Wednesday, October 14, 2020

Convexity Maven: "War and Peace"

Our boilerplate introduction to Mr. Bassman. First off he defines convexity::

...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change).

Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....

There is more, so much more but now, on to his latest, October 13, 2020: 

“The strongest of all warriors are these two – Time and Patience”
“War and Peace” – 1869

Such is the parlor game of alternate history that can be so entertaining. Would we have gone to war in Iraq if Al Gore had claimed a few more hanging chads ? Would German be the common tongue if the isolationist Wendell Willkie had denied Franklin Roosevelt a third term? Do the nation states of Europe owe their independence to Napoleon’s defeat of the Holy Roman Empire?

The point here is that perhaps the Zeitgeist of our time matters more for history, and investing, than who sits in the White House or the Federal Reserve Bank.

Borrowed whole cloth from the Egyptian mathematician Ptolemy (AD 100 – 170) who theorized that the Earth was the center of the Universe about which all other planets and stars revolved; Baby Boomers too analyze the world from a similar stance of hubris.

This is not without reason since the -plumbago line- U.S. birthrate expanded massively between 1946 to 1964 creating a huge bulge in our population distribution.

This growth of the boomer-driven -delphinium line- Labor Force created a so-called Pig in the Python that first drove -ranunculus line- interest rates higher before they collapsed synchronously with the Generation X baby bust.

Thus, I might propose it is possible that interest rates were going to follow a pattern that was only loosely linked to who slept in the White House.

After roughly 5% of the world’s population perished in a violent and unnatural manner during the short period of 1914 to 1945, it is likely the next generation might view life differently from their parents. Two global wars sandwiching a decade long economic depression leaves a mark. Thus, the Boomers may well have “turned on, tuned in and dropped out” whether Richard Nixon continued Dwight Eisenhower’s bromidic policies, or John Kennedy invigorated Camelot.

Pulling on this thread, perhaps the elevated divisiveness we are witnessing – such as unmasked marches paired with congested rallies – is not caused by our politics, but rather our politics are a reflection of our collective mood.

Does it matter if Donald Trump may be a proto-fascist or Joe Biden turns out to be an AOC-type socialist ? Just as an iceberg is 90% underwater, so too is it likely the core driver of our anxiety is not our bloviating leaders, but rather the grinding transition of power from the Baby Boomers to the Millennials.....