Weekend Reading #235

This is the two-hundred-and-thirty-fifth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 16th September 2023.

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*****

What we’re thinking

A fairly quiet week on the markets this week for a change with no major drama. Nothing major stood out for us and hence not much to opine about. Sorry. The good news is we aren’t going to make stuff up for the sake of it!

Shana Tova to everyone as the Jewish new year ticks over. May the year ahead be filled with much joy, fulfilment and laughter. And NACHAS. A sweet new year to all.

What we’re doing.

When it comes to the winter months I love to ski, although living in London it’s not something you can practically do all the time. Despite time and budget constraints, I try to go at least once a season, each year trying different resorts with friends and family. During the pandemic, I got a deal and finally bought my own boots. Given that my boot size won’t change now, that seems a very logical purchase rather than hiring each time. Whilst having to carry a boot bag in your luggage is a slight inconvenience, it seems a very small price to pay to avoid smelly and often poorly fitting hire boots. However, one thing I did put off buying was my own skis...until now that is. Back in the summer, I’d ordered a pair of Black Crow Mirus Cors, an all-mountain ski with an incredible turn radius making it perfect for both on and off-piste adventures. They arrived this week and whilst the ski season hasn’t kicked off yet, I’ll be taking them up to the indoor ski centre in Milton Keynes this weekend where I can play around on them and see how they perform. The first plans I’ve got to take them into the wild will be in January when I’m skiing at Happo One in Nagano Prefecture in Japan. Anyone that’s ever been, feel free to drop me a line with any tips/recommendations as this will be my first time in Japan too. HS

What we’re reading

The one highlight in the market this week was the US$54bn IPO of ARM, the design house behind the chips that power most of Apple’s (and most other mobile) devices. ARM’s chip architecture was the inflection point that made mobile computing energy efficient enough to spawn an entire generation of mobile devices, with chips designed very differently from the traditional x86 architecture. It’s a British company, in case anyone forgot, and was bought by Softbank post Brexit in what seemed like the UK government (at the time) insisting that the US$32bn deal was evidence of the UK remaining open for business.

The obvious question is, “What? That’s less than double.” And indeed, it is a far cry from the manifold returns that Softbank became legendary for. That said, at least Masayoshi Son is putting his money where his mouth is: with only 10% of shares floated in this IPO, the future upside (and downside) of how ARM trades in the market still very much lies in Softbank’s hands. This feature on Softbank/ARM in the NY Times was a pretty good read, and a reminder that while in many cases the IPO is the final exit, for Softbank this could just be the beginning.

In other news, a term that popped up in the financial vernacular earlier in the year seems to be accelerating in its occurrence: “negative amortisation”. As a concept, it is as oxymoronic as it is sinister: where normal mortgages amortise over their term as interest and principal gets paid down, in the case where floating rate mortgage rates go up so much that the fixed monthly payments don’t even pay down the interest due, the payments remain the same (rejoice!) but the deficit gets tagged onto the principal (hence - “negative” amortisation). In effect, the tenor of the mortgage extends to accommodate the fixed repayments. More debt for longer.

So, when this tweet popped up with a one-liner saying, “TD Bank in Canada had mortgages worth $45.7 billion negatively amortizing in the third quarter, per the Globe.”, some further googling was warranted. The total balance of negative amortisation mortgages in Canada is reported to be a whopping C$130bn, almost 20% of the mortgage loan books of the top 3 Canadian banks. For the moment, this seems to be a Canadian peculiarity, but one can see how after 15 years of QE feeding property prices, allowing generous home equity withdrawals, it is politically more palatable to have perpetual indebtedness (assuming incomes continue) than foreclosures. Or is it?  EL

What we’re watching

After an aborted attempt (long story) a few weeks back to see Oppenheimer, I went again to finish the job. Now that the media hype had died down, it was a pleasure to sit in the IMAX and experience everything that Christopher Nolan wanted to show the viewer. It’s a long film but I was totally engrossed. Cillian Murphy (from Peaky Blinders fame) is my favourite actor, and he was brilliant. As with all of the best films, it was just a story told from the perspective of the director. Excellent all-round. So few films today are actually good it was a really nice surprise that despite all the hype and this ridiculous word that everyone’s already forgotten about, “Barbenheimer”, the film was as good as I’d hoped. I enjoyed Matt Damon’s performance too. These days there is much talk about a Manhattan Project to confront the challenges of AI. History is generally told like a highlights reel and this film does a good job of showing that despite the ultimate success of the project in developing the bomb, it was most certainly not a straight line to the end result, and it was riddled with interpersonal conflict. Oppenheimer’s political contradictions are highlighted here and one can only shudder to imagine what a mess the politicians would make of something as generationally important as this should it have happened today. DC

What we’re listening to

I had the great pleasure of listening to two characters from many years back this week. Marko Papic, now chief strategist at Clocktower and Chen Zhao, now chief global strategist at Alpine Macro, are both formerly of BCA Research, one of my staple research providers earlier in my career. Somehow, they both appeared on a Real Vision podcast. Real Vision for me is a bit hit or miss. Often, they attract excellent guests but more often than on it all seems a bit of a grift. This one was high quality indeed. The conversation covered quite a bit on China – both economically and geopolitically. Both are in agreement China faces a tough economic path ahead. Zhao’s view is that Xi Jinping is deeply ideological and does not want to stimulate the consumer like the western nations have done is similar to mine. But his view that China’s influence in commodities is waning has given me pause for thought. Papic has many excellent geopolitical views but one of them is he doesn’t believe China has near-term ambitions on Taiwan. Very worthwhile listening to this one.

Elsewhere on Invest Like the Best, a chap named Will England appeared with Patrick O’Shaughnessy to talk about his business, Walleye Capital. The business is a multstrat hedge fund ala all the big boys but albeit smaller with around $5bn under management. The conversation was perfect for hedge fund insiders like me and covered everything from manager selection to the very real question of how to manage risk across such a widespread portfolio. Some great insights in here. DC

Eugene Lim