Video · 2026-08-05 · 1h 21m · 6 moments

When Genius Failed, Again | Animal Spirits 476

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Claim◆

You cannot blow up a fund because of how smart you are; the only way a fund blows up is with leverage, and this works regardless of intelligence — which is why 'When Genius Failed' should be required reading for anyone managing other people's money.

Michael and Ben argue that the Situational Awareness blowup shows intelligence is not protection: the fund blew up purely through excessive leverage, and the ability to nail a macro thesis does not make someone a good portfolio manager — a lesson straight out of 'When Genius Failed.'

transcript

Ben Carlson: the point that I was making about long-term capital management and the visual was bespoke has a chart showing they said it's crazy how the situational awareness blowup is right in line with the long-term capital management blowup on the Netscape chat GPT timeline... there's a difference between getting the macro thesis right and being a good portfolio manager. This guy is obviously not a good portfolio manager. Correct... he put too much leverage on... But the leverage is the thing as always. This always gets people. It's always leverage... which is why I mentioned he when genius failed should have been required reading. It's not about how smart you are. You can't blow up a fund. And the only way that you blow up a fund is with leverage.

Claim

People with high IQs will always be given money to manage — even after an avoidable blowup — because investors are drawn to brilliance and quirk; this guy deserves a mulligan and will get a second chance, but he should have been a VC investor, not a public market investor.

Ben explains why this 24-year-old will get a second chance despite blowing up his fund: high-IQ, quirky people always attract money. The fund never wound down, investors may even add more, and it's 'the velvet rope' type of fund where access to early Anthropic was worth it — but his real fit would have been venture capital, where you can't get margin-called.

transcript

Michael Batnick: the whole thing about when genius fail... the reason that people like this will always get money from people. If you're an intelligent person and you're super smart, people will throw stuff at you. People will give you money. This guy will totally get a second chance... he should be a VC investor. He should not be a public market investor... The investors in this fund like this was a velvet rope type of hedge fund. You had to be somebody to get in or know somebody to get in. These are not retail money that's going to demand their money back... I would suspect that if his investors were going to demand their money back or give him more, they would probably give more... the first chance is not over. Like the fund didn't wind down. He's still alive.

Claim◆

The most crucial survival rule for any stock market investor is to never become a forced seller — those getting margin-called, whether in South Korea or here, are the ones forced out while others buy the dip and the market keeps hitting all-time highs.

Michael argues survival is everything: investors get wiped out when leveraged or margin-called become forced sellers, like the South Korean investors (3.5% of the population margin-called) during the KOSPI's 40% drop in 5 weeks, which foreign investors then bought while the S&P 500 gapped to new all-time highs.

transcript

Michael Batnick: So they got liquidated... 3 and a half percent of the entire population of South Korea got a margin call... individual investors got liquidated and foreign investors bought the [__] out of the dip... the S&P 500 has gapped higher, meaning it opened higher to a new all-time high... Isn't that these people getting margin called and Leo getting margin called? Like, this is the thing as a stock market investor. You just have survival is the key. Just never get yourself in the position where you're a forced seller. That's like it sounds so simple and people just can't help themselves.

explains mechanism · 1

Claim

You should not let degenerate speculative behavior distract you from the legitimate bull market — speculation never goes away, but right now the degenerate trades are being punished while the real market makes all-time highs, and that's exactly the healthy divergence you want to see.

Michael argues people use degenerate retail speculation as an excuse to dismiss the bull market, but that behavior is permanent and accelerating. The healthy sign here is that the degenerate side (leveraged semiconductors, meme stocks, the 'degenerate Dow') has been crushed while the legitimate bull market reaches new highs — a genuine separation between speculation and real fundamentals.

transcript

Michael Batnick: one of the things that people use to dismiss the bull market or cast doubt is all of the degenerate behavior... I understand that impulse... we live in a world of 24/7 trading of hype everything happens with hypers speed... Do not let that behavior distract you because that is never going away... That sort of degenerate behavior is with us literally forever... I really love to see the fact that in this bull market a lot of that behavior is getting punished not just in the double lever semiconductor trade, but all of the meme stocks, all of the our degenerate Dow stocks... they got cut in half. So, while the legitimate bull market is reaching new all-time highs, the degenerate bull market is in shambles. How could you not love that to see that?

extends · 1

Claim

The Fed only really matters about 5% of the time — when it acts as lender of last resort in a crisis; the rest of the time its forecasts and 25-basis-point moves are basically astrology for middle-aged men who follow it.

Michael lays out his theory that the Fed matters only when it's a crisis lender of last resort; otherwise its influence is minimal and its forecasts are always wrong. He frames the reaction to Kevin Warsh — which macro commentators compared to an emerging-market credibility shock — as proof that the Fed's communication games are overvalued.

transcript

Michael Batnick: I have a theory and I think it's going to be put to test that the Fed really only matters like 5% of the time. And it matters when they are the lender of last resort and when we are in a crisis. That's the only time the Fed really matters. The other time I think it's basically astrology for middle-aged men that talk about the Fed's forecasts... Their forecasts are always wrong. They never help out like when there's an actual bubble. They always are way too late to the party. Like they want to come in and rescue after the fact. That's the only thing that the Fed is good for. Am I wrong?

Claim

If you still think the economy is fake, K-shaped, or only benefiting the rich, you aren't paying attention to what's around you — the planes are full, the restaurants and bars are full of young people, and the strongest evidence is the reality of consumer behavior over social media narratives.

Michael pushes back on the doom narratives by citing concrete observations: July 23rd was the busiest day for commercial air travel ever, and walking around Chicago he saw bars and restaurants full of young people. He argues social media is a 'warped fourth dimension' that makes people distrust their own eyes.

transcript

Ben Carlson: July 23rd was the busiest day for commercial air travel ever... I know everyone wants to say like everything in the economy is fake and it's all K-shaped and it's only rich people, but it's not. The planes are full. The restaurants when I was walking around Chicago... all the restaurants and bars were full of young people. And I keep being told how miserable young people are because of social media and they can't buy a home. That's not what I saw... If you still think like the economy is just all fake, then you're not paying attention to what's going on around you. You're too into social media. It's so nuts how social media is like a warped fourth dimension... People don't believe their eyes anymore. They just believe what they see on social media.

Highlight slides

Blowups come from leverage, not intelligence✦ from: You cannot blow up a fund because of how smart you are; the only way a fund blows up is with leverage, and this works regardless of intelligence — which is why 'When Genius Failed' should be required reading for anyone managing other people's money.Macro thesis ≠ good portfolio manager✦ from: You cannot blow up a fund because of how smart you are; the only way a fund blows up is with leverage, and this works regardless of intelligence — which is why 'When Genius Failed' should be required reading for anyone managing other people's money.Never become a forced seller✦ from: The most crucial survival rule for any stock market investor is to never become a forced seller — those getting margin-called, whether in South Korea or here, are the ones forced out while others buy the dip and the market keeps hitting all-time highs.Forced sellers lose; dip-buyers win✦ from: The most crucial survival rule for any stock market investor is to never become a forced seller — those getting margin-called, whether in South Korea or here, are the ones forced out while others buy the dip and the market keeps hitting all-time highs.

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