Weekend Reading #241

This is the two-hundred-and-forty-first weekly edition of our newsletter, Weekend Reading, sent out on Saturday 28th October 2023

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What we’re thinking. 

We’ve been having a variety of conversations on our travels with lots of different people of varying involvement in financial markets, but one theme seems to be coming up, and not unexpectedly so: from hunting down the best fixed deposit deals from banks to working out how best to extract yield from risk-free government securities, the irony from the bond market massacre last year which sent yields to highs not seen in decades is that suddenly fixed income is actually interesting again.

This of course isn’t to say that bonds are going to suddenly get bought en masse, but with US treasuries yielding 5.4% or so over a 1yr maturity, similarly for UK gilts, while German (and interestingly Singapore) government securities at the 1yr maturity mark yielding about 3.7-3.8%, higher rates have made saving great again.

Just two years ago, a decent quality corporate bond yielding 3.8% to maturity within 1-2 years would be snapped up like hotcakes, and 4-5% yield was seen extremely attractive. That’s now just pedestrian relative to the excess risk taken over sovereign risk of the risk-free issuer in each market. The secondary effect here is that if even slightly riskier bonds have had to reprice up to make up for the additional risk over sovereign debt, then what more for equities?

Gone are the days when the equity market was the only way to generate a return of > 0% (at least in theory). If taking no credit risk earns 5.4% over a year, then for stocks to be relatively as attractive, the implied return must be much higher – on average. Quick check here suggests S&P 500 reported earnings yield is sitting at 4.62% on average. So, the question for the average investor is: does it make more sense to take zero credit risk and a 100% chance of a nominal return of 5.4%, or a highly volatile (but potentially higher) average expected return on earnings (not necessarily dividends) of 4.62%?

Of course, there are pockets of idiosyncratic opportunity around which we will be on the lookout for. But if this isn’t one’s day job, then it wouldn’t be hard to imagine some portfolio readjustment might be due.

What we’re doing. 

I’ve landed in Singapore this week which means our readers will likely see the return of the much anticipated “what we’re eating" section of the company update. This follows on from me spending almost a week in Dubai. With none of us having visited the UAE before to now all of us having gone across two separate trips, it seems that it’s really a place for business to get done at the moment. Time zones wise it makes a lot of sense for us as it sits nicely connected for both Europe and Asia, and that’s also true for flights with approximately 7 hours to both London and Singapore. The ease ends there though as timing for trading US markets there is notoriously difficult which makes me think we won’t be there too much!

Perhaps the highlight of my UAE trip was the drive out to Hatta, a small town on the Oman border famous for its stunning mountain ranges and excellent hikes. Unfortunately, since they were building a new hydro-electric dam, some of the hikes were closed, although we were able to hire a small boat to cruise around the open water area that had been created as a result of the water blockage from the dam. Other highlights included an unlimited barbecue restaurant, catching up with some old friends that had moved to Dubai and enjoying La Mer beach where it was said that the sand had been imported from the Turks and Caicos Islands! HS

What we’re reading

This article from a couple of days ago featured an interesting application of NFTs and soulbound tokens, wherein the courts in Singapore ruled in favour of a soulbound NFT being attached to wallets containing stolen funds, which cannot be transferred or removed, thereby effectively blackmarking all transactions and assets from within that particular wallet. Soulbound NFTs, as their name suggests, are NFTs that are bound to the wallet permanently, and by construction because all token transfers are made by interacting with its minting contract, disallowing transfers makes the token permanently sit in the holders’ wallets – until the minting contract itself allows a move or removal. Named after items in games which once picked up and equipped can no longer be sold or traded, they started with gaming applications but clearly have picked up some useful real-world purposes too. The broader question is what happens when everyone starts making soulbound tokens and dishing them out to mark wallets, especially with blackmarks, the way public wallets of users including some celebrities were “dusted” with Tornado Cash ETH, effectively subjecting them to OFAC scrutiny (unless you were famous enough to argue yourself out of it). EL

The state of affairs on US university campuses is so bad that Jewish students were in one case forced to barricade themselves inside a library to escape a mob chasing them down. The mob was encouraged by faculty members. This brings back terrible memories of dark times gone by. If you thought anti-Zionism was not anti-semitism then the genie is out the bottle as this provocative yet bang on article from Michael Oren, entitled “A War Against the Jews” so eloquently states. Ultimately, as historians Niall Ferguson and Jay Mens write in this piece, this situation of zugzwang means there is little choice for Israel and the US but to act.

And if you want to understand what happened with the media and how they botched the Gaza hospital explosion story last week then Ben Hunt and Epsilon Theory’s Breaking News podcast does a brilliant job of breaking down the naked “why am I reading this now?” DC

What we’re watching.

Doesn’t get much better for me than Paul Tudor Jones interviewing Stan Druckenmiller. This happened once again at the Robin Hood conference this year and although it’s only 30 minutes it’s packed with mainly Druckenmiller’s views going forward. His concern over the US fiscal state is no secret but he believes the endgame is now in play. He is not bullish on US stocks but rather on pockets on the market. Best to watch yourself.

After the many public displays of Jew hatred on display in U.K. over the past weeks it was a relief to see a politician stand up and make a stand in front of her peers and that is what Kemi Badenoch did this week. She implored public officials to do their job and keep Jewish citizens safe. The fact she needed to do this was worrying in itself and despite her very strong words, it’s up to the officials to act. So far they have been despairingly and concerning reluctant to do so. DC

What we’re listening to.

If you are a crypto investor and are wondering why LINK, the token of the Chainlink ecosystem, has been breaking out after years of nothing, this Bankless episode is for you. Chainlink is an oracle, what blockchain applications use to interact with the real world and to authenticate actual real-life outcomes and translate them to the blockchain. For example, if you are betting on the weather, you need some source to determine what the weather outcome actually was. That’s where the oracle comes in: integral to how the future of blockchains operate. Interestingly, it’s not like this function that Chainlink performs was a new discovery or invention – it has been the raison d’être of Chainlink from the very start. It’s just that this time, everyone decided that it mattered enough to actually matter. DC

Eugene Lim