Weekend Reading #191

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This is the hundred-and-ninety-first weekly edition of our newsletter, Weekend Reading, sent out on Saturday 22nd October 2022.

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What we're thinking.

Do we have a pause? Does “pause” soon give way to “pivot”? That seems to be the next big thing to which the market has caught on. A pair of competing articles (two new Fed mouthpieces now, not just one) from Jeanna Smialek at the NYTimes (the “new” Fed mouthpiece) and Nick Timiraos of the WSJ (“old” mouthpiece) seem to mark the beginning of the gradual nudge in direction towards a potential Fed “pause”, pointing to greater attention being paid to “risks” to the economy. To put things in context, we also have the midterms coming up in November, so for those who question the true independence of the Fed, that’s an additional point of consideration. 

The beauty of this market is that it never fails to seek to inflict the maximum amount of pain on the greatest number of people possible at the same time. The “pause” could well be the most anticipated Fed event this year, the promise of relief for a market that has spent more than 10 months in “down-only” mode. Yet, just as there is the case of “buy on rumour, sell on fact”, that could well turn out to be the case here. 

What does the “pause” mean? Prima facie, these articles suggest a slowdown in the rate of increase of rates beyond the Nov 2nd meeting, where a 75bps hike seems to be largely set in stone. “Not as tight” could be enough to spur a huge relief rally in stocks, but as we’ve discussed before, monetary tightness is as much a function of “level” as it is of “time”: how long things remain tight has as much, or even greater, impact on markets as “how tight”. 

As it stands, “pausing” at this level of rates and keeping things here is still going to cause substantial amounts of pain in markets. Furthermore, if 2008/09 were to be the playbook (it’s not the best, but it’s the most recent one we have), then the Fed cutting rates at the end of 2008 was actually the trigger for the final flush into 2009 of a further -27% in the SPX to the now legendary 666 bottom.  

That makes sense in terms of narrative construction: if things are so bad that the Fed, which insisted HARD that bringing inflation under control was the biggest risk around, that the risks of doing too little outweighed the risks of doing too much, finally flips, then things must be REALLY bad. 

One segment of the market that is appearing rather perky is the commodities space. As much as growth worries remain, signalled by the risks to the economy which the Fed takes into consideration in their policymaking decisions, the structural supply shortages in the physical commodity space also remain. Prices have come down as a result of ebbing demand, but there still hasn’t been a supply response significant enough to bring the market back to balance at lower commodity prices – partly as a function of government and activist action to prevent more commodity extraction. 

When does the zeitgeist flip? When will the common narrative evolve to a realisation that high prices are a result of a dire lack of investment in infrastructure, and that the rush to renewables without a stable bridging energy source (natural gas) is leading to an unloved renaissance of arguably dirtier fuels like coal? Who knows.  

Finally, the headline-grabbing happenings in Whitehall this week, with British PM Liz Truss resigning after some botched policymaking, leaves the question of “what next” hanging in the air, or rather “who next”. We’re not political commentators or experts, but as always, we turn to the market for its collective expertise. It’s one thing to laugh at the GBP appreciating after a PM resigns and how it’s a rather damning judgement of a PM’s tenure; it’s another when the bounce was as short-lived as it was, underscoring the persistence of much deeper issues in the UK, and by extension, the rest of the developed world.

What we're doing.

While we typically tend to keep a low profile, eschewing public presentations and events, this week we were asked to fill in at a panel discussion for emerging managers, sharing tales from the trenches. We were asked to share specifically any business mistakes that we made when starting a new fund management business which would possibly help new managers contemplating the leap into the space to avoid those same pitfalls. For our part, there is a litany of things we could have done better, even if all things considered we are happy with where we are now. But it was certainly interesting to see that when it came to mistakes, our mistakes were pretty much on the mild side and that worse decisions have been made by better advised (and better funded) establishments. Starting a new business is hard, fund management included. The best thing a new manager can do for him/herself is to jettison any feelings of entitlement that extend from prior roles in larger corporations when it comes to things like large salaries, a personal assistant, luxurious travel entitlements etc. It’s trench warfare here, but the rewards so far have been well worth it. EL 

In addition to the above-mentioned panel, we also attended a conference on the theme of Institutional Access to Digital Assets as part of London Hedge Fund Week. Whilst the event was intended to focus more on fund managers themselves and rather successfully excluded service providers, the few that slip the net were fascinating with many projects and companies' worth further discussion as we grow on our journey. We’ve not been keen to heavily market our funds externally, but the event brought forward a number of fund of funds and family office allocators who will certainly drive conversations in the coming weeks on how they can get into our small but growing funds. The crypto space has certainly seen huge drawdowns from its peak, but this week's event proves the interest remains strong. HS 

What we're listening to.

