Weekend Reading #192
Photo from Unsplash
This is the hundred-and-ninety-second weekly edition of our newsletter, Weekend Reading, sent out on Saturday 29nd October 2022.
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What we're thinking.
This week was all about China. For anyone who has ever read our views on China, it would probably be no surprise what we saw unfold. Surely by now everyone had smartened up to the fact that China is not America. Well apparently, not. Monday was a bloodbath as everyone dumped. Again. But, for the first time, after years of shorting and being bearish, we are a bit more bullish on Chinese stocks. Our base case is that many of the events happening in China over the past months were a lead up to the monumental showpiece that we all saw. Funnily enough, from now onwards the way we see it there is MORE certainty to Chinese policy and behaviour than there has been for some time. Xi Jinping has told everyone exactly what he is going to do and now with no one to challenge him, he and his handpicked group will go about doing exactly that.
The positioning in Chinese assets has been flushed out and sentiment from Western investors genuinely could not get worse. Let’s be clear. We are not long-term bulls on Chinese assets given that for some time now, Xi has told everyone that wealth needs to be more balanced and has not only talked that talk but walked that walk. The country is not built around a culture of a successful stock market and there are dozens of reasons why else it's not a structural investment. However, at this point in time we see a window of opportunity far more than we see despair. One needs to be very selective and of course there will be volatility, but we took the opportunity on Monday to put our money where our mouth is in our fund. How long will we hold onto our position? Who knows. Maybe we will sell next week. Maybe we will hold longer. But to get bearish on China on Monday? Come on, we have all had years to prepare for this.
Away from this we got another new Prime Minister who seems to be on top of things and he now has two years to impress everyone until the next general election. Everyone seems to be making a big fuss about him being an Indian Brit and worth a lot of money when all anyone should be doing is working out if he is competent.
And finally, how can we not comment on Mark Zuckerberg and Meta. Whatever one may think about Meta’s metaverse strategy so far (and we reiterate so far), one has to admire the man for his singlemindedness. Despite all the shouting and screaming we are inclined to still give him the benefit of the doubt. He is one of the great entrepreneurs and is STILL not even 40 years old. We know by now not to judge a work in progress until its clear. What’s clear to us is that Facebook's core business is declining, and Zuckerberg realised that some time ago. Never mind the Fed, this could be the biggest pivot bet we have ever seen.
Finally, we’ll leave two charts to think about, presented without comment.
The first is circulating on Twitter without citations, but based on the font of the text, we’d guess Morgan Stanley research:
The second comes from the All-In Podcast Youtube channel – to properly understand this, we need some explanations for the terms used.
TVPI = total value to paid-in i.e. (current value of remaining investments within a fund + total value of all distributions to date) / total amount of capital paid into the fund aka “Unrealised + realised P&L”
DPI = Distribution to paid-in i.e. total amount of distributions to date / total amount of capital paid into the fund aka “realised P&L”
The Chamath take on this starts here.
What we're listening to.
Last week I wrote about Kanye or Ye as he is now called and linked to a great piece from Bari Weiss who articulately expressed how antisemitism is a major issue and how she (and most Jews) felt after Kanye’s recent antisemitic rants. This week my favourite interviewer, Lex Fridman had a long chat with him which squarely focuses on the recent rants about Jews. Kanye is clearly a creative genius with a tortured soul which gives rise to the amazing creations he has made in music and clothing and many other things. Lex does an incredible job here almost as a therapist in connecting with him and then repeatedly holding him to account. He absolutely does not tolerate his conspiracy theories and calls them our numerous times. The resulting interchange is just extraordinary. I don’t know whether Kanye apologises genuinely and means it. I don’t think he even knows. He is absolutely nuts – like incredibly nuts. To be honest I don’t care. One just hopes somehow, he understands the severity of his antics acting as encouragement to the many loons out. This was an incredible conversation - intelligent, bonkers, hilarious and emotional all at once. Of particular mention was Kanye’s multiple mentions of the size of his manhood in response to unrelated questions. Kudos to Lex Fridman for holding his ground. This was him at the top of his game.
Johannesburg is a great city. I lived there at the start of my career for a couple of years and at the time there was a resurgence in what was called “The City”. The City was the central business area decades earlier but had become run down and somewhat derelict as time went on and new centres emerged. This podcast in which Eusabius chats with Matthew Wilhelm-Solomon, about his book “The Blinded City –Ten Years in Inner-City Johannesburg”. This is an absolutely fascinating discussion about so called hijacked buildings. These are buildings in the city into which people have moved who don’t pay rent. Call them squatters, call them hijackers, whatever one calls them isn’t fair. Wilhelm-Solomon brings to life the stories behind these people – their struggles and sometimes terribly sad stories. These people are victims both of the gangs that roam around as well as the police who take advantage of them and treat them shockingly. And the law isn’t always on their side and even if it is it is hard to implement consistently. This is an eye-opener if you want to learn something and also if you are willing to feel a bit sad.
