Summary of Chaos Kings by Scott Patterson: How Wall Street Traders Make Billions in the New Age of Crisis

By Justin Reese

DISCLAIMER

This book does not in any capacity mean to replace the original book but to serve as a vast summary of the original book.

Summary of Chaos Kings by Scott Patterson: How Wall Street Traders Make Billions in the New Age of Crisis

 

IN THIS SUMMARIZED BOOK, YOU WILL GET:

• Chapter astute outline of the main contents.
• Fast & simple understanding of the content analysis.
• Exceptionally summarized content that you may skip in the original book

Chaos Kings is a deep dive into the world of billion-dollar traders and crisis predictors who strive to turn extreme events into financial windfalls. Two factions have formed around how to respond: Nassim Nicholas Taleb believes humans can never see the big disaster coming, while Mark Spitznagel launched the Universa hedge fund. Didier Sornette, a French mathematician, believes Dragon Kings are punishing events that can be predicted and defended against.

• Language: English
• Publisher: jUSTIN REESE
• Release date: Jun 6, 2023
• ISBN: 9798223324249

Book preview

HELL IS COMING

Bill Ackman dreamed of a virus spreading in China, replicating and infecting people at an exponential rate. He became particularly concerned when he learned that five million people had fled Wuhan, where the virus originated, before the city went into lockdown. The World Health Organization declared the outbreak of the deadly novel coronavirus constituted a global health emergency, and Ackman began to think about the billions of dollars’ worth of investments his firm owned. He was worried about the global economy and the spread of the virus. Jeff Ackman, a long-term investor at Pershing Square, saw a powder keg of risk in his portfolio due to the Covid-19 pandemic.

He called executives at the world's largest financial institutions and emailed Warren Buffett to cancel Berkshire Hathaway's annual meeting due to the virus. He shut down the office and told everyone to work from home, saying it was going to be a short-term disaster-recovery test. He made similar moves before in times of chaos, such as betting against companies exposed to the U.S. housing market in 2008. He noticed bond markets weren't reflecting the same risk he saw. The most important details in this text are that Pershing Square's Jeff Ackman purchased insurance contracts on $42 billion in U.S. investment-grade debt, more than $20 billion in an index of European debt, and a $3 billion position in junk bonds.

This bet paid off if the bond indexes fell, but if they crashed, it would pay off if the bond indexes fell. Ackman quickly sold his exposure to $4.5 billion worth of the investment-grade bet, $4 billion of the European stuff, and $400 million of the junk bonds, amassing a $2.6 billion profit that helped offset the losses in the stocks he had held on to. He then plowed his sudden windfall back into stocks. Bill Ackman, a hedge fund manager, bought Hilton, Berkshire Hathaway, Starbucks, Lowe’s, and more in March, even as the pandemic accelerated. He feared it would all be for nought if the U.S. didn’t get a handle on the pandemic and took to Twitter to call President Trump for a national thirty-day lockdown.

Scott Wapner, a host for CNBC, saw the tweet and asked Ackman to talk on air. Ackman told Wapner that the only way to deal with the virus would be to shut down the global economy and that the canary in the coal mine was New York’s Chinatown, where people had already stopped going to restaurants and many were shutting down. The most important details in this text are that Jack Ackman, a hedge fund manager, made headlines for his bearish bets and his understanding of exponential spread, which is key to managing risk on Wall Street and throughout the economy. His performance was described as near-hysterical and doom-laden by the Guardian and Forbes, but it was his understanding of exponential spread that alerted him to the Covid-19 virus's threat. Ackman was attuned to the exponential risk of the virus and panicked early, buying stocks to protect himself and his investors.

His bet on a crash in March resulted in a total gain of $3.6 billion from his $26 million bet. He was not the only one who understood the nature of exponential risk in early 2020, as another trader had also made a giant bet on a crash.

PART 1

BOOM!

Mark Spitznagel, founder of Universa Investments, a hedge fund with a unique strategy that thrives on chaos in the markets, was working from home in his century-old log house in Northport Point, Michigan. He had been preparing for moments like this since he was a sixteen-year-old staring in awe at the pandemonium of a Chicago trading pit in the 1980s. As pandemonium broke out across world markets, Spitznagel was perfectly calm, communicating via intercom with his small team of traders back at Universa’s headquarters in Miami’s Coconut Grove. He watched the imploding markets with a sense of dread and fascination. Universa, a trading machine with a strategy designed in the late 1990s at Empirica, had been positioning itself for such a disaster for years.

Nassim Nicholas Taleb, a contrarian Lebanese-American trader and mathematician, had grown convinced that financial markets and institutions had become far riskier than many realized. To test this theory, Taleb and Spitznagel launched Empirica, a hedge fund designed to reap enormous profits from crashes. Empirica only made a killing when the market crashed, purchasing positions that produced extreme payoffs when stocks fell sharply. The Black Swan Protection Protocol was a strategy used by Universa to protect investors from Black Swans, such as the Great Depression of the 1930s. Universa had made a fortune during the 2008 Global Financial Crisis and other turbulent periods.

In March 2020, the value of everything from stocks to bonds to commodities was in complete free fall. Universa's team of sixteen programmers and traders were exhausted, but had little time for rest. Spitznagel took up his usual spot at a desk perched beside a floor-to-ceiling window with sweeping views of Miami and Biscayne Bay. The 2008 financial crisis was a car crash in slow motion, with the Dow Industrial Average plummeting 13 percent and bond markets freezing. Universa's Black Swan Protection Protocol Fund had clocked an astonishing three-month gain of more than 4,144 percent.

Experts were skeptical of the returns, but Spitznagel said Universa never speculated and kept the same crash protection in place for its clients. Spitznagel conceded that Nassim Taleb had popularized the Black Swan concept, but Universa was entirely Spitznagel's baby. Taleb had become a celebrity thinker and philosophical gadfly, extending his Black Swan concept beyond trading and finance. He predicted pandemics in 2010, Antifragile in 2012, and The Precautionary Principle in 2014. In January 2020, he raised the alarm, but it was ignored. In today's highly mobile super-networked world, the risk of extreme events is greater than ever.

RUIN PROBLEMS

Nassim Taleb was unnerved by the high rate of contagion of the novel coronavirus that was sweeping through Wuhan, China in January 2020. He called Yaneer Bar-Yam, a friend and expert in complexity theory, who warned that with the ubiquity of long-range transportation, pathogens could become so aggressive that the entire host population dies. Bar-Yam warned that with the ubiquity of long-range transportation, there is a critical point at which pathogens become so aggressive that the entire host population dies. The most important details in this text are that Mark Zuckerberg founded Facebook in 2004, the iPhone didn't exist until 2007, Tesla produced its first all-electric