Weekend Reading #207

Photo by Thought Catalog on Unsplash

This is the two-hundred-and-seventh weekly edition of our newsletter, Weekend Reading, sent out on Saturday 4th March 2023.

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What we’re thinking

As both stock and crypto traders, what could possibly be more interesting for us than a crypto bank? In last week’s blogpost we wrote about crypto businesses who do things properly and those that don’t. Silvergate Bank quite blatantly falls into the latter category. We don’t comment directly on short positions in our fund until the positions are closed. But as this is now the case, we bagged ourselves a huge profit from a well thought out and executed short. Whether due to negligence, incompetence, malice or all of the above, the tale of Silvergate’s downfall has been one of immense woe. The writing was on the wall even before the fall of FTX, which resulted in the first part of the run on the bank. On Wednesday this week, after the US market closed, Silvergate released a statement in which they announced they are assessing the ability of the company to continue as a going concern over the next twelve months. An ignominious end it seems. And the lawsuits haven’t even begun yet. Good riddance.

What we’re reading

I’ve written before about Luminar, the company run by Austin Russell, who as a prodigiously gifted teen dropped out of Stanford to found the company with the help of a Thiel fellowship. This Forbes article sums up the leaps the company is making, particularly in their supply deal with Volvo for their Lidar. The demand is growing and they are fast developing into a global leader. It’s also one of the few successful SPACs despite naturally being a long way from its highs in the speculative frenzy of 2021. Russell believes his company can triple revenues annually for “several years”. At 27 years old, he has already been running the company for 11 years. As we sunset the era of get-rich quick startups with fancy fundraises, it’s great to see someone who has built a business the hard way achieving some success.

During the pandemic I was introduced to an excellent substack written by Zvi Moskowitz. I’m not quite sure how to describe this guy. He writes about a number of complex things with a great level of detail seemingly from a statistical angle but not always. Anyway, his writings on Covid and policy during the pandemic was pretty good and this week I dug into some of his stuff on AI. A warning, it is VERY long and detailed and unless you really want to get stuck in to the core pieces (here is the most recent one), I’d have a read of this separate piece which is called “Practical Advice for the Worried”. It comes hot on the heels of last week’s listen to Eliezer Yudhowsky who if you recall is calling for the end of the world as a matter of certainty once we reach sentient AI (by 2050 latest but in his view likely earlier). In this post Zvi quite literally provides an FAQ on how to live your life given that the world is going end. He is far more balanced than Yudhowsky but nevertheless it’s good to be prepared! Its part tongue in cheek but then again maybe it isn’t.

Michael Pollan is a fellow I’ve written about before. He has written much about psychedelics and their applications including a book (which became a Netflix docuseries) called “How to Change Your Mind”. He also wrote a book about plants and at 68 years of age now has lots of wisdom to dispense. So having spent many hours consuming his writing, it was a pleasure to listen to his Desert Island Disc episode in which he talks a bit about his life more broadly. The music was good too. DC

What we’re listening to

As far as market discourse goes, one of the biggest contradictions we come across is the seemingly randomness of whether “good news is good news” or “good news is bad news”. When it comes to stocks, it is often a case of positioning and expectations, but what about when it comes to the macroeconomy? We’ve written much about how the abundance of liquidity in the market, thanks to more than a decade of QE all the way until early last year, had led to the rise of passive ETFs and an environment of the proverbial “rising tide”. The reversal of that narrative – or of the expectation that abundant liquidity was going to continue – primarily due to the emergence of inflation, which had at one time been believed to be structurally dead, tore a gaping hole in the “up only” dreams of everyone from passive (or active) ETF managers to meme stonk traders. Underpinning that rupture in the bubble was one fundamental belief: that the Fed giveth, and the Fed taketh, and the chorus of “don’t fight the Fed” which had previously argued for staying long into ongoing liquidity flipped – arguably consistently – to a bearish slant.

Now, in 2023, after an entire year of brutal interest rate hikes and consistent liquidity withdrawal, everyone is bracing for a recession. The Fed’s threat of taming inflation through a tightening of financial conditions, with some potential damage to the labour market, is being taken seriously – at least by the financial intelligentsia. Yet the macro data that has been coming out doesn’t seem to reflect much of that tightening, and the decision of the Fed to slow down the pace of hikes to observe the impact of their tightening has led to a gradual shift in the market narrative.