One more this week was the Bankless podcast and an interview with Sorare founder, Nicholas Julia. Sorare is a fantasy sports-type game with a blockchain edge and even in this market has half a million users active daily. They seem to have a winning formula as well as plan for world domination in many sports. The upcoming world cup is a big coming out party for them and this was a really good conversation. DC
When we wrote about day traders flinging stocks around in 2021, powered by the intrinsic leverage of short-dated options and the gamma hedges that dealers had to put in place as a result of these YOLO trades, the assumptions were that 1. these were “small” stocks (GME, AMC, BBBY etc) which fulfilled the textbook definition of “penny stock”; 2. these was “retail” trading behaviour. Fast forward over a year, and we’re observing something different in markets. Skew – the difference between implied vol of puts vs calls the same distance from ATM – is close to historical lows. One interpretation is that market participants are unhedged for the downside – at least relative to upside hedges. The other interpretation of flat skew is that calls are much more bid up than they usually are, i.e., the market is bidding for upside via options (while being short/underweight underlying stock).
This sounds rather counterintuitive, given how bearish everyone seems. But upon deeper reflection, this makes sense: sell stocks because of a generally bearish view, but just in case there’s a ripper in the market at least some of the upside can be caught via options. The rise in volumes of short-dated index/index ETF options appears to be as much the work of “retail” traders as institutional managers, as various options market observers have been pointing out. This is something that requires much more processing, and helping along the way are these two podcasts, one with Benn Eifert and Hugh Hendry exploring the inner workings of volatility again, and the other featuring Cem Karsan, discussing all things volatility related including the lack of success of long volatility strategies this year, a year when such strategies SHOULD have (but haven’t) performed well. EL
One final chart courtesy of Morgan Stanley QDS:
What we're watching.
The Rings of Power on Amazon Prime video, with a plot line that pre-dates the main LOTR films, is a series that has drawn mixed reviews. 3.7/5 stars on Amazon Prime doesn’t exactly serve up a good first impression, but curiosity overpowered scepticism in the end. Granted, there were aspects of it for which the producers had to fill in the gaps in the lore of the Silmarillion with some artistic license, and as always there’s a need to retrofit prequels to match timelines that have already been produced on film. So, while the Tolkien purists probably were responsible for some of the less positive reviews, on average this was a rather enjoyable series to watch through – at least for this Tolkien amateur. EL
Back in July, I came across an article and a number of videos showing the re-introduction of Wild European Bison into UK woodlands specifically around Kent (for those unsure, imagine a fluffy brown cow). They were brought in to help boost biodiversity and play a role in tackling the climate crisis, and so far the ongoing study has proven to be a great success. However, this week videos emerged from the Natural History Museum in London that one of the female bison's has given birth after it was believed to have gone missing several weeks ago. As the article explains, the species is renowned for cleverly hiding its pregnancy as a means to avoid showing vulnerability to predators. The recent birth marks the first wild bison birth in the UK in more than a thousand years. HS
What we’re reading.
Matthew Ball’s VC and his associated blog have been a source of much enjoyment for us each week as we read his detailed and insightful reports on a number of current issues. His recent piece on the state of box office releases specifically those from the Marvel franchise, and what that has to say about the state of China/US foreign relations was fantastic. One thing that really shocked me from reading the article was that the marketing budget of Endgame exceeded the entire production cost of Avatar. HS
As far as explainers go, Bloomberg’s Matt Levine has delivered what is probably the most balanced, easy-to-understand yet comprehensive explainer of Crypto. Aptly titled “The Crypto Story You Need”, he takes the reader through the basic principles, technologies, controversies and innovations of the crypto world. For the uninitiated, he elucidates in plain language many of the key concepts that underpin how crypto works, pointing out (rightly) that they often find analogues in the incumbent system, with the key differentiator being the trust that is essential to have in financial institutions. This thoroughly enjoyable read probably qualifies as a magnum opus, and turns out to also be the only other time in Bloomberg Businessweek’s 93-year history that a single author writes a cover-to-cover issue (the other time being “What is code” from 2015). EL
Another independent journalistic publication I really recommend is The Weekly Dish by Andrew Sullivan, a journalist will a long and storied career across many well-known publications. This week one of his articles is about new UK prime minister, Richi Sunak and how his rise, which should be celebrated in theory by the American left has conspicuously not been so. This is a great piece about Sunak and also why the American left isn’t keen. DC