Weekend Reading #90

Photo by Drew Coffman on Unsplash

This is the ninetieth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 23rd October 2020.

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What we're doing.

One of the big themes for us as a business is connectivity and access, and our belief that all things being equal, the density of a network (i.e. how connected it is within itself) is much more critical than the size of the network (i.e. the number of nodes). Of course, this assumes a decent base number of connections, since a network of one is of rather little use. 

By first combining all our individual networks into one, and then building connections between them, we give more of them more access to more opportunities – it’s an allocative efficiency where everybody wins. 

We’ve started doing that with 3BC, building out our reach into private market investor and corporate communities in such diverse places as the US, Continental Europe, South Africa, Turkey, the Middle East, Hong Kong, Thailand, Indonesia and Singapore. We continue to build on that, increasing the density of those connections with every deal we list and every introduction we make. 

In contrast, the public market space is much more matured and regulated. Yet it is not without its challenges – if it were, public markets would be accessible to everyone, everywhere; they’re not. While the number of institutional brokers around the world dealing in publicly traded assets is huge, an array of costs impedes them from forming connections amongst themselves and their clients, including connectivity costs. 

We have been working in stealth on a product now for nearly 6 months in the public market space and we will shortly be ready to launch. Stay tuned in the weeks ahead as we prepare to give it a full go. We are incredibly excited and look forward to sharing more details. 

What we're thinking.

When it comes to investment ideas, there is often nothing sexier and more attractive than businesses with exponentially growing earnings forecasted for many years to come, where the sky’s only the first limit to what they could potentially achieve. The problem is that everyone wants these names, and the resulting mania causes the risk/reward balance to oscillate between attractive and terrifying quite frequently. 

For a machine, risk/reward doesn’t matter, and for many months now, more so than before, market flow has been dominated by passive and systematic trades, to the tune of c. 70% of flow being machine/algo driven. Active managers have largely stayed on the side lines, holding firmly to the argument (perhaps rightly) that the fundamentals don’t line up with the valuations – regardless of how sexy these top performing names are as businesses. 

We, too, have always had a “growth” tilt in our preferences. But we are always conscious about not being ideological – ideologies are for politicians, not investment managers.
 
We are starting to see the first signs of a cyclical rally. We have written before about inflation and its potential implications. We haven't seen an inflation narrative in global markets for well over a decade and the types of instruments that do well in this environment have not been in the limelight for a long time. Copper, for example, is a couple of percent away from a 6-year high. This is not without good reason as investment in supply has been dramatically curtailed in recent years. And what happens when the cyclicals catch a bid and the commodities rise is that “Traditional” EM begins to attract headlines again, with this week’s spotlight squarely on the Philippines’ recent outperformance. The Philippines is a tiny market which few investors usually pay attention to, so for it to feature like this is quite instructive. 

“Value” is the preserve of active, human managers. Many of them have been rather silent in these challenging times. But as the uncertainty of the US election – whichever way it goes – is thrown off, barring a cataclysmic outcome (widespread violence, a contested result etc), the active community could make its value (rather than price) driven perspectives known in the market. With active money naturally biased towards “value”, notwithstanding the broader structural flow from active to passive management, a rally in this beaten-down space of “traditional” sectors wouldn’t be eye-catching at all. 

On the other hand, a truly eye-catching announcement this week from Paypal took most people by surprise, as Paypal announced it would allow payment across its network in 4 cryptocurrencies. Yes, it was even featured on BBC news – that's how mainstream this news was. This is a monumental moment for crypto and Bitcoin in particular. One of the biggest problems any crypto investor faces is that in order to spend their cryptos, they must convert it back to fiat and encounter enormous transaction costs as well as complexity. By allowing its users to pay in crypto, Paypal offers them huge savings and improved convenience for anyone who wants to own cryptocurrencies. What is however puzzling is that apart from Bitcoin and Ether, Paypal also chose to offer Bitcoin cash and Litecoin, both of which are considered by many (including ourselves) to be almost worthless.  

We have written in the past also about Binance, the world’s largest crypto exchange and fast becoming a fully-fledged (albeit unregulated) new-age bank. Binance also recently announced the offering of a Visa payment card which would allow users to spend their cryptocurrencies. Both Paypal and Binance are approaching the same problem but from completely different angles: One from the world of traditional fintech and the other from the world of crypto. Either way, the winner is crypto in general as the barriers to adoption continue to fall. The question is do you really want to spend your Bitcoin when it still has the potential to rise parabolically? The real game changer would be when Paypal et al begin to offer the facilities to hold and spend stablecoins. But with all the political hurdles against such a development (and the subsequent circumvention of the traditional banking system that will result), that will probably take a bit longer.

What we're reading.

A recently released book worth reading that may help you to get our head around the current political climate is The Tyranny of Merit by philosopher Michael Sandel.  

As we read frequently in newspapers and on social feeds, these are dangerous times for democracy. Or, at least what we’ve called ‘democracy’ in recent years in the West. Populism is stamping its authority all over the world, replacing mainstream parties and politicians who are struggling to make sense of the discontent buried deep in our societies. This discontent has given rise to strongmen leaders, like Trump, Bolsonaro and Erdogan, and their ascent feels like the angry culmination of decades of widening inequality and a version of globalisation that benefits only those at the top whilst leaving most citizens feeling mightily disempowered. 

This very readable book tries to unpick the reason behind this disempowerment. Sandel argues that before the mainstream parties can hope to win back public support, they need to learn why populism has gotten so popular over the last decade, looking at the legitimate grievances that many people all over the world now feel.  

