Fake Plastic Trees

Investing in fake assets on fake markets based on fake data in a fake economy

Radiohead takes me back to a time I don’t often revisit. Takes me back to the freedom of my college years, after the misery of my high school years. Takes me back to a time I was figuring out who I was.

It was so long ago. I was a different person in one sense, and exactly the same in another. I took myself so seriously. I can laugh about that now. And I’m sure I’ll laugh at who I am today in another 20 years.

Portrait of the artist as a young douche

I took myself so seriously. And I took my music so seriously. Makes me cringe to think about it now. “Listen to the words, Maaaan”. I was that guy. But the truth is, I still am that guy. Just a little less so. Listen to the words, Man.

Listen to the words, Man. Just listen to the words.

A green plastic watering can

For a fake Chinese rubber plant

In the fake plastic earth

We were coming out of the hairband era. Bands with fake plastic hair wearing fake plastic spandex playing fake plastic pop on fake plastic MTV. And they tried to tell us it was metal.

Radiohead was a whole other thing. It was moody, it was introspective.

My most vivid memory of Radiohead back then was using the song Fade Out as the background music for my Film School Girlfriend’s shitty experimental movie short. I loved the song and hated the film.

She had these cool Film School Friends, and I desperately wanted to be a cool Film School Guy, or at least cool enough to hang with them. But at the end of the day I was just this nerd from Yeshiva University who was studying finance and reading baseball box scores every morning.

We are who we are.

So I was studying finance, but I was no standout student. In fact, my favorite professor in my favorite class was generous enough to give me a passing grade that I didn’t even deserve.

My father was an actuary, and I inherited some of his talent in mathematics, but not his discipline. I didn’t have the patience to sit in silence with a complex math problem, not back then. I was too wild. I wasn’t going to be an actuary, that wasn’t in the cards for me.

But, markets, that felt right. Markets were wild. Markets were free. Markets were fundamentally mathematical, but in a chaotic way. I read Liar’s Poker. I watched Wall Street. I learned about genius hedge fund managers who were also poker players and risk-takers that used odds as their edge.

This could work, this just might work for me.

That she bought from a rubber man

In a town full of rubber plans

To get rid of itself

I’ve got this saying: narratives drive flows and flows drive performance. It makes for a great tweet. But it’s also true. And it’s also a statement on markets and the zeitgeist. Things have changed. It wasn’t always like this. It’s not supposed to be like this. In a rational market, valuation would trump narratives.

We were taught valuation models. And we were taught about the efficient market hypothesis. And so on.

When I came up in the ETF industry, smart beta was the new hotness. And I loved it. I still do.

I am using the term “smart beta”, I should really call it systematic investing. Or factor investing. Because that’s what it is. And back then, it was new and there was opportunity to innovate.

Find a clever factor, or a better way to combine factors. Set up a rules-based systematic algo, and success will follow.

It was amazing. It was safe from human emotions and egotistical managers and there were infinite possibilities. There was a whole class of innovators and ideas coming out of index companies and ETF issuers, and I was right in the middle of it. I assumed it would always be that way.

She lives with a broken man

A cracked polystyrene man

Who just crumbles and burns

The smart beta thing turned out to be a fad. The big asset managers showed their trademark lack of restraint and pumped the market full of these funds, too fast and too furious, with all sorts of promises - sanitized with Finra-approved “we-believe” and “might, could, maybe” language - and then ran into a buz saw of a FAANG and tech run that pumped just one factor above all the others: market cap weight.

The market cap weight factor, with the power of passive and derivative flows and the narrative of lower fees went stratospheric. Won’t someone think of Capital Group’s bottom line.

In this transition we lost a lot. Narratives did drive flows, flows did drive performance, the fee narrative on passive became a performance narrative, and the whole thing started to feed off of itself. Jane, get me off this ride!

Well cycle that around for a decade and all that’s left is gamma squeezing, market manipulation - very much tolerated when manipulating upwards - and capital market games. Video games. Not that dissimilar I guess, just even more removed from the stocks, the companies, the businesses that once sought capital to produce goods.

