Weekend Reading #232

This is the two-hundred-and-thirty-second weekly edition of our newsletter, Weekend Reading, sent out on Saturday 26th August 2023.

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What we’re thinking

Is the AI bubble over? Nvidia reported results which shot the lights out but the price action in its stock was disturbing. Many price topping patterns are evident in the secondary names which leaves us to believe that for now anyway it's time to go the beach or the mountains or do some gardening or whatever.

We have also written over the past year or so about the nudging we have seen regarding a possible change in the fed’s inflation target. These articles began appearing in the mainstream media many months ago planting the seed and this week all pretences were removed as first Jason Furman in the New York Times and then Paul Krugman both came out in favour of a shift in the Fed’s target from 2% to 3%. While it probably isn’t as big a deal in terms of quantum, in principle it most certainly is. Central Banking effectiveness is based on a belief system. The market has to believe that the Fed is serious in whatever it is focused on. The balance between growth and inflation in the Fed’s dual mandate see-saws and more recently inflation had been in focus. As growth now begins to take preference should our base case be correct, and the eyeballs of the world move away from inflation, we wouldn’t be surprised should they sneak a change in there. The implication on long dated US yields will be important but that stuff is better left to the fixed income gurus. We just think it is another factor to add into the ever more complex mix.

What is going on in Turkey? Positive after positive. It can’t be! Can it? The central bank raised rates this week by 7.5%, way above what was expected by the market. Erdogan, as we wrote just before the election, is the eternal pragmatist. Despite his very public and long standing opposition to rates hikes as a means to control inflation, he has chucked out his banana republic advisors, instilled proper ones and now a couple of months later, what seems like orthodox economic policies are unfolding week after week. For Erdogan, political survival is all that counts. And for the meantime, the Turkish market is flying. At still ridiculously low valuations and foreign ownership, should this continue, there is a lot of money left to flow in. Even the Lira appreciated this week. It will likely last until Erdogan decides that he has generated enough buffer to pursue whatever it is he feels is most important. But then again who knows, maybe it’s the beginning of something bigger!

What we’re reading

This long form piece in The New Yorker on the many contradictions of Elon Musk is a fantastic read. It dives deep first into his power and then into his history and his ideologies. I really do believe in life that people are not all good or all bad. There are many parts of Musk’s persona that I really do not like but at the same time I think he is absolutely fantastic in many other areas. This article goes into both the pros and cons. In a way it’s a great trailer for the main event – Walter Isaacson’s biography on Elon coming out next month.

I flew through Michael Crichton’s Sphere this week in about 4 days. It was rollicking action from the first page. If you somehow don’t know who he is was, he was the author of Jurassic Park, The Andromeda Strain, Westworld and the TV series, ER amongst lots of other things. A truly original thinker with a prodigious bibliography. This sci-fi story involves the discovery of a massive ship of some sort at the bottom of the Pacific Ocean which has apparently been there for 300 years. A team is put together and despatched to the area to figure out what it is. Needless to say, things get really weird. Superb fun.

Elsewhere the death (or supposed death – it's hard to know to be honest) of Yevgeny Prigozhin surprised no one at all and this quote from renowned author and historian, Simon Sebag Montefiore, couldn’t have summed it up better. “In Stalin’s time, they liked to say: ‘one man one problem, no man no problem’”. DC

This latest piece from Arthur Hayes landed this week, and while he does spend a little too much time on his story about kitesurfing, speedreading through that section very quickly gets to the crux of his note: understandably bullish, he makes the case that there has already been enough policy missteps in Fed monetary policy AND US fiscal policy to bring about a situation of fiscal dominance in policymaking. Put differently, the idea of an independent central bank, if there was even a shred of pretence remaining around its continued existence, will soon be dead, and instead monetary policy will be set in consideration of the sustainability of fiscal debt, much like Japan.

The paper referenced in the note is here, published by the St. Louis Fed. This is as “official” as it gets and without any spoilers (it’s a good read, as far as academic papers go), here is the abstract from the paper:

As a matter of arithmetic, the trends of US government debt and deficits will eventually result in an outrageously high government debt-to-GDP ratio. But when exactly will the United States hit the constraint of infeasibility and how exactly will policy adjust to it? This article considers fiscal dominance, which is the possibility that accumulating government debt and deficits can produce increases in inflation that “dominate” central bank intentions to keep inflation low. Is it a serious possibility for the United States in the near future? And how might various policies change (especially those related to the banking system) if fiscal dominance became a reality?

