Weekend Reading #162

Photo by Caleb Woods on Unsplash

This is the hundred-and-sixty-second weekly edition of our newsletter, Weekend Reading, sent out on Saturday 2nd April 2022.

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What we're thinking.

This week we wrapped up the first quarter of the year, having gone through some of the wildest volatility in markets we’ve experienced in many years in the span of the last 12 weeks or so. From the tumultuous start to the year, taking markets to the brink, and the subsequent bounce of equally violent nature, the market is proving itself to be as maniacal as it has always threatened to be. 

And while there are many ways, with hindsight, where we could definitely have done better, working towards that dream of being able to sell the top, buy the bottom, and sell it back out at the top again (if only!), hindsight trading is the surest way to commit oneself to a mental asylum. What’s more important is that we keep in mind how this is an infinite game (at least until we one day retire) and how staying alive and in the game is MUCH more important than trying to swing the bat hard to attempt some impressive moves. 

Going into next week and the rest of the year, there is much to think about when it comes to the markets. Most glaring is the difference between what the fixed income markets are expecting of the world (one word: “recession”), based on the views they’re expressing in the form of inverted yield curves and what the equities (and crypto) markets are pricing in. Indeed, we can call the moves of the past 2 months whatever we want: a correction, a bear market, a “crash” (might be a bit too much hyperbole there), but at the end of the day the S&P500 is trading at a little more than 5% off its all-time highs, and the Nasdaq around 10% off all-time highs. What risk exactly is being priced in at these levels, if anything at all? 

Of course, there are also the slightly perverse narratives that can be spun to “reconcile” the two: “if a recession is coming, of course the Fed isn’t going to hike! Instead, they’ll print more money to support the economy so money printer goes brrrrrrrrrrr. Numba go up!”. Now just imagine that for a moment... 

To that end, mentally and to some extent physically exhausted, we once again attempted to spin up a blog post for the week – to no avail. In fact, we even considered writing a post about how it was pointless to write when nothing stands out as worth writing about, which would’ve been an interesting outcome of circular argumentation. 

What we're doing. 

Next week we’ll be in Lisbon on Monday and Tuesday attending the Non-fungible conference - looking forward to having interesting discoveries and learnings to write about next week, and if you’re around too, please feel free to get in touch. 

This week most of our team is away during the U.K. school break and I took the chance to go visit family and friends in Cape Town. Not having been here in over 3 years there are a few initial observations I’ve made. First the stark difference in attitude towards COVID versus the U.K. Everyone wears masks, people are still extremely cautious and life is still very far from normal whereas in the U.K. if you didn’t seek out the fact that Covid case numbers are at highs you would never know. It has been normalised and with stats now showing that chances of death for the fully vaxxed are lower than the flu hopefully it’s a sign of progress rather than throwing caution to the wind.  

Secondly, I have been blown away again by my hometown, Cape Town. Everyone here told me how it’s deteriorated yet all I see is improvement. The city is clean, roads are good, and it is buzzing. Of course, there are enormous socio-economic problems but that’s now a given in South Africa. Cape Town is truly a magnificent place to behold. Anyone in Cape Town keen to meet, hit me up! DC 

What we're reading. 

We came across two things this week that were so well written they sent literal chills down our spine, articulating what had previously been difficult for us to articulate (as hard as we try) when we write about what we’re thinking, about how the state of the world as it is has implications that are REAL for many people, rather than just financial and “numbers on a screen”. 

The first is this note on Linkedin entitled “History 101” by Stuart Loren, in which he starts with from his history professor: “The first lesson of history is that people need to eat.” He goes on to describe how the world had changed in its perspectives, valuing at much lower multiples the things we need (e.g. oil, gas, commodities) in the disinflationary environment we have enjoyed over the past couple of decades, while prioritising and ratcheting up the valuations on the things that are “nice to have” (e.g. technology, social media etc). These discrepancies show up in the way our markets are structured today, but like Stuart writes, “but the last time we checked, no country has ever started a war over an iPhone embargo.” But over oil, food and basic necessities (aka “commodities”)? History is full of examples. 

This note was written in September last year. Fast forward half a year and here we are with Credit Suisse’s Zoltan Poszar delivering another masterpiece, “Money, Commodities and Bretton Woods III”. Unfortunately, we don’t have the luxury of having Credit Suisse’s research, although the Fintwit community has very kindly provided a copy (rather hard to read, but nonetheless readable) of it here. 

In it, he lays out an uncomfortable set of parallels between the drivers of the nominal monetary system and the real economy: where there are nominal drivers of the cost of money like parity, interest, foreign exchange and price levels, so too does the REAL economy, in the form of commodity prices, foreign cargo, shipping and protection. We’ve been so used to the Fed having our back these past years, with many starting to believe that “money printer go brrr” can solve basically every problem in the world.  