These are capital market games

Capital Market Games are worth playing. But they’ve got nothing to do with the stock market games of the past. And now those genius hedge fund managers are just broken men who’ve crumbled.

He used to do surgery

On girls in the eighties

But gravity always wins

The lesson of the global financial crisis should have been something else. It should have taught us what can happen when a market gets over-valued and over-extended. It should have made us afraid to become fat and greedy.

It should have warned us against incentives that pushed companies to give loans no sane person would back themself. It should have warned us about separating risk from assets. It should have warned institutions about the dangers of performance chasing.

The precisely opposite lessons were learned. The only lesson learned was that the Fed can always save the day.

With hubris that can only be rivaled by the captain of the Titanic (“Even God couldn’t sink this ship”), the Fed has manipulated and printed and tinkered to the effect of ramping up markets ten-fold since then.

Ten-fold.

Is this hubris?

That was their takeaway. That was the lesson they learned. That markets can go up indefinitely.

With their two-dimensional models and their little 80-year sample sizes and their massive egos and arrogance and their money printers, they have left us in a vulnerable state where market prices can no longer be sustained by willing buyers - not in the absence of the knowledge that the Fed will print a lifeboat for them.

But market can not go up indefinitely. Gravity always wins.

She looks like the real thing

She tastes like the real thing

My fake plastic love

It looks like the real thing. Hey, the data says so. Never mind that you know thirty unemployed people and that your grocery bill doubles every six months. No, it’s their data you should trust.

The market is sustainable. The valuations are real. Job gains are good for the market because the consumer is back! Job losses are good for the market because the Fed will cut! Up is up and down is up. And if you question it we’ll tar and feather you and call you a permabear.

It’s been five years since I was invited onto CNBC, due to insufficient bullishness.

I can’t do it. I can’t smell bullshit and call it truth. I won’t do it. Career be damned.

just some slight “revisions”

Option volume now exceeds stock volume. The tail is wagging the dog. Fake narratives lead to gamma squeezes, algos chase momentum to trick other algos to chase momentum, all of which is generated by bots mimicking sentiment. It’s all fake.

The US treasury buys $2 Billion of it’s own debt and no one stops and questions it.

A brokerage that nobody uses IPOs for $10 Billion and nobody questions it.

An economy from which nothing is made, nothing is created. Just leverage and Number Go Up.

Fake plastic love. Fake data. Fake economy. Fake markets.

But I can't help the feeling

I could blow through the ceiling

If I just turn and run

I still love this industry. I still love this market. I still love this country. Wealth mobility might be down, but it ain’t dead. A good idea, a deck, the right phone calls, some good meetings… that’s all it takes. You can still make something of yourself. At least for now.

But man, the more ethical you are the harder the road. And it shouldn’t be that way.

That’s how it is in this fake market. It’s become exponentially harder to make an honest living in finance than it is to get rich quick. That’s a fact.

And what I am building now, I am building for a trustless world. Because trust is a diminishing commodity.

And if I could be who you wanted

If I could be who you wanted

All the time, all the time

I wonder what the college me would have thought about me now. I wonder if my last 20 years would have made myself proud.

There I was, listening to Radiohead, listening to Fake Plastic Trees, with no real idea of what my life would be. And now it is real, and there were failures and successes in roughly equal measure. There was love and heartbreak in roughly equal measure. There were highs and lows. I think I did alright. I always tried to do the right thing. I took big risks. I found the right girl, even if 15 years too late.

My oldest son told me that he has anxiety about his future. I didn’t exactly know what to say. I told him that the future was just a string of present moments. That he should follow opportunity and trust his instincts in doing so. And that he should enjoy the ride.

He takes himself so seriously. He found some song and came to me. Told me to “listen to the words, maaaan”. I rolled my eyes. I’ve got no time for that foolishness.

But later I found him and asked him to play that song for me.

If I could be who you wanted. If I could be who you wanted. All the time.