Weekend Reading #196

This is the hundred-and-ninety-sixth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 26th November 2022.

To receive a copy each week directly into your inbox, sign up here.

*****

What we’re thinking

If there was any doubt about how the US markets dominate our perceptions of time, this week presents some pretty good evidence. Thanksgiving holiday in the US has taken away a day and a half of trading in New York, and the resulting feeling that this is a “short” week – even as the rest of the world probably doesn’t share in the Thanksgiving tradition – is a strange but not unexpected one. Whatever one may say about the US losing its top position in the world, it still commands huge mindshare when it comes to the global economy and markets.

That said, the rumblings in the underbelly of financial markets continue, and one is best not lulled into a sense of complacency by the “short” trading week. In the crypto world, disbelief is prevalent at how SBF not only remains free in the Bahamas after the FTX shambles but is in fact going to speak at the New York Times’ Dealbook summit on the 30th of November (via video call). No, that’s not a joke:


As it happens, it would also set you back $2,499 to attend the conference, and attendance is by application only.

Unfortunately, the puff pieces attempting to shape a narrative that absolves SBF of guilt continue, including this coming from the Wall Street Journal entitled “Sam Bankman-Fried's plans to save the world went down in flames”. Spoiler: the part where it actually suggests it was all rather fishy is all the way at the end of the article, so no, they didn’t mislead; but they certainly didn’t put the hard truth upfront. If your IP is getting blocked for even the one free article:

As icing on the SBF cake (as if all of this isn’t already sufficiently unbelievable), it also turns out that Alameda research had bought a stake in a small rural US bank and transferred ownership of the stake to FTX, with the bank subsequently being added as a member of the Federal Reserve Banking system (h/t Ben Hunt) and with a board of directors which includes rather prominent figures associated with Gemini and Deltec (aka the bank of sometimes-controversial USD stablecoin Tether USDT). Of course, crypto twitter promptly went to google maps to look for said bank and while it exists, the experience of seeing it is best had without spoilers (clue: it reminds us of the time we went hunting for Vakrangee Kendras for those who know what that means).

Interestingly, for Farmington State Bank, or Moonstone Bank as it’s now called, it seems to be business as usual, according to this interview recently done with them.

While all of the action gravitates around SBF news, other moving parts in the crypto world teeter over the “traditional” system as we know it. Perhaps these two worlds aren’t as segregated as one would like to believe.

For one, the ongoing liquidity/solvency issues at DCG/Grayscale/Genesis remain an overhang, even as news flow has receded somewhat in recent days (though this could change any time, even from the time we press “schedule” on this newsletter to the time it gets sent). While many attribute the “degeneracy” of crypto leverage and trading to the likes of 3AC and Alameda, in the background of all of this is actually funding and leverage provided by the OG itself, quite aptly named Genesis. The arbitrage between GBTC and BTC (the former previously trading at a premium thanks to it being the “only” security-like means of getting BTC exposure including in 401k plans) allowed sizeable leverage to be gleaned from the arbitrage. It was this that became the primary funding source for the capital used by the likes of 3AC to run the trades that followed. Turns out Grayscale was not “just” a low-risk, benevolent ETF aspirant.

What we are reading.

In another corner of the crypto-stock interface, a familiar name with a shady past has re-emerged. Brendan Blumer, of Block.One and EOS provenance, who last year made waves with the announcement of a plan to launch a new crypto exchange called Bullish via SPAC (which we previously wrote about) appears to have taken up a large but reportedly passive stake in crypto-focused bank Silvergate, totalling almost 17% of the equity considering his and Block.One’s combined stakes. The golden question here is what the purpose of the transaction is – being “passive” doesn’t seem to be a compelling argument. Perhaps some clues in their filings which went largely under the radar because they went radio silent on social media, particularly this F-4/A registration statement filed at the end of June, as well as this 10-Q in august. Based on these filings, not only did Wells Fargo (the underwriter of the FPAC IPO), Nomura and JPM (two of the placement agents for the SPAC) resign and waive their fees, the PIPE investment agreement for US$300m also expired in July, allowing the commitments made by anchor investors to be withdrawn. FPAC trades substantially at $10, implying the market very much expects there to be no deal and a redemption of shares at $10 apiece by IPO investors. The combination can still occur, but chances are there won’t be much spare cash left once it’s done.