Yet Zoltan has very bad news: moving from the domain of money supply, repos and liquidity to the real domain of mines and oil fields, shipping, leasing, transport and security, we very quickly find out that we can print money to solve problems in the domain of the nominal. We can’t print oil, wheat, corn or copper. When these physical markets get “gummed up”, to use his words, there is little if anything central banks can do to unblock these bottlenecks. No amount of money printing will solve the problem, no amount of central bank guarantees or swap lines will unblock a ship stuck in the Suez Canal. 

On the flipside, central banks are now faced with high inflation numbers that are testing their mettle. Tightening liquidity into a gummed up real domain is equally bad news, because while printing more money doesn’t really help, taking liquidity out of markets for leasing (of tankers, freighters) and credit (for shipments in transit of commodities) in a world of greater risk of freight security (from piracy, tariffs etc) unequivocally makes things worse. A lack of understanding of supply chains for basic commodities (just as there was a lack of understanding of the plumbing in the banking system in 2008), not to mention the just-in-time, highly capital efficient (read “no redundancies”) system we’ve built over the past decades, lulls many into a false sense of assuming that big disruptions will be brushed off easily. For example, “Europe doesn’t want Russian oil? Easy, just sell to China, Europe can buy from Saudi.” is something WAY easier said than done, with WAY bigger implications on real lives around the world. 

No tl;dr summary will properly convey the nuances in these two pieces, so what we would say is please read them (even if the Zoltan piece is a bit difficult on the eyes). There are times when the markets can feel like a bit of a video game, with red and green candles ticking around the screen like a Hollywood film.  

And there are other times when they reflect developments that have very real implications for our daily lives. It sure feels like the latter is truer now than any time in recent history. DC/EL

This brilliant snippet popped up on my Twitter feed this week and it is so cool! If you ever want to explain to your kids the idea of the size of the universe then this does a great job. It did a great job on me too. DC 

What we're watching.

Any film with a Dame and a Sir leading the cast must be worth watching, right? Well, just about. The Good Liar is an interesting film, perfect for a rainy/snowy night in, starring Dane Helen Mirren and Sir Ian McKellen. Both play ageing divorcees seeking companionship in later life whilst attempting to sidestep the obvious traps and tribulations that a search for love online can bring, especially for people who are not necessarily tech savvy. Set mostly in London, my wife and I enjoyed this film, especially as it began to twist and turn a little more through the second act, and were very satisfied by the plot’s surprises, which made it feel like a unique film. Of course, it is wonderfully acted, as you would expect from two knights of the realm.  EJP

The Weekend Away is a sharp film with a fun premise that is quite creepily executed, telling the story of two girl friends who head off to enjoy a booze filled weekend in Croatia before things turn rather sinister when one of the girls goes missing. What follows is a version of The Missing or Taken in the sun, with the beautiful backdrop of the Adriatic and its beaches mixed with some pretty dark goings on as Beth does all she can to locate her friend, Kate. Worth a watch, especially if you like programmes about people going missing. EJP

Not long ago the new Batman film was released starring Twilight’s Robert Patterson cast in the role of Bruce Wayne AKA Batman. This week I headed to the cinema to watch it, something I’ve rarely done since the pandemic but after this occasion I think its something I’ll try to do more frequently. When it came to the film, contrary to public opinion who seemed to love the film, I was rather disappointed. Having loved Christopher Nolan’s Dark Knight trilogy growing up, as well as the more recent Gotham series (as keen newsletter readers will recall), I am by no means a hater of the franchise. Whilst the attention to detail in incorporating various characters was to be commended, the blatant contradictions when it came to the action scenes as well as the frankly shoddy car chase scenes made for an underwhelming viewing. Whilst I had gone in with high hopes for the film, I’m not in a rush to see what’s next under director Matt Reves. HS

What we're listening to.
This week I listened to a great episode of the Diary of a CEO podcast, hosted by entrepreneur, Steven Bartlett, whose story is as inspirational as many of his guests. As Steven himself describes, but a few short years ago, he was “a university dropout, living in one of the worst parts of the country, alone, with nothing but a laptop and a dream.” Now, he’s the ex-CEO of one of the UK’s fastest growing companies, Social Chain. Steven’s podcast interviews a variety of guests about their life in business and beyond. It’s enlightening, educational and highly entertaining, mostly because Steven seems a genuine guy, hence he seems to connect with his guests well. His aim with the podcast is to give the listened a look into what it’s like behind the scenes, being an entrepreneur, the deep, dark thoughts that nobody else seems to willing to share. The episode I just listened to with the oft-maligned Jordan Peterson was superb. I’m looking forward to listening to many more. EJP