Exceptional returns in trading come from betting on tails (extreme market events), not normal market conditions. Successful traders must correctly diagnose market situations by understanding the underlying drivers (cyclical, event-driven, or structural) and their impact on amplitude, duration, and recovery. The entire financial industry is structured around hedging tails rather than actively pursuing them, which is why most traders cannot achieve exceptional returns. Key indicators of bubble exhaustion include vertical blowoffs, narrowing market breadth, and when only major names continue to perform while weaker stocks underperform. Traders should develop frameworks for scenario planning and sizing positions appropriately to navigate bubbles and crashes effectively.
Manias, Panics, and Positioning: The Bubble Playbook本站添加:
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Ladies and gentlemen, welcome back to the daily capital flows live stream with myself and James Rosenthal where we are breaking down the entire macro regime, how to think about it, the asymmetrical bets that we're actively taking in markets and the topic IC for today. What I've labeled the stream is mania, panics, and positioning the bubble playbook.
And the reason why I really wanted to do a stream today and James and I decided that it'd be very important even though it's Memorial Day, right? Like a lot of people are taking the day off. We really wanted to spend time going over how tales function exactly and why exactly we should be covering them and thinking about them in an intentional way. And you know when when I talk about this idea of what is what is what is my entire goal in markets? What's the entire goal of just capital flows which is just an extension of that. map the macro regime to be on the right side of it and find a very few large asymmetric bets that become home run trades. At the end of the day, the largest asymmetric bets will be in the tales of a distribution of returns, whether that's on the upside or downside, but exceptional returns always come from betting on tails. And you know even the largest shops in the world that work on systematic macro or they work on different types of you know risk premium strategies or stat arb or whatever it might be. A lot of them primarily make their money when things are operating in a normal fashion and most people cannot structure their portfolio around betting on tails because they don't happen the majority of the time. And so what I believe is that when you have a mindset of let me be able to bat the singles that I need to bat but continually set a foundation for betting on tails.
That's when really asymmetric returns come and that is something that the entire industry is not structured around. The entire industry, the entire financial industry itself is structured around how exactly do we hedge tales so that we don't have to think about them.
And if you are in the business of risk takingaking then you know that the returns always happen on the tables.
They always happen in extreme events whether that's on an individual stock level, a sector level or in the overall market. And so that's what we are going to cover today. And we're going to talk about 200 years of bare markets. And we're not going to talk about them in the typical fashion. A lot of people are going to just reference bare markets in so much as they help them say that this is a market top and you need to listen to me. And what we're seeing right now in the market in my my view is a fundamental misdiagnosis of the situation. You know if a doctor comes in and misdiagnoses your condition then by definition they will not be able to give you a a cure. They might actually hurt you. So when you misdiagnose a scenario by default you are going to interact with the scenario and the situation in an unhelpful or even dangerous manner. And so the entire goal of today is to say how do we correctly diagnose the situation?
What are the current I would say deceptions and distortions that people are using right now to not recognize the real risks in the system and how do we pull all that together into a cohesive framework for how to actually take risk because at the end of the day myself and James we are traders who are taking risk in markets and that is that's our job that's our focus is to achieve exceptional returns. in markets. You know, neither of us are really interested in like, oh, well, you could always put your money in the risk-free rate and just, you know, buy the 30-year bond and just hold it for the next 30 years or, you know, what whatever that kind of might be. And our entire goal is to say, how can we build frameworks and be ready for that fat pitch when it comes? So, that's going to be our goal for today. James, what would you say?
What would what would you add to that really? because, you know, you've had, you know, such a long career in sitting at sitting at the table, keeping your seat at the table while you're batting singles, but then making large portions of money during those tail events. How would you kind of describe the importance of of kind of correctly orientating orienting yourself toward how tales function without just you know overlooking them in the first place or just trying to hedge them out and not think about them?
>> Yeah, when you were saying that I was thinking about how we always talk about you can cap volatility in certain places but it's going to go towards elsewhere.
And if you're willing to be the person that'll say, "I'll take the volatility. I'll take the potential, you could have your basic Fed funds rate or whatever returns. If I'm willing to go take the seat that involves the volatility, then I am willing to step into the arena and I'm available now to gain asymmetric opportunities at least."
I mean, obviously, if you're not putting in the time and effort and the uh reps to like protect yourself on the downside as well, um that you probably shouldn't try to take that chair. But we're both willing to take that chair. And for me, I'm more comfortable accepting it just because I've now traded through I mean, I wouldn't say I've traded through a bunch of bare markets, per se, but I've I've traded through a bunch of volatility events that simulate bare markets in a very short period of time. And every time I've moved through them, some I've done really well on, some I've broken even out. I wouldn't say any of them have really crushed me outside of 2022.
Uh but that was more my portfolio getting crushed, right? Not necessarily trading um actively. So I am now more confident in getting into that seat of volatility, getting ready for potential um just purely because of time in the seat, which is why I always personally go back to protecting your seat at all costs. But um one of the things we're doing here is trying to talk about the foundational price of money, execution, and mindset. And to get people who are watching more comfortable with getting into that seat and saying it's okay to get into that seat. You can get into that seat. The seat is open for you. You know what I mean? You just have to kind of take that next step as to best position yourself for uh for success there.
>> Yeah. I think that if you think about, you know, we'll I'm going to get into the deck right after this this comment, but if you think about the type of people we want to spend time with, it is at the end of the day risktakers who have a seat at the table or who want a seat at the table.
And if you have kind of this, you know, there's a very different kind of I think, you know, game that you're playing if you're just like, "Oh, well, I just want to, you know, play the slot machines here and there and just hope for, you know, whatever." Instead of actually saying like, "No, I want to like strategize, get a seat at the table, keep my seat at the table, and play at the highest level, and actively take risk." Because if you are a risk taker, then you by default understand the value of every single thing that we're going through and why it matters, why exactly you want to have people in your corner that are helping orient you in the right way. And I think that the reason why we go through a lot of material and we take time in the live stream every single day and you know guys, we're going to continue doing these every market day uh Monday through Friday, 8:30 a.m.
Mountain Standard Time. And you know, if you guys are here, we appreciate you guys being here because we know that you're giving us your your most valuable thing, which is your own time. Um, and if if you guys are on Twitter, wherever you guys are at, retweet it for us so that everyone else is aware of it. And in the comments section, ask questions as we go through this. But I think if you have the mindset of, well, I just want to kind of like find a one-off trade and just maybe copy trade once or twice or I'm just trying to find this one thing so I make a couple thousand bucks or, you know, a couple hundred thousand dollars and then just get out of here. you should probably just like click out of the stream right now and go back to scrolling. It's probably going to be the best decision for you because you're just not going to orient yourself toward actual risk-taking. And so it's probably this is probably not going to be the place for you. But if you're the person who is saying, you know what, I I actually want to invest in my own knowledge and create a base of knowledge over time so that the game comes to me, then that's really why you're here and why this entire session today is just going to be valuable for that purpose.
>> I think that's really good. But I think a lot of people to to your point say they want to take the seat. They want the seat. They want the responsibility.
They want the outperformance. But their actions wouldn't support that. They're not trading every day. They lose a trade. They leave for the day. They leave for the week until they um next time it'll work out, right? And they're just going to hope and hope and hope for that performance. Um we've been talking a lot lately about Rick Rubin.
And there was an instance in this interview he was with where they they were talking about Steph Curry, right?
Like Steph Curry is not going to take one or two three-point shots in a game, miss them and say, "You know what?
I'm going to just take today off. You know, I I I'm not feeling it today.
Maybe next game I'll start off on a hot streak." Right? That's just not like how the best operators in the world show up.
And it's like, you know how people talk about like, "Hey, oh yeah, I want to like work hard or I want to I want to accomplish this or that." And if you were to say like, "Okay, show me your screen time on your phone. Pull your phone out right now. Show me your show me how you spend your time." A lot of them would probably be like, "Well, uh, you know, I just there's things I got, you know, there's I watch the podcast like whatever." And it's like, "Well, h how much do you really like want to prove that you want it?" And I just think a lot of people say they want the seat, but they don't want the seat.
And that's okay. But again, like you said, like if you if you truly sit back and reflect and decide, you know what, I don't want that seat. Like I want to work a job. I want more of a linear v compressed life. That's absolutely fine.
And parts of me is like that. Trust me, I battle that guy all the time. But then I have my more grandiose plans with like, hey, this this is more of a game to me. I I want outperformance. I want to live a life where I can look back and be like, "Wow, what a story." I have to fight that, David. And I have to show up every day and say, "No, get in the damn seat." And like accept the volatility that comes with it. You'll be okay.
>> 100%. I think that's I think it's just so good. So good. So, the goal of today's stream and what you'll walk away with everyone is a full breakdown of how you want to think about bare markets, how you want to think about positioning through them, what the drivers are, how you should think about different categories of bare markets and that left tail risk. And I'm going to go over the technical side. James is going to pull in a lot of ideas from how exactly you want to process through information. How should you process through this technical information as you move through these different stages of the market? And how do you not try to fit how do you not try not to compress every single movement in the market into a box of like well we have to be in this stage we have to be doing this or this or this. How do you pull those pieces together into an actual framework for decision- making? And then we're going to talk about both of those elements.
And so that's, you know, I'll have an entire breakdown. If you want this slide deck, go to capital flows research.com.
Again, everything is laid out there on the website and you can get every single slide deck that we go over and then everything that James shares, it'll also be published on the website as well. So that's where everything is going to be.
And by the way, I just started doing this. I don't know, Floss, if you've used Notebook LM at all, but uh Jordy Visser has kind of gotten me on this recently. I'm starting to use it where you could go now take the transcript of this video if you could get it or at least go to Capital Flow's research, download the slide deck, uh copy the URL of all of the primers. Even if you're not going to go through them, copy paste the URL of all the primers. buy a subscription notebook LLM, throw them in the sources, just just unload everything into the sources. It's going to basically make that a cohesive like bucket for you and you can start asking all the questions that you might have here. And you can ask them on stream, too. And we obviously implore you to do so, but you can start asking questions that you don't understand about this slide or the slide deck for what what slide deck was he talking about from a previous stream or whatever. It's going to be able to help you synthesize a lot better. So every time you show up to the stream, click over to capitalflowsarchearch.com, rightclick, copy this slide deck, slap it in your notebook LM, and just start compiling a base that is going to it's going to pay off over time. And I'm starting to do the same for a lot of things.
>> That's good. Yeah, 100%. By the way, just a quick technical note for everyone, you know, says need subtitles and captions on the transcript to be available on YouTube. They are available after the live stream I don't know processes. So I do have them on. I can't really do anything about them. They don't have them live for live streams, but basically I think it's like 24 hours after it. It does it and it has that. Um I'll that's why I publish the live takeaways or the takeaways usually before that happens on the website. So what I would just say is take the article that I sent out every day and it has the live breakdown of that. So for example, you know, right here is China becoming the next world power. Here's all the main points. So just copy and paste these and go through these and then you can go through the transcript later and and download that. So that's what I would say about that and that's going to be the best way to to approach that. Okay. So on the points for today, where we're going to start is 200 years of bare markets. And one one of the things that is really interesting is that we are in a time of US exceptionalism where we have the best and cleanest data that we have is for the US over the last 40 years. So just recognize that in general much of the statistical significance that people come up with is for equity markets over the last 40 years because it's been the best data that we've had in history for any time series, any market, whatever it might be. And so we've had a lot of pullbacks, bare markets, whatever it might be during that time. And you know, again, all this will be laid out on the website afterward. Fundamentally, there are three different archetypes or you could say types of market corrections that occur. Now, here is what you want to understand about these. There's, you know, there can be cyclical ones where you have a recession driven by Fed tightening or something like that, capex bust, credit slowdown, an event driven one, or you can have structural ones.
