Surf Report: Artificial Quiet

Issue 48: 08.22.2021 (Free Version)

August 22, 2021

Hi everyone—I’m so glad to have you here. What a week.

The ongoing covid hysteria and its cascade of tensions between people and their governments got me thinking once again about the First Law of Ecology. The first law of ecology is this: You can never do just one thing.

“The world is filled with relationships, and anything we do is going to impact parts of the system that we may never have even thought of.”

—Richard Heinberg

I was first introduced to this principle in the book Filters Against Folly: How To Survive Despite Economists, Ecologists, and the Merely Eloquent, by Garrett Hardin. It’s a slim volume but packed with highlightable insights, just how I like my slim volumes. This idea goes by other names you’re probably more familiar with: the Butterfly Effect, unintended consequences, collateral damage, etc.

It’s important to remember that there’s no such thing as side effects—only effects. Side effects are just the undesirable parts of what transpired, but can’t be segmented out as “not counting” when tallying final outcomes.

One example in the context of markets and investing involves the idea of diversification, particularly in the form of passive index funds. Many people don’t think about the consequences of holding the same cap-weighted index as everyone else, assuming they have just spread the risk around a well-balanced slice of the overall market and are protected against major peaks and troughs of individual stock performance. Make no mistake, there was and is merit to this concept at a high level, but it’s not so clear-cut a discussion anymore. There’s a dark side to passive investing.

Markets rely on active participants somewhere upstream in order for there to be any activity to invest in in the first place. Passive investors merely rely on active investors to decide on whether or not to subscribe to new issuances (e.g. swapping a member of the S&P 500, funding an IPO, responding to new innovations), and collectively follow along with those individual decisions. For this reason, not everyone can be a pure passive investor.

And as a result, the more passive investors there are the more the link between prices and fundamentals breaks… since passive investors don’t look at prices or fundamentals at all.

Liquidity also dries up because passive investors don’t trade. That’s a problem, because active trading is how price discovery and liquidity are achieved in the first place. What’s a passive investor to do when they want to sell their shares for cash but no one is left in the market to make the deal?

The Federal Reserve actually acknowledged the pitfalls of a passive investing culture back in 2018: The Shift from Active to Passive Investing: Potential Risks to Financial Stability? One of the things they pointed out is that the rise of passive investing has led to something called “index inclusion effects,” one of which is an increased correlation of returns. Investors are all putting money into the same strategies—the most popular stocks with the highest index weightings.

For an ecological example, consider the conditions that triggered the Irish potato famine of 1845: the population was relying on potatoes for sustenance and virtually all were planting the same genetic strain of the plant, so when a potato fungus began spreading it took down 1/2 of the potato crop that year, and ~3/4 of the crop over the next seven years. Everyone’s food supply was unintentionally correlated and collectively vulnerable to the same triggering event.

“When an investment process makes no effort to differentiate winners from losers, and instead blindly allocates based on index weights, there is no diligence, no intelligent capital allocation, and eventually, no efficient market.”

When everyone is diversifying the same way, no one is diversified. When everyone invests in index funds, nothing moves. When everyone stops paying attention to what they own, what they own stops mattering at all.

Passivity has led to misallocated capital (exposure to ‘stocks’ vs. exposure to the most deserving stocks), asset price distortions (returns reflecting more multiple expansion than profit growth), and systemic risk factors (flash crashes)

The lesson: there are negative consequences to even the safest, most seemingly risk-averse strategies out there. Consider revisiting your personal definition of safety and risk, and open yourself up to the notion that actually paying attention and making decisions for yourself might be a safer plan.

For guidance on the optimal way forward, look to nature. She’s the best capital allocator of all.

“The idea is simply to let human mistakes and miscalculations remain confined, and to prevent their spreading through the system, as Mother Nature does. Reducing volatility and ordinary randomness increases exposure to Black Swans—it creates an artificial quiet.”

—Nassim Taleb

Until next time 🤙,



“The art of being wise is the art of knowing what to overlook.” —William James

Breaking News 🌊

🤚 The Federal Reserve may start to taper asset purchases this year and officials discussed the risk of stablecoins, July’s FOMC meeting minutes show [Blockworks]

⚠ U.S. Fed reverse repo volume hits record $1 trillion as debt ceiling looms [Reuters]

💸 States can pay unemployment benefits past Sept. 6 using pandemic funds, Labor and Treasury officials say [CNBC]

🎈 Cathie Wood says stocks are not in a bubble, thinks investors betting against her fund are off base [CNBC]

