Weekend Reading #177
This is the hundred-and-seventy-seventh weekly edition of our newsletter, Weekend Reading, sent out on Saturday 16th July 2022.
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What we're thinking.
Another month goes by and yet another inflation print from the US takes out the previous high, coming in this time at 9.1%. While the initial market reaction was one of shock, the accompanying commentary from Fed voters appears by any objective measure (i.e. not the view of someone hoping for any directionality) to be less than helpful, if not outright confusing. One can debate the merits and detriments of signalling through verbal commentary, but there is a clear distinction to be made between signalling for the purpose of removing undue surprise and shock (thereby reducing eventual volatility) from an impending decision and signalling in different directions (“75bps”, “100bps”, “data is old”, “data is worrying”, “neutral soon”, “already neutral” etc) in the hope of being able to achieve the desired effects without actually taking action. It is almost every alternate day now that the “view” expressed by Fed speakers also flips between hawkish and dovish. Ultimately there is only so much that words and expectation crafting can do: words about impending action that doesn’t come to pass incur a cost of credibility.
And for a central bank, credibility is all that stands between policy omnipotence and ineptitude.
Elsewhere in the world, it appears that for all the talk about going for full renewable energy sources, push has come to shove, and governments are letting the practicalities of reality dictate policy – as it should. Germany, Austria and the Netherlands have all in the past week decided to turn their coal power plants back on, while Japan has decided to turn on 4 more nuclear reactors ahead of winter time, taking their total to 9 operational reactors.
Once again, while it is tempting to blame the energy troubles in the developed world (at least those that are well-talked about in the media) on Russia, it is evident that the state of affairs, not least in the realm of energy security, is one that has been brought about by choices made years ago. The conflict in Ukraine was simply the spark that brought these issues to light. Ultimately, as much as ideology and (external) political alliances are nice to have, governments are elected to serve their people, starting by ensuring that people don’t freeze to death in winter. At least this much is well-understood by politicians.
While on the topic of government, the intricacies underlying Italian PM Mario Draghi’s resignation (and its subsequent rejection by the President) once again demonstrates how politics get in the way of good economic policies. Draghi is himself unaffiliated with any political party, and was brought in to solve Italy’s economic issues. But as elections draw near and political shenanigans ramp up, playing the card of “disagreeing with the incumbent” is all-too-easy as a strategy. Draghi’s resignation should perhaps be looked at more in the light of him calling these bluffs, basically “if you don’t want me to make policy for you, I’ll happily leave.”
The action will undoubtedly continue but the consequences extend far beyond Italy’s borders. Italy is a major economy in the eurozone, but it would seem that, to the credit of eurosceptics, the flaws in the design of the eurozone are being brought once again to the fore. With the EUR trading effectively at parity with the USD (having spent some time below 1:1 in the past few days) one can only wonder what could ensue if the trend in EUR/USD continues.
What we're doing.
It is a wonderful thing to be able to travel again, and a trip to the Ionian side of Greece was exactly what the doctor ordered. Swimming, delicious bites in little tavernas on the shore, cold Greek wine, reading books in a gentle breeze and spending time with old and new friends reminds one of how wonderful things can be. The loud noise of the cicadas that is there all day and then suddenly stops at night if someone had turned off a switch, to be replaced by the sound of the scops owls is wonderfully atmospheric. It’s just that travelling out and travelling back you are reminded that airports all over the world are very short staffed and that travelling is hard. The overall system clearly has not found a stable state of smooth running and that shows strongly in the travel and hospitality sector (unless your taverna is staffed with your parents, siblings and cousins). DC
With the glorious weather that the UK has been experiencing, I choose to “cycle” while the sun shines, as we all know that these opportunities are few and far between. Exploring the fabulous Surrey state while working on my fitness and indeed mental wellbeing has never felt so good! Long may the summer continue! DK
What we're listening to.
The LPO’s new release of Stravinsky recordings under their previous principal conductor Vladimir Jurowski has two great live recordings of the Firebird and Rite of Spring ballet scores, as well as some lesser-known pieces. The recordings show the incredibly fine and beautiful detailing of Stravinsky’s writing, as well as the ferocity and freshness of the music, especially the ballets. The Rite of Spring manages to shock every time and one can understand why it caused such a scandal when it was premiered in Paris in 1913: There was a riot, 40 people were arrested and Puccini described it as “The work of a madman … sheer cacophony”. Yet it changed music history and Leonard Bernstein described it as “The most important piece of music of the 20th century.”