And here's what I would say. Don't anchor too much to okay well is this structural event driven or cyclical right because there are no rules that say oh well cyclicals are always 20% event drivens are always 10 structurals are always 50 to 60 right these are ways these are mental models for how to break down the drivers of a bare market and why exactly they exist now typically you are going to have different return profiles for okay well usually if you have a structural unwind like Japan and they have a bare market for over a decade that's pretty significant to note if you have an event driven one like for example we just had an oil shock cause equities to pull back not that much and it you know recovered right away and you know that it's not pervasive in the underlying macro regime that tells you a lot and then cyclical you know just think 2022 or something like that where it is persisting for a decent period of time and you know these are you know kind of the metrics that you have for them average draw down right like why it's taking place however there are no rule like the market doesn't follow rules that say like oh I can't go down lower because this is an event- driven bare market or a cyclical bare market like the market does not obey any rules there are no rules and so you want to keep that in mind that these are categories that we've created that help filter the drivers for the statistical sample set of data that we have. it is of the past and it is not necessarily guarantee what's going to happen in the future especially if you know we chop in a range for a year where we just go down 10% rally 10% down 10% rally back up right and so the there's a complete breakdown of the amplitude duration and recovery and here is one of the things I'll talk about for amplitude duration recovery and things like that for any type of move in markets and this is how James and I think markets in general.
Let's say you have some type of move down where you have this draw down right here in the S&P 500. And let me pull this up. So notice from peak to trough you have a 10% let's just say a 10% draw down. And that peak to trough draw down how long did that draw down take? And when we look, you can say, okay, it took 42 bars, 61 days. So, it took 61 days for a 10% pullback. Now, what you need to ask, and again, this is not even that we chopped in a range for a little bit before we had the real draw down. You could even say that the the real draw down when it occurred, it was, you know, more like, you know, if we come to right here, it was more 31 days. So a month of real draw down when that happens and again this is just 10% draw down. It's not you know that's why I was not saying oh we're entering a bare market during this time when you have that you need to think okay it took us 30 days to have that type of draw down how long is it going to take for us to rebound. You shouldn't expect if it took us 30 days or you know whatever amount of days to draw down this entire period of time and we have that driver taking place. If we don't have an opposite and equal driver on the upside, then you shouldn't expect this entire move to reverse in a week, right? And it makes sense because once you this is one of the reasons why I talked about the credit cycle is we had such an aggressive rally on the upside that in itself the fact that we rallied out of here really faster than we went into it, right? you had us move back to all-time highs here in a shorter period of time than when we actually sold off. The fact that we did that is because the driver on the downside, let's just say I'm just going to use arbitrary numbers here, but it was a a five out of 10 strength, but then once we were at these lows, you had like an eight out of 10 or nine out of 10 strength of an impulse and a driver beginning to compress the risk for a move to the upside. And so you want to think about how long does it take for these moves and based on the drivers how should I think about the amplitude and duration of any type of reversals or continuation of these moves and that's why when we go back to this idea of the bare market you want to understand what are the drivers of that and how do they fall into amplitude duration things like that I mean now it's just the entire idea of you know if a if you have a move take place and you know why it took place, you should begin to understand is it going to reverse? Why is it taking place? How long should it function? You should think about amplitude and duration and recovery as key things when you're looking at all of these changes in markets. If you're just anchoring to technical levels, it is not going to serve you well because you are the person who's getting if you're going to say stop hunted or whatever it might be. I don't think that there is actual mechanisms or players in the market that quoteunquote hunt stops.
It just you can't make money hunting stops. Um like but the idea of amplitude and duration are really key in this idea. And so we're going to go through several of the examples so that you can say okay what are the drivers that exist. So 1929 through 1932, everyone knows Great Depression, largest crash basically in US financial history, a deflationary collapse. This is key. When you have deflation, you typically have really significant unwinds. That's why 2008 was such a big deal. It destroyed half of the banking system, broke the gold standard, and took 25 years to repair. The trigger was basically the roaring 20s and also interest rates. By the way, all of these things that we're going to go through, all these markets, the mechanism that you want to understand for their drivers is interest rates. You have to understand them. If you don't understand them, you are not going to understand the drivers. And then by definition, the amplitude, duration, and how that's going to function. So, amplitude, you know, basically 89% in the Dow, 86% in the S&P over 36 months, worst draw down in US history. It's a reference case for everyone. Everyone is always thinking about how do we avoid this? How do we not have this type of situation that occurs again? And so if you think about it, the main factor for that was deflation and the fact that the Fed was not cutting aggressively enough. The government didn't spend money into it. And you had Black Tuesday on October 29th which really set the stage for everything. You had a false rally during that time and then you had bank failures beginning to occur. What I will say is that when you have some type of bank failure and you're trading below the level that that information came out, it just tells you that you're having more risk in the system getting priced. So, you know, it's very clear that when you have these changes that take place, and let me zoom in a little bit.
When you have these changes that take place, you always want to look at the levels that information came out at.
Because, for example, if we have, pull these back. If we have information that comes out at these levels about crude or whatever it is and then we're trading below it, then you can know that the market by definition is pricing more risk, especially if the correlation is still strong and the coariance is still increasing. You can know that we based on the information that was released and we're trading below it. Now you can get an idea about how the market is pricing the risks relative to that information especially if it's correlating with crude and it has a you know just run a PCA principal component analysis to say how much of each change that we see in each asset is due to interest rates crude all these other factors right and beginning to decompose those correctly and so the great depression right? This entire crash, you can see that you had the black Tuesday mark that really kicked everything off and you know CPI went down really significantly during this time. So did 10-year uh yields as well and the you know UK left the gold standard during that time. the UA that the US really had a lot of issues during that time and it was only when you know you had a really significant push. I mean in many ways it was World War World War II that began to help us get out of that entire situation and kickstart everything but a lot of it was from government spending. Now the US really knows they need they'd rather deal with inflation than a great depression. That's one of the reasons why, you know, it's it's easier, you know, this environment that we're in today makes it harder to have a great depression unless you have a really significant injection of liquidity or credit on the consumer or corporate balance sheet. So for example today all of the debt rests on the public balance sheet for the US which pushes everything to say okay the issues are now in the currency which is why you need to understand the carry trade which is why everyone who is calling for a liquidity contracting earlier this year they were not understanding how crossber flows function in this regime and so the idea is that during that time you had a lot of the debt was on the private balance sheet for consumers and corporates. Now we're leveraging up the corporate balance sheet in a much more significant way, especially connected to all these AI flows. And that's actually going to be an important thing for I'm going to connect those AI flows to this idea of the bare market in 1973 and 1974, which was basically the opposite of the driver that happened in 1929. So when you think about the drivers, this is really where you begin to differentiate yourself for what drives bare markets. This is the first stagflation bare market where oil tripled, the dollar depaged and it's how growth stalled while inflation accelerated. So if you look during that time, real GDP was running negative and inflation was accelerating and the bottom in the bare market occurred when there was a top in inflation. And so during this time you had Nixon closed the gold window in 1971. You have a fiat era begin and then you begin to have the S&P draw down 48% over 21 months. And what happened is real GDP turned negative and CPI went from 3% to 12.3%.
There was a partial continuity to 2022 where in 2022 inflation accelerated and went up. However, real GDP was not negative in 2022. We had one negative print, but it wasn't really significant because the labor market was still growing so aggressively. And so you had the S&P down 48% in 2021 21 months. Now, something that James and I have talked about is the fact that during this period of time in the 70s, the United States had a higher sensitivity to oil prices because one, consumer spending was a lot more focused on durable goods as opposed to services. And two, you had a much larger industrial manufacturing base. And three, you also had so much really investment in the entire manufacturing and good space that is that was very different than it is today. So when you have oil go up, the entire economy is a lot more sensitive to oil in the 70s than it was today. That's why you know you have this inflationary bare market where you can notice here CPI it tops once the market bottoms. Same thing happened in 2022 by the way. And so you know once you have that entire move that took place and the inflation you want to understand that the inflation drove the bare market but it was also more stagflation. That's why when people are talking about stagflation today, they're ignoring the fact that during the 70s you had real GDP negative. We don't have that right now. And so when you think about where we are today, the reason why this is important is because we're probably not going to have a recession just because we have an oil shock. However, once you begin to have every single thing in the economy get retoled and now dependent on AI, my view is that it's very similar to how things functioned back in the 70s in so much as I'm not drawing a direct parallel, but there is a parallel in that the economy was more sensitive to oil in the 70s. We are retooling the entire economy right now so that it's more sensitive to changes in AI not only in mag 7 but in the underlying economy and in capex spending. So the implication of that is that if prices rise for tokens, if prices rise for compute, if prices rise for memory, that can actually cause a squeeze on the economy from the supply side, not demand side, but supply side that can actually cause or push things into a recession in a way similar to how energy did in the 70s. And so I think that's a really key thing to think about. There are some qualifications. There's, you know, not direct parallels across every single thing, but the principle that exists about these parallels is all about what is the sensitivity of the economy to these exact changes. If you draw a parallel in that section for how AI is creating dependence for all these companies to depend on AI and you had all this dependence on oil in the 70s.
So that's really interesting to me. So based on how we're kind of set up now, we have insulated oursel a little bit in America to well, we're the leader in tech and that's where a lot of the flows goes, but we're less vulnerable to the oil escapades um than we once were because we're not such a manufacturing powerhouse now. So we've actually in a sense um exported the risk to other places. But with that comes other internal risks that maybe we've been lucky to avoid or whatever. Whether that's like cultural or or revolutions or maybe we've uh had our government go certain directions and policies and things like that. Yet, as we move forward, we're we're re onshoring this this uh capacity and and manufacturing and whatever you want to call that risk within the AI trade, which is um so that could impact our chances at recession or whatever moving forward as opposed to where we've been for these past like couple decades. Am I thinking about that correctly? I would say we're not we are reshoring some industrial stuff but not enough not enough for us to be sensitive to like crude prices in my view.
>> No no no no sensitive to the the to the to the AI related things you said right like totally the power the memory the the chips like all that where if those things change drastically it's going to then impact us more than maybe oil would be impacting us now. Yeah, exactly. I think that AI is is changing how exactly energy is allocated, right? So if I can have a clear view of like how I can iterate or say I need to put 10 pounds of pressure over here and 20 pounds of pressure over here, AI is the mechanism that allows you to more efficiently allocate energy. And the problem is like the energy itself, let's just say, is crude. Let's say you're in an industrial plant. We're still using oil to run that industrial plant, you know, if the prices rise or fall for oil, right?
Like, yes, that's going to impact it, but just not as much as in the past for the US as a whole. But now AI comes in and says here's how we're going to efficiently allocate where this crude oil is going here, here, and here or whatever energy function you have, whether it's electricity or something else. And you know, the entire energy market is is very connected either way.
But I think that's what's interesting is because what happens when you begin to say, "Oh, I want to make efficient energy allocation decisions." But now it costs me so much just to make these decisions every day with this AI because tokens are getting so expensive.
Now I have this entire expense that's going through the roof. Honestly, it's it's kind of ironic because this is already happening in the e-commerce space where marketing is getting so much more expensive if you were just run like you know it's like the whole idea of like all the guys who ran Facebook ads in the early like you know in the early days right they made so much money because it was so inefficient you had such a hard high ROI and then really post AI coming out it's totally changed marketing spend and sure people are shifting more to organic organic content, but now people are trying to figure out ways to make that more efficient and and like think about the speed. Like people ran the whole Facebook ad playbook and all that stuff for like years, like years and years and years and they printed money, right? I mean like all of us know guys that like ran that playbook for some kind of thing, right? And they're not running it anymore because the opportunity is much lower. Now people have shifted to organic content but now what like the the speed at which the algorithm the system the social media platforms all of us have adapted is so much faster than the system adapted to like Facebook ads right so even in itself the system is self-correcting and increasing the speed at which it's able to iterate and adapt to these new changes for these costs to get pushed through. Um, so I think that all of those little things are perfect examples of like how this is already taking place, right?
>> I agree. And also like we're shifting, we're iterating as people where we're we're so intertwined with how all this technology works and how we're being sold to and everything that we go the other way too. You know what I mean? we know when we're being sold to. And um it's it's just interesting to think from that side of things how to now approach selling and business and everything uh moving into the future, right? And how do you create loyalty and authenticity and all that in an age of insane abundance, >> right?
>> So yeah. Yeah. Crazy. I think those are all the cultural release valves that are all connected to these financial release valves, right? And I think uh all of these different markets give you a picture into how to connect those during different periods of time. Uh the other I'm I want to go through this market really fast and then we're going to shift a little bit more. But the 1980s 1982 the blocker you know disinflation that happened that also the Fed deliberately induced two recessions to break a decade of inflation and equities uh held up far better than anyone expected. So you basically had, you know, Vulkar, you had this, you know, really massive run in interest rates that broke the inflation wall that took place and you had CPI move from 14 to, you know, just under four. And when you think about that, you know, there was multiple basically recessions that occurred during that time where, you know, Vulkar comes in as the Fed chair.
