Weekend Reading #193

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This is the hundred-and-ninety-third weekly edition of our newsletter, Weekend Reading, sent out on Saturday 5th November 2022.

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What we're thinking.

Another week, another Fed meeting and yet again chair Powell is forced to dismiss all the premature “pivot” talk we have been hearing all over the place every month since June. In no uncertain terms, he also put to bed the speculation about the “pause”, calling it premature to ask that question, and saying instead that the question to be asked is “how high” rates need to go. What's even more worrying is that he admitted that despite the frightening pace of rate increases, there has been little to no effect on inflation. With China seemingly opening up its hardly a recipe for less inflation either. It opens up the possibility that the Fed may not even be able to control inflation at all.  

On the note of trades that no one saw coming, as we mentioned last week, talk is rising of China reopening from its covid zero approach. While this is not going to happen overnight, there are now some possible signs of action at the margin. There will surely be false calls and associated volatility but it's evident that last week’s mega selloff heralded some kind of exhaustion and short-term inflection point in any case. All we can say is WOW these markets are definitely not boring! 

When it comes to cognitive biases, we’d be the first to admit that the damage an uncontrolled bias can do – especially in trading – could turn out to be catastrophic. While being aware of that risk doesn’t make us immune to bias, it certainly makes it easier to call out potential biases in our thinking without sounding absurd. For almost a decade now, the idea of “growth” has been led by “tech”. The past two years have added to the group of “growth drivers” the likes of high growth names, even “meme” stocks which may or may not have tech related underlying businesses (or profits to speak of). In volatile markets like these, it is easy to fall back on established heuristics: buy tech to catch a bounce, buy tech for beta etc. The reality is that markets are now structurally changing: higher inflation leading to higher rates – potentially higher terminal rates – means the long-dated cashflows of many of these traditional “growth” businesses aren’t as valuable as they used to be. They may have the same attractive narrative as before, but perhaps the way the market looks at them is starting to change too. On the flipside, cash generative businesses, even if they have “boring” narratives, may become the preferred instruments for catching the risk-on bid. As it happens, these include commodity producers, still under owned and unloved. 

What we’re doing.

They say that a bear market is the best time to build, and there is no place where the bear market playing out in more clarity than in crypto – and specifically, the NFT space. The need for exhortation and encouragement has never been greater: this week, we took the chance to attend a newly inaugurated event which aims to ultimately become the Davos of the NFT space, aptly titled the “Metaverse Economic Forum”. Except there was one glaring issue: the attendance was sparse. Perhaps it was because we got there at the wrong time, perhaps it was because there was another NFT event (NFT.London) happening at the same time, but the emptiness of the otherwise grand venue of 8 Northumberland Avenue was a stark highlight of the state of mind within the NFT space – at least in the UK. 

Is this a global phenomenon? The question really is whether interest in NFTs and crypto is purely for financial gain, juxtaposed against a plethora of other economic opportunities (e.g. get a “proper job”), or whether it’s seen as a dream come true, an opportunity for generational and permanent income uplift. And we’d be willing to take a bet that notwithstanding the depression we are witnessing here, NFTs and crypto still represent a dream of economic emancipation for large numbers of people, perhaps just not in the “developed” world. EL 

What we're listening to.

I blitzed through a Macrovoices podcast with Ole Hansen, the commodities guy from Saxo Bank in which he spoke about why commodities can go up even in a recession. This week’s action in commodity stocks certainly gives credence to that view and to those who are sceptical I would suggest a listen. Price action doesn’t lie, and we are seeing some really sustained moves now. Instead of waiting for the tech knife into a terrifyingly sticky inflation environment, rather have a look at the fun things going on in the commodity space!  