Sandel argues that a key part of this disenfranchisement has been the way our attitudes have changed towards success and failure. He shows that the populist complaint is based largely on, what he calls, the tyranny of merit, where the hubris a meritocracy generates among the winners and the harsh judgment it imposes on those left behind is creating an enormous gulf between the haves and the have nots. From college admission scandals to financial corruption to tax evasion to cheating in sport, the many feel as if they're being cheated out of the truth by the entitled few.  

As Sandel states, this isn’t necessarily a failure of the current climate, but rather a failure of the way society has developed over the last 40 years. Even a perfect meritocracy, says Sandel, would be a bad thing. “The book tries to show that there is a dark side, a demoralising side to that,” he says. “The implication is that those who do not rise will have no one to blame but themselves.” 

And that is a pretty good summation of the current state of the world. It’s a book worth reading as we build towards a US election which will provide another health check for the state of Western democracy. Sandel's is an insightful critique of where our societies have gone wrong. By engaging with smart minds like his, we might be able to do a little to put things right.  

One of our new favourite minds is Portuguese political scientist and author, Bruno Macaes. In this superb piece he outlines his view on China’s Belt and Road initiative. What we like about Mr Macaes is how he is pragmatic about his views on the US and China and has no ideological undertones unlike many of the pieces we tend to come across on this subject and many others. In the piece he writes further about how important this plan is to Xi Jinping and China and not for the reasons many would think.

What we're watching.

This week we saw the US Democratic Party’s rising star, Alexandria Ocasio-Cortez (AOC), try her hand at live steaming her attempt at new hit game, Among Us, on Twitch. This in our view is a genius move to appeal to a younger voter base. Her stream attracted nearly 440,000 concurrent viewers: not bad for a first attempt. This is yet another example of how gaming is taking over the world. Most of her audience would most likely be very much accustomed to watching streams on Twitch and the viewing numbers tell the story.  

Given how there’s a US election looming, it felt like the right week to dive back into The West Wing. All 7 series are currently streaming in the UK on Channel 4’s All4 service and so you’ve no reason not to sit back, relax and transport yourself back to Series 1 and 1999, pre Millenium, pre 9/11, pre GFC, pre Trump and enjoy what the world looked and felt like when people used pagers and flip phones, Twitter was just something the birds did in the Rose Garden and political press conferences contained more laughter than hard questions.  

21 years has passed since the show first aired and it’s interesting to consider the huge changes that have taken both in the world and in television since. It’s quite amazing how engaging, current and relevant the West Wing still feels. Other shows from that era feel like they’re from another time and place, but the West Wing, thanks in no small part to Aaron Sorkin’s razor-sharp script, still has the power to grip and entertain.  

It’s also a show where the episode length is a mere 40 minutes. These days, with the norm being for episodes to reach an hour, if not longer, it’s refreshing to be able to watch an episode of immensely satisfying television without feeling like you’re giving up an entire evening. What’s more, with the US election inbound, there’s plenty to be learned about American politics. If things get messy in the coming months, you stand a chance of sounding smart at dinner parties (on Zoom) if you’ve been concentrating whilst Sam, CJ, Josh and Toby talk you through the finer points of US law.  

If you’ve watched it before, don’t hesitate to jump back in. If you’ve never seen an episode, man, are we jealous!

What we're listening to.

So, we try not to talk about our heroes every week, but we did warn a few weeks back that Bruce Springsteen had a new album coming out. Now it’s here. And it’s superb.

Whether you love, hate or are ambivalent towards The Boss, Letter To You should still be considered a remarkable musical achievement. Recorded in 5 days at Springsteen’s New Jersey home studio, the album, his 20th, is a tour de force of musicianship, with Bruce’s legendary 7-person-strong E Street Band providing a celebration of live music and an antidote to auto-tuned pop. There is no dubbing or voiceover here. This is live music, in the raw, like the old days with instruments and singers in one room, working together. The freshness and energy you glean from the record is all the better for it.

The fact this album was pulled together in such a short space of time is an even more remarkable feat when you consider how it stands in contrast to the way much of Springsteen’s other music has been made over the years. A student of his craft, putting down songs on record and pulling together the eventual albums have often taken him an age. His 1975 classic Born to Run took 14 months. The River, eventually released in 1980, was ready to go in 1979 when Springsteen scrapped the whole thing and spent another seven months recording it all again. A perfectionist he is, but it feels like he found perfection in under a week this time around.

Accompanying the album is a documentary on Apple+ that takes a behind-the-scenes look at the recording process of the album but also looks back at Springsteen’s past and his musical career. Despite looking like a 35-year-old, the man is in fact 71, and the theme of the album and the documentary seems to centre on mortality and the passing of time. This year, more so than ever, we have all been reminded how random and chaotic this world can be, how short life potentially is, and Springsteen seems to be reflecting in this latest work on a life well lived, a body of work to be proud of and, potentially, the coming to end of the road. This sense of a ticking clock is likely a reason why Springsteen chose to work so quickly on this piece of work. We’re delighted he did.  

For those of you with a more classical tilt, perhaps deploring the fact that most concert halls remain out of action, great news: the Barbican has reopened and has been given the “COVID Secure” stamp of approval. We haven’t been in, but the Barbican seems to have taken an interesting step towards monetising a WFH (in this case, “watch” from home) future.

This week, the Kanneh-Mason family (arguably Britain’s “most musical family”, most notably with Sheku Kanneh-Mason having performed at Prince Harry and Meghan Markle’s wedding) performed their first ever public concert at the Barbican. Audiences had two choices: £25 per ticket to watch live at the Barbican, or £12.50 to watch a live stream.

Unfortunately, we missed both the live event and the live stream – but when it comes to tackling audiences neither too obsessed about sound quality nor too bothered to travel to concerts, the Barbican may have just managed to expand its seating capacity exponentially.

And it’s COVID-safe too.