You have a really significant recession that takes place, but it's not as deep as kind of everyone expects, but equity markets still draw down. And then you have kind of the bottom right here in the, you know, 1982 era. And then 1987, this is what I would say is probably in terms of how the micro structure of the market works today, the biggest risk. And you know, you had a 22% down day in one day. And you know, I don't care if this is this is a great example of I don't care if you think it's structural or cyclical. If the S&P goes down 22% one day, all that matter all that matters is how you manage your risk. And so, yeah, the market crashed 23% in one day for reasons that didn't have a ton to do with the economy. However, here's the key thing that I would draw your attention to is that during this time, was it partially event driven and you had this insurance thing in the market and these, you know, new kind of form where you would be constrained to sell?
Yes. However, notice that as we melt up into 1987, one of the key things that I think people ignore is how interest rates rose into this meltup as well. And that was one of the reasons why we had a squeeze into the 1987 crash right before it just went off a cliff. The financing costs went up so aggressively during such a short period of time that in my view what we had is interest rates increased the financing of all of these functions in the market and the economy but primarily in the market. And as a result, there was a bit of a time lag and a positioning squeeze, but then the higher interest rates really kind of popped the positioning on wine and then the actual constraint to sell happened a couple weeks later. And I think that's really key because we're in a period of time right now where interest rates are rising and the market is melting up at the same time. And it's going to be very interesting to see how it happens, especially given where we're at with all these factors in the concentration of passive flows. I mean, again, this goes back to if you haven't gone to the website and gone through the most recent article I did on the 2026 AI deception, you need to read this because we have zero DTE options and notional exposure for equities or for um call volume on the S&P at 2.6 trillion notional. You have all these betting markets getting pushed through the system with the amount of money that we have passive flows over 50%. Which just is really really it's it's fine until it's not. And then you have the indexation effect on top of this. It wouldn't be so such of a tail risk if you didn't have the S&P so aggressively outperforming the equal weighted index.
And then all that's taking place while you have the valuations and price to sales ratios of global equity indices, not just about AI, global equity indices all at all-time highs right now. And it's not just in the major indices, it's also in small caps, the Russell 3000, the topex, all showing the same thing, which shows you that this is a macro driver. And then pop on top of all of that that you have the credit cycle pushing a ton of capital out the risk curve which you know by definition if you have lowquality stocks outperforming high quality stocks liquidity in the system is expanding. it is expanding like you if equities rip 17% and you were saying that liquidity was contracting clearly your liquidity view was wrong right I mean that is such a large rally that it is impossible for it to be a statistical anomaly it was just like the view is wrong totally fine if it's wrong right but you just have to iterate and you can't just say like oh no it's just you know we're just waiting for the view to come to fruition like clearly did not come to fruition and So when we see these types of moves where the high yield debt sensitivity index and all the stocks that have high yield debt outperform the index the S&P index it tells you everything and so you know again I talked about we are seeing risk compress in the market and you don't want to just I think one of the most dangerous things that we are seeing you know I talk about how all these things function here and I would encourage you to go through that but one of the biggest misdiagnosises that we are seeing And don't get me wrong, all this is fun. It's posted on social media. Like, we all have a fun time doing this. But like, it's one thing to say nothing ever happens. It's another thing if we are compressing volatility for a very fragile moment in time. Right? So, if we have shocks to the system and the system is resilient to those, yes, that's a positive thing. However, you need to ask questions underneath that and say, "Are we compressing risk or is the system absorbing and distributing the risk?"
That's what you need to ask. And you know, every single pullback in the S&P has been bought so aggressively. It's an indication of liquidity in the system.
It's a confirmation of the views that I've been laying out over and over. But the key thing you need to ask is are we compressing risk so that we have an ultimate turkey event or is it just that the market is just no problems there's no risk actually there's no risk compressing under the surface and there is no risk of a bare market that's the thing that you really want to ask >> the freaking turkey man uh like if this if this ends up happening. Like there's got to be something with the turkey that we do, you know? Uh we might have to sacrifice a turkey or something. I'm not sure. But uh >> if you you and I I know I don't think your kids would want to do this, but I told you I have a friend >> out.
>> I have a friend and uh they kill turkeys every single year at their house for Thanksgiving. And uh it's like the best experience for uh they always have their kids do it and they like their kids eat the turkey that they kill. and they've like been raising it for whatever, but like we could do that.
>> I have a I mean I have a pretty great experience having turkey delivered to my house but right before dinner, so that's also pretty cool.
>> Um I pay a premium to the people willing to do the killing. But uh if if we're talking about this whole idea of I I really like the framing of that question, by the way. I think you should do a thread on that. Are we spreading the risk out and effectively absorbing it and nullifying it in a way or are we compressing it to this sharp moment in time? I almost picture it like the you know the thing you kick on the bottom of a door and it's like wiggle wiggles you know like the little door stop like at the point where it stops then what right it's like it's like this moment in time and when I think about all the stuff you've shown with the 2.6 six trillion at zero DTE and the passive flows just every two every year two or 3% more two or the concentration right it all seems to be going towards we're gathering risk into a certain like very small area and it's like that that pent up um compression has to be expressed somewhere and when I think of like demographics and the next 15 years it's still boomers retiring and they're all concentrated in these similar things.
And nobody's ever had to over the last 30, 40 year, I guess at least 20 years or so, have a moment where they've had to ask the tough questions on whether or not they should sell or not because we've had all of these V-shaped recoveries and all this stuff. To me, when I think about that potential, it gets really doom and gloomy to me because like it it just catches everybody offguard.
and we've been re exposed to like the same situation over and over and every time it is it is I won't I don't use the term bailed out but the the recovery and the speed and the rate of change has reinforced this thing over and over that's going to be hard to unlearn if the situation changes completely.
Yeah, I I agree and I think this goes back to all exceptional returns exist in tales, right? All home run trades exist in tales. Now, it could be the right tail or left tail, but you know, this is why, you know, people are like, oh, you know, like most managers don't outperform the market for, you know, 30 years or this or that or they're or whatever. And here's the thing. Part of it is that the guys who are really successful, I mean, you know how many guys are really successful, they make a big trade, they make so much money, and they're just like, "Yeah, yeah, shutting it down. I just made so much money. All you need to do is do it once." Right? It's just it's it's I mean, think about what Paul Tudtor Jones did, right? He made so much money in 1987 that he eventually shut down his hedge fund.
And and but people will say like, "Oh, yeah, but like, you know, you can't replicate that, this, or that, it doesn't matter, you know, if if you get one tail event and you're positioned correctly into it and you know how to do that, and I mean, to be fair, Paul Tuner Jones has opened his family office and he's been swinging ever since then, right? But I'm just saying that people will take these anecdotal examples and and not understand how returns are never evenly distributed through time.
And I think that's really where you connect it to, well, how should I think about these tail events from a trading perspective, right?
>> You're muted. You're muted.
>> Sorry. Sorry. Uh I I totally agree. And I want to dive more into like as we get closer, I'm almost excited for the potential of this, right? We I think I think we all are a little bit in a way of like we want to watch the world burn a little bit, but like I'm excited to get more into like downside mechanics and what what could possibly happen and how to how to organize your trading and your portfolio around those scenarios and stuff. And a lot of people will say, well, we can't have a 1987 crash anymore flows. like they have circuit breakers now and we have all these tools and it's like yeah actually in a weird way that's what scares me more because like again we so you can drop what 5% let's say seven and a half percent to pedagon certain mechanics and what time it happens and all that but let's say 5% a day right if you guys are around in COVID this is why I get back into order books and stuff like you gota you guys have to at least explore order books a little bit because if you could see what happens around the limit down in order books. It's it's it's crazy. Like, it's absolutely crazy. It changes your mind on everything. You really get to see the players involved, the the absolute energy of downside or upside or whatever, right? But like now with the the market or the circuit breakers, I really wonder if like it actually makes it more dangerous because people are going to start thinking about all the um crazy V-shaped violent reversals we've had, all of these tools that we could throw at it, right? And then what if during this unwind based on these, you know, bigger flows that are taking place every time, people just start to load up the boat at every moment they possibly can. And it just keeps water falling on itself to the point where those demographics come into play and the people have to start asking the questions of like, wait a second, this isn't doing what it used to do. What do I do? I'm 30% poorer now. I'm 40% poor now. Wait a minute. I'm 50% poorer now.
And the market is not, you know, buy the dip anymore. What do I do? And they don't know the questions to ask. They don't know where to turn to. And the the younger people that may have the answers. They haven't had the opportunity. They don't even have the assets. They haven't traded through any of these things. Nobody's going to have the answers for you. And that's actually what makes it more scary to me and makes it makes me think that it'll be an extended crash rather than this, oh, we need to reset the economy 50% and then we can figure it out from there. It's not going to work like that. It can't, you know.
>> Yeah. So, I want to I actually want to touch on two things here. One, for anyone who doesn't know, you should look up what a limit order book is and recognize that there's a lot more that goes on for the price action on the screen than just what you see in your volume profile, bros.
And that's that's one. Um, so go look that up. Two, James, can you explain what exactly an order book is, how you think about it, and why you should actually spend time thinking about it because you have I think you have to realize like most people have never seen level three CME data they've never seen limit orders they've never seen uh Bergs they've never seen any of these types of mechanisms um in the most liquid markets in the world primarily because people don't have enough money for the data so could you kind of explain how you think about them a maybe a little bit about your career and all the things that you've done in that space um however much you're able to talk about um just so that people understand a little bit if they've most people have just had no clue. They have no frame of reference for any of these things that we're even referencing.
Yeah. I mean, if you've never seen an order book, like you got to go do it. Go watch some YouTube videos. Search like futures uh order books or or doms like uh what do you call it?
I can't remember what the D stands for.
Uh but basically it's going to show you a ladder right every all these futures markets you're on trading view you're doing volume profile work you're doing ICT you're doing whatever these are all just painting a picture of what is happening in the futures order books right but you could go look at the futures order books if you want right you could go to book maps or trading technologies or there's a bunch of them right you could go search it but you have to at least visualize what is going on and in these order books you're seeing every single seller and every single buyer in a in a visual kind of ladder fashion and you actually get to watch them compete against each other and move, right? Which paints the tape on Trading View that you guys are actually watching. But when you live and breathe in the order books, you start to see who are the players, who are the market makers, what are the rangers, what's the feel like for the volatility in there once it gets accelerating in volatility? How do those like break out and move really fast and gap up or go to auction? You probably don't even know what an auction is, right? Other than like the guy with the gavvel. Like seeing seeing like gold or oil go to auction in a futures order book is like first of all it's awesome. Second of all, it's like going to give you an idea of how volatile things are out there and it might make you think twice about like catching lives in certain directions or whatever because you're gonna actually see the living and breathing order book and the players in there. What are they rushing to try to do? What are they trying to accomplish? And that's all I did for like a decade. I didn't even like Yeah, I'd look at charts to be like, wait, did we just wick down or up because it's moving so fast. I'd go right back to the order book and I'd spend the rest of the day in there, right? Like charts to me, that's why I don't like TA so much, are just like references. They just add to my story.
But in reality, like I think you could probably see in my reflection up there, if I could actually move my hands right, these are all order books and I can't show you those. It's like proprietary stuff, but like uh they exist out there and you could go find them. And hopefully actually, you know, six months from now, we'll be able to incorporate some of the stuff that I do to show you guys in real time and show you executions. And I think pers are going to be a big part of that too. Um, but I tell you guys, like during COVID or during Volageddon or during uh like I made a video on like the Chinese revaluation of the currency they did in 2015 or like 2018, the Q4 crash, all these events, you should see the violence that happens in order books and it gives you a such a better feel as to like, oh, like I want to buy the dip here or like whoa, low, absolutely No [ __ ] way am I touching this to the long side right now. Do you see what's happening? Do you see the people puking in the order books, capitulating, super heavy offers, icebergs, like all these things you might not have heard of? You got to start learning these because when this eventual time comes that we're talking about and you're not at least able to look and feel that like you're just going to be at such a disadvantage and you're just going to be clicking the buy button praying that we sometime make an all-time high within the next year and I just don't think it's going to happen. So that's that's why like orderbook trading is so important to me.
