Weekend Reading #69

Photo by Brandi Redd on Unsplash

This is the sixtieth-ninth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 23rd May 2020. To receive a copy each week directly into your inbox, sign up here.

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What we're doing.

Another week of surging stock markets goes by with most market participants still standing on the sidelines in disbelief. As the world begins to return to work (slowly in the beginning) there are some small signs that the outcome looking ahead in the developed world may be even better than many had dared hope only a month or two ago. Sadly in Africa and South America in particular, the caseloads are only now beginning to accelerate. The contrasting approaches in Brazil vs South Africa are notable. On the one hand, President Bolsonaro is being lambasted for his astonishingly laissez faire approach and on the other President Ramaphosa is being lambasted for continuing a very strict lockdown (albeit somewhat lessened in recent days). As we explore in this week’s blog post, political games aplenty abound. 

Sending our fund, deal platform and trading businesses live has changed things for us. We thought we were busy before, but things have now ramped up to another level. Everyone is focused on their own business lines and we gather on Zoom every day as a team to share ideas, troubleshoot and ensure that we’re maximising synergies between the different business units. Slack is also helping to keep everyone in the loop. We’re being ruthless with our time and cutting out those calls and emails that can wait. It’s not always easy saying no, but it’s a skill we need to hone if we’re going to achieve our ambitious targets for the rest of 2020.

Our private deals platform, 3BC, continues to press forward. It’s still early days but the product is doing what it’s supposed to – connecting professional investors with deal flow. This week we’ve been fielding calls from introducers keen to source deals for the platform and benefit from our approach to revenue sharing. It’s clear from these conversations that in the current environment, issuers need funding options. There are lots of platforms out there but 3BC offers something a bit different – access to a differentiated investor community in emerging markets. Sourcing deals has not been a problem thus far and we expect supply to ramp up in the coming months as the impact of COVID-19 feeds into the real economy. 
  
What we're thinking.

“Before, you are wise; after, you are wise. In between, you are otherwise.”
~ David Zindell

This quote is more than just a joke – it’s a truism that explains the human condition. Wisdom cannot be taught, only experienced. Understanding that we are “otherwise” helps us to stay humble, seek help from others when we need it, and plan for multiple outcomes. We cant eliminate risk, but we can manage it.

This week we’ve spent some time thinking about economic nationalism and the weaponization of stock markets. The news that the US is delisting companies controlled by foreign governments from exchanges doesn’t surprise us. In May 2019 we wrote:
 
“It’s not impossible the US government calls foul on the VIE structures used for many US listed Chinese names and penalises these companies, punishing equity valuations and cutting off a source of capital. Nor is it inconceivable that the Chinese government instructs its companies to leave western investors carrying the bag through their own dexterity with the same VIE structures.” 

The risks here are not symmetrical. Indeed, the latter is potentially more lethal to the US than the former is to China. A single judicial ruling in China that the transfer of economic interest to offshore investors through contractual arrangements via VIEs is illegal and prohibited is all it would take to turn the collective market capitalisation of all the US-listed Chinese companies to zero, with shareholders laying claim to a shelf filing in the Cayman islands rather than a Chinese internet behemoth. This is a dynamic situation that we are watching extremely closely as it could have a significant impact on asset valuations and create interesting opportunities.  
 
What we're reading.

This week the FT brought us news that gamblers who can’t bet on professional sport because fixtures have been scrapped are flocking to the US stock market. The big story here is the creation of a new class of customer for online brokerages – a development that adds fuel to the market rally. Let’s call them “The Malletts”:

“In January Mr Mallett opened a brokerage account with Royal Bank of Canada and as the rally intensified he has traded more, investing C$3,000 of stimulus money he received from the Canadian government into US stocks including Lyft and Tesla. “I’m a little bit up,” he said. “I cut grass at a golf course. I’m on a lawnmower refreshing the app every few seconds – it’s great.”

Of course, this isn’t really news. For years now, next-gen retail brokers have been applying the gambling industry’s marketing playbook to the world of equity investments. And it’s worked. For an entire generation of educated millennial consumers, investing has become the only game in town, albeit one that is increasingly passive and automated. As we pointed out in last week’s communique, we are acutely aware of how passive flows create structural peculiarities that can distort asset valuations. This trend isn’t going anywhere. 

This short book from Daniel Klein has wonderful title. “Every Time I Find the Meaning of Life, They Change It: Wisdom of the Great Philosophers on How to Live”. The words of Reinhold Niebuhr set the tone for what is a wryly humorous look at some of the great philosophical pronouncements on how life ought to be lived. This book doesn’t take itself too seriously. It’s short, fun and surprisingly arresting. Fifty years ago Daniel Klein embarked on the study of philosophy at Harvard, where he began gathering wise words from the world's greatest thinkers. Now in his seventies, he revisits these pronouncements with warmth, charm and done dry sense of humour. A must read for anyone who’s tired of half-baked self-help tomes that are effectively blog posts spun out into full-length books. 

George Saunders writes surreal short stories and experimental novels (including one that one the Man Booker Prize in 2017). His early work in particular presents a vision of America's near future that’s both extremely dark, and extremely funny. His characters are a ragtag gang of misfits and losers struggling to survive in an increasingly chaotic and dangerous world. His work will make you laugh. And it will make you worry. But most of all, it will make you think.

A quick word on this Forbes article, provocatively entitled, “DeFi Is Reinventing Global Finance Faster Than The Fed Can Print Money”. This paragraph pretty much sums it up:

“The decentralized finance (DeFi) movement is reimagining the way we do finance. From savings, peer-to-peer (P2P) loans, derivatives to insurance. Within just a blink of an eye, DeFi has become a global alternative to traditional finance.”

The message that central banks have undermined the traditional monetary system is old hat – but the frequency and ferocity of this content in recent weeks, following unprecedented central bank intervention in capital markets globally, is significant. Like a snowball rolling down a hill, the narrative is becoming larger, fully formed, and harder to ignore. And it’s coming straight at us.
 
What we're watching.

Key & Peele is an American sketch comedy television series created by Keegan-Michael Key and Jordan Peele. Each episode consists of skits starring the two actors, with their unique take on American popular culture, ethnic stereotypes, social awkwardness and race relations. Ridiculously well convinced and belly-laughs-out-loud funny.

Less funny but no less entertaining (at least to us) is this interview with Stanley Drunkenmiller (thank you to Jawad Mian for the link). The legendary investor offers his thoughts on post-Coronavirus markets  and makes it clear that the acceleration of digitization is a major theme. The question is, when will Druckenmiller and his many disciples join the likes of Paul Tudor Jones and start buying Bitcoin?!

Plain entertaining is a Netflix drama series called The Stranger, an adaptation of a Harlan Coben novel, and we’ve been guiltily binging on it this week. Guiltily because we don’t actually think it’s very good! But that depends on how you choose to define ‘good’. 

If you’re after BAFTA-claiming acting, an HBO-sized budget, beautiful cinematography, a moving soundtrack and cliffhanger episode endings, then The Stranger is not for you (maybe watch Normal People instead). But if you simply want to be entertained, The Stranger certainly keeps you wanting to right-click onto the next episode. 

So how do you measure ‘good’? There is no objective measure, but ‘watchability’ for a Netflix show is a pretty good place to start and The Stranger sure is watchable. 
 
What we're listening to.

Van Morrison in the morning. Chopin in the evening. House music in between. Our taste is nothing but eclectic! 

We’re always looking for new ideas so let us know what you’re listening to and we’ll share with our community. Perhaps it’s time we added a TBC Spotify playlist to our roadmap! Joe Rogan certainly thinks Spotify is half decent.