Volatility Mavens Artemis Uppercase Administration | Missive Of The Alphabet To Investors | July 2018

Always interesting, fifty-fifty a twosome months out of date.
From Chris Cole's Artemis Capital:

What is Water inwards Markets? Volatility too the Fragility of the Medium

“This is Water” is the championship of a kickoff spoken language delivered past times David Foster Wallace that has acquire a masterpiece of meta -thinking. If y'all haven’t listened to it, pose downwards this newspaper too do too so now. It is worth twenty minutes of your life. The Foster Wallace parable of ii immature fish ignorant of the medium that defines their reality is too so of import on many levels. Foster Wallace contends that nosotros swim inwards a footing defined past times self-centered thoughts, that serve to develop reality visible, but should never hold upward false every bit fundamental truth.

In capitalism the medium that defines reality is fiat money. To this point, does coin exist? This seems lightheaded to enquire but it is rattling of import philosophically. Yes, coin exists inwards the feel that y'all tin purchase goods too services alongside it. At the same time, coin is exclusively of import because of a collective belief inwards it, too is worthless without that. This is truthful of whatsoever human construct: markets, words, brands, too nation-states... all abstract mediums that receive got important because nosotros collectively believe they do, too thence they give shape to reality, but are non existent independent of our thoughts.

In markets too inwards life, nosotros swim inwards mediums of idea abstractions... the same agency a fish swims inwards H2O . When the medium collapses, too so does the reality... causing us to query the nature of both. As Foster Wallace eloquently explains, “ The immediate yell for of the fish story is that the most obvious, ubiquitous, of import realities are oft the ones that are the hardest to encounter too verbalize about.”

Volatility is e'er the failure of medium ... the crumpling of a reality nosotros idea nosotros knew to a novel truth. It is the instant whe re nosotros acquire that nosotros are a fish living inwards a simulated reality called water... too that reality tin change... or at that spot are other realities. True volatility isn’t the alter of the thing, it’s the changing of the medium around it too the realization that the affair never actually existed inwards the inaugural of all place.

This is all y'all remove to know to empathize when the volatility tempest volition really come. It is non virtually valuations, coin printing, or where the VIX is at whatsoever point. When the collective consciousness stops believing increment tin hold upward created past times coin too debt expansion the entire medium volition autumn apart violently, otherwise it volition proceed to hold upward real. The belief that the medium is the reality is what holds the building together temporally.

This alphabetic quality is divided into iii key themes: The inaugural of all business office volition hash out fragility of the marketplace position medium; the 2nd volition hash out how the volatility inwards Feb was a symptom of a much greater liquidity work ; too the 3rd volition hash out how flows are to a greater extent than of import than fundamentals when the medium dominates truth. Out of the fishbowl too downwards the drain nosotros go...

Fragility inwards the Medium 
Investors swim inwards a pond of bid too enquire prices. Without a bid too enquire at that spot is no cost discovery... too the market... similar a fish out of water... dies . Now hither is an interesting question: does the marketplace position create value, or tin value be without a medium to facilitate it? Influenza A virus subtype H5N1 soundless revolution is at nowadays beingness fought for the soul of investing betwixt ii contradictory schools of meta -thinking, each alongside their ain strategies too key planning philosophies to back upward them. These ii schools are the following:

1) Value is independent of the medium too intrinsic to the asset: The classic schoolhouse of investing embodies the value investing principals of Graham too Dodd every bit pose into practise past times investors similar Warren Buffet (younger version) , Seth Klarman, too David Einhorn. In this school, the bid too enquire prices of an property do non stand upward for value whatsoever to a greater extent than than a moving-picture demonstrate of a “pipe” is a existent pipe. Liquidity is a highly flawed medium to limited value. Although prices may fluctuate they are independent from the intrinsic worth of an property . If y'all desire to smoke a pipe, the moving-picture demonstrate is non sufficient to provide value.

2) Value is generated from the medium . In the 2nd school, liquidity is the sole determinant of value every bit defined past times a constant bid too enquire price. An property is exclusively worth what individual is willing to pay for it at whatsoever given moment. If Facebook, Snapchat, Tesla, Ethereum, too Ripple hold going up, who cares why, every bit long every bit individual is willing to pay. When marketplace position participants gain confidence inwards a quantitative investment element (growth, depression volatility, truthful cat ownership of society management), it becomes real, regardless of whether it makes sense. As long every bit people render a bid too enquire price, the medium is the reality, too so to speak. The schoolhouse is besides supported past times modern key banking policies. If a moving-picture demonstrate of a piping looks similar a pipe, it is a damn pipe, peculiarly if people purchase to a greater extent than tobacco.

The 2nd meta-view of value is at nowadays winning the revolution too dominating key banking too institutional property flows. Passive too element -based investments are but the most obvious symptom of this novel worldview. If value is “created” past times the medium of money, y'all don’t remove to pay people to notice it, thence active investors should hold upward replaced past times passive index funds, systematic trading, too element -based quantitative investments. Today fundamental discretionary traders exclusively concern human relationship for 10% of trading majority inwards stocks according to J .P . Morgan, spell rules-based strategies concern human relationship for 60%. Since the recession $2 trillion inwards assets receive got migrated from active to passive strategies. Starting this year, over 50% of the assets nether administration inwards the U .S. volition hold upward passively managed according to Bernstein Research . Almost a decade of unprecedented global monetary stimulus resulted inwards the best risk-adjusted returns for passive investing inwards over 200 years betwixt 2012 too 2017. Large upper-case alphabetic quality flows into stocks occur for no argue other than the fact that they are highly liquid members of an index, too those upper-case alphabetic quality flows chase the hottest ETFs too collections of stocks (FANGs)....

...MUCH MORE (11 page PDF)

Previous visits to Artemis:
October 2017 
"Will Short Volatility Trigger the Next Black Monday?"
 August 2017
"Volatility too the Prisoners Dilemma"—CBOE Risk Management Conference Asia, Dec 1, 2015

And many more, purpose the search weblog box keywords 'Cole, Artemis' if interested.
(just using 'Artemis' volition acquire y'all a hundred posts on reinsurance too truthful cat bonds, worthy but non related, directly)

From The Mercenary Trader:
"I like… fat… tails too I cannot lie, You vol sellers can’t deny..."

Baby Got Black (Swan)
(With apologies to Sir Mix-a-Lot)

I like… fat… tails too I cannot lie
You vol sellers can’t deny
When a hot tendency breaks alongside a well-timed stop
and a cracking large dark swan popular y'all get
Paid… P&L twelvemonth gets made
‘Cause y'all noticed that merchandise was packed
Buncha hateful reversion suckers got jacked

Oh babe I wanna acquire lumpy
Long gamma for when it gets bumpy
Central banks tried to haze me,
But those deport trades but don’t faze me!..."VIX Surge Is Unwelcome Lesson inwards Duplicity of Volatility Wagers"--UPDATED:

FT Alphaville's Izabella Kaminska used to verbalize alongside Chris Cole of Artemis Capital virtually volatility but I haven't seen him mentioned inwards a while. What he's upward to is on a whole dissimilar grade from the usual. Here's an example: An Awful Lot of People Are Shorting Volatility (VIX; VXX; XVIX; XXV)":

I'm starting to wonder if Izabella likes posting on volatility because, inwards add-on to talking to Chris Cole who is pretty sharp, the ETP symbols read similar Roman numerals?

As to the headline, I hateful "awful lot" inwards both the colloquial too the literal....

But, instead of listing our links to FTAV, y'all tin run guide to the source:

site:https://ftalphaville.ft.com Chris Cole