I mean we talked about it. I left my firm and I didn't have order books for like a year and I was like, dude, I I have lost like the touch and the feel of markets. All I'm looking at is Trading View and I'm like, I don't know what's going on. So now I finally I could look over and I could be like, okay, that confirms what I'm thinking or that definitely doesn't confirm it. So that's that's how I I treat order books. And like when you get up to limit ups and limit downs, you know, circuit breakers that you've heard of, you start to see how the flow is really rushing for the exits or not. And it's super important.
It's going to be maybe it's not important to you now because everything's all good and you're just worrying about like should I should I buy a micron or not? Uh it's going to be much bigger than that. I'm telling you much bigger.
>> Yeah, 100%. I think it's it's so good.
Um, >> quick question, quick question here.
Just on that said, is it circuit breakers trigger on the SP? Would it affect the ability to sell a perp? Uh, I believe so. I believe the pers are are working in um basically circuit breakers. I think I've seen that in oil over the weekend sometime.
>> Well, no, they're not. They don't have circuit breakers.
>> They they just have different margin requirements at different levels.
There's no >> Okay. Okay.
>> There should be so it should so it should be more another effective way to help you get exposure.
>> Oh yeah. I mean if we go limit down uh I mean we went we but did we go limit up during COVID? We went limit up right.
>> Well probably towards the end in like April >> for like a day like we went limit up for a day or something like that. I >> No.
No. No. We I think we only went limit down.
All I remember the limits at like 1 a.m.
I don't remember.
>> Well, it might have post Jerome like I I'm not sure.
>> Yeah. What? Whatever. Yeah.
>> Just imagine imagine that, dude. Like imagine like 247 markets aren't exactly functioning or whatever properly yet and you have huge liquidity and you have the ability to sell or buy S&P futures past a limit breaker to like hedge positions and stuff. I mean, your article that we should touch on at some point is like right up that wheelhouse.
>> Totally. Yeah, we're we'll go over that, I think, in one moment. I know we have a lot of stuff to cover today, but um >> on if if you guys uh yes, you have to pay for it. Um again, trading technology, I think the only people that are public right now are what do you say? training technologies and who are the who is the one >> book bookmaps is like I don't really like the product but it's one that people use a lot you can use it's like a live ticking book plus um plus the DOM like the broken down yeah >> order book but it's not visually pleasing >> part of part of the issue is that there's there's actually a pretty big gap in just so you know guys I mean any just expect that any financial any financial products that are expensive like basically are not offered to the public are like marketed because like no one can afford them. Like you think if you put up a thing that I mean even I mean think about a Bloomberg terminal.
It's like no one's marketing a Bloomberg Twitter uh terminal on Twitter because it's too expensive, right? I mean at least for like mo most people who are who are managing money, right? And so that's part of the entire thing as well is like there's an entire field of like strategies, tools, and things like that that like no one on social media even knows about because they're not marketed because if they were marketed or just because like marketing on social media doesn't work because they're too expensive, right? So, I think there's, you know, maybe you'll hear about them here and there, like basically, I mean, honestly, the only place you're going to hear about them is like conversations like this, especially since, you know, like most guys who like work at firms or stuff like that, like they they can't even talk about a lot of stuff like especially if you work at a hedge fund with a lot of proprietary data and a lot of other things, like they can't even talk about anything. They can't even talk about it, right? like they couldn't even say like, "Oh, you should look at this thing right here." They would just get fired, right? So, it's, you know, again, another reason why if you are surrounding yourself with the right people and you can talk to people offline, it's super valuable. Um, >> I mean, I wanted to make content, right?
And they were like, absolutely not. you know, and there's uh and there's non-competes and there there's all this stuff and yes, more things are public, but I'm telling you guys, there is proprietary stuff out there and they are seeing so much more than you could ever imagine. It's pretty crazy.
>> Totally. Um it go it goes back to you always want to think about the things that are available independent of like that type of data edge. And really that comes back down to understanding like what is the information in markets right that's why these drivers think about think about like even if someone has credit card data for daily inflation numbers right like any major hedge fund has credit card data for daily inflation numbers across everything and they'll that's how they price rates but at the end of the day that's only a daily frequency or it's a daily frequency, but they're still going to be under the constraint of like all of these other macro factors. Which is why if you understand how the causal mechanics of the system work, data latency of a little bit here and there is is not your primary edge. It's an amplifier or it helps you be more precise, but it is not the fundamental thing that is going to like, oh, if you don't have this, you're going to lose a bunch of money. It just means that you can't be as precise in some execution, right? And so, I think that that's why going over these ideas of like what are the drivers of these types of moves is so valuable. So going going back to the original breakdown, the the 2000 at 2002 tech bubble unwind, we're going to call it was primarily actually in many ways a sector rotation where the NASDAQ lost 83% while the Dow lost 38 and in many ways you had a massive rotation from growth into value in on a factor basis and you had a pretty significant can draw down into these IPOs and people are drawing a parallel to today. Here's what I would say is that there is a continuity that we are moving into the largest IPOs in history and the IPOs in 2000 set a top. However, on the flip side, you have to recognize that all of the major names in the index right now have a ton more cash flow than any of these names ever did. And so that is one of the dis pieces of discontinuity that we have. Here's a breakdown of, you know, the entire chart where we're at relative to the S&P, the Dow, and, you know, here's the NASDAQ, which at the peak here, and it basically retraced its entire move. I mean, just think about if you retrace from 97, so that's three, six. Imagine going straight up and then retracing six years of returns, >> right?
>> Dude, you just have to buy Bitcoin. You can experience that. No problem.
>> What am I saying? What am I saying? I do remember when we were hit the 2021 highs and you're just like, what is going on?
Um, global financial crisis.
Everyone knows this very well because it's the one that everyone dooms about the most. But it was really about a global implosion of balance sheets in the commercial space. What I will say now is that it's less about we have a little bit of a 19 uh7s inflation. We have a little bit of it but not the entire picture. We have a little bit of the IPO dynamic and valuation dynamic of the 2000s, but not the same lack of cash flow. We have a little bit of kind of 2008 risk, but it's on the sovereign balance sheet instead of the commercial balance sheet, which means it's about the currency. So, we and then we have a little bit of the micro structure from 1987, but not kind of the the same dynamic um as as we did during that time. So we have like a little bit of a flavor of every single risk and you know 2008 everyone kind of knows the story behind that where you have Leman go under you have unwinding the primary reason why we have this is that all of the debt was where on the consumer balance sheet there was no debt on the public balance sheet in the same way there is today. That's why the government could step in and why it did so much. And so that's one of the key things to think about when people say like, "Oh, we're gonna have another 2008." They literally don't even understand how the consumer and corporate balance sheet work because there is such a significant level of discontinuity in that. And so when you have the consumer balance sheet leveraged up so much, the reason why banks had a problem was because they held all the debt on the consumer balance sheet. Now a lot of banks hold debt from the US government but the US government's not going to default on that. And then we had the entire SVB crisis where you add duration risk and that is what drove this repricing of duration and impacting banks but then the Fed back stopped that with some new policy.
So that's why you have to realize there are so many points the fact that there are so many points of discontinuity is in itself an indication that the system and players in the system have figured out all of the different ways to kick the can down the road. Every time you kick the can down the road though, you have a suppression of risk, not an actual dealing with it. And so that's why you had, you know, 2008 you had some suppression of risk and now we're kind of seeing even greater suppression of risk and that's why we had the 2020 event where everything sold off so aggressively.
Japan in the late 80s is the exact example of a structural bare market that every single person wants to avoid. And during that time you had such a big demographic change, such a big injection of liquidity and central banks. If you want a great video on this, watch the princes of the yen or read the book or watch a podcast with the guy who's the author of it. And you can see that the nicke from the peak here is, you know, was just in a bare market for a decade.
That is the worst case scenario that could happen. And a lot of that connects to uh during this entire time the BOJ was doing yield curve control, zero interest rate policy, stuff like that.
So when people say like, oh well the Fed can get us out of it, don't worry. Yeah, that's what people thought with the BOJ and look what happened, right? And so these entire expectations and ideas that people form and they begin to assume a reality are the exact issues that that create the tales that exist because everyone thinks that an idea is true which allows them to put an overwhelming amount of weight on it and then they begin to structure their lives around it and then when you pull out that small idea everything crumbles. So again, all of these ideas that people talk about about the Fed put, about this, about that, just recognize that there is always a situation historically and there are always scenarios in foresight that could totally flip the idea that you think is going to create a safety net for you. In 2011, you also have the European sovereign debt crisis that was, you know, one of the most kind of significant events. But to understand from a devaluation perspective and currency perspective, uh I'll you can go through all the slides for how this one worked. One second.
Here we go. Um and and the moves that we had in markets during that time right here. and you know this is just euro stocks during that time that is going to be an important one if you have any type of monetary shift I still don't see people talking about that um in kind of the world that we're in right now the 2020 we actually talked about that James already talked about how you had a 34% bare market compressed into 33 days and limit order books just going all over the place really crazy times and it was 10x the speed of a regular you know, changes that we have seen historically. And then you add the VIX 10-year, all these correlations really blow out in a major way and it was only when the Fed stepped in that you had a pretty significant change. Um, oil prices going negative.
James, maybe talk about that a little bit. What was that? What was that like trading oil during that time when when prices went negative?
so much better than oil going to like 120 just like bor it's just like boring at this point like uh yeah so oil going to zero was wild just because again this is why it's so important that we're discussing like what are the potential like let's say we do have this kind of turn and this maybe impending crash it could happen at a variety of ways depending on how the interest rate regime is shifting and at what pace right but what we hadn't really thought about that in oil. So, it was really hard to interpret in real time when you hadn't scenario planned for oil going negative, right? So, I was uh the story I like to tell is we were sitting there on the trading desk and I was like looking to my left and looking to my right as oil was like going from 25 to 20 to 15 and I'm like, "Yo, hey, can like can the ladder go negative on oil?
Like, what if it goes to zero? Like, what's the deal?" and that people were like, I don't know, you know, and I was like, I'm not really sure. I guess we're gonna find out here soon. And I remember just saying to myself, because I just feel like I know ladders pretty well. I was like I was like, either we're going to bounce violently at zero and like I want to buy, but if we break zero and we don't bounce, like I'm gonna short the [ __ ] out of this thing. And sorry for swearing, but I'm just, you know, I get excited thinking about that day. Uh, and we went down and we broke zero and we went to like minus 50 cents and nothing happened. Like it just kind of sat there. It was almost like the whole world was a little confused. So I said, well, I was already up, you know, trading COVID quite a lot. So I was pretty I was like willing to take the risk here. So I just was like, okay, like I'll short like whatever. Let's see what happens. And this thing, guys, let me tell you, when order books were important, like this thing went from minus50 to like minus $27 in the span of like a couple maybe an hour. I don't even think it was an hour.
It was insane. Like, there was nothing in there. There were no orders. Nobody knew what was going on. And then right at the end of the oil settlement, I believe, um it kind of stopped around that 20US $25 mark. And I remember saying to myself, well, oil settlement just ended. We just went down $25 under zero. I think I'll take the chance because I was up a bunch. I was up astronomically at that point. So, I was like, well, I might as well flip long and see what happens here. Uh, and risk a couple bucks. Like, if it goes to minus 30 bucks or whatever, like, okay, I'll I'll reassess. And it we went all the way back up in the next couple days back towards and above zero. So, one of the better trades of my career, one of the more exciting times, and I don't think it's the last time we see this, you know, and it doesn't necessarily have to be in oil, but you'd be shocked at how different futures markets can break in different ways.
>> Yeah, I think that's such a such a good example. I actually think it's funny. I mean, I think it's it's cool when you kind of shared those examples because I know you that like having such a unique spot during that time was really was really key. I always love these questions when people are like, I was wondering if James could speak to how he actually trades because he shares all these useful lessons, but I basically have no idea how he trades or traded in the past 13 years. I think the entire point is neither does he.
like >> yeah, we've tried to we've tried to talk about this a lot. Like uh it's a good question. One I don't ever really share my trades. The only place I do is on my Discord where I actually talk about a lot of the trades I'm in and I'm taking.
