Weekend Reading #230

This is the two-hundred-and-thirtieth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 12th August 2023.

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What we’re thinking

Markets have had the first real test in a long time this week. Many year-to-date winners are facing meaningful pullbacks. This has been led by the AI-theme with Palantir and Super Micro Computer, two leading names in the recent rally, selling off materially (albeit from recent extended highs). Other large cap tech names have also pulled back in line with the Nasdaq. The question is whether this is the beginning of the big selloff that everyone seems to be waiting for or just a pullback in the new bull market.

There are a few factors circling our minds. Firstly, the rally in general this year has certainly been boosted by hopes of a US soft landing. As we have written in our newsletters, we find it difficult to accept that the US will not face a recession of some sort (whenever that would be) given the massive excesses we saw over the past decade. The question is why we have not had one already given the spectacular pace of interest rate rises we have seen. Most macro guys we respect point to the unusually large level of savings present in the US after the record stimulus given out during Covid. This “excess savings” is being slowly worked through and has buffered the economy from damage thus far. The thing is that eventually this must end as the savings dwindle and some indications are that this is beginning to happen. Our base case is now that recession is near enough that the market will begin to move towards this. What helps us as always make our conclusion is price action. Many parts of the US domestic market are showing what could become bearish patterns in our view. We have waited patiently for this to show, and it is beginning to now show.

The next issue is how severe the recession will be. We really don’t know but it would surprise us if it wasn’t severe. Once again, apart from the tech and VC space, we have not really seen yet a large unwind of the excesses we saw over the decade before rates began to move.

But what about bond yields? This one we really don’t know. Worries about the dollar’s reserve status have been around for a long time – check out this Business Week clipping from 1978 entitled “The dollar fades as a reserve currency”.

But that doesn’t mean that this time isn’t different. Fiscal deficits are huge, the debt burden is a record and eventually this will come home to roost. And it will most likely be driven by markets forcing the hand of politicians. Our instinct is we are close to this moment but the difference between being close to being there and being there can be an expensive mistake. Price action of the long-dated US bonds is key. Normally during recessions, we would expect a bond rally and a collapse in yields. Should this not happen then we will have our answer.

And what about inflation? Our view has been since the very beginning of this period that inflation will prove sticky. We have had a collapse in inflation from the highs and we are currently undergoing what appears to be immaculate disinflation. This comes off last year’s base BUT and this is a big one, there are early signs of some of the key drivers inflation are reaccelerating and this gives us food for thought. We are not quite there yet, but after the next few months where the base is still high, if inflation reaccelerates into a weak economy, then there will be trouble. One doubts the Fed will be able to be as aggressive once the economy is no longer strong.

Finally, does all of the above matter? If ultimately the Fed relents and for one reason or another is forced to flood liquidity, then the market can be detached from the economy much like we’ve seen in the emerging world many times over. The Turkish stock market is the best recent example of how stocks can defy the so called fundamentals in an environment where inflation is high and liquidity abundant. The investment world may get to know the difference between the words NOMINAL and REAL a lot better.

The easy markets of the year to date may be coming to a close for now. As ever, we will look to price action to guide us through this complex choice of outcomes rather than pre-empt what we hope to be true.

What we’re doing.

I took my daughter to Lords this week to see a match in the UK’s local Hundred cricket series. A slight twist of the T20 format, in this one each team faces 100 balls and tries to whack it as far as they can. Sadly, it poured with rain for 4 out of the 6 hours we were there but it was nevertheless a real treat to be at Lords to watch my daughter’s eyes open wide when she first saw the grass and realised how big the field actually is. To be honest it felt like everyone was trying just a bit too hard to make it into a spectacle. From the DJ bouncing around to the band that was there to play to a rather unengaged crowd, it all felt a bit contrived. The cricket, if its good, should stand out as the entertainment on offer. That’s what it used to be like, but then again maybe it's just the rain or maybe I’m a bit more obtuse than I used to be. Next time, we’ll hope for a non-English summer and lots more cricket. DC

When one hears the name the Cordon Bleu, the immediate association is to the idea of the pinnacle of the culinary arts. After all, as the website of Le Cordon Bleu describes, it is “a world renowned network of educational institutions dedicated to providing the highest level of culinary and hospitality instruction through world class programmes”. Sure, it is where aspiring chefs go to train, so there’s some margin for error given they’re still in training, but to expect standards that are markedly above the average pub is absolutely reasonable. This week, to celebrate the first month of recurring revenues for Nachas Networks, our trading software business, we therefore decided to try out CORD by Le Cordon Bleu.

