by Fade_Dance | 2025-10-11 16:50:25+00:00
>why the heck is so much money pouring into the sector - including Tesla and Facebook

The names you pulled out have Size factor in common, and with the modern market cap weighted index/futures dominated market, flows into Size factor have a close correlation with overall liquidity flows. That's a broad phrase, but if you're talking about the narrative over the past 6 months (most human readable market narratives are bunk, but some are sound) you mainly watched the system deleverage and then releverage, which constitutes a major flow of liquidity. With 7% daily real moves, extreme implied volatility, and more concrete geopolitical uncertainty, portfolio risk metrics from any angle light up and risk has to be taken down. Not just hedge funds and traders (although they exert significant influence), but the more broad equity space as well, such as say pension funds who are in portfolios that target a yearly volatility band (vol targeting), or trend followers (500 billion and highly levered), and of course regular people who for either emotional or other reasons can't take the heat.

Since the tariff shock, realized and implied volatility have come down, which mechanically drives a bid from the vol-targeting world, and gives more buying power to any entity who has a volatility budget (and to some degree everyone does), and that forms trends which bring traders and trend followers back in, and of course allows the construction of new narratives which most humans always like to have before committing capital.

The points of extremely high leverage and extremely sharp deleveraging (panic selling) are often excessive in nature. It's a cycle that repeats, in an ongoing auction and price discovery process that never ends. Better to just look at longer term averages if you want to strip those aspects out. But that does beg the question of why this cycle continues to persist, and the answer is quite simply that dynamically targeting exposure can be profitable even with the obvious drawbacks. Selling volatility makes money. Following trends also makes money, and in trend following most of the profit comes from the extreme moves that you would think are the most dangerous (ex: gold recently, or equities themselves - mechanical trend followers have been increasingly net long equities until exposure started coming down within the past few weeks).

The recent selloff had about 150 billion in forced selling from realized and implied volatility exposed entities: "Taking a look at Nomura's estimated "Index Rebalancing Projection” proxy which is an aggregation of SPX Options Dealer positioning / Greeks hedging, Leveraged ETF rebalancing and Vol Control deallocation flows: -$88.9B for Spot ~-2% move (which nearly doubles to -$151.0B in a -3% slide... which is pretty much where the Nasdaq is right now)." (from Friday)

Ex: The portfolio I run has a volatility selling component, and it's been cranking on that for months now with fine results. Typically as this goes on, human fallacies creep in. Look at incentives, which are usually defined in yearly terms, which leads to traders and portfolio managers feeling like they have "house money" to gives back when they have high profits somewhere. Then you also have the greed and fear of missing out that builds up as well. AI being "hot" and the gold narrative are headline stories now.

The flows above can be modeled: https://ibb.co/zW3PNMYw.

Also remember that modern markets are surprisingly illiquid, which effects both on the downside and the upside. Be careful about assigning a few shares trading at a price to the "price" of the entire bulk of shares. This especially applies to the Teslas of the world that you named, and many of the AI names. People like to extrapolate when they maybe shouldn't be.

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You have some other topics you're bringing up. Some of it can see some pushback: I remember thinking Google was dirt cheap 4 months ago. The popular narrative was that AI was going to destroy Google Search, etc, but I thought it was fairly likely AI search blurbs would not be a catastrophe, and then of course Gemini/Google's in house AI prowess was almost entirely ignored despite fairly excellent execution, and more importantly Google Cloud growth was downplayed at the same time it was hyped up at every other cloud company (that's a spread that seemed unsustainable), and then finally YouTube growth and recent expectation beating aspects of the business were downplayed as well. (This was my biggest equity position if you couldn't tell, although it no longer is since the business seems more in line with peers now).

Then you have some obvious statements that the market is making about currency debasement. Equity markets generally perform very strongly in nominal terms during inflationary periods, and many debasement trades like Gold are through the roof. Perhaps the market is just expecting further concentration of wealth at the top and more asset inflation, rather than goods inflation. Another angle of this is that bonds are not looking attractive to people, and there seems to be some desperation for alternatives (I'd say that explains some of the gold run, especially if you personify foreign central banks this way as well, which is arguably true).