Uh so that's that that is a paid Discord. So I'm not I'm not here to shill that, but I do talk about that more. Uh, but really what I do best is I just I just trade and I feel markets and I synthesize a lot of different things into like I call it like I build chapters um within a book and I have a little story whether that story is for a scalp or for a swing trade or for a long-term trade. Um, and then I just go I apply risk management to it and I try to keep things as simple as possible, right? I try to left curve my trading just because every time I try to get to be too right curve, I always second guess second guess myself, improperly execute. It just doesn't feel natural to me. So I would say I'm just more of a I was an order book trader for a long time. So I was taking 50 to 100 trades a day. Now I do that a little bit less.
I'm more of like a swing trader slash I scalp sometimes if the news calls for it. Um but that's about it. I'm more of a mean reversion type trader. I like to fade. I like to catch knives and I like to limit my risk. And then I'm really good at holding winners when I get on sides. So, I'm not really a momentum guy. I'm not really a breakout blue sky trader type of dude. Um, that's I guess how how I could best summarize my style of trading. Yeah, I think that I think that part of the problem is that even even being at that point where you're saying, "Oh, we saw this go from 0 to 50 cents and it was so clear to me that I need to just get short, right?"
Like even getting to that point where you realize that or you understand that and then you're at settlement and you're like, "Oh, you know what? I'll just flip along, right? Like I think that especially with who you are and your skill set, you really narrow down on to like what are the unique things that I know during this time? Because if you try to like a lot of I think a lot of the ways that you make money is all about well like how do you back test? Oh, if it goes to 50 cents, go to uh get short till it goes to 27. You know, there there is no back test for that. And that's why people and that that's one of the dangers of like listen I'm really good at explaining things technically and I'm more technical than James but I would say in terms of how I actually put on risk like it's probably more similar to James than any quant right because I'm looking for very similar stuff I think I'm just better at explaining some of the technical stuff and helping like the intu intuition that James has come and have a quantification in words. But like you guys look at that and you think that like oh well I know how capital flows takes trades. I know but but I don't understand how James takes trades.
Whereas like honestly for me it's like the way I view it is like it's like the opposite. Even though I'm better at you know you know what I'm saying? It's like even though I might be better at explaining the technical side, people don't understand that like you're so good at finding the idiosyncratic and unique things that are nonre replicable in a specific situation and you have enough emotional control in the moment to put on your risk correctly and make informed decisions in a way that you know someone maybe some other experienced trader would be like, "Oh yeah, I probably take that same trade, but I don't really look for those because I'm trying to find more replicable edge, right? Or a systematic strategy or something like that. But when you, you know, build your entire life around that type of unique nonreplicable alpha with idiosyncratic factors, when you build your entire life around that and that's your entire experience, by definition, it's going to be difficult for people to understand.
So I think that's like a a very important like framing and I think like my mindset of actually putting on risk is more similar and has been a lot really influenced in many ways by you that people I think people don't really see that well because I think it'd be difficult for people to understand.
Uh yeah, I totally agree. Actually, that might be the best way to put it is I try to execute and feel as if I execute best in spots that you can't back test.
If you wanted to if you wanted to get it down to that, it's like weird anomaly type moves that like if I said that to you, I think if it breaks zero and it just sits there at 50 cents and doesn't bounce aggressively, I just don't think there's anybody willing to step in there. I'm just gonna short the shab of it. Most people that are watching this and that are posting on Twitter and all that, they'd be like, "That's the stupidest thesis I've ever heard in my life." And I would be like, "Ironically, it's the best and it's going to go down now." You know what I mean? Like, and and then at the end of settlement when there's like less volume following through, all these unwinds happened before the market like soft closed, and then like we've gone down such an extreme amount, and I feel like I see some bids in the book that are starting to layer. It's like that to me is like an amazing setup. But if you said that to somebody who wants answers, who is more like an an owl archetype, right?
Who can't pull the trigger in the moment like that, they're never gonna they're going to say, "That's stupid." Like, "What are you doing? How can we prove that that's a winning trade? How do you know you have edge there?" And I'm going to be like, "I don't know." You know, that's the beauty of it. And I just feel like that's that's maybe the best way to put it is I like to try and live in those unback testable moments while still applying like my risk standards.
>> Yeah, I think it's that's so good. And I I just think that is that is where everything lives today, especially with how fast everything moves. And I've I've really focused a lot more on that. And I think there's just so much there's so much about that. I think it would be I mean I think you should be actively trying. This is why if you curate a really good trading network, it's very valuable because I think that there were so many things that I didn't I mean I I feel like this is vice versa.
I'm sure you've learned a lot of stuff from me and then even in the moment and stuff like that, but like I think that like there was a lot of things that I learned from like sitting with you and watching you and order books that I would have never learned from you in a conversation.
I don't think and I and it's it's you know how how to explain that in real time. I'm not really sure. I think I could probably come up with a technical explanation, but like, you know, I think a lot of times when I would be like, "Oh, why'd you do that?"
or "Why did you think of that?" There would just be this like shrug off of like, "Ah, it just seems like a good idea." Or, you know, like, "Oh, why didn't you do that? Why didn't like there's a there's a thing there. Why didn't you do this?" And you just say like, "Ah, it just doesn't doesn't seem right here. And there's this, there's this there's this, but you know, things aren't lining up, right?" And like I was like >> because I try to think how could I best explain this in a way that would make sense and yeah the answers just don't without actually being in the order books trading it's like really hard to translate that.
>> Yeah. So I think that's um and I mean I think for the best types of alpha they're probably very difficult to one understand and two teach. So I think by definition that is like a quality of a synthesis of a complex outcome. So um I think that's really good. So on you know I'm going to go through the rest of these a little bit faster. 2022 obviously inflationary bare market and that was basically the last one that we had. Sorry we're Yeah. And the primary thing that I would really encourage people to remember for that is that there was no recession.
It was purely driven by inflation. And you still have the total bond index from that time as negative like like the you know TLT is still at lows, right? It hasn't really moved. And so, you know, that was really a lot of the consequences from inflation having to get repriced. And the entire question is how is that connected to where we're moving right now since inflation risk is a little bit higher. So, you know, you have all of these situations with different market events and the key thing this goes back to the very first slide that I had of if you want to understand oh is this cyclical event driven structural again you know we're applying those to the amplitude duration and things like that around it but what you want to ask is what are the underlying drivers is it a inflationary deflationary driven market, inflationary bare market. Is it driven by a an event like rates going through the roof and you know like a black Monday 1987 type of deal or is it larger and structural and you say no we have a lot of risk that we need to unwind and how should you think about these and all of these function as a mental framework because like I said we're in a period of time now where you know the we have a a little bit of flavor from the we have a little bit of flavor from kind of every past market right now. We have a little bit of 2000, we have a little bit of the 70s, we have a little bit of all these different elements and everyone is kind of talking about them from their own perspective.
And really what you want to do is think about okay we have all these technical data points and we understand that we all all major returns exist on tails. If I want to make exceptional returns I need to make sure I get the tails right.
Number two is there's always different drivers for these factors and I always need to take derivative views or subviews on the drivers. So I'm always asking, oh the market just pulled back this amount based on crude blowing out like this. How much farther is crude likely to blow out? Is that likely to persist? If it does persist, what's the scenario analysis? Hence why, you know, James and I weren't super, you know, I think we turned a little less aggressive, but we weren't bearish moving into the pullback that we had earlier this year. If anything, I talked about how the injection of inflation and the pause of the Fed is setting the stage and a compression for a snapback that no one is expecting. And if you go back during that time, you can see all the live streams we did, all the reports that we went through and all of the specific ideas that we talked about. And on top of all that, the largest trades that we have been taking are in what a trade that actually rallied during that entire time. No one wants to talk about that though. But when hyperlid when purr rallies and the entire market is selling off, it is literally the best thing in the world that you can possibly do.
Literally the best thing. And so that's another key thing to kind of just like think about. And we're going to go over the the hyperlquid and per thesis a little bit because I know people have a lot of questions about that um especially as we head into this week.
But we want to take these technical components and begin to say, okay, how should I think through the information that takes place, the different players, why are these different players saying certain things, how are they viewing the market, right? Like how would an actual hedge fund manager view things, but then he's saying another thing on TV, right?
Like how do you think about the kind of everyone in their seat at the table? And so James is going to go through a couple elements on that on the upside and downside and begin to talk through okay how should you be thinking and processing through these technical data points without having you know analysis paralysis as your your only outcome here.
>> Yeah. And I want to start by saying like a lot of the ideas that I try to share from my side of things are, you know, what we try to do here is is bring Flows's ability to price money, track the regimes, track the rate of change, whittle it down to an asymmetric bet, right? Some of the the best asymmetric bet to take in the world. And then we also talk from my side a little bit more about, well, everybody's going to want to take that bet a little bit differently, right? I might want to go full port. I want I want to make make all the money and retire. And then it might be somebody else who is um 50 years old with a family and college and an income and they're like, you know what, I've never really taken big risks. I haven't really explored that asymmetric lifestyle. So, I'm gonna I'm going to take two 3% of my wealth and put it into a bet like this to try and start to feel and live that experience. So, everybody approaches the way we kind of discuss this in different ways. Um, but anyways, the the point I'm trying to say is I try to make things that are like uh kind of available to everybody, especially newer traders, somebody somebody that might be, you know, within their first year or two of trading. A lot of my audience on YouTube is that, right? that somebody who's they're interested, they're intrigued, maybe they're six months in, they got a few thousand bucks, or they're a few years in, and they're really running into the the big walls that everybody inevitably runs into in trading. So since we have been um talking about bare markets and bubbles and euphoria and despair and all that just for people who haven't really thought through some of the mindset and execution stuff about how to actually execute in a bubble, I just thought it might be might be really interesting to just kind of walk through that a little bit and talk about some of the the more broad generic topics that you you tend to forget sometimes when you're just looking for that next AI capex buildout trade.
that beta to this or beta to that, right? Um, when I think of bubbles, you know, we all hear about this term animal spirits, right? It's like the crowd is is coming in, retail's coming in. Um, but you also hear a lot of people who are sidelined along this wall of worry into a bubble where it's like, we're going to have a recession. Oh, the prices are too high. The crash is coming soon. I'll wait for a pullback. And then, of course, what happens? we go so high so aggressively that people end up kind of getting some exposure maybe in these areas and then you know generally how this works out um in the arcs of narratives and bubbles and things like that right so the the per the price you're seeing is kind of that that current moment of the belief of like what we're experiencing right now all of the doubt you know all the all the doubt that people feel along the way is just fuel to make these things more and more.
And that's actually where I feel like we're in those those pulses at the moment of this AI trade where every single push higher, we have 10 more KS out out there putting together great stories as to why this is all going to end quickly and why, you know, this AI they're they're not going to fill the back end uh from from profits or it looks exactly like 1970 or it's going to end because Michael Bur says so. That's all fuel for us to move higher, especially if you could try to somewhat accurately map the interest rate regime, the rate of change, look at other things like what's going on in Europe, like what's going on in Japan with the currency depreciation, how that could all um equal to us moving much much higher uh from where we are even now.
And that reflexivity you hear about, right, is the price and the perception.
That could be to the upside and it could also be to the downside. So, it's just something you want to think about. Um, you know, where are we in all these kind of moments of time, right? uh think about when I'll use AI as the example of course but like you know when was this flows like we're talking 2022 maybe 2023 where a lot of people that maybe understood what was coming were starting to accumulate positions and you're starting to hear a little bit of ideas about this AI capex buildout roughly.
