A Few Things: Disorder, BS in Investing, Contrarian Idea Of The Week, On Markets, The Mind of Demis Hassabis, Mike Chalfen on Venture and Mike Saylor on Crypto.....

July 15, 2022

I am sharing this weekly email with you because I count you in the group of people I learn from and enjoy being around.

“Too often we enjoy the comfort of opinion without the discomfort of thought.”

- John F. Kennedy

“Education is a progressive discovery of our own ignorance”

- Will Durant

“Facts do not cease to exist because they are ignored”

- Aldous Huxley

“Ignorance more frequently begets confidence than does knowledge”

- Charles Darwin

“All appears to change, when we change”

- Henri-Frederic Amiel

If you missed last week’s note on: Dan Ariely on Human Capital, Marko Papic on Markets, The Halfways, Vaclav Smil on How The World Really Works, Sebastian Mallaby on Crypto, The Next Renaissance.

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A. A Few Things Worth Checking Out:

1. I love books that synthesise and bring number of ideas together. Prof. Helen Thompson at the University of Cambridge has written an amazing book: Disorder: Hard Times in the 21st Century which does just that.

We discussed a few months back in April. It’s a difficult book but definitely worth a read. Think of her as the opposite of Peter Zeihan. In the sense that her work is nuanced, deep and thoughtful, and not full of a sound bites built on a simple theory. I do like a little Peter Zeihan, and yes I am listening to his latest book.

Helen was on the Hidden Forces podcast last week. Borrowing from them:

For those of us who grew up in the 1980s and 1990s, the nature of the world as we knew it to be only seemed to be getting better and better. The price of energy and the cost of capital kept getting cheaper, the world kept getting safer and more interconnected, and liberal democracy and free-market capitalism were seen as inevitable outcomes of the end of history. Today, all of that feels like it was almost a dream.

The last two decades have brought a powerful tide of geopolitical, economic, and democratic shocks onto the world. Their fallout has led central banks to create over twenty-five trillion dollars of new money, brought about a new age of geopolitical competition, destabilized the Middle East, ruptured the European Union, and exposed old political fault lines in the United States--fault lines that seem to challenge even those of the tumultuous 1960s and 1970s when the specter of nuclear war and the trauma of violent riots and political assassinations cast a long shadow over the future of the Republic.

Helen’s work tries to draw a line of continuity between those turbulent years and the present political moment. She recounts three histories. One about geopolitics, one about the world economy, and one about western democracies, and explains how in the years of political disorder prior to the pandemic, the disruption in each became part of one big story, much of which originates in problems generated by fossil-fuel energies and our efforts to control them. And it explains why, as the green transition takes place, the longstanding predicaments that energy invariably shapes will remain firmly in place.

I had to listen to this twice, since it’s so dense and nuanced.

2. Great post by Benn Eifert titled - On bullshit in investing. Which starts off as:

The investing industry is ridden with bullshit. The most common and insidious form is over-optimism: offers of tantalizing risk/reward that defy any notion of reality, often based on misinformation or deception. Less common but even more dangerous are outright frauds.

The problem is inherent to the product. Most consumer goods – apples, hotel rooms, laptop computers – are tangible objects or services that you can see, taste, feel, or experience, so you can judge how much they are worth to you. Investments represent claims about some future probability distribution of monetary outcomes which are not literally verifiable. The best an investor can do is form a reasonable judgment about the uncertainty around those claims, based on historical evidence and details about the mechanics of how those claimed outcomes are generated.

And ends with key things to watch out for:

If BS in investing is something you want to double click on, it’s worth reading Aja Raden’s: The Truth About Lies.

It’s a great historical, anecdotal taxonomy of deceit, hoaxes and cons.

The book covers three types of lies: the lies we tell each other, the lies we tell ourselves and the lies we all agree to believe.

It helped me not only see the world in a different light but only learn a ton of new stuff.

She did a quick 30 min podcast if you want a taste.

3. CONTRARIAN IDEA OF THE WEEK: Yes, the US should always trade at a premium to other markets.

The US Dollar is the world’s reserve currency and the US has the largest and deepest financial markets. It arguably has the best companies in the world, and potentially the best corporate governance (maybe). But, when does this premium become too rich.

I wonder if the recent melt up in the USD and last 15 year huge outperformance of US assets will lead to an eventual decade of underperformance vs EAFE and EM assets?

Thank you Kartik V for the idea.

4. Jeff Currie, Global Head of Commodities Research at Goldman Sachs was on the Smarter Markets podcast.

Jeff gave a great overview of how we arrived at the current energy crisis and describes the current situation as the “Revenge of the Old Economy.”

5. The amazing Thomas Heatherwick (designer of everything from Google’s Kings Cross HQ, New Routemaster Bus, The Olympic Cauldron), gave a thoughtful TED talk on the case for radically human buildings. It’s a great call to change the way our cities look and function.

and it’s got 58k views in a week!

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B. On Markets

A couple of things to think about on markets. Yes people are bearish today but I’m not sure sentiment matches positioning.

Agreed with this recent Gavekal piece outlining that while sentiment was as bearish as ever, stock allocation hadn’t changed much. In fact, they found that the spread between bearish sentiment and positioning was widest ever.

