Weekend Reading #206 — Three Body Capital

This is the two-hundred-and-sixth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 25th February 2023.

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What we’re thinking

Once again, this week sent our way another set of data points that don’t look particularly friendly to the market. Sure, the SPX has come off its recent highs and is perched at its rally trend line – whether one calls that trend a “bear market rally” or a “new bull market” doesn’t really matter – but once again, we had two huge risk events this week into which volatility was extremely well bid. Whether the release of the Fed minutes (which had equal amounts of hawkish and dovish commentary, depending on what you’re looking for) or the release of the PCE deflator (which came in hotter than expected), both of these were events that were well-anticipated and which did come in as negative outcomes i.e. “sticky inflation”. In itself, these being anticipated and hedged-for events dampened the extent of the reaction, at least in terms of its violence.

On one hand, this further substantiates the rationale that inflation is going to be a difficult thing to get rid of, arguably the basis for markets going WAY lower, especially if rates need to go WAY higher for WAY longer. But there is an alternative to this, and we’d be open to the possibility of that which was previously deemed impossible gradually being nudged into the realm of possibility.

These tweets from so-called “Fed Whisperer” Nick Timiraos at the WSJ is one of those things that nudge the unspeakable into the realm of the possible: a subtle pair of tweets referencing a study by the Cleveland Fed that concluded that IF (that’s a big if) inflation expectations didn’t go unanchored, then having inflation at 2.8% for an extended period of time (instead of the 2% target the Fed has) would be the optimal outcome, whereas a “deep recession” would be required to bring inflation back to around 2.1%.

Added to comments from JP Morgan’s chief Jamie Dimon about having “lost a bit of control of inflation”, we can’t help but wonder, “Why are we reading this now?”

On a different note, we’ve been catching up a little more with old friends in the City, and one question that we were asked was very much a blast from the past: “So, what’s your top stock pick now?”. Throwback to the days when fundamentals were the be all and end all of analysis, when the only reason anyone needed to buy or sell something came out of an excel model, informed by management meetings and site visits. Compare that with how macro-driven markets are today and it’s increasingly evident what the effects of a decade of surplus liquidity has done to the entire investor psyche – ultimately, even fundamentals are a meme.

Finally, as an appendix to our note on Coinbase, this chart caught my eye (albeit from a couple of weeks back):

It shows how the BTC futures on the CME are now at an all-time high in terms of the % of total open interest in BTC futures, which suggests that for all the doom and gloom around crypto, “the institutions” of which the early adopters dreamt are actually active in the space. Ultimately, BTC is the bellwether of the crypto market, alongside ETH, and with CME open interest now filling part of the gap left by FTX, the linkages between traditional institutions and crypto grow ever stronger – and intertwined.

What we’re reading.

As a father of 2 young girls this article on a new substack I follow from Jon Haidt got my attention. It was always fairly obvious to most observers that social media was bad for teenagers but now this suspicion has been backed up by some hard data in the form of the CDC’s bi-annual Youth Risk Behaviour Survey. The survey showed that 57% of teen girls say they experience “hopelessness or persistent sadness” with as many as 30% saying they considered suicide! The effect on boys is there too but it’s nowhere near as bad. Surely, we are going into an era where this is taken into account by the forces that be. And more importantly by parents. It’s frightening.

Haidt is also responsible for directing me to this fantastic article called the Childhoods of Exceptional People and is written by a guy named Henrik Karlsson. As Haidt says in his tweet, there is one key common denominator and that is that they all had time to roam around and relied very much of self-directed learning. His question is why did that stop happening? From my side, we always are trying to encourage our kids to be curious and adventurous but categorically I can say they have nowhere near the amount of freedom that I had when I was growing up. The school system in England, which is very strong, most definitively encourages conformity. Every day we debate how to counteract this. I’m open to any ideas.

As readers will know, I’m into blockchain art and think it could go down in future times as a trajectory-changing moment for the digital art movement. One of the most famous blockchain art collectors is an (somewhat) anonymous collector who goes by the name of Cozomo de’ Medici, a play on the famous Florentine Medici family’s Cosimo. From early fame as one of the first big money buyers of a zombie punk (or two), the anonymous collector has built a massive collection, culminating recently in the donation of 22 pieces of blockchain art to the Los Angeles County Museum of Art. This interview appeared in Christie’s of all places, which in itself tells a story. Worth a read if you’re curious about blockchain art. DC

What we’re listening to

If you want to feel desperately hopeless about the future of humanity then go ahead and listen to this Bankless podcast with a chap named Eliezer Yudhowsky, a co-founder and research fellow at the Machine Intelligence Research Institute (MIRI), a private research non-profit based in Berkeley, California. He is also one of the most well-known people in artificial intelligence. He believes there is quite simply no possible positive outcome in which humans survive once AI becomes sentient. His logic is very plain. It is impossible to correctly code an AI with human morals and values. It takes just one slip up somewhere in the world to create a system which dispenses with pesky humans who get in the way of it achieving its ultimate objective – whatever that may be. And with the cascade of funding being thrown at the space, he cannot see it ending any other way. It’s worth listening to but I would caution that the interviewers on Bankless, don’t do a great job with this interview. There is just so much more to ask that wasn’t asked. They themselves acknowledge this in the intro too. So, I’ll be looking for some more material where Yudhowsky is interviewed. But this is some really deep stuff. Pretty depressing actually.

Away from this, one of my old favourites to read, Tim Urban, of Waitbutwhy.com appeared all over my podcast feed because of course he has decided to monetise his prodigious brain by writing a book. I chose to listen to the interview with Patrick O’Shaughnessy, which was around 90 minutes rather than the Lex Fridman one which was over 3 hours. The two of them cover the premise of his book, which is based on his work for the past few years on society and the reasons behind why we behave in such peculiar ways as groups of people. His book is called “What’s Our Problem?: A Self Help Book for Societies.” I haven’t read it yet but have read all of his blogposts on the same topic and I’d imagine it’s a great read. This podcast gives a slimmed down version of the concepts which underpin his thinking and once again remind us of what a wonderful mind this chap has. DC

What we’re doing

This week, I’m excited to recommend checking out Dhaba@49, a vibrant Indian restaurant located in the heart of Maida Vale in London. The restaurant's modern twist on traditional Indian cuisine offers a unique dining experience that is both flavourful and memorable. Their menu offers a range of delicious options including classic favourites like butter chicken and lamb rogan josh, as well as more adventurous choices like paneer tikka masala and tandoori prawns. The inviting atmosphere and friendly service make it a great spot for a casual lunch or celebratory dinner. If you're in London and craving Indian food, Dhaba@49 is definitely worth a visit. HS

What we’re watching

This week, I recommend checking out the hit comedy series "The Good Place" on Netflix. The show follows Eleanor Shellstrop (played by Kristen Bell), a woman who mistakenly ends up in the afterlife's "Good Place" despite leading a less-than-virtuous life on Earth. As she tries to keep up the charade of being a good person in the afterlife, she meets a cast of quirky characters, including a moral philosophy professor, a British socialite, and a silent monk, who all must navigate their way through the afterlife. "The Good Place" is a unique and witty show that explores philosophical concepts and moral dilemmas in a fun and engaging way. The show's writing is smart, and the cast delivers hilarious performances throughout the series. With four seasons available to binge-watch on Netflix, "The Good Place" is a great choice for those looking for a light-hearted and thought-provoking series. HS