>> Yeah. I mean, I I think I mean, I'll be honest. I think a lot of it happened in the VC space before that, right? Because all these AI firms are still private during that time, right? There wasn't even a way to invest in them. But, um, I do think that one of the great examples of this is you have that Chad GBT launch and then, yeah, I I just remember Duck even, you know, he had got long Nvidia And then you know everyone like you know everyone thought like oh well it's all priced in now and he was just like no it's not you guys don't you know like he he every everyone using their sentiment strategy about oh it's on the timeline it has to be a top everyone using their their their sentiment strategy right they're they they've been SCP into thinking that the way to trade is basically fading Jim Kramer like that's that's their that's their process, right? And then he comes in and is just like, "Yeah, I don't think so." And he even like he doesn't usually publicly even share his views, right? But even the fact that he publicly shared it and then on top of that, you know, he still holds it for another year or two years or something like that, I think just shows how disorienting where you even are on this life cycle it is if you're not looking at the underlying drivers. And so I think 2022 is really the the kickoff, right, with the Chad GBT launch. But I think the DR example in that and just how we maneuvered through that and how everyone was just like, "Oh, now everyone's talking about it. It's time to fade it." And it's just like, you clearly don't understand how the system works, right? Like those are two separate systems.
>> Totally. And like, you know, we don't know exactly where we are now, but you've seen in all of the different places in these AI infrastructure plays and stuff. We had the Deepseek moment.
We had the Bitcoin miners that transferred over to AI that took massive hits. Uh you probably had you had like things like Aster Labs, which are like super picks and shovels for this, have 60% draw downs and not they're not all at alltime highs. like you've had a lot of bull traps along the way during these violent rotations, but you guys all know and feel this moment, right? You we we feel this right now. Now, the question is, and this is why we show up every day and we keep trying to ask the hardest questions and think about all this is like what what does the end of this look like? You know, how long? Who knows? And then how do we avoid or take part in and make money from this eventual thing that at some point uh you know it's going to be around that point where everybody's in the trade it's a new paradigm blah blah blah uh to where we could take advantage of kind of being on the forefront of that down move. So I think you know again these are things you've probably seen before. You've probably seen on X but these are not just simple charts. These are very very important things to help plant deep into your mind so that as you're trading in real time you can start to ask yourself even on many cycles or midterm cycles or long-term cycles where you are on these spots, right? Um, and again, this is another way to kind of think about this this chart is like the genuine technological shift that we've been seeing, right? It's a real thing. AI is not a joke. It's it's it's changing the world in real time. I mean, we're seeing the insane amount of layoffs and that's a whole another conversation to start.
We are now seeing the the FOMO, right?
The FOMO's coming. The media is coming.
It's all we ever hear about. And you know, I'm kind of still waiting for I'm kind of still waiting for this, right?
Where everybody is fully on board with this. So to me to me, we're we're living in this moment right now where we're somewhere between the story is loud, but by no means does everybody feel as if these are the new companies, this is the new meta, all the money is going here, the paradigm is different, the world has changed now. Um, that's interesting to me. And then of course that all eventually leads to a reality check. And if you guys want to Google the um, gardener hype cycle, we talk a lot about that. That's another page I would absolutely bookmark and look at as many times as you possibly can to understand probably the different waves that we're going to be experiencing in the next few years.
Uh, just a couple examples and you actually touched on a couple. We've all heard of the tulip mania, right? This is way way back in the day. You had a a point where like one house was worth a tulip bulb, right? And there was there was a point where they hit an auction where just nobody bid anymore. And then at that point, it was one of the fastest crashes. Like we obviously 1600s like it's not going to be like seeing a crash on Trading View or whatever. And there were no uh circuit breakers for the tulips. But again, it's just to to to kind of show you a point, right? Do com bubble internet is the technological shift. It's changing the entire entire economy. Everybody's eyeballs.
Everybody's trading. They're buying whatever it is, Cisco and Pets.com or whatever it is. NASDAQ's just it's the only place to be. But in this case, they had the they didn't have the profits and the revenue to back up all the money that was being spent. uh and I believe there was you probably touch on that but there was rising Fed rates uh or that situation and regime shift as well towards the peak of this and we experienced the what is it 83% draw down I believe you said in the NASDAQ which I mean yeah >> dude that's crazy to think about 83% right I mean what what what on earth and feel free to jump in at any point if you want to but >> you're good you're good >> yeah uh how's taking a credit, you know, you got the subprime. This is this is what what killed it here. Credit squeeze. Le brothers falling apart.
Everybody was buying houses. Strippers owned five condos, whatever you want.
You know, uh the age of the the strippers and the drugs and and Michael Bur, right? Michael Bur. So, we all know >> what was it like to be a stripper during that time, James? I mean, you can speak.
>> Well, it the thing is it wasn't as woke as before. So, I wasn't accepted in as many households, you know what I mean?
It was mostly women getting all the credit and I thought I shook my hips just as well. It's just like didn't work out. Sometimes you got to be right and you got to be lucky.
>> You were the top. You were the top.
>> Yeah, I kind of was the top of the stripper market.
>> Wait, you were in Sorry. You were in Vegas during that time, right?
>> I was in college.
>> Okay.
>> I was in Vegas post crash and I was so young and dumb that I didn't even really know a housing I didn't even know a crash was happening.
>> Okay, >> fair enough. I didn't even know, dude. I was at like Buffalo Wild Wings like eating eating chicken wings or whatever I was doing, you know?
>> Like housing prices. What are those?
>> What are I don't know what I'm living in a studio apartment. I don't know anything about a house. And then of course my favorite uh the thing I live through the most and I saw somebody say, "James, you should get into crypto if you like." Yeah, man. I've been in crypto a long time. Uh I I understand quite a lot about it. Uh I've been through quite a lot of peaks and valleys in there and it's taught me a lot. Um, and this this one especially when we I look back at the NFT craze of 2021 and it peaked if you if you're around it peaked. You everybody's probably heard of the board apes. The board apes created this metaverse called the other side. And when they sold all the land to the other side, that was the absolute pico top of crypto for the next multiple years. You had to be there. It was crazy. Um, so one thing that I've talked about if you showed up to the streams, I'm very much like process oriented, archetype oriented. Find about find like who you are, what you expect from markets, what are you trying to do here, how do you how do you approach risk, what are the assets you like, what is your time horizon, all that stuff. That that's that's your lane. And when you finally realize that's your lane, there are a lot of billionaires that also have your lane. You don't have to be Paul Tudtor Jones. You don't have to be Global Flows. You don't have to be B. You have to be you. And you're going to get tested on that version of you all the time in a bubble, right? Uh because like right here, a mania makes you think whatever you're doing feels wrong. It's going to make you feel small. It's going to make you feel like you're missing out. Like everything you've done up to this point just doesn't matter anymore.
So, it's going to draw you away from that, right? to pull you out of your lane and chase what feels like the the world is turning towards. It's the growth. This is where all the money is, right? And it's it yes, you want to participate, but it's also a massive distraction. So, I don't care if you trade it. In fact, I want you to trade it. I want you to build reps and experience and bubbles and crashes and all that stuff. But you have to try to approach it as you. How can I take advantage of this bubble or this crash as you? How does it fit in there? Not just the reckless version of like, "Oh my god, I saw this next hashtag whatever from this guy I like online. I'm gonna go buy that stock now." Just remember, whenever you see things, you're never first to see them, right? So, beware of the shiny detour that leads to a dead end, right? Kind of stick to your process. Your process can make you a lot of money in a bubble if you just adhere to that.
Uh, next thing I want to touch on quick is is sizing. like you need to start pushing yourself during these moments.
Like you cannot be afraid to push yourself, but there is a limit, right?
Um we've talked about this before privately flows is like when we have swings that are so far out of our personal bowler bids, if you will, it's going to affect you in different ways daytoday, right? It's it's going to just show up um in how you approach work, in how you're just walking around touching grass. it eats at you. And so I I try to find my personal limits and I try to just slowly push into those. And bubbles and crashes will bring you to those limits very quickly. The problem is you really don't want to push too far chasing what could be because a bubble is going to say, "Hey, you know those goals and expectations you had? Let's just take care of it in two weeks. Like look at all this opportunity. We could do it in two weeks." And you'll get you're going to do that. You're going to make those mistakes. You're going to size way too big. But you're going to need to learn how to do that while taking this big step back when it doesn't work out. Right? You need to be humble enough or the market's going to teach you to be humble enough that if you don't take this step back, right, it's going to crash you. You're going to lose another one of your portfolios.
You're going to have to go back to work and maybe we'll see you back in two years, right? But this ability to step back and then push it again and step back and push it again. You know, you can approach these higher levels much faster than you think in trading. You know that the the days seem slow but the years seem fast. And when I look back at like just four or five years ago, the size that I was using compared to what I am now doesn't feel like too long, but it's a big difference. And I've slowly worked my way up there to where my nervous system can actually like deal with a lot of the swings that I take now. Some sometimes not. Sometimes still gets to me. So that capacity is built.
>> Yeah. I I think that that's probably the most misunderstood thing about these entire like moves because people project on any situation and say if I just had a little bit better information I'd be able to do things better. And yes, you need to always increase the quality of your information. But at the same time, it doesn't matter if you're you're a person who doesn't know how to have the regulation where you size incrementally and continually take risks incrementally, then it doesn't matter how much anybody in the world helps you. It doesn't matter if Paul Tudtor Jones comes down and sits next to the desk right next to you, puts his arm around you, and says, "Hey man, I'm here for you. I'm gonna help you every step of the way." You'll still screw it up.
And I think that that's why if you understand who you are, you'll always understand that this process of not just going in and saying, you know what, I just want to be all in because I want to know if I'm going to lose or not. And I would, you know, I'm not really confident in who I am, who I am or my ability or anything like that. So, I'd rather just risk it all, try to make a ton of money all in one moment or just fail, right? Like that's a mindset of someone who is inevitably just going to destroy everything in their life regardless of how much one-off success that they have. They're just going to they're going to screw it up. Even if they make a bunch of money once, life is going to figure out how to take it back from them. Like it's it's going to because the fundamental problem is in who you are, not in a single one-off action. And so I think just that the sizing thing is the tangible expression of having a very clear understanding of who you are as a person, right? Those are like directly linked.
>> I totally agree. And the people who go for it too fast, too strong, and and they don't know who they are and kind of everything you touched on, to me, it's just self-sabotage. You deep down want to just eventually lose it, right?
You're not trying to actually improve and get better and have a longevity and a career here, right? You're just playing the lottery, hoping that it works out for you in some magical situation where you're going to win a lot of money and then and then stop and never touch it again. To me, it's just it's just a form of self-sabotage and you you actually want to lose it deep down. You don't want to actually have to deal with it. Um, now this doesn't seem like the most sexy path, but as you go on and go forward in markets, it actually does seem like the most sexy path. This is how I picture my career going. It goes back to the thing you hear all the time is like you don't lose, you learn, right? Like all these like step backs are just like learning moments for you and tuition, little mini tuitions you have to pay for you to level up your um your nervous system to to better deal with bigger, higher numbers, bigger, higher swings.
Um you know, once once you're in uh like bubble trading, u you you want to be really careful with like again with the sizing thing. Like I do want to be pushing the risk. I do want to size bigger. I want to use my momentum, my wins to be get more momentum and more wins in a reflexive way, but not just because I'm excited, right? Not just because of the feelings that are coming up with all of the excitement around markets. That shouldn't be guiding you.
It should be it should be again, we go back to you need to be thinking about these things before you're actually in the situation itself. Because if you're not prepped, if you're not having thought about that, the the situation itself will control you. You won't control yourself in this situation. So, I think it's definitely fine to think about size, but where is that size coming from? Is it you recognizing things are going well, you're in a bubble mania? There's a lot of like convexity, there's a lot of asymmetry, and I want to push my boundaries and learn how to accept more into my life.
or is it just because you're excited, you feel behind, it's FOMO, you're failing, and you don't want to you don't want to um go this whole time without taking advantage of something. So, something to think about in real time.
Uh just some some things you could think about maybe maybe uh if you're not great at risk management, you're going to have to have some blatant rules for yourself, right? How much could you lose in a day?
uh is is it might sound dumb, but you would be shocked at, you know, if somebody has like this stoploss and they don't follow it during a mania, right? Like you could lose something and then you double it and you lose that and then you double it and you lose that and then all your rules go out the window and you just full port into something.
That's a very very dangerous reality that lives in trading and doesn't live in something like poker where I use used to be, right? Because in poker, you could only really lose the buyin you have on the table, right? And then like you could go buy in at the table again. You could buy in at the table again. And if you're if you're somebody that has 50 buyins, well, it's going to hard be hard for you to risk your entire portfolio in a poker game, right? But you could do it at the click of a button um on your TDM trade or Schwab or whatever it is or thinkers, right? Like you could do that instantly.
