SITCHY: The Decade Ahead
Virtually nobody is pricing in the possibility that a raccoon-level amount of financial literacy could outperform traditional risk management.
We believe this is incorrect.
We believe it is incorrect in a specific and expensive way. The failure mode of sophisticated risk management is not that it is wrong about the world. It is that it is right about the world on a timeline that is longer than the one the position is financed on. The raccoon has no such problem. The raccoon has no timeline. The raccoon cannot be margin called.
This is the central asymmetry of the decade ahead, and it is not in anybody’s model.
The five forces
The next decade will be defined by:
- Compute
- Capital
- Liquidity
- Leverage
- Knowing when you are completely fucked
A great deal has been written about the first four. They are legible, they are quantifiable, and they scale in ways that make excellent charts. The fifth is illegible, arrives without notice, and is typically discovered rather than forecast.
We note without comment that across the entire literature on the first four, the section addressing the fifth runs to approximately zero pages. We have identified an opportunity.
The five OOMs of SITCHY
Orders of magnitude are the correct analytical frame for anything with a durable trendline. We have applied the frame to ourselves. The results are below. We concede in advance that four of the five are activities rather than quantities, and that the fifth is a restatement of the first.
| Order | Stage | Description |
|---|---|---|
| OOM 1 | BUY | The position is opened. Analysis is not yet required. |
| OOM 2 | LEVER | The position is opened again, four times, using the same money. |
| OOM 3 | POST THESIS | The position acquires a narrative. The narrative acquires an audience. |
| OOM 4 | GET MARGIN CALLED | The position is closed by someone who has not read the thesis. |
| OOM 5 | WRITE ANOTHER THESIS | The cycle is the product. See OOM 1. |
Counting the OOMs
Extrapolation is not naive. When a quantity has compounded at a consistent rate for long enough, the burden of proof sits with whoever claims it will stop. We take this seriously. We take it so seriously that we have extrapolated a series with no underlying mechanism, on a logarithmic y-axis, and produced the chart below.
A log-scale y-axis makes any series look like a law of nature. This is sometimes because the series is a law of nature and sometimes because it is a log-scale y-axis. We recommend establishing which one you are looking at. We did not.
The vertical part
Every chart of this kind has a vertical segment at the end, and it is always described afterwards as unforeseeable. It is not unforeseeable. It has a closed-form expression, it is computable in advance, and it depends on exactly two numbers you already have: your leverage and the maintenance margin.
At 4x leverage with a 0.5% maintenance requirement, the underlying needs to fall about 24.6% before the position is closed for you. Not 100%. Not 75%. Roughly a quarter. You can check this yourself on the simulator, which uses the same formula every exchange uses.
We publish that number because it is the one piece of analysis on this website that is unambiguously true, and because it is the number that is missing from almost every document written in this format, including, until this paragraph, ours.
Conclusion
We are constructive on the decade ahead. We are constructive on compute, on capital, and on the continued willingness of intelligent people to describe a trendline at great length without stating the price at which they stop owning it.
Our own thesis confidence remains at 99.7%, a figure we have not derived from anything. Our actual confidence is computed live on the terminal from real market data. The gap between those two numbers is the only genuine finding in this document.
Nothing in this document is financial advice and no figure here predicts a price. The arithmetic is real; the conviction is ours. Use your situational awareness.