I’m new. Forgive me for being giddy and please pardon the slobber. I just like the cut of your sample bag.
A little taste before you buy. The ritual of pulling out the bottles and rotating the labels sends anticipatory butterflies of rose petal and violet across my palette. Have I had that one before? Which will go best with our program? Damn I love a good Châteauneuf-du-Pape.
Sampling for wholesale purchase doesn’t have the pomp and circumstance of a customer oriented tasting. One glass, rinse with wine, spit a little bit if you have to. Dumping encouraged. Noses deep in the glass, gargling noises as the juice rolls over every part of your tongue.
Most importantly, there’s only one opinion that matters; it’s yours.
Mano y mano, at most a doubles match, there’s no hiding here. Tastemaker and list curator, the buyer is responsible for what gets offered to their customers. A balance of price points and regions adds some objective structure, but at the end of the day it’s all about feels - what do you think?
Small tables lead to big discussions.
There’s no hiding behind nods and hummed affirmations. “I like this” doesn’t quite cut it. And at the other end of the spectrum, pontificating around WSET classifications of medium acidity and a garnet hue aren’t exactly answering the real question. Screw your 92 point rating.
Romantically that question is “does this wine bring people joy”; commercially it’s just a question of whether it sells. If you believe the utilitarians, the latter indicates the former.
Earlier this week I found myself sitting at a more familiar small table, but with equally few places to hide my opinions. A few series 65 registered dorks in a conference room, and someone posed the point blank question that every client asks - what’s the market going to do? No prospects to impress or regulators to surveil the conversation - whaddya got?
My defensive reaction when I have absolutely no clue what to say is some hemming and hawing about more buyers than sellers, and that the market can stay irrational longer than you can. Dash it with contemporaneous examples of the AI bubble and a nodding wink to how “this time is different.” But that’s cocktail party repartee, not any real pearl of wisdom.
If you’re in the right circles, too strong of an opinion about what’s going to happen is appropriately and quickly dismissed as clueless. Uncertainty is a given. But a wishy-washy answer that sounds pre-hedged isn’t helpful when all the inquisitor wants is a matchstick in a cavern.
There are some medium strength opinions that carry water. The skyward bend in equity prices gives reason for pause. Four years ago the S&P 500 was half what it is today. The US GDP in Q3 of 2022 was $26T. Currently we’re running about $32T. 100% growth versus 23% growth. Far from a complete story, but worth raising an eyebrow.
Even the most common and benign position is an opinion. If you’re following conventional wisdom and buying low fee diversified market exposure for the long run - that’s still a vote for a general class of outcomes.
That’s as close as I’ll get to a directional call about the market. “Most likely up in the long term.” When it gets there I don’t know, but I do have an opinion on how. It’s going to be more volatile.
The evolution of market structure in both equities and options will be a significant contributing factor. With the proliferation of exchanges, while customers have more and better ways to execute, the inherent nature of this liquidity fragmentation creates microstructure chop.
Options market makers must display their interest across multiple different venues, and their risk tolerance doesn’t scale with the count of exchanges. This leads to phantom bids and offers that disappear when something else shifts, and the ripples of oversizing trickle back into the underlying markets.
On the equities front we’re seeing a trend away from lit markets. Not only has dark pool activity risen to nearly 50% of US share volume, there’s a simultaneous erosion of regulatory structure with the proposed elimination of the order protection rule. As more shares trade less transparently, the price discovery process gets inherently more choppy.
The speed of trading continues to accelerate. A human eye can recognize flashes of light in about 15 milliseconds, but takes up to 250 milliseconds to push a button. Matching engines move more than 100x faster. Before you can blink trades, updates, and more trades will happen.
Particularly with order entry code accessible to anyone, the second, third, and tenth order consequences of this are highly unpredictable. Interactions and their subsequent reactions quickly push into the wilds of randomness.
High frequency trading has been around for more than a decade, and that alone will not increase the volatility of markets. In general it should hasten and improve the price discovery process. But trading can happen so much faster than the human brain can process it. On time scales more like hours and days, we’re seeing market moving information quickly traded on before it can be fully digested.
Artificial intelligence will quickly be able to handle that cognition back at the high freak time scale. But that will only increase the value of a human weighing the decisions at their relatively glacial pace. In a world of generative content and fake news, volatility is a given.
As the bots distance themselves from humans, so we distance ourselves from each other. The Overton window continues to widen, and the definition of centrist has never been more off kilter. Politicians left and right are playing eyeball grabbing games that will only get more extreme, and the incentives are all about stirring the pot.
Volatility begets volatility. With choppy seas forecasted, the best reaction is to rock the boat. Much like inflation expectations drive interest rates, wider distributions of outcomes encourage behavior that perpetuates that variance.
So what’s the trade?
Volatility isn’t necessarily mispriced. Long term options have always been priced at an elevated level to the present. Contango is the norm, and only in periods of panic do we see the short term spike into backwardation. Between now and next month’s expiry I can clearly see the possibilities, but the further out you go the more unknown unknowns exist, so buyers pay more for options.
Not only can’t I pitch you a security to buy, there’s no good answer here. The closest thing I’ve got is to grok the concept of being long vol of vol, antifragile, or just convexity acceptant.
I’ve got strong opinions about wine, and weaker ones about the market. But neither matter as much as the expectation of uncertainty.