You could blow your account in futures instantly. Your per account could go to zero instantly. Um, so you need to start defining some rules for yourself. We've talked a little bit about this last time, by the way, which I really have, this has been a big concept for me recently, is rewarding the trades and the things that are working out with fresh capital and not rewarding the trades that are hurting you with fresh capital. If the trades are not working and they're not rewarding you, don't reward those trades anymore. Reward the things that are working. Add to your winners. Don't average into your losers, especially in a bull market phase. Like you're just going to hurt yourself and you're going to come up with all these stories as to why it's the right move.
And then u you know this is this is the hardest part probably of the whole thing is trying to feel where is this all ending? Why is it ending? How should I be exiting my positions? What are my rules on taking profits and allocating back to cash or back to other positions or rebalancing or whatever it may be?
These are all things you should probably try to think about now before you're in that moment. kind of give yourself some sort of process because if you have at least a little inkling of something to do, you might trust yourself to hit that exit door a little bit faster and a little bit um better, I guess, when it's actually happening. And if you've never thought through any of these, again, the market will tell you when to do so. and it's going to be too early into which you'll get capitulate back into some other things or it's going to be too late and then you're going to believe the market's still at a bull market and you're going to double down and triple down. You're going to lose everything that you had made along the way. So, start thinking about these things now.
This is why we're even going over this is like, hey, we're kind of in these moments. Let's start thinking about it, right? Volatility super important. Bubble volatility versus normal volatility. Hey, if we're, you know, if we're in this normal regime, take like Bitcoin right now for instance, right? We're just bouncing around in this like 10k range. It's on, it's off, it's on, it's off. Like we're going to go down to 40k, we're going up to 100K. Who knows, right? But right now, just fading and mean reverting in a low volatility extreme has been the play for Bitcoin, even though it might seem tough. And then we're what we're seeing is the complete opposite in the kind of buildout of AI and all the five layer cake that's involved in power and connectivity and chips and uh what have you. So you need to start recognizing when is volatility expanding, when are those dips staying shallow, the shorts are getting blown out, the momentum is breaking to one side and fading in these regions is actually going to really hurt you. Right? This is where you could get you could get Michael Bur like where you're just going to dig your heels in more and more and more as the market goes more and more offsides. Um but in this volatility regime reversion might actually be your best friend. So in this case you got to remember if you're selling you know as markets are trending to the upside very powerfully you're actually going to be the fuel as you have to cover those positions as we march higher and higher. There's a lot of that fuel left in the tank in my eyes. Um, and we'll get get to the end of this here soon because it's been a long stream, but uh, what are some of the signs that this stuff is ending?
Vertical blowoffs, parabas. Everybody you see online is an absolute expert.
You're probably going to see Twitter profiles where people are like AI experts, right? Just like we had NFT experts back in 2021. Maybe good news like earnings and stuff stop actually propelling us forward. Oh, we're in a new paradigm. AI has changed everything about the world. And maybe the breadth narrows. You start to see the weaker names start to not perform as well. Only the bigger names and indexes are holding on. That's starting to tell you that things might be changing. And then of course, some of the biggest mistakes you could make getting married to your trades. Oh, I'm a Nvidia guy through and through now forever. Uh maybe you're shorting too early. This is a top. I want to catch the downside. You're levered up in certain ways. You have the right thesis, but you sized it wrong. Or of course, you give it all back.
And this is something flows that I have talked about a lot. You're going to mess this up. You're going to mess it up.
Even if you win a lot of money or you lose, you're going to mess it up. And you're gonna see on X, you're gonna see the guys who are the anomalies that and you won't even know if they're telling the truth, but you're going to see the guys that seem to top tick these things perfectly. They're going to show you screenshots. It's going to seem amazing.
But most of us are living on these two spectrums. 99 out of 100 people, probably even more than that. You're either going to be exiting too early or you're going to be on the back side of this. My goal for me personally is because I've spent my time over here too much. I want to be the one that's exiting a little too early this time, right? I'm trying to learn from my mistakes in the past because when I get stuck too late, I'm not willing as much to admit that it's all over. Insert Bitcoin for me, right? Uh but I've tried to adjust to this again in the expectations of what's to come into the future. All right? So, you know, rent the trends, man. rent the trends, try to bank it. The bubbles are going to punish the people who are married to their positions and to the idea and to the the AI. Again, I'm using AI as an example here and the ones that are late. It's not going to it's not going to hurt as much the people who are disciplined and scenario planned a lot. So, I hope this helps you guys think through a little bit from the mindset and execution stage. I know it was a little long this time, but I think it's important as we you know, everybody's talking about all the different opportunities out there and um you know, I hope it helps.
>> Yeah, I think that's I think it's great because I think if you this goes back to that quote from the art of war where if you know the enemy and you know yourself, you need not fear the result of you know 100 battles. And I think that in the same way if you understand all these moving parts right and the technical side of things and then you understand okay here's who I am here's how I need to interpret and move in lock step with these parts individually and uniquely then you don't need to fear any single loss and I think that's that is what begins to give you confidence and the reason you lack confidence is not because you're just like oh well I just need a little bit better data I just need a little bit better model. I just need a little bit better of this or that or that of this. And begin to shift your understanding and then saying you're always going to have imperfect information and you just want to be the person who knows how to win even when the deck is stacked against them. That's where you should just be, oh, I'm at a disadvantage here. Perfect. That's, you know, like that's where I as a person show my abilities and my edge the best is when everyone just says like, "Oh, you can't do it. This is not possible.
Why are you trying to do that?" And I think that is why I've walked through and both of us have really this entire hyperlquid per trade over the last six months now. And for everyone who is here, um I shared a post recently that I want to pull all of these moving parts to and I'm going to go through it um quickly and we're going to cover more tomorrow because I have a lot to share on this entire hyperlquid side and I even have a model to share with everyone. But I want to start with the tweet that I shared. If you're not, if you haven't gone through this yourself and and understood this, go on to Twitter and go to this recent tweet that I did, do me a favor and just retweet this um you know, right now as we're going through it. And the idea that I've laid out is that as we have moved up to the highs that have taken place, if you have been following along, if you have been following along this entire time, then you know that I've been laying out the thesis for hyperlid and specifically the expression of it of perurr in this entire range right here.
And since we were in this low $20 range and the rally that we have had, every single move up we've had, people have called, oh, top, top, top top. And even now, people are saying, oh, there's a top in, there's whatever it might be.
And again, it's basically the same thing as people saying like, oh, everyone's talking about Nvidia and the end of 2022 or 2023. Top top, right? It just it just shows how uninformed market participants are. And so what you want to begin to do is say what are the underlying drivers to these mechanisms. And this is why understanding what I've been laid out is so key. One, you know, I've laid out the entire hyper with thesis. And then as we move to these levels, I said, "Hey, listen. I understand that some people maybe have come to the game a little bit late and they haven't put on the risk that I have had." And so I said, "Here's how you want to think about the riskreward for taking risk." And I shared this right here. And you know, people are still, you know, when when people are saying like, "Oh, what would you do now? What would you do now?" Well, I shared this riskreward because I said this is a great place to buy and we have moved up into that riskreward to all-time highs and I think we're going to continue to do that and then hyperlquid strategies per has been the major beneficiary of this change. And one of the things that I want to talk about right here is how does the outperformance or underperformance of hyperlquid strategies function right here relative to the hype token. And what you will see right here is in green and red the relative performance of perurr to hyperlquid. Now let's just start with something very simple where we show hyperlquid and purr in the same chart.
There we go. Notice that since inception per is up 80% hyperlquid is up 64%. So just as a baseline, the entire thesis I've been laying out for purr has been correct. There is a reason why I want to be long purr still. And if you are going to, you know, I'm not even going to respond to people who come into my comment section asking me about my thesis with they're literally asking me in my thesis, oh, like what do you think about this? and it's literally laid out in the very tweet they're commenting under. And so if you if I don't respond to a tweet or a comment, 90% of the time it's because you didn't read the tweet above it. Anytime you ask a very thoughtful question, I'll always respond or I always try to if I'm on Twitter or whatever that might be. But when you look at these changes here, you say, "Okay, what is the original thesis that we've been laying out?" Number one, PER has outperformed Hyperlid. Why is that?
It has a regulatory arbitrage that has existed and the value they provide prior to the launch of the ETFs.
It has been the primary beneficiary of that because it's been the only place to get exposure to hyperlquid in the United States.
That is one of the reasons why it's outperformed hyperlquid this entire time. These green regimes is a script that I built. You can go download it on the website. It's uh on capitalflows research.com.
Let me just pull it up for you really fast so that you can download it yourself. Actually, I'll just link it in the notes after. So, if you're a subscriber on the website and you get the email later today, this script will be linked there and you can you can just download it so we can keep going. But the idea is that we have continued to outperform hype. The per stock has continued to outperform hype. And you can see here on the downside sometimes it underperforms. On the upside, it outperforms. Remember and if you notice that these periods of time when it underperforms and when we move at a discount to NAV it is very consistent that the leadership of PER does what?
Buys back stock. So this just goes back to people don't know how to think about second or third order thinking. They're only looking at what is happening right now. If you move at a discount and you are buying back stock when it's underperforming at a discount to NAV, by definition, you're increasing the probability of it outperforming in the future and increasing expected returns because you are buying back your stock at a discount to NAV. In the same way, you are doing the same when it's trading at a premium. The problem that people have is that they have only compared per to other DATs and they have not really thought about why exactly a DAT exists and they've compared it to things like Micro Strategy which only issues shares and is not buying back shares. And when you begin to have the market realize that PER is not just selling shares at a premium, but also buying them back when they're at a discount, it totally changes the entire game. Notice, here's a great breakdown uh by uh Tobias right here. He has always a lot of great charts on PER and and Hyperlid itself that Hyperstrat is already up a billion dollars on their hype position. This is literally the only treasury company in the world that is net positive on their position. Maybe there's some like very small arbitrary ones where they have a couple million or whatever, but we're talking about size.
Hyperlid strategies per is the only company that is functioning with a positive P&L. Not even Micro Strategy has that right now. I'm not saying they can't change or anything like that. I'm just saying understand the signal of what is taking place. Okay. So we understand how that is functioning in its mechanics. Now what we want to do is go to this idea that I explained for hyperlquid. What I said is that the most misunderstood factor for hyperlquid if you understand it, it's still an uncertain thing if it's going to happen or not. But if it does, my view personally is that the price has a very high probability of hitting $350 this year. And what I'm going to do is walk you through this tweet and then tomorrow and also today I'm I'm going to send out a model today to help you quantify this and then tomorrow we'll go through it even further on the live stream. Right now everyone is overly fixated on all this ETF stuff. And uh if you go down in this tweet, all of the ones I link below it, I explained my entire thesis for why PER can still and is likely to still outperform even after the post ETF launches. If you're going to ask me about my view on PER post the hyperlquid ETFs getting launched, you need to go to this video and to the tweet I linked below it where I laid out the entire breakdown of how to think about that. If you have a question, then after you go through both of those things and you've already asked AI, then you can shoot me a DM, shoot me a comment, whatever it might be. Go through all of these and see the entire breakdown that I laid out for how to think about that. What I want to talk about is hyperlquid itself and how it connects to the global system of liquidity.
It's very straightforward if you understand global interest rates FX and the supply of money in the system. Most people don't even understand how this works. And most people think they understand liquidity because they traded Bitcoin during a dollar devaluation narrative. And it's really impossible to have a view on macro liquidity without understanding interest rates. That's why when someone says, I have a view on macro liquidity, but then I say, what's your view on interest rates? And they say, oh, well, I don't really have one.
I'm just like, well then how how in the world do you have a view on macro liquidity? Because by definition, interest rates are about the price that you pay for macro liquidity, the price that you pay for money, how it expands or contracts. It is the direct input into that. And so the idea is that interest rates are all about the money in the system. FX markets are the flip side of that. And so when you Why does this matter for Hyperlid? The largest markets in the world are all about interest rates and FX. You I've said this before. If you think equity traders use a lot of leverage, go talk to a bond trader or go talk to someone that's you know trading in the sofur complex. Those guys are more more of degenerates and leverage traders than any crypto trader will ever be. Bitcoin and crypto are just a drop in the bucket for large players who are managing massive balance sheets. Um, if Hyperliquid can provide enough value via one, liquidity, and two, lowcost leverage, then you can have the largest players in the world start to move capital onto the platform to transact in the most important markets in the world.