What we're reading.
For fantasy fans George RR Martin needs no introduction. The author of the Game of Thrones series which preceded the HBO phenomenon, he is an unusual chap to say the least. He has kept fans waiting forever for the last book in the series. So much so that the TV series passed the point where his books ended. He is still keeping everyone guessing as to how his version of the series will end but he promises it won’t be the same as the show (which he of course had input into). In this blogpost, which also has a video interview, he talks about his last book as still being a work in progress. He speaks about writers as either architects or gardeners. Architects he says plan every detail meticulously while gardeners have big ideas and prune and rejig them as they go along. He identifies his style as that of a gardener. The Winds of Winter is being gardened as we speak but is indeed drifting away from the HBO series. To those of us who were disappointed with the TV series’ finale, this is great news. DC
Arthur Hayes dishes up another tantalising read on his blog with part 1 of a tale of 3 central bankers: A Samurai, A Knight, and a Yankee. (Couldn’t help but note his use of the oxford comma!) Part One touches a little on the general backdrop of economics and politics but spends the bulk of the second half of the piece on Japan. Japan has been one of the markets that we have known to be extremely important in the global macro scheme of things, but which has remained much of a mystery. We’ve never traded in Japan, not least because of our principle of only participating in markets where we understand the workings of the local market and the mindset of the market’s participants. But there is always a right time to learn something new, and this note gives us a bit more insight into Hayes’ interpretation of what goes on in the heads of the Japanese government and its central bank in aggressively pursuing its Yield Curve Control policy.
His promise for part 2 is to touch on the ECB – it's a sequel to which we’ll be eagerly looking forward. The underlying message here is one that is bullish for cryptos – in the longer term. And as we wrote last week, if your base case is one of complete fiat debasement, then crypto (and gold) provides an escape route. But while that may eventually come to pass, persistent strength in the USD doesn’t seem to signal any doubt in its ability to retain value. At least, for now.
Alibaba once again finds itself in the spotlight, first as their executives get summoned by the regulators for an explanation for allowing one of the country’s largest data leaks, and secondly as news broke of them having to downsize their investments team by a third as regulators hit the brakes on their acquisition and dealmaking activities. Alibaba remains the posterchild of the Chinese internet space: in case no one noticed, Jack Ma barely even features in these happenings anymore – personality cult disarmed. But with great success also comes great responsibilities, obligations and scrutiny. We wrote about how Alibaba was having its Gazprom moment more than a year ago, and every time news like this emerges, it serves as a reminder that not all markets and their sets of rules are built the same. EL
What we’re watching.
Several weeks ago, I mentioned the “Tour” (Tour De France) … well it's been one of the best races for many a year. Two days ago, we witnessed that the Slovenian powerhouse Tadej Pogacar is in fact human. He has dominated the race for the past two years and for the best part of this year's edition (at the tender age of 23) and we witnessed his first “off” day on the bike... It's blown the race wide open now with the challenger Jonas Vingegard taking his chance to capitalise on Pogacar’s misfortunes and build a handy lead. Vingegard’s team (Jumbo Visma) have been in sublime form and “bullied” Pogacar with a number of attacks. Team UAE have lost several key riders so Pogacar is literally on his own. With the break day fast approaching and a rest from the mountains, let's see what happens in the next instalment of the mountains next week. I don’t think Pogacar will give up. He’s got it in him to bring it back but he can't afford to wait... He needs to take his chance soon... DK
Chapter 2 of the new Stranger Things series dropped a couple of weeks ago and I finally had the chance to sit down and enjoy it. Having watched the show since its first release in 2016, I had been somewhat dissatisfied with some of season 2/3 and felt as though it had become repetitive. However, when I watched S4, this had all changed and it was back to the same energy of S1. All in all, it’s quite a fun show filled with action, throwbacks to the 80s and some fantastic cinematography, what’s not to like! HS