That’s a long introduction (context is important) to the guest in Hugh Hendry’s Acid Capitalist podcast from a few weeks back – an interview with George Robertson. The 40 year veteran PM goes on Hendry’s podcast (the host being a subscriber to the view that monetary tightening has gone too far and a recession is around the corner) and dishes out the opposite thesis: that the S&P 500 is going to 5,000, and even more. Without spoiling the fun of listening to this, the heart of his thesis is this: the Fed isn’t as effective as they make themselves out to be, hamstrung by politics and the “dual mandate” from fulfilling its role as a central bank, and the spending over 2020-21 as a result of the US government response to Covid has injected WAY more stimulus into the real economy, resulting in more real growth for longer, much more than the Fed can remove through policy.

In contrast, higher rates correlating with higher growth, and higher growth leading to higher stock market valuations is common sense, contrary to the distorted “recession is good because lower rates so meme stocks to the moon” logic that has pervaded even the highest echelons of investment mentalities.

Put differently, if one doesn’t expect the Fed to be able to solve the inflation problem, and inflation sticks around as a long-lasting phenomenon (unlike the past 30 years), then wouldn’t the best hedge in an inflationary environment be assets with pricing power, including real assets and profitable businesses?

It's an old-school view, and certainly not the consensus view, and in typical Hugh Hendry fashion, the podcast ends on a gentlemanly agreement to disagree between the two, which just leaves every listener with much to think about.

Ultimately, our challenge is that we’re going into a macro environment that few people alive today have traded, which outlives much of the data to which modern economic and financial theory makes reference. Perhaps we can find inspiration in the writings of more classical economics, of the likes of Keynes and Hayek, but perhaps all we need is some old-school common sense.

As a supplement to this, which should rightly be under the reading section but also deserves to be mentioned in this context since it was shared on George Robertson’s twitter, is this paper entitled “Three world wars: Fiscal-monetary consequences”. It’s a bit of an econometric heavyweight, but in summary, the paper makes a comparison between the two world wars of the 20th century and the “War on COVID-19”, especially when the size of US government outlays in 2020-21 as a % of GDP measure up to those of WW2, and surpass those of WW1. It also compares how the US financed those outlays, and the telling statistic is how both world wars were financed with increased taxes and government bonds, while the COVID-era expenditure saw almost no taxation increases, but instead an increase in money supply growth as a financing method.

Unfortunately, as we know, this fiscal and monetary profligacy isn’t exclusive to the US. It was global. As such, this paper should be mandatory reading when trying to understand the consequences we’re about to face around the world over the coming decades. We spent like we were in a world war, and excessive spending has consequences. History shows (charts below) that the consequences come in the form of inflation, classical “crowding out” or, heaven forbid, monetary debasement. The third hasn’t occurred for the US yet, though the Emerging Market world is familiar with it – either way, regardless of what monetary and/or fiscal policy measures are taken to smooth things out, the market always collects on its debts.

What we’re doing

Last week, I had the pleasure of visiting Christie's to view their 20th/21st Century London Evening Sale collection. The collection showcased a wide variety of modern and contemporary artworks, including pieces from iconic artists such as Andy Warhol, Pablo Picasso, and even a sculpture from Anthony Gormley. The sale total ultimately reached an impressive £128,952,500. The collection's focus on modern and contemporary art provided a fascinating insight into the evolution of the art world throughout the 20th and 21st centuries. From the bold and expressive works of abstract expressionism to the intricate and complex pieces of contemporary sculptures, the collection presented a diverse range of artistic styles and mediums. Overall, the exhibition was a testament to the enduring power and importance of modern and contemporary art. HS

This week, I also had the opportunity to attend the HFM European Emerging Fund Managers Conference at Pennyhill Park in Surrey, UK. The conference brought together a diverse group of hedge fund managers, institutional investors, and industry experts for two days of networking, informative panels, and roundtable discussions. The beautiful grounds of Pennyhill Park provided a picturesque backdrop for the conference. I particularly enjoyed the panel discussions, which covered a wide range of topics, including emerging market investments, ESG considerations, and the impact of new technologies on the hedge fund industry. Overall, the conference was an excellent opportunity to learn from industry leaders and connect with peers in the hedge fund community. HS