Yesterday we talked markets with phil dauber, author of Morning Musings- Thoughts from Dauber Island here on Substack. Special thank you to Hedge Fund Telemetry One Chart (Tom Thornton!) for introducing us.
MARKETS TOO COMPLACENT?
JPMorgan CEO Jamie Dimon said yesterday that he expects cyber and terror attacks as retaliation in the Iran conflict.
Phil broadly agrees: “I don’t think the Iranians have done everything they can or will to retaliate,” he said. “The market is too complacent [to these risks].”
Add to that, he says “one of the issues right now with the Iran military action is it’s unclear what the goals are. The president had 3 phone interviews and gave 3 different goals: regime change, internal revolution, and a deal… More than anything else, the market hates uncertainty.”
So Phil is cautious in this environment but added that “it’s hard to be cautious when the market goes up every day,” he said. “Putting Iran aside, the market has been up and to the right for a while. Liquidity and inflows trump everything, and right now, money’s coming into the equity market.”
💡Reminder: “It always makes sense to me to have some kind of downside protection, whether it’s downside stops or an option position where, when you get to your pain level, you’ve already built in the fire escape.”
PAVLOVIAN’S BUY THE DIP?
Phil guesses that around 30-40% of traders now weren’t around in the Great Financial Crisis, and so have been conditioned to buy the dip as it has pretty much worked every time.
“Buy the dip gets a little self-fulfilling because you have a couple of people do that and then everyone says ‘uh oh, I’m missing it’ and runs back in,” he said.
But that won’t work forever - everything works until it doesn’t, Phil said. Add to that, there’s the big ol’ passive buying machine that helps fuel buy the dip. “If passive flows ever reverse, it’s going to be a fire drill getting out of the positions,” he said.
Phil is talking from experience:
“I started trading in ‘87, so I watched portfolio insurance basically end people’s careers because they were sure markets would never go down like that.”
“I was at Bear Steans in ‘08. 5 days before Bear got shut down, the guys trading MBS were sure everything was fine. Sometimes the disaster move happens.”
THE SIGNAL TO NOISE RATIO IS “AS BAD AS IT’S EVER BEEN”
“Now, everybody has to watch Twitter and everybody’s looking at every other news aggregator,” Phil said. “So we’re reacting to everything. Any Bloomberg red headline, markets move. The signal-to-noise ratio, I think, is as bad as it’s ever been.”
The (or at least an) antidote is to zoom out. “We all stare at our screens, and if you’re looking at a 5-day chart it looks like it moved a lot. But if you look at a 1-year chart it really didn’t. And I think that’s why you have some of the longer-term players saying ‘hey, I think my basic thesis is still correct. I don’t need to really adjust my portfolio dramatically.’”
Of course, if you’re a short-term trader that requires a different framework, but if you’re more of an investor than a trader, it’s worth remembering “the 3 or 4 cornerstones” of your general thesis, and ride it out unless one of them changes fundamentally.
THE GREAT AI SCARE OF 2026, CONTD.
The uncertainty around the speed of AI’s impact is a big concern, Phil said. “Everybody thought AI was going to be great, but we had a few years until it would really start competing for white collar jobs,” he said. “And then Claude rolled out a couple of new modules and everybody had to do their math again and say, ‘maybe 30% of jobs in 3 years.’”
In an echo of our favorite rodent The Blind Squirrel describing the current market environment as a “rotating locust swarm” moving from sector to sector, Phil said:
“They [Claude] rolled out the financial model and all the brokers went down. They rolled out the lawyer model and all the brokers went down. And all due respect to Citrini, he does great work, but he wrote a 30 page article and took billions of dollars out of the market on a ‘what could happen’ paper. He doesn’t have a crystal ball, he’s not from the future, yet IBM was down 12%. This is an example of why it’s hard to trade this market.”
Adding fuel to that fire is that there are so many mechanical, algorithmic systems that just react instantaneously and the whole thing just feeds on itself.
PRIVATE CREDIT - NEVER JUST ONE COCKROACH
Phil views the private credit market as a significant systemic threat, stating, “I think it’s a huge deal... This feels a little bit 07, 08 ish to me.”
He points to Blue Owl as a “poster child” for potential problems in the private sector: “They sold a bunch of private credit to a consortium for 99.5 cents on the dollar, and trumpeted it. That was a big deal. Well, what they didn’t tell you was that one of the buyers was one of their subsidiaries, and also a bunch of distressed funds went in and said ‘we’ll buy your credit for 70 cents on the dollar. Well, what is the credit worth? The problem with a lot of this credit is because they’re illiquid markets, you can’t mark to market, you mark to model. And the model is subject to whatever parameters you put in the model."
Add to that, he says there isn’t enough due diligence, and there’s also cases of outright fraud, specifically cases where companies “pledged the same assets to multiple lenders,” a problem he says has reached the “tune of billions of dollars.”
The danger is not ring-fenced; Phil said “life insurance companies have major exposure to private credit” and that major banks like Jefferies, Wells Fargo, and JP Morgan have already “lost a lot of money” on various blowups. This exposure stems from a desperate “chase for yield” to cover liabilities.
Phil also highlights a regulatory shift: the FDIC is forcing banks to recategorize hundreds of millions in loans to private equity intermediaries as “NDFI” (non-depository financial institution) loans rather than commercial ones. While the industry currently manages to “extend and pretend” by avoiding mark-to-market valuations, Phil warns that “there are going to be some that are going to blow up.” When these failures occur, he predicts a “domino effect” where investors must sell liquid assets like equities and gold to raise cash quickly
🪢Some great charts from Phil on private credit here.
Thank you to everyone who tuned in live! we’ll be back Talking Markets on Wednesday at 4pm ET with the one and only Vincent Deluard.
Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and overall financial plan.