On the other hand, you can also find data that shows futures positioning is as bearish as ever. So I’m not sure.

The bigger idea that I’ve seen from a hedge fund and this Epsilon Theory piece titled: Hollow Men, Hollow Markets, Hollow World, and it ties in with what Marko Papic has been saying around the Buenos Aires consensus.

Thank you Andrew Wynn for flagging the piece.

The key idea for Ben Hunt at Epsilon Theory is this chart. Which represents the financialization of the US Economy starting around 1996.

Historically US GDP and US Household + Net Profit Net Worth has grown together. In 1996, starting with Alan Greenspan and rates being kept lower for longer, combined with the FED put, led to a pulling forward of asset prices.

Today, society perceives itself richer than it was even in 2019 - according to the Epsilon Theory, a 150% of GDP “wealth” was added in two years. This wealth created demand for more good and services than the economy could meet, since the economy hadn’t really grown at all.

When demand is too strong, there is inflation across the whole gamut of good, services, wages. In order to stop the inflation then we either need to grow the economy or destroy the wealth.

Which begs the question of how much wealth destruction needs to happen vs how much can actually happen?

Key section from Epsilon Theory piece:

Low inflation – in both real world and narrative world – is the necessary and sufficient condition for these red arrows to be steeper than the green arrows.

High inflation – in either real world or narrative world – requires the red arrow to be less steep than the green arrow.

Greenspan’s magic trick – inflating wealth without sparking inflation in the real economy – is dead. It doesn’t work anymore. There’s no more room for monetary policy to create “free” wealth, for these growth lines to separate further. There’s only room for these lines to converge, and the only realistic way for that to happen is for the wealth growth line to go down. A lot. Remember, a bear market is only a little notch in that line. A nationwide collapse in home prices, like in 2008-2009, is only a modest dip.

Roughly speaking, we need a wealth destruction event that’s equivalent to the 2008-2009 Great Financial Crisis just to get the ratio of wealth to GDP back to pre-pandemic levels.

If you sincerely want to eliminate inflationary pressure and expectations, that is.

If you don’t want to eliminate inflationary pressure and expectations, or rather, if the political consequences of the wealth destruction required to eliminate inflationary pressure and expectations are too unbearable, then you can instead simply mandate the effects of inflation away through wage/price controls and related policies (effective nationalization of large swaths of economic activity, for example). But those are your choices. Neither is attractive. At least with the former – wealth destruction to get at the heart of what creates inflation – you can recover and grow your way back to a more equitable and more vibrant society. The latter, though – wage/price controls and outright nationalization or pseudo-nationalization of entire economic sectors – man, you never recover from that.

Unfortunately, I think the political consequences of the wealth destruction now required to control inflation authentically ARE too unbearable for every status quo political institution, for both the Dems and the GOP. I think by far the most likely path forward is greater and greater political lashing-out into worse and worse policy positions, both economically and culturally.

Disclaimer: I certify that these are my personal views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments.

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C. The Tech and Crypto Section:

1. Demis Hassabis is the founder of Deepmind and probably one of the smartest people on earth. Deepmind has been behind a number of AI breakthroughs in recent years from AlphaGo to AlphaFold.

He spoke with Lex Fridman for over 2 hours. They talk philosophy, AI, aliens, consciousness and of course breakthrough technology. His views are not conventional and neither are his habits and routines but then again the greatest minds never are.

We discussed AlphaFold last year, and here is the latest on it in Fast Company.

2. My friend the amazing Mike Chalfen was on the 20VC podcast discussing how to build ant-fragile portfolios. This is 100% substance from a guy who’s been in venture across cycles, putting together a great track in the mean time. MUST LISTEN. (Disclaimer: I am an investor in his funds).

3. Mike Saylor was on the Prof. Galloway podcast discussing the Bull Case for Crypto. Mike Saylor sometimes come across as unhinged and overly promotional but this is a sober and thoughtful conversation and worth a listen. He wants more regulation, and wants the exchanges and the SEC to step up.

Thank you David G for flagging.

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We officially launched my wife’s debut novel: The Halfways last week, and sold out Hatchards! Thank you to everyone who’s picked up a copy. The Audible version will be out end of the month. If you’d like your copy signed just let me know.

Here’s a review from Amazon:

The Halfways is a beautiful story about a family scattered across the world, brought back together after a sudden passing, after which secrets are revealed.

This story is beautifully told, well plotted, emotional, gripping and wonderfully cathartic. The characters brought to life in this novel are so incredibly human. They are frustrating and sympathetic, flawed and strong, full of spite and love and everything in between. This story is almost entirely character driven and as such lives and dies on the characters and personally I enjoyed every moment I spent with them.

I loved the descriptions of the locations in the book and I could imagine the hills of Wales, the rush in New York and the hustle and bustle of village life in Bangladesh. The references to food were also a delight. I also loved the use of a different language and how it talks about a different culture.

From the very first chapter this was a completely immersive novel. The writing is just superb. The story completely drew me in and I couldn’t put it down.
An absolutely beautiful cover and an engaging synopsis drew me into this book.
An enchanting family saga that I adored. Well written with a riveting storyline and well developed characters that I took to my heart. An incredible read. I highly recommend this book.