SEC statements aren’t usually classified as “good reads” but given “no smoke without fire” and the ongoing conflagration in the crypto space, this is very much related reading for uncovering an ongoing mystery. EL

Another breakthrough announced this week in the AI space, this time through Meta Labs announcing that their AI program beat humans at a game called Diplomacy, a game which requires deep negotiation using natural language and also requires a large amount of deception as real politics would. What’s frightening about this for anyone who believes in ASI (artificial super intelligence) is that the AI, aptly named Cicero, lied numerously in order to achieve the optimal outcome. Over 40 games the Cicero AI got double the human average score. Pretty scary stuff. For a refresh on AI I refer you to Tim Urbans epic piece which although is a bit dated, is wonderful stuff. DC

What we’re doing.

On a somewhat completely unrelated note, I had the pleasure this week of my first attendance at a speed awareness course, courtesy of a speeding fine I received a few months ago. In the UK, if you receive a vanilla speeding fine, you can choose to get penalised points on your driver’s licence (bad for insurance premiums etc), arguing in court (generally a low upside endeavour especially when guilty) or attending a speed awareness course. The good news is that the course is available on Zoom, which I gleefully accepted. I had expectations of a dull, monotonous experience whereby I was read repeatedly the rules of the road and encouraged not to speed again. However much to my surprise it was extremely impressive. The trainer was superb at his job, hopefully well-paid and the materials really interesting! It made me wonder why His Majesty’s Government spends so much on these courses and the answers were quite clear. Lower speed means fewer accidents which means fewer disruptions to daily lives and the economy, lower pressure on emergency services and all the like. I had never before stopped to consider how the speed limits are set, what the impact of just 1 extra mile per hour could be on braking-response time and many other things. I wouldn’t exactly recommend it but if you are in the UK, know that at least if you do get done, it's not time in your life that you will never get back. DC

What we’re listening to.

I’d seen the name, Dr Pippa Malmgren, floating around over the past few years but to be honest I just had a bit of geopolitical fatigue and couldn’t imagine listening another geopolitical expert prognosticating about the world. So, this week I decided to give her a listen when she appeared on Erik Townsend’s Macro Voices podcast. And wow I was rewarded. It was the best set of original geopolitical ideas I’d heard of in ages, giving me fresh impetus to look at the investment opportunities in the space area as well as a host of other brilliant titbits. Anyone heard of Svalbard? Well, you should have, because it recently was subject to the most off the radar and important bit of military subterfuge in recent times. Svalbard is Norwegian territory in the Arctic and just so happens to be the place on earth with the fastest internet. This is because it is the place where most of the world’s civilian and military satellites and the International Space Station connect to earth. On January 7th this year (7 weeks before the invasion of Ukraine), a Russian oligarch’s mega yacht parked atop the most important cable for space connectivity and underneath it submarines cut the cable (in 2 spots) to remove around 6.5km of cable. It was apparently done to send a message. The message was well received as the British Chief of Defence Forces called it “an act of war under ordinary circumstances”. Dr Malmgren’s view is that this began the war, rather than the physical invasion of Ukraine. She also covers China’s covid policy, Trump and much, much more. I highly recommend this one. DC

What we’re watching.

Surely everyone on earth is watching the world cup. This year’s world cup has no shortage of controversy which I’m sure everyone has read about themselves but so far there have been many matches which for me have been surprisingly competitive. It’s not just the results but the manner which Argentina lost to Saudi, Germany lost to Japan or today as I write, Wales got hammered by Iran. The quality of the football from the so-called minnows has been superb. The only team so far that looks genuinely rubbish is Qatar. Shows you that money can’t buy talent and success, especially when you can’t transfer in players at national level. Away from this there have been no shortage of political statements. Maybe I am just getting older, but I don’t remember a time where there was so much controversy around a world cup. Even in Russia four years ago, things were not so vocally raised despite many of the exact same issues being equally evident. Surely the reason is that we live now in a much more CLEARLY divided world to the one as recently as four years ago. But at the same time despite all this, a flagship global event like this does bring together people from far and wide. Where else does South Korea get to play Uruguay or Senegal get to face off against Ecuador? Sometimes you just wish you were 14 again without so much knowledge of how the world really works. Its far easier to enjoy the football or at least have an excuse to ignore all the “issues”.

Simon Sebag Montefiore has written loads of book and been on TV a lot especially for his history shows about individual cities. I have read lots of his books and he is definitely one of the most knowledgeable on Russia. He is one of the few (he was the second person) who has actually had early access to the St Petersburg archives in order to source original texts as research for this work. He is also an expert on the city of Kherson, the Eastern Ukrainian city just last week reclaimed by the Ukrainians after the initial Russian offensive took the city. He speaks in this appearance on Mikhail Zygar’s show about Potemkin, Kherson, Stalin, and history of the region in great detail. Especially interesting is his view on why Potemkin’s bones were removed by Russian troops (in Kherson). Another piece of the geopolitical puzzle clicks into place after watching this one. DC

Eugene Lim