DeepSeek would be a great name for a rock band. As would Rapeseed, an alternative offered by the helpful Whole Foods staff when I asked for canola oil.
Canola so far as I know is unrelated to Nvidia, which is in 756 Exchange Traded Funds. For 92 of those ETFs, it was a 10% or greater weighting. And 76 are leveraged, inversed, hedged. The sea of Large Cap Growth ETFs holding NVDA suggest it may be the most overexposed such stock on the planet.
They’re all reasons NVDA traded $95 billion of stock Jan 27.
To me, the economic model for AI has always seemed contrived. That’s an opinion. I don’t think we’ll pay trillions as consumers on mining our past thoughts for brilliance.
I may be wrong on that. What I know is market structure. The regulations and mechanics of the stock market that in large part determine outcomes.
Stick with me here. What I’m sharing is a key reason why public companies need a new strategy for the addressable market of investment dollars, which mainly go to ETFs.
Public companies, the addressable market is not money buying your story. That segment is a net seller, has been for 15 years. There’s no alpha. There’s beta. ETFs put you in a basket OFF-MARKET. They need the absence of volatility. Do you have a plan?
And ETFs don’t “form capital.” They don’t “invest.” They facilitate more access to the same stocks. That’s how we get NVDA with market cap of $3 trillion.
Despite claiming to do it, ETFs aren’t myriad ways to thin-slice the stock market so you can invest in bitcoin polishers or hydrogen-powered hair dryers. No, ETFs offering fabulously nuanced market exposure all own NVDA.
There are 3,500 ETFs and 115 stocks with 75% of market cap. You can’t get in or out of illiquid smallcaps. So ETFs are inevitably, mathematically, going to own the same stuff while saying they do different things.
NVDA is in several alternative energy ETFs, it’s in a health and biotech ETF from Goldman Sachs. It’s in a high-yield bond ETF, a small cap growth ETF. Yes, really.
Paul Simon claimed there are fifty ways to leave your lover. The result is the same. ETFs are like that. NVDA is a big weighting in something called the Unusual Whales Subversive Democratic Trading ETF. What it offers is exposure to NVDA.
Everybody owning the same stuff is not a problem until one particular thing happens. It’s essential to how ETFs are priced.
As I’ve explained over the years, ETFs were invented by commodity traders who wanted to eliminate going to the warehouse for wheat or cattle or whatever.
They said, What if we traded the RECEIPTS representing the wheat and cattle?
ETFs are receipts representing a transaction to which you are not a party as an investor. You just get to trade them.
And they’re priced by arbitrage – the same things at different prices. There’s a basket of stocks. There’s an ETF. They are supposed to track each other. Firms like Citadel and Jane Street make billions of dollars keeping ETFs and stocks aligned.
It’s literally called the “arbitrage mechanism.”
And there’s another. ETFs are created in large blocks off-market between two parties, and traded in tiny pieces, shares, in the stock market. That’s arbitrage too.
The particular thing that has to remain predictable for this mass complex to function so elegantly is VOLATILITY.
If big things move more than 2%, there’s trouble, Taylor Swift would say. And it doesn’t go away after it happens. It’s like a virus. It becomes part of the data set. And it repeats. Almost never does volatility – wham! – hit. And then vanish. Nothing’s the same as it was, Harry Styles might croon.
DeepSeek wasn’t first. It was third. On Dec 18, the market pitched like a drunk into a ditch with the Fed meeting (there’s an FOMC press conference today). So far as we can tell, it was the largest day-over-day volatility event in SPY ever. Crushing March 2020.
Then Demand in the stock market plunged. Stocks are priced by Demand, Supply and volatility, so any ripple in these is what destabilizes pricing models.
Demand Dec 27 sank by our measures to the lowest level since Dec 2022, which marked the end of the bear market that year. The same thing happened in Dec 2021 – inaugurating the bear market, though we didn’t know till later.
Stocks rise off low Demand, at least briefly, and correcting markets show wild Demand swings. Like we have now.
As the world learned the word “DeepSeek,” NVDA shed the largest amount of market cap in history. The same thing happened on Feb 3, 2022, when META lost $251 billion of market cap, the biggest ever at the time, and we tumbled into a bear market.
Volatility. That’s the big problem. Maybe it melts away. If not, things will start crumbling. Now if you’ll excuse me, I need to hedge some volatility. With NVDA.