I also listened to a Hidden Forces pod featuring Kaiser Kuo as a guest. Kuo is host of the Sinica Podcast, one which I’ve listened to from time to time. This was really cool as it was a bit of his story as well as his business’s story mingled with all sorts of anecdotes about the differences between how the West sees China and how China sees the west, never mind how China sees itself. A little different and some great insights. DC 

In tandem with what we’re seeing (or rather, not seeing) in terms of attendance at crypto/Metaverse themed conferences, one discussion that has popped up within the big cap tech space this week has centred around Meta, whose stock price has cratered even further after their earnings release. Have they completely messed it up with this aggressive spending of their free cash flow on what appears to most people (other than Zuckerberg himself) to be a wild moonshot? Perhaps things could’ve been managed a bit better with some improved communication? At least, that’s what was discussed on last week’s episode of the All-in Pod, in which a comprehensive breakdown of the magnitude of Meta’s spending is discussed, in relation to other era-defining investments (including the iPhone and the Apollo project) and capital management. On the latter point, Apple’s dramatic outperformance of the rest of the FAAMG stocks (apparently now called “MAGMA” instead) is no doubt the outcome of some very prudent capital management within the business. It’s an enthralling lesson in managing both capital deployment and investor communications. EL 

What we're watching.

I finally finished House of the Dragon this week and it was brilliant. Great series, great story, great ending to the season and full of all the things I loved about the original Game of Thrones. The scene has been set for quite a few seasons I’d imagine, and I look forward to season two when it eventually comes round again. The only critique I’d make is the jumps in time as the series progresses meant that HBO needed to find new actors and actresses to play the more grown-up versions of the characters. This was a little confusing for a while and could probably have been finessed a bit better. On the whole though it was good old rollicking entertainment and even though this is an epic medieval fantasy series, many of the political power themes apply all over the world today. DC

What we’re reading.

When it comes to geopolitics, the most useful exercise I find is to read actual transcripts of what key global leaders are saying. You can read all the analysis in the world, but the most useful exercise is reading the actual words directly. From Xi Jinping to Vladimir Putin all you really need to do is consistently pay attention to what they are saying. And if you subscribe to this approach then last week’s speech by Putin to the Valdai Discussion Club is as clear as it gets. The Ukraine War is not about Ukraine, it is far larger than that. Putin is aiming to reshape the world order away from a US dominated unipolar world to one which is multipolar. Clearly this benefits Russia as a less powerful global player but it is also something which many countries around the world will find appealing. Certainly, China and India but many other developing nations will too. And when Putin makes a speech like this he is talking not to the Americans and the Europeans but to the other nations of the world. He is saying join me in my battle to create a “fairer” world. While Western observers may disagree with Putin’s actions and I sure as heck am not a fan of invading another sovereign nation and all the atrocities that have resulted, it is worth remembering the age-old quote that countries have neither friends nor enemies, only interests. And for many countries around the world, the judgement call sadly is not a human rights one, but a strategic one. For those who don’t want to read the full speech here is a link to a short audio podcast by Konstantin Kisin, who writes a great substack too, in which he gives his own summary of the talk. DC 

Twitter has been all over the news recently following Elon Musk’s takeover and of course the memes have followed. Upon entering the company, notably holding a sink, a hint towards ‘let that sink in’, many layoffs within the company were announced. Two pranksters appeared outside of the office claiming to be former employees. They managed to trick several huge media outlets including Bloomberg and CNBC who ran stories interviewing the pair naming themselves as Rahul Ligma and Daniel Johnson, telling the media to ‘tell his wife and her husband that they love them’. Following Elon’s announcement of an $8/month verification fee for users, many were outraged and Elon simply didn’t care as can be seen below. HS 

Mention “rainforests” and we immediately think about the Amazon, or the lush equatorial/tropical rainforests of Southeast Asia and Central America. It turns out that rainforests can also exist in temperate climates, as long as they’re wet and rainy enough to support that level of density of plant life, and there’s no place more fitting of the description “wet and rainy” than England. This article discusses exactly this: British temperate rainforests. Cornwall, Devon and the Lake District come up as some of the key regions in the UK which are perfect for temperate rainforests to flourish – if they were given the ability to. Turns out we didn’t need to be close to the tropics to get a bit of the rainforest pie at all. EL