😬 T-Mobile confirms hackers gained access to its systems, following reports that sensitive data on over 100M people was for sale on the dark web [Vice]

Bitcoin News 💱

₿ Leading mortgage lender in the U.S., United Whole Mortgages, announced plans to accept bitcoin payments later this year, in what would be a first for the industry [Coindesk]

₿ Wells Fargo and JPMorgan have both filed for new passive Bitcoin funds for their wealthy clients—making a 180° from their initial negative views Bitcoin [Bitcoin Magazine]

₿ Former SEC Chairman Jay Clayton Joins Crypto Platform Fireblocks [Blockworks]

₿ Eurex to Launch Bitcoin ETN Futures to Meet ‘Significant Demand’ [Coindesk]

₿ Bitcoin Fans Are Suddenly a Political Force [Wall Street Journal]

₿ No. 1 NBA Draft Pick, Cade Cunningham, To Be Paid In Bitcoin Via Partnership With BlockFi [Forbes]

₿ The Advisor to the President of Colombia called Bitcoin the “most brilliant piece of software ever.” [Bitcoin Magazine]

₿ Vietnam now has the highest level of Bitcoin adoption in the world [Chainalysis]

₿ Iran’s central bank says Bitcoin and other cryptocurrencies from licensed miners can be used by banks to pay for imports [Cointelegraph]

₿ Bluesky, the decentralized social media initiative unveiled by Twitter in 2019, will be led by Jay Graber, a former startup founder and cryptocurrency dev [The Block]

From The Tweetbox 🐦

“CPI is at 13 year high.
Fed balance sheet is at all-time high.
S&P 500 and Dow Jones at all-time highs.

Crazy world we live in” [Tweet]

“there is no substitute for being on the ground, rolling up your sleeves and getting your hands dirty
alpha is in the details not in the pontificating” [Tweet]

“Blockstream launching modular bitcoin mining units.
’Much of the world’s usable renewable sources are concentrated in remote locations where there is little local demand’
✖ Bitcoin wastes energy
✅ Bitcoin uses waste energy” [Tweet]

For The Pros 😎

Worth A Read 📃

How To Conduct Investment Research

“I’ve spent thousands of hours researching dozens of companies from many different industries. Along the way, I’ve developed a research process. While I’m no expert, I’m hoping that this article -- which outlines my process -- will be valuable to other students of investing.”

Tip ☝

Consider adding an "s" to the verb in your headline to get more leads.

When an ad for music lessons was changed from “Put music in your life” to “Puts music in your life,” it brought in 3x more leads.

Check This Out 👀

Fold Unveils First-Ever AR Bitcoin Rewards Experience, à la Pokemon Go

“Fold, the leading bitcoin rewards and payments app, announced today the release of their augmented reality (AR) feature that allows users to earn bitcoin and in-app benefits by exploring their physical surroundings.

Instead of finding rare creatures in the world around you, like in the hit game Pokemon Go, Fold users will now be able to discover and collect bitcoin around them.”

PNGs 🖼

The Federal government keeps pumping funds into the commercial banking system.

Gerd Gigerenzer on dealing with risk:

Pods & Schools 🐬🐠

Recent podcasts + books I highly recommend, and upcoming courses + seminars that look promising

🔊 Citadel Dispatch e0.3.5 - bitcoin tuesday happy hour, hosted by Matt Odell

“At the end of the day, all energy is is a means to an end. You’re gonna convert it into something that has value. And that value, in theory, has a higher economic case than it would otherwise be for just keeping the energy in the ground or whatever you’re getting it from.

So if you can convert it into value that never goes away, that goes up over time, and can be stored indefinitely…Energy gets converted into value eventually, and with bitcoin mining you can convert it to value right at the source and then harness that value forever, and then direct that value to wherever you want to direct it. It’s just really powerful.

Not only is bitcoin a superior store of value but it’s also superior in transporting the value over space and time. Which is a beautiful thing to see.”

Tools of the Trade ⚒

Products I use to make money

Swan. I recently became an official Swan partner because I love them so much. So if you're like me and just want an easy, automated way to buy bitcoin on the regular with the lowest fees in the game, head to to get $10 for free ✨

Fold. Earn bitcoin on everything. You can win up to 100% back on every purchase, and every swipe is a chance to win a whole bitcoin. I use my own Fold card to pay for almost literally everything. If you use this referral link you get 5,000 sats free

StockCharts. I easily make back the small monthly subscription fee with the superpowers it gives me.

Carrd. I use card for all my landing page needs. Use this link or referral code 892PYX69 to start your own web empire.


Nothing in this email is intended to serve as financial advice. Do your own research.