Weekend Reading #201 — Three Body Capital

This is the two-hundredth-and-first weekly edition of our newsletter, Weekend Reading, sent out on Saturday 21st January 2023.

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What we’re thinking

Anyone who has read our blogposts will know our base case is a new bull market outside of the US, particularly in select emerging markets and commodities. And constructing a portfolio around this raises the question of do we even bother trading US stocks anymore at all? Well, the answer is mixed. Many commodity and EM stocks are listed in the US, which brings all sorts of other factors into play. Are they part of EM flow, or do they form part of US dedicated flow? Does Mercadolibre trade like a US tech stock or like a Latin American champion consumer name? Does Pinduoduo trade like a Chinese stock or a Nasdaq component? Does Petrobras trade like Brazil or like Oil? We think we know these answers but it's always good to check our assumptions. But we do believe the new bull market is here right in front of us. We just need to size appropriately so we can see it through.

We also this week went through our full attribution of profit and loss for 2022 for our funds. Every year we work through this line by line trying to understand what we did right and what we stuffed up. Note: We do this all through the year too of course but an annual exercise with a big picture view is an excellent exercise. Good ideas come and go but its process that turns the winning ideas into profit and prevents losses for accumulating. We are always looking for how our process can improve. This review was no different.

In the world of crypto, a look at the charts would seem to suggest that the worst might be over. In reality, what was thought to be the final domino (or at least the final few) is still in the process of falling: crypto lender and prime broker Genesis has declared bankruptcy, arguably thrown under the bus by its parent company DCG in a bid to protect the cash cow that is the Grayscale trust business, while DCG itself has been named along with crypto exchange Gemini in SEC enforcement action. Add to the mix ongoing legislation against Bankman-Fried, and one would be forgiven for thinking crypto is buried in trouble. Yet, while all of this is happening, BTC and ETH are up about 30% each for the year so far, with other tokens seemingly shrugging off the legal cacophony in an attempt for another bull run.

All of this just goes to say once again that the correlation and coincidence between the market and “fundamentals” can easily be transient. Sure, they coincide sometimes, sometimes for a long time, but most importantly fundamentals contribute to the narrative, but don’t make them up in their entirety. The market’s priorities move at its whim, not ours: so perhaps it was positioning and a violent short liquidation cascade that triggered the run, abetted by a weaker USD, that took centre stage over the legal furore.

Is this the end? Probably not. Are the risks of exchange runs, mass Grayscale liquidation and dumping, or more bankruptcies still in existence? Definitely. But the market is looking forward, and failing to understand that could be costly.

What we’re doing.

I recently moved house from the South East of London where I’ve grown up, over to Queen’s Park/Maida Vale in West London. In discovering the local area, one of the best ways I’ve found to do so has been through running. These past two weeks, I’ve been keen to stay active and live a healthier life and this has been the perfect way to do so in addition to regular gym visits. One of the highlights in running this week has been the route I’ve found from my new home down to and around Notting Hill before looping around and returning via Portobello Road. The route is just over 6km in total and takes just under 30 mins. Having gone back along the road another time when checking out the market, it’s certainly worth doing this run earlier in the day in order to avoid the foot traffic (Even at 8am I could see the setting up of stalls) but nevertheless it made for a more interesting run taking in the surroundings. HS

What we are reading.

As a fan of The All-In Podcast, I was delighted to read this piece on slate.com. The author does an excellent deep dive into the podcast, pros and cons and he really it. It’s a new approach to building a media business. Everyone has their own opinions about the protagonists - Chamath, Sacks, Calacanis and Friedberg. And that’s the point. As the author points out, this show has become a must-listen to get your finger on the pulse of what's going on in tech and more and more on everything else. It’s the anecdotal stuff that I find the most interesting. As an investment manager my job is not to take blindly the opinions of other (mostly much smarter) people but to know when to do so and in what context. After a while, you get to know the characters and understand what makes their minds’ tick. I don’t listen every week but often enough to keep my finger on the pulse. And it's always great entertainment.

I dove back in this week to my favourite spy thriller series by Daniel Silva featuring Mossad superspy, Gabriel Allon. The thing about a page-tuner is it makes you find time to read it rather than picking it up when you feel like reading a book. I flew through The Cellist in a few days. It is set around the time of the US election in 2020 and is all about Russian influence and the mechanics of money laundering with all the subterfuge along the way. Expertly weaved together as always - another masterclass.

Finally for the football fans out there I stumbled on this superb profile of Erling Haaland, the striking phenomenon now plying his trade for Manchester City. It’s a long dive into his history and what makes him who he is today. He doesn’t get distracted and his focus at such a young age is admirable. Can you imagine how good he will be when he is in his peak? A really great read. DC

Looking under the hood in the world of crypto devs, this report from Electric Capitalpaints an extremely encouraging story of continued growth in developer interest, despite the widespread negativity around crypto in the wake of the past few months. As far as open-source developer communities go, the stats are absolutely stunning: 471k code commits per month, 3.9k monthly devs active in DeFi (who said DeFi was dead??) for a total of 23k monthly active devs in crypto, with 61k new devs touching crypto code in 2022. Perhaps also interesting is that the frequency of new code commits by full-time devs was on the rise, vs a decrease in one-off dev commits, pointing to things generally getting a bit more serious – fewer “tourists”, much more serious developer talent. Across ecosystems, everything has grown, but the largest of the lot is Ethereum, with all signs for a multi-chain world pointing to it emerging very quickly on Eth L2 rollups like Arbitrum and Optimism.

This thread is a useful summary of the report, but the bottom line of this entire exercise is summed up well by @MariaShen: Developer engagement is an early and leading indicator of value creation in emerging platforms. That makes sense – the more human and intellectual capital gets invested, the more likely we are to see something absolutely revolutionary show up. As far as the devs are concerned, crypto is alive and well, notwithstanding the market, which isn’t even looking as dire as it did before; on the flipside, dedicated human ingenuity is something we’d be careful not to bet too hard against.

What we’re watching.

I have never been a massive gamer, though I’ve tried. It takes too long to get involved in a game and to be honest the best part for me is always the story. So when I saw that HBO was making a series out of The Last of US, one of the most successful story-based games of the past decade, I was interested. The first episode was released last week and it is a feature length film in itself. I am also not historically a fan of Zombie stuff but this was just great. Rollicking fun, fast paced and really beautifully crafted. HBO is just so much better at this than everyone else. And with the TB/film industry seemingly out of new ideas for some time now, the steady onboarding of gaming IP is happening at a pace. This was a good one. DC

Having scrolled through the endless catalogue of seemingly nothing to watch on Netflix over the weekend, I decided to re-watch what is perhaps one my favourite war-time films of recent years, Munich; The Edge of War (although technically its set before the Second World War in late 1938). Contrary to most films of the genre, it looks at the build-up to the war as well as the peace negotiations of then Prime Minister Neville Chamberlain in the period of appeasement, attempting to frame him in a light other than the naïve leader that history has portrayed him to be. However, the more interesting element of the film comes in uncovering the truths around Nazi Germany through espionage in what was the early days of MI6 (The UK’s secret intelligence division tasked with overseas affairs) and the rekindled personal relations of the film's protagonist, Hugh Legat played by George McKay (also the lead of 1917, another great war-time film) as a translator for the cabinet office in London. HS