Just a matter of time now.

Finally, with the US election machine starting to really get into its rhythm, including a rather confident Trump deciding the Republican debate in Mailwaukee wasn’t worth his time attending (instead he went on with Tucker Carlson on Twitter - one may disagree with what he says but it’s 100% entertaining, including his comeback tweet), it’s worth using the benefit of data (thanks to Jim Bianco’s research, featured in the Arthur Hayes note) visualising which of the two presidencies (Trump vs Biden) really turned out beneficial for the average American.

Specimen 1: Wage growth outpacing inflation, workers generally better off in terms of cost of living.

Specimen 2: Inflation outpacing wages, cost of buying goods increasing over time.

What we’re watching

Unless you live under a rock you simply had to be on Youtube yesterday live streaming the FIDE Chess World Cup final between Magnus Carlsen and young Indian pretender, Rameshbabu Praggnanandhaa. The tournament is the only one Carlsen hadn’t won in his glittering career and if you listened to him during the tournament, you’d think he didn’t care. He complained about the boring, classical chess format which involves long matches and also about not feeling like playing really. On top of that he was ill just before the final which he also complained about. But in the end, he got the job done and ticked this one off on his CV. After the tournament he spoke about chess needing to modernise and include more rapid-format matches so that mainstream sponsors can get on board. I wholeheartedly agree. Cricket is a great example of a game that has modernised in recent years with the new, very not purist T20 format dominating the agenda and bringing blockbuster status to a game that in its test and ODI formats was stagnating. No reason why chess can’t take some of this and mainstream itself. And classical chess can still be a big part of it just like test cricket is today too. Either way, the first tie-break match, after both the first 2 games in the final had been drawn, was a Carlsen masterclass. Worth a watch (on fast speed)! DC

What we’re listening to

First up Lee Ainslee, one of the original Tiger cubs and founder of Maverick Capital. He gives a great interview with Patrick O’Shaughnessy on Invest Like the Best this week. Is succession in fund management possible? They talk about the state of the hedge fund industry, what higher rates mean and the art of shorting and where all the great short sellers have gone. There is so much to unpack here if you are in our game, it’s a must listen.

I’ve been spending some time recently focusing on crypto. Now is the time to get on top of what is likely to be the drivers of any new bull market in the coming months and years. A few things have been catching my attention. The first is the growth of a new social-app called friend.tech. Friend.tech is a platform where you can buy “keys” of your favourite influencers and get access to a telegram-like channel to communicate directly. What makes this interesting is the keys go up and down in value so you can actually speculate on the rise or fall in “value” of your influencer of choice. The app is the most popular new app in crypto since the heady days of the 2021 NFT frenzy. In the beginning it is frequented by crypto influencers but already we have seen a handful of sports stars, gaming influencers and most recently Onlyfans “content” providers flock to the platform. The gap here is the influencer receives a share of the trading fees and hence is incentivised to produce value to key holders to drive the price. Fees are earned in ETH. The app is the first breakout one on Coinbase’s new BASE chain and has happened not long after its launch barely a fortnight ago. This conversation that took place on the Empire podcast is a great intro to what it’s about. To me it looks like it could go viral. But in the absence of any token to trade, the question is how to make money out of it. As appealing as doing individual deep dives on the newest onlyfans additions may be, it's not a particularly time-efficient approach.

Vance Spencer, co-founder of Framework Ventures is one of the few authentic voices in crypto. He has been in it for the tech for some time now and he appeared on Bankless this week to talk about his DeFi thesis including his latest acronym, SMELL – Synthetix, Maker, Ethereum, Lido and Chainlink (Link). He covers his overall views as well as mini dives into the above 5 projects. Long story short, these have survived the copycats, the bubble burst etc and have emerged strong and in a position to dominate. He is a major Ethereum bull but even he has some time for the merits of an alternative blockchain architecture approach in the form of Solana’s. An excellent conversation this one. DC