If you’re expecting a rave review, here’s the one where we rave about how mediocre, perhaps borderline poor, the food was. The nadir of the meal was the pan-seared Halibut that was reminiscent of chewing on a dry kitchen scrubbing pad. For the prices they charge, I’d have happily gone for multiple sashimi boats at Eat Tokyo instead. It wasn’t inedible per se, but therein lies the problem: the dishes are bad, but not bad enough to reject and send back, and the portion sizes were so small that by the time you realise they’re not great, there isn’t anything left on the plate to send back anyway. We had unanimous agreement that this was a complete waste of time and hard-earned money, and that a pub dinner at Wetherspoon’s probably beats them in value for money AND quality. EL

What we’re reading

Sixto Rodriguez, known by South Africans as Rodriguez, passed away this week at the age of 81. The man, who became famous in South Africa without knowing it was the subject of Oscar winning documentary “Searching for Sugarman”. The title is from his most famous song, Sugarman, which is a great song and every South African knows it. Have a listen.

Dave Portnoy came to my attention during Covid when I learned about his day trading show in which he famously said making money from stocks is easy by just buying the dip. He learned through the passage of time that it turns out it wasn’t so. Portnoy is more famous for his sports-betting business called Barstool Sports which he sold to Penn Entertainment earlier this year for $550m. So, this week when he bought it back from them for $1, literally months after he sold it, it made news. The deal didn’t quite work out. It turned out his personality and reputation preceded him

“We underestimated just how tough it is for myself and Barstool to operate in a regulated world.”

“We got denied [gambling] licenses because of me,” Portnoy said. “So the regulated industry [is] probably not the best place for Barstool Sports and the type of content we make.”

What was even better was this video he posted after walking back into his office the day after he bought it, wondering where all his employees were first thing in the morning. This was trumped by the next one at the end of the day where he posted one showing how everyone was afraid to leave! And then the next day his team set up a cam to see what time everyone arrived in the morning, complete with soundtrack to take the piss. Legend. DC

The episode of amateur scientific excitement around LK-99, the material which had shown potential to be an ambient pressure and temperature superconductor, drew to a close over the past week. Unfortunately, its conclusion was one of disappointment, perhaps the most easily understood concession was this one written by Andrew McCalip, explaining that the magnetic levitation observed in a small number of samples was really due to iron impurities in the samples. Incidentally, as pointed out by Alex Kaplan, one of the first commentators on the LK-99 developments, the main constituent of LK-99 is mineral called apatite, which is often mistaken for other materials. Its name comes from the Greek ἀπατάω (apatao) which means, amongst other definition, “to deceive”. The universe certainly played a good trick on everyone – but nothing detracts from how impressive the efforts around the world were to give this a try, even if it were a very long shot.

In other news, it turns out that Sam Bankman-Fried's mischief has once again got him into trouble, this time leading to the revocation of his bail conditions, following what seems to be a rather nefarious act of witness tampering ahead of trial, through the leaking of private writings of Caroline Ellison to the NY Times. The evidence that is likely to emerge will be quite a sight to behold, but it certainly contains some truths that SBF is quite determined to hide. EL

What we’re watching

What we’re listening to

I listened to a great episode of Bankless involving the host of a podcast that used to be top of the food chain. It was called Uncommon Core and featured an anon named Hasu and the now notorious, Su Zhu, of the blown-up Three Arrows Capital fame. The episode this week featured Hasu in his capacity as strategic advisor to Lido, the largest Ethereum staking protocol. The conversation covered Lido in some detail and debated amongst other things whether Lido can become systemic to Ethereum given its rising dominance in its staking as well as much, much more. One of the few protocols around that actually makes real money and has a real pass through mechanism to token holders, Lido also seems to have a long runway and many drivers for further growth. I recommend this if you are looking for something real in crypto. Few and far between at this stage! DC