Weekend Reading #237

This is the two-hundred-and-thirty-seventh weekly edition of our newsletter, Weekend Reading, sent out on Saturday 30th September 2023.

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What we’re thinking. 

It all seems so easy until it isn’t! The markets staged a late rebound this week. We would hardly call it a major rebound, but it certainly did seem that bears were out in full force over the past week culminating in a short-term reversal up. Another reminder to remain humble as the market is often there to prove you wrong. Oversold bounce? Yes. Overbought correction on the dollar? Yes. Our base case remains but often these things lead to something more, especially with so many variables out there. The three scenarios we highlighted are all still in play and driven by US yields. Significantly higher yields – chaos, somewhat lower yields - joy, much lower yields – chaos. The most surprising part of the week for us has been the bounce in what we call the “so called AI” names despite some extremely bearish price action over the past few weeks. Oversold bounce? Probably. Something more? The price action will show us, and it will do so imminently. Always keeping an open mind and prioritising not messing up completely. 

Talking of price action, crypto is trading like it wants to go up. In the face of every reason to go down, one has to wonder as the latest crypto meme goes. “All 15 traders left have decided to buy today”. Who is left to sell?  

What we’re doing. 

The end of the week was spent enjoying a few cold beers on the rooftop of Goldman’s office in London as the half-day conference they hosted aimed at their client firms’ slightly more junior staff drew to a close. It proved interesting to meet some younger fund managers given most of the people I deal with day to day are well into their 40’s and 50’s. Instead, there was a whole variety of firms from across the buy-side spectrum with hedge funds, long only firms, some family offices and asset management representatives too. Given our generation’s prolific use of technology, it’s interesting to see how many mutual friends many of us all shared and how truly such a small world finance really is. HS 

What we’re reading 

One of the side effects of decades of financialisaton is that everyone starts to get the impression that with enough money, any problem can be solved, and that hard skills (especially those involving hard labour) are beneath the “educated class”. Everyone wants to be a tech founder and get rich on inflated valuations. That could be true if globalisation in its prior form were still the status quo, with everything available to buy in one happy global marketplace. But what happens when it isn’t? This article in the WSJ from two weeks back underscores another own goal in policymaking – while everyone was trying to spin up the next “killer app”, skills like welding steel were very quickly forgotten. And now, as climate change brings along a potentially groundbreaking (almost literally) change in melting polar ice caps – certainly opening up both risks and opportunities – the US is finding itself as no longer the technological hegemon of the past decades, but in a position of ineptitude as the hard engineering skills that made it an industrial superpower have been lost. Instead, they’ve been outsourced to shipyards around the world, with these skills now in the hands of the Chinese and the Russians whose influence around receding arctic ice is growing. It turns out the list of things money can’t buy is pretty long, and as the article’s title says: “To build ships that break ice, U.S. must relearn to cut steel.” In that vein, the skills lost to the privilege of the past few decades are more than just cutting steel (think for example hypersonic weapons – invented in the 50s, abandoned because of “no immediate military application”, now playing catch up), and that skill shortage combined with a broader trend of growing union action seeking to protect perceived privilege makes for a dangerous combination. The other thing the WSJ got right here: filing this under the category of “national security”. EL 

What we’re watching 

I went back to the IMAX this week to see The Creator, an original film directed by Gareth Edwards who directed Rogue One: A Star Wars Story as well as 2010 film, Monsters. The Creator is a science fiction thriller in a world where humanity and AI are jostling for control. It stars John David Washington (son of Denzel) as the main character. It’s visually stunning and the music is awesome. On the one hand the movie was different because it depicts the AI as benevolent and peace-loving fighting for survival against the all-powerful (and evil) US army with its phantasmagorical weapons. I guess it's about love and all that stuff too but the story and characters despite having some promise was a bit shallow. More new Star Wars than old I’d say and it’s age appropriate (12) with no major violence, sex or seriously bad stuff. Personally, I think it needed a bit more edge but still a fun film to watch. DC 

What we’re listening to 

Cem Karsan, the options guru appeared on one of the Real-Vision podcasts this week to talk about why he thinks the selloff we saw was mainly a result of September options expiry. He believes there could remain some weakness until end of next week but already we’ve seen the worst and then we have a window into year end to rally. To be honest I don’t get too caught up in the short-term predictions of one guy, but it is most certainly useful to understand and emphasize that these flows do drive markets, as we have written many times before. So, when the market doesn’t behave as it “should”, there is always a very good reason. And that is that there are many “non-fundamental” players around. A quick and very useful listen. DC 

I’d been out of podcast mode the past few months, so when a friend told me that a recent Macro Voices podcast featuring Gavekal’s Louis-Vincent Gave was out with some worrying views on oil, it was a good reason to give it a listen. To some extent, I wouldn’t call it “worrying” as much as interesting, in particular how the sum total of “green” policies leading to “decarbonisation”, a populist move to release SPR reserves in the US to defer rising energy costs and a longtime abandonment of incremental exploration of energy supply have converged to incapacitate the collective West in the face of weaponised oil supply. The cards are literally all in the hands of Russia and China, so while it would definitely be worrying, it’s most certainly far from surprising – at least to us. EL