A Few Things: 2022 Predictions, The Big Trends, The Changing Nature of The Game, When Society Rolls The Dice
January 22 2022
“Every generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it.”
- George Orwell
“Value your time. It is all you have. It’s more important than your money. It’s more important than your friends. It is more important than anything. Your time is all you have. Do not waste your time. This doesn’t mean you can’t relax. As long as you’re doing what you want, it’s not a waste of your time. But if you’re not spending your time doing what you want, and you’re not earning, and you’re not learning—what the heck are you doing?”
- Naval Ravikant
“You don’t have to burn books to destroy a culture. Just get people to stop reading them.”
- Ray Bradbury
A. A Few Things Worth Checking Out:
1. Benjamin Franklin said: “If we all think alike, no one is thinking.”
A number of new predictions come out this time of year, this little pictogram from Visual Capitalist tells you what people are thinking and talking about.
There are a lot of calls for volatility, rates going up, and political tensions going up.
What’s priced in?
2. The big story in markets last week was slowing demand and user growth. Peloton for example is (and has been) a poster child for this phenomenon. Netflix also reported similar issues.
One of the things the stock market is trying to price right now is how much demand was pulled forward during the pandemic.
Maybe consumption in 2022 will be below trend, allowing inflation to fall?
This is probably going to hurt cyclicals and commodities more in the near term.
Source: Jason Frum
3. Wunderman Thompson Intelligence presented its "The Future 100”. It’s their annual and highly anticipated snapshot of the most compelling trends to watch this year.
The report charts 10 emerging trends across 10 sectors: culture, tech & innovation, travel & hospitality, brands & marketing, food & drink, beauty, retail & commerce, luxury, health and work.
I enjoy flipping through pieces like this to get me out of the filter bubble I live in.
Thank you David Giampaolo for sharing.
These are the top three that had me thinking:
4. Jeff Currie head of Commodity Research at Goldman Sachs was on the Smarter Markets podcast last week with Grant Williams discussing Commodities. On the demand side they discuss the role of income inequality and climate change, and on the supply side the likelihood of very little supply responsive, which together can lead to explosive commodity markets. He’s bullish Uranium too.
Thanks to Benjamin Pourrat for sharing.
5. Great tweet storm on some big, big concepts that I wish I knew when younger.
6. The Hunga Tonga-Hunga Ha'apai eruption and tsunami are unlike anything volcanologists have seen before according to Wired Magazine.
Jaws dropped across the world. The explosion that produced the ash cloud, one estimated to be equivalent to 10 million tons of TNT, unleashed 25,000 times more energy than the lethal blast in the Lebanese capital Beirut in August 2020. The Tonga eruption is easily one of the largest explosions this century.
7. Carbon continues to be an interesting market. This analysis by Citi GPS shows the size and pricing of carbon globally.
When will the prices merge and how long will it take?
8. Re-watched the Night Manager TV series, starring Olivia Colman, Tom Hiddleston, and Hugh Laurie. Even better the 2nd time!
2. The Changing Nature Of The Game
Some thoughts on markets…
There remains a degree of complacency in the markets. The orthodoxy of “the markets eventually always go up” continues to be peddled.
“Imagine you’d bought the lows in March 2020 – you’d be rich now”, is the narrative.
Speaking to a friend about inflation, the FED and real rates got me thinking “what if the game is changing?”
“Buy the dip” has been the stock market game for more than a decade, ushering in great riches for those who simply held and kept adding, amassing huge assets in vehicles that take on strategies which are largely variations of the same idea.
From this, came the complacency of “don’t worry, markets always go up (even in the short-ish term i.e. a couple of months)” has taken root.
I hear it with millennials often.
All great, until the game starts to change – as it appears to be doing now.
Inflation is a problem – a big political problem. Pressure is building on the Fed to “do something” about widespread and elevated inflation which threatens to become entrenched.
For now, all this means is that the rate hikes are coming, liquidity is tightening.
The problem is that the market doesn’t completely believe it….”don’t they see the economy rolling over?” or “don’t they see the falling market and its wealth effect?” are some signs of denial out there.
But what if we are playing a new game where the Powell put is at a very different strike price to the one we we have been used to?
We have gone from falling rates and a constant FED put to rising inflation and an uncertain FED put. This calls for portfolios that are built to be far more anti-fragile to handle the new reaction function.
This chart from Marko Papic at the Clocktower Group is a reminder of just a mild corrections have been.
C. The Tech and Crypto Section:
1. The crypto market has had a rough few weeks. Bitcoin is off almost 50% from its highs, while recent L1 favourite Solana is off almost 65%. Who knows where the floor is, but we are probably close if sentiment is anything to go by.
2. I always remind people new to then market to focus on what’s real. Projects with real developers, real users, real use cases. Crypto is simply liquid venture capital, and these tokens (companies) come and go as quickly as most start ups.
This chart from Pantera Capital is a reminder of all projects that disappeared.
3. Enjoyed this recent conversation between Mike Green and Ben Savage, two of my favourite people.
The big idea here is that the pandemic has crystallised a change that was already in place across society: YOLO - you only live once.
A structural shift has happened in our risk tolerance across society post pandemic. The pandemic put people into two camps: a) those that became much more risk averse and did things to increase their safety across the board and b) those that concluded that you only live once, and they need to dial up their risk.
Sharing key parts of the transcript (emphasis mine):
Even if the pandemic was an accelerant of these things, I think it also acted as a crystallizing agent. It said, look, there's all these things that have been going on. Now, we're going to reveal them, lock them in and almost force you to make a decision about what is your risk tolerance because it actually literally caused everyone to have to start pricing risk in their real-life day to day in a way that historically, we had not had to think about in advanced industrialized countries in the West. And I think that has led to, as I said, on net, an increase in the risk tolerance of civilization.
Well, I think it translates to more risk. I don't think folks change what they want in terms of lifestyle. If anything goes the other way, people want more out of life than they've been getting pre this vol shock that crystallized a higher risk tolerance. And they're going, okay, I want the same level or better of returns that I was getting before. But I'm willing to take more risk to get there in aggregate.
That functionally lowers the anticipated Sharpe ratio across all asset classes. In order to then get to the return levels that I want, I essentially have to move more and more into higher risk asset classes, I have to lever up. I have to actually take more risk on from a market standpoint, which in some sense, is reflective of their pain, actually more risk in the world. As I said, reality vol is independent of humanity has just gone up, and the parts that are dependent on humanity have gone up.
But from a market standpoint, yeah, nobody wants to own this safe, boring, low vol, high Sharpe asset. You'd rather own the high vol, low Sharpe asset and have more of a chance of winning the lottery. I do think what that will ultimately imply is even if yields come back up, nobody's going to want to own bonds. Because they're just not going to return enough to be interesting in this world.
I think back to your paradigm of how do people feel, part of the increase in volatility is, in aggregate, I think people feel less rich, even people who are rich, because there's more volatility in the world. The things that you thought you had are at risk in a way that maybe you didn't think they were at risk two, three years ago, even as you've gotten wealthier in many cases. And it increases your risk tolerance if you don't feel like you're safe anymore. I think it does lead to more lottery ticket type behavior.
What if we live in a society in which more people are willing to make riskier bets?