot. All the hot periods had 1 or both of 1) liquidity expansion and 2) strong AI narrative, the chop periods had either 1) liquidity contraction or 2) AI fud. It's logical to me we consolidate for a while and have another leg in a couple months. The most important is just not missing the next one

[plur daddy @plur_daddy]

Reading the tea leaves it is looking like Xi did not make any strong commitments. Even if he did it would not be said directly, but I believe there would be coded language in the Chinese official statements, and Trump would be all over the press talking about it. His vibe about it has been more subdued. As I said, it was a possible scenario with good upside convexity, and the NQ is exactly where it was when I posted this, so was a free shot on goal.

From here it gets trickier because we have been in a regime where Hormuz didn't matter because the true earnings flow-through was minimal. That is changing now with the high PPI prints in the US and Japan, as the Hormuz -> inflation -> central bank channel relinks the market to Hormuz. After a blistering rally, the odds of volatility here are growing.

Trump is in a tough spot because Iran views Hormuz as its primary source of deterrence now (over nuclear) and does not want to let it go. The US can force it open through military means but that is a huge undertaking that would not be easy nor fast.

It's genuinely tricky because buying the unwinds has continually worked through this rally. It's difficult to be nuanced on Twitter as the crowd wants decisive views, I will simply say that the up/down feels more balanced than it has been, and I am carrying less risk than I have been over the last few weeks. If the market proves me wrong I am prepared to add back length quickly.

At the same time, can't get too bearish as I am growing in conviction that we are in the foothills of a great bubble and the NQ will be far higher over the medium term. Trade around things as we all must but don't fumble this. The most important thing is not fumbling this. I still have all my right tail LEAPS (which have doubled) and will be looking to add more on any decent pullback. I would also like to reload on AI stocks.

[plur daddy @plur_daddy]

Can Trump save the day on Iran with a China deal?

Posting about geopolitics is the easiest way to instantly look like a moron but I will throw out a highly bullish scenario that has been coalescing for me.

1. Over the weekend we got a surprisingly hardline counter from Iran, seemingly walking back weeks of progress in the talks. This was chalked up to the split camps with Iran (IRGC vs. civilian gov). What if this was Iran doing China's bidding, to maximize Xi's leverage into the talks? The timing is uncanny. If I were China, this is exactly what I would do. There was no cost to Iran since clearly there were not going to be any attacks right before the Xi summit.

2. Yesterday we got an article in Reuters that the US and China have agreed that transit through Hormuz should be free and open. Most notably, the US statement was affirmed by the Chinese. This is strong signal on what the Chinese are thinking.

3. What do the Chinese want? You can make a strong case either way. The bearish view is that China wants Iran to control Hormuz because then they have de facto control over it. They can use that to isolate countries diplomatically. Iran controlling Hormuz represents a massive weakening of the US naval guarantee and imperial prestige. And if it spirals out into a full on ground war, that massively sucks US resources and opens up The bullish view is that China needs the spice to flow, and anything that negatively impacts global growth is bad for them as the world's factory. The damage to the US interests has already been done but a spiraling energy crisis could get very bad for China. Also Iran's geopolitical priorities (such as isolating Israel) are different from China's.

4. Overall I've come to the conclusion that China prefers for Hormuz to be open and free, but they want to max extract from Trump in exchange for helping out. Xi gets to tout a big diplomatic win. Of course China doesn't have infinite leverage over Iran, but they have meaningful influence given they are the main buyer of their crude oil and thus the source of funds, and also of key goods and military hardware, and other forms of support.

5. You can see the contours of a deal here. China helps with Iran, and throws in other token issues like rare earths. US drops tariffs (which have been weakened by the SCOTUS anyways), gives them NVDA chips, and perhaps some subtle shifts on Taiwan. Note that Jensen was not going on the trip, and then was added at the last minute. This is signal that his presence was specifically requested by China.

6. If this deal comes together, we have the combination of 3 bullish events for the equity index at once. We have Hormuz reopening. We have tariffs being dropped. We have NVDA expanding sales into China. Put the geopolitics of the AI race aside, because clearly this is a massive own goal from that perspective, but I'm focusing on how the market is going to respond. This is a scenario, not a certainty, but there is a lot of logic to it. It's a win-win on both sides. It would be tremendously bullish.

[plur daddy @plur_daddy]

Its tricky because think the market after initially panicking would realize it does mean a real opening is coming as well. But the GCC infra getting blown up is real bad. Honestly hard to make sense of it all but think it's a good time to be less exposed and just take a break, easy to get chopped up in these types of windows

[plur daddy @plur_daddy]

@2147gp I haven't looked into Reddit closely enough tbh but have seen that thesis before and it makes sense. One aspect I'm not certain about is whether Reddit data gets poisoned over time from too many LLMs posting on it. I'll look into it more when I get a chance

[plur daddy @plur_daddy]

@obvs___ Yeah China does have incentives to do a deal but as you are saying it is not really their style to get too involved

[plur daddy @plur_daddy]

@aeybobby Don't have a strong view on that piece

[plur daddy @plur_daddy]

Think the relative price impacts will be k-shaped, if you extrapolate it out, should be much cheaper to build a home as long as land is cheap, most consumer goods get cheaper, etc. Overall CPI goes down. Can see this being true even for upper mid tier McMansion type of homes that are not tied to being in a specific place. But the truly desirable higher end homes should go up infinite since its capped by genuine scarcity of land/place and thus leveraged to wealth accumulation for that demand pool.

[plur daddy @plur_daddy]

TRUMP: MAY, MAY NOT APPROVE TAIWAN WEAPONS

TRUMP ON TAIWAN: I WANT CHINA TO COOL DOWN

TRUMP TO FOX DISCOURAGES TAIWAN GOING 'INDEPENDENT'

The plot thickens

[plur daddy @plur_daddy]

@Briefcase421578 Yeah exactly, more of an excuse for a wipe then some real justification for a sustained down move

[plur daddy @plur_daddy]

I think China does have meaningful sway because they are the main buyer for their oil and then they barter with them for military hardware, consumer goods, pretty much everything Iran needs. As a giga sanctioned country its hard for them to do much trade. But for whatever reason Xi is not leaning on them. Agree that inflation shift is transitory ultimately, I am absolutely not betting on permanent inflation, but think this re-linking effect is enough to shift the regime as things were frothy.

[plur daddy @plur_daddy]

@mtndrew Thanks for reading my brother

[plur daddy @plur_daddy]

@mandalapore That would be super reasonable. I feel like there is enough latent demand that we wouldn't get a huge move lower in broader indices. Specific stocks that are crowded could really nuke temporarily but good ones would also bounce back hard.

[plur daddy @plur_daddy]

@notthreadguy @Evan_ss6 I'll trade you divine robes loot

[plur daddy @plur_daddy]

@ultimaversum @0xMerp All fair points. Could be a matter of time

[plur daddy @plur_daddy]

@JackofTradesX @0xMerp No, but they will proliferate massively relative to today