Only one podcast to recommend this week came in the form of Steven Bartlett’s Diary of a CEO in which he chats to a chap named Paul Brunson.Brunson is a matchmaker and relationships expert with a really cool backstory. A former investment banker, he quit to start his matchmaking business with not much and no real clue where to start so he started a Youtube channel. This was a while ago when Youtube wasn’t even as big as today. Each week he would produce his episode and for ages he had no viewers. Turns out one of the eleven viewers (I think it was) was Oprah Winfrey. And it all came from there. The conversation is brilliant and full of stories, anecdotes and advice for successful relationships whether in love or in business. Highly recommend this one! DC 

Music supergroups are one of those ideas that sound wonderful on paper but often yield mixed results. Assembling one is probably easier than assembling a superstar sports team, and in a way when virtuosity of different sorts come together, the results get quite interesting. In more recent times, we’d be talking about a group like Dreamtheater, although things really haven’t been the same since the departure of drummer Mike Portnoy. Dating slightly further back, another supergroup recently popped back onto Spotify’s rock mix list: Ritchie Blackmore’s Rainbow. Better known as the lead guitarist of the great band Deep Purple, Blackmore started his supergroup project with some interesting styles, fusing his prior hard rock style with jazz/baroque/folk influences to create an album with a rather singular style. The music is still classified as “heavy metal” but from Man On The Silver Mountain, to Catch The Rainbow, to The Temple Of The King, these tracks aren’t anywhere close to “heavy”. That said, they do split opinions – but doesn’t all good music? EL  

What we're watching.

The Watcher is a Netflix thriller series that could be a horror but not quite. It’s a pretty familiar story arc. Couple moves into new home, weird stuff starts happening, someone is watching them etc. But its creepy because it’s based on a true story (which I only fond out after). It's one of those shows that feels a bit too predictable but then again you just never know whether the script writers want to lead you in different directions as it goes on. Naomi Watts is in it alongside a chap named Bobby Cannavale, who somehow does rather look like Barack Obama (well I think so). Pure entertainment and nice and light. A great breather from the seriousness of everything else going on. 

Another one we got stuck into over the past week is Dahmer – Monster: The Jeffrey Dahmer Story, the Netflix series based on notorious American serial killer, Jeffrey Dahmer. Let me tell you this series is heavy. The violence is graphic to say the least. But it’s a brilliant production. Evan Peters in particular is superb as Dahmer. If you can handle the gore, it’s worth it. I guess what makes the gore more difficult to handle is that it was all true so it’s a bit less like a Tarantino’s gratuitous violence which makes it part of the fun.  

Funnily enough both of the above series are Ryan Murphy creations. Never heard of him until these. DC 

The Greatest Beer Run Ever is a war drama based on an incredible true story that follows Chickie Donoghue played by Zac Efron as he makes his way to deliver a 'cold one to his boys' in the midst of the Vietnam War. He rather naively enters into this journey as a bid to rally the troops as well as boost morale back home in their inner-Brooklyn neighbourhood. As he delivers the beers to his friends on the ground, he travels up and down perilous Vietnam, with many of the military expecting a civilian in such an environment to be CIA or foreign spy. Without spoiling the film, it was interesting to hear the long-lasting friendship they all shared post-war and how they continued to remain in touch upon returning home. HS 

What we’re reading.

Russell Napier is a name I hadn’t heard for years after his repeated bear warnings over the past decade were all summarily dismissed by markets. But there is a time and place for everyone and there has never been any doubt as to his intellect. This piece did the rounds this week and its very good. He, like some others, warns of structural inflation lasting a very long time and what that means for governments and markets. He predicts a capex boom let by fiscal profligacy. It's worth a read, as long as one doesn’t extrapolate the outcomes with any immediacy.  

Meanwhile one spot of good news in a sea of anguish is once again that from our favourite gaming studio, CD Projekt. On Wednesday they announced that Cyberpunk has now reached 1 million active players every day for four weeks. Once again, what an unbelievable comeback. Almost as impressive as Boris Johnson! While it's easy to say its dumb luck, the reality is that a multi-medium content strategy makes this type of thing more likely. The success of the Netflix show based on the same content IP has driven this and you never know, it could last. Four weeks already is a long time.  

Another spot of good news (I think) is this week’s initial public offering of Prime Medicine, the latest out of rockstar scientist, David Liu’s laboratory. Prime is the pioneer of prime editing, the latest major iteration of CRISPR gene editing technology which offers more precise outcomes and a larger addressable market of potential gene mutations. There has been a little uproar over this IPO, given that Prime is very early stage, even compared to other gene editing IPOs and also the timing of the IPO into a very weak market. As with most in this space, the technology is spectacularly exciting but it's going to be a long time before we see anything meaningful that can impact human lives (and generate sizeable revenues). But as the company begins its public journey there is much more to be excited about than not. We will be following closely! Here is a link to the S-1 for the very industrious. 

There’s been a lot of coverage of Kanye West’s antisemitic outbursts recently and it's easy to be glib about them. Antisemitism is most definitely rising in America (and everywhere else) and this piece she wrote sums it up rather well. Kanye clearly has mental health issues, and we all love his music, but he is extremely influential, and this kind of talk is dangerous. What in her view is even more concerning is the reaction to his utterances. The rising antisemitism in American universities is probably most concerning of all. While many denialists will argue it is “Zionism” and not antisemitism, you can put lipstick on a pig but it's still a pig. DC 

One of the most important points raised in China’s Party Congress report is Section 9: “Improving the People’s Wellbeing and Raising Quality of Life”. Highlighted by Bill Bishop in his Sinocism blog, this section includes new language about managing wealth accumulation in China, aiming to “keep income distribution and the means of accumulating wealth well-regulated.” He further quotes a researcher cited in the Beijing News saying that “a few people accumulated wealth too quickly... This problem remains to be solved”. This has been an ongoing point of concern for us when it comes to investing in China – as we’ve argued before here, here and here, the rules are different when playing in China. If there was any doubt left about whose interests are at the top of the stack, these proclamations from the Congress should clarify them well enough. EL