Now, here's the thing that people misunderstand.
This is not about a zero someum view of the world. Hyperlquid is not about replacing the CME, URX, a bank. That is not what it's about. Hyperlquid in itself is a pricing mechanism, especially as it relates to the supply and demand of credit that functions as a marketplace that people can continue to transact that is in itself decentralized and it provides a signal that doesn't exist in the same way in the traditional financial system. On top of that, you have the entire mechanism where you can have massive leverage that is available that you almost have is level leverage without having to be an institutional player. And so it begins to open up a lot of access in leverage and also in the markets for rates and FX that is just not really exist in the same way today. And so the idea is that if you can pay a lower fee for leverage, think about brokerage accounts right now. Do I go to Fidelity or Interactive Brokers?
Most people are making that decision based off of user interface. And don't get me wrong, like all user interfaces in banks or in um brokerage firms, uh I guess besides Robin Hood basically suck.
And all of us when we're thinking about trading and running risk, what we care about most is what are the margin rates?
I mean, there's a reason personally why my broker is Interactive Brokers because they have the cheapest margin and leverage in the system right now at at you know in the US financial system in terms of US brokers. And so the same dynamic exists for Hyperlquid. they're going to pro provide attractive margin rates, what we call funding rates, then this is a massive value proposition for hyperlquid. And so everyone's focused on ETF flows. Sure, those are going to move things around a little bit. The larger picture, and this goes back to why no one understands hyperlquid, is because it's about the value proposition that's going to attract capital. If Hyperlid doesn't provide value, it doesn't matter if it gets added to the US or not. If it doesn't provide value, then no one's going to care about it. The fact that everyone is itching to be able to get long and to transact on hyperl is in itself an indication of the value proposition it provides. And one of the things that let me find the note here.
Everyone has talked about this entire dynamic of the Euro dollar system. How dollars in the system, everyone's trying to hedge their surplus of dollar liquidity. If you don't understand how that works, oh man, I think a lot of the education around Euro dollars is probably not that great. But if you want to understand the Euro dollar system, what I would do is spend time thinking about Oh, you know what? Um, if you there's a great book, it doesn't explicitly talk about the Euro dollar system, but the dollar's reserve currency status. Um, I'll have to link it in the notes. It's by Barry something and it's a about the I don't remember the title of it. I remember it was a good book and I remember all the ideas in it. But um the idea is that he a guy uh author named Barry he talks about the exorbitant burden that the dollar reserve currency status is. If you just Google that it'll come up. But the idea is that the US in itself has a surplus of dollar liquidity in the global system. One because it's used as a global reserve currency. Two because the US runs a current account deficit where they import goods and export dollars to the world. And so the mechanism for dollars in the system is all about how can I get cheap dollar leverage.
The wild thing in my view and this still exists is that hyperlquid takes advantage of the biggest blind spot that people in the crypto space and traditional markets are. Crypto people have been conditioned to just to think in terms of pump and dumps. They're thinking, "Oh, ETF flows. This is increasing decrease. I should buy it."
That's all momentary price fluctuations.
They're speed bumps to the upside, downside, whatever you want to call them.
They're not thinking in terms of value creation and flow mechanics in the system because they don't trade rates.
And then traditional financial people, anytime you ask anyone in finance, they don't want to be part of anything in crypto right now. And for good reason, because all people in cryptos cared about is how can I just pump and dump this thing whether it's with ETF lows or whatever it might be. You want to click on this link right here on how I talked about the establishment, you know, sold everyone a lie or the crypto establishment sold everyone a lie and they became the establishment. This lays out the conflicts of interest and why hyperlid actually has an edge. There's a reason why no one is talking about hyperlid and these mechanics. all the crypto influencers and VCs, they won't talk about it because they didn't get to invest in Hyperlquid on the front side before it got launched or got a crypto allocation to shill. I mean, there's a reason why, you know, all of these major VC firms that are creating a bunch of content and monitoring the situation online, there's a reason why they're not talking about it and they didn't get an allocation to it. It's not part of their portfolio.
And on the flip side, the large institutions like Jane Street or Citadel or anything like that, they don't want to talk about Hyperlid because they don't want to draw attention to a market they haven't established a position in yet. And I put this quote here because I think it so accurately represents where we are. Do you mean to tell me that you finally establish a position so you can price mine correctly? That was the whole quote from the big short that Michael Bur said. He's like, "Well, where's my position at?" Oh, well, it's not not not positive yet. You still need to post margin. And then finally, these guys establish a position net short and they're like, "Oh, we have to mark yours fairly now because we've established a position." And so what you have to realize is that purr sits at the place that it can take advantage of one this gap of where it can have a dominant voice in the space plus it could create a connection and also on top of that they have the potential to have even more VC investments on top of that where they're adding value or doing a ton of other things that I laid out in a tweet below and I'll go through that in a moment.
that they can still offer superior returns on top of all of that. And so I continue to hold my per position. It is my strong conviction that Hyperlink will have a significant rally beyond anyone's expectations because it is going to attract capital as these funding rates drop more and more. And so there are three things that you want to know to navigate this.
Number one, understand where we are in the credit cycle. Again, this is what we're going over every single day on the substack on these live streams. two, understand hyperlquid underlying drivers. And one of the ways that you want to do that is by understanding funding rates. So, here's a hyperlquid model that I've built. I'm going to share this with everyone. Um, we're going to cover it again tomorrow and James and I are going to walk through it for you. But, here are the funding rates for Hyperlquid. And what you can see is how these funding rates move. And, you know, right now, current funding rate, annualized funding rate is 5.46%. 46% 47% for the S&P 500 for trading it on hyperlquid. And so this begins to tell you how much you have to pay to have exposure. And that's going to be important because if you're going to pay to have margin on the platform, that interest rate is going to be very very critical. Now here's your upper and lower band, which is also what you need to understand. There's premiums to extract from that as well. But this will be such a significant market to understand how leverage costs or how how exactly you price leverage and how much it costs. And what you need to do is do that across every single product. And that's what we'll be covering tomorrow and breaking down a bit more. Back to this idea on the tweet that I'm sharing.
And I'll and by the way, this entire breakdown and the code behind it, if you're a subscriber on the website, you'll get all this code 100% free. So you'll get an entire breakdown, an entire mapping of Hyperlid, the products on it, and how exactly funding rates work with that, and you'll get all the code for it. So you just could plug and play it into Claude code yourself. And you didn't even have to, you know, you don't have to rely on me for anything.
you can just go through and have the model for yourself and then it all comes back down to do you understand the macro regime and how these things are aligning with the progression of the thesis.
So that is going to be the main thing that we lay out tomorrow and going down to the other sections.
Go through the entire tweet right here and this video that I made on it where I broke down every single way that per has a value proposition to produce excess returns above hyperlquid.
A lot of people getting caught up on two days of underperformance.
Is it theoretically possible that that underperformance persists? Yes, theoretically, right? You also have the opposite side where the opposite could occur. And so what you need to do is instead of extrapolating a single moment to the whole, ask questions about why it took place and if there's likely to be persistence. In my view, when you understand these factors I laid out in this video, in this thread right here that I published on the day of the ETF launches, I laid out that there are so many factors that and levers that Perk can pull for them to be able to have a dominant role in the market and produce excess returns. That really comes down to the leadership of David, the CEO, and also Bob Diamond, who's on the board. the bar has been set higher for them and if they decide to rise to the occasion and really execute not only when there's premiums and discounts and buying back or issuing shares but on top of that providing additional value through the different mechanisms they have access to and they become a very strong leader in the hyperlquid ecosystem.
If they do that then perr is very likely to outperform the hyperlquid token. That is my view. It continues to be my position that I'm holding per still my largest position and I'm holding that.
Um that hasn't changed and if anything changes I'll publish a report on the website with it. So, if you guys have any questions, go through all of that material and go through those tweets, all the kind stuff that we've laid out today. You guys will get the slide deck on. So, you can ask any questions based off of that in tomorrow's live stream as well. And we'll take all these factors, go over the model, and connect it to the larger macro picture tomorrow as well.
James, what you know, as we kind of pull some of these pieces together, what are kind of some initial ideas or thoughts or kind of clarifying questions that you would ask for for the for this topic?
>> I guess like when it comes to the bigger players that might want to build these positions, hedge their currency risks, things like that. Are how are they approaching like the regulation with this stuff? Are they do you think they're trying to get exposure beforehand in the um assuming that it's coming or are there a bunch of them that are just like not they don't care that much. They'll just wait, get clarity and then move.
How I don't know how these guys operate so much.
Let me say two things about that. Number one is from all the conversations I have that I can't repeat everything that I've had conversations about or go over every single thing in detail, but what I will say on a broad basis is that as long as Hyperlquid is not added in the United States, no major investment firm especially with a very stringent compliance department will operate on the platform or if they want a position they are likely to buy per as opposed to the ETF just given the regulatory backdrop they would rather buy the treasury company as opposed to the ETF that's probably why and most likely why I'm not going to say for sure or comment on anything, but that's likely why Goldman Sachs has bought PER instead of the ETF. I mean, why do you think they did that? Was that just a dumb decision by them? There's probably a reason for that. And so in my view, the leadership of PER, the fact that they have been very intentional about building relationships in the financial system and then pitching it to those firms, pitching hyperlid strategies and the reputation they have in the traditional financial system is why it still has a significant misunderstood edge.
And so I think that any of these large market making firms that are going to move on to hyperlquid once it gets added to the United States, they're not touching it right now. That is from all my conversations, none of those guys are active on the platforms. Jane Street's not touching it. Any of the market makers, none of them are touching it. but they may want to establish a position and and be able to have exposure in the interim and once they get access to move on to the platform it is going to push a ton of capital on because there's still a lot of inefficiencies on Hyperlid right now. There's still a lot of market microstructure things as well as premiums and discounts in the funding rates that exist to make a lot of money.
And that's why more sophisticated quantitative traders who don't work at these firms, they're actually very active on Hyperlquid and they don't want it to get added to the United States because in the interim that it does it, they make so much money.
So, I think that's a really key thing to to think about as well. So I think it it connects to the global value proposition that it provides. And then finally I think it connects to the fact that anytime there's a regulatory I mean think about it banking and healthcare move the slowest to regulation.
So, you know, you want to remember that people want to just stay far away from anything that has the regulatory ick on it just to play it safe because in a bank or in any type of business, that's their tail risk, right? That's their biggest tail risk.
>> Yeah. Uh, okay. That sounds pretty straightforward. Um yeah, I guess the only other thing is uh we talked a little bit about like a certain big player and and his position. Could you just maybe I mean unless you want to save this for tomorrow since we distributing but talking a little bit more about how the bigger players could could actually hedge positions and stuff on Hyperlid to a large extent and how that might actually shift and change narratives just because like as as you could see with this one guy it's very hard to understand even uh to me to most people what he's even trying to achieve but to you it was somewhat straight straight forward.
>> Yeah, let's let's uh let's talk about him tomorrow and >> we'll go over that the model that I built and we'll break everything down for everyone then. And we'll also go over price action since we'll be in cash equity and we'll have everything trading. So, I think it'll be a very really good stream tomorrow that operates in the context of everything we've covered today.
>> Perfect. Yeah, I think we let everybody go eat their hamburgers or whatever they're going to do now. money. All right. Well, everyone, thank you for joining the stream today. Everything will be laid out on capitalflows.com.
If you guys have any questions, go through all the resources, go through the material, there's an entire list of educational primers on the main page of the Substack. And you can always feel free to shoot me a DM on Twitter, shoot me a DM on Substack, and uh more than happy to chat or connect with people um uh as you guys are utilizing all the research that's coming out. And we're going to continue doing these streams every single day. We're going to continue showing up every single day, going over everything, providing the entire playbook. And I think it's going to be I think we have a really exciting week ahead. So, it'll be awesome. So everyone, thanks for joining. James, thanks for being here and sharing everything that you uh provided. I think it was really good today.
It's a big week until next week, which is bigger. All right. See everybody.
>> Yeah.
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