Last week, AI edged back ahead of Hormuz in a contest for pole risk position that has changed leaders several times since February 28. The Strait pivoted back towards the negotiating table instead of the battlefield while AI claimed its first (youngest?) victim in the hedge fund Situational Awareness. The handover was neat: one risk resumed diplomatic theatre just as the other produced yet another example of the consequences of hubris. The Hormuz supply shock is like cat hair: you just can’t get rid of it. Negotiations have lowered its claim on the front page, not removed its claim on portfolios.
In blithe defiance of some very real evidence out there that we still had reason for concern, rampant optimism, fueled by money, ego, and a maddening fingers-in-the-ears-can’t-hear-you-lalala denial, there seemed no longer to be any room in the discourse at ‘Situational Unawareness’ for anything but the sunniest outlook. Goldman was allegedly the guilelessly astute child at the procession who pointed out the emperor's nakedness. And though Situational Awareness was launched to prove that a front-row seat to the AI revolution conferred a front-running advantage in the stock market, its abrupt demise ended up proving the opposite. Instead of demonstrating that expertise in artificial intelligence translates into investment acumen, it merely remind investors that understanding a technology and understanding its market value are two entirely different disciplines. To quote Morpheus in the Matrix, “There is a difference between knowing the path and walking the path”. Forecast of the future can be right and the position insolvent.
Don’t get me wrong, AI isn’t some rusty ’73 Ford Pinto with a factory-defective gas tank that causes it to explode when it’s rear-ended in the parking lot of the supermarket; it’s more like next year’s Lexus, but, as Situational Awareness reminded us, it still has a tank. In the last two years, despite repeated fears that AI models were developed by a kind of Orwellian Ministry of Malign Intent, investors returned to AI after every pullback – it is all-powerful. It will have certainly created more than one mutually abusive marriages between un-moneyed techies with AI-based stories and the financiers who, desperate to get in on the action, bankrolled them. Last week was a reminder that expertise may identify where the road is going, but leverage still decides whether the passenger survives the journey.
The ROOF Scores suggests that investors are becoming increasingly anxious across all markets we track. Aggregate sentiment fell from -0.28 to -0.47 (only 3 bps above the bearish threshold) last week and from -0.16 a month ago, with the weekly move continuing to confirm the monthly deterioration. Investors are already bearish in global developed-markets (-0.69), global emerging-markets (-0.76), and APAC ex-Japan (-0.64). Chinese investor sentiment remains the most bearish-1.44, although the +0.15 weekly move may constitute an early-turn signal. Japanese investor sentiment is very negative at -0.47 after deteriorating materially over the month. Developed markets excluding the US sit exactly at -0.5, on the bearish threshold, with weekly and monthly changes aligned.
The neutral readings in the US, Europe, the UK and Australia offer less comfort than the label implies. US and European investor sentiment was little changed last week, but UK and Australian sentiment deteriorated materially. No market currently shows a confirmed early-turn signal.
Thresholds are rarely interesting until someone ignores them. Nor should investors underestimate the tenacity of hubris and its extreme resistance to sharing the emotional spotlight with doubt. At today’s weaker sentiment levels, that matters operationally: investors are more likely to discount positive news and overreact to negative news, leaving crowded positions vulnerable to a single adverse headline. Doubt, when heard, gives reasoning dimension, improves performance, and can stave off disaster. Silicon Valley’s techies may symbolize the risk tolerance behind the American Dream—it settled the West and built the railroads, I suppose—but I like to think the doubters with the anxious foresight to circle the wagons also had something to do with it.
Contingency thinkers shall inherit the earth.
Aggregate ROOF Trend: A one-year line chart of the equally-weighted average ROOF score across the ten markets. The black line is the aggregate mean of ROOF scores across the ten markets; the shaded grey band shows the range from the most bearish market's ROOF to the most bullish market's ROOF on each day, indicating the dispersion of sentiment across the universe. Reading it: a rising line indicates increasing risk tolerance; a declining line indicates increasing risk aversion.
Regime Distribution
Regime Distribution: Three horizontal stacked bars show how the ten markets are distributed across the five regimes — today, one week ago, and one month ago. Each bar is colored by regime: red (Bearish), yellow (Negative), grey (Neutral), blue (Positive), green (Bullish). The white vertical marker on each bar shows the aggregate ROOF score for that period. Tick marks below the bars align with the regime thresholds at ±0.20 and ±0.50. Reading it: a leftward shift over time indicates broadening deterioration; a rightward shift indicates broadening improvement. Widening tails signal rising dispersion.
Market Monitor
Market Monitor: A table showing, for each market: current ROOF score, current regime, weekly and monthly changes, regime one month ago, and distance to the nearest extreme threshold. Color cues highlight regime deteriorations (red) and improvements (green). Reading it: scan the "1M Ago Regime" column for markets that have crossed regime bands over the past month; check the "Distance" column to find markets close to the ±0.50 extreme thresholds.
Correlation Matrix
Correlation Matrix (Δ1M): A heatmap of correlations between monthly sentiment changes across all market pairs, over a rolling 60-day window. Green cells indicate that investor sentiment in the two markets changed in the same direction; red cells indicate opposite directions. The rightmost column shows each market's average correlation with the rest of the universe. Important: these are correlations of sentiment changes, not market returns or ROOF levels. High correlation means investor mood in the two markets moved in sync over the past 60 days.
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