Weekend Reading #190

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This is the hundred-and-ninetieth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 15th October 2022.

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What we're thinking.

One of the things that equity investors often take for granted is the existence and stability of the fixed income markets – not so much that their prices aren’t gyrating (they are, but that’s only half the problem), but also that there is liquidity in those markets. The reason fixed income markets are important, especially markets for government securities, is that bonds are often used as collateral for all sorts of lending – between corporates, banks, governments and all sorts of other entities. With the likes of US Treasuries (also the case for German bonds), when one speaks of a “liquidity shortage” it is more often a case of a shortage of collateral i.e. not enough bonds to go around. To us, this reads as two things: 1. bilateral lenders are increasingly cautious of accepting other types of collateral and aren’t willing to lend against, hence growing demand for the top quality AAA good stuff; 2. the risk is that credit markets grind to a halt when no further liquidity is extended.

So, when we then read this headline saying, “US Treasury asks major banks if it should buy back U.S. government bonds”, it gets us thinking about the available supply of US govt bonds in circulation, which directly impacts the availability of collateral in the market. Granted this is a rather regular occurrence that the Treasury undertakes before its quarterly refunding announcements, and we wouldn't be panicking (yet), but the irony of the situation is that liquidity might be improved if MORE new treasuries were issued, another seemingly contradictory policy decision to be made.

To put things in perspective, the last New York Fed reverse repo operation took in US$2.24tn in surplus reserves from banks, in exchange for the equivalent value of none other than... treasuries. All things considered, do the banks want more treasuries in the market or more reserves?

Zooming out, how is this not a chart that gets the little grey cells working?

Source: https://www.newyorkfed.org/markets/desk-operations/reverse-repo

What we're doing.

Instead of sitting in a conference room, Eugene and I decided earlier this week to take advantage of a beautiful Autumn day and talk through our portfolio while playing golf instead. We had a slow stroll round one of the local courses here, The Hertsmere. I wouldn’t say it’s a complicated course, quite the contrary. And yet golf is like markets in that just when you think you have it figured out you get a timely reminder that it's not so easy. Furthermore, like markets, golf is more a case of you versus yourself rather than anyone else. A test of patience and emotions. We both had our ups and downs but spending a few hours in beautifully maintained greenery was most certainly better than being in the office and the fresh air and setting were most welcome. DC

This Thursday, I finally took a day-off and decided to take the train up to the city of Cambridge to visit a friend studying at the famous university. In addition to catching up with an old friend whom I hadn’t seen since the start of the pandemic, whilst there I was also fortunate enough to attend a lecture on the political ecology of the Yangzi River in China from Brown University’s Brian Lander. Instead of the more common research approach where experts look at the more recent history of the riverways since the rise of Modern China (Post-1948), Professor Lander instead looks at the historical changes to the ecology as a means to push back the baseline from which we compare modern day climate change in China. Through this research, he has also begun to look deeper into the areas further west, considering much of the existing academic research has centred around the more eastern region around Shanghai and Zhejiang Province. Whilst in Cambridge, I was also able to get an inside glimpse into some of the university’s colleges as well as visit some of the faculty buildings. It was also quite refreshing to find pints under a fiver and reasonably priced restaurant food, and considering it is just an hour from London’s Liverpool St Station, is certainly worth a return visit. HS

What we're listening to.

Louis Vincent Gave’s appearance on Ted Seides’ Capital Allocators podcastthis past week was a bit eerie as in many respects it echoed our own views on emerging markets - only Gave is far more suave in his delivery. Our blogpost today should cover it but one of our core premises is that a new bull market will have new leadership. We suspect it that once this global liquidity drain passes there may ultimately be a weaker USD environment led by commodities and certain emerging markets (not all). Regular readers will know our disdain for the term “emerging markets” given all how non-uniform they have become, but in essence the old school commodity-driven ones where governance is reasonable are the ones we are looking at. Gave also speaks of reasons for a potential weaker USD environment in future. Let's call it the trade after the trade. He also talks a bit about what to watch for in China’s coming “election”. For anyone in markets this is a must listen. Historically, he has been on the button with long term trends.

Jim Rogers appeared on The Meb Faber podcast and he was full of beans as always. Every single time I’ve ever heard him he recommends going long commodities but this time it seemed relevant. For everyone interested in what his biggest new idea is – Uzbekistan. Don’t ask me but apparently they are doing some decent things over there. Certainly, worth a look! He talks about demand/supply imbalances in commodities and inflation and rates and macro too. He is one of the greats and his folksy way of speaking adds much to the mix too. 2 great podcasts to get stuck into this week. DC

What we're watching.

From reading this regular weekly update it may seem as though we’re becoming frequent viewers of the output from Disney+, or perhaps alternatively it’s as a result of the sheer growth in content. But this week, I decided to watch Marvel Studio’s Wandavision, in what I would describe as one of the strangest shows I’ve watched in quite some time. It follows on from Avengers Endgame and looks at Wanda Maximoff and her once seemingly deceased husband, Vision. It has been out for some time having first aired between January and February 2021, although having watched the first two episodes at the time, I had never made it to the end. I came back to it again this week following a spout of Marvel films and the broader context of having the Marvel Cinematic Universe fresh in my mind made the show much more pleasant viewing. All in all, it is perhaps not my favourite mini-series released, although certainly nice to see some fresh Marvel content. HS

What we’re reading.

Giles Kristian is the author of a number of historical fiction series including The Rise of Sigurd and The Raven trilogies. He also wrote two phenomenal historical novels, Lancelot and Camelot, about the legend of King Arthur. He recently tried his hand at a more contemporary thriller called Where Blood Runs Cold. It takes place in the freezing Northern Norwegian snow and is simply unstoppable. The pace is searing and it’s just a pleasure to read a master storyteller. The format is a bit different with quite a narrow focus on a small cast of characters in a local setting, but it works! I much prefer his historical fiction but this was a good first crack at a new genre.  

This amazing Twitter thread did the rounds this week and its one to enjoy and even show to your kids. It shows a piece of art from each decade since 1300! And it's not country or region specific – its global! I have no idea who The Cultural Tutor is, but it seems he/she has written a book on An Introduction to Western Civilisation. Its beautifully put together. DC